-----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, P+hBMK4HoOPl0RVfyz26hRhtw0jQB1Z06TYSc4+385bW6O/fXKyMtin46WDwZQ2h DW2avbBkpB2/53oS19GRsw== 0001047469-98-027819.txt : 19980721 0001047469-98-027819.hdr.sgml : 19980721 ACCESSION NUMBER: 0001047469-98-027819 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 24 FILED AS OF DATE: 19980720 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: 98668848 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/A As filed with the Securities and Exchange Commission on July 20, 1998. Registration Statement No. 333-52835 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- MISSION WEST PROPERTIES (Exact name of registrant as specified in its charter) CALIFORNIA 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. 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 PROXY STATEMENT/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, dated July 20, 1998. PROXY STATEMENT/PROSPECTUS MISSION WEST PROPERTIES 109,624,072 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 and existing cash to fund the payment of $35,200,000 owed by the Company for the acquisition of the sole general partner interests representing approximately 10.91% of the total partnership interests in each of four existing limited partnerships (collectively the "Operating Partnerships") owning from approximately 4.2 to 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") will allow the Company to acquire control of more than 5.2 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 10.91% 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. If the shareholders approve such proposals, all other transactions will close 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"). 3. Pursuant to AMEX rules, the Company also seeks shareholder approval of the issuance of up to 100,825,478 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 Grouppursuant to the terms of an Exchange Rights Agreement among the company, the Operating Partnerships and the Limited Partners (the "Exchange Rights Agreement") to take effect at the final closing date for the Berg Acquisition. 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" also may refer to Mission West-Maryland unless the discussion concerns the Reincorporation Merger or the Charter or the Mission West-Maryland bylaws. 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 and the purchasers of shares in the Private Placement of (i) 8,193,594 shares of Common Stock (after giving effect to the Private Placement) 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 100,825,478 shares of New Common Stock for issuance upon any future exchange of L.P. Units as a result of the Reincorporation Merger. The Company has filed a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act") covering the shares of New Common Stock to be issued in 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 LEGAL MATTERS...........................................................................................................121 EXPERTS.................................................................................................................121 OTHER MATTERS...........................................................................................................121 SHAREHOLDER PROPOSALS...................................................................................................121
-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 the Registration Statement. 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. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 3. The Company's Current Report on Form 8-K filed on March 13, 1998. 4. 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 1 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 The Berg Acquisition concerns 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 4.2 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," intended to be effective as of July 1, 1998, as well as rights to acquire additional R&D Properties, as described below, after shareholder approval. On July __, 1998, the Company and the parties to the Acquisition Agreement agreed to consummate the Company's acquisition of the general partner interests in the Operating Partnerships, effective for financial and income tax accounting and reporting purposes as of July 1, 1998 (the "Partnership Closing"), in advance of the Special Meeting, 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 each of the Operating Partnerships a demand note 7.25% interest with a principal amount equal to 10.91% of the net asset value of the Operating Partnership, as provided in the Acquisition Agreement as amended by the parties effective as of July 1, 1998. Each note is payable upon the closing of the Private Placement, or an equivalent transaction, or, if earlier, on July 1, 2000. As a consequence of the Partnership Closing, the Company now controls the Operating Partnerships, all of 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. 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 in connection with the Berg Acquisition. By amendment to the 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") subject to a purchase option held by Mr. Berg. A dispute has arisen. Based upon the parties current positions, the Company believes that this dispute will result in litigation The Acquisition Agreement, as amended, obligates Mr. Berg to convey the Fremont Properties to MWP, if and when he completes his own acquisition of those Properties. 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 Properties rentable square footage owned and operated by the Operating Partnerships following the Partnerships' 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 certain R&D Properties (the "Kontrabeki Properties") held by the three limited partnerships (the "Kontrabecki Partnerships") previously controlled by John Kontrabecki and the Fremont Properties. Under the terms of the Acquisition Agreement, the Operating Partnerships and the Company also have agreed to the terms of 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 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 75,100,000. 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 Related L.P. Unit Allocation 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 March 31 1998, the Berg Properties were 100% occupied, with a total of 73 tenants principally engaged in the information technology business, and the Acquired Properties were 100% occupied by a total of 10 tenants. The Berg Properties currently are subject to total indebtedness of approximately $78_ million, of which approximately $38.2 million is secured by first deeds of trust. Certain of the Acquired Properties are subject to secured indebtedness of approximately $39.2 million. At the final closing for the Berg Acquisition, the Company intends to obtain $130 million of new secured debt financing from Prudential (the "New Secured Loan") and a $50 million line of credit. The proceeds of the New Secured Loan along with the proceeds of the Company's purchase of its interest in the Operating Partnerships will be used to repay $82.6 million of existing debt secured by the Berg Properties and the Acquired Properties, incurred prior to the Partnership Closing to fund a distribution of approximately $91.6 million to members of the Berg Group. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Consequences of the Berg Acquisition and the Private Placement" and "DESCRIPTION OF THE PROPERTIES." -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. During 1998, the Company expects to pay quarterly distributions of approximately $0.085 per share of Common Stock. 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 operations 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 does expect 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 84.6% 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 Berg Land Holdings 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 ("Independent Directors Committee") 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." 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 will be accounted for as a recapitalization of the Berg Properties in a manner similar to reverse acquisition accounting recording the historical carrying value of assets with the exception of the Acquired Properties. The Acquired Properties will be accounted for as a purchase for the Fremont Properties and as a step-acquisition for the Kontrabecki Properties. Pursuant to the step-acquisition for the Kontrabecki Properties, The Berg Group's ownership interest will be recorded at their historical carrying value. 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 held 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. The Company intends to file with the Commission a registration statement on Form S-8 to register shares of Common Stock reserved for issuance 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 March 31, 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, 1998 and 1997, respectively. 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 Three Months Ended Year Ended March 31, 1998 December 31, 1997 ---------------------- ------------------- (in thousands) OPERATING DATA: Revenue: Rent $ 12,731 $45,572 Tenant reimbursements 2,097 6,769 ---------------------- ------------------- Total revenue 14,828 52,341 ---------------------- ------------------- Expenses: Operating expenses 1,026 3,790 Real estate taxes 1,212 4,475 General and administrative 700 2,750 Interest 2,944 11,777 Depreciation and amortization 2,229 8,892 ---------------------- ------------------- Total Expenses 8,111 31,684 ---------------------- ------------------- Income before minority interest 6,717 20,657 Minority Interest 5,984 18,403 ---------------------- ------------------- Net income 733 2,254 ---------------------- ------------------- ---------------------- ------------------- Basic and Diluted Earnings Per Share(1) $ 0.09 $0.28 ---------------------- ------------------- ---------------------- ------------------- 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) $ 0.94 $0.87 Average occupancy - stabilized 100% 97% FUNDS FROM OPERATIONS: (3) $ 8,946 $29,549 BALANCE SHEET DATA: Real estate assets, net of accumulated depreciation $154,852 Total assets 167,406 Debt 164,639 Total liabilities 172,880 Shareholders' equity (5,474)
- ------------------- (1) Per share calculations do not consider the dilutive effect of (i) 66,906,406 L.P. Units that are exchangeable for common shares of the Company's 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 industry analysts have accepted it as such. 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. 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.
Three Months Ended March 31, Year Ended December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ($ in thousands) (Unaudited) (Unaudited) OPERATING DATA: Revenue: Rent $11,073 $8,801 $40,163 $28,934 $23,064 $25,186 $25,620 Tenant reimbursements 2,033 1,226 6,519 3,902 4,193 3,190 3,486 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Total revenue 13,106 10,027 46,682 32,836 27,257 28,376 29,106 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Expenses: Operating expenses 1,019 1,118 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129 Real estate taxes 1,189 980 4,229 3,750 3,595 2,716 3,116 Management fee (related parties) 322 240 1,050 827 654 739 994 Interest (related parties) 61 79 248 293 357 329 45 Interest 1,485 1,470 5,919 6,090 6,190 8,222 9,054 Depreciation and amortization 1,935 1,680 7,717 6,739 6,323 6,851 7,156 ------------ ------------ ----------- ---------- ---------- ---------- ---------- 6,011 5,567 22,904 19,605 19,151 20,212 21,494 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before gain on sale of real estate and extraordinary item 7,095 4,460 23,778 13,231 8,106 8,164 7,612 Gain on sale - - - - 20,779 - - ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before extraordinary item 7,095 4,460 23,778 13,231 28,885 8,164 7,612 Extraordinary item - - - 610 3,206 - 1,766 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ------------ ------------ ----------- ---------- ---------- ---------- ---------- Net income $ 7,095 $ 4,460 $23,778 $13,841 $32,091 $ 8,164 $ 9,378 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ------------ ------------ ----------- ---------- ---------- ---------- ---------- PROPERTY AND OTHER DATA: Total properties, end of period 58 55 58 53 50 41 40 Total square feet, end of period 3,779 3,484 3,779 3,392 3,195 2,856 2,796 Average monthly rental revenue per square foot(1) $ 0.95 $ 0.81 $ 0.86 $0.78 $0.71 $ 0.96 $0.84 Occupancy at end of period 100% 96.2% 97.7% 91.9% 87.4% 80.3% 89.6% FUNDS FROM OPERATIONS(2)(3) $ 9,030 $ 6,140 $31,495 $19,970 $14,429 $15,015 $14,768 Cash flow from operations $ 9,835 $ 5,477 $29,909 $20,248 $16,392 $16,518 $18,480 Cash flow from investing (236) (3,454) (17,251) (29,275) (6,353) (5,003) (3,248) Cash flow from financing (505) (640) (8,432) 9,433 (10,013) (12,093) (13,599) March 31, December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: ($ in thousands) (Unaudited) (Unaudited) Real estate assets, net of accumulated depreciation $98,453 $92,484 $100,15 $90,710 $72,319 $62,450 $61,610 Total assets 122,529 102,791 113,950 97,651 73,730 59,957 64,516 Debt 76,168 73,314 76,507 73,416 69,543 79,594 100,126 Debt - related parties 1,821 2,411 1,975 2,546 3,051 2,889 1,433 Total liabilities 85,795 81,909 84,299 80,826 76,199 83,720 104,117 Partners' equity 36,734 20,882 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 industry analysts have accepted it as such. 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. 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 "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. As a result of the Berg Acquisition, Carl E. Berg and other Berg Group Members will relinquish control of the Berg Properties, which have a total book value of $98,453 as of March 31, 1998, to the Company, and debt owed to or guaranteed by Mr. Berg and other members of the Berg Group totaling approximately $143 million will be repaid with the proceeds of the New Secured Loan and the Company's purchase of the general partnership interests in the Operating Partnerships, including $77 million for debt incurred by MWP I and MWP II prior to the Partnership Closing to fund a distribution to members of the Berg Group. The valuation of the Company implied by the Company's purchase of the 10.91% 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." 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 substantial 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. See "POTENTIAL CONFLICTS OF INTEREST." In particular, Mr. Berg is a substantial 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 of 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 84.4% limited partnership interest in the Operating Partnerships, and an aggregate of 84.6% of the Outstanding Shares, (without regard to the Berg Group Ownership Limit) through 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. In addition, unless Mr. Berg can resolve the dispute which has arisen concerning the Fremont Properties in a manner which allows him to acquire those Properties, he will be unable to contribute them to an Operating Partnership. PENDING DEVELOPMENT PROJECTS. There are four Pending Development Projects which represent a total of 12 R&D Properties and approximately one million rentable square feet in the aggregate. Under the Acquisition Agreement, the Company and the owners of these Properties have agreed that the Company or the Operating Partnerships will acquire each of the R&D Properties as it is completed and leased. Under the terms of the Pending Projects Acquisition Agreement the sellers of the Properties may elect to receive cash or L.P. Units at a value of $4.50 per unit. The purchase price for each of the Properties 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 of the Properties prior to their transfer to the Company. 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 or 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. -11- 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 March 31, 1998, after giving effect to the Berg Acquisition, 26 of the Properties are mortgaged to secure payment of debt, and the Company expects to have outstanding approximately $164.6 million of debt secured by such Properties for the final closing date for the Berg Acquisition, following shareholder approval at the Special Meeting. 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 Lines" 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 32.8% at March 31, 1998, assuming the occurrence of the UPREIT Transactions, a Market Price of $4.50 price per share, and 75,100,000 Outstanding Shares issued and -13- 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. 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 has 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." 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 year following the Berg Acquisition. During such initial 12-month 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 -17- "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 which would be 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. Sales of shares acquired by members of the Berg Group and other Limited Partners through the exercise of their Exchange Rights and registration rights may adversely impact the price and trading volume of the Common Stock from time to time to the detriment of other shareholders. -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 100,825,478 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 most of the interests in the limited partnerships comprising the Operating Partnerships and, upon final consummation of the Berg Acquisition, including acquisition of the Fremont Properties, will beneficially own 63,381,987 L.P. Units, or approximately 84.4% of the Operating Partnerships. The remaining 3,524,421 L.P. Units will be 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. Certain of the Acquired Properties known as the "Fremont Properties" are subject to an option held by Carl E. Berg. Mr. Berg intends to acquire and contribute the Fremont Properties to the Operating Partnerships at or before the final closing for the Berg Acquisition, although he first must resolve a dispute, which is unrelated to the activities of the Company or the Operating Partnerships, with the current owners of the Fremont Properties. The Company believes that this dispute may lead to litigation and there can be no assurance that Mr. Berg will be able to reach a resolution of the dispute and acquire the Fremont Properties prior to the final closing date for the Berg Acquisition. 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 March 31, 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. Two substantially similar Voting Rights Agreements (the "Voting Rights Agreements") cover all shares of Common Stock acquired from the Company in a private placement in September 1997, as well as a substantial number of shares acquired from the Company in a private placement in November 1997. Consequently, the holders of the 1,097,959 shares subject to the Voting Rights Agreements have agreed to vote their shares of Common Stock as directed by Mr. Berg, on behalf of BBE, on all matters submitted to a vote of the shareholders of the Company. The Voting Rights Agreements terminate at the earliest of the following dates: (i) upon any sale of the shares pursuant to a registration statement declared effective under the Securities Act of 1933, as amended (the "Securities Act"), but only as to the shares so sold; (ii) upon a sale of the shares pursuant to Rule 144 promulgated under the Securities Act, but only as to the shares so sold; (iii) two years after the effective date of the Voting Rights Agreement. BBE has advised the Company that it will not exercise its rights under the Voting Rights Agreements with respect to any of the Proposals to allow for approval of the Proposals by the holders of a majority of shares of Common Stock without regard to any voting rights possessed directly or indirectly by members of the Berg Group. Accordingly, all holders of Common Stock will be entitled to determine independently whether to vote their shares in favor of each of the Proposals. Furthermore, BBE has advised the Company that it will terminate the Voting Rights Agreements following the approval or ratification of all of the UPREIT Transactions at the Special Meeting. CONSEQUENCES IF THE PROPOSALS ARE NOT APPROVED The board of directors adopted resolutions approving Proposals 1 through 6 on May 14, 1998, subject to shareholder approval or ratification. 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. As the Company and other parties to the Acquisition Agreement completed the Partnership Closing on 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 L.P. Unit Majority may call the demand notes issued at the Partnership Closing, which currently total approximately $33.6 million and which the Company will need to finance by that date at the latest. Accordingly, if the shareholders do not approve the Private Placement, the Company will seek to obtain the amount of funds to be provided by the Private Placement in the same or another manner. 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, which the Company believes would materially diminish the Company's 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 and could ask BBE, which is also a party to the Acquisition Agreement to advise the holders of the shares subject to the Voting Rights Agreements to vote their shares in favor of the proposal at the new meeting. 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's announced objective has been to re-enter the real estate business. In May 1997, BBE and the Company entered 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, as disclosed in the Company's July 8, 1997 Proxy Statement, that the Company would achieve that objective by acquiring 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 and making arrangements to acquire additional R&D Properties. Those efforts culminated in the execution of the Acquisition Agreement in May 1998. In July 1998, the Acquisition Agreement was amended and the Company acquired an approximate 10.91% interest as the sole general partner in each of the Operating Partnerships. The Operating Partnerships now own all of the Berg Properties and the Kontrabecki Properties, and will acquire the Fremont Properties once Mr. Berg has purchased them, resulting in a total of approximately 4.34 million rentable square feet of R&D Properties to be held in the Operating Partnerships. 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 the L.P. Units issuable to Mr. Berg for the Fremont Properties, the Berg Group will own L.P. Units representing approximately 84.4% of the interests in the Operating Partnerships, and non-Berg Group parties will own approximately 4.69% of the interests in the Operating Partnerships, prior to the acquisition of any Pending Development Projects. 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. 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 (collectively the "Berg Voting Group") signed the Voting Rights Agreements. 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 Berg Voting Group acquired a 79.6% controlling ownership position in the Company. 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 from members of the Berg Voting Group for the purchase of their shares. No portion of the distribution was paid on shares held by the members of the Berg Voting Group. 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. In November 1997, the Company changed its fiscal year to December 31. THE OPERATING PARTNERSHIPS. On July __, 1998, the Company acquired control of the four Operating Partnerships by becoming the sole general partner and acquiring an approximate 10.91% interest in each one, which became effective as of July 1, 1998 for financial and partnership income tax accounting purposes. To purchase its interest the Company issued Demand Notes of approximately $6.9 million, $6.7 million, $19 million, and $1 million to MWP, MWP I, MWP II and MWP III, respectively. Although each Demand Note is payable on demand, no such demand may be made prior to the earlier of the closing of the Private Placement or July 1, 2000. Demand under each note may be made by action of the holders of a majority of the outstanding L.P. Units in the partnership. Interest on the Demand Notes is computed at the rate of 7.25, compounded semiannually. The amendment to the Acquisition Agreement, dated as of July 1, 1998, provides that upon the acquisition of the Fremont Properties by MWP, the Company will be required to pay MWP an additional $1.6 million to maintain its 10.91% interest in that partnership. As a consequence of the Partnership Closing, the Operating Partnerships currently hold R&D Properties with an aggregate book value as of March 31, 1998, of $135.2 million (net of accumulated depreciation of $82.6 million), subject to total debt of $158.7 million. The Fremont Properties will have a total purchase price of $19.7 million which include indebtedness of $5.9 million when acquired by the Operating Partnerships. Upon the completion of the Berg Acquisition and the implementation of the New Secured Loan, the total amount of collateralized indebtedness of the Operating Partnerships will be $164.6 million, none of which will be owed to related parties. 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 a Wells Fargo Bank N.A. ("Wells Fargo") line of credit, in the event of payment default by the Operating Partnerships. The Limited Partners have assumed a share of this debt to preserve basis for federal income tax purposes, and intend to provide limited guaranties of a similar nature to Prudential upon the refinance of the Wells Fargo debt with the New Secured Loan, and other proceeds. As a result of the Partnership Closing, the Operating Partnerships now have an aggregate of 63,844,980 L.P. Units outstanding, of which 60,320,520 L.P. Units are held by Carl E. Berg and other members of the Berg Group. Mr. Berg will receive 3,061,427 additional L.P. Units from upon his acquisition and contribution of the Fremont Properties to MWP. All of the Operating Partnerships are governed by the terms of the Operating Partnership Agreement and the Acquisition Agreement, as amended. Upon the final closing date for the Berg Acquisition, the Operating Partnerships also will be subject to the terms of the Exchange Rights Agreement, the Pending Projects Acquisition Agreement and the Option Agreement. The Operating Partnerships are maintained as separate entities to avoid unnecessary transfers of real estate interests and maintain favorable tax depreciation methods and periods. 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 proportionately with 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 share of all distributions with respect to its interest in each of the four limited partnerships will be identical. 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." 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 at the same time as 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. -23- ADDITIONAL DEBT ARRANGEMENTS. After the final closing date for the Berg Acquisition, the Company and the Operating Partnerships expect to obtain the $130 million New Secured Loan to be secured by 14 of the Properties. All of the proceeds of the New Secured Loan will be used to refinance existing debt, including approximately $33 million of debt outstanding under lines of credit guaranteed by all of the Berg Group members. At the closing of the Berg Acquisition, the Company and the Operating Partnerships also intend to obtain a $50 million revolving line of credit, which they are currently negotiating with several financial institutions (the "New Credit Line"). Proceeds from the New Credit Line will be used for working capital. Certain of the Limited Partners may guaranty all or part of the outstanding debt under the New Secured Loan for federal income tax considerations. See "DESCRIPTION OF THE PROPERTIES -- Mortgage Debt and Credit Line" and "FUTURE OPERATIONS OF THE COMPANY -- Line of Credit -- Mortgage Indebtedness Outstanding After Berg Acquisition." 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. In connection with the Company's July 1997 solicitation of shareholder approval for the sale of shares of Common Stock constituting control of the Company to BBE and its co-investors, the Company expressed its intention and desire to continue its historical involvement in the real estate business through some form of business combination with the Berg Group. The Company believes that the UPREIT Transactions fulfill that objective. See "FUTURE OPERATIONS OF THE COMPANY--Operating and Growth Strategy." Moreover, the acquisition of a controlling interest in the Operating Partnerships rather than the direct acquisition of any of the Properties will enhance 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 can 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 will simplify the accounting procedures associated with recording the associated transactions, permit clearer financial statement presentation, reduce the risk that the Company might fail to meet the 75% gross income test for REIT qualification in 1998, and help the Company to avoid regulation under the Investment Company Act of 1940. After the final closing of the Berg Acquisition and the closing of the Private Placement, the Company will have 75,100,000 Outstanding Shares, and the Berg Group will have beneficial ownership of approximately 84.6% of the Outstanding Shares (assuming contribution of the Fremont Properties). Except for the Excluded Properties, the Properties in the Company's initial portfolio will include all of the Silicon Valley R&D Properties currently owned by any of the Berg Group members SUMMARY OF THE TRANSACTIONS The Berg Acquisition and Private Placement transactions include the following events (assuming acquisition of the Fremont Properties): - - 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 and become Limited Partners. - - The Company has become the sole general partner of the Operating Partnerships by acquiring an approximate 10.91% interest in the capital and profits of the Operating Partnerships for $35.2 million ($33.6 million of Demand Notes payable upon closing of the Private Placement, and $1.6 million payable upon contribution of the Fremont Properties to MWP). - - Existing Limited Partnership interests will have been converted into 52,695,177 L.P. Units and a total of 14,211,229 L.P. Units will have been issued in exchange for R&D Properties contributed to MWP by Carl E. Berg, certain Berg Group members, and two of the Kontrabecki Partnerships. -24- - - The Company will give the Limited Partners the right to exchange each of their L.P. Units for one share of Common Stock upon certain circumstances. - - The Operating Partnerships will give certain Limited Partners 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 Berg Land Holdings 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 will transfer its property management business to the Company and will lease a portion of its Bandley Drive headquarters to the Company pursuant to the Office Lease. - - The Operating Partnerships will obtain secured debt of $130 million to repay $33.3 million of existing debt secured by the Kontrabecki Properties and $49.3 million of existing debt secured by some of the Berg Properties. Existing debt secured by some of the Berg Properties and Fremont Properties totaling approximately $34.6 million will remain outstanding. - - For income tax reasons certain Limited Partners have assumed secondary personal liability of existing debt and the same Limited Partners intend to guaranty payment of all or some portion of the New Secured Loan. The existing liability assumption and allocation agreements and the new guarantees would 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 its assets. CONSEQUENCES OF THE BERG ACQUISITION AND THE PRIVATE PLACEMENT The Berg Acquisition and the Private Placement will result in the following: - - 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 will be the sole general partner of, and own a 10.91% interest in, the Operating Partnerships. - - The members of the Berg Group will beneficially own 63,381,987 L.P. Units representing in the aggregate an approximate 84.4% limited partnership interest in the Operating Partnerships. - - Individuals and entities, other than members of the Berg Group, will directly and indirectly own 3,524,421 L.P. Units representing in the aggregate an approximate 4.69% 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 New 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 will have been used to repay $82.6 million of existing debt secured by the Properties, and to make a distribution of approximately $91.6 million to Carl E. Berg and Clyde J. Berg prior to the Partnership Closing. 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 (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. - Certain debt relating to the Properties will be refinanced, including debt of approximately $33 million owed under lines of credit for which members of the Berg Group are personally liable. However, in connection with the New Secured Loan, members of the Berg Group and other Limited Partners in the Operating Partnerships may provide 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 will succeed 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 10.91% general partner interest in the Operating Partnerships for $35.2 million, which (assuming 75,100,000 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 upon the resumption of trading of the Common Stock on the AMEX, 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 March 31, 1998. 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 (based on the combined historical financial statements) as of March 31, 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."
March 31, 1998 ----------------------------------- Predecessor Company Pro Historical Forma(2) --------------- --------------- (in thousands) Debt: Lines of credit $ 37,953 5,000 Notes payable (related parties) 1,821 - Mortgage notes payable 38,215 $159,639 --------------- --------------- Total debt(1) 77,989 164,639 Shareholders'/owners' 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 - (1,234) Additional paid in capital - (4,248) Accumulated equity of continuing interests 36,734 - --------------- --------------- Total shareholders'/owners' equity 36,734 (5,474) --------------- --------------- --------------- --------------- Total Capitalization $114,723 $159,165 --------------- --------------- --------------- ---------------
- ----------- (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 March 31, 1998; and (iii) combined historical financial statements of the Operating Partnerships' predecessor as of and for the periods or years ended March 31, 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 March 31, 1998, the approximate number of holders of record of the Company's common stock was 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 March 31, 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, 1998 and 1997, respectively. 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 Three Months Ended Year Ended March 31, 1998 December 31, 1997 ---------------------- ------------------- (in thousands) OPERATING DATA: Revenue: Rent $ 12,731 $45,572 Tenant reimbursements 2,097 6,769 ---------------------- ------------------- Total revenue 14,828 52,341 ---------------------- ------------------- Expenses: Operating expenses 1,026 3,790 Real estate taxes 1,212 4,475 General and administrative 700 2,750 Interest 2,944 11,777 Depreciation and amortization 2,229 8,892 ---------------------- ------------------- Total Expenses 8,111 31,684 ---------------------- ------------------- Income before minority interest 6,717 20,657 Minority Interest 5,984 18,403 ---------------------- ------------------- Net income 733 2,254 ---------------------- ------------------- ---------------------- ------------------- Basic and Diluted Earnings Per Share(1) $ 0.09 $0.28 ---------------------- ------------------- ---------------------- ------------------- 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) $ 0.94 $0.87 Average occupancy - stabilized 100% 97% FUNDS FROM OPERATIONS: (3) $ 8,946 $29,549 BALANCE SHEET DATA: Real estate assets, net of accumulated depreciation $154,852 Total assets 167,406 Debt 164,639 Total liabilities 172,880 Shareholders' equity (5,474)
- ------------------- (1) Per share calculations do not consider the dilutive effect of (i) 66,906,406 L.P. Units that are exchangeable for common shares of the Company's 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 industry analysts have accepted it as such. 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. 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 close to 100% 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. As a result, the Company believes that average asking rental rates will continue to increase during 1998 and 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 -33- 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. During 1998 and 1999, 13 Berg Properties representing 521,000 rentable square feet will be available for new leases or rent renewals. These Properties are located in Milpitas, Cupertino, Sunnyvale and San Jose, which the Company believes are in the highest rent category in Silicon Valley, aside from Palo Alto, a very specialized market with a low base of R&D Property square footage and an occupancy rate of 99.4% according to BT Commercial. Based on current conditions in the Silicon Valley R&D Properties market, the Company believes that it will be able to lease these Properties at rents which exceed the rental rates under the existing leases. 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 pro forma financial statements included elsewhere in this Proxy Statement/Prospectus.
Three Months Ended March 31, Year Ended December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ($ in thousands) (Unaudited) (Unaudited) OPERATING DATA: Revenue: Rent $ 11,073 $8,801 $40,163 $28,934 $23,064 $25,186 $25,620 Tenant reimbursements 2,033 1,226 6,519 3,902 4,193 3,190 3,486 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Total revenue 13,106 10,027 46,682 32,836 27,257 28,376 29,106 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Expenses: Operating expenses 1,019 1,118 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129 Real estate taxes 1,189 980 4,229 3,750 3,595 2,716 3,116 Management fee (related parties) 322 240 1,050 827 654 739 994 Interest (related parties) 61 79 248 293 357 329 45 Interest 1,485 1,470 5,919 6,090 6,190 8,222 9,054 Depreciation and amortization 1,935 1,680 7,717 6,739 6,323 6,851 7,156 ------------ ------------ ----------- ---------- ---------- ---------- ---------- 6,011 5,567 22,904 19,605 19,151 20,212 21,494 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before gain on sale of real estate and extraordinary item 7,095 4,460 23,778 13,231 8,106 8,164 7,612 Gain on sale - - - - 20,779 - - ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before extraordinary item 7,095 4,460 23,778 13,231 28,885 8,164 7,612 Extraordinary item - - - 610 3,206 - 1,766 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Net income $7,095 $4,460 $23,778 $13,841 $32,091 $ 8,164 $ 9,378 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ------------ ------------ ----------- ---------- ---------- ---------- ---------- PROPERTY AND OTHER DATA: Total properties, end of period 58 55 58 53 50 41 40 Total square feet, end of period 3,779 3,484 3,779 3,392 3,195 2,856 2,796 Average monthly rental revenue per square foot(1) $0.95 $0.81 $0.86 $0.78 $0.71 $0.96 $0.84 Occupancy at end of period 100% 96.2% 97.7% 91.9% 87.4% 80.3% 89.6% FUNDS FROM OPERATIONS(2)(3) $9,030 $6,140 $31,495 $19,970 $14,429 $15,015 $14,768 Cash flow from operations $9,835 $5,477 $29,909 $20,248 $16,392 $16,518 $18,480 Cash flow from investing (236) (3,454) (17,251) (29,275) (6,353) (5,003) (3,248) Cash flow from financing (505) (640) (8,432) 9,433 (10,013) (12,093) (13,599) March 31, December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: ($ in thousands) (Unaudited) (Unaudited) Real estate assets, net of accumulated depreciation $98,453 $92,484 $100,15 $90,710 $72,319 $62,450 $61,610 Total assets 122,529 102,791 113,950 97,651 73,730 59,957 64,516 Debt 76,168 73,314 76,507 73,416 69,543 79,594 100,126 Debt - related parties 1,821 2,411 1,975 2,546 3,051 2,889 1,433 Total liabilities 85,795 81,909 84,299 80,826 76,199 83,720 104,117 Partners' equity 36,734 20,882 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 industry analysts have accepted it as such. 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. 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.
Three Months Ended March 31, Year Ended December 31, ------------------------------- ---------------------------------------------------------------- 1998 1997(1) 1997(1) 1996 1995 1994 -------------- ------------- ------------- ------------- -------------- ------------ (in thousands) (Unaudited) (Unaudited) Revenue Base rent $1,658 $1,025 $5,409 $3,388 $3,136 $2,956 Other income 64 28 250 61 58 60 -------------- ------------- ------------- ------------- -------------- ------------ Total Revenue 1,722 1,053 5,659 3,449 3,194 3,016 Expenses Property operating 7 15 49 170 417 725 Real estate taxes 23 55 246 48 11 128 -------------- ------------- ------------- ------------- -------------- ------------ Total Expenses 30 70 295 218 428 853 -------------- ------------- ------------- ------------- -------------- ------------ Revenue in excess of certain expenses $1,692 $ 983 $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. As part of the Berg Acquisition, the Kontrabecki Properties became part of the real estate holdings of the Operating Partnerships at the Partnership Closing, and the Fremont Properties will be contributed when, and if, acquired by Carl E. Berg. The Company is the sole general partner and the beneficial owner of an approximately 10.91% interest in the Operating Partnerships, and, in general, will control the operations and activities of the Partnership. As a result, for accounting purposes, the financial information of the Operating Partnerships and the Company will be consolidated, as of 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 March 31, 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:
March 31, December 31, -------------------- --------------------------------------------- 1998 1997 1997 1996 1995 1994 -------- -------- --------- -------- --------- -------- Square feet (millions) 3.8 3.5 3.8 3.4 3.2 2.9 Occupancy percentage 100% 96.2% 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, 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:
Three Months Ended March 31, Years Ended December 31, ----------------------------- -------------------------------------------- 1998 1997 1997 1996 1995 ------------- -------------- -------------- ------------- ------------- ($ in thousands) Borrowing of Wells Fargo lines - - $3,750 $6,999 $ 1,034 Repayment of Wells Fargo lines - - (1,335) (952) (5,978) Borrowing on Notes (related parties) - - - - 637 Repayment on Notes (related parties) $(154) $(135) (571) (504) (474) Borrowing on Mortgages - - 3,105 - - Repayment of Mortgages (339) (102) (2,429) (1,563) (1,210) ------------- -------------- -------------- ------------- ------------- Borrowed/(Repaid) Total: $(493) $(237) $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:
Three Months Ended March 31, Years Ended December 31, ---------------------------- --------------------------------------- 1998 1997 1997 1996 1995 ------------- ------------- ------------ ------------ ----------- Constructed - 91,584 387,729 196,348 200,484 Purchased - - - - 454,591 Sold - - - - (315,460) ------------- ------------- ------------ ------------ ----------- Total Net - 91,584 387,729 196,348 339,615 ------------- ------------- ------------ ------------ ----------- ------------- ------------- ------------ ------------ -----------
Since 1991, BBE has operated as a management company providing services to the Berg Group members and their Affiliates that have owned the Berg Properties and 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 will be terminated upon the closing of the Berg Acquisition. 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. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 THE BERG PROPERTIES RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue increased by $2.3 million, or 26.1%, to $11.1 million for the three months ended March 31, 1998 compared to $8.8 million for the three months ended March 31, 1997. The principal reasons for the increase in rental revenue were the increase in the overall occupancy rate for the Berg Properties, from 96.2% at March 31, 1997 to 100% at March 31, 1998, the addition of approximately 296,000 rentable square feet of leased space during the second and third quarters of 1997, scheduled rental rate increases, and the higher rents associated with new leases. Tenant reimbursements increased by $0.8 million, or 66.7%, to $2.0 million for the three months ended March 31, 1998 from $1.2 million for the three months ended March 31, 1997. The increase in tenant reimbursements was due primarily to the higher occupancy level, the increase in total rentable square feet of leased space, and an increase in the number of tenants reimbursing the Berg Properties for operating expenses instead of paying them directly to the service provider. EXPENSES. Total expenses for the Berg Properties increased by approximately $0.4 million, or 7.1%, to $6.0 million for the three months ended March 31, 1998, compared to $5.6 million for the three months ended March 31, 1997. Property operating expenses decreased slightly by approximately $0.1 million, or approximately 9.1%, to approximately $1.0 million for the three months ended March 31, 1998 compared to approximately $1.1 million for the three months ended March 31, 1997. Depreciation expense increased by approximately $0.2 -39- million, or 11.8%, to $1.9 million for the three months ended March 31, 1998 compared to $1.7 million for the three months ended March 31, 1997 primarily as a result of new improvements and new construction. Real estate taxes increased slightly and interest expense (including amounts associated with related parties) for the three months ended March 31, 1998 was essentially unchanged in comparison to the quarter ended March 31, 1997, as debt principal balances and interest rates remained substantially the same. NET INCOME. Net income increased by approximately $2.6 million to almost $7.1 million for the three months ended March 31, 1998, an increase of nearly 58% over the net income of $4.5 million for the comparable period ended March 31, 1997. The substantial rise in net income resulted from a combination of new leases at higher rental rates and scheduled rental rate increases, as well as the addition of leased space, while operating expenses and interest expense were flat and real estate taxes, depreciation and amortization expense, and the BBE management fee resulted in an overall increase in expenses for the first quarter of 1998 of just $0.4 million or, approximately 7.1%, over the first quarter of 1997. THE ACQUIRED PROPERTIES RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue for the three months ended March 31, 1998 was $1.7 million for the Acquired Properties, with $1.2 million coming from the Kontrabecki Properties and $0.5 million coming from the Fremont Properties. Tenant reimbursements and other income were a combined $0.06 million, mostly attributable to the Fremont Properties. The Kontrabecki Properties had minimal expenses and minimal tenant reimbursements as the tenants paid most of their expenses directly to the service providers. EXPENSES. Total expenses for the Acquired Properties were $0.03 million, all of which were attributable to the Fremont Properties. REVENUE IN EXCESS OF CERTAIN EXPENSES. The combined revenue in excess of certain expenses of the Acquired Properties was $1.7 million, of which $1.2 million was derived from the Kontrabecki Properties and $0.5 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 first quarter of 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." Upon completion of the Berg Acquisition, the Company expects to have total indebtedness on the Properties of approximately $164.6 million, comprised of mortgage debt secured by certain of the Properties under the New Secured Loan and existing secured loan arrangements for $34.6 million. The New Secured Loan financing is expected to total $130 million, bearing an interest rate of 6.56%, with a term of 10 years, payable in monthly installments of interest and principal (based upon a 30 year amortization) of approximately $0.8 million. The Company will be required to pay total fees of approximately $0.5 million in connection with this new secured loan which is expected to close in late September 1998. The Company also expects to have $50 million available to borrow under the New Line of Credit. The Company's debt to Total Market Capitalization ratio will be approximately 32.8% based upon an estimated market capitalization of approximately $503 million. The Company expects to meet its short-term liquidity requirements generally through its initial working capital, the New Credit 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 that substantially all of these sums will be recouped from the tenants under new or renewed leases by way of increased 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 (including the New Credit Line) 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 $9.8 million and $5.5 million for the three months ended March 31, 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 $4.3 million increase in net cash provided by operating activities for the three months ended March 31, 1998 compared to the same period in 1997 was primarily due to an increase in net income, a reduction in the increase in other assets, as well as an increase in accounts payable and accrued expenses. 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 used in investing activities with respect to the Berg Properties was approximately $0.2 million and $3.5 million for the three months ended March 31, 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 $3.3 million decrease in net cash used in investing activities for the three months ended March 31, 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 $(0.5) million and $(0.6) million for the three months ended March 31, 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 have been directly related to the level of new construction and development of R&D Properties by the Berg Group. Comparing the three months ended March 31, 1998 to the three months ended March 31, 1997, there were no changes in debt other than normal recurring principal payments, and capital distributions decreased to $0.01 million for the three months ended March 31, 1998 from $0.4 million for the three months ended March 31, 1997. 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, the Berg Group increased total debt on the Berg Properties by $4.0 million, increased capital contributions by $9.3 million, and reduced capital distributions 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 $3.3 million for the three months ended March 31, 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- 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, currently are, or prior to the final closing of the Berg Acquisition will be, 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 March 31, 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. Upon completion of the Berg Acquisition, the Apple Properties will 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"). Upon completion of the Berg Acquisition, the Amdahl Properties will 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. Upon completion of the Berg Acquisition, the Cisco Properties will 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 would comprise approximately 21.63% of the Operating Partnerships' total rentable square footage following the Berg Acquisition. 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. 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 Project 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." -56- LAND HOLDING AND DEVELOPMENT ARRANGEMENTS BERG LAND HOLDINGS. Certain members of the Berg Group, including Carl E. Berg, own several parcels of undeveloped real estate in the Silicon Valley (the "Berg Land Holdings") which have been made available to the Company for future development, subject to closing the Berg Acquisition, 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 at a price equal to (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 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 -57- developer and ending at the close of escrow, and minus the sum of the principal amount of all debt encumbering the acquired property. The acquisition value of each parcel under the Option Agreement follows:
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 sell such building to a third party. - All action by the Company under the Option Agreement must be approved by a majority of the members of 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. 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 March 31, 1998. All mortgage debt is nonrecourse to the Company, although certain of the mortgages are cross-defaulted and cross-collateralized with other mortgaged Properties.
Pro Forma Actual March Pro Forma Annual Pro March 31, 31, 1998 Debt Paid off March 31, Forma Debt Maturity 1998 Debt Description Collateral Properties Balance at Offering 1998 Balance Service Date (1) Interest Rate - ----------------- ----------------------------- ------------ ------------- ------------ ------------ ----------- ------------- ($ IN THOUSANDS) LINES OF CREDIT: Wells Fargo 2251 Lawson Lane, Santa $37,953 $(32,953) 5,000 363 10/99 (2) 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 LOANS: Great West Life & Annuity Insurance Company 6320 San Ignacio Ave, San Jose, CA 7,836 - $7,836 $553 2/04 7.0% Great West Life & Annuity Insurance Company 6540 Via del Oro, 6385 San Ignacio Ave., San Jose, CA 1,977 - 1,977 140 5/04 7.0% Great West Life & Annuity Insurance Company 1170 Morse Avenue, Sunnyvale, CA 3,739 - 3,739 264 5/04 7.0% National Electrical Contractors Association Pension Benefit Trust Fund 2251 Lawson Lane, Santa Clara, CA 4,758 (4,758) - - 1/09 - Prudential Capital Group 1230 E. Arques, Sunnyvale, CA 1,130 (1,130) - - 11/07 - Prudential 20605 - 20705 Valley Green Capital Group Drive, Cupertino, CA 3,206 (3,206) - - 10/98 - Prudential Capital Group 20400 Mariani, Cupertino, CA 2,126 (2,126) - - 7/09 - Prudential Capital Group 1250 E. Arques, Sunnyvale, CA 2,249 (2,249) - - 11/99 - New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 444 (444) - - 8/09 - Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 558 (558) - - 1/07 - Amdahl 3120 Scott, Santa Clara, CA 7,087 - 7,087 682 3/14 9.5% Corporation Citicorp U.S.A. 2800 Bayview Drive, 3,105 - 3,105 233 4/00 (3) Inc. Fremont, CA ----------- ------------ ------------ ------------ Mortgage Loans Sub-total 38,215 (14,471) 23,744 2,235 Related Party 1,821 (1,821) - - Debt Acquired Properties 39,218 (33,323) 5,895 442 4/00 7.5% New Secured Loan 130,000 9,100 (4) 7.0%(4) -------- ------- $164,639 $11,777
- ------------- (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 three months ended March 31, 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) The Company is currently in negotiations with Prudential Capital to procure the New Secured Loan expected to total $130 million. The Company anticipates that the New Secured Loan will have an initial term of 10 years with an interest rate of 6.56%. At this time, there can be no assurance that the Company will be able to complete this transaction or another transaction with similar terms. Management believes that if negotiations were commenced with a new potential lender, the interest rate negotiated would approximate 7% (the current prevailing market rate), and therefore, the Company has assumed an interest rate of 7% for this loan. CREDIT LINE. 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. At the closing of the Berg Acquisition, the Company intends to repay indebtedness of approximately $33 million under the Wells Fargo lines of credit which are secured by some of the Properties. The Company also intends to repay -59- approximately $33.3 million of indebtedness under the Wells Fargo line which is secured by some of the Acquired Properties. The Company intends to obtain the New Credit Line the final closing date for the Berg Acquisition. 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 limited partnerships comprising the Operating Partnerships, only Mission West Properties, L.P. has had any Properties transferred to it as part of the Berg Acquisition; the other three limited partnerships will retain their historical Properties. The Property transfers to Mission West Properties, L.P. 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. Upon completion of the Berg Acquisition, the Company, through its general partnership interests in the Operating Partnerships, will own and operate 69 Silicon Valley R&D Properties. As of March 31, 1998, the occupancy rate of the Properties was approximately 100%. The Company also will acquire the 12 Silicon Valley R&D Properties comprising the Pending Development Projects, and has an 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 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. Frequently, the IPO proceeds are used to fund the companies' growth and expansion, with a resulting need for additional space. The Company believes that this financial 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. 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 constructed by the Berg Group on the Berg Land Holdings under the Option Agreement. 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- LINE OF CREDIT The Company intends to obtain the New Credit Line in order to finance acquisitions and for general corporate purposes. It is expected that the available credit facility will be approximately $50,000,000. Management expects to obtain this line of credit from a national or regional lending institution. The Company intends to have the line of credit in place by the closing of the Berg Acquisition. MORTGAGE INDEBTEDNESS OUTSTANDING AFTER BERG ACQUISITION The Company intends to obtain mortgage financing in order to refinance existing indebtedness. Management has had discussions with three national lending institutions regarding the mortgage financing. It is expected that the financing will be secured by a group of the Properties. This New Secured Loan financing is expected to total $130 million, with a term of 10 years, amortized over 30 years, resulting in monthly debt service obligations of $0.8 million. The Operating Partnerships expect to pay approximately $0.5 million as application and financing fees for the New Secured Loan. In addition, secured loans totaling approximately $34.6 million, which are secured by some of the Properties, will remain outstanding following the consummation of the Berg Acquisition. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PROPERTIES -- Pro Forma Liquidity and Capital Resources." -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 88% 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 pro forma FFO of the Company for all of the Properties for the twelve months ending March 31, 1999, with adjustments for certain known events occurring after March 31, 1998 that are not reflected in the Company's historical or pro forma financial statements. DISTRIBUTION TABLE The following table illustrates the adjustments made to the Company's pro forma FFO for the twelve months ended March 31, 1998, as adjusted, in estimating its initial dividend:
(in thousands, except expected initial dividend per share) --------------------- Pro forma income before minority interest and other non-recurring items for the year ended December 31, 1997 $20,657 Plus: Pro forma real estate depreciation and amortization for the year ended December 31, 1997 8,892 --------------------- Pro forma FFO for the year ended December 31, 1997 (1) 29,549 Less: Pro forma FFO for the three months ended March 31, 1997 (5,271) Plus: Pro forma FFO for the three months ended March 31, 1998 8,946 --------------------- Pro forma FFO for the twelve months ended March 31, 1998 33,224 Adjustments: Net increase in contractual rental income (2) 2,601 --------------------- Estimated adjusted pro forma FFO for the twelve months ended March 31, 1998 30,825 Adjustments: Net effect of straight-line rents (3) (1,508) Scheduled mortgage loan principal payments (4) (3,630) Estimated annual provision for leasing commissions (5) (1,074) Estimated annual provision for capital expenditures (6) (525) --------------------- Estimated pro forma Cash Available for Distribution for the twelve months ended March 31, 1999 29,088 --------------------- --------------------- Minority interests' share of estimated pro forma Cash Available for Distribution 25,914 --------------------- --------------------- The Company's share of estimated pro forma Cash Available for Distribution available for shareholders (7) 3,174 --------------------- --------------------- Estimated initial annual distribution per share (8) $0.34 --------------------- --------------------- Payout ratio based on estimated pro forma Cash Available for Distribution (9) 87.8% --------------------- ---------------------
- ------------------ (1) 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. (2) 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 March 31, 1998 and new leases and renewals that went into effect between March 31, 1998 and July 8, 1998. Rental Income has not been included for any properties for the periods prior to their construction completion and availability for occupancy. (3) Effect of adjusting straight-line rental income included in pro forma adjusted FFO for the twelve months ended March 31, 1998 to a cash basis. (4) Represents scheduled payments of debt principal due during the 12 months ending March 31, 1999. -64- (5) 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 April 1, 1998 through December 31, 2000. (6) The estimated cost of recurring building improvements and equipment replacements (excluding tenant improvements) at the Properties for the twelve months ending March 31, 1999. Generally, the Properties and their associated tenant leases are such that non-revenue producing tenant improvements are immaterial. (7) The Company's share of estimated pro forma Cash Available for Distribution and the initial amount available for distribution to the shareholders is based on the Company's 10.91% partnership interest in the Operating Partnerships. (8) 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. (9) 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 March 31, 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 partnership) or to conduct business other than through the operating partnership, 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 32.8% at March 31, 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. At the closing of the Berg Acquisition the Company intends to establish the New Secured Loan and the New Credit Line. The line of credit 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 issues 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 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 have acquired certain Berg Properties and certain Acquired Properties in July 1998, when the Company has consummated the Partnership Closing, and 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 10.91% general partner interest 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 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. -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 of 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 this 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 issues 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 become exercisable after the first anniversary of the Berg Acquisition, except that 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. Once in each 12-month period beginning on the first anniversary of the closing of the Offering, 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 permits 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 May 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 voting and investment power. The number of shares of Common Stock for which L.P. Units are exchangeable is not reflected in the table but is discussed in the footnotes. 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) Prior to After UPREIT Percent UPREIT Percent Transactions Ownership Transactions Ownership -------------- ------------- -------------- ------------- Michael J. Anderson 225,000(2) 13.1% 225,000 2.7% Vice President, Chief Operating Officer and Director Carl E. Warden 117,333(3) 6.9% 156,942(3) 1.9% 1516 Country Club Drive Los Altos, CA 94024 Robert L. & Sharon K. Yoerg(4) 111,111 6.5% 111,111 1.4% 98 Melanie Lane Atherton, CA 94027 Thelmer Aalgaard 82,973(5) 4.9% 152,973(6) 1.9% c/o Berg & Berg Enterprises, Inc. 10050 Bandley Drive Cupertino, CA 95014 Roger S. Kirk, Director 34,556 2.1% 34,556 * 521 E. Peach #28 Bozeman, Montana 59771 John C. Bolger, Director 25,348(7) 1.5% 25,348 * 96 Sutherland Drive Atherton, CA 94027 Carl E. Berg(8) 27,333(9) * 77,333(10) 1.0% President, Chief Executive Officer and Director Clyde J. Berg(8) 27,333(9) * 27,333(11) * c/o Berg & Berg Enterprises, Inc. 10050 Bandley Drive Cupertino, CA 95014 Berg & Berg Enterprises, Inc. 27,333(8) * 27,333(12) * 10050 Bandley Drive Cupertino, CA 95014 Bradley A. Perkins 0(13) * 0 * Vice President, General Counsel and Secretary Marianne K. Aguiar 0(14) * 0 * Vice President of Finance and Controller Ingalls & Snyder Value 0 * 1,125,067 13.7% Partners, L.P.(15) 61 Broadway New York, NY 10006 Meyer Family Trust 0 * 1,000,000 12.2% 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% 909 Montgomery Street, Suite 400 San Francisco, CA 94133 Leo Helzel(17) 0 * 437,000 5.3% 5550 Redwood Road, Suite 4 Oakland, CA 94619 Paul McCarthy(18) 0 * 430,000 5.2% 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% 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 May 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 May 15, 1998. (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) Does not include 1,254,577 shares of Common Stock issuable on exchange of L.P. Units held by Mr. Aalgaard 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 does not include 595,048 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. If all Common Stock issuable on exchange of L.P. Units were outstanding, Mr. Aalgaard's percent ownership would be 2.7%. (7) Includes 3,126 shares of Common Stock issuable on exercise of options. (8) Carl E. Berg and Clyde J. Berg disclaim beneficial ownership, except to the extent of their pecuniary interest, in the 1,097,959 shares of Common Stock subject to the Voting Rights Agreements. 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. 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. (9) Does not include 1,070,626 shares of Common Stock which are subject to Voting Rights Agreements. BBE and the Messrs. Berg disclaim beneficial ownership of such shares because BBE has no investment control over such shares and no power to vote such shares. However, holders of such shares are obligated, pursuant to Voting Rights Agreements, to vote such shares as recommended by Carl E. Berg, as agent for BBE. Both Clyde J. Berg and Carl E. Berg may be deemed the beneficial owner of any shares of Common Stock beneficially owned by BBE. See Footnote (1) above. (10) Does not include 31,476,025 shares of Common Stock issuable on exchange of L.P. Units held by Mr. Berg as a result of his status as a 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; Berg Venture II, a California limited partnership and limited partner of MWP; and ownership of certain properties referenced herein as the Fremont properties which he is obligated to contribute to MWP upon acquiring them. Also does not include an additional 4,542,121 shares of Common Stock issuable on exchange of L.P. Units held by BBE. If all Common Stock issuable on exchange of L.P. Units were outstanding and Mr. Berg were deemed to be the beneficial owner of the shares set forth above, Mr. Berg's percent ownership would be 48%. (11) Does not include 20,006,025 shares of Common Stock issuable on exchange of L.P. Units held by Mr. Berg 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 does not include 862,268 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 and 1,957,983 shares of Common Stock issuable on exchange of L.P. Units held by Mr. Berg as trustee of the 1981 Kara Ann Berg Trust. Does not include an additional 4,542,121 shares of Common Stock issuable on exchange of L.P. Units held by BBE. If all Common Stock issuable on exchange of L.P. Units were outstanding and Mr. Berg were deemed to be the beneficial owner of the shares set forth above, Mr. Berg's percent ownership would be 36.5%. (12) Does not include 4,542,121 shares of Common Stock issuable on exchange of L.P. Units held by BBE. If all Common Stock issuable on exchange of L.P. Units were outstanding, BBE's percent ownership would be 6.1%. (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 36,362,383 shares of Common Stock, or 48.4%. -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 is 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 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; which will be freely transferable in the public market without restriction or further registration under the Securities Act, unless purchased by Affiliates of Mission West-Maryland, whose shares will be subject to the resale limitations of Rule 144 and Rule 145(d). 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 will be accounted for as a recapitalization of the Berg Properties in a manner similar to reverse acquisition accounting recording the historical carrying value of assets with the exception of the Acquired Properties. The Acquired Properties will be accounted for as a purchase for the Fremont Properties and as a step-acquisition for the Kontrabecki Properties. Pursuant to the step-acquisition for the Kontrabecki Properties, The Berg Group's ownership interest will be recorded at their historical carrying value. 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- 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. -121- 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. -122- "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. "Berg Voting Group" means those shareholders of the Company who have executed one of the Voting Rights Agreements. "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. "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. -123- "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. -124- "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 Credit Line" means a line of credit facility for $50 million to be obtained by the Company and the Operating Partnerships on or after the date of final closing for the Berg Acquisition. "New Equity Financing Rights" has the meaning set forth in Section 8.8 of the Operating Partnership Agreement. -125- "New Credit Line" means a line of credit facility for $50 million to be obtained by the Company and the Operating Partnerships on or after the date of final closing for the Berg Acquisition. "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. -126- "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. "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. -127- "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. "Xilinx Sales" means sales of two R&D Properties by Berg & Berg to Xilinx Corporation in 1995. -128- MISSION WEST PROPERTIES INDEX TO FINANCIAL STATEMENTS ----------
Page --------- I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS Pro Forma Balance Sheet as of March 31, 1998 FS-2 Pro Forma Statement of Operations for the three months ended March 31, 1998 FS-3 Pro Forma Statement of Operations for the year ended December 31, 1997 FS-4 Notes and Management's Assumptions to Unaudited Pro Forma Financial Statements FS-5 II. COMBINED FINANCIAL STATEMENTS FOR THE BERG PROPERTIES Report of Independent Accountants FS-8 Combined Balance Sheets as of March 31, 1998 and 1997 and as of December 31, 1997 and 1996 FS-9 Combined Statements of Operations for the three month periods ended March 31, 1998 and 1997 and for the years ended December 31, 1997, 1996, and 1995 FS-10 Combined Statements of Net Equity for the three month period ended March 31, 1998 and for the years ended December 31, 1997, 1996 and 1995 FS-11 Combined Statements of Cash Flows for the three month periods ended March 31, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995 FS-12 Notes to Combined Financial Statements FS-13 III. FREMONT PROPERTIES Report of Independent Accountants FS-22 Combined Statement of Revenue and Certain Expenses for the year ended December 31, 1997 FS-23 Notes to Combined Statement of Revenue and Certain Expenses FS-24 IV. KONTRABECKI PROPERTIES Report of Independent Accountants FS-25 Combined Statements of Revenue and Certain Expenses for the years ended December 31, 1997, 1996 and 1995 FS-26 Notes to Combined Statements of Revenue and Certain Expenses FS-27
FS-1 MISSION WEST PROPERTIES PRO FORMA BALANCE SHEET (UNAUDITED) (IN THOUSANDS) ----------
Preferential The Acquired Mission West The Berg Equity Properties Pro Froma Properties Properties Distribution March 31, 1998 Adjustment Pro Forma March 31, 1998 March 31, 1998 (Note 3) (Note 4) (Note 5) March 31, 1998 --------- ----------- ---------- ---------- ----------- ----------- Assets: Real Estate: Land - $30,426 - $10,947 - $41,373 Building and improvements - 148,039 - 46,999 $1,000 196,038 --------- ----------- ---------- ---------- ----------- ----------- - 178,465 - 57,946 1,000 237,411 Less, accumulated depreciation - (80,012) - (2,557) - (82,569) --------- ----------- ---------- ---------- ----------- ----------- - 98,453 - 55,389 1,000 154,842 Cash and cash equivalents $5,153 14,813 (91,594) - 74,600 2,972 Deferred rent receivable - 4,365 - - - 4,365 Other assets, net 329 4,898 - - - 5,227 ========= =========== ========== ========== =========== =========== Total Assets 5,482 122,529 (91,594) 5,389 75,600 167,406 ========= =========== ========== ========== =========== =========== Liabilities and shareholders' (deficit) / equity: Lines of credit - 37,953 - - (32,953) 5,000 Notes payable (related parties) - 1,821 - 33,323 (35,144) - Mortgage notes payable - 38,215 - 5,895 115,529 159,639 Accounts payable/ accrued expenses 435 3,549 - - - 3,984 Other liabilities - 4,257 - - - 4,257 --------- ----------- ---------- ---------- ----------- ----------- Total Liabilities 435 85,795 - 39,218 47,432 172,880 --------- ----------- ---------- ---------- ----------- ----------- Shareholders'/ owners' 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 Common Stock (1,234) - - - - (1,234) Additional paid in capital 6,281 - (54,860) 16,171 28,160 4,248 Accumulated equity of continuing interests - 36,734 (36,734) - - - --------- ----------- ---------- ---------- ----------- ----------- Total shareholders' /owners equity 5,047 36,734 (91,594) 16,171 28,168 (5,474) --------- ----------- ---------- ---------- ----------- ----------- Total liabilities and shareholders'/ owners' equity $5,482 $122,529 (91,594) $55,389 $75,600 $167,406 ========= =========== ========== ========== =========== ===========
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 THREE MONTHS ENDED (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) ----------
The Acquired Mission West The Berg Properties Pro Forma Properties Properties March 31, 1998 Adjustments Pro Forma March 31, 1998 March 31, 1998 (Note 4) (Note 5) March 31, 1998 -------------- -------------- --------------- ------------ -------------- Revenue: Rent - 11,073 $1,658 - $12,731 Tenant reimbursements - 2,033 64 - 2,097 Other $77 - - $(77) - -------------- -------------- --------------- ------------ -------------- Total revenue 77 13,106 1,722 (77) 14,828 -------------- -------------- --------------- ------------ -------------- Expenses: Operating expenses - 1,019 7 - 1,026 Real estate taxes - 1,189 23 - 1,212 General and administrative 230 - - 470 700 Management fees (related parties) - 322 - (322) - Interest (related parties) - 61 - (61) - Interest - 1,485 - 1,459 2,944 Depreciation and amortization - 1,935 294 - 2,229 -------------- -------------- --------------- ------------ -------------- Total expenses 230 6,011 324 1,546 8,111 -------------- -------------- --------------- ------------ -------------- Income (loss) before minority interest (153) 7,095 1,398 (1,623) 6,717 Minority interest - - - 5,984 5,984 -------------- -------------- --------------- ------------ -------------- Net income (loss) $(153) $7,095 $1,398 $(7,607) $733 -------------- -------------- --------------- ------------ -------------- -------------- -------------- --------------- ------------ -------------- -------------- -------------- -------------- -------------- Basic and diluted earnings (loss) per share $(0.10) $0.09 -------------- -------------- -------------- -------------- Weighted average number of common shares outstanding 1,503,933 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) ----------
The Acquired Mission West The Berg Properties Properties Properties December 31, Pro Forma Pro Forma November 30, December 31, 1997 Adjustments December 31, 1997 1997 (Note 4) (Note 5) ------------ ------------ ------------- ------------ ------------- Revenue: Rent $1,376 $40,163 $5,409 $(1,376) $45,572 Tenant reimbursements - 6,519 250 - 6,769 Other 359 - - (359) - ------------ ------------ ------------- ------------ ------------- Total revenue 1,735 46,682 5,659 (1,735) 52,341 ------------ ------------ ------------- ------------ ------------- Expenses: Operating expenses 246 3,741 49 (246) 3,790 Real estate taxes - 4,229 246 - 4,475 General and administrative 1,467 - - 1,283 2,750 Management fees (related parties) - 1,050 - (1,050) - Interest (related parties) - 248 - (248) - Interest 425 5,919 - 5,433 11,777 Depreciation and amortization 246 7,717 1,175 (246) 8,892 ------------ ------------ ------------- ------------ ------------- Total expenses 2,384 22,904 1.470 4,926 31,684 ------------ ------------ ------------- ------------ ------------- Income (loss) before minority interest, gain on sale of real estate, income taxes (649) 23,778 4,189 (6,661) 20,657 Minority interest - - - 18,403 18,403 ------------ ------------ ------------- ------------ ------------- Income before gain on sale of real estate and income taxes (649) 23,778 4,189 (25,064) 2,254 ------------ ------------ ------------- ------------ ------------- Gain on sale for real estate 4,736 - - (4,736) - (Provision) for income taxes (1,043) - - 1,043 - ------------ ------------ ------------- ------------ ------------- Net income $3,044 $23,778 $4,189 $(28,757) $2,254 ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------- Basic and diluted earnings per share $18.48 $0.28 ------------ ------------- ------------ ------------- 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 THREE MONTHS ENDED MARCH 31, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997, CONTINUED (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------- 1. ORGANIZATION AND BASIS OF PRESENTATION: The pro forma 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 UPREIT Transactions. The pro forma balance sheet of the Company at March 31, 1998 has been prepared as if the UPREIT Transactions had been consummated at March 31, 1998. The pro forma statements of operations for three months ended March 31, 1998 and for the year ended December 31, 1997 have been prepared as if the UPREIT Transactions had been consummated on January 1, 1998 and 1997, respectively. In management's opinion, all adjustments necessary to reflect the effects of the UPREIT Transactions 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 March 31, 1998, nor actual results of operations for three months ended March 31, 1998 or for the year ended December 31, 1997, had the UPREIT Transactions occurred on March 31, 1998 and January 1, 1998 or 1997, respectively, 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, 1997. As the transition period was less than one month no separate transition period statements have been prepared. 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 adjusted to reflect the self-administered structure of the Company and the additional expenses of being a public company. 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. PREFERENTIAL EQUITY DISTRIBUTION: In connection with the recapitalization, members of the Berg Group will receive a preferential equity distribution aggregating $91,594. The Berg Group's equity in the underlying properties, on a fair market basis, is significantly in excess of the book value and the preferential equity distribution represents the return of that value to the Berg Group prior to the contribution of the properties to the Operating Partnership. The preferential equity distribution served to reduce the purchase price of the 10.91% general partnership interest required to be paid by the Company. 4. THE ACQUISITIONS: Concurrent with the consummation of the UPREIT Transactions, the Company will purchase the Acquired Properties which include approximately 144,000 rentable square feet currently owned by a third party (Continued) FS-5 (the "Fremont Properties"), as well as approximately 416,000 rentable square feet consisting of properties held by limited partnerships controlled by John Kontrabecki as general partner (the "Kontrabecki Properties"). Certain entities related to the Berg Group own non-controlling interests in the Kontrabecki Properties. Any interests related to the Acquired Properties held by certain entities related to the Berg Group have been reflected in the pro forma financial statements at their historical book values. In connection with the acquisition of the Acquired Properties, the Operating Partnership will issue 6,694,027 partnership units (issued at a value of $4.50 per partnership unit) with a fair value of $30,123. The Operating Partnership will also assume $39,218 of debt which is collateralized by these properties, resulting in a total purchase price of $69,341. Subsequent to the closing of the $130,000 portfolio mortgage facility, $33,323 of debt assumed in connection with the Acquired Properties will be repaid. Upon the closing of the Berg Acquisition, the Acquired Properties will have a total book value of $55,389 which includes a partial step-up in basis for the interest in the Acquired Properties previously held by entities outside the Berg Group. The book value has been allocated between land, buildings and improvements based upon the historical percentages of costs incurred to purchase the land and land improvements of the overall properties' value. 5. PRO FORMA ADJUSTMENTS: (1) In conjunction with the UPREIT Transactions, in September and November 1997, the Company completed the private placement of 200,000 (adjusted for the 1 for 30 reverse stock split) and 1,250,000 shares of common stock, respectively, resulting in proceeds to the Company of $6,525. On March 30, 1998, the Company sold 200,000 shares at $4.50 per share to an executive officer in exchange for a note receivable payable to the Company. Concurrent with the UPREIT Transactions, the Company will sell 6,295,058 shares at $4.50 per share to certain accredited investors for net proceeds of $28,328. 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. Operations of the Company for the year ended November 30, 1997, represent the results of its liquidation of prior holdings and are not indicative of its future operations. (2) The Company will repay amounts borrowed as follows:
Lines of credit $32,953 Mortgages notes payable 14,471 Notes payable (related parties) 35,144 --------- $82,568 --------- ---------
The pro forma statements of operations have been adjusted to reflect historical interest expense to reflect such payment. The early repayment of certain mortgages is expected to result in prepayment penalties of $160. (3) The Company intends to borrow $130,000 under a new portfolio mortgage facility that is collateralized by certain properties owned by the Operating Partnerships controlled by the Company. The Company is currently in negotiations with a potential lender for a loan which will have an initial term of 10 years with an interest rate of 6.56%. However, as the Company is still in negotiations with the potential lender, there can be no assurance that the Company will be able to complete this transaction or a transaction with similar terms. Management believes that if the Company was required to seek a loan from a new potential lender, the available interest rate would approximate 7% (the current prevailing market rate). Therefore, the Company has used a rate of 7% in the pro forma financial statements reflecting this projected loan. Additional interest expense associated with these borrowings, net of the repayments discussed above, in the amounts of $1,459 and $5,433 for the pro forma three months ended March 31, 1998, and for the pro forma year ended December 31, 1997, respectively, has been adjusted to reflect the new capital structure of the Company. (4) As a result of the transfer of title from the current owners of certain properties to the Operating Partnerships, transfer taxes approximating $1,000 will be paid. The Company does not anticipate full reassessment for property tax purposes due to the transactions associated with the UPREIT Transactions, however, any increases in such taxes will be passed to the properties' tenants under such tenants' lease agreements. (5) 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 eliminated. (6) In connection with the UPREIT Transactions, the Company will own an approximate 10.91% interest in the Operating Partnerships and become its sole general partner. Pursuant to EITF 94-2 the initial minority interest is less than zero and; therefore, has been recorded at zero in the pro forma balance sheet at March 31, 1998.. (7) The historical financial information for the Company has been eliminated as it is not reflective of the future operations of the Company. (Continued) FS-6 MISSION WEST PROPERTIES NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997, CONTINUED (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------- PRO FORMA ADJUSTMENT SUMMARY: Balance Sheet - March 31, 1998:
Cash and Notes Payable Mortgage Shareholders' Pro Forma Cash Real Estate Lines of (Related Notes Common (Deficit)/ Adjustment Equivalents Assets Credit Parties) Payable Stock Equity - ---------- ------------- ----------- --------- --------------- ------------ --------- -------------- 1 $28,328 $(8) $(28,320) 2 (82,728) $32,953 $35,144 $14,471 160 3 130,000 (130,000) 4 (1,000) $1,000 ------------ ----------- --------- --------------- ------------ --------- -------------- $74,600 $1,000 $32,953 $35,144 $(115,529) $(8) $(28,160) ------------ ----------- --------- --------------- ------------ --------- -------------- ------------ ----------- --------- --------------- ------------ --------- --------------
Statement of Operations - for the three months ended March 31, 1998:
Management Fee Interest Pro Forma General and (Related (Related Minority Adjustment Revenue Administrative Parties) Parties) Interest Interest - -------------- ---------- ----------------- ----------------- ----------- -------------- ------------ 2 $61 $816 3 (2,275) 5 $(700) $322 6 $(5,984) 7 $(77) 230 ------------ --------------- ----------------- ----------------- ------------- ------------ $(77) $(470) $322 $61 $(1,459) $(5,984) ------------ --------------- ----------------- ----------------- ------------- ------------ ------------ --------------- ----------------- ----------------- ------------- ------------
Statement of Operations - for the year ended December 31, 1997:
Management General Fee Interest Depreciation Pro Forma Operating and (Related (Related and Adjustment Revenue Other Expenses Administrative Parties) Parties) Interest Amortization - ------------- ---------- -------- ----------- --------------- ------------- ----------- ---------- --------------- 2 $248 $3,242 3 (9,100) 5 $(2,750) $1,050 6 7 $(1,376) $(359) $246 1,467 425 $246 -------- ------- --------- ------------ ------------ --------- -------- ------------ $(1,376) $(359) $246 $(1,283) $1,050 $248 $(5,433) $246 --------- ------- --------- ------------ ------------ --------- -------- ------------ --------- ------- --------- ------------ ------------ --------- -------- ------------ Provision for Pro Forma Minority Gain Income Adjustment Interest on Sale Taxes - ------------ ---------- --------- ----------- 2 3 6 7 $(18,403) 8 $(4,736) $1,043 ----------- ---------- -------- $(18,403) $(4,736) $1,043 ----------- ---------- -------- ----------- ---------- --------
FS-7 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-8 THE BERG PROPERTIES COMBINED BALANCE SHEETS (IN THOUSANDS) -------
March 31, 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 61,262 55,982 61,262 51,410 Tenant improvements 86,777 75,385 86,541 73,163 ------------------- ---------------- --------------- --------------- 178,465 161,793 178,229 154,999 Less, accumulated depreciation (80,012) (72,744) (78,077) (71,064) ------------------- ---------------- --------------- --------------- 98,453 89,049 100,152 83,935 Construction-in-progress - 3,435 - 6,775 ------------------- ---------------- --------------- --------------- 98,453 92,484 100,152 90,710 ------------------- ---------------- --------------- --------------- Cash and cash equivalents 14,813 2,876 5,719 1,493 Deferred rent receivable 4,365 3,169 4,144 2,843 Other assets, net 4,898 4,262 3,935 2,605 ------------------- ---------------- --------------- --------------- $122,529 $102,791 $113,950 $ 97,651 ------------------- ---------------- --------------- --------------- ------------------- ---------------- --------------- --------------- LIABILITIES AND NET EQUITY Lines of credit $ 37,953 $ 35,538 $ 37,953 $ 35,538 Notes payable (related parties) 1,821 2,411 1,975 2,546 Mortgage notes payable 38,215 37,776 38,554 37,878 Accounts payable and accrued expenses 3,549 2,884 2,102 2,262 Other liabilities 4,257 3,300 3,715 2,602 ------------------- ---------------- --------------- --------------- 85,795 81,909 84,299 80,826 Net equity 36,734 20,882 29,651 16,825 ------------------- ---------------- --------------- --------------- $122,529 $102,791 $113,950 $ 97,651 ------------------- ---------------- --------------- --------------- ------------------- ---------------- --------------- ---------------
The accompanying notes are an integral part of these financial statements. FS-9 THE BERG PROPERTIES COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS) ----------
Three Months Ended March 31, Year Ended December 31, ------------------------------ ------------------------------------------------- 1998 1997 1997 1996 1995 -------------- ------------- -------------- ------------- ------------- (Unaudited) (Unaudited) Revenue: Rent $11,073 $ 8,801 $40,163 $28,934 $23,064 Tenant reimbursements 2,033 1,226 6,519 3,902 4,193 -------------- ------------- -------------- ------------- ------------- Total revenue 13,106 10,027 46,682 32,836 27,257 -------------- ------------- -------------- ------------- ------------- Expenses: Operating expenses 1,019 1,118 3,741 1,906 2,032 Real estate taxes 1,189 980 4,229 3,750 3,595 Management fee (related parties) 322 240 1,050 827 654 Interest (related parties) 61 79 248 293 357 Interest 1,485 1,470 5,919 6,090 6,190 Depreciation and amortization 1,935 1,680 7,717 6,739 6,323 -------------- ------------- -------------- ------------- ------------- 6,011 5,567 22,904 19,605 19,151 -------------- ------------- -------------- ------------- ------------- Income before gain on sale of real estate and extraordinary item 7,095 4,460 23,778 13,231 8,106 Gain on sale - - - - 20,779 -------------- ------------- -------------- ------------- ------------- Income before extraordinary item 7,095 4,460 23,778 13,231 28,885 Extraordinary item - - - 610 3,206 -------------- ------------- -------------- ------------- ------------- Net income $ 7,095 $ 4,460 $23,778 $13,841 $32,091 -------------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. FS-10 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 (12) Net income 7,095 ------------- Balance, March 31, 1998 (unaudited) $ 36,734 ------------- -------------
The accompanying notes are an integral part of these financial statements. FS-11 THE BERG PROPERTIES COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) --------------
Three Months Ended March 31, Year Ended December 31, ---------------------------- ------------------------------------ 1998 1997 1997 1996 1995 ----------- ----------- -------- -------- -------- (Unaudited) (Unaudited) Operating activities: Net income 7,095 4,460 $ 23,778 $ 13,841 $ 32,091 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 1,935 1,680 7,717 6,739 6,323 Loan fee amortization 3 3 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 (221) (326) (1,330) (586) (77) Other assets (966) (1,660) (1,221) (406) 354 Accrued expenses 1,447 622 (160) 353 1,841 Other liabilities 542 698 1,113 907 (165) ----------- ----------- -------- -------- -------- Net cash provided by operating activities 9,835 5,477 29,909 20,248 16,392 ----------- ----------- -------- -------- -------- Investing activities: Purchase and improvements to real estate (236) (3,454) (17,251) (29,275) (35,910) Proceeds from sale of property - - - - 29,557 ----------- ----------- -------- -------- -------- Net cash (used in) investing activities (236) (3,454) (17,251) (29,275) (6,353) ----------- ----------- -------- -------- -------- Financing activities: Borrowings on lines of credit - - 3,750 6,999 1,034 Repayments on lines of credit - - (1,335) (952) (5,978) Borrowings on notes payable (related parties) - - - - 637 Repayments on notes payable (related parties) (154) (135) (571) (504) (474) Borrowings on mortgage notes payable - - 3,105 - - Repayments on mortgage notes payable (339) (102) (2,429) (1,563) (1,210) Capital contributions - - 755 12,299 2,953 Capital distributions (12) (403) (11,707) (6,846) (6,975) ----------- ----------- -------- -------- -------- Net cash (used in) provided by financing activities (505) (640) (8,432) 9,433 (10,013) ----------- ----------- -------- -------- -------- Increase in cash and cash equivalents 9,094 1,383 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 $14,813 $ 2,876 $ 5,719 $ 1,493 $ 1,087 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Noncash investing and financing activities: Noncash transfers of construction-in-progress - $ 3,340 $ 6,775 $ 75 - ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Noncash property distribution - - - - $ 6,775 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Supplemental information: Cash paid for interest, net of amounts capitalized $ 1,485 $ 1,470 $ 6,272 $ 6,278 $ 6,243 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. FS-12 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-13 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 March 31, 1998 and 1997, and the results of their operations and cash flows for the three months ended March 31, 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-14 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-15 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-16 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 three months ended March 31, 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-17 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-18 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-20 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-21 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-22 FREMONT PROPERTIES STATEMENT OF REVENUE AND CERTAIN EXPENSES (IN THOUSANDS) ----------
Three Months Ending March 31, ------------------------------ Year Ended 1998 1997 December 31, 1997 -------------- -------------- ------------------ (unaudited) Revenue: Base rent $530 $223 $1,256 Tenant reimbursements 64 28 173 -------------- -------------- ------------------ 594 251 1,429 Expenses: Property operating and maintenance 7 11 40 Real estate taxes 23 55 234 -------------- -------------- ------------------ Total expenses 30 66 274 -------------- -------------- ------------------ Revenue in excess of certain expenses $564 $185 $1,155 ============== ============== ==================
The accompanying notes are an integral part of these financial statements. FS-23 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-24 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-25 KONTRABECKI PROPERTIES COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES (IN THOUSANDS) ----------
Three Months Ended Year Ended December 31, March 31, -------------------- ----------------------------- 1998 1997 1997 1996 1995 --------- --------- -------- -------- --------- (unaudited) Revenue: Base rent $1,128 $802 $4,153 $3,388 $3,136 Other income - - 77 61 58 --------- --------- -------- -------- --------- 1,128 802 4,230 3,449 3,194 --------- --------- -------- -------- --------- Expenses: Property operating and maintenance - 4 9 170 417 Real estate taxes - - 12 48 11 --------- --------- -------- -------- --------- Total expenses - 4 21 218 428 --------- --------- -------- -------- --------- Revenue in excess of certain expenses $1,128 $798 $4,209 $3,231 $2,766 ========= ========= ======== ======== =========
The accompanying notes are an integral part of these financial statements. FS-26 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-27 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 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 July 20, 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 July 20, 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 * /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 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 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-2.1 2 MERGER AGREEMENT AND PLAN OF MERGER MERGER AGREEMENT AND PLAN OF MERGER This Merger Agreement and Plan of Merger ("Agreement") is made and entered into as of ________ __, 1998 by and between Mission West Properties, a California corporation ("Mission West-California" or "Parent"), and Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland" or "Surviving Corporation") (collectively, with Mission West-California, the "Constituent Corporations"). ARTICLE I THE MERGER 1.1 EFFECTIVE TIME OF THE MERGER. Mission West-California shall merge with and into Mission West-Maryland (the "Merger") pursuant to Section 1110 of the California General Corporation Law ("CGCL") and Sections 3-101 et seq. of the Maryland General Corporation Law ("MGCL"). The Merger shall become effective upon the filing of the certificate of ownership of Mission West-California, which incorporates this Agreement, with the Secretary of State of the State of California and acceptance for record of Articles of Merger by the State Department of Assessments and Taxation of Maryland ("SDAT") (the "Effective Time of Merger"). 1.2 MERGER AT THE EFFECTIVE TIME. At the Effective Time of the Merger, Mission West-California shall be merged into Mission West-Maryland, and the separate corporate existence of Mission West-California shall cease. Mission West-Maryland shall be the Surviving Corporation. 1.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Section 1107 of the CGCL and Sections 3-114 of the MGCL. As the Surviving Corporation in the Merger, Mission West-Maryland shall succeed, without other transfer, to all the rights and property of Mission West-California and shall be subject to all of the obligations and liabilities of Mission West-California in the same manner as if Mission West-Maryland had incurred them itself. ARTICLE II APPROVAL OF THE MERGER 2.1 APPROVAL BY PARENT. The Merger shall be approved by the Board of Directors of Mission West-California in accordance with the provisions of Section 1110(a) of the CGCL. The Merger shall be approved by the shareholders of Mission West-California as provided in Section 1110(c) of the CGCL. 2.2 APPROVAL BY SUBSIDIARY. The Merger shall be approved by the Board of Directors of Mission West-Maryland as provided in Sections 3-105 and 3-106 of the MGCL. ARTICLE III ARTICLES OF INCORPORATION, BYLAWS AND DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION 3.1 ARTICLES OF INCORPORATION OF SURVIVING CORPORATION. The Articles of Amendment and Restatement (the "Charter") of Mission West-Maryland, attached hereto as Exhibit A, in effect immediately prior to the Effective Time of the Merger, shall be the Charter of the Surviving Corporation unless and until the Charter is amended as provided by applicable law or as provided in such Charter. 3.2 BYLAWS OF SURVIVING CORPORATION. The Bylaws of Mission West-Maryland, attached hereto as Exhibit B, in effect immediately prior to the Effective Time of the Merger, shall be the Bylaws of the Surviving Corporation unless and until amended or repealed as provided by applicable law, the Charter or Bylaws of the Surviving Corporation. 3.3 OFFICERS AND DIRECTORS OF SURVIVING CORPORATION. The officers and directors of Mission West-California in office immediately prior to the Effective Time of the Merger shall be the officers and directors of the Surviving Corporation unless and until replaced as provided by applicable law, the Charter or the Bylaws of the Surviving Corporation. ARTICLE IV EFFECT ON OUTSTANDING STOCK; CAPITALIZATION 4.1 CAPITALIZATION. As of the date hereof, the authorized capital stock of Mission West-California consists of 200,000,000 shares of Common Stock, no par value, of which ____________ are currently issued and outstanding, and 20,000,000 shares of Preferred Stock, no par value, none of which has been designated as any series and none of which are issued and outstanding. As of the date hereof, the authorized stock of Mission West-Maryland consists of 200,000,000 shares of Common Stock, $0.001 par value per share, of which 100 shares are currently issued and outstanding and 20,000,000 shares of Preferred Stock, $0.001 par value per share, none of which has been designated as any series and none of which are issued and outstanding. Mission West-California owns all of the issued and outstanding shares of Common Stock of Mission West-Maryland. 4.2 EFFECT ON PARENT STOCK. At the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the Constituent Corporations, each share of the issued and outstanding Common Stock of Mission West-California shall be exchanged for one share of the Common Stock of Mission West-Maryland. 4.3 EFFECT ON PARENT STOCK OPTIONS. At the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the Constituent Corporations, the 5,500,000 shares of Common Stock reserved for issuance under the Mission West-California 1997 Stock Option Plan shall become shares of Common Stock of Mission West-Maryland reserved for issuance under such Plan, and options to purchase _______ shares of Common Stock of Mission West-California which have been granted and are outstanding under such Plan shall be exchangeable for options to purchase the same number of shares of Mission West-Maryland Common Stock at the same exercise price per share. 4.4 EFFECT ON STOCK OF SUBSIDIARY. At the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the Constituent Corporations, all of the shares of Common Stock of Mission West-Maryland issued and outstanding immediately before this Effective Time of the Merger shall be canceled. No securities, cash, or other property shall be issued to Mission West-California as the holder of all of the outstanding shares of Mission West-Maryland Common Stock. ARTICLE V GENERAL PROVISIONS 5.1 GOVERNING LAW. This Agreement shall be governed by and effected in accordance with the laws of the State of California. 5.2 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the Merger and supersedes all prior or contemporaneous agreements. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. MISSION WEST PROPERTIES, a California corporation By: -------------------------------- Carl E. Berg, President and Chief Executive Officer By: -------------------------------- Bradley A. Perkins, Secretary MISSION WEST PROPERTIES, INC. a Maryland corporation By: (SEAL) -------------------------- Carl E. Berg, President and Chief Executive Officer Attest: ---------------------------- Bradley A. Perkins, Secretary EX-3.2-1 3 ARTICLES OF AMENDMENT AND RESTATEMENT MISSION WEST PROPERTIES, INC. ARTICLES OF AMENDMENT AND RESTATEMENT FIRST: Mission West Properties, Inc., a Maryland corporation (the "Corporation"), desires to amend and restate its charter as currently in effect and as hereinafter amended. SECOND: The following provisions are all the provisions of the charter currently in effect and as hereinafter amended: ARTICLE I INCORPORATOR The undersigned, James J. Hanks, Jr., whose address is c/o Ballard Spahr Andrews & Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland 21202, being at least 18 years of age, does hereby form a corporation under the general laws of the State of Maryland. ARTICLE II NAME The name of the corporation (the "Corporation") is: Mission West Properties, Inc. ARTICLE III PURPOSE The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the "Code")) for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force. For purposes of these Articles, "REIT" means a real estate investment trust under Sections 856 through 860 of the Code. ARTICLE IV PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT The address of the principal office of the Corporation in the State of Maryland is c/o Ballard Spahr Andrews & Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland 21202, Attention: James J. Hanks, Jr. The name of the resident agent of the Corporation in the State of Maryland is James J. Hanks, Jr., whose post address is c/o Ballard Spahr Andrews & Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland 21202. The resident agent is a citizen of and resides in the State of Maryland. ARTICLE V PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS Section 5.1 NUMBER OF DIRECTORS. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation shall be five, which number may be increased or decreased pursuant to the Bylaws, but shall never be less than the minimum number required nor more than the maximum number allowed by the Maryland General Corporation Law. Section 5.2 EXTRAORDINARY ACTIONS. Notwithstanding any provision of law permitting or requiring any action to be taken or approved by the affirmative vote of the holders of shares entitled to cast a greater number of votes, any such action shall be effective and valid if taken or approved by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter. Section 5.3 AUTHORIZATION BY BOARD OF ISSUANCE OF STOCK, DEBT SECURITIES. The Board of Directors may authorize the issuance from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or securities or rights convertible into shares of its stock of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the charter or the Bylaws. To the fullest extent permissible under the General Corporation Law of Maryland, the Board of Directors may authorize the issuance from time to time of debt securities convertible into other debt securities or into shares of the Corporation within such time and upon the happening of one or more specified events, and upon such terms and conditions as are fixed by the Board of Directors. Section 5.4 PREEMPTIVE RIGHTS. Except as may be provided by the Board of Directors in setting the terms of classified or reclassified shares of stock pursuant to Section 6.4, or as may otherwise be provided by contract, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right to purchase or subscribe for any additional shares of stock of the Corporation or any other security of the Corporation which it may issue or sell. Section 5.5 INDEMNIFICATION. The Corporation shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former director or officer of the Corporation or (b) any individual who, while a director of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any 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 the Corporation. The Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. Section 5.6 DETERMINATIONS BY BOARD. The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the charter and in the absence of actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a court, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: The amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, redemption of its stock or the payment of other distributions on its stock; the amount of paid-in surplus, net assets, other surplus, annual or other net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Corporation; any matter relating to the acquisition, holding and disposition of any assets by the Corporation; or any other matter relating to the business and affairs of the Corporation. Section 5.7 REIT QUALIFICATION. If the Corporation elects to qualify for federal income tax treatment as a REIT, the Board of Directors shall use its reasonable best efforts to take such actions as are necessary or appropriate to preserve the status of the Corporation as a REIT; however, the Board of Directors may revoke or otherwise terminate the Corporation's REIT election pursuant to Section 856(g) of the Code and may determine that compliance with any restriction or limitation on stock ownership and transfers set forth in Article VII is no longer required for REIT qualification upon the affirmative vote of more than seventy-five percent (75%) of all directors then serving on the Board of Directors. Section 5.8 REMOVAL OF DIRECTORS. Subject to the rights of holders of one or more classes or series of Preferred Stock to elect or remove one or more directors, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least a majority of the votes entitled to be cast generally in the election of directors. For the purpose of this paragraph, "cause" shall mean 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 the Corporation through bad faith or active and deliberate dishonesty. Section 5.9 ADVISOR AGREEMENTS. Subject to such approval of stockholders and other conditions, if any, as may be required by any applicable statute, rule or regulation, the Board of Directors may authorize the execution and performance by the Corporation of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control of the Board of Directors, any such other person, corporation, association, company, trust, partnership (limited or general) or other organization shall render or make available to the Corporation managerial, investment, advisory and/or related services, office space and other services and facilities (including, if deemed advisable by the Board of Directors, the management or supervision of the investments of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements (including, if deemed fair and equitable by the Board of Directors, the compensation payable thereunder by the Corporation). Section 5.10 PROTECTIVE PROVISIONS. Until such time as 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 Berg & Berg Enterprises, Inc., Baccarat Cambrian Partnership, Baccarat Fremont Developers LLC, and DeAnza Office Partners (collectively, the "Berg Group") and their affiliates (other than the Corporation and Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II or Mission West Properties, L.P. III (collectively, the "Operating Partnership"), in the aggregate, own less than fifteen percent (15%) of the voting stock of the Corporation (including without limitation upon the exercise of all outstanding warrants, options, convertible securities and other rights to acquire voting stock of the Corporation, and all units of limited partnership interest exchangeable or redeemable for Common Stock or other voting stock of the Corporation without regard to any ownership limit set forth in the charter, the Bylaws or by agreement), a majority of the directors, including Carl E. Berg or an individual whom he designates to replace him on the Board of Directors ("Designee"), shall be required to (i) hold a meeting of the Board of Directors which is not attended by Carl E. Berg or his Designee, (ii) approve an amendment to the Corporation's charter or Bylaws, or (iii) approve any merger, consolidation or sale of all or substantially all of the assets of the Corporation or the Operating Partnership. Section 5.11 CONFLICT OF INTEREST. No director shall 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 Corporation, and no action taken by the board of directors will be void or voidable because (i) a majority of directors are affiliated with the Berg Group or (ii) an action is beneficial to the Berg Group, to the extent permitted by the Maryland General Corporation Law. ARTICLE VI STOCK Section 6.1 AUTHORIZED SHARES. The Corporation has authority to issue 200,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"), and 20,000,000 shares of Preferred Stock, $.001 par value per share ("Preferred Stock"). The aggregate par value of all authorized shares of stock having par value is $220,000. If shares of one class of stock are classified or reclassified into shares of another class of stock pursuant to this Article VI, the number of authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of stock of all classes that the Corporation has authority to issue shall not be more than the total number of shares of stock set forth in the first sentence of this paragraph. To the extent permitted by Maryland law, the Board of Directors, without any action by the stockholders of the Corporation, 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 the Corporation has authority to issue. Section 6.2 COMMON STOCK. Subject to the provisions of Article VII, each share of Common Stock shall entitle the holder thereof to one vote. Section 6.3 PREFERRED STOCK. The Board of Directors may classify any unissued shares of Preferred Stock and reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, in one or more classes or series of stock. Section 6.4 CLASSIFIED OR RECLASSIFIED SHARES. Prior to issuance of classified or reclassified shares of any class or series, the Board of Directors by resolution shall: (a) designate that class or series to distinguish it from all other classes and series of stock of the Corporation; (b) specify the number of shares to be included in the class or series; (c) set or change, subject to the provisions of Article VII and subject to the express terms of any class or series of stock of the Corporation outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Corporation to file articles supplementary with the State Department of Assessments and Taxation of Maryland ("SDAT"). Any of the terms of any class or series of stock set or changed pursuant to clause (c) of this Section 6.4 may be made dependent upon facts or events ascertainable outside the charter (including determinations by the Board of Directors or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary filed with the SDAT. Section 6.5 CHARTER AND BYLAWS. All persons who shall acquire stock in the Corporation shall acquire the same subject to the provisions of the charter and the Bylaws. ARTICLE VII RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES Section 7.1 DEFINITIONS. For the purpose of this Article VII, the following terms shall have the following meanings: AMEX. The term "AMEX" shall mean the American Stock Exchange. BENEFICIAL OWNERSHIP. The term "Beneficial Ownership" shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative meanings. BUSINESS DAY. The term "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. CAPITAL STOCK. The term "Capital Stock" shall mean all classes or series of stock of the Corporation, including, without limitation, Common Stock and Preferred Stock and any equity security of the Company convertible into or exchangeable for Common Stock or Preferred Stock. CHARITABLE BENEFICIARY. The term "Charitable Beneficiary" shall mean one or more beneficiaries of the Trust as determined pursuant to Section 7.3.6, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. CHARTER. The term "Charter" shall mean the charter of the Corporation, as that term is defined in the MGCL. CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. CONSTRUCTIVE OWNERSHIP. The term "Constructive Ownership" shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have the correlative meanings. EXCEPTED HOLDER. The term "Excepted Holder" shall mean a stockholder of the Corporation for whom an Excepted Holder Limit is created by these Articles or by the Board of Directors pursuant to Section 7.2.7. EXCEPTED HOLDER LIMIT. The term "Excepted Holder Limit" shall mean, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Directors pursuant to Section 7.2.7, and subject to adjustment pursuant to Section 7.2.8, the percentage limit established by the Board of Directors pursuant to Section 7.2.7. INITIAL DATE. The term "Initial Date" shall mean the date upon which the Articles of Amendment containing this Article VII are filed with the SDAT. MARKET PRICE. The term "Market Price" on any date shall mean, with respect to outstanding shares of Common Stock, the Closing Price for the Common Stock on such date. The "Closing Price" on any date shall mean the last sale price for the Common Stock, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for the Common Stock, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the AMEX or, if the Common Stock is not listed or admitted to trading on the AMEX, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Corporation or, in the event that no trading price is available for the Common Stock, the fair market value of the Common Stock, as determined in good faith by the Board of Directors of the Corporation. MGCL. The term "MGCL" shall mean the Maryland General Corporation Law, as amended from time to time. OWNERSHIP LIMIT. The term "Ownership Limit" shall mean not more than nine percent (9%) in value of the aggregate of the outstanding shares of Capital Stock. The value of the outstanding shares of Capital Stock shall be determined by the Board of Directors of the Corporation in good faith, which determination shall be conclusive for all purposes hereof. PERSON. The term "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit applies. PROHIBITED OWNER. The term "Prohibited Owner" shall mean, with respect to any purported Transfer, any Person who, but for the provisions of Section 7.2.1(b), would Beneficially Own or Constructively Own shares of Capital Stock in violation of Section 7.2.1(a), and if appropriate in the context, shall also mean any Person who would have been the record owner of the shares that the Prohibited Owner would have so owned. RESTRICTION TERMINATION DATE. The term "Restriction Termination Date" shall mean the first day after the Initial Date on which the Corporation determines pursuant to Section 5.7 of the Charter that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of shares of Capital Stock set forth herein is no longer required in order for the Corporation to qualify as a REIT. TRANSFER. The term "Transfer" shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Capital Stock or the right to vote or receive dividends on Capital Stock, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Capital Stock or any interest in Capital Stock or any exercise of any such conversion or exchange right and (c) transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Capital Stock; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms "Transferring" and "Transferred" shall have the correlative meanings. TRUST. The term "Trust" shall mean any trust provided for in Section 7.3.1. TRUSTEE. The term "Trustee" shall mean the Person unaffiliated with the Corporation and a Prohibited Owner, that is appointed by the Corporation to serve as trustee of the Trust. Section 7.2 CAPITAL STOCK. Section 7.2.1 OWNERSHIP LIMITATIONS. During the period commencing on the Initial Date and prior to the Restriction Termination Date: (a) BASIC RESTRICTIONS. (i) (1) No Person, other than any Person in the Berg Group or an Excepted Holder, shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Ownership Limit, and (2) no Excepted Holder shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Excepted Holder Limit for such Excepted Holder. (ii) No Person, including all of the Persons in the Berg Group, shall Beneficially or Constructively Own shares of Capital Stock to the extent that such Beneficial or Constructive Ownership of Capital Stock would result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, Beneficial or Constructive Ownership that would result in the Corporation owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Corporation from such tenant would cause the Corporation to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). (iii) Notwithstanding any other provisions contained herein, any Transfer of shares of Capital Stock (whether or not such Transfer is the result of a transaction entered into through the facilities of the AMEX or any other national securities exchange or automated inter-dealer quotation system) that, if effective, would result in the Capital Stock being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void AB INITIO, and the intended transferee shall acquire no rights in such shares of Capital Stock. (b) TRANSFER IN TRUST. If any Transfer of shares of Capital Stock (whether or not such Transfer is the result of a transaction entered into through the facilities of the AMEX or any other national securities exchange or automated inter-dealer quotation system) occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Capital Stock in violation of Section 7.2.1(a)(i) or (ii), (i) then that number of shares of the Capital Stock the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2.1(a)(i) or (ii)(rounded to the nearest whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such shares; or (ii) if the transfer to the Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 7.2.1(a)(i) or (ii), then the Transfer of that number of shares of Capital Stock that otherwise would cause any Person to violate Section 7.2.1(a)(i) or (ii) shall be void AB INITIO, and the intended transferee shall acquire no rights in such shares of Capital Stock. Section 7.2.2 REMEDIES FOR BREACH. If the Board of Directors of the Corporation or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any shares of Capital Stock in violation of Section 7.2.1 (whether or not such violation is intended), the Board of Directors or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Corporation to redeem shares, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or other event; PROVIDED, HOWEVER, that any Transfer or attempted Transfer or other event in violation of Section 7.2.1 shall automatically result in the transfer to the Trust described above, and, where applicable, such Transfer (or other event) shall be void AB INITIO as provided above irrespective of any action (or non-action) by the Board of Directors or a committee thereof. Section 7.2.3 NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of shares of Capital Stock that will or may violate Section 7.2.1(a) or any Person who would have owned shares of Capital Stock that resulted in a transfer to the Trust pursuant to the provisions of Section 7.2.1(b) shall immediately give written notice to the Corporation of such event, or in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer on the Corporation's status as a REIT. Section 7.2.4 OWNERS REQUIRED TO PROVIDE INFORMATION. From the Initial Date and prior to the Restriction Termination Date: (a) every owner of more than five percent (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding shares of Capital Stock, within 30 days after the end of each taxable year, shall give written notice to the Corporation stating the name and address of such owner, the number of shares of Capital Stock and other shares of the Capital Stock Beneficially Owned and a description of the manner in which such shares are held. Each such owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation's status as a REIT and to ensure compliance with the Ownership Limit; and (b) each Person who is a Beneficial or Constructive Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial or Constructive Owner shall provide to the Corporation such information as the Corporation may request, in good faith, in order to determine the Corporation's status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance. Section 7.2.5 REMEDIES NOT LIMITED. Subject to Section 5.7 of the Charter, nothing contained in this Section 7.2 shall limit the authority of the Board of Directors of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders in preserving the Corporation's status as a REIT. Section 7.2.6 AMBIGUITY. In the case of an ambiguity in the application of any of the provisions of this Section 7.2, Section 7.3, or any definition contained in Section 7.1, the Board of Directors of the Corporation shall have the power to determine the application of the provisions of this Section 7.2 or Section 7.3 with respect to any situation based on the facts known to it. In the event Section 7.2 or 7.3 requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3. Section 7.2.7 EXCEPTIONS. (a) Subject to Section 7.2.1(a)(ii), the Board of Directors of the Corporation, in its sole discretion, may exempt a Person from the Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if: (i) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial or Constructive Ownership of such shares of Capital Stock will violate Section 7.2.1(a)(ii); (ii) such Person does not and represents that it will not own, actually or Constructively, an interest in a tenant of the Corporation (or a tenant of any entity owned or controlled by the Corporation) that would cause the Corporation to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Corporation (or an entity owned or controlled by the Corporation) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the opinion of the Board of Directors of the Corporation, rent from such tenant would not adversely affect the Corporation's ability to qualify as a REIT, shall not be treated as a tenant of the Corporation); and (iii) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Sections 7.2.1 through 7.2.6) will result in such shares of Capital Stock being automatically transferred to a Trust in accordance with Sections 7.2.1(b) and 7.3. (b) Prior to granting any exception pursuant to Section 7.2.7(a), the Board of Directors of the Corporation may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Corporation's status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception. (c) Subject to Section 7.2.1(a)(ii), an underwriter which participates in a public offering or a private placement of Capital Stock (or securities convertible into or exchangeable for Capital Stock) may Beneficially Own or Constructively Own shares of Capital Stock (or securities convertible into or exchangeable for Capital Stock) in excess of the Ownership Limit, but only to the extent necessary to facilitate such public offering or private placement. (d) The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Ownership Limit. Section 7.2.8 INCREASE IN OWNERSHIP LIMIT. The Board of Directors may from time to time increase the Ownership Limit. Section 7.2.9 LEGEND. Each certificate for shares of Capital Stock shall bear substantially the following legend: The shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose of the Corporation's maintenance of its status as a Real Estate Investment Trust under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions and except as expressly provided in the Corporation's Charter, (i) no Person may Beneficially or Constructively Own shares of Capital Stock of the Corporation in excess of nine percent (9%) of the value of the total outstanding shares of Capital Stock of the Corporation, unless such Person is a member of the Berg Group, or an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own Capital Stock that would result in the Corporation being "closely held" under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and (iii) no Person may Transfer shares of Capital Stock if such Transfer would result in the Capital Stock of the Corporation being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own shares of Capital Stock which causes or will cause a Person to Beneficially or Constructively Own shares of Capital Stock in excess or in violation of the above limitations must immediately notify the Corporation. If any of the restrictions on transfer or ownership are violated, the shares of Capital Stock represented hereby will be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void AB INITIO. All capitalized terms in this legend have the meanings defined in the charter of the Corporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Capital Stock of the Corporation on request and without charge. Instead of the foregoing legend, the certificate may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge. Section 7.2.10 Notwithstanding any other provision of this Section 7.2, the restrictions set forth in this Section 7 other than the restrictions set forth in Section 7.2.1(a)(ii), shall not apply to shares of Capital Stock owned or acquired in original issuance by members of the Berg Group. Section 7.3 TRANSFER OF CAPITAL STOCK IN TRUST. Section 7.3.1 OWNERSHIP IN TRUST. Upon any purported Transfer or other event described in Section 7.2.1(b) that would result in a transfer of shares of Capital Stock to a Trust, such shares of Capital Stock shall be deemed to have been transferred to the Trustee as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Trust pursuant to Section 7.2.1(b). The Trustee shall be appointed by the Corporation and shall be a Person unaffiliated with the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Corporation as provided in Section 7.3.6. Section 7.3.2 STATUS OF SHARES HELD BY THE TRUSTEE. Shares of Capital Stock held by the Trustee shall be issued and outstanding shares of Capital Stock of the Company. The Prohibited Owner shall have no rights in the shares held by the Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the shares held in the Trust. Section 7.3.3 DIVIDEND AND VOTING RIGHTS. The Trustee shall have all voting rights and rights to dividends or other distributions with respect to shares of Capital 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 the Corporation that the shares of Capital 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 held in the Trust and, subject to Maryland law, effective as of the date that the shares of Capital Stock have been transferred to the Trustee, 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 the Corporation that the shares of Capital Stock have been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Corporation has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this Article VII, until the Corporation has received notification that shares of Capital Stock have been transferred into a Trust, the Corporation shall be entitled to rely on its share transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of stockholders. Section 7.3.4 SALE OF SHARES BY TRUSTEE. Within 20 days of receiving notice from the Corporation that shares of Capital Stock have been transferred to the Trust, the Trustee of the Trust shall sell the shares 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 Section 7.2.1(a). 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 provided in this Section 7.3.4. The Prohibited Owner shall receive the lesser of (1) 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., in the case of a gift, devise or other such transaction), the Market Price of the shares on the day of the event causing the shares to be held in the Trust and (2) the price per share received by the Trustee from the sale or other disposition of the shares held in the Trust. Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Corporation that shares of Capital Stock have been transferred to the Trustee, such shares are sold by a Prohibited Owner, then (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 this Section 7.3.4, such excess shall be paid to the Trustee upon demand. Section 7.3.5 PURCHASE RIGHT IN STOCK TRANSFERRED TO THE TRUSTEE. Shares of Capital Stock transferred to the Trustee shall be deemed to have been offered for sale to the Corporation, 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 the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer until the Trustee has sold the shares held in the Trust pursuant to Section 7.3.4. Upon such a sale to the Corporation, 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. Section 7.3.6 DESIGNATION OF CHARITABLE BENEFICIARIES. By written notice to the Trustee, the Corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Trust such that (i) the shares of Capital Stock held in the Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. Section 7.4 AMEX TRANSACTIONS. Nothing in this Article VII shall preclude the settlement of any transaction entered into through the facilities of the AMEX or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction occurs shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII. Section 7.5 ENFORCEMENT. The Corporation is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII. Section 7.6 NON-WAIVER. No delay or failure on the part of the Corporation or the Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the Corporation or the Board of Directors, as the case may be, except to the extent specifically waived in writing. ARTICLE VIII AMENDMENTS The Corporation reserves the right from time to time to make any amendment to its charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the charter, of any shares of outstanding stock. All rights and powers conferred by the charter on stockholders, directors and officers are granted subject to this reservation. ARTICLE IX LIMITATION OF LIABILITY To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article IX, nor the adoption or amendment of any other provision of the charter or Bylaws inconsistent with this Article IX, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. THIRD: The amendment to and restatement of the charter as hereinabove set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law. FOURTH: The current address of the principal office of the Corporation is as set forth in Article IV of the foregoing amendment and restatement of the charter. FIFTH: The name and address of the Corporation's current resident agent is as set forth in Article IV of the foregoing amendment and restatement of the charter. SIXTH: The number of directors of the Corporation is as set forth in Article V of the foregoing amendment and restatement of the charter. The current directors of the Company are Carl E. Berg, Michael J. Anderson, John Bolger, and Roger Kirk. SEVENTH: The total number of shares of stock which the Corporation had authority to issue immediately prior to this amendment and restatement was 100, consisting of 100 shares of Common Stock, $.001 par value per share. The aggregate par value of all shares of stock having par value was $.10. EIGHTH: The total number of shares of stock which the Corporation has authority to issue pursuant to the foregoing amendment and restatement of the charter is 220,000,000, consisting of 200,000,000 shares of Common Stock, $.001 par value per share, and 20,000,000 shares of Preferred Stock, $.001 par value per share. The aggregate par value of all authorized shares of stock having par value is $220,000. NINTH: The undersigned President acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its President and attested to by its Secretary on this _____ day of ____________, 1998. ATTEST: MISSION WEST PROPERTIES, INC. By: (SEAL) ------------------------- --------------------------------------- Secretary President EX-3.2-2 4 RESTATED BYLAWS OF MISSION WEST-MARYLAND MISSION WEST PROPERTIES, INC. RESTATED BYLAWS ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal office of the Corporation shall be located at such place or places as the Board of Directors may designate. SECTION 2. ADDITIONAL OFFICES. The Corporation may have additional offices at such places as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE. All meetings of stockholders shall be held at the principal office of the Corporation or at such other place within the United States as shall be stated in the notice of the meeting. SECTION 2. ANNUAL MEETING. An annual meeting of the stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on a date and at the time set by the Board of Directors. SECTION 3. SPECIAL MEETINGS. The president, chief executive officer or Board of Directors may call special meetings of the stockholders. Special meetings of stockholders shall also be called by the secretary of the Corporation upon the written request of the holders of shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. The secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment to the Corporation by such stockholders of such costs, the secretary shall give notice to each stockholder entitled to notice of the meeting. SECTION 4. NOTICE. Not less than ten nor more than 90 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid. SECTION 5. SCOPE OF NOTICE. Any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. SECTION 6. ORGANIZATION. At every meeting of stockholders, the chairman of the board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the chairman of the board, one of the following officers present shall conduct the meeting in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman, and the secretary, or, in his absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman shall act as secretary. SECTION 7. QUORUM. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 8. VOTING. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the charter of the Corporation. Unless otherwise provided in the charter, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. SECTION 9. PROXIES. A stockholder may cast the votes entitled to be cast by the shares of the stock owned of record by him either in person or by proxy executed in writing by the stockholder or by his duly authorized agent. Such proxy shall be filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. SECTION 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Corporation registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or other fiduciary may vote stock registered in his name as such fiduciary, either in person or by proxy. Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification. Notwithstanding any other provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition. SECTION 11. INSPECTORS. At any meeting of stockholders, the chairman of the meeting may appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be PRIMA FACIE evidence thereof. SECTION 12. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS. (A) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors, (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 12(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(a), or (iv) as provided below in Section 14. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for action by stockholders. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Corporation has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of shares of each class of stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 12 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 12(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors, (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 12(b) and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(b) or (iv) in any event, as provided in Section 14. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice containing the information required by paragraph (a)(2) of this Section 12 shall be delivered to the secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. (C) GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 12 or in Section 14 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 12. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 12 and, if any proposed nomination or business is not in compliance with this Section 12, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 12. Nothing in this Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in, nor any right of the Corporation to omit a proposal from, the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 13. VOTING BY BALLOT. Voting on any question or in any election may be by voice unless the presiding officer shall order or any stockholder shall demand that voting be by ballot. SECTION 14. NOMINATION AND ELECTION OF BERG GROUP DIRECTOR REPRESENTATIVES. The Board of Directors shall include among its members two individuals nominated by 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 Berg & Berg Enterprises, Inc., Baccarat Cambrian Partnership, Baccarat Fremont Developers LLC and DeAnza Office Partners (collectively the "Berg Group") and their affiliates (the "Berg Group Board Representatives") so long as the members of the Berg Group, together with their affiliates (other than the Corporation or Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II or Mission West Properties, L.P. III (collectively, the "Operating Partnership"), in the aggregate, own at least 15% of the total number of shares of voting stock of the Corporation (taking into account the conversion, exchange or exercise of all outstanding warrants, options, convertible securities and other rights to acquire voting stock of the Corporation and all units of limited partnership interests in the Operating Partnership exchangeable or redeemable for Common Stock or other voting stock of the Corporation (without regard to any ownership limit set forth in the Corporation's charter, the Bylaws or any agreement) (the "Fully-Diluted" number of shares)). The Berg Group shall exercise the right to name directors provided in this Section 14 by submitting to the Board of Directors prior to any annual meeting or other meeting at which directors are elected the name(s) of the Berg Group nominee(s). In the event the Berg Group and their affiliates (other than the Company and the Operating Partnership), in the aggreagate, own less than 15%, but at least 10%, of the Fully-Diluted number of shares, the Berg Group may nominate only one director to be a Berg Group Board Representative. A Berg Group Board Representative may not be replaced, whether by election or filling of a vacancy, by any individual who has not been nominated by the Berg Group. In the event of doubt concerning the identification of the nominees of the Berg Group, prior to any meeting of stockholders at which directors are to be elected, the chief executive officer or presiding officer, if a different person, shall ask the Berg Group members to cast ballots, and the one or two individuals, as the case may be, selected by the holders of a majority of all of the Fully-Diluted shares held by the Berg Group members shall be deemed to be the nominees of the Berg Group. As used in this Section 14 the term "affiliate" shall have the meaning ascribed to it by Rule 12b-2 promulgated under the Exchange Act. ARTICLE III DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. SECTION 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolution. SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman of the board, president or by a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them. SECTION 5. NOTICE. Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, facsimile transmission, United States mail or courier to each director at his business or residence address. Notice by personal delivery, by telephone or a facsimile transmission shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting and shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Telephone notice shall be deemed to be given when the director is personally given such notice in a telephone call to which he is a party. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws. SECTION 6. QUORUM. (a) Subject to the requirements of paragraph (b) of this Section 6, a majority of the directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the charter of the Corporation or these Bylaws, the vote of a majority of a particular group of directors is required for action, a quorum must also include a majority of such group. (b) Until the date on which the Berg Group and their affiliates (other than the Company and the Operating Partnership) own less than 15% of the Fully-Diluted number of shares, all meetings of the Board of Directors shall require the presence of Carl E. Berg or the presence of an individual whom he designates to replace him on the Board of Directors (the "Designee"). Mr. Berg shall submit a written statement identifying the Designee to the Company from time to time to permit identification of the Designee in the event that death, disability or other event results in a vacancy on the Board of Directors as a result of Mr. Berg's inability to serve as a director. Mr. Berg may amend the statement at his sole discretion. (c) Subject to the foregoing, the directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. SECTION 7. VOTING. (a) Except as provided in paragraph (a) and (b) of this Section 7, the action of the majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute. (b) The approval of more than 75% of all of the directors then serving on the Board of Directors shall be required to approve (i) acquisitions of assets or conduct of any business other than, in either case, through the Operating Partnership, (ii) the termination of the Corporation's status as a REIT or (iii) the Corporation's incurring indebtedness for borrowed funds exceeding 50% of the market value of the outstanding Common Stock determined as if all outstanding units of limited partnership interests in the Operating Partnership had been converted into Common Stock, plus the market value of all other publicly traded securities of the Corporation outstanding from time to time, plus the total debt of the Corporation and the Operating Partnership. SECTION 8. TELEPHONE MEETINGS. Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. SECTION 9. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each director and such written consent is filed with the minutes of proceedings of the Board of Directors. SECTION 10. VACANCIES. If for any reason any or all the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Any vacancy on the Board of Directors for any cause other than an increase in the number of directors shall be filled by a majority of the remaining directors, even if such majority is less than a quorum. Any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority vote of the entire Board of Directors. Any individual so elected as director shall hold office until the next annual meeting of stockholders and until his successor is elected and qualifies. SECTION 11. COMPENSATION. Directors shall receive a salary for their services as directors as set forth in a resolution of the Board of Directors, and may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 12. LOSS OF DEPOSITS. No director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited. SECTION 13. SURETY BONDS. Unless required by law, no director shall be obligated to give any bond or surety or other security for the performance of any of his duties. SECTION 14. RELIANCE. Each director, officer, employee and agent of the Corporation shall, in the performance of his duties with respect to the Corporation, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Corporation, upon an opinion of counsel or upon reports made to the Corporation by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also be a director. SECTION 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The directors shall have no responsibility to devote their full time to the affairs of the Corporation. Except as provided otherwise in any agreement between the Corporation and the affected person, any director or officer, employee or agent of the Corporation, in his personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to or in addition to or in competition with those of or relating to the Corporation. ARTICLE IV COMMITTEES SECTION 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may appoint from among its members an Executive Committee, an Audit Committee, a Compensation Committee, and other committees, composed of one or more directors, to serve at the pleasure of the Board of Directors. SECTION 2. POWERS. The Board of Directors may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law and these Bylaws. SECTION 3. MEETINGS. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings. SECTION 4. TELEPHONE MEETINGS. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. SECTION 5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. SECTION 6. VACANCIES. Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee. ARTICLE V OFFICERS SECTION 1. GENERAL PROVISIONS. The officers of the Corporation shall include a chief executive officer, a president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, one or more vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders, except that the chief executive officer may appoint one or more vice presidents, assistant secretaries and assistant treasurers. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that of president, treasurer and secretary. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent. SECTION 2. REMOVAL AND RESIGNATION. Any officer or agent of the Corporation may be removed by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation. SECTION 3. VACANCIES. A vacancy in any office may be filled by the Board of Directors for the balance of the term. SECTION 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate a chief executive officer. In the absence of such designation, the chairman of the board shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. SECTION 5. CHIEF OPERATING OFFICER. The Board of Directors may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. SECTION 6. CHIEF FINANCIAL OFFICER. The Board of Directors may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. SECTION 7. CHAIRMAN OF THE BOARD. The Board of Directors shall designate a chairman of the board. The chairman of the board shall preside over the meetings of the Board of Directors and of the stockholders at which he shall be present. The chairman of the board shall perform such other duties as may be assigned to him by the Board of Directors. SECTION 8. PRESIDENT. The president or chief executive officer, as the case may be, shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief operating officer by the Board of Directors, the president shall be the chief operating officer. He may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. SECTION 9. VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the president or by the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility. SECTION 10. SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the share transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Board of Directors. SECTION 11. TREASURER. The treasurer shall have the custody of the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation. The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and Board of Directors, at the regular meetings of the Board of Directors or whenever it may so require, an account of all his transactions as treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belonging to the Corporation. SECTION 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Board of Directors. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Directors. SECTION 13. SALARIES. The salaries and other compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the directors or by an authorized person shall be valid and binding upon the Board of Directors and upon the Corporation when authorized or ratified by action of the Board of Directors. SECTION 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors. SECTION 3. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate. ARTICLE VII STOCK SECTION 1. CERTIFICATES. Each stockholder shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of stock held by him in the Corporation. Each certificate shall be signed by the chief executive officer, the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of stock, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. If the Corporation has authority to issue stock of more than one class, the certificate shall contain on the face or back a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of each class of stock and, if the Corporation is authorized to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. In lieu of such statement or summary, the certificate may state that the Corporation will furnish a full statement of such information to any stockholder upon request and without charge. If any class of stock is restricted by the Corporation as to transferability, the certificate shall contain a full statement of the restriction or state that the Corporation will furnish information about the restrictions to the stockholder on request and without charge. SECTION 2. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein, and to the terms of any written agreement between the Corporation and a stockholder with respect to share transfers subject to the terms of such agreement. SECTION 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board of Directors may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Board of Directors may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. SECTION 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the thirtieth day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein. SECTION 5. STOCK LEDGER. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder. SECTION 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit. ARTICLE VIII ACCOUNTING YEAR The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution. ARTICLE IX DISTRIBUTIONS SECTION 1. AUTHORIZATION. Dividends and other distributions upon the stock of the Corporation may be authorized and declared by the Board of Directors, subject to the provisions of law and the charter of the Corporation. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the charter. SECTION 2. CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INVESTMENT POLICY Subject to the provisions of the charter of the Corporation, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion. ARTICLE XI SEAL SECTION 1. SEAL. The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words "Incorporated in Maryland." The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. SECTION 2. AFFIXING SEAL. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. ARTICLE XII INDEMNIFICATION AND ADVANCE OF EXPENSES To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director of the Corporation and at the request of the Corporation, 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 Corporation may, with the approval of its Board of Directors, provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Bylaws or charter of the Corporation inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. ARTICLE XIII WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the charter of the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XIV AMENDMENT OF BYLAWS The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws subject to the provisions of the corporation's charter and Article III, Section 7 of these Bylaws. EX-10.1-1 5 FORM OF AMENDED AND RESTATED AGREEMENT OF LP OF OP AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MISSION WEST PROPERTIES, L.P. [ ] __________ __, 1998 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MISSION WEST PROPERTIES, L.P. [ ] This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MISSION WEST PROPERTIES, L.P. [--] (this "Agreement"), dated as of __________ __, 1998, is entered into by and among Mission West Properties, Inc., a California corporation (the "Company" or the "General Partner")] and the parties whose names are set forth on Appendix I attached hereto (as it may be amended from time to time). WHEREAS, the Partnership was organized initially as [INSERT DESCRIPTION] and became a limited partnership pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware by filing an [AMENDMENT TO] certificate of limited partnership with the Secretary of State of the State of Delaware on _____ _____, 199__; WHEREAS, since its organization as a Delaware limited partnership, the Partnership has been operated and managed by [_________ ("_______")], as sole general partner, pursuant to the terms of the Agreement of Limited Partnership of [___________ __] (the "Prior Agreement"); WHEREAS, on ________ __, 1998, the Partnership filed an amendment of certificate of limited partnership with the Secretary of State of the State of Delaware changing the Partnership's name to Mission West Properties, L.P. [-]; WHEREAS, pursuant to the terms of a Acquisition Agreement dated as of ________ __, 1998 (the "Acquisition Agreement"), the Company has agreed to acquire a ___% general partner interest in the Partnership and to become the sole general partner in the Partnership upon the satisfaction of certain conditions set forth in the Acquisition Agreement, which now have been satisfied or waived by the parties thereto; WHEREAS, [NAME OF EXISTING GENERAL PARTNER] and all of the limited partners in the Partnership wish to admit the Company as a general partner, to amend the certificate of limited partnership of the Partnership to reflect the Company's admission as a general partner, and to amend and restate the Prior Agreement as provided herein; and WHEREAS, upon the filing of the certificate of amendment of the certificate of limited partnership of the Partnership with the Secretary of State of the State of Delaware, _______ intends to resign as a general partner and become a limited partner in the Partnership pursuant to the terms of this Agreement. NOW THEREFORE, in consideration of the mutual covenants herein contained, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows: ARTICLE 1. DEFINED TERMS. The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the following terms used in this Agreement. 1.1 "ACT" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute. 1.2 "ACQUISITION AGREEMENT" means the agreement dated as of ________ __, 1998, among the Partnership, the other partnerships comprising the Operating Partnership, 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 Partnership, the Company's investment in and admission to the Operating Partnership as sole general partner, and the rights and options of the limited partners in the Operating Partnership to tender L.P. Units or acquire shares of Common Stock under certain circumstances. 1.3 "ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.3 hereof and who is shown as such on the books and records of the Partnership. 1.4 "ADJUSTED CAPITAL ACCOUNT DEFICIT" means with respect to any Partner, the negative balance, if any, in such Partner's Capital Account as of the end of any relevant fiscal year, determined after giving effect to the following adjustments: (a) credit to such Capital Account any portion of such negative balance which such Partner (i) is treated as obligated to restore to the Partnership pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or (ii) is deemed to be obligated to restore to the Partnership pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (b) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. 1.5 "ADJUSTED CONTRIBUTION" means the Capital Contributions of any Partner reduced by the total distributions to such Partner from Capital Events occurring subsequent to the Closing Date under the Acquisition Agreement. For purposes of this Agreement, the initial Capital Contribution of the Company shall be equal to [$35,200,000] and the initial Adjusted Contribution of each Limited Partner shall be equal to the value of the Limited Partner's interest in the Operating Partnership as set forth in Appendix I of the Acquisition Agreement. 1.6 "AFFILIATE" means, (a) with respect to any individual Person, any member of the Immediate Family of such Person or a trust established for the benefit of such member, or (b) with respect to any Entity, any Person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, any such Entity. 1.7 "AGREEMENT" means this Amended and Restated Agreement of Limited Partnership, as originally executed and as amended, modified, supplemented or restated from time to time, as the context requires. 1.8 "ARTICLES OF INCORPORATION" means the Articles of Incorporation of the Company, as amended and restated from time to time, or the articles of incorporation, certificate of incorporation, operating agreement of other Charter instrument of any corporation or other entity which is a successor to the Company by merger or consolidation. 1.9 "ASSIGNEE" means a Person to whom one or more L.P. Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5. 1.10 "AVAILABLE CASH" means the Partnership's share of the Operating Partnership's Available Cash (as defined in the Acquisition Agreement) with respect to the applicable period of measurement (i.e., any period beginning on the first day of the fiscal year, quarter or other period commencing immediately after the last day of the fiscal year, quarter or other applicable period for purposes of the prior calculation of Available Cash for or with respect to which a distribution has been made, and ending on the last day of the fiscal year, quarter or other applicable period immediately preceding the date of the calculation). Notwithstanding the foregoing, Available Cash shall not include any cash received or reductions in reserves, nor shall the calculation of Available Cash take into account any disbursements made or reserves established, after commencement of the dissolution and liquidation of the Partnership. 1.11 "BERG ACQUISITION" has the meaning set forth in the Acquisition Agreement. 1.12 "BERG GROUP" means Carl E. Berg, Clyde J. Berg, the members of their respective Immediate Families, and any Entity which is an Affiliate of either Carl E. Berg or Clyde J. Berg, excluding the Partnership and the Company. 1.13 "BERG LAND HOLDINGS" means certain land held by members of the Berg Group which the Operating Partnership may acquire under certain circumstances pursuant to the terms of the Acquisition Agreement and the related Berg Land Holdings Option Agreement dated as of ________ __, 1998. 1.14 "CAPITAL ACCOUNT" means with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions: (a) to each Partner's Capital Account there shall be credited (i) such Partner's Initial Adjusted Contribution as of the effective date of this Agreement (ii) such Partner's Capital Contributions subsequent to the Effective Date of this Agreement, (iii) such Partner's distributive share of Net Income and any items in the nature of income or gain which are specially allocated to such Partner pursuant to Sections 1 and 2 of Appendix II and (iv) the amount of any Partnership liabilities assumed by such Partner or which are secured by any asset distributed to such Partner; (b) to each Partner's Capital Account there shall be debited (i) the amount of cash and the Gross Asset Value of any Property distributed to such Partner pursuant to any provision of this Agreement, (ii) such Partner's distributive share of Net Losses and any items in the nature of expenses or losses which are specially allocated to such Partner pursuant to Sections 1 and 2 of Appendix II, and (iii) the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any asset contributed by such Partner to the Partnership to the extent not assumed by the Partner; and (c) in the event all or a portion of a Partnership Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Partnership Interest. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Sections 1.704-1(b) and 1.704-2 of the Regulations, and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall reasonably determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed assets or which are assumed by the Partnership, the General Partner or any Limited Partner) are computed in order to comply with such Regulations, the General Partner may make such modification; provided that it does not have an adverse effect on the amounts distributable to any Partner pursuant to Article 13 hereof upon the dissolution of the Partnership. 1.15 "CAPITAL CONTRIBUTION" means, with respect to any Partner, any cash, cash equivalents or the Gross Asset Value of property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Article 4 hereof. 1.16 "CAPITAL EVENT" means any Partnership transaction not in the ordinary course of its business, including, without limitation, distribution to the Partners in excess of distributive shares of income, principal payments, prepayments, prepayment penalties, sales, exchanges, foreclosures or other dispositions of Property owned by the Partnership, recoveries of damage awards and insurance proceeds not used to rebuild (other than the receipt of contributions to the capital of the Partnership and business or rental interruption insurance proceeds not used to rebuild). 1.17 "CERTIFICATE" means the Certificate of Limited Partnership relating to the Partnership to be filed in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act. 1.18 "CHANGE OF CONTROL TRANSACTION" shall mean (A) any transaction or series of transactions occurring after the Effective Date, in which all Limited Partners in the Operating Partnership 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 Partnership 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. 1.19 "CHARTER" has the meaning set forth in Rule 405 of Regulation C promulgated by the SEC under the Securities Act ("Rule 405"). 1.20 "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. 1.21 "COMMON STOCK" means a share of Common Stock of the Company or any shares of Voting Securities into which the Common Stock may be reclassified or converted or for which shares of Common Stock may be exchanged in any transaction made applicable or available to all holders of Common Stock as a class. 1.22 "COMMON STOCK PRICE" means with respect to a particular valuation event identified under this Agreement, the last reported sales price regular way on such date or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way on such date, in either case on the American Stock Exchange, the New York Stock Exchange, or if the Common Stock is not then listed or admitted to trading on any such exchange, the Nasdaq or any comparable system on which the Common Stock is then listed or admitted to trading or, if not then listed or admitted to trading on any national securities exchange, the Nasdaq or any comparable system for the 10-trading day period ending with the last day preceding the date of the valuation event. 1.23 "COMPANY" means Mission West Properties, a California corporation, and any successor to such corporation. 1.24 "CONSENT" means the consent or approval of a proposed action by a Partner given in accordance with Section 14.2 hereof. 1.25 "DEPRECIATION" means, with respect to any asset of the Partnership for any fiscal year or other period, the depreciation, depletion, amortization or other cost recovery deduction, as the case may be, allowed or allowable for federal income tax purposes in respect of such asset for such fiscal year or other period; provided, however, that except as otherwise provided in Section 1.704-2 of the Regulations, if there is a difference between the Gross Asset Value (including the Gross Asset Value, as increased pursuant to paragraph (d) of the definition of Gross Asset Value) and the adjusted tax basis of such asset at the beginning of such fiscal year or other period, Depreciation for such asset shall be an amount that bears the same ratio to the beginning Gross Asset Value of such asset as the federal income tax depreciation, depletion, amortization or other cost recovery deduction for such fiscal year or other period bears to the beginning adjusted tax basis of such asset; provided, further, that if the federal income tax depreciation, depletion, amortization or other cost recovery deduction for such asset for such fiscal year or other period is zero, Depreciation of such asset shall be determined with reference to the beginning Gross Asset Value of such asset using any reasonable method selected by the General Partner. 1.26 "DIVIDEND REINVESTMENT PLAN" has the meaning set forth in Rule 405. 1.27 "EFFECTIVE DATE" means the date of closing of the Berg Acquisition. 1.28 "EMPLOYEE BENEFIT PLAN" has the meaning set forth in Rule 405. 1.29 "ENTITY" means any general partnership, limited partnership, corporation, joint venture, trust, business trust, real estate investment trust, limited liability company, cooperative or association. 1.30 "EQUITY SECURITY" has the meaning set forth in Rule 405. 1.31 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time (or any corresponding provisions of succeeding laws). 1.32 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 1.33 "EXCHANGE FACTOR" has the meaning set forth in the Exchange Rights Agreement, and is equal to the number of L.P. Units exchangeable for one share of Common Stock, from time to time, under the Exchange Rights Agreement. 1.34 "EXCHANGE RIGHT" has the meaning set forth in the Exchange Rights Agreement. 1.35 "EXCHANGE RIGHTS AGREEMENT" means Exchange Rights Agreement among the Company, and each of the limited partners of the partnerships comprising the Operating Partnership. 1.36 "GAAP" means United States generally accepted accounting principles, as in effect from time to time. 1.37 "GENERAL PARTNER" means the general partner of the Partnership, if there is more than one general partner, all such general partners. 1.38 "GENERAL PARTNER INTEREST" means a Partnership Interest held by the General Partner, in its capacity as general partner. A General Partner Interest may be expressed as a number of Units, each of which shall represent the same Percentage Interest in the Partnership as one L.P. Unit. 1.39 "GROSS ASSET VALUE" means, with respect to any asset of the Partnership, such asset's adjusted basis for federal income tax purposes, except as follows: (a) the initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, without reduction for liabilities, as determined by the contributing Partner and the Partnership on the date of contribution thereof; (b) if the General Partner reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Partners, the Gross Asset Values of all Partnership assets shall be adjusted in accordance with Sections 1.704-1(b)(2)(iv)(f) and (g) of the Regulations to equal their respective gross fair market values, without reduction for liabilities, as reasonably determined by the General Partner, as of the following times: (1) a Capital Contribution (other than a de minimis Capital Contribution) to the Partnership by a new or existing Partner as consideration for a Partnership Interest; or (2) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership assets as consideration for the repurchase of a Partnership Interest; or (3) the liquidation of the Partnership within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations; (c) the Gross Asset Values of Partnership assets distributed to any Partner shall be the gross fair market values of such assets (taking Section 7701(g) of the Code into account) without reduction for liabilities, as reasonably determined by the General Partner as of the date of distribution; and (d) the Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations (as set forth in Appendix II); provided, however, that Gross Asset Values shall not be adjusted pursuant to this paragraph (d) to the extent that the General Partner reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d). At all times, Gross Asset Values shall be adjusted by any Depreciation taken into account with respect to the Partnership's assets for purposes of computing Net Income and Net Loss. 1.40 "IMMEDIATE FAMILY" means, with respect to any Person, such Person'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. 1.41 "INCAPACITY" OR "INCAPACITATED" means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof; (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within 90 days after the expiration of any such stay. 1.42 "INDEMNITEE" means (i) any Person made a party to a proceeding by reason of (A) such Person's status as (1) the General Partner, (2) a director, trustee or officer of the Partnership or the General Partner, or (3) a director, trustee or officer of any other Entity, each Person serving in such capacity at the request of the Partnership or the General Partner, or (B) his or its liabilities, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to); and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion. 1.43 "INITIAL CONTRIBUTED PROPERTY" means the Properties as defined in the Acquisition Agreement. 1.44 "LIEN" means, with respect to any asset of the Partnership, (i) any mortgage, deed of trust, lien, pledge, encumbrance, charge, restriction or security interest in or on such asset, (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (iii) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. 1.45 "LIMITED PARTNER" means any Person named as a Limited Partner in Appendix I, as such Appendix may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner of the Partnership. 1.46 "LIMITED PARTNER INTEREST" means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of L.P. Units. 1.47 "LIQUIDATING EVENT" has the meaning set forth in Section 13.1 hereof. 1.48 "LIQUIDATOR" has the meaning set forth in Section 13.2 hereof. 1.49 "L.P. UNIT" means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1, 4.2 and 4.3. The number of L.P. Units outstanding and the Percentage Interests in the Partnership represented by such L.P. Units are set forth in Appendix I, as such Appendix may be amended from time to time. The ownership of L.P. Units shall be evidenced by such form of certificate for units as the General Partner adopts from time to time unless the General Partner determines that the L.P. Units shall be uncertificated securities. 1.50 "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 in the Operating Partnership. 1.51 "NET INCOME" OR "NET LOSS" means, for each fiscal year or other applicable period, an amount equal to the Partnership's taxable income or loss for such year or period as determined for federal income tax purposes by the General Partner, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) of the Code shall be included in taxable income or loss), adjusted as follows: (a) by including as an item of gross income any tax-exempt income received by the Partnership and not otherwise taken into account in computing Net Income or Net Loss; (b) by treating as a deductible expense any expenditure of the Partnership described in Section 705(a)(2)(B) of the Code (or which is treated as a Section 705(a)(2)(B) expenditure pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations) and not otherwise taken into account in computing Net Income or Net Loss, including amounts paid or incurred to organize the Partnership (unless an election is made pursuant to Section 709(b) of the Code) or to promote the sale of interests in the Partnership and by treating deductions for any losses incurred in connection with the sale or exchange of Partnership property disallowed pursuant to Section 267(a)(1) or 707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the Code; (c) by taking into account Depreciation in lieu of depreciation, depletion, amortization and other cost recovery deductions taken into account in computing taxable income or loss; (d) by computing gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes by reference to the Gross Asset Value of such property rather than its adjusted tax basis; (e) in the event of an adjustment of the Gross Asset Value of any Partnership asset which requires that the Capital Accounts of the Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f) and (g) of the Regulations, by taking into account the amount of such adjustment as if such adjustment represented additional Net Income or Net Loss pursuant to Appendix II; and (f) by not taking into account in computing Net Income or Net Loss items separately allocated to the Partners pursuant to Sections 1 and 2 of Appendix II. 1.52 "NEW EQUITY FINANCING RIGHT" has the meaning set forth in Section 8.8. 1.53 "NONRECOURSE DEDUCTIONS" has the meaning set forth in Regulations Sections 1.704-2(b)(1) and 1.704-2(c). 1.54 "NONRECOURSE LIABILITIES" has the meaning set forth in Regulations Section 1.704-2(b)(3). 1.55 "OPERATING PARTNERSHIP" means, collectively, Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II and Mission West Properties, L.P. III. 1.56 "PARTNER" means the General Partner or a Limited Partner, and "Partners" means the General Partner and the Limited Partners collectively. 1.57 "PARTNER MINIMUM GAIN" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). 1.58 "PARTNER NONRECOURSE DEBT" has the meaning set forth in Regulations Section 1.704-2(b)(4). 1.59 "PARTNER NONRECOURSE DEDUCTIONS" has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). 1.60 "PARTNERSHIP" means the limited partnership governed by this Agreement, and any successor thereto. 1.61 "PARTNERSHIP INTEREST" means an ownership interest in the Partnership representing an Adjusted Contribution by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of L.P. Units. 1.62 "PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). 1.63 "PARTNERSHIP RECORD DATE" means the record date established by the General Partner for the distribution of Available Cash pursuant to Section 5.1, which shall be the same as the record date established by the Company for a distribution to its shareholders of some or all of its portion of such distribution. 1.64 "PARTNERSHIP YEAR" means the fiscal year of the Partnership, which is the calendar year, as set forth in Section 9.2. 1.65 "PENDING DEVELOPMENT PROJECTS" means three Berg Group-owned R&D Property development projects which the Operating Partnership has agreed to acquire upon their completion pursuant to the terms of the Acquisition Agreement and the related Pending Projects Option Agreement dated as of ________ __, 1998. 1.66 "PARTNERSHIP INTEREST" means, as to a Partner, the fractional part of the Partnership Interests owned by such Partner and expressed as a percentage as specified in Appendix I, as such Appendix may be amended from time to time. 1.67 "PERMITTED PARTNERS" has the meaning set forth in Section 1(b) of Appendix II. 1.68 "PERMITTED TRANSFEREE" means any person to whom L.P. Units are Transferred in accordance with Section 11.3 of this Agreement. 1.69 "PERSON" means an individual or Entity. 1.70 "PRECONTRIBUTION GAIN" has the meaning set forth in Section 3(c) of Appendix II. 1.71 "PUT RIGHTS" shall have the meaning provided in Section 8.7. 1.72 "PROTECTIVE PROVISIONS EXPIRATION DATE" means the date on which the members of the Berg Group own less than 15% of the Common Stock, treating all Equity Securities of the Company and all L.P. Units owned by such members as Common Stock outstanding for this purpose. 1.73 "PROPERTIES" has the meaning given such term in the Acquisition Agreement. 1.74 "QUARTER" means each of the three month periods ending on March 31, June 30, September 30 and December 31. 1.75 "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). 1.76 "REIT" means a real estate investment trust as defined in Section 856 of the Code. 1.77 "REIT REQUIREMENTS" means all of the requirements imposed under the Code on any entity seeking to qualify and remain qualified as a REIT. 1.78 "RESTRICTED PARTNER" has the meaning set forth in Section 1(b) of Appendix II. 1.79 "SEC" means the U.S. Securities and Exchange Commission. 1.80 "SECURITIES ACT" means the Securities Act of 1933, as amended. 1.81 "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 Partnership or their respective Affiliates in consideration for services or future services. 1.82 "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. 1.83 "SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4 hereof. 1.84 "TAX ITEMS" has the meaning set forth in Appendix II. 1.85 "TERMINATING CAPITAL TRANSACTION" means any Change of Control Transaction. 1.86 "TOTAL MARKET CAPITALIZATION" means the market value of the outstanding Common Stock determined as if all L.P. Units in the Operating Partnership had been converted into Common Stock at the Exchange Factor plus the total debt of the Company and the Operating Partnership. 1.87 "TRANSFER" as a noun, means any sale, assignment, conveyance, pledge, hypothecation, gift, encumbrance or other transfer, and as a verb, means to sell, assign, convey, pledge, hypothecate, give, encumber or otherwise transfer. 1.88 "UNIT" means an equal undivided interest in all of the outstanding Partnership Interests. 1.89 "UNITED STATES PERSON" means a holder of L.P. Units 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 L.P. Units is effectively connected with the conduct of a United States trade or business. 1.90 "VOTING SECURITIES" means any Equity Security which entitles the holder thereof to vote on all matters submitted for a vote of equity holders by the issuer of such Equity Security, including the right to vote for directors in the case of a corporation. Certain additional terms and phrases have the meanings set forth in Appendix II. ARTICLE 2. ORGANIZATIONAL MATTERS. 2.1 CONTINUATION. The Partners hereby agree to continue the Partnership under and pursuant to the Act. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. 2.2 NAME. The name of the Partnership shall be Mission West Properties, L.P. [ ]. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary to comply with the laws of any jurisdiction. The General Partner in its sole and absolute discretion may, upon 5 days' prior written notice to the Limited Partners, change the name of the Partnership. 2.3 REGISTERED OFFICE AND AGENT; PRINCIPAL OFFICE. The address of the registered office of the Partnership in the State of Delaware and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, 1029 Orange Street, Wilmington, Delaware 19801. The principal office of the Partnership shall be 10050 Bandley Drive, Cupertino, California 95014, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. 2.4 POWER OF ATTORNEY. A. Each Limited Partner and each Assignee hereby constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may or plans to conduct business or own property, including, without limitation, any documents necessary or advisable to convey any Contributed Property to the Partnership; (b) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or the Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article 11, 12 or 13, or the Capital Contribution of any Partner; and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interest; and (2) execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14, or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the Transfer of all or any portion of such Limited Partner's or Assignee's L.P. Units and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. 2.5 TERM. The term of the Partnership shall commence on the date hereof and shall continue until December 31, 2048, unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law. ARTICLE 3. PURPOSE. 3.1 PURPOSE AND BUSINESS. The purpose and nature of the business to be conducted by the Partnership is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act including, without limitation, to engage in the following activities: to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with the Properties, and the Pending Development Projects; to acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease, transfer, encumber, convey, exchange, and otherwise dispose of or deal with real and personal property of all kinds; to undertake such other activities as may be necessary, advisable, desirable or convenient to the business of the Partnership; and to engage in such other ancillary activities as shall be necessary or desirable to effectuate the foregoing purposes. 3.2 POWERS. The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business for which it has been formed and for the protection and benefit of the Partnership; provided, that the Partnership shall not take, and shall refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the Company to continue to qualify as a REIT; (ii) could subject the Company to any additional taxes under Section 857 or Section 4981 of the Code; or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the Company or its securities, unless such action (or inaction) shall have been specifically consented to by the Company, if not the General Partner, and the L.P. Unit Majority. ARTICLE 4. CAPITAL CONTRIBUTIONS. 4.1 CAPITAL CONTRIBUTIONS OF THE PARTNERS. A. At the time of the execution of this Agreement, the Partners have made the Adjusted Contributions, or shall make the Capital Contributions contemplated by the Acquisition Agreement, as set forth in Appendix I to this Agreement. Each Limited Partner shall own L.P. Units in the amount set forth for such Partner in Appendix I and shall have a Percentage Interest in the Partnership as set forth in Appendix I, which shall be adjusted in Appendix I from time to time by the General Partner to the extent necessary to reflect accurately exchanges, additional Capital Contributions, the issuance of additional Partnership Interests, the exercise of Put Rights with respect to L.P. Units or similar events having an effect on any Partner's Percentage Interest. B. The number of Units held by the General Partner, in its capacity as general partner, shall be deemed to be the General Partner Interest. Except as provided in Sections 4.2, 10.5 and 13.3, the Partners shall have no obligation to make any additional Capital Contributions. 4.2 ADDITIONAL FUNDS; RESTRICTIONS ON COMPANY. A. The sums of money required to finance the business and affairs of the Partnership shall be derived from the initial Capital Contributions made to the Partnership by the Company as set forth in the Acquisition Agreement and from funds generated from the operation and business of the Partnership including, without limitation, distributions directly or indirectly received by the Partnership from Available Cash provided by the Operating Partnership. In the event additional financing is needed from sources other than as set forth in the preceding sentence for any reason, subject to the provisions of Sections 8.8 and 8.9, the General Partner may, in its discretion, in such amounts and at such times as it solely shall determine to be necessary or appropriate, obtain additional funds for the Operating Partnership which shall be allocated to each of the partnerships included therein, including the Partnership, pro rata in proportion to the ratio of the number of Units then outstanding in each such Partnership to the total number of L.P. Units then outstanding in the Operating Partnership taken as a whole ("Pro Rata Share"). Accordingly, to the extent of such Pro Rata Share of the Partnership and subject to Section 8.9 and any other limitations contained in this Agreement or the Acquisition Agreement, the General Partner may, (i) cause the Partnership to issue additional Partnership Interests and admit additional Limited Partners to the Partnership in accordance with Section 4.3; (ii) make additional Capital Contributions to the Partnership (subject to the provisions of Section 4.2B); (iii) cause the Partnership to borrow money, enter into loan arrangements, issue debt securities, obtain letters of credit or otherwise borrow money on a secured or unsecured basis; or (iv) make loans to the Partnership (subject to Section 4.2B). In no event shall the Limited Partners be required to make any additional Capital Contributions or any loan to, or otherwise provide any financial accommodation for the benefit of, the Partnership pursuant to any such permitted action by the General Partner, except insofar as a Limited Partner has exercised its New Equity Financing Right pursuant to Section 8.8. B. Except as agreed otherwise at the time by vote or written consent of the L.P. Unit Majority: (i) the Company shall lend to the Partnership its Pro Rata Share of the proceeds of or consideration received by the Company from all loans and advances to the Company pursuant to any financial borrowing arrangement on the same financial terms and conditions, including interest rate and repayment schedule, as shall be applicable with respect to or incurred in connection with the issuance of such loans and advances to the Company (which the Partnership may, in turn, lend to any other partnership constituting part of the Operating Partnership); (ii) in the case of Equity Securities senior or junior to the Common Stock as to dividends and distributions on liquidation, which are not convertible into Common Stock as of the issuance date, the Company shall contribute to the Partnership the proceeds of or consideration (including any property or other non-cash assets) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and shall receive from the Partnership, new Partnership Interests in the Partnership in consideration therefor with the same financial terms and conditions, including dividend, dividend priority, liquidation preference, conversion and redemption rights, as are applicable to such Equity Securities; (iii) in the case of Common Stock, or other Equity Securities convertible into Common Stock as of the issuance date, including, without limitation, shares of Common Stock or other Equity Securities issued upon exercise of options issued under the Stock Option Plan or any other Employee Benefit Plan of the Company, the Company shall contribute to the Partnership the proceeds of or consideration (including any property or other non-cash assets) received for such Securities and the proceeds of, or consideration received from, any subsequent exercise, exchange or conversion thereof (if applicable), and shall receive from the Partnership a number of additional Units of General Partner Interest in consideration therefor equal to the product of (x) the number of shares of Common Stock or other Equity Securities issued by the Company, multiplied by (y) the Exchange Factor in effect on the date of such contribution; and (iv) in the case of Common Stock or other Equity Securities issued upon the exercise or surrender of rights under a stock option, warrant, or any other right for which the Company does not receive proceeds, and issues less than the number of shares of Common Stock or other Equity Securities subject to such option, warrant or other right to the holder thereof retaining the excess of such shares as payment of the purchase price (a "net exercise"), or where the Company uses the proceeds received pursuant to a Dividend Reinvestment Plan to acquire shares of Common Stock or other Equity Securities to be issued to the shareholder exercising such right, the Company shall receive from the Partnership a number of additional Units of General Partner Interest equal to the actual number of shares of Common Stock or other Equity Securities so issued to the shareholder multiplied by the Exchange Factor. 4.3 ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS; ADMISSION OF ADDITIONAL LIMITED PARTNERS. In addition to any Partnership Interests issuable by the Partnership pursuant to Section 4.2, and subject to the provisions of Sections 8.8 and 8.9, the General Partner is authorized to cause the Partnership to issue additional Partnership Interests (or options therefor) in the form of L.P. Units or other Partnership Interests senior or junior to the L.P. Units to any Persons at any time or from time to time, for consideration per Unit of Partnership Interest not less than the Common Stock Price determined at the initial issuance date divided by the Exchange Factor, and on such other terms and conditions, as the General Partner shall establish provided, however, that (i) each partnership included in the Operating Partnership shall effect its Pro Rata Share of such issuance, (ii) such issuance does not cause the Partnership to become, with respect to any Employee Benefit Plan subject to Title I of ERISA or Section 4975 of the Code, a "party in interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e) of the Code); and (iii) such issuance does not cause any portion of the assets of the Partnership to constitute assets of any Employee Benefit Plan subject to Section 2510.3-101 of the regulations of the United States Department of Labor. Subject to the limitations set forth in the preceding sentence, the General Partner may take such steps as it, in its reasonable discretion, deems necessary or appropriate to admit any Person as a Limited Partner of the Partnership, including, without limitation, amending the Certificate, Appendix I or any other provision of this Agreement. 4.4 REPURCHASE OF COMPANY EQUITY SECURITIES. In the event the Company shall elect to purchase from its shareholders shares of Common Stock for the purpose of delivering such shares to satisfy an obligation under any Dividend Reinvestment Plan or Employee Benefit Plan adopted by the Company, or shall repurchase any other Equity Securities of the Company pursuant to any other share repurchase obligation or arrangement undertaken by the Company with any Company shareholder, including preferred stock redemptions, the purchase price paid by the Company for such shares and any other expenses incurred by the Company in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the Company, subject to the condition that: (i) if such shares subsequently are to be sold by the Company, the Company shall pay to the Partnership any proceeds received by the Company for such shares of Common Stock or other Equity Securities (provided that an exchange of shares of Common Stock for L.P. Units pursuant to the Exchange Rights Agreement would not be considered a sale for such purposes); and (ii) if such shares are not re-transferred by the Company within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel the number of Units of General Partner Interest held by the Company determined by multiplying (x) the quotient obtained by dividing the total amount deemed paid by the Partnership by the Common Stock Price determined as of the repurchase date, by (y) the Exchange Factor in effect on the date of such repurchase. 4.5 NO THIRD PARTY BENEFICIARY. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns. 4.6 NO INTEREST; NO RETURN. No Partner shall be entitled to interest on its Capital Contribution or on such Partner's Capital Account. Except as provided in Section 8.7 or Article 13 of this Agreement, or by law, no Partner shall have any right to demand or receive the return of its Capital Contribution from the Partnership. ARTICLE 5. DISTRIBUTIONS. 5.1 REGULAR DISTRIBUTIONS. Except for distributions pursuant to Section 13.2 in connection with the dissolution and liquidation of the Partnership, and subject to the provisions of Sections 5.3, 5.4 and 5.5, the General Partner shall cause the Partnership to distribute, from time to time as determined by the General Partner, but in any event not less frequently than once each Quarter, the Partnership's Pro Rata Share of all Available Cash, to the Partners, in accordance with each Partner's respective Percentage Interest; provided, however, that in no event may a Limited Partner receive a distribution of Available Cash with respect to a L.P. Unit, if such Limited Partner is entitled to receive a distribution out of such Available Cash with respect to a share of Common Stock for which such L.P. Unit has been exchanged. 5.2 QUALIFICATION AS A REIT. The General Partner shall be entitled to cause the Partnership to distribute to the General Partner the Partnership's Pro Rata Share of Available Cash distributed by the Operating Partnership to enable the General Partner to pay shareholder dividends that will (i) satisfy the REIT Requirements for distributions to shareholders, and (ii) avoid any federal income or excise tax liability of the General Partner; provided, however, the General Partner is not bound to comply with this covenant to the extent such distributions would violate applicable Delaware law. 5.3 WITHHOLDING. With respect to any withholding tax or other similar tax liability or obligation to which the Partnership may be subject as a result of any act or status of any Partner or to which the Partnership becomes subject with respect to any Unit, the Partnership shall have the right to withhold amounts of Available Cash distributable to such Partner or with respect to such Units, to the extent of the amount of such withholding tax or other similar tax liability or obligation pursuant to the provisions contained in Section 10.5. 5.4 ADDITIONAL PARTNERSHIP INTERESTS. If the Partnership issues Partnership Interests in accordance with Section 4.2 or 4.3 which are entitled to certain distribution priorities, Section 5.1 shall be amended, as necessary, to reflect the distribution priority of such Partnership Interests and corresponding amendments shall be made to the provisions of Appendix II. 5.5 DISTRIBUTIONS UPON LIQUIDATION. Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership shall be distributed to the Partners in accordance with Section 13.2. ARTICLE 6. ALLOCATIONS. The Net Income, Net Loss, and other Partnership items of income, gain, loss, deduction or credit as provided under the Code, shall be allocated pursuant to the provisions of Appendix II, as amended from time to time. ARTICLE 7. MANAGEMENT AND OPERATION OF BUSINESS. 7.1 MANAGEMENT. A. Except as otherwise expressly provided in this Agreement, and subject to the provisions of Section 8.9, all management powers over the business and affairs the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners, with or without cause. In addition to the powers now or hereafter granted a general partner of a limited partnership under the Act or which are granted to the General Partner under any other provision of this Agreement, the General Partner shall have full power and authority to make contracts, sign documents, conduct litigation, acquire and convey property, hire employees, consultants and professionals, raise capital, borrow funds, incur liabilities, invest funds, comply with all applicable laws, and do all other things deemed necessary or desirable by the General Partner to conduct the business of the Partnership on behalf of the Partnership; to exercise all powers set forth in Section 3.2, and to effectuate the purposes set forth in Section 3.1, provided that any exercise of the foregoing rights and powers must be consistent with the REIT Requirements. B. Except as provided in Section 8.9, each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement to the fullest extent permitted under the Act or other applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity. C. At all times from and after the date hereof, in accordance with the provisions of the Acquisition Agreement, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amount as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. Such accounts may include funds of the General Partner and the other partnerships in the Operating Partnership, which the General Partner shall be free to commingle. D. In exercising its authority under this Agreement, the General Partner shall take into account the tax consequences to any Partner of any action taken by it and shall select the alternative which appears at the time to present the least adverse tax consequences to the Limited Partners. By way of example, but not of limitation: If the General Partner decides to refinance (directly or indirectly) any outstanding indebtedness of the Partnership, the General Partner shall use reasonable efforts to structure such refinancing in a manner that minimizes any adverse tax consequences resulting therefrom to the Limited Partners. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of a necessary action (or inaction) by the General Partner taken pursuant to its authority under and in accordance with this Agreement where avoiding the resulting adverse tax consequences to a Limited Partner was not reasonably practicable under the circumstances. 7.2 CERTIFICATE OF LIMITED PARTNERSHIP. The General Partner shall file the [AMENDED CERTIFICATE] [CERTIFICATE] with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all of the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5A(iv) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. 7.3 REIMBURSEMENT OF THE GENERAL PARTNER AND THE COMPANY. A. Except as provided in this Section 7.3 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. B. The General Partner, shall be reimbursed on a monthly basis, or such other basis as it may determine in its sole and absolute discretion, for all expenses that it incurs relating to the ownership and operation of, or for the benefit of, the Partnership; provided, that the amount of any such reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it in its name. Such reimbursement shall be in addition to any reimbursement made as a result of indemnification pursuant to Section 7.6. 7.4 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER. The General Partner shall not directly or indirectly enter into or conduct any business other than in connection with the ownership, acquisition, development and disposition of Partnership Interests and the management of the business of the Partnership, and such activities as are incidental thereto. The General Partner and any Affiliates of the General Partner may acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests. 7.5 CONTRACTS WITH AFFILIATES. A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. B. Except as provided in Section 7.4, the Partnership may Transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable. C. Except as expressly permitted by this Agreement or otherwise contemplated by the Acquisition Agreement, neither the General Partner nor any of its Affiliates shall sell, Transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable. D. Except as provided otherwise in Section 8.9, the General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt, on behalf of the Partnership, Employee Benefit Plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the General Partner, or any Subsidiaries of the Partnership. E. The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a "right of first opportunity" or "right of first offer" arrangement, non-competition agreements and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable. 7.6 INDEMNIFICATION. A. To the fullest extent permitted by Delaware law, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, reasonable attorneys' fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership or the Company as set forth in this Agreement, in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, except to the extent it is finally determined by a court of competent jurisdiction, from which no further appeal may be taken, that such Indemnitee's action constituted intentional acts or omissions constituting willful misconduct or fraud. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), except with respect to Partnership debt that has been assumed or guaranteed by an Indemnitee in its capacity as a Limited Partner. The General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.6 in favor of any Indemnitee having or potentially having liability for any such indebtedness. Any indemnification pursuant to this Section 7.6 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership, or otherwise provide funds, to enable the Partnership to fund its obligations under this Section 7.6. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding shall be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding. C. The indemnification provided by this Section 7.6 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, under the Company's Articles of Incorporation, as a matter of law, or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnities are indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnities and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.6, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an Employee Benefit Plan whenever the performance by such Indemnitee of its duties to the Partnership also imposes duties on, or otherwise involves services by, such Indemnitee to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an Employee Benefit Pan pursuant to applicable law shall constitute fines within the meaning of this Section 7.6; and actions taken or omitted by the Indemnitee with respect to an Employee Benefit Plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participant and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. F. In no event may an Indemnitee subject any of the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.6 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. H. The provisions of this Section 7.6 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.6 or any provision hereof shall be prospective only and shall not in any way affect the Partnership's liability to any Indemnitee under this Section 7.6, as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. I. The provisions of this Section 7.6 shall be inapplicable to any investigation, claim, suit, or proceeding, or the portion thereof, which concerns claims for breach of contract between the Partnership and a Person contracting other than in such Person's capacity as a Partner, or as an officer or director of the General Partner. J. No provision of this Section 7.6 shall be construed as permitting any contract or transaction which is prohibited by the provisions of Section 9.2(b) of the Acquisition Agreement. 7.7 LIABILITY OF THE GENERAL PARTNER. A. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner and its officers and directors shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission, if the General Partner acted in good faith; provided, however, the foregoing shall not be deemed to exculpate the Company from any liability the Company may have under the Acquisition Agreement. B. Subject to its obligations and duties as General Partner set forth in Section 7.1A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agent. The General Partner shall not be liable for any acts or omissions on the part of any such agent, except in circumstances for which the General Partner may be liable under Section 7.7A or would not be subject to indemnification under Section 7.6. C. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's and its officers' and directors' liability to the Partnership and the Limited Partners under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 7.8 LIMITED PARTNERS' RIGHT TO BRING DERIVATIVE LAWSUITS. Any Limited Partner may bring an action on behalf of the Partnership, as permitted under the Act and the laws of the State of Delaware, to recover a judgment in favor of the Partnership if the General Partner has refused to bring the action or if an effort to cause the General Partner to bring the action is not likely to succeed. 7.9 OTHER MATTERS CONCERNING THE GENERAL PARTNER. A. The General Partner may rely and shall be protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and duly appointed attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. D. Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Company to continue to qualify as a REIT; or (ii) to avoid the Company incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. 7.10 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership asset for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. 7.11 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if the General Partner were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that: (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect; (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership; and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. ARTICLE 8. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS. 8.1 LIMITATION OF LIABILITY. The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Sections 10.5 and 13.3 hereof, or under the Act. Notwithstanding the preceding sentence, each Limited Partner shall have the right, but not the obligation, to guarantee a portion of the indebtedness of the Partnership in accordance with the terms of the Acquisition Agreement. 8.2 MANAGEMENT OF BUSINESS. No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. 8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS. Subject to any agreements entered into pursuant to Section 7.5 hereof and any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or any of its Subsidiaries including the Acquisition Agreement, any Limited Partner (other than the Company) and any officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner (other than the Company) shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee which are permitted within the scope of this Section 8.3. None of the Limited Partners (other than the Company) nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person. 8.4 RETURN OF CAPITAL. Except in connection with the exercise of Exchange Rights or Put Rights, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except to the extent provided by Appendix II, or as otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee, either as to the return of Capital Contributions or as to profits, losses or distributions. 8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP. A. In addition to the other rights provided by this Agreement or by the Act, and except as limited by Section 8.5B hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense (including such reasonable copying and administrative charges as the General Partner may establish from time to time): (i) to obtain a copy of the most recent annual and quarterly reports filed by the Company with the SEC pursuant to the Exchange Act; (ii) to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership Year; (iii) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (iv) to obtain a copy of this Agreement and the Certificate and all amendments and/or restatements thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments and/or restatements thereto have been executed; and (v) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner. B. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner reasonably believes to be in the nature of trade secrets or other confidential information, the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or the Company or could damage the Partnership or its business; or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential. 8.6 EXCHANGE RIGHTS. The Limited Partners may exchange all or a portion of their L.P. Units for shares of Common Stock on the terms and subject to the conditions and restrictions contained in the Exchange Rights Agreement. 8.7 PUT RIGHTS. A. Upon the terms and subject to the conditions of this Agreement, each Limited Partner (other than Carl E. Berg and Clyde J. Berg with respect to all L.P. Units owned by them beneficially as of the Effective Date) shall have the right to tender to the Partnership outstanding L.P. Units no more than once during any 12-month period commencing after ___________, ___ 1999. The Partnership shall purchase properly tendered L.P. Units for cash at a price (the "Tender Price") equal to the average market value of the Common Stock price as of the date the Limited Partner delivers to the General Partner, at the address provided in Appendix II, a completed and duly executed Letter of Transmittal in the form attached as Exhibit A to the Exchange Rights Agreement, and any other documents required by the Letter of Transmittal. Only a tender in this manner will constitute a valid tender of L.P. Units pursuant to this Section 8.7A. The General Partner shall make all determinations as to the validity and form of any tender of L.P. Units in accordance with the provisions of this Agreement, and upon rejection of a tender, shall give the tendering holder written notice of such rejection, which shall include the reasons therefor. Unless otherwise agreed by the General Partner or as provided in Section 8.7C, tenders of L.P. Units pursuant to this Section 8.7A shall be irrevocable and shall not be subject to withdrawal or modification. B. Within 15 days after the valid tender of L.P. Units pursuant to Section 8.7A, the Company may make an election to purchase such L.P. Units itself with cash of the Company (the "Cash Election"). If with respect to any tender of L.P. Units pursuant to this Section 8.7, the Company makes the Cash Election, then within 90 days after such tender the Company shall pay to the tendering Limited Partner an aggregate amount of cash equal to the purchase price of the tendered L.P. Units with available cash, borrowed funds or the proceeds of an offering of new shares of Common Stock. Upon acquiring the L.P. Units, the Company may cause the Partnership to retire the L.P. Units and convert them to the same number of Units of General Partner Interest, and the General Partner shall amend Appendix I accordingly. C. Notwithstanding the foregoing, if the purchase price for the L.P. Units tendered by a Limited Partners in one year exceeds $1,000,000, the Partnership or the Company shall be entitled to reduce proportionally the number of L.P. Units to be acquired from each Tendering Partner so that the total purchase price does not exceed $1,000,000 if the Company so elects. In addition, if the Company does not timely make the Cash Election, the Partnership shall deliver the purchase price for the tendered L.P. Units to the Limited Partner within 45 days after the Letter of Transmittal was delivered to the General Partner. The General Partner may defer payment of the purchase price until such time not to exceed 120 days after the valid tender of L.P. Units pursuant to Section 8.7A as the Partnership has adequate Available Cash after payment of the purchase price, in the reasonable judgment of the General Partner, to fund current distributions necessary for the Company to satisfy the REIT Requirements following the waiver by the Company of its right to make the Cash Election. In such event, the General Partner shall give the tendering Limited Partner written notice of its decision to defer the payment with a calculation supporting the General Partner's determination within 20 days after the Letter of Transmittal was delivered to the General Partner. Upon receiving such notice, the Limited Partner may withdraw the tender. In addition, the Limited Partner may instead exercise its rights under the Exchange Rights Agreement. If a Limited Partner tenders L.P. Units pursuant to this Section 8.7, the Limited Partner shall pay the amount of any additional documentary, stamp or similar issue or transfer tax which is due, and shall be responsible for all income or other taxes as a result of such exchange. D. Each tender of L.P. Units shall constitute a representation and warranty by the tendering Limited Partner of each of the representations and warranties set forth in the form of Letter of Transmittal. E. Until the holder of L.P. Units tendered pursuant to Section 8.7 has received cash in exchange therefor, such Limited Partner shall continue to hold and own such L.P. Units for all purposes of this Agreement. 8.8 NEW EQUITY FINANCING RIGHTS. A. If the General Partner determines that it is in the best interests of the Partnership to obtain additional funds through the issuance of additional Partnership Interests, the General Partner shall first offer to the Limited Partners in each of the partnerships comprising the Operating Partnership, including the Partnership, the right of first refusal to purchase that portion of such additional Partnership Interests which their respective numbers of L.P. Units bear to the total number of outstanding L.P. Units in the Operating Partnership. The General Partner shall make this offer pursuant to a written notice describing the offering price, class or series of Partnership Interest, and all other material terms of the offer. Such notice shall be sent to each Limited Partner at the address reflected in Appendix I, as amended. The Limited Partners shall have 10 days from the date of such notice to elect to purchase any such additional Partnership Interests. Such election shall be made pursuant to a written subscription form specifying the number of Units of additional Limited Partnership Interests the Limited Partner intends to acquire and the total purchase price therefor, and shall be signed by the Limited Partner and delivered to the General Partner at the address set forth on Appendix I. After such 10-day period, the General Partner shall be free to offer any additional Limited Partnership Interests on substantially similar terms to non-Partners and Partners alike. B. The foregoing right of the Limited Partners to acquire additional equity interests offered by the Partnership ("New Equity Financing Right") shall not apply to any offering (i) which is part of a transaction in which the Limited Partners had the ability to exercise their New Equity Financing Rights under the Acquisition Agreement with respect to an offering of Equity Securities by the Company, (ii) in connection with a merger or other business combination subject to approval by the L.P. Unit Majority pursuant to Section 8.9, (iii) to a Person in connection with the acquisition of property or services by the Partnership from such Person, or (iv) of any Partnership Interest upon conversion of an outstanding Equity Security of the Partnership, any Partnership Subsidiary, or the Company. 8.9 MATTERS REQUIRING L.P. UNIT MAJORITY APPROVAL. The consent of the L.P. Unit Majority will be required with respect to the following actions involving the Partnership: (i) the material amendment, modification or termination of the 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 Partnership; (iii) the institution of any proceeding for bankruptcy of the Partnership; (iv) the Transfer of any General Partnership Interests, including transfers attendant to any merger, consolidation or liquidation of the Company except as otherwise provided in 11.2C; (v) the admission of any additional or substitute General Partner in the Partnership; and (vi) a Change of Control Transaction. In addition, until the Protective Provisions Expiration Date, the consent of the L.P. Unit Majority will also be required with respect to: (i) any Terminating Capital Transaction; (ii) the dissolution and liquidation of the Partnership; and (iii) the Partnership's issuance of Limited Partner Interests having seniority over the L.P. Units with respect to distributing assets, and voting rights. 8.10 APPROVAL OF CERTAIN TAXABLE SALES. Until the earlier of the tenth anniversary of the closing of the Berg Acquisition and the Protective Provisions Expiration Date, the General Partner must obtain the prior written consent of Carl E. Berg, and upon Carl Berg's death if prior to the expiration of this provision, Clyde J. Berg, before effecting any sale or other transfer of any of the Properties identified on Schedules 1, 2, 3 or 5 to the Acquisition Agreement on behalf of the Partnership which results in the recognition of taxable income by any member of the Berg Group under the Code. Until the earlier of the tenth anniversary of the Berg Acquisition and the date on which John T. Kontrabecki ceases to beneficially own at least 750,000 L.P. Units, the General Partner shall obtain his prior written consent prior to effecting any sale or other transfer of any of the Properties (identified in Schedules 4 or 5 to the Acquisition Agreement) as owned by Kontrabecki, Triangle Partners, or Berg Ventures II, which will result in the recognition of taxable income by Kontrabecki under the Code. ARTICLE 9. BOOKS, RECORDS, ACCOUNTING AND REPORTS. 9.1 RECORDS AND ACCOUNTING. The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business, including, without limitation, all books and records necessary to comply with applicable REIT Requirements and to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Sections 8.5A and 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with GAAP, or such other basis as the General Partner determines to be necessary or appropriate. 9.2 FISCAL YEAR. The fiscal year of the Partnership shall be the calendar year. ARTICLE 10. TAX MATTERS. 10.1 PREPARATION OF TAX RETURNS. The General Partner shall arrange for the preparation and timely filing of all Partnership returns for federal and state income tax purposes and shall use all reasonable efforts to furnish, within sixty (60) days of the close of each taxable year, the tax information reasonably required by Limited Partners for their federal and state income tax reporting purposes. 10.2 TAX ELECTIONS. The General Partner shall elect for the Partnership to be considered a limited partnership on all applicable federal and state income tax returns to be filed by the Partnership. Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any other available election pursuant to the Code. Notwithstanding the above, in making any such tax election the General Partner shall take into account the tax consequences to the Limited Partners resulting from any such election. The General Partner shall make such tax elections on behalf of the Partnership as the L.P. Unit Majority request, provided that the General Partner believes that such election is not adverse to the interests of the General Partner, including its interest in preserving its qualification as a REIT under the Code. In addition, the General Partner shall elect the "traditional method" of making Section 704(c) allocations pursuant to Regulations Section 1.704-3 with respect to each Property under the Acquisition Agreement. The General Partner shall have the right to seek to revoke any tax election it makes (other than the election to use the traditional method of making the Section 704(c) allocations described in this Section 10.2), including, without limitation, the election under Section 754 of the Code, upon the General Partner' s determination, in its sole and absolute discretion, that such revocation is in the best interests of the Limited Partners taken as a whole and with the approval of the L.P. Unit Majority until the Protective Provisions Expiration Date. All such elections and determinations may be made on a Property-by-Property basis, and the General Partner shall be required to analyze the impact of all such elections and determinations on that basis. 10.3 TAX MATTERS PARTNER. A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the Internal Revenue Service of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the Internal Revenue Service with the name, address, taxpayer identification number, and Percentage Interest of each of the Limited Partners and the Assignees; provided, that such information is provided to the Partnership by the Limited Partners and the Assignees. B. The tax matters partner is authorized, but not required: (1) to enter into any settlement with the Internal Revenue Service with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the Internal Revenue Service providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner; or (ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the Code) or a member of a "notice group" (as defined in Section 6223(b)(2) of the Code); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Partnership's principal place of business is located; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; (4) to file a request for an administrative adjustment with the Internal Revenue Service and, if any part of such request is not allowed by the Internal Revenue Service, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the Internal Revenue Service to extend the period for assessing any tax which is attributable to any item required to be taken account of by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.6 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. 10.4 ORGANIZATIONAL EXPENSES. The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a 60-month period as provided in Section 709 of the Code. 10.5 WITHHOLDING. Each Limited Partner hereby authorizes the Partnership to withhold from, or pay on behalf of or with respect to, such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within 15 days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner; or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the amount of Available Cash which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner's Partnership Interest to secure such Limited Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay when due any amounts owed to the Partnership pursuant to this Section 10.5, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event, the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amount payable by a Limited Partner hereunder shall bear interest at the highest base or prime rate of interest published from time to time by any of Wells Fargo Bank, N.A., plus 4 percentage points, but in no event higher than the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. ARTICLE 11. TRANSFERS AND WITHDRAWALS. 11.1 TRANSFER. A. The term "Transfer," when used in this Article 11 with respect to a Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person. The term "Transfer" when used in this Article 11 does not include any exchange of L.P. Units for shares of Common Stock pursuant to the Exchange Rights Agreement. B. No Partnership Interest shall be Transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any Transfer or purported Transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void. 11.2 TRANSFER OF THE COMPANY'S PARTNERSHIP INTERESTS. A. The General Partner may not withdraw as General Partner or transfer its General Partner Interest or Limited Partner Interest unless (i) the L.P. Unit Majority (excluding L.P. Units held by the Company) consents to such Transfer or withdrawal, or (ii) such Transfer is to an entity which is wholly-owned by the Company and is a Qualified REIT Subsidiary under Section 856(i) of the Code. B. In the event the General Partner withdraws as General Partner in accordance with Section 11.2A, the General Partner's General Partner Interest shall immediately be converted into a Limited Partner Interest. 11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER. A. Subject to the provisions of this Section 11.3, a Limited Partner (other than the Company) may, without the consent of the General Partner: (a) if such Limited Partner is a partnership or a limited liability company, Transfer such Limited Partner's L.P. Units to any partner of such Limited Partner or any member of such limited liability company; (b) Transfer such Limited Partner's L.P. Units to any other Limited Partner; and (c) pledge such Limited Partner's L.P. Units to any financial institution as collateral for any loan with respect to which such Limited Partner is personally liable. B. Subject to the provisions of this Section 11.3, a Limited Partner may Transfer any of such Limited Partner's L.P. Units, other than in accordance with Section 11.3A, only with the prior written consent of the General Partner which may be withheld in its sole discretion. C. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all of the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to Transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. D. No Transfer by a Limited Partner of its L.P. Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation; (ii) such Transfer would cause the Partnership to become, with respect to any Employee Benefit Plan subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the Code); (iii) such Transfer would, in the opinion of legal counsel for the Partnership, cause any portion of the assets of the Partnership to constitute assets of any Employee Benefit Plan pursuant to Department of Labor Regulations Section 2510.2-101; (iv) such Transfer would subject the Partnership to regulation under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or ERISA; or (v) such Transfer is a sale or exchange, and such sale or exchange would, when aggregated with all other sales and exchanges during the 12-month period ending on the date of the proposed Transfer, result in a Change of Control Transaction. E. Subject to the foregoing provisions of Section 11.3 and the terms of Section 12.2, a Limited Partner may transfer L.P. Units to an Affiliate and have such Affiliate become a Limited Partner. In addition to the conditions set forth in Sections 11.3D, 11.4, and 12.2 any Transfer pursuant to this Article 11 is subject to the following conditions: (1) unless such Transfer is being made pursuant to an effective registration statement under the Securities Act, or pursuant to Rule 144 or Rule 144A thereunder, the transferring Limited Partner shall deliver to the Company a notice with respect to the proposed transfer, together with an opinion of counsel in form and substance satisfactory to the General Partner prepared by counsel reasonably satisfactory to the General Partner (which shall include, without limitation, counsel to each of the Limited Partners as of the date hereof), to the effect that an exemption from registration and qualification under such Securities Act is available; (2) the transferring Limited Partner and its transferee shall each provide a certificate to the General Partner, in form and substance satisfactory to the General Partner, to the effect that (i) the proposed transfer will not be effected on or through (a) a United States national, regional or local securities exchange, (b) a foreign securities exchange or (c) an interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers (including, without limitation, the Nasdaq) by electronic means or otherwise, and (ii) it is not, and the proposed transfer will not be made by, through or on behalf of, (a) a Person who regularly quotes equity interests in the Partnership, such as a broker or dealer making a market in equity interests in the Partnership or (b) a Person who regularly makes available to the public (including customers or subscribers) bid or offer quotes with respect to equity interests in the Partnership and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others; PROVIDED, HOWEVER, that such certificate shall not be required for any transfer in connection with a registered public offering; (3) the transferee must be a United States Person for federal income tax purposes; and (4) such transfer must not cause the Partnership to terminate or lose its status as a partnership for tax purposes. F. If it shall become unlawful for any Limited Partner to continue to hold some or all of the L.P. Units held by such Limited Partner, or by reason of legal or regulatory restrictions the cost to such Limited Partner to continue to hold such L.P. Units (in relation to the value of such L.P. Units to such Limited Partner) has, in the reasonable judgment of such Limited Partner, significantly increased, such Limited Partner may, at any time following the date three business days after the delivery by such Limited Partner to the General Partner a notice of the existence of any such restriction, Transfer all or any portion of the L.P. Units held by such Limited Partner free of any restrictions imposed under this Agreement (other than those restrictions required by federal or state laws, including securities, and tax, laws, and subject to the prospective transferee meeting the requirements of Section 12.2, and provided that the transferee Limited Partner shall hold its L.P. Units subject to all of the terms of this Agreement); but only if such Limited Partner cannot then exercise its Exchange Rights or Put Rights for cash, and the Company has notified the Limited Partner that the Company will not register for offer and sale all shares of Common Stock issued upon the exercise of the Exchange Rights within 90 days. In connection therewith, the Company shall assist such Limited Partner in disposing of the L.P. Units held by it in a prompt and orderly manner, and (at the request of such Limited Partner) make available (and authorize such Limited Partner to make available through the Company) financial and other information concerning the Company and its Subsidiaries (including, without limitation, the information described in Rule 144A(d)(4)) to any prospective purchaser of such L.P. Units (it being agreed that such prospective purchaser shall be either an "accredited investor" within the meaning of Rule 501 (a) under the Securities Act or a "qualified institutional buyer" within the meaning of Rule 144A(d)(1) under such Act to the extent that such L.P. Units are "restricted securities" as such term is defined in Rule 144). The Company may require that each such prospective purchaser keep confidential, pursuant to customary confidentiality requirements, any information received by it pursuant to this provision. 11.4 SUBSTITUTED LIMITED PARTNERS. The General Partner shall have the right to consent to the admission of a transferee who receives L.P. Units pursuant to Section 11.3A, C, or E, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit such transferee to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. 11.5 ASSIGNEES. If the General Partner, in its sole and absolute discretion, does not consent to the admission of any transferee as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses and any other Tax Items with respect to the L.P. Units assigned to such transferee, but shall not be deemed to be a holder of L.P. Units for any other purpose under this Agreement, and shall not be entitled to vote such L.P. Units in any matter presented to the Limited Partners for a vote (such L.P. Units being deemed to have been voted on such matter in the same proportion as all other L.P. Units held by Limited Partners are voted). In the event the Assignee desires to make a further assignment of any such L.P. Units, such Assignee shall be subject to all of the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of L.P. Units. 11.6 EFFECT OF PROHIBITED TRANSFER. Any transfer made in violation of Article 11 shall be null and void and of no force and effect. 11.7 GENERAL PROVISIONS. A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of such Limited Partner's L.P. Units in accordance with this Article 11, or pursuant to the tender or exchange of all of its L.P. Units pursuant to the exercise of Put Rights or Exchange Rights. B. Any Limited Partner who shall Transfer all of its L.P. Units in a Transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all Assignees of such L.P. Units as Substituted Limited Partners. Similarly, any Limited Partner who shall Transfer all of its L.P. Units pursuant to a tender or exchange of all of its L.P. Units pursuant to the exercise of Put Rights or Exchange Rights shall cease to be a Limited Partner. C. Without the consent of the General Partner, permitted Transfers pursuant to this Article 11 may be made effective only as of the first day of a Quarter. D. If any Partnership Interest is transferred or assigned during the year in compliance with the provisions of this Article 11, or redeemed pursuant to Section 8.7, or exchanged pursuant to the Exchange Rights Agreement on any day other than the first day of a Partnership Year, the Net Income, Net Losses, each item thereof, and all other Tax Items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which the Transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which an exchange occurs shall be allocated to the exchanging Partner, provided, however, that the General Partner may adopt such other conventions relating to allocations in connection with transfers, assignments, or exchanges as it determines are necessary or appropriate. All distributions of Available Cash attributable to such L.P. Units with respect to which the Partnership Record Date is before the date of such transfer, assignment, or exchange shall be made to the transferor Partner or the exchanging Partner, as the case may be, and in the case of a Transfer or assignment other than an exchange, all distributions of Available Cash thereafter attributable to such L.P. Units shall be made to the transferee Partner. ARTICLE 12. ADMISSION OF PARTNERS. 12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor to all of the General Partner Interest pursuant to Article 11 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective upon the Transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement, the Acquisition Agreement, and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6D. 12.2 ADMISSION OF ADDITIONAL AND SUBSTITUTED LIMITED PARTNERS. A. A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement after the Effective Date and a Permitted Transferee pursuant to Article 11 shall be admitted to the Partnership as an Additional Limited Partner or a Substituted Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement and the Acquisition Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner or a Substituted Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner or a Substituted Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each other Tax Item and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all of the Partners and Assignees, including such Additional Limited Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees, other than the Additional Limited Partner, and all distributions of Available Cash thereafter shall be made to all of the Partners and Assignees, including such Additional Limited Partner. D. A transferee who has been admitted as a Substituted Limited Partner or an Additional Limited Partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. 12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP. For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Appendix I) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. ARTICLE 13. DISSOLUTION, LIQUIDATION AND TERMINATION. 13.1 DISSOLUTION. The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. In the event of the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, only upon the first to occur of any of the following ("Liquidating Events"): (i) the expiration of its term as provided in Section 2.5 hereof; (ii) an event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless, within 90 days after such event of withdrawal a majority in interest of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner; (iii) from and after the date of this Agreement through December 31, 2048, an election to dissolve the Partnership made by the General Partner, with the Consent of Limited Partners holding 66-2/3% or more of the L.P. Units (including L.P. Units held by the Company); (iv) on or after January 1, 2049, an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion; (v) entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; (vi) the sale of all or substantially all of the assets and properties of the Partnership; (vii) a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to the entry of such order or judgment all of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General Partner. 13.2 WINDING UP. A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by Limited Partners holding at least a majority of the Limited Partnership Interests (the General Partner or such other Person being referred to herein as the "Liquidator"), shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of beneficial interest or other securities of the Company) shall be applied and distributed in the following order: (i) First, to the payment and discharge of all of the Partnership's debts and liabilities to creditors other than the Partners; (ii) Second, to the payment and discharge of all of the Partnership's debts and liabilities to the General Partner; (iii) Third, to the payment and discharge of all of the Partnership's debts and liabilities to the other Partners; (iv) Fourth, to the General Partner and Limited Partners to the extent of and in accordance with the positive balances in their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods; and (v) The balance, if any, to the Partners according to their Percentage Interests. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. B. Notwithstanding the provisions of Section 13.2A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any asset except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interests of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. C. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be: (1) distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or (2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2A as soon as practicable. 13.3 OBLIGATION TO CONTRIBUTE DEFICIT. In the event the Partnership is "liquidated" within the meaning Section 1.704-1(b)(2)(ii)(G) of the Regulations, if any Partner's Adjusted Contributions are less than zero (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs), such Partner shall contribute to the capital of the Partnership the amount necessary to restore such Partner's Capital Account to zero in compliance with Regulations Section 1.704-1(b)(2(ii)(B)(3). 13.4 RIGHTS OF LIMITED PARTNERS. Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Adjusted Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its Adjusted Capital Contributions, distributions, or allocations. 13.5 NOTICE OF DISSOLUTION. In the event a Liquidating Event occurs or an event occurs that would, but for the provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within 30 days thereafter, provide written notice thereof to each of the Partners. 13.6 TERMINATION OF PARTNERSHIP AND CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP. Upon the completion of the liquidation of the Partnership' s assets, as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the state of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken. 13.7 REASONABLE TIME FOR WINDING-UP. A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect among the Partners during the period of liquidation. 13.8 WAIVER OF PARTITION. Each Partner hereby waives any right to partition of the Partnership property. 13.9 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other provisions of this Article 13, in the event the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(G) but no Liquidating Event has occurred, the Property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Instead, the Partnership shall be deemed to have distributed the Property in kind to the Partners, who shall be deemed to have assumed and taken subject to all Partnership liabilities, all in accordance with their respective Capital Accounts, and if any Partner has an Adjusted Capital Account Deficit (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs) such Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(2(ii)(b)(3). Immediately thereafter, the Partners shall be deemed to have recontributed the property in kind to the Partnership, which shall be deemed to have assumed and taken subject to all such liabilities. ARTICLE 14. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS. 14.1 AMENDMENTS. A. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners (other than the Company) holding in the aggregate 25% or more of the Partnership Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. The General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than 15 days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner's recommendation with respect to the proposal. Except as provided in Section 8.9, 13.1C, 14.1B, 14.1C or 14.1D, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Limited Partners holding 50% or more of the Percentage Interests of the Limited Partners (including Limited Partner Interests held by the Company). B. Notwithstanding any provisions of Sections 8.9 and 14.1A to the contrary, the General Partner shall have the power, without the consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to set forth the designations, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.3 hereof; (4) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; and (5) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law. The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1B is taken. C. Notwithstanding provision of Section 14.1A and 14.1B to the contrary, this Agreement shall not be amended without the Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a General Partner Interest; (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner; (iii) alter rights of the Partner to receive distributions pursuant to Article 5 or Article 13, or the allocations specified in Article 6 (except as permitted pursuant to Article IV and Section 14.1B(3) hereof); (iv) cause the termination of the Partnership prior to the time set forth in Section 2.5 or 13.1; or (v) amend this Section 14.1C. Further, no amendment may alter the restrictions on the General Partner's authority set forth in Section 13.1C without the Consent specified in that section. 14.2 MEETINGS OF THE PARTNERS. A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Limited Partners (other than the Company) holding 25% or more of the Partnership Interests. The request shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than 7 days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Limited Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of the Partners or may be given in accordance with the procedure prescribed in Section 14.1A hereof. Except as otherwise expressly provided in this Agreement, the consent of holders of a majority of the Percentage Interests held by Partners (including Limited Partnership Interests held by the Company) shall control. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership's receipt of written notice of such revocation from the Limited Partner executing such proxy. D. Each meeting of the Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate. Meetings of Partners may be conducted in the same manner as meetings of the shareholders of the Company and may be held at the same time, and as part of, meetings of the shareholders of the Company. ARTICLE 15. GENERAL PROVISIONS. 15.1 ADDRESSES AND NOTICE. Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee (including electronic mail and electronic facsimile transmission if delivery in that manner has been confirmed) at the address set forth in Appendix I or such other address of which the Partner shall notify the General Partner in writing. 15.2 TITLES AND CAPTIONS. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. 15.3 PRONOUNS AND PLURALS. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 15.4 FURTHER ACTION. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. 15.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. 15.6 CREDITORS. Other than as expressly set forth herein with respect to the Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. 15.7 WAIVER. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. 15.8 COUNTERPARTS. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all of the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. 15.9 APPLICABLE LAW. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof. 15.10 INVALIDITY OF PROVISIONS. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 15.11 ENTIRE AGREEMENT. This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto. 15.12 GUARANTY BY THE COMPANY. The Company unconditionally and irrevocably guarantees to the Limited Partners the performance by the General Partner of the General Partner' s obligations under this Agreement. This guarantee is exclusively for the benefit of the Limited Partners and shall not extend to the benefit any creditor of the Partnership. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. GENERAL PARTNER: [GENERAL PARTNER] By: ----------------------------------- Title: LIMITED PARTNERS: [TO COME] APPENDIX I
PARTNERS' [ADJUSTED] CONTRIBUTIONS AND PARTNERSHIP INTERESTS Name Cash Agreed Total L.P. Percentage and Contribution* Value of Contribution Units Interest Address Contributed of Property Partner GENERAL PARTNER [General Partner] LIMITED PARTNERS [General Partner] [Other Limited Partners To Come]
*The Company's Cash Contribution shall be increased by all transaction costs paid by the Company out of the Company Cash pursuant to the Acquisition Agreement. APPENDIX II ALLOCATIONS OF PARTNERSHIP INTERESTS 1. ALLOCATION OF NET INCOME AND NET LOSS. (a) NET INCOME. Except as otherwise provided in this Appendix II, Net Income (or items thereof) (other than Net Income, or items thereof, arising in connection with a Terminating Capital Transaction) for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests. (b) NET LOSS. Except as otherwise provided in this Appendix II, Net Loss (or items thereof) of the Partnership for each fiscal year or other applicable period shall be allocated to the Partners in accordance with the Partners' respective Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) allocated to a Partner under this subparagraph (b) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit, or increase the amount of an existing Adjusted Capital Account Deficit, as of the end of the fiscal year or other applicable period to which such Net Loss relates, such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with each Permitted Partner's Percentage Interest. (c) TERMINATING CAPITAL TRANSACTION; LIQUIDATION. Allocations of Net Income or Net Loss (or items thereof) in connection with a Terminating Capital Transaction or Liquidation of the Partnership shall first be made so that, to the extent possible, each Partner's Capital Account balance is equal to such Partner's Adjusted Contribution, and the remainder of such Net Income or Net Loss (or items thereof) shall be allocated to the Partners in accordance with their Percentage Interests. Notwithstanding the preceding sentence, to the extent any Net Loss (or items thereof) would be allocated to a Restricted Partner under this subparagraph (c), such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the Permitted Partners pro rata in accordance with each Permitted Partner's Percentage Interest. (d) RULES OF CONSTRUCTION. (1) CAPITAL ACCOUNT INCREASES. For purposes of making allocations pursuant to subparagraph 1(c) of this Appendix II, a Partner's Capital Account balance shall be deemed to be increased by such Partner's share of any Partnership Minimum Gain and Partner Minimum Gain remaining at the close of the fiscal period in respect of which such allocations are being made. (2) CHANGE IN PERCENTAGE INTERESTS. In the event any Partner's Percentage Interest changes during a fiscal year for any reason, including without limitation, the Transfer of any interest in the Partnership, the tax allocations contained in this Appendix II shall be applied as necessary to reflect the varying interests of the Partners during such year. 2. SPECIAL ALLOCATIONS. Notwithstanding any provisions of paragraph 1 of this Appendix II, the following special allocations shall be made. (a) MINIMUM GAIN CHARGEBACK (NONRECOURSE LIABILITIES). Except as otherwise provided in Section 1.704-2(f) of the Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Sections 1.704-2(f) and (j)(2) of the Regulations. This subparagraph 2(a) is intended to comply with the minimum gain chargeback requirement in said Section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(a) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. (b) PARTNER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704- 2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Regulations. This subparagraph 2(b) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 2(b) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. (c) QUALIFIED INCOME OFFSET. In the event a Partner unexpectedly receives any adjustments, allocations or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, and such Partner has an Adjusted Capital Account Deficit, items of Partnership income (including gross income) and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible as required by the Regulations. This subparagraph 2(c) is intended to constitute a "qualified income offset" under Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) OTHER CHARGEBACK OF IMPERMISSIBLE NEGATIVE CAPITAL ACCOUNT. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this paragraph 2(d) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Appendix II have been tentatively made as if this paragraph 2(d) were not in the Agreement. (e) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests. (f) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Regulations). (g) INTENT OF ALLOCATIONS. The parties intend that the allocation provisions of this Appendix II shall result in final Capital Account balances of the Partners that initially are equal to each Partner's Adjusted Contribution and are then in proportion to the Partners' respective Percentage Interests, so that when liquidating distributions are made in accordance with such final Capital Account balances under Section 13.2A(4) hereof, such distributions will be able to return to each Partner its Adjusted Contribution and then will be made in proportion to the Partners' respective Percentage Interests. To the extent that such final Capital Account balances do not so reflect the provisions of this Appendix II, income and loss of the Partnership for the current year and future years, as computed for book purposes, shall be allocated among the Partners so as to result in final Capital Account balances reflecting the provisions of this Appendix II, and to the extent such allocations of items of income (including gross income) and deduction do not result in such final Capital Account balances, then, income and loss of the Partnership for prior open years, as computed for book purposes (or items of gross income and deduction of the Partnership for such years, as computed for book purposes) shall be reallocated among the Partners consistent with the foregoing. This subparagraph shall control notwithstanding any reallocation of income, loss, or items thereof, as computed for book purposes, by the Internal Revenue Service or any other taxing authority. (h) SECTION 754 ADJUSTMENT. To the extent an adjustment to the adjusted tax basis of any asset of the Partnership pursuant to Section 734(b) of the Code or Section 743(b) of the Code is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated among the Partners in a manner consistent with the manner in which each of their respective Capital Accounts are required to be adjusted pursuant to such section of the Regulations. (i) GROSS INCOME ALLOCATION. There shall be specially allocated to the General Partner an amount of Partnership income and gain during each Partnership Year or portion thereof, before any other allocations are made hereunder, which is equal to the excess, if any, of the cumulative distributions of cash made to the General Partner under Section 7.3B hereof over the cumulative allocations of Partnership income and gain to the General Partner pursuant to this Section (i) of this Appendix II. 3. TAX ALLOCATIONS. (a) ITEMS OF INCOME OR LOSS. Except as is otherwise provided in this Appendix II, an allocation of Partnership Net Income or Net Loss to a Partner shall be treated as an allocation to such Partner of the same share of each item of income, gain, loss, deduction and item of tax-exempt income or Section 705(a)(2)(B) expenditure (or item treated as such expenditure pursuant to Regulations Section 1.704-1(b)(2)(iv)(i)) ("Tax Items") that is taken into account in computing Net Income or Net Loss. (b) SECTION 1245/1250 RECAPTURE. If any portion of gain from the sale of Partnership assets is treated as gain which is ordinary income by virtue of the application of Code Sections 1245 or 1250 ("Affected Gain"), then such Affected Gain shall be allocated among the Partners in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated. This subparagraph 3(b) shall not alter the amount of Net Income (or items thereof) allocated among the Partners, but merely the character of such Net Income (or items thereof). For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Income and Net Loss for such respective period. (c) PRECONTRIBUTION GAIN. The Partnership may elect the traditional method of allocation contained in Section 1.704- 3(b) of the Regulations to take into account any variation between the adjusted basis and the fair market value of the Initial Contributed Property at the time of the contribution ("Precontribution Gain") on a Property-by-Property basis. By executing this Agreement, each Partner hereby agrees to report income, gain, loss and deduction on such Partner's federal income tax return in a manner that is consistent with the use of the traditional method of allocation with respect to the Initial Contributed Property. With respect to any Contributed Property, the Partnership shall use any permissible method contained in the Regulations promulgated under Section 704(c) of the Code selected by the General Partner, in its sole discretion, to take into account any variation between the adjusted basis of such asset and the fair market value of such asset as of the time of the contribution. Each Partner hereby agrees to report income, gain, loss and deduction on such Partner's federal income tax return in a manner consistent with the method used by the Partnership. (d) ALLOCATIONS RESPECTING SECTION 704(C) AND Revaluations. If any asset has a Gross Asset Value which is different from the Partnership's adjusted basis for such asset for federal income tax purposes because the Partnership has revalued such asset pursuant to Regulations Section 1.704-1(b)(2)(iv)(f), the allocations of Tax Items shall be made in accordance with the principles of Section 704(c) of the Code and the Regulations and the methods of allocation promulgated thereunder, provided, however, that the General Partner shall elect with respect to each Initial Contributed Property, to allocate the income, gain, loss and deduction with respect to such Property using the "traditional method" described in Regulations Section 1.704-3(b) unless the majority of the Limited Partners affected thereby otherwise instruct the General Partner. The intent of this Section 3(d) and Section 3(c) above is that each Partner who contributed to the capital of the Partnership a Contributed Property will bear, through reduced allocations of depreciation, increased allocations of gain or other items, the tax detriments associated with any Precontribution Gain. This Section 3(d) and Section 3(c) are to be interpreted consistently with such intent. (e) EXCESS NONRECOURSE LIABILITY SAFE HARBOR. Pursuant to Regulations Section 1.752-3(a)(3), solely for purposes of determining each Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership (as defined in Regulations Section 1.752-3(a)(3)), the Partners' respective interests in Partnership profits shall be determined in accordance with each Partner's Percentage Interest; provided, however, that each Partner who has contributed an asset to the Partnership shall be allocated, to the extent possible, a share of "excess nonrecourse liabilities" of the Partnership which results in such Partner being allocated nonrecourse liabilities in an amount which is at least equal to the amount of income pursuant to Section 704(c) of the Code and the Regulations promulgated thereunder (the "Liability Shortfall"). In the event there is an insufficient amount of nonrecourse liabilities to allocate to each Partner an amount of nonrecourse liabilities equal to the Liability Shortfall, then an amount of nonrecourse liabilities in proportion to, and to the extent of, the Liability Shortfall shall be allocated to each Partner. (f) REFERENCES TO REGULATIONS. Any reference in this Appendix II or the Agreement to a provision of proposed and/or temporary Regulations shall, in the event such provision is modified or renumbered, be deemed to refer to the successor provision as so modified or renumbered, but only to the extent such successor provision applies to the Partnership under the effective date rules applicable to such successor provision. (g) SUCCESSOR PARTNERS. For purposes of this Appendix II, a transferee of a Partnership Interest shall be deemed to have been allocated the Net Income, Net Loss and other items of Partnership income, gain, loss, deduction and credit allocable to the transferred Partnership Interest that previously have been allocated to the transferor Partner pursuant to this Agreement. (h) LIMITATION TO PRESERVE REIT STATUS. Notwithstanding anything else in this Agreement, to the extent that the amount paid, credited, distributed or reimbursed by the Partnership or any Partners to, for or with respect any Partner that is a REIT ("REIT Partner") or its officers, directors, employees or agents, whether as a reimbursement, fee, expense or indemnity (a "REIT Payment"), would constitute gross income to the REIT Partner for purposes of Section 856 (c)(2) or Section 856(c)(3) of the Code, then, notwithstanding any other provision of this Agreement, the amount of such REIT Payments, as selected by the General Partner in its discretion from among items of potential distribution, reimbursement, fees, expenses and indemnities, shall be reduced for any Fiscal Year so that the REIT Payments, as so reduced, to, for or with respect to such REIT Partner shall not exceed the lesser of: (i) an amount equal to the excess, if any, of (x) four and nine-tenths percent (4.9%) of the REIT Partner total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subSections (A) through (H) of Section 856(c)(2) over (y) the amount of gross income (within the meaning of Section 856(c)(2)) derived by the REIT Partner from sources other than those described in subSections (A) through (H) of Section 856(c)(2) (but not including the amount of any REIT Payments); or (ii) an amount equal to the excess, if any, of (x) 24% of the REIT Partner's total gross income (but excluding the amount of any REIT Payments) for the Fiscal Year that is described in subSections (A) through (I) of Section 856(c)(3) over (y) the amount of gross income (within the meaning of Section 856(c)(3)) derived by the REIT Partner from sources other than those described in subSections (A) through (I) of Section 856(c)(3) (but not including the amount of any REIT Payments); PROVIDED, HOWEVER, that REIT payments in excess of the amounts set forth in clauses (i) and (ii) above may be made if the General Partner, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts shall not adversely affect the REIT Partner's ability to qualify as a REIT. To the extent that REIT Payments may not be made in a Fiscal Year as a consequence of the limitations set forth in this Section 3(h), such REIT Payments shall carry over and shall be treated as arising in the following Fiscal Year. Nothing in this Section 3(h) shall permit the General Partner to allocate income of the Partnership to any Partner in excess of the income that would otherwise be allocated to it under Article 6 without regard to this Section 3(h). The purpose of the limitations contained in this Section 3(h) is to prevent any REIT Partner from failing to qualify as a REIT under the Code by reason of such REIT Partner's share of items, including distributions, reimbursements, fees, expenses or indemnities, receivable directly or indirectly from the Partnership or the Partners, and this Section 3(h) shall be interpreted and applied to effectuate such purpose. EX-10.1-2 6 FORM OF AGREEMENT FOR ASSUMPTION AND ALLOCATION AGREEMENT FOR ASSUMPTION AND ALLOCATION OF LIABILITIES THIS AGREEMENT is made by and among the parties identified herein with reference to the following facts: RECITALS A. ____________________, a Delaware limited partnership (the "Partnership") owns and manages certain real property. B. _____________, ____________, and _________________ are the limited partners of the Partnership, and Mission West Properties, a California corporation (the "Company"), is the general partner of the Partnership. C. The Partnership is the successor to ________________, a ___________ limited partnership, and is governed by the provisions of the Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. III dated as of July 1, 1998, which has revised and restated the limited partnership agreement of ______________ (the "Partnership Agreement"). D. The Partnership has certain liabilities for debt arising from loans to the Partnership, some of which are secured by real property of the Partnership and others of which are unsecured. E. The terms of the Partnership Agreement require the limited partners and the general partner to make-up the amount of any capital account deficit resulting upon liquidation and winding up of the Partnership under certain circumstances ("Deficit Make-Up Provision"). F. The terms of the Partnership Agreement provide the manner in which liability for debt for "nonrecourse debts" (as defined therein) of the Partnership is to be shared among the partners for income tax purposes. G. As of July 1, 1998, the Partnership has principal indebtedness of approximately $___________, under a secured loan from _________, and ___________ jointly [or other entity], which they made from funds borrowed from Wells Fargo Bank N.A. (the "Lender"), and for which they are personally liable (the "Recourse Loan"). H. The partners in the Partnership (individually, each an "Assuming Party" and collectively the "Assuming Parties") desire to establish among themselves their respective responsibilities for payment of any liability of the Partnership under any loans to the Partnership if the Partnership fails to pay them, and to release all other partners of any ultimate liability therefor that such partners might otherwise have under the terms of such loan, the Partnership Agreement or applicable law. AGREEMENT NOW, THEREFORE, in order to formalize the understanding of the Assuming Parties, to establish the amount of the Partnership's debt obligations assumed by each Assuming Party, to relieve the General Partner from its existing primary liability for the Recourse Loan, to declare the Assuming Parties' respective shares of nonrecourse debts of the Partnership, and to amend the Partnership Agreement as provided herein, the parties agree as follows: 1. ASSUMPTION OF LIABILITY. (a) By execution of this Agreement, each Assuming Party hereby unconditionally assumes personal liability, without right of contribution from the General Partner or any other Assuming Party, to pay pursuant to the terms of the Recourse Loan, whose terms are incorporated herein by this reference, or any successor credit agreement, the percentage of the sum of Recourse Loan principal now or existing hereafter and all interest thereon as set forth next to their names solely in the event the Partnership fails to pay all principal and interest due under the terms of the Recourse Loan and only after all cash and other assets of the Partnership have been used to satisfy the liabilities of the Partnership including such loan:
PERCENTAGE OF PARTNERS RECOURSE LOAN ASSUMED The Company 0% ______________ ___% ______________ ___% ______________ ___%
(b) An Assuming Party shall not be liable to the Partnership or any other Assuming Party for any more of the unpaid balance of the Recourse Loan than his or its percentage share provided in Paragraph 1(a). Each Assuming Party shall share liability for nonrecourse debts of the Partnership for income tax purposes in the manner provided in the Partnership Agreement. No Assuming Party shall have any obligation under a Deficit Make-Up Provision of the Partnership Agreement if that will result in the Assuming Party's bearing a greater share of the Recourse Loan or the nonrecourse debts of the Partnership than is provided by this Agreement. (c) Payments of the Recourse Loan made by the Partnership (and not by any Assuming Party personally) shall be credited pro rata against the amounts assumed by the Assuming Parties under Paragraph 1(a). 2. DIRECTION TO PAY LENDER. If required by the Lender, each Assuming Party agrees to remit to the Lender, or to the Partnership, all amounts payable by such Party by reason of this Agreement, and each Assuming Party hereby authorizes and directs the Partnership and the Company to pay over such amounts to the Lender. Each Assuming Party further agrees that the Partnership may pay directly to the Lender from its funds any amounts due to such Party from the Partnership up to the amount the Assuming Party is obligated to pay the Lender by reason of this Agreement, if the Assuming Party defaults in any payment obligation assumed by and allocated to the Assuming Party under this Agreement. The Assuming Parties hereby authorize and direct the Company to make such payments on behalf of the Partnership. 3. INDEMNIFICATION. Each Assuming Party hereby agrees to indemnify and hold harmless every other partner in the Partnership against any and all liability, costs, damages, attorneys' fees and other expenses that any such other partners may incur with respect to the Recourse Loan from any failure by the Assuming Party to satisfy its proportionate liability for such indebtedness as provided in Paragraph 1. 4. ACCOUNTING. The Company shall maintain books and records setting forth the amount of the liabilities assumed under this Agreement and the amounts applied by the Company pursuant to the direction and authorization in Paragraph 2, hereof, to the reduction of such liabilities, including any amounts paid by the Company or the Partnership to the Lender upon any default in payment by any Assuming Party. The Company shall provide to an Assuming Party a statement of any change in the amount of any such liability upon request by the Assuming Party. 5. DEFAULT. An Assuming Party shall be in default under this Agreement in the event: (i) he or it fails to pay when due any amount he or it is required to pay under the Recourse Loan by reason of this Agreement; (ii) he or it fails to satisfy any condition or to honor and perform any covenant set forth in Paragraphs 1, 2, or 3 above; or (iii) he or it fails to pay when due any amount he or it owes to the Lender hereunder. In the event of such default: (a) All amounts owed by the defaulting Assuming Party under the Recourse Loan by reason of this Agreement will become due and payable in full immediately; (b) The Lender shall have all rights and remedies set forth herein, and as otherwise provided by law to collect all amounts due and payable by such defaulting Assuming Party. The Lender shall have the right to enforce one or more of such remedies, successively or concurrently, and any action to enforce the same shall not bar the Lender from pursuing any further remedy which it may have hereunder or otherwise as provided by law, including, without limitation, the absolute right on the part of the Lender to commence an action against a defaulting Assuming Party for a judgment in the amount of all sums due and collectible from such Assuming Party under this Agreement; and (c) This Agreement and the obligations and rights of the Assuming Party hereunder are further subject to all remedies and rights of enforcement of the Lender under the Recourse Loan solely to the extent of an Assuming Party's liabilities thereunder by reason of this Agreement. 6. GOVERNING LAW. This Agreement is governed by and construed under the laws of the State of California without regard to any principles governing conflicts of laws. 7. AGREEMENT FOR THE BENEFIT OF THE LENDER. Each Assuming Party agrees that this Agreement is made for the benefit of the Lender. After execution of this Agreement it shall be delivered to the Lender upon the Lender's request, and the Lender shall be entitled to proceed against an Assuming Party under this Agreement as if the Assuming Party had made and issued his or its personal note directly to the Lender in an amount equal to his or its total obligations hereunder. 8. NOTICES. All notices and information to be submitted to an Assuming Party shall be sent to him or it at 10050 Bandley Drive, Cupertino, California 95014. 9. COUNTERPARTS. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement which shall be binding on all the parties hereto. IN WITNESS WHEREOF, the Assuming Parties, the Company and the Partnership have executed this Agreement as of July 1, 1998. MISSION WEST PROPERTIES ----------------------------- By: By: Mission West Properties Its: President Its: General Partner By: Its: President --------------------- --------------------- --------------------- LENDER'S ACKNOWLEDGMENT OF RECEIPT Receipt of the attached Agreement for Assumption and Allocation of Liabilities is hereby acknowledged as of July 1, 1998 for all purposes. (Insert name of lender) By: Its: EX-10.2 7 FORM OF EXCHANGE RIGHTS AGREEMENT EXCHANGE RIGHTS AGREEMENT This Exchange Rights Agreement (this "Agreement") is made as of ________ __, 1998 by and among Mission West Properties, a California corporation (the "Company"), and each of the limited partners ("Limited Partners") of Mission West Properties, L.P., a Delaware limited partnership ("MWP"), Mission West Properties, L.P. I, a Delaware limited partnership ("MWP I"), Mission West Properties, L.P. II, a Delaware limited partnership ("MWP II") and Mission West Properties, L.P. III, a Delaware limited partnership (MWP III, and collectively with MWP, MWP I and MWP II, the "Operating Partnership"), listed on the signature pages hereto. WHEREAS, the Limited Partners own all of the units of limited partnership interest of the Operating Partnership ("L.P. Units") currently outstanding; WHEREAS, pursuant to an Acquisition Agreement dated of even date herewith (the "Acquisition Agreement") among the Company, the Operating Partnership and the Contributing Entities (as that term is defined in the Acquisition Agreement), the Company will acquire the general partnership interests in the Operating Partnership in exchange for $35,200,000, and the Operating Partnership will acquire certain properties from the Contributing Entities in exchange for L.P. Units and the shareholders and/or limited partners of the Contributing Entities will thereby become Limited Partners and parties to an Operating Partnership Agreement of the Operating Partnership. For purposes of this Agreement, L.P. Units shall include L.P. Units outstanding on the date hereof, together with any L.P. Units of the Operating Partnership issued after the date hereof. WHEREAS, pursuant to the Acquisition Agreement the parties hereto are entering into this Agreement to provide for the rights of the Limited Partners to (i) tender L.P. Units in exchange for shares of the Company's common stock (the "Common Stock"), cash or a combination of Common Stock and cash, on the terms and conditions set forth herein (the "Exchange Rights") and (ii) register shares of Common Stock; NOW, THEREFORE, in consideration of the premises and the mutual covenant set forth herein, the parties hereto agree as follows: 1. DEFINITIONS. For purposes of this Agreement: "AFFILIATE" shall mean (a) with respect to any individual person, any member of the immediate family of such person or a trust established for the benefit of such member, or (b) with respect to any entity, any person which, directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with any such entity. "BENEFICIALLY OWNING" means owning Common Stock directly, indirectly or constructively by a person or entity through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code, or Section 544 of the Code, as modified by Section 856(h) of the Code. The term "Beneficially Own" shall have a correlative meaning. "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. "COMMON STOCK" means the shares of Common Stock, no par value per share, of the Company or any shares of voting securities into which the Common Stock may be reclassified or converted or for which shares of Common Stock may be exchanged in any transaction made applicable or available to all holders of Common Stock as a class. "CLOSING PRICE" shall mean, with respect to a particular date, the last reported sales price regular way on such date or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way on such date, in either case on the AMEX, or if the Common Stock is not then listed or admitted to trading on such Exchange, on the principal national securities exchange, the Nasdaq or any comparable system on which the Common Stock is then listed or admitted to trading or, if not then listed or admitted to trading on any national securities exchange, the Nasdaq or any comparable system. The closing sale price on such date of the Common Stock or if the Common Stock is not then quoted on Nasdaq or any comparable system, the Board of Trustees of the Trust and the Board of Directors of the Corporation shall in good faith determine the Closing Price. "EXCHANGE FACTOR" shall mean the ratio at which L.P. Units will be exchangeable into Common Stock. The Exchange Factor shall initially be 1:1. The initial Exchange Factor shall be subject to adjustment as provided in Section 7. "OWNERSHIP LIMIT" has the meaning set forth in the Restated Articles, as amended from time to time, or in the Acquisition Agreement with respect to the Berg Group (as defined therein). "PARTNERSHIP AGREEMENT" shall mean the Operating Partnership's Amended and Restated Agreement of Limited Partnership, as amended from time to time. "REIT REQUIREMENTS" shall mean the requirements for the Company to (i) qualify as a REIT under the Code and the rules and regulations promulgated thereunder and (ii) avoid any federal income or excise tax liability. "RESTATED ARTICLES" means the Amended and Restated Articles of Incorporation of the Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland"), as amended from time to time after the date of this Agreement. Mission West-Maryland will be the successor corporation to the Company upon the consummation of a merger by the Company with and into Mission West-Maryland for the purpose of redomiciling the Company in Maryland. 2. RIGHT TO TENDER L.P. UNITS. 2.1 GENERAL. Upon the terms and subject to the conditions of this Agreement, after the first anniversary hereof each holder of L.P. Units shall have the right to tender to the Company outstanding L.P. Units; provided, that prior to the first anniversary of this Agreement, holders of L.P. Units may tender L.P. Units solely in connection with (i) the registration of shares of Common Stock acquired upon exchanging L.P. Units for Common Stock pursuant to a registered public offering of Common Stock initiated by the Company to the extent of 25% of the total shares sold in the offering (subject to the Ownership Limit and the underwriter's unlimited right to reduce the participation of all selling shareholders) and (ii) the registration of an aggregate of 500,000 shares of Common Stock acquired upon exchanging L.P. Units into such shares of Common Stock on a Form S-3, or any successor form thereto (subject to the Ownership Limit). Any registration of Common Stock received in exchange for L.P. Units pursuant to this Section 2 shall comply in all respects with Section 8 hereof. 2.2 CERTAIN LIMITATIONS. Notwithstanding any other provision of this Agreement to the contrary, no Common Stock or cash shall be issued or paid in respect of any tender of L.P. Units (i) if the right to tender L.P. Units and receive Common Stock or cash would result in the Company not satisfying the REIT Requirements in any respect or would result in any person or entity Beneficially Owning Common Stock exceeding the applicable Ownership Limit, (ii) prior to the expiration or termination of the waiting period applicable to such exchange and issuance, if any, under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as it may be amended from time to time, or (iii) prior to the receipt of all governmental and regulatory approvals which are required to be obtained prior to such tender and issuance or payment. Such holder shall, as a condition to any tender of L.P. Units which would result in any Limited Partner, together with such Limited Partner's Affiliates, Beneficially Owning, in the aggregate more than shares of outstanding Common Stock exceeding the applicable Ownership Limit, give not less than ninety (90) days' written notice to the Company of its intent to tender L.P. Units. In the event that the ability to receive Common Stock or cash would result in the Company not satisfying the REIT Requirements in any respect or would result in any person or entity Beneficially Owning Common Stock exceeding the Ownership Limit, and as a result thereof no Common Stock or cash may be issued or paid in respect of any tender of L.P. Units pursuant to subsection (i) above, the parties hereto shall use their respective best efforts to restructure the terms and provisions of this Agreement (and, if necessary, the Partnership Agreement), or to agree to terms and provisions in addition to such terms and provisions, so as to provide to each such party the same substantive rights (or substantive rights as close thereto as is reasonably practicable) as those provided by this Agreement and the Partnership Agreement. 2.3 NATURE OF THE OFFER. The right to exchange L.P. Units pursuant to this Agreement constitutes a continuous offer and may not be withdrawn, amended or modified by the Company without the prior written consent of each holder of outstanding L.P. Units adversely affected by such withdrawal, amendment or modification; provided that any withdrawal, amendment or modification that does not adversely affect any holder of outstanding L.P. Units may be effected without the consent of such holder. 3. ACCEPTANCE OF TENDER; ELECTION OF METHOD OF PAYMENT FOR TENDERED L.P. UNITS. 3.1 FORM OF TENDER. Upon the terms and subject to the conditions of this Agreement, the Company shall accept L.P. Units validly tendered in proper form and meeting all of the requirements of this Agreement. In order for L.P. Units to be validly tendered pursuant to this Agreement, the registered holder thereof shall deliver to the Company, at the address provided pursuant to Section 12 (i) a completed and duly executed Letter of Transmittal in the form attached hereto as Exhibit A (the "Letter of Transmittal") and any other documents required by the Letter of Transmittal and (ii) a calculation, to the best knowledge of such registered holder after due inquiry (together with such supporting documentation as the Company may reasonably request), of the maximum number of shares of Common Stock that may be issued to such registered holder without causing either (x) the Company to not satisfy the REIT Requirements in any respect or (y) any person or entity to Beneficially Own Common Stock in excess of the applicable Ownership Limit. The Company shall make all determinations as to the validity and form of any tender of L.P. Units in accordance with the provisions of this Agreement and upon rejection of a tender shall give the tendering holder written notice of such rejection, which shall include the reasons therefor. 3.2 REVOCABILITY. Unless otherwise agreed to by the Company, tenders of L.P. Units pursuant to this Agreement shall be irrevocable and shall not be subject to withdrawal or modification; provided that if the Company makes the Stock Election (as defined below) with respect to a tender, then within three (3) days after such Stock Election the tendering holder may elect to revoke such tender so long as (i) no public disclosure of such tender has been made prior to such revocation and (ii) such tendering holder reimburses the Company for all reasonable costs and expenses incurred in connection with such tender. 3.3 COMPANY ELECTIONS. Within fifteen (15) days after the valid tender of L.P. Units pursuant to this Agreement, the Company shall make an election to pay for such L.P. Units by delivering either (i) Common Stock (the "Stock Election"), (ii) cash (the "Cash Election") or (iii) a combination of Common Stock and cash (the "Combined Election"). 4. STOCK ELECTION. 4.1 STOCK EXCHANGE. If with respect to any tender of L.P. Units pursuant to this Agreement, the Company makes the Stock Election, then within twenty (20) days after such tender the Company shall deliver to the tendering holder one share of Common Stock for each L.P. Unit validly tendered pursuant to the provisions of this Agreement, as adjusted pursuant to Section 7. 4.2 FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon exchange of L.P. Units pursuant to this Agreement. If more than one Letter of Transmittal shall be delivered at one time by the same holder, the number of full shares which shall be issuable upon exchange of the L.P. Units tendered thereby shall be computed on the basis of the aggregate number of L.P. Units so tendered. Instead of any fractional shares which would otherwise be issuable upon exchange of any L.P. Units, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price. 4.3 TAXES. If a holder exchanges L.P. Units pursuant to this Agreement, the Company shall pay any documentary, stamp or similar issue or transfer tax due on any issue of Common Stock upon such exchange. Such holder, however, shall (i) pay to the Company the amount of any additional documentary, stamp or similar issue or transfer tax which is due (or shall establish to the satisfaction of the Company the payment thereof) as a result of Common Stock being issued in a name other than the name of such holder and (ii) be responsible for all income or other taxes as a result of such exchange. 5. CASH ELECTION. If with respect to any tender of L.P. Units pursuant to this Agreement, the Company makes the Cash Election, then within thirty (30) days after such tender the Company shall pay to the tendering holder an aggregate amount of cash (the "Aggregate Cash Payment") equal to the product of (i) the number of shares of Common Stock which would have been delivered to such holder if the Company had made the Stock Election with respect to such tender and (ii) the average Closing Price for the ten (10) trading day period ending one (1) day prior to the date of such tender. 6. COMBINED ELECTION. If with respect to any tender of L.P. Units pursuant to this Agreement, the Company shall make the Combined Election, then within thirty (30) days after such tender the Company shall (i) notify the tending holder of the number of such tendered L.P. Units which will be exchanged for cash (the "Cash Units") and the number of such tendered L.P. Units which will be exchanged for Common Stock (the "Stock Units") as adjusted pursuant to Section 7, (ii) pay to the tendering holder, in respect of each Cash Unit validly tendered pursuant to the provisions of this Agreement, an amount of cash equal to the average Closing Price for the ten trading-day period ending one (1) day prior to the date of such tender and (iii) deliver to the tendering holder one share of Common Stock for each Stock Unit validly tendered pursuant to the provisions of this Agreement. The provisions of Sections 4.2 and 4.3 of this Agreement shall apply to the issuance of Common Stock pursuant to this Section 6. 7. EXCHANGE FACTOR; ADJUSTMENTS TO EXCHANGE FACTOR. 7.1 EXCHANGE FACTOR. Pursuant to Sections 4, 5 and 6, each L.P. Unit initially shall be exchangeable, without the payment of additional consideration by the holder thereof, into one (1) share of Common Stock or the equivalent thereof in cash. The number of L.P. Units exchangeable for one share of Common Stock ("Exchange Factor") shall be subject to adjustment as hereinafter provided. 7.2 ADJUSTMENT FOR STOCK SPLITS, DIVIDENDS AND Combinations. If the Company at any time or from time to time after the date hereof shall effect a subdivision of the outstanding Common Stock, or shall fix a record date for determination of shareholders entitled to receive a dividend of Common Stock on its outstanding Common Stock, the Exchange Factor then in effect immediately before such subdivision or as of such record date shall be proportionately reduced, and if the Corporation shall combine the outstanding shares of Common Stock, the Exchange Factor then in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 7.2 shall become effective at the close of business on the date the subdivision or combination becomes effective or on the record date for determining holders of any class of securities entitled to receive the dividend; provided that if such record date shall have been fixed and such dividend shall not have been fully paid on the date fixed therefor, the adjustment previously made in the Exchange Factor that became effective on such record date shall be cancelled as of the close of business on such record date, and thereafter the Exchange Factor shall be adjusted pursuant to this Section 7.2 as of the time of actual payment of such dividend. 7.3 ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event the Company at any time or from time to time shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then and in each such event provision shall be made so that the holders of L.P. Units shall receive upon exchange thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of such securities of the Company that they would have received had their L.P. Units been exchanged into Common Stock on the date of such event, giving effect to all adjustments called for with respect to such securities during the period from the date of such event to and including the exchange date. 7.4 ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Common Stock issuable upon exchange of the L.P. Units shall be changed into the same or different number of shares of any class or series of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for in Sections 7.1 and 7.2 above, or a merger, consolidation, sale of assets or other transaction provided for in Section 7.3 below), then and in each such event the holder of each L.P. Unit shall have the right thereafter to exchange such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change by holders of the number of shares of Common Stock into which such L.P. Unit might have been exchanged immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. 7.5 ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In the event of any merger or consolidation of the Company with or into another corporation or the conveyance of all or substantially all of the assets of the Company to another corporation, each L.P. Unit shall thereafter be exchangeable into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon exchange of such L.P. Units would have been entitled upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holders of the L.P. Units, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Exchange Factor) shall thereafter be applicable, as nearly as reasonably may be, in relation to any share of stock or other property thereafter deliverable upon exchange of L.P. Units. 7.6 NO IMPAIRMENT. The Company will not, by amendment of this Agreement or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Section 7 and in the taking of all such action as may be necessary or appropriate in order to protect the Exchange Rights of the holders of L.P. Units against impairment. 7.7 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Exchange Factor pursuant to this Section 7, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of L.P. Units, a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of L.P. Units, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the ratio at which exchanges of L.P. Units would be made at the time, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon exchange of such holder's L.P. Units. 8. REGISTRATION RIGHTS. The Company shall provide the following registration rights to the Limited Partners: 8.1 DEFINITIONS. For purposes of this Section 8: (a) The term "REGISTER", "REGISTERED", and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "REGISTRABLE SECURITIES" means (1) the Common Stock of the Company issued upon exchange of the L.P. Units (the "Exchange Stock") and (2) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right, or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Exchange Stock, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which such person's rights under this Agreement or the Partnership Agreement were not assigned in conformity with this Agreement or the Partnership Agreement; (c) For this purpose, "REGISTRATION EXPENSES" mean any and all expenses of the Company incident to performance of or compliance with this Agreement, including, without limitation, (i) all SEC and securities exchange registration and filing fees, (ii) all printing, messenger and deliver expenses, (iii) all fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange, and the fees and disbursements of counsel for the Company and of its independent public accountants, but excluding underwriting discounts and commissions and transfer taxes, if any; (d) The term "FORM S-3" or "FORM S-11" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 8.2 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Limited Partners) any of its stock or other securities under the Securities Act of 1933, as amended (the "Securities Act") in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Limited Partner written notice of such registration. Upon the written request of each Limited Partner given within twenty (20) days after mailing of such notice by the Company in accordance with Section 12 of this Agreement, the Company shall, subject to the provisions of paragraph 8.9 below, cause to be registered under the Securities Act the Registrable Securities that each such Limited Partner has requested to be registered to the extent of 25% of the total shares to be sold in the offering. 8.3 SHELF REGISTRATION. At any time, from time to time, following the first anniversary of the date of the Agreement, upon the request of Limited Partners holding at least five percent (5%) of the Registrable Securities ("Participating Limited Partners"), the Company shall file, and use its best efforts to have declared effective under the Securities Act by the sixtieth (60th) day after the date the Company receives such request, a "shelf" registration statement pursuant to the requirements of the Securities Act on Form S-3 or another appropriate form pursuant to Rule 415 under the Securities Act (or any successor rule or regulation) covering the disposition of at least 200,000 shares of the Registrable Securities in one or more underwritten offerings, block transactions, broker transactions, at-the-market transactions, and in such other manner or manners as may be specified by such Participating Limited Partners, PROVIDED, HOWEVER , that the Company is only obligated to effect one (1) such registration in any twelve (12)-month period. The Company shall use its best efforts to keep such "shelf" registration continuously effective as long as the delivery of a prospectus is required under the Securities Act in connection with the disposition of the Registrable Securities registered thereby and in furtherance of such obligation, shall supplement or amend such registration statement if, as, and when required by the rules, regulations and instructions applicable to the form used by the Company for such registration or by the Securities Act or by any other rules and regulations thereunder applicable to "shelf" registrations. The Company shall provide the Participating Limited Partners with written notice of the filing of such "shelf" registration statement within five (5) days after such registration statement has been filed with the Securities and Exchange Commission ("SEC"). If the Company delivers to the Participating Limited Partners a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company or its shareholders for the Participating Limited Partners to offer or sell, or to continue to offer and sell, any Registrable Securities under the shelf registration statement for a period set forth in such certificate not to exceed one hundred twenty (120) days and commencing no earlier than ten (10) days after the date such certificate is so delivered (the "Blackout Period"), the Limited Partners shall not offer or sell any Registrable Securities during such Blackout Period, provided that the Company shall have the right to deliver such a certificate only once during any twelve (12) month period. 8.4 REQUESTS FOR REGISTRATION. (a) Notwithstanding the limitations set forth in Section 8.3 above, subject to the Ownership Limit and the discretion of the Company, all Limited Partners in the aggregate may request the registration of L.P. Units prior to the first anniversary of the Closing Date in connection with the registration of an aggregate of 500,000 shares of Common Stock on a Form S-3 or another appropriate form pursuant to Rule 415 under the Securities Act (or any successor rule or regulation), upon converting L.P. Units into shares of Common Stock. Such registration shall be subject to the Blackout Period described in Section 8.3. (b) If the Company shall receive a written request from Limited Partners holding no fewer that 500,000 L. P. Units (the "Initiating Holders") and the Company is not then eligible to file a registration statement on Form S-3 or another appropriate form pursuant to Rule 415 of the Securities Act (or any successor rule or regulation) in accordance with the requirements of Section 8.3, the Company shall promptly give written notice of such request to all Limited Partners and shall, subject to the limitations set forth below, effect as soon as practicable, and in any event with in one hundred twenty (120) days of the receipt of such request, a registration on Form S-11, or an equivalent form, of all Registrable Securities which the Limited Partners request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 12 hereof in an underwritten public offering. The underwriter will be selected by a majority in interest of the Initiating Holders and shall be an underwriter of nationally recognized standing reasonably acceptable to the Company. In such event, the right of any Limited Partner to include such Limited Partner's Registrable Securities in such registration shall be conditioned upon such Limited Partner's participation in such underwriting and the inclusion of such Limited Partner's Registrable Securities in the underwriting to the extent provided herein. All Limited Partners proposing to distribute their securities through such underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 8.4(b), if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Limited Partners proposing to distribute Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Limited Partners, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities to be offered for sale by any security holder are first entirely excluded from the underwriting. In addition, any registration pursuant to this Section 8.4(b) shall be subject to the Blackout Period described in Section 8.3. 8.5 OBLIGATIONS OF THE PARTIES. (a) Whenever required under Section 8.2, 8.3 or 8.4 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (i) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of a Limited Partner, keep such registration statement effective until the completion of the sale of the Registrable Securities subject to the registration statement, subject to the provisions of Section 8.3; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (iii) furnish to the Limited Partners such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by the Limited Partners; (iv) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Limited Partner, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (v) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Limited Partner shall also enter into and perform its obligations under such an agreement; and (vi) notify the Limited Partners at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. (b) When requested by Limited Partners in connection with a "shelf" registration pursuant to Section 8.3, the Company shall assist the Limited Partners in obtaining a firm commitment underwriting agreement for such resales from a qualified investment banking firm, as determined by the Company. (c) The Limited Partners agree that in connection with any registration of the Registrable Securities by the Company pursuant to Section 8.2, 8.3 or 8.4, except as permitted under Regulation M promulgated under the Exchange Act, if the Registrable Securities of Holder are being distributed pursuant to such registration, the Limited Partners shall not, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or the mails, or any facility of any national securities exchange, either alone or with one or more persons, bid for or purchase for any account in which any Limited Partner has a beneficial interest, any shares of the Common Stock of the Company until such Limited Partner has completed the Limited Partner's participation in such distribution. 8.6 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Sections 8.2, 8.3 or 8.4 with respect to the Registrable Securities of a Limited Partner that the Limited Partner shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Limited Partner's Registrable Securities. 8.7 EXPENSES OF REQUESTED REGISTRATIONS. In connection with registrations, filings, or qualifications pursuant to Sections 8.3 or 8.4, the Company shall pay all Registration Expenses, other than selling expenses (including commissions and separate counsel' fees of the Limited Partners). 8.8 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred by the Company in connection with any registration, filing, or qualification of Registrable Securities with respect to registrations pursuant to Section 8.2 and the closing of the sale thereof, including (without limitation) all registration, filing, qualification, printer's fees, attorneys' and accounting fees and expenses; provided, however, that the Company shall not be responsible for underwriting discounts and commissions or other charges relating to the Registrable Securities, or for the Limited Partners' attorneys' fees and expenses or any taxes imposed with respect to the Registrable Securities on the sale and transfer thereof. 8.9 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock pursuant to Section 8.2, Limited Partners may include up to 25% of the shares sold in the offering, provided however, that the Company shall not be required under Section 8.2, to include any of the Limited Partners' Registrable Securities in such underwriting unless the Limited Partner accepts the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by the Participating Limited Partners to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders). For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a Participating Limited Partner of Registrable Securities and which is a partnership or corporation, the partners, retired partners, and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder", and any pro rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder", as defined in this sentence. 8.10 DELAY OF REGISTRATION. The Limited Partners shall not have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of any provision of this Section 8. 8.11 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 8: (a) To the extent permitted by law, the Company will indemnify and hold harmless a Limited Partner, any underwriter (as defined in the Act) for a Limited Partner and each person, if any, who controls a Limited Partner or underwriter within the meaning of the Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the Exchange Act, or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Act, or the Exchange Act or any state securities law; and the Company will pay to a Limited Partner, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection (a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to any indemnitee for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished by such indemnitee expressly for use in connection with such registration. (b) To the extent permitted by law, a Limited Partner will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other shareholder selling securities in such registration statement and any controlling person of any such underwriter or other shareholder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the Exchange Act, or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by a Limited Partner expressly for use in connection with such registration; and a Limited Partner will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection (b), in connection with investigating or defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subSection (b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the a Limited Partner, which consent shall not be unreasonably withheld; and PROVIDED, THAT, in no event shall any indemnity obligation under this subsection (b) (together with any obligation to contribute under subsection (d)) exceed the gross proceeds from the offering received by a Limited Partner. (c) Promptly after receipt by an indemnified party under this Section 8.11 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 8.11, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 8.11, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 8.11. (d) If the indemnification provided for in this Section 8.11 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. In no event shall any a Limited Partner's obligation to contribute under this subsection (d) (together with any obligation to indemnify under subSection (b)) exceed the gross proceeds from the offering received by such a Limited Partner. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and a Limited Partner under this Section 8.11 shall survive the completion of any offering of Registrable Securities in a registration statement filed pursuant to Section 8.2, 8.3 or 8.4, and otherwise. 8.12 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Limited Partners the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit the Limited Partners to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to use reasonable efforts to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times; (b) take such action as is necessary to enable the Limited Partners to utilize Form S-3 for the sale of Registrable Securities as soon as permitted pursuant to this Section 8 after the date of the Agreement; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act of 1934 as amended (the "Exchange Act"); and (d) furnish to a Limited Partner, so long as a Limited Partner owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the Securities Act, and the Exchange Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing a Limited Partner of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 8.13 EXERCISE OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 8 may be exercised by a Limited Partner or by any transferee or assignee of such securities who, after such assignment or transfer, holds at least 500,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations, and other recapitalizations), provided, in the case of any such transferee or assignee, the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and such transferee or assignee agrees to comply with all obligations imposed on a Limited Partner under applicable provisions of this Section 8; and PROVIDED, FURTHER, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants, and siblings of such partners or spouses who acquire Registrable Securities by gift, will, or intestate succession) shall be aggregated together and with the partnership; and PROVIDED THAT all assignees and transferees who would not qualify individually for an assignment of the registration rights as provided herein shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices, or taking any action under applicable provisions of this Section 8. 8.14 "MARKET STAND-OFF" AGREEMENT. The Limited Partners hereby agree that, during the period of duration (not to exceed one hundred eighty (180) days) specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of any registered underwritten public offering of the Company's securities, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; PROVIDED, HOWEVER, that all officers and directors of the Company, and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of the Limited Partners (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 8.15 DELAYED PAYMENT UNITS REGISTRATION. If at any time after one year from the date of this Agreement, (a) a Limited Partner validly tenders L.P. Units pursuant to the provisions of this Agreement, (b) the Company makes the Stock Election or the Combined Election with respect to such tender, (c) as a result of the Ownership Limit such Limited Partner cannot receive the full number of shares of Common Stock otherwise issuable to such Limited Partner pursuant to such tender and such election (without giving effect to the Ownership Limit), then: (i) subject to the other terms and conditions of this Agreement, such Limited Partner shall be entitled to receive the number of shares of Common Stock which it can receive pursuant to such tender, such election and the Ownership Limit; and (ii) if such Limited Partner shall make a written request for registration of Common Stock pursuant to this Section 8, the Company shall cause there to be filed with the SEC a registration statement and the Company shall register and sell pursuant thereto a number of shares of Common Stock equal to the number of shares of such Unissued Common Stock. Within two (2) business days after the receipt by the Company of the proceeds of any sale (after underwriting discounts and commissions) of such Common Stock pursuant to such registration, the Company shall pay such proceeds to the tendering holder of the Delayed Payment Units, in full payment for the tender of such Delayed Payment Units. (iii) For purposes of this Section 8.15, the number of shares of Common Stock which such Limited Partner cannot receive pursuant to such tender as a result of the Ownership Limit are referred to as the "Unissued Common Stock" and the L.P. Units tendered in respect of such Unissued Common Stock are referred to as the "Delayed Payment Units." 9. REPRESENTATIONS OF TENDERING HOLDER. Each tender of L.P. Units shall constitute a representation and warranty by the tendering holder of each of the representations and warranties set forth in the form of Letter of Transmittal. Without limiting the generality of the foregoing, unless, at the time of a tender for exchange of L.P. Units pursuant to this Agreement, a registration statement relating to Common Stock to be delivered upon such tender is effective under the Securities Act, such tender shall constitute a representation and warranty by the tendering holder to the Company that such tendering holder (i) is an "accredited investor" within the meaning of Rule 501 under the Securities Act, (ii) has sufficient knowledge and experience in financial and business matters and in investing in entities similar to the Operating Partnership and the Company, so as to be able to evaluate the risks and merits of its investment in the Operating Partnership and the Company and it is able financially to bear the risks thereof, (iii) has had an opportunity to discuss the business, management and financial affairs of the Operating Partnership and the Company with the management of the Operating Partnership and the Company and (iv) understands that the Common Stock has not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 506 promulgated under the Securities Act and such Common Stock must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities laws or is exempt from such registration. 10. STATUS OF TENDERING HOLDER. Until the holder of L.P. Units tendered pursuant to this Agreement becomes a holder of record of the Common Stock issued in exchange therefor (in the case of a Stock Election or a Combined Election) or until such holder has received cash in exchange therefor (in the case of a Cash Election or a Combined Election), such holder shall continue to hold and own such L.P. Units for all purposes of the Partnership Agreement. In the case of a Stock Election or a Combined Election, no such holder shall have any rights as a shareholder of the Company in respect of such Common Stock until such holder becomes a holder of record of such Common Stock. 11. RESERVATION OF SHARES; CLOSING OF TRANSFER BOOKS. 11.1 The Company shall reserve and shall at all times have reserved out of its authorized by but unissued Common Stock, solely for the purpose of effecting the exchange of L.P. Units pursuant to this Agreement, enough shares of Common Stock to permit the exchange of the then outstanding L.P. Units. All Common Stock which may be issued upon exchange of L.P. Units shall be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof other than income taxes resulting from such exchange. 11.2 The Company shall not close its transfer books so as to prevent the timely issuance of Common Stock pursuant to this Agreement. 12. GENERAL. 12.1 SURVIVAL. The covenants, representations and warranties of the parties to this Agreement shall survive the execution and delivery of this Agreement. 12.2 BINDING EFFECT; BENEFITS; ASSIGNMENT. All of the terms of this Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the successors and permitted assigns of the Company and all the Limited Partners. Nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies under or by reason of this Agreement except as expressly indicated in this Agreement. 12.3 FURTHER ACTION. Each of the parties to this Agreement shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and the transactions contemplated in this Agreement or, at or after the date hereof, to evidence the consummation of the transactions contemplated in this Agreement. Each of the parties to this Agreement shall take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, to satisfy the conditions to this Agreement and to obtain in a timely manner all necessary waivers, consents, and approvals and to effect all necessary registrations and filings. 12.4 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California without regard to its principles governing conflicts of laws. 12.5 NOTICES. All notices, requests, demands and other communications to be given pursuant to the terms of this Agreement shall be in writing and shall be delivered personally, telecopied or sent by nationally recognized overnight delivery service, and shall be deemed given and effective when so delivered personally, telecopied or sent, as follows: (a) If to the Company: Mission West Properties 10050 Bandley Drive Cupertino, California 95014 Telecopier: 408/725-1626 Attention: Carl E. Berg with a copy to: Graham & James LLP 600 Hansen Way Palo Alto, California 94304 Telecopier: 650/856-3619 Attention: Alan B. Kalin (b) If to the Limited Partners: At the Address set forth on the signature page hereto. Each party may change its address or telecopier number by prior written notice to the other parties. 12.6 COUNTERPARTS. This Agreement may be executed in counterparts and transmitted by facsimile, each of which when so executed and transmitted shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument. 12.7 EXPENSES. The Company and the Limited Partners shall pay their own respective expenses, costs and fees (including, without limitation, attorneys' and accountants' fees) incurred in connection with the negotiation, preparation, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement. 12.8 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the Company and the Limited Partners with respect to the transactions contemplated by this Agreement, and supersede all prior agreements, arrangements and understandings relating to the subject matter of this Agreement. 12.9 AMENDMENT AND WAIVER. This Agreement may be amended, modified, superseded or canceled, and any of the terms, covenants, representations, warranties or conditions of this Agreement may be waived, only by a written instrument executed by the Company and a majority in interest of the Limited Partners or, in the case of a waiver, by or on behalf of the party waiving compliance. The failure of any party at any time to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or of any breach of any such term, covenant, representation or warranty or any other term, covenant, representation or warranty set forth in this Agreement. 12.10HEADINGS. The headings of the Sections and paragraphs of this agreement have been inserted for convenience or reference only and shall in no way restrict or otherwise modify any of the terms or provisions of this Agreement. 12.11NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, express or implied, is intended to or shall (a) confer on any person other than the parties hereto and their respective successors or assigns any rights (including third-party beneficiary rights), remedies, obligations or liabilities under or by reason of this Agreement or (b) constitute the parties hereto as partners or as participants in a joint venture. This Agreement shall not provide third parties with any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to the terms of this Agreement. No third party shall have any right, independent of any right that exists irrespective of this Agreement, under or granted by this Agreement, to bring any suit at law or equity for any matter governed by or subject to the provisions of this Agreement. 12.12RULES OF CONSTRUCTION. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation or rule of construction providing that ambiguities in any agreement or other document will be construed against the party drafting such agreement or document. 12.13SEVERABILITY. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. THE COMPANY: MISSION WEST PROPERTIES BY: --------------------------- (signature) Name: ------------------------- (Print or type if signing on Company's behalf) Title: ------------------------ (if applicable) THE LIMITED PARTNERS: ------------------------------ By: --------------------------- (signature) Name: ------------------------- (print or type name) Title: ------------------------ (if applicable) Address: ---------------------- ------------------------------ ------------------------------ Telecopier: ------------------- ------------------------------ By: --------------------------- (signature) Name: ------------------------- (print or type name) Title: ------------------------ (if applicable) Address: ---------------------- ------------------------------ ------------------------------ Telecopier: ------------------- ------------------------------ By: --------------------------- (signature) Name: ------------------------- (print or type name) Title: ------------------------ (if applicable) Address: ---------------------- ------------------------------ ------------------------------ Telecopier: ------------------- ------------------------------ By: --------------------------- (signature) Name: ------------------------- (print or type name) Title: ------------------------ (if applicable) Address: ---------------------- ------------------------------ ------------------------------ Telecopier: ------------------- ------------------------------ By: --------------------------- (signature) Name: ------------------------- (print or type name) Title: ------------------------ (if applicable) Address: ---------------------- ------------------------------ ------------------------------ Telecopier: ------------------- EX-10.3-2 8 EXHIBIT 10.3.2 [Mission West Properties Logo] GRANT PURSUANT TO 1997 STOCK OPTION PLAN ________________________, OPTIONEE: Mission West Properties, a California corporation (the "Company"), hereby grants to Optionee, an option ("Option") to purchase a total of __________________ (_______) shares of Common Stock ("Shares") of the Company, at the price set forth herein, and in all respects subject to the terms, definitions and provisions of the Company's 1997 Stock Option Plan ("Plan"), which is incorporated herein by this reference. THE DETAILS OF YOUR OPTION ARE AS FOLLOWS: 1. NATURE OF THE OPTION The Option is intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). To the extent that the Option, or any portion thereof, does not qualify as an incentive stock option under the Code because the aggregate fair market value (determined at the grant date) of the Shares for which the Option or portion thereof first becomes exercisable hereunder will, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Shares or other securities for which the Option or one or more other incentive stock options granted to the Optionee prior to the grant date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first becomes exercisable during the calendar year, exceed $100,000 in the aggregate, the Option or portion thereof shall constitute an incentive stock option under the Plan in such calendar year only to the extent of such $100,000 limitation. To the extent that the fair market value of the Shares for which the Option first becomes exercisable in any calendar year exceeds such $100,000 limitation, the Option may nevertheless be exercised for those excess Shares in such calendar year as a "Nonstatutory Stock Option", as defined in Section 2.o of the Plan. 2. OPTION PRICE The Option Price is $____________ for each Share. 3 VESTING AND EXERCISE OF OPTION The Option shall vest and become exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: a. VESTING AND RIGHT TO EXERCISE i. The Option shall vest as follows, subject to the Optionee's Continuous Employment with the Company: NUMBER OF SHARES DATE OF EARLIEST EXERCISE (INSTALLMENT) (VESTING) ---------------------------------------------------------------- Page 1 Subject to the provisions of subparagraphs ii and iii below, the Optionee can only exercise the portion of the Option that is vested, until the expiration of the Option term. ii. In the event of the Optionee's death, disability or other termination of employment, the exercisability of the Option shall be governed by Sections 9.d, e and f of the Plan. iii. The Option may not be exercised for fractional shares or for less than ten (10) Shares b. METHOD OF EXERCISE In order to exercise any portion of this Option, the Optionee shall notify the Company in writing of the election to exercise the Option, the number of shares in respect of which the Option is being exercised by executing and delivering the Notice of Exercise of Stock Option in the form attached hereto to the Secretary of the Company. The certificate or certificates representing Shares as to which this Option has been exercised shall be registered in the name of the Optionee. b. RESTRICTIONS ON EXERCISE This Option may not be exercised if the issuance of the Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable Federal or state securities law or other law or regulation. Furthermore, the method and manner of payment of the Option Price will be subject to the rules under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board if such rules apply to the Company at the date of exercise. As a condition to the exercise of this Option, the Company may require the Optionee to make any representation or warranty to the Company at the time of exercise of this Option as in the opinion of legal counsel for the Company may be required by any applicable law or regulation, including the execution and delivery of an appropriate representation statement. Accordingly, the stock certificates for the Shares issued upon exercise of this Option may bear appropriate legends restricting transfer. 4. NON-TRANSFERABILITY OF OPTION This Option may be exercised during the lifetime of the Optionee only by the Optionee and, subject to the provisions of Sections 9.f and 10 of the Plan, may not be transferred in any manner other than by will or by the laws of descent and distribution. The terms of this Option shall be binding upon the executors, administrators, heirs and successors of the Optionee. 5. METHOD OF PAYMENT Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: a. cash; b. certified or bank cashier's check; c. in the event there exists a public market for the Company's Common Stock on the date of exercise, by delivery of a sell order to a broker for the shares being purchased and an agreement to pay (or have the broker remit payment for) the purchase price of the shares being purchased on or before the settlement date for the sale of such shares to the broker; or e. in the event there exists a public market for the Company's Common Stock on the date of exercise, by surrender of shares of the Company's Common Stock, provided that if such shares were acquired upon exercise of an incentive stock option, the Optionee must have first satisfied the holding period requirements under Section 422(a)(1) of the Code. In this case payment shall be made as follows: i. Optionee shall deliver to the Secretary of the Company a written notice which shall set forth the portion of the purchase price the Optionee wishes to pay with Common Stock, and the number of shares of such Common Stock the Optionee intends to surrender pursuant to the exercise of this Option, which shall be determined by dividing the aforementioned portion of the purchase price by the average of the last reported bid and asked prices per share of Common Stock of the Company, as reported in THE WALL STREET JOURNAL, for the day on which the notice of exercise is sent or delivered; ii. Fractional shares shall be disregarded and the Optionee shall pay in cash an amount equal to such fraction multiplied by the price determined under subparagraph i above; iii. The written notice shall be accompanied by a duly endorsed blank stock power with respect to the number of Shares set forth in the notice, and the certificate(s) Page 2 representing said Shares shall be delivered to the Company at its principal offices within three (3) working days from the date of the notice of exercise; iv. The Optionee hereby authorizes and directs the Secretary of the Company to transfer so many of the Shares represented by such certificate(s) as are necessary to pay the purchase price in accordance with the provisions herein; v. If any such transfer of Shares requires the consent of the California Commissioner of Corporations or of some other agency under the securities laws of any other state, or an opinion of counsel for the Company or Optionee that such transfer may be effected under applicable Federal and state securities laws, the time periods specified herein shall be extended for such periods as the necessary request for consent to transfer is pending before said Commissioner or other agency, or until counsel renders such an opinion, as the case may be. All parties agree to cooperate in making such request for transfer, or in obtaining such opinion of counsel, and no transfer shall be effected without such consent or opinion if required by law; and vi. Notwithstanding any other provision herein, the Optionee shall only be permitted to pay the purchase price with Shares of the Company's Common Stock owned by him as of the exercise date in the manner and within the time periods allowed under 17 CFR Section 240.16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as such regulation is presently constituted, as it is amended from time to time, and as it is interpreted now or hereafter by the Securities and Exchange Commission. 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. The number of Shares covered by this Option shall be adjusted in accordance with the provisions of Section 11 of the Plan in the event of changes in the capitalization or organization of the Company, or if the Company is a party to a merger or other corporate reorganization. 7. TERM OF OPTION This Option may not be exercised more than six (6) years from the date of grant of this Option, as set forth below, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 8. NOT EMPLOYMENT CONTRACT Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Company or shall interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause, subject to the provisions of applicable law. This is not an employment contract. 9. INCOME TAX WITHHOLDING a. The Optionee authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld by Federal, state or local laws as a result of the exercise of this Option. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the shares acquired upon exercise of an incentive stock option. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the exercise of this Option, or a disqualifying disposition of the shares acquired upon exercise of an incentive stock option, the Optionee agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not Optionee is an employee of the Company at that time. b. At such time as the Optionee is required to pay to the Company an amount with respect to tax withholding obligations as set forth in subparagraph a, the Optionee may elect prior to the date the amount of such withholding tax is determined to make such payment, or such increased payment as the Optionee elects to make up to the maximum federal, state and local marginal tax rates (including any related FICA obligation) applicable to the Optionee and the particular transaction in accordance with the provisions of Section 9.g of the Plan. c. Any adverse consequences incurred by an Optionee with respect to the use of shares of Common Stock to pay any part of the Option Price or of any tax in connection with the exercise of an Option, including, without limitation, any adverse tax consequences arising as a result of a disqualifying disposition within the meaning of Section 422 of the Code, shall be the sole responsibility of the Optionee. Page 3 Dated the _____ day of ________________________. MISSION WEST PROPERTIES By --------------------------------------------- Duly authorized on behalf of the Board of Directors The Optionee acknowledges receipt of copies of the Plan, the Restricted Stock Purchase Agreement and the exhibits referred to therein, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan. - ------------------------------------------------ Optionee CONSENT OF SPOUSE I, _________________________, spouse of the Optionee who executed the foregoing Agreement, hereby agree that my spouse's interest in the shares of Common Stock subject to said Agreement shall be irrevocably bound by the Agreement's terms. I further agree that my community property interest in such shares, if any, shall similarly be bound by said Agreement and that such consent is binding upon my executors, administrators, heirs and assigns. I agree to execute and deliver such documents as may be necessary to carry out the intent of said Agreement and this consent. - ------------------------------------------------ Spouse Page 4 EX-10.3-3 9 EXHIBIT 10.3.3 [MISSION WEST PROPERTIES LOGO] GRANT PURSUANT TO 1997 STOCK OPTION PLAN ________________________, OPTIONEE: Mission West Properties, a California corporation (the "Company"), hereby grants to Optionee, an option ("Option") to purchase a total of __________________ (_______) shares of Common Stock ("Shares") of the Company, at the price set forth herein, and in all respects subject to the terms, definitions and provisions of the Company's 1997 Stock Option Plan ("Plan"), which is incorporated herein by this reference. THE DETAILS OF YOUR OPTION ARE AS FOLLOWS: 1. NATURE OF THE OPTION The Option is intended to be a nonstatutory option and NOT an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. OPTION PRICE The Option Price is $____________ for each Share. 3 VESTING AND EXERCISE OF OPTION The Option shall vest and become exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: a. VESTING AND RIGHT TO EXERCISE i. The Option shall vest as follows, subject to the Optionee's Continuous Employment with the Company: NUMBER OF SHARES DATE OF EARLIEST EXERCISE (INSTALLMENT) (VESTING) ----------------------------------------------------------------- Page 1 Subject to the provisions of subparagraphs ii and iii below, the Optionee can only exercise the portion of the Option that is vested, until the expiration of the Option term. ii. In the event of the Optionee's death, disability or other termination of employment, the exercisability of the Option shall be governed by Sections 9.d, e and f of the Plan. iii. The Option may not be exercised for fractional shares or for less than ten (10) Shares b. METHOD OF EXERCISE In order to exercise any portion of this Option, the Optionee shall notify the Company in writing of the election to exercise the Option, the number of shares in respect of which the Option is being exercised by executing and delivering the Notice of Exercise of Stock Option in the form attached hereto to the Secretary of the Company. The certificate or certificates representing Shares as to which this Option has been exercised shall be registered in the name of the Optionee. b. RESTRICTIONS ON EXERCISE This Option may not be exercised if the issuance of the Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable Federal or state securities law or other law or regulation. Furthermore, the method and manner of payment of the Option Price will be subject to the rules under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board if such rules apply to the Company at the date of exercise. As a condition to the exercise of this Option, the Company may require the Optionee to make any representation or warranty to the Company at the time of exercise of this Option as in the opinion of legal counsel for the Company may be required by any applicable law or regulation, including the execution and delivery of an appropriate representation statement. Accordingly, the stock certificates for the Shares issued upon exercise of this Option may bear appropriate legends restricting transfer. 4. NON-TRANSFERABILITY OF OPTION This Option may be exercised during the lifetime of the Optionee only by the Optionee and, subject to the provisions of Sections 9.f and 10 of the Plan, may not be transferred in any manner other than by will or by the laws of descent and distribution. The terms of this Option shall be binding upon the executors, administrators, heirs and successors of the Optionee. 5. METHOD OF PAYMENT Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: a. cash; b. certified or bank cashier's check; c. in the event there exists a public market for the Company's Common Stock on the date of exercise, by delivery of a sell order to a broker for the shares being purchased and an agreement to pay (or have the broker remit payment for) the purchase price of the shares being purchased on or before the settlement date for the sale of such shares to the broker; or e. in the event there exists a public market for the Company's Common Stock on the date of exercise, by surrender of shares of the Company's Common Stock, provided that if such shares were acquired upon exercise of an incentive stock option, the Optionee must have first satisfied the holding period requirements under Section 422(a)(1) of the Code. In this case payment shall be made as follows: i. Optionee shall deliver to the Secretary of the Company a written notice which shall set forth the portion of the purchase price the Optionee wishes to pay with Common Stock, and the number of shares of such Common Stock the Optionee intends to surrender pursuant to the exercise of this Option, which shall be determined by dividing the aforementioned portion of the purchase price by the average of the last reported bid and asked prices per share of Common Stock of the Company, as reported in THE WALL STREET JOURNAL, for the day on which the notice of exercise is sent or delivered; ii. Fractional shares shall be disregarded and the Optionee shall pay in cash an amount equal to such fraction multiplied by the price determined under subparagraph i above; iii. The written notice shall be accompanied by a duly endorsed blank stock power with respect to the number of Shares set forth in the notice, and the certificate(s) Page 2 representing said Shares shall be delivered to the Company at its principal offices within three (3) working days from the date of the notice of exercise; iv. The Optionee hereby authorizes and directs the Secretary of the Company to transfer so many of the Shares represented by such certificate(s) as are necessary to pay the purchase price in accordance with the provisions herein; v. If any such transfer of Shares requires the consent of the California Commissioner of Corporations or of some other agency under the securities laws of any other state, or an opinion of counsel for the Company or Optionee that such transfer may be effected under applicable Federal and state securities laws, the time periods specified herein shall be extended for such periods as the necessary request for consent to transfer is pending before said Commissioner or other agency, or until counsel renders such an opinion, as the case may be. All parties agree to cooperate in making such request for transfer, or in obtaining such opinion of counsel, and no transfer shall be effected without such consent or opinion if required by law; and vi. Notwithstanding any other provision herein, the Optionee shall only be permitted to pay the purchase price with Shares of the Company's Common Stock owned by him as of the exercise date in the manner and within the time periods allowed under 17 CFR Section 240.16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as such regulation is presently constituted, as it is amended from time to time, and as it is interpreted now or hereafter by the Securities and Exchange Commission. 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. The number of Shares covered by this Option shall be adjusted in accordance with the provisions of Section 11 of the Plan in the event of changes in the capitalization or organization of the Company, or if the Company is a party to a merger or other corporate reorganization. 7. TERM OF OPTION This Option may not be exercised more than six (6) years from the date of grant of this Option, as set forth below, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 8. NOT EMPLOYMENT CONTRACT Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Company or shall interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause, subject to the provisions of applicable law. This is not an employment contract. 9. INCOME TAX WITHHOLDING a. The Optionee authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld by Federal, state or local laws as a result of the exercise of this Option. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the shares acquired upon exercise of an incentive stock option. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the exercise of this Option, or a disqualifying disposition of the shares acquired upon exercise of an incentive stock option, the Optionee agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not Optionee is an employee of the Company at that time. b. At such time as the Optionee is required to pay to the Company an amount with respect to tax withholding obligations as set forth in subparagraph a, the Optionee may elect prior to the date the amount of such withholding tax is determined to make such payment, or such increased payment as the Optionee elects to make up to the maximum federal, state and local marginal tax rates (including any related FICA obligation) applicable to the Optionee and the particular transaction in accordance with the provisions of Section 9.g of the Plan. c. Any adverse consequences incurred by an Optionee with respect to the use of shares of Common Stock to pay any part of the Option Price or of any tax in connection with the exercise of an Option, including, without limitation, any adverse tax consequences arising as a result of a disqualifying disposition within the meaning of Section 422 of the Code, shall be the sole responsibility of the Optionee. Page 3 Dated the _____ day of ________________________. MISSION WEST PROPERTIES By __________________________________________________ Duly authorized on behalf of the Board of Directors The Optionee acknowledges receipt of copies of the Plan, the Restricted Stock Purchase Agreement and the exhibits referred to therein, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan. _____________________________________________ Optionee CONSENT OF SPOUSE I, _________________________, spouse of the Optionee who executed the foregoing Agreement, hereby agree that my spouse's interest in the shares of Common Stock subject to said Agreement shall be irrevocably bound by the Agreement's terms. I further agree that my community property interest in such shares, if any, shall similarly be bound by said Agreement and that such consent is binding upon my executors, administrators, heirs and assigns. I agree to execute and deliver such documents as may be necessary to carry out the intent of said Agreement and this consent. _____________________________________________ Spouse Page 4 EX-10.3-4 10 EXHIBIT 10.3.4 [MISSION WEST PROPERTIES LOGO] NON-EMPLOYEE DIRECTOR GRANT PURSUANT TO 1997 STOCK OPTION PLAN ________________________, OPTIONEE: Mission West Properties, a California corporation (the "Company"), hereby grants to Optionee, an option ("Option") to purchase a total of __________________ (_______) shares of Common Stock ("Shares") of the Company, at the price set forth herein, and in all respects subject to the terms, definitions and provisions of the Company's 1997 Stock Option Plan ("Plan"), which is incorporated herein by this reference. 1. NATURE OF THE OPTION This Option is intended to be a nonstatutory option and is NOT an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986 ("Code"). 2. OPTION PRICE The Option Price is _______________ ($________) for each share of Common Stock, which is one hundred percent (100%) of the fair market value of the Common Stock as determined on the date of grant of this Option. 3. VESTING AND EXERCISE OF OPTION This Option shall be exercisable during its term in accordance with the provisions of Section 5 and Section 9 of the Plan as follows: a. VESTING AND RIGHT TO EXERCISE i. Any Option granted to a Non-Employee Director shall vest and become exercisable in installments cumulatively with respect to 1/48 of the Optioned Shares on the first day of each month following the date of grant only while the Non-Employee Director remains a director. ii. Any Option granted hereunder to any person other than an Outside Director shall vest and become exercisable, cumulatively, as to 20% of the Optioned Shares on each anniversary of the date of the grant of the Option until all of the Optioned Shares have vested, subject to the Optionee's Continuous Employment. iii. This Option may not be exercised for a fraction of a share or for fewer than ten (10) shares. iv. In the event of the Optionee's death, disability or other termination of service as a Director, the exercisability of the Option shall be governed by Section 9(b) of the Plan. b. METHOD OF EXERCISE This Option shall be exercisable by notifying the Company in writing of the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment in full of the aggregate purchase price of the shares purchased. The certificate or certificates for shares of stock as to which the Option is exercised shall be registered in the name of the Optionee. c. RESTRICTIONS ON EXERCISE This Option may not be exercised if the issuance of such shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable Federal or state securities law or any other law or regulation. Furthermore, the method and manner of payment of the Option Price will be subject to the rules under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board if such rules apply to the Company at the date of exercise. As a condition to the exercise of this Option, the Company may require the Optionee to make any representation or warranty to the Company at the time of exercise of the Option as in the opinion of legal counsel for the Company may be required by any applicable law or regulation, including the execution and delivery of an appropriate representation statement. Accordingly, the stock certificates for the Shares issued upon exercise of this Option may bear appropriate legends restricting transfer. Page 1 4. NON-TRANSFERABILITY OF OPTION This Option may not be transferred in any manner otherwise than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Optionee only by him, except that to the extent permitted by the Committee, an Optionee may transfer Nonstatutory Stock Options solely by gift to members of the Optionee's immediate family. The terms of this Option shall be binding upon the executors, administrators, heirs and successors of the Optionee. 5. METHOD OF PAYMENT Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: i. cash; ii. check; iii. wire transfer; iv. promissory note; v. authorization to retain from the total number of shares as to which the Option is exercised that number of shares having a fair market value on the date of exercise equal to the exercise price for the total number of shares as to which the Option is exercised; vi. in lieu of delivery of a cash payment for the purchase price of the Shares for which the Option is exercised, by delivery of a sell order to a broker for the shares being purchased and an agreement to pay the purchase price for the share being purchased (or irrevocable instructions to the Optionee's broker to deliver to the Company the amount of sale proceeds required to pay the exercise price) on or before the settlement date for the sale of such shares; or vii. by surrender of other shares of the Company's Common Stock that: 1/ either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company; and 2/ have a fair market value (within the meaning of Section 8(a) of the Plan) on the date of surrender equal to the aggregate Option Price of the Shares as to which the Option is being exercised. Notwithstanding any other provision herein, the Optionee shall only be permitted to pay the purchase price with shares of the Company's Common Stock owned by him as of the exercise date in the manner and within the time periods allowed by Rule 16b-3 under the Exchange Act as such regulation is presently constituted, as it is amended from time to time, and as it is interpreted now or hereafter by the Securities and Exchange Commission. 6. TERM OF OPTION The term of each Option granted under the Plan shall be six (6) years from the date of grant of this Option, as set forth below, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 7. NO RIGHT TO SERVE AS A DIRECTOR Nothing in this Agreement or in the Plan shall confer upon the Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director with the Company or shall interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to terminate the Optionee's directorship at any time. This is not an employment contract. Page 2 8. TAXATION UPON EXERCISE OF OPTION Optionee understands that, upon exercise of this Option, he will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares purchased over the exercise price paid for such Shares. (Since the Optionee is subject to Section 16(b) of the Exchange Act, the measurement and timing of such income may be deferred under certain circumstances, and the Optionee is advised to contact a tax advisor concerning the desirability of filing an 83(b) election in connection with the exercise of the Option.) Upon a resale of such Shares by the Optionee, any difference between the sale price and the fair market value of the Shares on the date of exercise of the Option to the extent not included in income as described above, will be treated as capital gain or loss. Dated the _____ day of ________________________. MISSION WEST PROPERTIES By ____________________________________________________ Duly authorized on behalf of the Board of Directors The Optionee acknowledges receipt of copies of the Plan, the Restricted Stock Purchase Agreement and the exhibits referred to therein, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan. _____________________________________________ Optionee CONSENT OF SPOUSE I, _________________________, spouse of the Optionee who executed the foregoing Agreement, hereby agree that my spouse's interest in the shares of Common Stock subject to said Agreement shall be irrevocably bound by the Agreement's terms. I further agree that my community property interest in such shares, if any, shall similarly be bound by said Agreement and that such consent is binding upon my executors, administrators, heirs and assigns. I agree to execute and deliver such documents as may be necessary to carry out the intent of said Agreement and this consent. _____________________________________________ Spouse Page 3 EX-10.4-1 11 ACQUISITION AGREEMENT, DATED AS OF MAY 14, 1998 ACQUISITION AGREEMENT DATED AS OF MAY 14, 1998 among MISSION WEST PROPERTIES, CERTAIN PARTNERSHIPS AND THE BERG GROUP (AS DEFINED THEREIN). ACQUISITION AGREEMENT This Acquisition Agreement is made and entered into as of May __, 1998, by and among Mission West Properties, a California corporation (the "Company"), Mission West Properties, L.P., a Delaware limited partnership ("MWP"), Berg Family Partners, L.P., a Delaware limited partnership ("MWP I"), Berg & Berg Developers, L.P., a Delaware limited partnership ("MWP II"), Kontrabecki Associates, a California limited partnership ("MWP III"), and each of the partners of the respective partnerships (the "Partners"), holders of equity interests in the other entities listed in Appendix I hereto, and certain other persons identified on exhibits and schedules hereto. RECITALS WHEREAS, the Company, a publicly owned corporation which desires to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), for the tax year ending December 31, 1998, desires to rapidly acquire a substantial portfolio of San Francisco Bay Area properties used primarily for office, research and development, light manufacturing and assembly ("R&D Properties); WHEREAS, MWP, formerly known as Berg Properties, L.P., owns and operates the R&D Properties listed on Schedule 1 hereto (the "MWP Properties"); MWP I owns and operates the R&D Properties listed on Schedule 2 hereto (the "MWP I Properties"); MWP II owns and operates the R&D Properties listed on Schedule 3 hereto (the "MWP II Properties"); WHEREAS, John Kontrabecki ("Kontrabecki") is the general partner of three limited partnerships, including MWP III, that own R&D Properties (the "Kontrabecki Partnerships"). MWP III owns and operates the R&D Properties listed on Schedule 4 hereto (the "MWP III Properties"); WHEREAS, the Kontrabecki Partnerships and the individuals and other entities listed on Schedule 5 hereto (the "Contributing Entities") own and operate the R&D Properties set forth opposite such Contributing Entity's name on Schedule 5 (the "Contributed Properties"); WHEREAS, the Company intends to acquire a general partnership interest in each of MWP, MWP I, MWP II and MWP III (collectively, the "Operating Partnership") in exchange for Thirty-Five Million Two Hundred Thousand Dollars ($35,200,000) (the "Berg Acquisition"); WHEREAS, in order to raise funds for the Berg Acquisition, the Company intends to issue and sell 5,800,000 shares of its Common Stock ("Common Stock") for $26,100,000 to a group of private investors introduced to the Company by Ingalls & Snyder LLC as placement agent and intends to issue and sell 695,058 shares of its Common Stock for $2,227,761 in cash and such other consideration as the Company deems acceptable to certain additional investors in a separate private placement (collectively, the "Private Placement"); WHEREAS, each of MWP, MWP I, MWP II, and MWP III holds and will hold its Properties subject to certain secured indebtedness and is and will be liable with respect to one or more lines of credit, some or all of which have been guaranteed or assumed proportionately by the existing partners therein and which they will continue to assume or guaranty in the same proportion after the transactions contemplated by this Agreement; WHEREAS, in connection with the acquisition by the Company of the general partnership interest in the Operating Partnership, each of MWP, MWP I, MWP II and MWP III intends to issue units of limited partnership interest (the "L.P. Units") in each respective limited partnership in exchange for the existing interests in such partnerships in accordance with the schedule attached hereto; WHEREAS, following the Berg Acquisition, each of the existing general partners of MWP, MWP I, MWP II and MWP III intends to resign as the general partner and become a limited partner in their respective limited partnerships through the acquisition of additional L.P. Units in exchange for such interest as a general partner; WHEREAS, following the Berg Acquisition, the Company will manage the Operating Partnership as a single enterprise while maintaining separate books and records for each of MWP, MWP I, MWP II, and MWP III, and each of the partners therein shall share only in the income or loss of that partnership for federal and state income tax purposes; WHEREAS, at the closing for the Berg Acquisition, the Operating Partnership intends to enter into an agreement (the "Pending Projects Acquisition Agreement") regarding the acquisition by the Company or the Operating Partnership of certain pending R&D Property developments in exchange for the issuance to the owners of such R&D Properties for cash or L.P. Units, when each such project has been completed and fully leased; WHEREAS, at the closing for the Berg Acquisition, certain of the Partners will grant to the Company and the Operating Partnership the right to purchase certain land holdings of such Partners in exchange for cash, in the aggregate, pursuant to the terms and conditions of an option agreement (the "Berg Land Holdings Option Agreement"); WHEREAS, upon consummation of the Berg Acquisition, the Company intends to reincorporate in the State of Maryland through a merger (the "Reincorporation Merger") with and into its wholly-owned subsidiary, Mission West Properties, Inc. ("Mission West-Maryland"); WHEREAS, in connection with the Berg Acquisition and the Reincorporation Merger, the Company and certain Partners and their affiliates referred to as the "Berg Group" intend to agree to certain corporate governance and management covenants; and WHEREAS, promptly following the consent of the shareholders of the Company to the transactions contemplated hereby, the parties hereto wish to consummate the transactions contemplated hereby, upon all of the terms and conditions hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants, conditions and promises hereinafter set forth, the parties agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the meanings specified or referred to in this Section 1. 1.1 "AFFILIATE" shall have the meaning ascribed to such term in Rule 12b-2 under the Exchange Act. 1.2 "APPLICABLE LAWS" shall have the meaning set forth in Section 7.8. 1.3 "AMEX" shall mean the American Stock Exchange. 1.4 "ARTICLES OF INCORPORATION" shall mean the Articles of Incorporation of Mission West-Maryland attached as Exhibit A to the Merger Agreement. 1.5 "AVAILABLE CASH" shall mean, with respect to the applicable period of measurement (i.e., any period beginning on the first day of the fiscal year, quarter or other period commencing immediately after the last day of the fiscal year, quarter or other applicable period for purposes of the prior calculation of Available Cash for or with respect to which a distribution has been made, and ending on the last day of the fiscal year, quarter or other applicable period immediately preceding the date of the calculation) the excess, if any, as of such date, of: (a) the gross cash receipts of all of the Constituent Partnerships combined for such period from all sources whatsoever, including, without limitation, the following: (i) all rents, revenues, income and proceeds derived from operations, including, without limitation, distributions received from any Entity in which the Constituent Partnership has an interest; (ii) all proceeds and revenues received on account of any sales of property or as a refinancing of or payments of principal, interest, costs, fees, penalties or otherwise on account of any borrowings or loans made by the Constituent Partnership or financings or refinancings of any property of the Constituent Partnership; (iii)the amount of any insurance proceeds and condemnation awards received by either Constituent Partnership; and (iv) all capital contributions or loans received by the Constituent Partnership from its partners: (b) over the sum of: (i) all operating costs and expenses, including costs relating to tenant improvements, brokerage expenses, taxes and other expenses of the Properties, of the Partnership and capital expenditures made during such period (without deduction, however, for any capital expenditures, charges for Depreciation or other expenses not paid in cash or expenditures from reserves described in (viii) below); (ii) all costs and expenses expended or paid during such period in connection with the sale or other disposition, or financing or refinancing, of property of the Partnership or the recovery of insurance or condemnation proceeds; (iii)all fees provided for under this Agreement; (iv) all debt service, including principal and interest, paid during such period on all indebtedness (including under any line of credit); (v) all capital contributions, advances, reimbursements or similar payments made to any person in which a Partnership has an interest; (vi) all loans made by the Constituent Partnership in accordance with the terms of this Agreement; (vii) all reimbursements to the General Partner or its Affiliates during such period; and (viii) any new reserves or increases in reserves reasonably determined by the General Partner in its sole discretion to be necessary for working capital, capital improvements, payments of periodic expenditures, debt service or other purposes of the Operating Partnership or any Person in which the Partnership has an interest. 1.6 "BERG GROUP" means Carl E. Berg, Clyde J. Berg, the members of their Immediate Family, and any Entity which is an Affiliate of either Carl E. Berg or Clyde J. Berg (excluding any Constituent Partnership and the Company). 1.7 "BERG LAND HOLDINGS OPTION AGREEMENT" shall mean the agreement among the Company, the Operating Partnership and certain members of the Berg Group substantially in the form attached hereto as Exhibit A. 1.8 "BYLAWS" shall mean the Bylaws of Mission West-Maryland attached as Exhibit B to the Merger Agreement. 1.9 "CHARTER" shall have the meaning set forth in Rule 405 under the Securities Act. 1.10 "CLOSING" shall have the meaning set forth in Section 3. 1.11 "CLOSING DATE" shall mean the date and time of the Closing. 1.12 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.13 "COMPANY" shall mean Mission West Properties, a California corporation and its successor corporation, Mission West Properties, Inc., a Maryland corporation, in the event that the Reincorporation Merger is approved. 1.14 "COMPANY SEC FILINGS" shall have the meaning set forth in Section 6.6. 1.15 "COMPANY FINANCIAL STATEMENTS" shall have the meaning set forth in Section 6.6. 1.16 "CONSTITUENT PARTNERSHIP" shall mean any of the four limited partnerships comprising the Operating Partnership. 1.17 "CONTRIBUTED PROPERTIES" shall mean those R&D Properties listed on Schedule 5. 1.18 "CONTRIBUTING ENTITY" shall mean an Entity which is contributing any of the Contributed Properties to the Operating Partnership as part of the Berg Acquisition. 1.19 "CONTRIBUTING ENTITIES" shall mean all such Entities. 1.20 "CONTRIBUTION AMOUNT" shall mean Thirty-Five Million Two Hundred Thousand Dollars ($35,200,000) payable to the Operating Partnership by the Company at the closing of the Berg Acquisition. 1.21 "ENTITY" shall mean any general partnership, limited partnership, corporation, joint venture, trust, business trust, real estate investment trust, limited liability company, cooperative or association. 1.22 "EQUITY SECURITIES" shall have the meaning set forth in Rule 405 under the Securities Act. 1.23 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.24 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. 1.25 "EXCHANGE RIGHTS AGREEMENT" shall mean the agreement between the Company and the Limited Partners with respect to the exchange of L.P. Units for shares of Common Stock of the Company, in the form attached hereto as Exhibit B. 1.26 "EXISTING PROPERTIES" shall mean the R&D Properties held by MWP, MWP I, and MWP II immediately prior to the closing of the Berg Acquisition. 1.27 "FUNDS FROM OPERATIONS" shall mean funds from operations as determined in accordance with the standards established by the Board of Governors of NAREIT in its March 1995 White Paper. 1.28 "GOVERNMENTAL BODY" shall mean any domestic or foreign national, state or municipal or other local government or multi-national body, any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority thereunder. 1.29 "IMMEDIATE FAMILY" means, with respect to any Person, such Person'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. 1.30 "INDEMNIFIED PARTIES" shall have the meaning set forth in Section 8.7(b). 1.31 "INDEPENDENT DIRECTOR" shall mean any director of the Company who is not a member of the Berg Group. 1.32 "LEASES" shall mean the leases for the Properties to be set forth on Schedule 7.2(a). 1.33 "LIENS" means, with respect to any property of any Person, (i) any mortgage, deed of trust, lien, pledge, encumbrance, charge, restriction or security interest in or on such asset, (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (iii) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. 1.34 "LIMITED PARTNER" shall mean any limited partner in the Operating Partnership after the Closing Date. 1.35 "MATERIAL ADVERSE EFFECT" shall mean any change or effect that is materially adverse to the business, assets, properties, results of operation or financial condition. 1.36 "MERGER AGREEMENT" shall mean the agreement to be entered into between the Company and Mission West-Maryland to effect the Reincorporation Merger, subject to Shareholder Approval, substantially in the form attached to this Agreement as Exhibit C. 1.37 "OPERATING PARTNERSHIP" shall mean MWP, MWP I, MWP II, and MWP III, collectively. 1.38 "OPERATING PARTNERSHIP AGREEMENT" shall mean the agreement of limited partnership for MWP, MWP I, MWP II and MWP III substantially in the form attached to this Agreement as Exhibit D. 1.39 "PENDING PROJECTS ACQUISITION AGREEMENT" shall mean the agreement among the Company, the Operating Partnership, and certain members of the Berg Group substantially in the form attached hereto as Exhibit E. 1.40 "PERSON" shall mean an individual or an Entity. 1.41 "PROPERTIES" shall mean the Existing Properties and the Contributed Properties. 1.42 "PROPOSED TRANSACTIONS" shall mean (i) the Berg Acquisition; (ii) the Private Placement; and (iii) the Reincorporation Merger. 1.43 "PROTECTIVE PROVISIONS EXPIRATION DATE" shall mean the date on which the members of the Berg Group own less than 15% of the Equity Securities of the Company, treating all L.P. Units in the Operating Partnership owned by such members as Common Stock outstanding for this purpose. 1.44 "PROXY STATEMENT/PROSPECTUS" shall mean the proxy statement/prospectus of the Company which forms a part of the S-4 Registration Statement and which will be mailed to the Company's shareholders in connection with obtaining Shareholder Approval at the Special Meeting. 1.45 "RELATED AGREEMENTS" shall mean the Operating Partnership Agreement, the Exchange Rights Agreement, the Berg Land Holdings Option Agreement, and the Pending Projects Acquisition Agreement. 1.46 "REQUIRED CONSENTS" shall mean the licenses, authorizations, consents, orders and approvals to be listed on Schedule 6.5 and such other material licenses, authorizations, consents, orders and approvals that are necessary for the consummation of the Proposed Transactions. 1.47 "REQUIRED DIRECTORS" shall mean a majority of the directors of the Company including Carl E. Berg or an individual designated by Carl E. Berg to replace him on the board of directors. 1.48 "S-4 REGISTRATION STATEMENT" shall mean the registration statement on SEC Form S-4 to be filed by the Company with respect to the Reincorporation Merger. 1.49 "SEC" shall mean the Securities and Exchange Commission. 1.50 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. 1.51 "SHAREHOLDER APPROVAL" shall mean the vote of the shareholders of the Company approving a Proposed Transaction at the Special Meeting. 1.52 "SPECIAL MEETING" shall mean the Special Meeting of Shareholders of the Company for which proxies will be solicited for approval of all of the Proposed Transactions pursuant to the Proxy Statement. 1.53 "SUBSIDIARIES" shall mean MIT Realty, Inc., Mission West Executive Aircraft Center, Inc., and any other subsidiary of the Company as of the Closing Date. 1.54 "TOTAL MARKET CAPITALIZATION" shall mean the sum of the aggregate market value of the outstanding shares of Common Stock, assuming the exchange of all L.P. Units for shares of Common Stock, plus the aggregate market value of all publicly traded Equity Securities of the Company (other than Common Stock) which may be outstanding from time to time, plus the Company's total outstanding debt. 1.55 "VOTING SECURITIES" means any Equity Security within the meaning of SEC Rule 405 which entitles the holder thereof to vote on all matters submitted for a vote of equity holders by the issuer of such Equity Security, including the right to vote for directors in the case of a corporation. 2. THE PARTIES. 2.1 THE COMPANY. The Company is a publicly owned corporation which has its Common Stock listed on the AMEX. The Company is incorporated in California as an infinite life corporation. 2.2 THE OPERATING PARTNERSHIP AND ITS PARTNERS. As of the date hereof, the Constituent Partnerships are three (3) Delaware limited partnerships, MWP, MWP I, MWP II, and one California limited partnership, MWP III. Such limited partnerships hold the Existing Properties listed in Schedules 1, 2, 3 and 4, respectively. The general and limited partners of each of MWP, MWP I, MWP II and MWP III are set forth on Appendix I hereto. 2.3 THE CONTRIBUTING ENTITIES. The Contributing Entities consist of the eight Persons set forth on Schedule 5, including MWP III. 2.4 CARL E. BERG AND THE BERG GROUP. Carl E. Berg and the other members of the Berg Group, as identified on Appendix I are the promoters of the Operating Partnership and, collectively, are principal Affiliates of the Company. Some of the Berg Group members also will be limited partners of the Operating Partnership. 3. THE TRANSACTIONS SUBJECT TO THIS AGREEMENT. 3.1 AGREEMENT TO FORM THE OPERATING PARTNERSHIP. Each of the Constituent Partnerships hereby agrees to adopt the Operating Partnership Agreement and to be managed and operated as a participant in the Operating Partnership. Subject to the consummation of the Berg Acquisition, the Company shall manage the Operating Partnership, in its capacity as general partner of each of the Constituent Partnerships, in accordance with the principles and procedures contained in Section 9.7. Upon the Closing, all of the limited partnership interests and the existing general partner interests in each of the Constituent Partnerships shall be converted automatically into the number of L.P. Units set forth opposite the name of each Constituent Partnership on Schedule 6; MWP III shall elect to become a Delaware limited partnership pursuant to Section 17-217(b) of the Delaware Revised Uniform Limited Partnership Act; and the existing limited partnership agreement of each of the limited partnerships shall be amended and restated to substantially conform to the provisions of the Operating Partnership Agreement. 3.2 ACQUISITION OF THE CONTRIBUTED PROPERTIES. Subject to the terms and conditions hereof and in reliance upon the representations, warranties, and agreements contained herein, at the Closing, the Operating Partnership shall acquire the Contributed Properties and the Contributing Entities (other than MWP III) shall convey their respective Contributed Properties to MWP. In exchange each Contributing Entity shall be entitled to receive that number of L.P. Units set forth opposite its name on Schedule 5 at the Closing. 3.3 THE BERG ACQUISITION. (a) Subject to the terms and conditions hereof and in reliance upon the representations, warranties, and agreements contained herein, at the Closing: (i) the Company shall acquire the general partnership interests in each of the Constituent Partnerships for the total amount of Thirty-Five Million Two Hundred Thousand Dollars ($35,200,000) payable in cash to each of the Constituent Partnerships as set forth below (the "Contribution Amount"); (ii) Berg & Berg Enterprises, Inc., Berg Family Partners LLC, Berg & Berg Developers LLC, and John Kontrabecki shall resign as the general partner of MWP, MWP I, MWP II, and MWP III, respectively; and (iii) the Company shall receive a general partner interest equal to 10.91% of the capital, profits, losses and distributions of each Constituent Partnership (or 10.91% of the Operating Partnership) in accordance with the terms of the Operating Partnership Agreement. The capital contribution and amount payable by the Company for its general partner interest in each of the Constituent Partnerships at the Closing is equal to the following percentages of the total Contribution Amount, subject to adjustment as provided in Section 3.3(b), as follows:
PARTNERSHIP PERCENTAGE MWP 24.25529% MWP I 19.01593% MWP II 53.87997% MWP III 2.84881%
(b) At or prior to the Closing, the Operating Partnerships may obtain new loans or refinance existing debt of the Constituent Partnerships, which will be, or is secured by, certain Existing Properties and/or Contributed Properties. The amount of debt encumbering such Properties will affect the value of each of the Constituent Partnerships and the percentage of the total Contribution Amount allowable to each such Partnership. Accordingly, the parties agree that proportional adjustments will be made in the percentages set forth in the table in Section 3(a) to reflect the difference between the amount of indebtedness for borrowed funds which encumbers the Properties of a Constituent Partnership as of the Closing Date and the amount of such indebtedness as of the date of this Agreement. Furthermore, the parties acknowledge and agree that for income tax purposes, limited partners in the Operating Partnership, and the partners or other equity owners in such limited partners have assumed or guaranteed, or will wish to assume or guaranty certain indebtedness of their respective Constituent Partnerships. All parties acknowledge and agree that all limited partners or owners of interests therein shall be entitled to assume or guaranty indebtedness of the Operating Partnership as of the Closing Date in such proportions as they request. 4. THE CLOSING. 4.1 THE CLOSING DATE. Subject to Shareholder Approval, the closing of the transactions described in Sections 3.1, 3.2, and 3.3 (the "Closing") shall take place at the offices of Berg & Berg Enterprises, Inc., 10050 Bandley Drive, Cupertino, California at 10:00 a.m., P.D.T., on the last business day of the calendar month in which the Special Meeting is held. 4.2 DELIVERIES. On the Closing Date: (i) the Company shall pay the Contribution Amount to the Operating Partnership in immediately available funds for the credit of each of the Constituent Partnerships as provided in Section 3.3, and the Company shall receive the general partner interest in each of the Constituent Partnerships and such certificates representing the same as shall be available; (ii) the Contributing Entities shall deliver good and marketable title to the Contributed Properties by grant deeds executed and acknowledged by the applicable Contributing Entity, and the Operating Partnership shall deliver to the Contributing Entities certificates representing the number of L.P. Units set forth opposite each respective Contributing Entity's name on Schedule 5 hereto; (iii) the parties to the Pending Projects Acquisition Agreement and the Berg Land Holdings Option Agreement shall deliver duly executed copies of the agreements to each party thereto; (iv) the Company and all other partners in each of the Constituent Partnerships shall sign and deliver the Operating Partnership Agreement to representatives of the respective parties at the Closing; and (v) the Company, each Constituent Partnership and all of the Limited Partners shall sign and deliver the Exchange Rights Agreement to the representatives of the respective parties at the Closing; and (vi) each of the general partners in each of the Constituent Partnerships shall execute and deliver a certificate of amendment of certificate of limited partnership designating the Company as the new sole general partner in the partnership. 4.3 ADJUSTMENTS. The amounts receivable by or payable to the Contributing Entities (other than MWP III) at the Closing based upon the pro rations required under this Section 4.3 shall be determined and the net amount shall be paid in cash at the Closing by or to the Contributing Entity that owns the particular Contributed Property to which the adjustment relates. The items to be pro rated as of the Closing Date include the following: real estate taxes (on the basis of the due dates of the tax bills for the period for which such taxes are assessed) on the Contributed Properties, personal property taxes on the Personal Property, minimum water and sewer rentals, rents, including without limitation, expense pass-throughs, percentage rents, income from and expenses for electricity and other sums paid by tenants, licensees and concessionaires and collected by the Contributing Entities prior to the Closing Date under the Leases covering the Contributed Properties, payments due under service agreements which are to be assigned to the benefit of the Operating Partnership, prepaid license fees and other charges for licenses and permits for its Contributed Properties, which will remain in effect for the benefit of the Operating Partnership after the Closing Date, rental under any ground lease, municipal rubbish removal charges, lease rejection awards made in any bankruptcy proceedings of a tenant, and prepaid insurance premiums for insurance which will remain in effect for the benefit of the Operating Partnership after the Closing Date, if any, shall be apportioned pro rata between the Contributing Entity and the Operating Partnership, on a per diem basis as of midnight on the day before the Closing Date, so that the Contributing Entity shall bear all expenses with respect to its Contributed Properties and benefit from all items of income with respect to its Contributed Properties through the day before the Closing Date. To the extent that the amounts of the items to be adjusted are not reasonably ascertainable as of the Closing Date or there are any other items which should properly be allocated at that time, they shall be adjusted or taken into account by the affected Contributing Entity and the Operating Partnership as promptly after the Closing Date as the amounts thereof are ascertained. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO OBLIGATIONS OF ALL PARTIES. The obligations of the parties to this Agreement to effect the Closing shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) APPROVAL OF SHAREHOLDERS. The transactions contemplated by this Agreement shall have received Shareholder Approval under applicable California law, the Company's articles of incorporation and bylaws, and the rules of AMEX. (b) NO INJUNCTION. No permanent or preliminary injunction or restraining order or other order by any court or other Governmental Body of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Proposed Transactions shall be in effect. (c) APPROVALS AND CONSENTS. All Required Consents shall have been obtained and shall be in full force and effect. (d) CONSUMMATION OF THE PRIVATE PLACEMENTS. The Company shall have consummated the Private Placement. (e) OFFERING OF L.P. UNITS. The offer, sale and issuance of the L.P. Units to the Company and the Contributing Entities shall have complied with Rule 506 promulgated under the Securities Act and applicable blue sky and state securities laws. 5.2 CONDITIONS TO OBLIGATIONS OF THE CONTRIBUTING ENTITIES. The obligations of the Contributing Entities to effect the Closing shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The representations and warranties of the Company and each of the Constituent Partnerships set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at such time, except for such changes permitted or contemplated by the terms of this Agreement and except insofar as any such representations and warranties relate solely to a particular date or period, in which case they shall be true and correct in all material respects on the Closing Date with respect to such date and period, and the Company shall have performed and complied in all material respects with all obligations, covenants and agreements contained in this Agreement required to be performed and complied with by it at or prior to the Closing Date. (b) ADDITIONAL DOCUMENTS. The Company shall have delivered or caused to be delivered to the Contributing Entities all other documents required to be delivered to them pursuant to this Agreement. (c) NO MATERIAL ADVERSE CHANGE. Since the date hereof nothing shall have occurred which, individually or in the aggregate, has had, or is reasonably likely to have, a Material Adverse Effect on the Company, or the Properties. (d) CASH CONTRIBUTION. The Company shall have contributed to the Operating Partnership a total of Thirty-Five Million Two Hundred Thousand Dollars ($35,200,000). 5.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company to effect the Closing shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. (i) The representations and warranties of the Constituent Partnerships and the Contributing Entities set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at such time, except for such changes permitted or contemplated by the terms of this Agreement, and except insofar as any such representations and warranties relate solely to a particular date or period, in which case they shall be true and correct in all material respects on the Closing Date with respect to such date and period and (ii) the Constituent Partnerships, the Contributing Entities and their respective partners, as the case may be, shall have performed and complied in all material respects with all obligations, covenants and agreements contained in this Agreement required to be performed and complied with by them at or prior to the Closing Date. Prior to the Closing Date, each of the Contributing Entities and Owners shall submit the following representation and warranty schedules for the Company's approval concerning the consistency of the information provided therein with the representations and warranties made by each of such parties under this Agreement: REPRESENTATION AND WARRANTY SCHEDULES 5.4(a) Permitted Encumbrances 6.5 Required Consents 6.11 ERISA Plans 6.13 Certain Changes or Events 7.2(a) Leases 7.2(c) Rent Roll 7.2(d) Tenant Security Deposits 7.5(b) Non-Qualified Income 7.6 Insurance Policies
(b) WITHDRAWALS. At the Closing, each of BBE, Berg Family Partners LLC, Berg & Berg Developers LLC, and Kontrabecki shall deliver a letter to the Company declaring their resignations as general partners from MWP, MWP I, MWP II and MWP III, respectively, and their respective agreement to become Limited Partners in such partnership subject to the terms of the Operating Partnership Agreement. (c) ADDITIONAL DOCUMENTS. The Operating Partnership, the Contributing Entities and the other parties to this Agreement shall have delivered or caused to be delivered to the Company all other documents required by any of them to be delivered to the Company pursuant to this Agreement. (d) NO MATERIAL ADVERSE CHANGE. Since the date hereof nothing shall have occurred which, individually or in the aggregate, has had, or is reasonably likely to have, a Material Adverse Effect on the Existing Properties or the Contributed Properties, taken as whole. 5.4 ADDITIONAL CONDITIONS WITH RESPECT TO THE CONTRIBUTED PROPERTIES. The obligations of the Company and the parties hereto other than the Contributing Entities to effect the Closing with respect to the acquisition of the Contributed Properties shall be subject to the satisfaction of the following conditions at or prior to the Closing Date by each of the Contributing Entities with respect to its particular Contributed Property(ies): (a) Title to its Contributed Properties shall be such as will be insured, solely in the name of the appropriate Contributing Entity as good and marketable by a national title insurance company (the "Title Insurance Company") at regular rates pursuant to the standard stipulations and conditions of the 1970 Form B ALTA Owner's Title Insurance Policy as revised in 1984 and as the same may be modified by such endorsements, affirmative coverage and other matters which have been requested by the Company prior to the date hereof (and such other endorsements and affirmative coverages as may hereafter be reasonably required by the Company), free and clear of all Liens and encumbrances, except for the Permitted Encumbrances. The term "Permitted Encumbrances" shall mean those title matters and Liens set forth as to such Contributed Property on Schedule 5.4(a). At Closing, title to the personal property associated with each Contributed Property shall only be subject to the Permitted Encumbrances as to such Contributed Property except for the personal property described on Schedule 5.4(a) which is denoted as being leased or financed. The Contributing Entity shall deliver to the Title Insurance Company such commercially reasonable instruments as the Title Insurance Company requires to issue endorsements and other coverages, in such form as the Company reasonably requires. The premiums and other costs of title insurance shall be borne by the Operating Partnership. (b) The Contributing Entity shall have delivered to the Company prior to the Closing Date current searches of all Uniform Commercial Code financing statements filed with the Secretary of State and/or county clerk against its Contributed Properties, together with bankruptcy, tax lien and judgment searches and searches for pending litigation in all appropriate jurisdictions. It is a condition of Closing that such searches reveal that other than the Permitted Encumbrances there are no bankruptcies, actions, claims or liens affecting or encumbering or which might affect or encumber its Contributed Properties or any interest in its Contributed Properties which will continue after the Closing Date. (c) The Contributing Entity shall have delivered estoppel certificates acceptable to the Company obtained from lessors under any ground lease under which a Contributing Entity is a lessee. (d) The Contributing Entity shall have delivered the estoppel letters received by the Contributing Entity from those parties under reciprocal easement agreements, if any, for which the Company has requested that the Contributing Entity request estoppel letters. The Contributing Entity agrees to use reasonable and diligent efforts to obtain such estoppel letters. (e) The Contributing Entity shall have delivered the originals, if available, of all Leases and amendments thereto and guarantees thereof, all ground leases and all mortgages and related documents relating to its Contributed Properties directly to the Operating Partnership. (f) The Contributing Entity shall have executed and delivered a notice (suitable for reproduction) to tenants advising of the transfer of the Contributed Property to the Operating Partnership and advising the tenants to pay all future rentals to or upon the order of the Operating Partnership. (g) The Contributing Entity shall have delivered to the Operating Partnership, all Security Deposits, together with all interest earned thereon as of the Closing Date which the Contributing Entity is obligated, by law, contract or otherwise, to pay to tenants with respect to its Contributed Properties. (h) The Contributing Entity shall have delivered directly to the Company, copies of building plans and specifications for its Contributed Properties, if available. (i) The Contributing Entity shall have delivered directly to the Company, the following, to the extent in the possession of the Contributing Entity: copies of all certificates of occupancy, licenses, permits, authorizations and approvals required by law and issued by all Governmental Bodies having jurisdiction over its Contributed Properties, together with copies of all certificates issued by any local board of fire underwriters (or other body exercising similar functions). The Contributing Entity also shall have delivered at the Closing the original or copies of each bill, together with proof of payment thereof (if any of the same have been paid), for current real estate and personal property taxes. (j) Each of the Contributing Entities shall have delivered to the Company, a Non-Foreign Transferor Certificate, certifying that such the Contributing Entity is not a "foreign person" within the meaning of Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"). (k) The Contributing Entity shall have executed and delivered to the Company such other documents or instruments as in the reasonable opinion of counsel for the Company may be necessary to effectuate the transactions described in this Agreement, provided that such documents or instruments do not increase the liability of the Contributing Entities. 6. REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE PARTIES. Each of the Company, the Constituent Partnerships and the Contributing Entities, severally as to itself only, represents and warrants to, and agrees with, the other parties hereto as follows: 6.1 ORGANIZATION OF THE CONSTITUENT PARTNERSHIPS; AUTHORIZATION. Each Constituent Partnership is a limited partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, with full partnership power and authority to execute and deliver this Agreement and any other agreements contemplated hereby and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the consummation of the Proposed Transactions have been duly authorized by all necessary partnership action. This Agreement constitutes a valid and binding obligation of the Constituent Partnership, enforceable against such Partnership in accordance with its terms. 6.2 ORGANIZATION OF THE CONTRIBUTING ENTITIES; AUTHORIZATION. Each Contributing Entity is an Entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, with full power and authority to execute and deliver this Agreement, and any other agreements contemplated hereby and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate or partnership action. This Agreement constitutes a valid and binding obligation of the Contributing Entity, enforceable in accordance with its terms. 6.3 ORGANIZATION OF THE COMPANY; AUTHORIZATION; CAPITALIZATION. (a) The Company is a California corporation duly organized, validly existing and in good standing under the laws of the State of California, with full power and authority to execute and deliver this Agreement and any other agreements contemplated hereby and, subject to obtaining the consent of its shareholders, to perform its obligations hereunder and thereunder. The execution, delivery and performance by the Company of this Agreement, and the Related Agreements, and the consummation of the Proposed Transactions have been duly authorized by the board of directors of the Company and by all other necessary action, subject to Shareholder Approval. This Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. (b) The authorized capital stock of the Company consists of Two Hundred Million (200,000,000) shares of Common Stock, no par value, of which, as of April 30, 1998, 1,698,536 shares were issued and outstanding and Twenty Million (20,000,000) shares of Preferred Stock, no par value, none of which were issued and outstanding as of April 30, 1998. All outstanding shares of the Company have been validly issued, and are fully paid and nonassessable. Except for shares of Common Stock reserved for (i) exchange of the L.P. Units, (ii) the Private Placement, and (iii) options for the purchase of 605,000 shares of common stock under the Company's 1997 Stock Option Plan, there are no outstanding subscriptions, options, rights, warrants, convertible securities or other agreements or calls, demands or commitments of any kind relating to the issuance, sale or transfer of the Company's common stock or securities convertible into or exchangeable for, the Company's common stock. (c) The Company does not own any Equity Securities of, and has no direct or indirect ownership interest in, any Person other than the Subsidiaries. The Company owns all of the issued and outstanding shares of capital stock of each such Subsidiary. There are no outstanding subscriptions, options, rights, warrants, convertible securities or other agreements or calls, demands or commitments of any kind relating to the issuance, sale or transfer of the such shares. 6.4 NO CONFLICTS. Neither the execution and delivery of this Agreement nor the consummation of any or all of the transactions contemplated hereunder, or of the Proposed Transactions will (a) violate any provision of the certificate of incorporation, bylaws, partnership agreement or other governing instrument of the Company, the Constituent Partnerships, or the Contributing Entities or (b) violate, be in conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under any material contract to which the Company, the Constituent Partnership, or any of the Contributing Entities is party or (c) violate any statute or law or any judgment, decree, order, regulation or rule of any court or other Governmental Body applicable to the Company, the Constituent Partnership, or any of the Contributing Entities. 6.5 CONSENTS AND APPROVALS. Except for the filing with the SEC of the Proxy Statement, and the Shareholder Approval, and as set forth on Schedule 6.5 (the "Required Consents"), no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Body or any other Person is required in connection with the execution, delivery and performance of this Agreement, any of the Related Agreements or the consummation of the Proposed Transactions by the Company, the Operating Partnership or the Contributing Entity or any of the Contributing Entities. 6.6 COMPANY REPORTS AND FINANCIAL STATEMENTS. The Company has heretofore made available to the Constituent Partnerships and the Contributing Entities true and complete copies of all documents that the Company has filed with the SEC (the "Company SEC Filings") since January 1997. The Company SEC Filings constitute all of the documents (other than preliminary material) that the Company was required to file with the SEC since such date. As of their respective dates, each of the Company SEC Filings complied in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations under each such Act. When filed with the SEC, the financial statements (the "Company Financial Statements") included in the Company SEC Filings complied as to form in all material respects with the applicable rules and regulations of the SEC and were prepared in accordance with generally accepted accounting principles consistently applied (except as may be indicated therein or in the notes or schedules thereto). 6.7 LITIGATION. There is no action, suit, inquiry, proceeding or investigation by or before any court or Governmental Body pending or, to the best knowledge of the Company, the Constituent Partnerships or the Contributing Entities, threatened against or involving the Company, the Constituent Partnerships or the Contributing Entities which questions or challenges the validity of this Agreement or the Related Agreements or any action taken or to be taken pursuant to this Agreement or the Related Agreements or in connection with the transactions contemplated hereunder or the Proposed Transactions, nor is there any valid basis for any such action, proceeding or investigation. Neither the Company, the Constituent Partnerships nor the Contributing Entity is in default under or in violation of any agreement, commitment or restriction to which it is a party or by which it is bound; or is subject to any judgment, order or decree that may have an adverse effect on its business practices or on its ability to acquire any property or conduct any business. 6.8 COMPLIANCE WITH LAW. The operations of the Company, the Constituent Partnerships and the Contributing Entities have been conducted in accordance with all applicable laws, regulations and other requirements of all Governmental Bodies. 6.9 BROKERS AND FINDERS. No agent, broker, finder or investment or commercial banker, or other Person or firms engaged by or acting on behalf of the Company, any of the Constituent Partnerships or any of the Contributing Entities or any of their respective Affiliates in connection with the negotiation, execution or performance of this Agreement or the consummation of the transactions contemplated hereunder, is or will be entitled to any broker's or finder's or similar fees or other commissions as a result of the Closing except for the fee of 200,000 shares of the Company's Common Stock to be sold and issued to John Moran by the Company in connection with the Private Placement. 6.10 MATERIAL ADVERSE CHANGES. (a) With respect to each of the Properties, since the date of the most recent rent roll relating to the applicable Properties, (i) there has not been any material adverse change in the business, results of operations, properties, assets or financial condition of the Properties, respectively, or, to the best knowledge of the Constituent Partnership or the Contributing Entity, any event, condition or contingency that is likely to result in such a material adverse change and (b) neither the Constituent Partnership nor the Contributing Entities have taken any action which, if taken after the date hereof, would violate Sections 8.8, 8.9 or 8.10. (b) Except as disclosed in the Company SEC Filings, prior to the date hereof there has not been any Material Adverse Effect on the business, results of operations, properties, assets or financial condition of the Company or any event, condition or contingency that is likely to result in a Material Adverse Effect. 6.11 EMPLOYEE BENEFIT PLANS; COMPLIANCE WITH ERISA. (a) Except as set forth in Schedule 6.11, neither the Company, any Constituent Partnership nor any Contributing Entity (i) maintains or contributes to or has any obligation with respect to, and none of the employees of the Company, the Operating Partnership or any Contributing Entity is covered by, any ERISA plans, or (ii) is a party to any contract for the employment of any employee or any other person who renders services to it. Neither the Company, any Constituent Partnership nor any Contributing Entity has any agreement or commitment to create any additional ERISA plan, enter into any additional employment agreement or to modify or change any existing Plan or employment agreement. (b) Neither the execution and delivery of this Agreement nor the consummation of any or all of the transactions contemplated hereunder will (i) entitle any current or former employee of the Company, any Constituent Partnership or any Contributing Entity to severance pay, unemployment compensation or any similar payment, or (ii) accelerate the time of payment or vesting or increase the amount of any compensation due to any such employee or former employee. 6.12 FINANCIAL STATEMENTS. (a) Each of the Contributing Entities has provided to the Company all of the financial information requested by the Company for the preparation of financial statements and other financial data required by the Company for the S-4 Registration Statement, and will provide promptly all such additional financial information and data requested by the Company. Each of the Contributing Entities will permit the Company's auditors to review the books and records of the Contributing Entity. All financial information provided to the Company is correct and complete. (b) The books and records of the Contributing Entity, all of which have been or will be made available to the Company, are complete and correct, have been maintained in accordance with sound business practices and fairly reflect the assets, liabilities and operations of the Contributing Entity and the aforesaid financial statements are in conformity therewith. 6.13 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, the business of the Contributing Entity has been conducted in the ordinary course and, except as shall be set forth on Schedule 6.13, the Contributing Entity has not: (a) incurred any indebtedness for money borrowed or any noncurrent indebtedness for the purchase price of any fixed or capital asset; (b) made (A) any change, except in the ordinary course of business, in its properties and assets or in its liabilities, (B) any commitment for any capital expenditure or (C) any sale, lease or other disposition of any capital asset; (c) made any change in its corporate charter or partnership agreement; (d) made any partnership or other distribution or payment, or set aside any amount for payment with respect to any partnership interest; (e) amended, made or entered into any agreement with, or increased the salaries of, any employee, agent, consultant, advisor or sales or other representative of the Contributing Entity; (f) amended any material contract, Lease or agreement; (g) entered into any agreement resulting in the imposition of any mortgage or pledge of, or the creation of any lien, charge or encumbrance on, any of its properties or assets; or (h) voluntarily incurred any material obligation or liability, absolute or contingent, except in the ordinary course of business or pursuant to existing contracts and agreements described in this Agreement or in the Schedules delivered pursuant hereto. 6.14 SUITABILITY. Each of the partners in the Constituent Partnerships and each of the Contributing Entities is an "accredited investor," or is represented by a "purchaser representative," as defined in Rule 501 of Regulation D promulgated under the Securities Act. 6.15 INVESTMENT. Each of the partners in the Constituent Partnerships and each of the Contributing Entities is acquiring the L.P. Units for investment for such party's own account and not with a view to, or for resale, in connection with, any distribution of the L.P. Units, and such party has no present intention of selling or distributing any of such L.P. Units. Each of the partners in the Constituent Partnerships and each of the Contributing Entities understands that the L.P. Units have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the BONA FIDE nature of the party's investment intent as expressed herein. 6.16 RULE 144. Each of the partners in the Constituent Partnerships and each of the Contributing Entities acknowledges that, because they have not been registered under the Securities Act, the L.P. Units constitute "restricted securities" as defined in Rule 144(a)(3) and must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Each of the partners in the Constituent Partnerships and each of the Contributing Entities is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the securities, the availability of certain current public information about the issuer, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of securities being sold during any three-month period not exceeding specified limitations (unless the securities satisfy the requirements of Rule 144(k)). 7. REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE PROPERTIES. Each of the Contributing Entities represents and warrants to the Company and the Operating Partnership, severally and for itself with respect only to the particular Contributed Property or Contributed Properties being contributed by such Contributing Entity, and each of the Constituent Partnerships (other than MWP III) represents and warrants to the Company, severally for itself with respect only to the Existing Properties of such Constituent Partnership, (each of the foregoing an "Owner") as follows: 7.1 TITLE TO PREMISES. (a) The Owner has not done or suffered or permitted to be done or committed any act or matter which would render legal and equitable title to its Properties to not be good and marketable, such as will be insured as such by the Title Insurance Company, as specified in Section 5.4(a), subject only to the Permitted Encumbrances and the Leases. (b) There has been no violation by the Owner or its Properties of any provision, condition or agreement contained in any restrictive covenant, cross-easement agreement or similar instrument or agreement affecting its Properties or any portion thereof, which would have a material adverse effect on its Properties. (c) The Personal Property located on its Properties, other than that owned by tenants, utility companies or contractors is owned or leased by the Owner, includes all the types and approximate quantities of personal property heretofore owned or leased by the Owner and used in the ownership, operation and maintenance of the improvements located on its Properties and, if owned or leased by the Owner, as of the Closing Date, is owned or leased by the Owner free and clear of any liens or security interests of any kind, except for Permitted Encumbrances. (d) Its Properties are an independent unit which does not now rely on any facilities (other than facilities covered by Permitted Encumbrances including, without limitation, any reciprocal easement agreements, or facilities of municipalities or public utility and water companies and other than parking areas which its Properties make legal use of under any reciprocal easement agreements) located on any property not included in its Properties to fulfill any requirement of any Governmental Body or for the furnishing to its Properties of any essential building systems or utilities. (e) Except as may be contained in the Leases, there are no purchase contracts, options, or any other agreements of any kind, written or oral, recorded or unrecorded, whereby any person or entity other than the Owner has or will have any basis to assert any right, title or interest in, or right to possession, use, enjoyment or proceeds of all or a portion of its Properties. 7.2 LEASES. (a) Except for the Leases of its Properties to be set forth on Schedule 7.2(a), the Owner has not entered into any other contracts for the sale or leasing of its Properties or any portion thereof. (b) As of the Closing Date, no persons or entities, other than the Owner and the tenants under the Leases and their permitted subtenants and licensees, shall have any right to the possession, use or occupancy of its Properties or any portion thereof for any reason whatsoever. (c) As of the Closing Date, Schedule 7.2(c) (the "Rent Roll") will be true and correct in all material respects as of the date noted thereon and discloses all Leases and the rents due for the dates shown thereon (collectively, "Rents"). The Leases include all tenancies, licenses and subleases and other rights of occupancy or use for all or any portion of its Properties pursuant to which the Owner is landlord or licensor, all as amended, renewed and extended to the date of the Rent Roll, whether oral or written. (d) As of the Closing Date, Schedule 7.2(d) will contain a list of all security deposits given by the lessees under the Leases (the "Security Deposits"). Each Security Deposit has been and is held by the Owner or its agents in compliance with the respective Lease and applicable law. There are no unfulfilled obligations as to Security Deposits to tenants under Leases the terms of which have expired or been terminated and there is no suit, action or other claim made, or, to the knowledge of the Owner, pending or threatened with respect to any such Security Deposit. (e) The following is true with respect to each Lease: (i) the Lease is valid and existing and in full force and effect in accordance with its terms. No Lease has been modified, in writing or otherwise; (ii) all obligations of the lessor thereunder which accrue prior to or on the Closing Date shall have been performed and paid for in full by the Owner on or prior to the Closing Date; (iii) except for delinquencies in payment of rent of less than thirty (30) days, to the knowledge of the Owner there has been no material default or event which, with the giving of notice or the lapse of time, or both, would constitute a default, on the part of the lessor thereunder and, the tenant has not asserted and, to the knowledge of the Owner, has no defense to or offset or claim against its rent or the performance of its other obligations under the Lease; (iv) no tenant has prepaid any rent for more than one month if the lease term has commenced and two months if the lease term has not yet commenced; (v) the Owner has received no written notice from any tenant or any guarantor of a Lease that such tenant or guarantor is or may become unable or unwilling to pay its rent or other sums due under its Lease, continue to operate for the balance of the term of the Lease, operate in accordance with the exclusives prescribed under the Lease or otherwise perform any of its other material obligations under the Lease; (vi) the Owner has not, and to the knowledge of the Owner, no other person has, released or discharged any guarantor, voluntarily or involuntarily or by operation of law, from any obligation with respect to the Lease that such guarantor has guaranteed; (vii) at the time of Closing, no rents will have been assigned, pledged or encumbered; (viii) except as shall be set forth on Schedule 7.2(a) as of the Closing Date, the Owner does not own, directly or indirectly, (A) five percent (5%) or more of the total combined voting power of all classes of stock entitled to vote, or ten percent (10%) or more of the total number of shares of all classes of stock, of any tenant of its Properties or (B) an interest of ten percent (10%) or more in the assets or net profits of any tenant of its Properties; and (ix) all tenant improvements required under the Leases have been installed and/or completed, all costs relating thereto have been paid, and there is no on-going work with respect to any tenant improvement. 7.3 ENVIRONMENTAL MATTERS. The Owner, or any Person in control of the Owner, has not done anything to cause or knowingly permit and, to the knowledge of the Owner, no other person or entity has done anything to cause or permit Hazardous Materials (as defined below) to be now located on (except for reasonable amounts used in the ordinary course for the construction, operation or maintenance of its Properties by the Owner in accordance with all applicable laws or used by tenants of its Properties in the ordinary course of operation of their business, which use by tenants is, and has been, to the knowledge of the Owner, in accordance with all applicable laws), in or under its Properties or released into the environment, or discharged, placed or disposed of at, on or under its Properties; (ii) the Owner has not done anything to cause or knowingly permit and, to the knowledge of the Owner, no other person or entity has done anything to cause or permit any underground storage tanks to be located at its Properties now or during the time of such Owner's ownership of the property; (iii) during the time of such Owner's ownership of the property, the Owner has not done anything to cause any of its Properties to be used to store, treat or dispose of Hazardous Materials and the Owner has not become aware of any Hazardous Materials stored or disposed of or adjacent to any of its Properties; and (iv) the Owner has not done anything to cause or knowingly permit its Properties and its prior uses to fail to comply with, at all times, any applicable Environmental Laws (as hereafter defined) or any other governmental law, regulation or requirement relating to environmental and occupational health and safety matters and Hazardous Materials. To the knowledge of the Owner, there currently exist no facts or circumstances that would give rise to a material Environmental Claim (as defined below). The term "Hazardous Materials" shall mean any substance, material, waste, gas or particulate matter which is regulated by any local Governmental Body, the state in which its Properties are located, or the United States Government, including, but not limited to, any material or substance which is (i) defined as a "hazardous waste", "hazardous material", "hazardous substance", "extremely hazardous waste", or "restricted hazardous waste" or words of similar import under any provision of any Environmental Law; (ii) petroleum or petroleum products; (iii) polychlorinated biphenyl; (iv) radioactive material; (v) radon gas; (vi) designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1317); (vii) defined as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903); or (viii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601). The term "Environmental Laws" shall mean all statutes specifically described in the foregoing sentence and all federal, state and local environmental health and safety statutes, ordinances, codes, rules, regulations, orders and decrees regulating, relating to or imposing liability or standards concerning or in connection with Hazardous Materials. The term "Environmental Claim" shall mean any administrative, regulatory or judicial action, suit, demand, demand letter, claim, lien, notice of non-compliance or violation, investigation or proceeding relating in any way to any Environmental Law or any permit issued under any such Environmental Law including, without limitation, (a) by any Governmental Body for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. 7.4 ENGINEERING MATTERS. (a) To the knowledge of the Owner there are no material defects in or damage to the structure (including the roof and walls) of its Properties. To the knowledge of the Owner, the systems of its Properties, including any elevators, heating, ventilation, air conditioning, plumbing, electrical, drainage, fire alarm, communications, sprinkler, security and exhaust systems are in operational and working order and such systems do not contain any material hidden defect. (b) The Owner has no knowledge that the flood hazard area designation for its Properties as shown on a survey of its Properties is incorrect. (c) All water, sewer, gas, electric, telephone, and other public utilities and all storm water drainage necessary for the operation of its Properties (i) either enter its Properties through open public streets adjoining its Properties, or, if they pass through adjoining private land, do so in accordance with valid public or private easements or rights of way which will inure to the benefit of the Operating Partnership, (ii) are installed, connected and operating, with all installation and connection charges paid in full, including, without limitation, connection and the permanent right to discharge sanitary waste into the collector system of the appropriate sewer authority, (iii) to the knowledge of the Owner, are being utilized in compliance with all applicable governmental and environmental protection authorities' laws, rules, regulations and requirements, and (iv) to the knowledge of the Owner, have been adequate and, to the knowledge of the Owner, will continue to be adequate to service its Properties as improved and presently used. To the knowledge of the Owner, no moratorium, proceeding or other fact or condition exists which (A) threatens to impair continued furnishing of such services to its Properties at regular rates and fees, or (B) could result in the discontinuance of such services presently available or necessary. Water and sanitary sewer provided for its Properties are public. 7.5 FINANCIAL MATTERS. (a) All alterations, improvements or other work required to have been completed by the Owner under any reciprocal easement agreements, Leases executed prior to the Closing Date, and other agreements to which it is a party, including, without limitation, all alterations, improvements and other work or allowances therefor required to prepare space for the initial occupancy of each tenant under a lease, has heretofore been completed and/or paid for in full. (b) Except as may be set forth on Schedule 7.5(b) as of the Closing Date, there is no income derived from the Owner's Properties other than rental income and interest income. The rental income derived from its Properties constitutes "rent from real property" as defined in Section 856(d)(1) of the Code. The interest income derived from the operation of its Properties constitutes "interest" as defined in Section 856(c)(2)(B) of the Code. 7.6 INSURANCE. (a) As of the Closing Date, Schedule 7.6 shall set forth an accurate and complete list of the insurance policies relating to its Properties or any part thereof and naming the Owner as an insured; all such policies are in full force and effect and all premiums thereunder as of the Closing Date have been paid to the extent due; and no notice of cancellation has been received with respect thereto and, to the knowledge of the Owner, none is threatened. The Owner represents that it does not currently self-insure with respect to any portion of the insurance, other than earthquake insurance. (b) The Owner has not received any notice from any insurance company of any defect or inaccuracies in any of its Properties, or any parts thereof, which would adversely affect the insurability of any of its Properties, or would increase the cost of insurance beyond that which would ordinarily and customarily be charged for similar properties in the vicinity of such Properties. All of its Properties are fully insured in accordance with prudent and customary practice. (c) To the knowledge of the Owner, the Owner has complied with all work orders, requirements and demands of each and every insurance company insuring all or any part of its Properties. 7.7 REAL ESTATE TAXES AND ASSESSMENTS. (a) The copies of the real property tax bills for its Properties for the current tax year which have been furnished by the Owner to the Operating Partnership are true and correct and complete copies of all of such tax bills. All real estate taxes due and payable as of the Closing Date have been paid in full and there are no pending or, to the knowledge of the Owner, threatened proceedings for the correction or reduction of the assessed valuation of its Properties for the current or prior tax years. (b) Each of its Properties alone constitutes one or more entire tax parcel(s) for real estate tax purposes, and are not taxed as part of a larger tax parcel. (c) The Owner has not received notice that, and to the knowledge of the Owner, there are no public improvements in the nature of off-site improvements, or otherwise, which have been ordered to be made and/or which have not heretofore been assessed and there are no special or general assessments (other than regular, annual real estate taxes) pending against or presently being considered in formal municipal or quasi-municipal proceedings which will affect its Properties. 7.8 CONDEMNATION; COMPLIANCE WITH LAWS, ETC. (a) The Owner has not received any written notice with respect to its Properties from any public authority concerning any eminent domain or condemnation proceeding, or any uncorrected violation of any ordinance, public regulation, statute, permit, site plan approval, zoning or subdivision regulation or urban redevelopment plan applicable to its Properties. (b) To the knowledge of the Owner, its Properties, when built, did not violate any federal, state, county or municipal laws, ordinances, codes, regulations or requirements affecting all or any of its Properties including, without limitation, housing, building, safety, health, environmental, fire or zoning ordinances, codes and regulations of the respective jurisdictions within which its Properties are located (together, "Applicable Laws"). (c) To the knowledge of the Owner, there are no material unperformed obligations relative to its Properties outstanding pursuant to any written agreements with any Governmental Body. 8. COVENANTS. 8.1 FINANCIAL STATEMENTS. As soon as practicable following any request by the Company, the Contributing Entities and the Constituent Partnerships shall cause to be prepared and delivered to the Company such financial statements prepared in accordance with the applicable rules of SEC Regulation S-X, including any updates of such financial statements needed to satisfy the requirements of Rule 3-12 of Regulation S-X as needed in connection with the S-4 Registration Statement. When and if these financial statements are delivered, such financial statements will be true and correct in all material respects and will fairly present the assets, liabilities and financial condition and the results of operations of the Properties of the Constituent Partnerships or the Contributing Entities, as the case may be, as at the respective dates thereof and for the periods therein referred to, all in accordance with generally accepted accounting principles consistently applied throughout the periods involved, subject, in the case of unaudited interim financial statements, to normal, recurring year-end audit adjustments. 8.2 CONSENT OF CONTRIBUTING ENTITIES. As promptly as practicable, and in any event prior to the Closing Date, each of the Contributing Entities shall, to the extent that the terms of its charter, bylaws or partnership agreement require, use commercially reasonable efforts to solicit and obtain all required consents of certain Persons listed on Exhibit F to this Agreement and the consummation of the transactions contemplated hereunder substantially in the form of the Consents of Certain Persons attached hereto as Exhibit F. 8.3 COMPANY CORPORATE ACTIONS. (a) SPECIAL MEETING. As soon as practicable, in accordance with the CGCL and the Company's articles of incorporation and bylaws, and the policies and regulations of the AMEX, the Company shall take all action necessary to convene the Special Meeting as soon as practicable to consider and vote to approve the Proposed Transactions. (b) PROXY STATEMENT; OTHER FILINGS. As soon as practicable, the Company shall prepare, and the Company shall file an S-4 Registration Statement with the Commission to register all of the securities to be issued by the Company's successor, Mission West-Maryland, as part of the Reincorporation Merger pursuant to Section 5 of the Securities Act, and shall use its best efforts to have it declared effective by the Commission. Upon the effectiveness of the S-4 Registration Statement the Company shall mail to its shareholders the Proxy Statement/Prospectus contained therein, and a form of proxy with respect to the meeting of the Company's shareholders referred to in subparagraph (a) above. In connection with the Company's preparation of the Proxy Statement/Prospectus, the Constituent Partnerships and the Contributing Entities shall provide to the Company a description of the Properties, the financial statements referred to in Section 8.1 and such other information with respect to the Properties, the Constituent Partnerships, and the Contributing Entities as the Company shall reasonably request. (c) DISCLOSURE. None of the information supplied or to be supplied by the Limited Partners, the Constituent Partnerships or the Contributing Entities, or any of their respective Affiliates, directors, officers, employees, agents or representatives for inclusion in the S-4 Registration Statement or any other document filed or to be filed with the SEC or any Governmental Body in connection with the Proposed Transactions will, at the time it is provided, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. 8.4 ACCESS. Between the date of this Agreement and the Closing Date, the Limited Partners, the Constituent Partnerships, and the Contributing Entities shall (and shall use commercially reasonable efforts to cause their respective Affiliates to) afford to the officers, employees, counsel, auditors, financial advisors and other authorized representatives of the Company full access during normal business hours to all its properties, personnel, books and records that relate (directly or indirectly) to the assets or properties that, following the Closing, will be owned by the Operating Partnership and furnish promptly to such persons such information concerning its business, properties, personnel and affairs as such persons shall from time to time reasonably request. 8.5 PUBLIC ANNOUNCEMENTS. No party to this Agreement other than the Company shall (and each such party shall use its reasonable efforts to cause its Affiliates, directors, trustees, officers, employees, agents and representatives not to), issue any press release, make any public announcement concerning the S-4 Registration Statement or any of the Proposed Transactions 8.6 INDEMNIFICATION AND INSURANCE. (a) In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any such claim, action, suit, proceeding or investigation in which any of the present officers or directors of the Company is, or is threatened to be, made a party by reason of the fact that he is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a trustee, director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, whether before or after the Closing, the Company shall use its best efforts to defend against such claim, action, fact, proceeding or investigation and to respond promptly thereto. It is understood and agreed that the Company shall indemnify and hold harmless, as and to the full extent permitted by applicable law, each such officer or director against any losses, claims, damages, liabilities, costs, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any such claim, action, suit, proceeding or investigation, and in the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Closing), (i) the Company shall retain counsel reasonably satisfactory to the officer or director and shall pay all fees and expenses of such counsel for the officer or director promptly as statements therefor are received and (ii) the Company will use its best efforts to assist in the vigorous defense of any such matter; provided that the Company shall not be liable for any settlement effected without its prior written consent; and provided further that the Company shall have no obligation hereunder to any officer or director when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and non-appealable, that indemnification of such officer or director in the manner contemplated hereby is prohibited by applicable law. Any officer or director wishing to claim indemnification under this Section 8.6(a), upon learning of any such claim, action, suit, proceeding or investigation, shall notify the Company thereof. (b) The Company acknowledges and agrees that all rights to indemnification existing in favor of the present or former directors, officers, employees, fiduciaries and agents of the Company or any of its Subsidiaries (collectively, the "Indemnified Parties") as provided in the Company's articles of incorporation or bylaws or the certificate or articles of incorporation, bylaws or similar documents of any of the Company's Subsidiaries as in effect as of the date hereof with respect to matters occurring prior to the Closing shall survive the Closing and shall not be amended in a manner which would have the effect of limiting such indemnification rights for any period of time. 8.7 MATERIAL CHANGES. (a) Between the date of this Agreement and the Closing Date, each of the parties to this Agreement will give prompt notice to all other parties of: (i) the occurrence, or failure to occur, of any event that would be likely to cause any representation or warranty of such party contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date of this Agreement to the Closing Date (except for changes permitted or contemplated by this Agreement), (ii) any failure of such party to comply with or satisfy, in any material respect, any covenant, condition or agreement to be complied with by it under this Agreement, (iii) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement, or that such transactions otherwise may violate the rights of or confer remedies upon such third party, and (iv) any notice of, or other communication relating to, any violation of Applicable Laws, any litigation or any order or judgment entered or rendered therein. (b) Between the date of the mailing of the Proxy Statement/Prospectus to the Company's shareholders and the Closing Date, all parties other than the Company shall notify the Company of any material change in the information supplied by it or any of its respective Affiliates, directors, officers, agents or representatives for inclusion in the Proxy Statement/Prospectus. 8.8 APPROVALS. Each party to this Agreement shall as promptly as practicable, (a) use commercially reasonable efforts to obtain all Required Consents, and give all necessary notices to and make all necessary filings with and applications and submissions to, any Governmental Body or other person or entity in connection with the consummation of the transactions contemplated hereunder, and (b) cooperate with the reasonable requests of any other party in connection with the foregoing. 8.9 CONDUCT OF BUSINESS PRIOR TO THE CLOSING. (a) Between the date of this Agreement and the Closing Date, each party to this Agreement shall conduct its business only in the ordinary course and consistent with past practice. (b) At the Closing, each Contributing Entity will assign to the Operating Partnership the Leases applicable to its Contributed Properties. (c) Between the date of the execution of this Agreement and the Closing Date, each Owner agrees that: (i) It shall, at its expense, make all repairs and replacements, structural and non-structural, which are required with respect to any portion of the Properties to maintain it in its present condition; and shall also complete, at their expense to the extent that the expenses may not be passed through to tenants, any repairs or capital improvements commenced prior to the Closing Date. (ii) It shall operate and manage its Properties in the same manner as it has been operated and managed prior to the date of this Agreement and in accordance with Applicable Laws. (iii) It shall submit to the Company monthly reports of rental collections, occupancy and vacancies. (iv) It shall perform any and all acts, and shall make any and all payments, necessary to cause the representations and warranties of such party under this Agreement to be true and correct as of the date made or as of the Closing Date if then required to be true and correct. (v) It shall comply with all of the obligations of such party under the Leases and all other agreements and contractual arrangements by which the party and/or the Properties are bound or affected, and to its best knowledge, shall comply with all Applicable Laws. (vi) It shall maintain the insurance policies on the Properties in full force and effect and shall pay all required premiums and other charges. (vii) It shall not modify or terminate, any of the Leases (except by reason of a default by the tenant thereunder). (viii) Promptly after receipt thereof by the Company, it shall deliver to the Company, the following: (A) a copy of any notice of default given or received under any of the Leases or other agreements or any notices of termination given for any Lease; (B) a copy of any tax bill, notice or statement of value, or notice of change in a tax rate affecting or relating to its Properties; (C) a copy of any notice of an actual or alleged violation of Applicable Laws; and (D) a copy of any notice of any condemnation proceedings with respect to its Properties. (d) Between the date of this Agreement and the Closing Date, each of the Constituent Partnerships and each Contributing Entity shall not, without the consent of the other parties hereto (which consent shall not be unreasonably withheld), except as specifically contemplated by this Agreement: (i) make any changes or amendment of its limited partnership agreement; (ii) be party to any merger, consolidation or other business combination; or (iii) agree or otherwise commit, whether in writing or otherwise, to do either of the foregoing. Notwithstanding the foregoing, this Section 8.9(d) shall not apply to any transaction or event contemplated by this Agreement or the Related Agreements. 8.10 FIRE OR OTHER CASUALTY. Each Owner shall maintain in full force and effect until the Closing Date the fire and extended coverage insurance policies now in effect on the Properties. In the event that any building on a Property shall have been materially damaged by fire or other casualty (in a manner which adversely affects the operation of such Property as a whole or which could have an adverse economic consequence to the Property and not restored as of the Closing Date) the Company may, in its sole discretion, continue to include such Property in the Operating Partnership for purposes of the Berg Acquisition; provided that the proceeds of any insurance policy attributable to such Property shall be transferred to the Operating Partnership and in such event, there shall be no reduction in the consideration received by the Property Owner or its partners or shareholders. 8.11 RESERVATION AND LISTING OF SHARES. The Company shall take all action necessary to reserve a sufficient number of Shares for issuance upon (a) the exchange of all L.P. Units issuable under this Agreement, including the L.P. Units potentially issuable under the Pending Projects Acquisition Agreement for shares of the Company's Common Stock in accordance with the terms of the Exchange Rights Agreement, and shall take all action necessary to list such reserved shares, subject to official notice of issuance, on the AMEX. 9. ADDITIONAL COVENANTS. 9.1 EXCHANGE RIGHTS OF LIMITED PARTNERS OF OPERATING PARTNERSHIP. Effective as of the Closing Date, the Company agrees to give the Limited Partners the right to exchange each L.P. Unit into one share of the Company's Common Stock at such times and upon such terms as are set forth in the Exchange Rights Agreement, and subject to adjustment of such exchange ratio as are provided therein. 9.2 CORPORATE OPPORTUNITIES; FREEDOM OF ACTION. (a) CORPORATE OPPORTUNITIES. Effective as of the Closing Date Carl E. Berg agrees not to directly or indirectly acquire or develop, or acquire an equity ownership interest in any entity that has an ownership interest in any real property zoned for industrial or R&D use or which intends to acquire such interests (with the exception of investments in the securities of publicly-traded companies, which do not represent more than 10% of the outstanding voting securities thereof) 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 a committee of the Company's Board of Directors comprised solely of Independent Directors; PROVIDED, HOWEVER that the foregoing shall not apply to any acquisition, development or investment with respect to the Berg Land Holdings, or the Projects subject to the Pending Projects Acquisition Agreement, or the Excluded Properties (as defined in the S-4 Registration Statement). The foregoing restriction shall remain 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 beneficially owns less than 25% of the outstanding Common Stock of the Company (including for these purposes all shares then issuable upon exercise of the Exchange Rights). (b) CERTAIN INTERESTED PARTY TRANSACTIONS. Effective as of the Closing Date, the Company and each party hereto who is a member of the Berg Group agrees that prior to undertaking any transaction or entering into any contract between the Company or the Operating Partnership and any member of the Berg Group, or any Entity in which a Berg Group member beneficially owns at least 5% of the outstanding Equity interests shall be subject to prior review and approval by the Independent Directors Committee. If the proposed transaction or contract is not approved by the Independent Directors Committee, at least as to the Berg Group member(s)' involvement therein, such Berg Group member or members agree not to participate in the transaction or enter into such contract. The provisions of this Section 9.2(b) shall not apply to transactions or contracts of a minor nature determined in accordance with standards or thresholds established by the Independent Directors Committee. (c) FREEDOM OF ACTION. Except as provided in Section 9.2(a) and (b), after the Closing Date neither Carl E. Berg nor any other member of the Berg Group shall have any obligation to the Company, the Operating Partnership, or the Company's shareholders or any other Limited Partners not to (i) engage in the same or similar activities or lines of business as the Company, (ii) invest or own any interest publicly or privately in, or develop a business relationship with, any corporation, partnership or other entity engaged in the same or similar activities or lines of business as, or otherwise in competition with, the Company, or (iii) do business with any client or customer of the Company. Neither Carl E. Berg nor any other member of the Berg Group shall have any obligation, or be liable, to the Company, or the Operating Partnership (A) for or arising out of the conduct described in (i), (ii), or (iii), above, (B) for exercising or failing to exercise his or the Berg Group's rights under this Agreement or any other Related Agreement to which he or they will be a party, (C) for exercising or failing to exercise his or the Berg Group's rights as a shareholder of the Company or as a Limited Partner, (D) for breach of any fiduciary or other duty to the Company, or the Operating Partnership by reason of the conduct described in (A), (B) or (C) above. Except as provided otherwise in Section 9.2(a) or (b), in the event that any member of the Berg Group, acquires knowledge of a potential transaction, agreement, arrangement or other matter which may be a corporate opportunity for both such Person and the Company, neither such Person nor its officers, directors, employees or former employees shall have any duty to communicate or offer such corporate opportunity to the Company, and neither such Person nor its officers, directors, employees or former employees shall be liable to the Company for breach of any fiduciary or other duty, as a shareholder or otherwise, by reason of the fact that such Person pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another Person or does not communicate such corporate opportunity or information regarding such corporate opportunity to the Company. 9.3 RIGHT OF FIRST REFUSAL. The Company hereby grants to each Limited Partner the right of first refusal to purchase his, her or its pro rata share of any New Securities (as defined below) that the Company may, from time to time, propose to sell and issue. A Limited Partner's pro rata share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock issuable upon exchange of the L.P. Units held by such Limited Partner immediately prior to the issuance of New Securities to the total number of shares of Common Stock outstanding immediately prior to the issuance of New Securities, assuming conversion or exchange of all outstanding securities convertible or exchangeable into Common Stock of the company. This right of first refusal shall be subject to the following provisions: (a) "NEW SECURITIES." "New Securities" shall mean any capital stock of the Company, whether or not now authorized, and rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are or may become convertible into capital stock; provided, however, that the term "New Securities" shall not include (i) securities issued pursuant to this Agreement and the Private Placement, (ii) securities issued upon exchange of L.P. Units, (iii) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets of such entity or business segment or other reorganization whereby the Company or its shareholders will own more than fifty percent (50%) of the voting power of such business entity or business segment of any such entity, (iv) securities issued to officers, directors, employees or consultants of or to the Company pursuant to any stock option, stock purchase or stock bonus plan, agreement or arrangement approved by the board of directors of the Company, (v) securities issued to any financial institution in connection with a loan transaction approved by the board of directors of the Company, (vi) securities issued to vendors or customers or to other persons in similar commercial situations with the Company, provided such issuance is approved by the board of directors, (vii) securities issued in a public offering pursuant to a registration under the Securities Act with an aggregate offering price to the public of more than $7,500,000, (viii) securities issued in connection with any stock split, stock dividend or recapitalization of the Company, and (ix) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (viii) above. (b) NOTICE OF PROPOSED ISSUANCE. In the event the Company proposes to undertake an issuance of New Securities, it shall give each Limited Partner written notice of its intention, describing the type of New Securities, their price and the general terms upon which the Company proposes to issue such New Securities. Each Limited Partner shall have ten (10) days after any such notice is mailed or delivered to agree to purchase such Limited Partner's pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) SALE OF NEW SECURITIES. In the event the Limited Partners fail to exercise fully the right of first refusal within said ten (10) day period, the Company shall have sixty (60) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of such agreement) to sell the New Securities respecting which the Limited Partners' right of first refusal set forth in this Section 9.3 is not exercised, at a price and upon terms no more favorable to the purchasers thereof than are specified in the Company's notice to Limited Partners pursuant to Section 9.3(b). In the event the Company has not sold the New Securities within the foregoing period, the Company shall not thereafter issue or sell any New Securities without first again offering such securities to the Limited Partners in the manner provided in Section 9.3 (b) above. (d) ASSIGNMENT. The rights granted by the Company pursuant to this Section 9.3 may be assigned by any Limited Partner to a transferee or assignee of not less than 500,000 L.P. Units (as adjusted for stock splits, combinations and the like), provided that such assignment may otherwise be effected in accordance with applicable securities laws and that the Company is given written notice at the time of said assignment stating the name and address of said transferee or assignee and identifying the securities with respect to which such rights are being assigned. (e) TERMINATION OF RIGHT OF FIRST REFUSAL. The right of first refusal granted under this Section 9.3 shall terminate upon the earlier of (i) May 14, 2003 or (ii) written agreement of the Company and the holders of a majority of the L.P. Units then outstanding. 9.4 REIT ELECTION. After the Closing, the Company agrees to take all action necessary to qualify as a REIT and to make an election to be taxed as a REIT in the tax year ending December 31, 1998. 9.5 BERG GROUP BOARD REPRESENTATIVES; REQUIRED DIRECTORS CONSENT; SUPER MAJORITY APPROVAL. The Company agrees that the Berg Group will have the right to nominate two directors for election to the board of directors so long as the Berg Group members together with their Affiliates (other than the Company and the Operating Partnership) own at least 15% of the Equity Securities of the Company treating all L.P. Units owned by such members and their Affiliates as Common Stock for this purpose, and the right to nominate one director if such ownership interest is less than 15% but at least 10% of such Equity Securities. The Company agrees to take all steps necessary to cause the election of such Berg Group nominees to the board of directors. The Company agrees that until the Protective Provisions Expiration Date it will not take or permit to be taken any of the following actions without the approval of the Required Directors (in addition to all other approvals required by the Company's articles of incorporation, bylaws, contracts or applicable law): (i) establishing a quorum for any meeting of the board of directors which is not attended by a Required Director; (ii) amending the Company's articles of incorporation or bylaws; (iii) merging the Company with or into any other Entity; or (iv) any sale of all or substantially all of the Company's assets. The Company agrees further, and the bylaws of Mission West-Maryland shall provide following the Reincorporation Merger 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 Partnership, (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. 9.6 REINCORPORATION MERGER. After the Closing, and subject to Shareholder Approval of the Reincorporation Merger, the Company shall take all actions and file all documents necessary and shall cause Mission West-Maryland to take all actions and file all documents necessary to effectuate the Reincorporation Merger. The Company agrees to cause the provisions of Sections 9.2 and 9.5 to be incorporated into either the Articles of Incorporation or the Bylaws of Mission West-Maryland. 9.7 OPERATION OF THE OPERATING PARTNERSHIP. (a) CASH; DISTRIBUTIONS. The Constituent Partnerships acknowledge and agree that from and after the Closing Date, as provided in the Operating Partnership Agreement, the Available Cash will be commingled and used to pay the obligations of all Constituent Partnerships. In addition, the Operating Partnership shall and will make any distributions of Available Cash to the Constituent Partnerships on a pro rata basis in proportion to the ratio of the number of L.P. Units then outstanding in each such limited partnership to the total member of L.P. Units then outstanding in the Operating Partnership, and shall pay distributions simultaneously to the General Partner of each Constituent Partnership in accordance with the General Partner's interest in each such limited partnership. Notwithstanding the foregoing, separate books and records shall be maintained for each Constituent Partnership, and all costs shall be accounted for separately and properly credited to the general ledger of each Constituent Partnership. (b) FUTURE OPERATIONS. The Company, as general partner of the Operating Partnership, shall make investment, financing and operational decisions as though the Operating Partnership was a consolidated entity; provided that accounts, books and records shall be properly maintained on a separate basis for each Constituent Partnership. The Operating Partnership may transact business and otherwise act for all of the Constituent Partnerships in the name "Mission West Properties, L.P." The Company, as general partner of the Operating Partnership, shall endeavor to structure all transactions in such manner as will maintain the current pro rata interests of each Constituent Partnership, and of the Limited Partners thereof, to the Operating Partnership, as a whole, based on the ratio which the outstanding L.P. Units of each such limited partnership bears to the total number of L.P. Units set forth on Schedule 6. 9.8 REIT QUALIFICATION OF THE COMPANY. For the purposes of Section 856(a)(6) and (h) of the Code, the Berg Group members agree that they shall not own (within the meaning of Section 544(a) of the Code), both individually and as a group, more than 20% of the total value of the Company's outstanding stock (as determined for purposes of Section 542(a)(2) of the Code) (the "Berg Ownership Limit"); and (ii) for purposes of all other ownership attribution rules under the Code (in particular Section 318 of the Code), no single Berg Group member shall directly or indirectly own 50% or more of the value of the Company's outstanding stock. The Berg Group members further agree that at no time while the Company is a REIT shall they acquire or permit any person within their control to acquire shares of Common Stock or other Equity Securities of the Company if such acquisition would cause the Company to fail to satisfy the REIT requirement that five or fewer individuals cannot own more than 50% of the value of the Company's outstanding stock within the meaning of Sections 544(a)(2) and Section 856(a)(6) and (h) of the Code. The Company acknowledges and agrees that the right of Limited Partners to exchange L.P. Units for Common Stock pursuant to the Exchange Rights Agreement does not constitute the ownership of stock by such Limited Partners under Section 544(a) or 318 of the Code. 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION. 10.1 SURVIVAL. All representations, warranties and agreements contained in this Agreement or in any certificate delivered pursuant to this Agreement shall survive the Closing for a period of one year. 10.2 INDEMNIFICATION. Each party to this Agreement shall severally indemnify and hold harmless all other parties and their Affiliates, for any loss, liability, claim, damage, expense (including, but not limited to, costs of investigation and defense and reasonable attorneys' fees) or diminution of value (collectively, "Damages") arising from or in connection with (a) any inaccuracy in any of the representations and warranties of such party in this Agreement, (b) any failure by such party to perform or comply with any covenant, obligation or agreement in this Agreement, (c) any liabilities of such party not specifically assumed by the Operating Partnership or the Company hereunder, (d) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with such party (or any Person acting on such party's behalf) in connection with any of the Proposed Transactions. 10.3 PROCEDURE FOR INDEMNIFICATION. Promptly after receipt by an indemnified party ("Indemnified Party") under Section 10.2 of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against an indemnifying party ("Indemnifying Party") under such section, give notice to the Indemnifying Party of the commencement thereof, but the failure so to notify the Indemnifying Party shall not relieve it of any liability that it may have to any Indemnified Party except to the extent the Indemnifying Party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an Indemnified Party and it shall give notice to the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party and, after notice from the Indemnifying Party to such Indemnified Party of its election so to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under such section for any fees of other counsel or any other expenses, in each case subsequently incurred by such Indemnified Party in connection with the defense thereof, other than reasonable costs of investigation. If an Indemnifying Party assumes the defense of such an action, (a) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnified Party's consent unless (i) there is no finding or admission of any violation of law or any violation of the rights of any Person and no effect on any other claims that may be made against the Indemnified Party and (ii) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (b) the Indemnifying Party shall have no liability with respect to any compromise or settlement thereof effected without its consent (which consent will not be unreasonably withheld). If notice is given to an Indemnifying Party of the commencement of any action and it does not, within ten (10) days after the Indemnified Party's notice is given, give notice to the Indemnified Party of its election to assume the defense thereof, the Indemnifying Party shall be bound by any determination made in such action or any compromise or settlement thereof effected by the Indemnified Party. Notwithstanding the foregoing, if an Indemnified Party determines in good faith that there is a reasonable probability that an action may adversely affect it or its affiliates other than as a result of monetary damages, such Indemnified Party may, by notice to the Indemnifying Party, assume the exclusive right to defend, compromise or settle such action, but the Indemnifying Party shall not be bound by any determination of an action so defended or any compromise or settlement thereof effected without its consent (which consent shall not be unreasonably withheld). Notwithstanding the foregoing, any determination with respect to the Company's determination to make a claim for indemnification against the Contributing Entities shall be made solely by a majority of the Independent Directors. 11. TERMINATION. 11.1 TERMINATION. (a) This Agreement may be terminated by the Company or by Carl E. Berg before the Closing occurs, whether before or after the Shareholder Meeting, only as follows: (i) if the consummation of the Proposed Transactions by the Company would violate any non-appealable final order, decree or judgment of any Governmental Body having competent jurisdiction; (ii) if any material representation or warranty of the Operating Partnership or any of the Contributing Entities or the Constituent Partnerships made herein is untrue in any material respect (other than a change permitted or contemplated by this Agreement) and such breach is not cured within 60 days of receipt of a notice from the Company that such breach exists or has occurred; (iii) if the conditions to the Company's obligations to consummate the Closing as set forth in Sections 5.3 and 5.4 cannot reasonably be satisfied on or before September 30, 1998; (iv) if the Company's shareholders do not approve the Private Placements and the Berg Acquisition at the Special Meeting. (b) This Agreement may be terminated by the Company alone if any consent of any Limited Partner other than a Limited Partner who is a member of the Berg Group shall not have been obtained on or before the Closing Date. 11.2 EFFECT OF TERMINATION. In the event that this Agreement is terminated pursuant to Section 11.1, this Agreement shall terminate without any liability or further obligation of any party to another, except for Sections 8.6, 10.2, and 10.3 which shall survive termination. A termination under Section 11.1 shall not relieve a defaulting or breaching party (or any party who has liability under this Agreement in respect of the actions of a defaulting or breaching party) from any liability to the other party or parties hereto for or in respect of such default or breach. 12. NOTICES. All notices, consents and other communications under this agreement shall be in writing and shall be deemed to have been duly given when (a) delivered by hand, (b) sent by facsimile transmission (with receipt confirmed), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), in each case to the appropriate addresses, and telecopier numbers set forth in Appendix I hereto (or to such other addresses, and fax numbers as a party may designate as to itself by notice to the other parties). 13. GOVERNING LAW; JURISDICTION; ETC. 13.1 GOVERNING LAW. This Agreement and (unless otherwise provided) all amendments hereof and waivers and consents hereunder shall be governed by the internal laws of the State of California, without regard to the conflicts of law principles thereof. 13.2 JURISDICTION. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this agreement may be brought against any of the parties in the courts of the State of California, or, if it has or can acquire jurisdiction, in the Northern District of California, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. 14. MISCELLANEOUS. 14.1 SPECIFIC PERFORMANCE. The parties acknowledge that the subject matter of this Agreement is unique and that no adequate remedy of law would be available for breach of this Agreement. Accordingly, each party agrees that the other parties will be entitled to an appropriate decree of specific performance or other equitable remedies to enforce this Agreement (without any bond or other security being required) and each party waives the defense in any action or proceeding brought to enforce this Agreement that there exists an adequate remedy at law. 14.2 CAPTIONS. The captions or headings of the Sections of this Agreement are for convenience only, and shall not control or affect the meaning or construction of any of the terms or provisions of this Agreement. References in this Agreement to Sections are references to Sections of this Agreement, unless expressly stated to the contrary. References in this Agreement to Schedules are, unless expressly stated to the contrary, references to Schedules to this Agreement, each of which is part of this Agreement. 14.3 NO WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. 14.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement supersedes all prior agreements among the parties with respect to its subject matter, and is intended (with the documents referred to herein) as a complete and exclusive statement of the terms of the agreement among the parties with respect thereto and cannot be changed or terminated except by a written instrument executed by the party or parties against whom enforcement thereof is sought. This Agreement shall bind and inure to the benefit of the parties hereto and their respective heirs, executors, personal representatives, successors and assigns. 14.5 BINDING NATURE. This Agreement shall be binding on each party hereto at the time that such party executes this Agreement notwithstanding that other signatories hereto executed and delivered the Agreement at a later date or not at all. 14.6 COUNTERPARTS. This Agreement may be executed in counterparts and delivered by electronic facsimile transmission, and each signed counterpart transmitted by electronic facsimile shall be considered an original, but all of which together shall constitute the same instrument. [Remainder of page intentionally left blank] SIGNATURE PAGES OF ACQUISITION AGREEMENT IN WITNESS WHEREOF, the parties hereto have hereunto executed this Agreement as of the first date written above, and a party's signature hereon in any capacity shall constitute such party's execution of this Agreement in all capacities which the party holds for purposes of this Agreement. CONSTITUENT PARTNERSHIPS MISSION WEST PROPERTIES, L.P., A DELAWARE LIMITED PARTNERSHIP By: Berg & Berg Enterprises, Inc., a California corporation Its: General Partner By: Carl E. Berg Its: President By: Thelmer Aalgaard Its: Limited Partner By: Clyde J. Berg, Trustee, 1981 Kara Ann Berg Trust Its: Limited Partner By: Michael L. Knapp Its: Limited Partner By: Thelmer Aalgaard, Trustee of the Sonya L. Berg Trust Its: Limited Partner By: Thelmer Aalgaard, Trustee of the Sherri L. Berg Trust Its: Limited Partner BERG FAMILY PARTNERS L.P., A DELAWARE LIMITED PARTNERSHIP By: Berg Family Partners, LLC Its: General Partner By: Carl E. Berg Its: Manager By: Berg Living Trust UTA dated May 1, 1981 Its: Limited Partner By: Carl E. Berg Its: Trustee By: Mary Ann Berg Its: Trustee By: Clyde J. Berg, Trustee, 1995 Clyde J. Berg Revocable Trust, dated April 4, 1995 Its: Limited Partner By: Clyde J. Berg Its: Trustee By: Clyde J. Berg, Trustee, Carl Berg Child's Trust UTA dated June 2, 1978 Its: Limited Partner By: Clyde J. Berg Its: Trustee BERG & BERG DEVELOPERS, L.P., A DELAWARE LIMITED PARTNERSHIP By: Berg & Berg Developers, LLC, a Delaware limited liability company Its: General Partner By: Carl E. Berg Its: Manager By: Carl E. Berg Its: Limited Partner By: Mary Ann Berg Its: Limited Partner By: Clyde J. Berg Its: Limited Partner KONTRABECKI ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP By: John T. Kontrabecki Its: General Partner CONTRIBUTING ENTITIES KONTRABECKI ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP By: John T. Kontrabecki Its: General Partner TRIANGLE DEVELOPMENT, A CALIFORNIA LIMITED PARTNERSHIP By: Berg Ventures I Its: General Partner By: John T. Kontrabecki Its: General Partner BERG VENTURES II, A CALIFORNIA LIMITED PARTNERSHIP By: John T. Kontrabecki Its: General Partner BACCARAT FREMONT DEVELOPERS, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY By: Michael L. Knapp Its: Managing Member BACCARAT CAMBRIAN, A CALIFORNIA GENERAL PARTNERSHIP By: Carl E. Berg Its: General Partner BERG & BERG ENTERPRISES INC., A CALIFORNIA CORPORATION By: Carl E. Berg Its: President DE ANZA OFFICE PARTNERS, A CALIFORNIA GENERAL PARTNERSHIP By: Carl E. Berg Its: General Partner THE COMPANY MISSION WEST PROPERTIES, A CALIFORNIA CORPORATION By: Michael J. Anderson Its: Vice President and Chief Operating Officer ADDITIONAL CONSENTING BERG GROUP MEMBERS The terms of the foregoing Acquisition Agreement are acknowledged and accepted by the undersigned. Michael J. O'Rosky Sonya O'Rosky James R. Zorn Sherri Zorn APPENDIX I LIMITED PARTNERS IN THE OPERATING PARTNERSHIP POST-CLOSING
L.P. NAME ADDRESS UNITS ---------------------------------------------------------- Carl E. Berg, Mary 10050 Bandley Drive 31,869,313 Ann Berg, and Berg Cupertino, Living Trust UTA California 95014 Dated May 1, 1981 Fax No. (408) 725-1626 ---------------------------------------------------------- Clyde J. Berg and 10050 Bandley Drive 20,006,201 Clyde J. Berg Cupertino, Revocable Trust, California 95014 dated April 4, 1995 Fax No. (408) 725-1626 ---------------------------------------------------------- Clyde J. Berg, 10050 Bandley Drive 910,958 Trustee, Cupertino, Carl Berg Child's California 95014 Trust UTA Dated Fax No. (408) June 2, 1978 725-1626 ---------------------------------------------------------- Berg & Berg 10050 Bandley Drive * Developers, LLC Cupertino, California 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- Berg Family 10050 Bandley Drive * Partners, LLC Cupertino, California 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- Clyde J. Berg, 10050 Bandley Drive 998,472 Trustee Cupertino, of the 1981 Kara California 95014 Ann Berg Trust Fax No. (408) 725-1626 ---------------------------------------------------------- Thelmer G. 10050 Bandley Drive 297,524 Aalgaard, Trustee Cupertino, of the Sonya L. California 95014 Berg Trust Fax No. (408) 725-1626 ---------------------------------------------------------- Thelmer G. 10050 Bandley Drive 297,524 Aalgaard, Trustee Cupertino, of the Sherri L. California 95014 Berg Trust Fax No. (408) 725-1626 ---------------------------------------------------------- Thelmer G. Aalgaard 10050 Bandley Drive 302,567 Cupertino, California 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- Michael L. Knapp 10050 Bandley Drive 100,856 Cupertino, California 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- Berg & Berg 10050 Bandley Drive 4,542,121 Enterprises, Inc. Cupertino, CA 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- Baccarat Cambrian 10050 Bandley Drive 2,878,152 Partnership Cupertino, California 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- Baccarat Fremont 10050 Bandley Drive 1,216,290 Developers Cupertino, California 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- DeAnza Office 10050 Bandley Drive 806,846 Partners Cupertino, California 95014 Fax No. (408) 725-1626 ---------------------------------------------------------- Triangle 2755 Campus Drive, 482,911 Development Company #100 San Mateo, CA 94403 Fax No. (650) 312-1333 ---------------------------------------------------------- John Kontrabecki 2755 Campus Drive, 953,018 #100 San Mateo, CA 94403 Fax No. (650) 312-1333 ---------------------------------------------------------- Berg Venture II 2755 Campus Drive, 1,243,653 #100 San Mateo, CA 94403 Fax No. (650) 312-1333 ---------------------------------------------------------- Total 66,906,406
* Initial holder of 0.50% of the total L.P. Units outstanding in each of Mission West Properties L.P. I and Mission West Properties L.P., II which will be distributed after the closing to the owners of the LLC in identical proportion to their percentage interests in each such partnership. Such distributed Units are included in the individual L.P. Unit totals reflected above. SCHEDULE 1 SCHEDULE OF MISSION WEST PROPERTIES, L.P. PRE-CONTRIBUTION PROPERTIES
Assessor's PROPERTY ADDRESS PARCEL # --------------------------------------------------- 519-1010-1174 48700-48800 Milmont Drive, Fremont --------------------------------------------------- 104-04-120 4750-4800 Patrick Henry Drive, Santa Clara ---------------------------------------------------
SCHEDULE 2 SCHEDULE OF MISSION WEST PROPERTIES, L.P. I (FORMERLY BERG FAMILY PARTNERS) PROPERTIES
ASSESSOR'S PARCEL # PROPERTY ADDRESS ------------------------------------------------------------ 110-29-007 1190 Morse Avenue, Sunnyvale ------------------------------------------------------------ 160-54-017 450 National Avenue, Mountain View ------------------------------------------------------------ 205-23-011 1135 Kern Avenue, Sunnyvale ------------------------------------------------------------ 216-35-024 1230 E. Arques Avenue, Sunnyvale ------------------------------------------------------------ 216-35-026 1250 E. Arques Avenue, Sunnyvale ------------------------------------------------------------ 224-44-019 2251 Lawson Lane, Santa Clara ------------------------------------------------------------ 224-44-020 3120 Scott Boulevard, Santa Clara ------------------------------------------------------------ 224-47-019 3301 Olcott Street, Santa Clara ------------------------------------------------------------ 316-22-018 20400 Mariani Avenue, Cupertino ------------------------------------------------------------ 326-10-046 20605-705 Valley Green Drive, Cupertino ------------------------------------------------------------ 357-20-020 10300 Bubb Road, Cupertino ------------------------------------------------------------ 357-20-036 10440 Bubb Road, Cupertino ------------------------------------------------------------ 357-20-037 10460 Bubb Road, Cupertino ------------------------------------------------------------ 316-22-017 10500 N. DeAnza Boulevard, Cupertino ------------------------------------------------------------ 519-1005-72 2800 Bayview ------------------------------------------------------------
SCHEDULE 3 SCHEDULE OF MISSION WEST PROPERTIES, L.P. II (FORMERLY BERG & BERG DEVELOPERS) PROPERTIES
Assessor's DESCRIPTION PARCEL # -------------------------------------------------- 086-33-092 McCandless-Parcel 7, Milpitas -------------------------------------------------- 086-33-093 McCandless-Parcel 8, Milpitas -------------------------------------------------- 086-33-094 McCandless-Parcel 9, Milpitas -------------------------------------------------- 086-33-095 McCandless-Parcel 10, Milpitas -------------------------------------------------- 086-33-098 McCandless-Parcel 4, Milpitas -------------------------------------------------- 086-33-099 McCandless-Parcel 5, Milpitas -------------------------------------------------- 086-33-100 McCandless-Parcel 6, Milpitas -------------------------------------------------- 086-41-016 McCandless 2A & 2B, Milpitas -------------------------------------------------- 086-41-017 McCandless-Parcel 3, Milpitas -------------------------------------------------- 086-41-018 McCandless-Parcel 3, Milpitas -------------------------------------------------- 086-41-019 McCandless-Parcel 11, Milpitas -------------------------------------------------- 086-41-020 McCandless-Parcel 11, Milpitas -------------------------------------------------- 086-41-021 McCandless-Parcel 12, Milpitas -------------------------------------------------- 086-41-022 McCandless-Parcel 13, Milpitas -------------------------------------------------- 097-13-054 75 E. Trimble Road and 2600-2610 North First St., San Jose -------------------------------------------------- 097-13-055 2600-2610 North First St., and 75 E. Trimble Road, San Jose -------------------------------------------------- 110-14-198 1170 Morse Avenue, Sunnyvale -------------------------------------------------- 110-25-040 1212 Bordeaux Drive, Sunnyvale -------------------------------------------------- 216-29-112 3236 Scott Boulevard, Santa Clara -------------------------------------------------- 224-65-006 1600 Memorex Drive, Santa Clara -------------------------------------------------- 421-07-021 2033-2243 Samaritan Drive, San Jose -------------------------------------------------- 706-02-025 6850 Santa Teresa, San Jose -------------------------------------------------- 706-02-026 140-160 Great Oaks Boulevard and 6781 Via Del Oro, San Jose -------------------------------------------------- 706-02-034 6385-6387 San Ignacio and 6540 Via Del Oro, San Jose -------------------------------------------------- 706-09-023 6320-6360 San Ignacio, San Jose -------------------------------------------------- 706-09-094 6311-6351 San Ignacio, San Jose --------------------------------------------------
SCHEDULE 4 MISSION WEST PROPERTIES, L.P. III (FORMERLY KONTRABECKI ASSOCIATES) PROPERTIES
ASSESSOR'S PROPERTY ADDRESS PARCEL # --------------------------------------- 104-15-128-00 3506-3510 Bassett, Santa Clara --------------------------------------- 104-15-130-00 3540-3544 Bassett, Santa Clara --------------------------------------- 104-15-131-00 3550-3580 Bassett, Santa Clara --------------------------------------- 104-15-132-00 Cul-de-Sac ---------------------------------------
SCHEDULE 5 SCHEDULE OF CONTRIBUTED PROPERTIES
CONTRIBUTING ASSESSOR'S DESCRIPTION NUMBER OF ENTITY PARCEL #'S UNITS - --------------------------------------------------------------------- Carl E. Berg 525-1350-54-1, 4050 Starboard Drive, 3,061,427 525-1350-18, 45700 Northport, 525-1350-24 45738 Northport Loop, Fremont, CA - --------------------------------------------------------------------- MWPIII 104-15-128-00, 3506-3510 Bassett 1,906,036* 104-15-130-00, Street, 104-15-131-00 3540-3544 Bassett Street, 3550-3580 Bassett Street Santa Clara, CA - --------------------------------------------------------------------- Triangle 104-15-133-00 3530 Bassett Street 482,911 Development Santa Clara, CA Company - --------------------------------------------------------------------- Berg Venture 104-15-134-00 3520 Bassett Street 1,243,653 II Santa Clara, CA - --------------------------------------------------------------------- Baccarat 519-850-102 3501 W. Warren and 1,216,290 Fremont 46600 Fremont Developers Boulevard LLC - --------------------------------------------------------------------- Baccarat 421-07-025 2001 Logic Drive 2,878,152 Cambrian Partnership - --------------------------------------------------------------------- Berg & Berg 678-16-005 4949 Hellyer Avenue 4,521,950 Enterprises, Inc. - --------------------------------------------------------------------- De Anza 357-20-010 10401-10411 Bubb 806,846 Office Road, Cupertino, CA Partners - ---------------------------------------------------------------------
* Included on Schedule 6 also. SCHEDULE 6 POST-CONTRIBUTION SCHEDULE OF L.P. UNITS OUTSTANDING FOR EACH PARTNERSHIP IN THE OPERATING PARTNERSHIP
PARTNERSHIP NAME NUMBER OF L.P. UNITS -------------------------------------------------- Mission West Properties, 16,228,344 L.P. -------------------------------------------------- Mission West Properties, 12,722,876 L.P. I -------------------------------------------------- Mission West Properties, 36,049,150 L.P. II -------------------------------------------------- Mission West Properties, 1,906,036 L.P. III -------------------------------------------------- Total: 66,906,406 --------------------------------------------------
EXHIBIT F CONSENT OF CERTAIN PERSONS EACH OF THE FOLLOWING PERSONS/ENTITIES HEREBY ACKNOWLEDGES THE TERMS OF THE ACQUISITION AGREEMENT DATED AS OF MAY 14, 1998 TO WHICH A LIMITED PARTNERSHIP IN WHICH THE UNDERSIGNED IS A LIMITED PARTNER, AND CONSENTS TO THE LIMITED PARTNERSHIP'S AGREEMENT TO BE BOUND BY THOSE TERMS. By: Brian Aalgaard Dated: By: James Koch Dated: By: KLA Development Corporation By: Its: Dated: By: Karen Bella Dated: EX-10.4-2 12 AMENDMENT TO ACQUISITION AGREEMENT, JULY 1, 1998 AMENDMENT TO ACQUISITION AGREEMENT This Amendment to Acquisition Agreement is made and entered into as of July 1, 1998, by and among Mission West Properties, a California corporation (the "Company"), Mission West Properties, L.P., a Delaware limited partnership ("MWP"), Berg Family Partners, L.P., a Delaware limited partnership ("MWP I"), Berg & Berg Developers, L.P., a Delaware limited partnership ("MWP II"), Kontrabecki Associates, a California limited partnership ("MWP III"), and each of the partners of the respective partnerships (the "Partners"), holders of equity interests in the other entities and certain other persons who are listed on the signature pages hereto. RECITALS WHEREAS, the parties hereto entered into an Acquisition Agreement dated May 14, 1998 (the "Acquisition Agreement") pursuant to which the parties thereto may amend the Acquisition Agreement by a writing executed by the party or parties against whom enforcement is sought in accordance with Section 14.4 thereof. WHEREAS, the parties wish to amend the Acquisition Agreement and their respective performance thereunder to permit the occurrence of the Berg Acquisition (as defined xtherein) and the organization of the Operating Partnership (as defined therein) prior to the Special Meeting (as defined therein) so that the accounting period for which the Company reports the operations of the Operating Partnership in 1998 shall commence on July 1, 1998. WHEREAS, such parties now desire to amend the terms of the Acquisition Agreement to provide for the changes set forth below. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants, conditions and promises hereinafter set forth, the parties agree as follows: 1. DEFINITIONS. Unless otherwise defined or specified in this Amendment, all capitalized terms used herein will have the meanings set forth in the Acquisition Agreement. 2. AMENDMENT TO CERTAIN SECTIONS OF ACQUISITION AGREEMENT. The following sections of the Acquisition Agreement will be amended as follows: 2.1 DEFINITIONS. Section 1.10 shall be amended to read in its entirety as follows: 1.10 "CLOSING" shall have the meaning ascribed to it in Section 4.1, and "PARTNERSHIP CLOSING" shall mean the closing of the transactions described in Section 3 (THE TRANSACTIONS SUBJECT TO THIS AGREEMENT), as amended hereby. Section 1.11 shall be amended to read in its entirety as follows: 1.11 "CLOSING DATE" shall mean the date and time of the Closing. "PARTNERSHIP CLOSING DATE" shall mean July 1, 1998. Section 1.51 shall be amended to read in its entirety as follows: 1.51 "SHAREHOLDER APPROVAL" shall mean the vote of the shareholders of the Company approving or ratifying a Proposed Transaction at the Special Meeting. 2.2 THE TRANSACTIONS SUBJECT TO THIS AGREEMENT. Sections 3.1-3.3 shall be amended to read in their entirety as follows: 3.1 AGREEMENT TO FORM THE OPERATING PARTNERSHIP. Each of the Constituent Partnerships hereby agrees to adopt the Operating Partnership Agreement and to be managed and operated as a participant in the Operating Partnership. Upon the occurrence of the Partnership Closing, the Company thereafter shall manage the Operating Partnership, in its capacity as general partner of each of the Constituent Partnerships, in accordance with the principles and procedures contained in Section 9.7. Upon the Partnership Closing, all of the limited partnership interests and the existing general partner interests in each of the Constituent Partnerships shall be converted automatically into the number of L.P. Units set forth opposite the name of each Constituent Partnership on Schedule 6 (provided that 3,061,427 L.P. Units of MWP shall not be issued unless and until Carl E. Berg has acquired the properties set forth opposite his name on Schedule 5 (the "Fremont Properties") and has contributed them, subject to secured indebtedness of approximately Five Million Nine Hundred Thousand Dollars ($5,900,000) in principal), by grant deed to MWP; MWP III shall elect to become a Delaware limited partnership pursuant to Section 17-217(b) of the Delaware Revised Uniform Limited Partnership Act; and the existing limited partnership agreement of each of the limited partnerships shall be amended and restated to substantially conform to the provisions of the Operating Partnership Agreement. 3.2 ACQUISITION OF THE CONTRIBUTED PROPERTIES. Subject to the terms and conditions hereof and in reliance upon the representations, warranties, and agreements contained herein, at the Partnership Closing, the Operating Partnership shall acquire the Contributed Properties and the Contributing Entities (other than MWP III) shall convey their respective Contributed Properties to MWP. In exchange, each Contributing Entity shall be entitled to receive that number of L.P. Units set forth opposite its name on Schedule 5 at the Partnership Closing. Notwithstanding the foregoing, Carl E. Berg shall not contribute the Fremont Properties to MWP at the Partnership Closing and shall not be entitled to receive 3,061,427 L.P. Units of MWP limited partnership interest, as set forth on Schedule 5, unless and until he has contributed the Fremont Properties, subject to indebtedness in the approximate principal amount of $5,900,000, to MWP by grant deed. 3.3 THE BERG ACQUISITION. (a) Subject to the terms and conditions hereof and in reliance upon the representations, warranties, and agreements contained herein, at the Partnership Closing: (i) the Company shall acquire the general partnership interests in each of the Constituent Partnerships for the total amount of Thirty-Three Million Five Hundred Eighty-Nine Thousand Three Hundred Thirty-Three Dollars ($33,589,333) payable by delivery of a demand note ("Demand Note") to each of the Constituent Partnerships in the amounts set forth opposite the name of such Constituent Partnership (the "Contribution Amount") in the form attached hereto Exhibit G; (ii) Berg & Berg Enterprises, Inc., Berg Family Partners LLC, Berg & Berg Developers LLC, and John T. Kontrabecki shall resign as the general partner of MWP, MWP I, MWP II, and MWP III, respectively; and (iii) the Company shall receive a general partner interest equal to 10.91% of the capital, profits, losses and distributions of each Constituent Partnership (or 10.91% of the Operating Partnership) in accordance with the terms of the Operating Partnership Agreement. The capital contribution and amount of the Demand Note payable by the Company set forth below for its general partner interest in each of the Constituent Partnerships at the Partnership Closing is subject to adjustment as provided in Section 3.3(b).
PARTNERSHIP DEMAND NOTE AMOUNT MWP $ 6,927,195 MWP I 6,693,607 MWP II 18,965,750 MWP III 1,002,781
(b) At or prior to the Partnership Closing, the Operating Partnership may obtain new loans or refinance existing debt of the Constituent Partnerships, which will be, or is secured by, certain Existing Properties and/or Contributed Properties. The amount of debt encumbering such Properties will affect the value of each of the Constituent Partnerships and the percentage of the total Contribution Amount allocable to each such Partnership. Accordingly, the parties agree that appropriate adjustment, if any, will be made in the amount of each of the Demand Notes set forth in the table in Section 3.3(a) to reflect the difference between the amount of indebtedness for borrowed funds which encumbers the Properties of a Constituent Partnership as of the Partnership Closing Date and the amount of such indebtedness as of the date of this Agreement. Furthermore, the parties acknowledge and agree that for income tax purposes, limited partners in the Operating Partnership, and the partners or other equity owners in such limited partners have assumed or guaranteed, or will wish to assume or guaranty certain indebtedness of their respective Constituent Partnerships. All parties acknowledge and agree that all limited partners or owners of interests therein shall be entitled to assume or guaranty indebtedness of the Operating Partnership as of the Partnership Closing Date and any refinancing date in such proportions as they request. 2.3 THE CLOSING. Sections 4.1-4.3 shall be amended to read in their entirety as follows: 4.1 THE CLOSING DATE. Subject to Shareholder Approval, the closing of the transactions contemplated by this Agreement, excluding the transactions described in Sections 3.1, 3.2, and 3.3 to be concluded on the Partnership Closing Date, shall take place (the "Closing") at the offices of Berg & Berg Enterprises, Inc., 10050 Bandley Drive, Cupertino, California at 10:00 a.m., P.D.T., on the last business day of the calendar month in which the Special Meeting is held (the "Closing Date"). The Partnership Closing for the transactions described in Sections 3.1, 3.2 and 3.3 shall take place at the same offices, effective at the close of business on July 1, 1998 (the "Partnership Closing Date"). 4.2 DELIVERIES. (a) On the Partnership Closing Date: (i) the Company shall deliver a Demand Note to each Constituent Partnership as provided in Section 3.3, and the Company shall receive the general partner interest in each of the Constituent Partnerships and such certificates representing the same as shall be available; (ii) the Contributing Entities shall deliver good and marketable title to the Contributed Properties (other than the Fremont Properties) by grant deeds executed and acknowledged by the applicable Contributing Entity, and the Operating Partnership shall deliver to the Contributing Entities certificates representing the number of L.P. Units set forth opposite each respective Contributing Entity's name on Schedule 5 hereto (other than L.P. Units issuable in exchange for the contribution of the Fremont Properties); (iii) the Company and all other partners in each of the Constituent Partnerships shall sign and deliver the Operating Partnership Agreement to representatives of the respective parties at the Partnership Closing; and (iv) each of the general partners in each of the Constituent Partnerships shall execute and deliver a certificate of amendment of certificate of limited partnership designating the Company as the new sole general partner in the partnership. (b) On the Closing Date, (i) the parties to the Pending Projects Acquisition Agreement and the Berg Land Holdings Option Agreement shall deliver duly executed copies of the agreements to each party thereto; (ii) the Company, each Constituent Partnership and all of the Limited Partners shall sign and deliver the Exchange Rights Agreement to the representatives of the respective parties at the Closing; (iii) Carl E. Berg shall deliver good and marketable title to the Fremont Properties by duly executed and acknowledged grant deeds, and the Operating Partnership shall deliver to Carl E. Berg a certificate representing 3,061,427 L.P. Units; and (iv) the Company shall pay in immediately available funds to the Operating Partnership One Million Six Hundred Ten Thousand Six Hundred Sixty-Seven Dollars ($1,610,667) as a contribution which equals 10.91% of the net equity value of the Fremont Properties, as the contribution amount to be paid for the remainder of the Company's 10.91% general partner interest in MWP, and shall pay in immediately available funds all other amounts payable on demand made by the Operating Partnership pursuant to the terms of the Demand Notes. 4.3 ADJUSTMENTS. The amounts receivable by or payable to the Contributing Entities (other than MWP III) at the Partnership Closing based upon the pro rations required under this Section 4.3 shall be determined and the net amount shall be paid in cash at the Partnership Closing by or to the Contributing Entity that owns the particular Contributed Property to which the adjustment relates. The items to be pro rated as of the Partnership Closing Date include the following: real estate taxes (on the basis of the due dates of the tax bills for the period for which such taxes are assessed) on the Contributed Properties, personal property taxes on the Personal Property, minimum water and sewer rentals, rents, including without limitation, expense pass-throughs, percentage rents, income from and expenses for electricity and other sums paid by tenants, licensees and concessionaires and collected by the Contributing Entities prior to the Partnership Closing Date under the Leases covering the Contributed Properties, payments due under service agreements which are to be assigned to the benefit of the Operating Partnership, prepaid license fees and other charges for licenses and permits for its Contributed Properties, which will remain in effect for the benefit of the Operating Partnership after the Partnership Closing Date, rental under any ground lease, municipal rubbish removal charges, lease rejection awards made in any bankruptcy proceedings of a tenant, and prepaid insurance premiums for insurance which will remain in effect for the benefit of the Operating Partnership after the Partnership Closing Date, if any, shall be apportioned pro rata between the Contributing Entity and the Operating Partnership, on a per diem basis as of midnight on the day before the Partnership Closing Date, so that the Contributing Entity shall bear all expenses with respect to its Contributed Properties and benefit from all items of income with respect to its Contributed Properties through the day before the Partnership Closing Date. To the extent that the amounts of the items to be adjusted are not reasonably ascertainable as of the Partnership Closing Date or there are any other items which should properly be allocated at that time, they shall be adjusted or taken into account by the affected Contributing Entity and the Operating Partnership as promptly after the Partnership Closing Date as the amounts thereof are ascertained. 2.4 CONDITIONS TO CLOSING. Section 5.2 is hereby amended to apply only to the Partnership Closing as of the Partnership Closing Date. Section 5.2(d) shall be amended by deleting such provision in its entirety and replacing it with the following: "PAYMENT OF CONTRIBUTION AMOUNT." The Company shall have executed and delivered Demand Notes to the Operating Partnership in the aggregate amount of Thirty-Three Million Five Hundred Eighty-nine Thousand Three Hundred Thirty-three Dollars ($33,589,733) substantially in the form attached hereto as Exhibit G." Sections 5.3(a), (c) and (d) shall apply to the Partnership Closing and the Closing, and Section 5.3(b) and Section 5.4, in its entirety, shall apply only to the Partnership Closing. 2.5 REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE PROPERTIES. Section 7 is hereby amended to be applicable with respect to both the Partnership Closing, and the Closing and compliance with any representation or warranty waived by the parties with respect to the Partnership Closing shall be required as of the Closing Date; provided, further that all such provisions shall apply with respect to Carl E. Berg's contribution of the Fremont Properties to MWP only as of the date such contribution occurs. 2.6 COMPANY CORPORATE ACTIONS. Section 8.3(a) is hereby amended to read in its entirety as follows: (a) SPECIAL MEETING. As soon as practicable, in accordance with the CGCL and the Company's articles of incorporation and bylaws, and the policies and regulations of the AMEX, the Company shall take all action necessary to convene the Special Meeting as soon as practicable to consider and vote to approve or ratify the Proposed Transactions. The Company and all other parties to this Agreement agree to use their respective ultimate best efforts to obtain Shareholder Approval. 2.7 CORPORATE OPPORTUNITIES; FREEDOM OF ACTION. The provisions of Section 9.2 shall take effect as of the Partnership Closing Date immediately upon completion of the Partnership Closing. 2.8 OPERATION OF THE OPERATING PARTNERSHIP. The provisions of Section 9.7 shall take effect as of the Partnership Closing Date immediately upon completion of the Partnership Closing. 2.9 TERMINATION. Section 11.1 is amended to read in its entirety as follows: 11.1 TERMINATION. This Agreement may be terminated by the Company or by Carl E. Berg before the Closing occurs, whether before or after the Shareholder Meeting only if the consummation of the Proposed Transactions by the Company would violate any non-appealable final order, decree or judgment of any Governmental Body having competent jurisdiction. Section 11.2 is amended to add the following sentence at the end thereof: 11.2 EFFECT OF TERMINATION. In the event of termination pursuant to Section 11.1 as amended, the Company, the Constituent Partnerships and the Contributing Entities shall take all actions and execute all documents deemed reasonable or necessary to unwind the transactions concluded at the Partnership Closing and, to the extent practicable at the time, to restore each of the parties to the Agreement to the position that such party was in on the date immediately preceding the Partnership Closing Date, as if the Partnership Closing had not occurred with respect to such party. 3. WAIVER OF CERTAIN CLOSING CONDITIONS. The parties hereto agree that the conditions to Closing set forth in Sections 5.1(a) and (d) of the Acquisition Agreement are hereby waived with respect to the Partnership Closing and need not be completed prior to the Partnership Closing Date. 4. AMENDMENT OF EXHIBITS TO ACQUISITION AGREEMENT. The parties hereto agree that any and all agreements attached as exhibits to the Acquisition Agreement shall be amended as recommended by legal counsel to the extent necessary to conform to the Acquisition Agreement as amended hereby. 5. CONTINUED EFFECT. Except as otherwise expressly provided herein, the Acquisition Agreement will continue in full force and effect, in accordance with its terms. 6. MISCELLANEOUS. This Amendment and (unless otherwise provided) and waivers and consents hereunder shall be governed by the internal laws of the State of California, without regard to the conflicts of law principles thereof. This Amendment constitutes the full and entire understanding and agreement among the parties with regard to the subject matter contained herein, and supersedes all prior written and oral agreements, representations and commitments, if any, among the parties with respect to such subject matter, provided that each party hereto hereby agrees to take such other actions and execute such additional documents as may be necessary to effectuate the terms of this Amendment. This Amendment may be executed in counterparts and delivered by electronic facsimile transmission, and each signed counterpart transmitted by electronic facsimile shall be considered an original, but all of which together shall constitute the same instrument. Any provision of this Amendment may be waived or modified only in accordance with Section 14.4 of the Acquisition Agreement. [Remainder of the page intentionally left blank] SIGNATURE PAGES OF AMENDMENT TO ACQUISITION AGREEMENT IN WITNESS WHEREOF, the parties hereto have hereunto executed this Amendment as of the first date written above, and a party's signature hereon in any capacity shall constitute such party's execution of this Amendment in all capacities which the party holds for purposes of this Amendment. CONSTITUENT PARTNERSHIPS MISSION WEST PROPERTIES, L.P., A DELAWARE LIMITED PARTNERSHIP By: Berg & Berg Enterprises, Inc., a California corporation Its: General Partner By: Carl E. Berg Its: President By: Thelmer Aalgaard Its: Limited Partner By: Clyde J. Berg, Trustee, 1981 Kara Ann Berg Trust Its: Limited Partner By: Michael L. Knapp Its: Limited Partner By: Thelmer Aalgaard, Trustee of the Sonya L. Berg Trust Its: Limited Partner By: Thelmer Aalgaard, Trustee of the Sherri L. Berg Trust Its: Limited Partner BERG FAMILY PARTNERS L.P., A DELAWARE LIMITED PARTNERSHIP By: Berg Family Partners, LLC Its: General Partner By: Carl E. Berg Its: Manager By: Berg Living Trust UTA dated May 1, 1981 Its: Limited Partner By: Carl E. Berg Its: Trustee By: Mary Ann Berg Its: Trustee By: Clyde J. Berg, Trustee, 1995 Clyde J. Berg Revocable Trust, dated April 4, 1995 Its: Limited Partner By: Clyde J. Berg Its: Trustee By: Clyde J. Berg, Trustee, Carl Berg Child's Trust UTA dated June 2, 1978 Its: Limited Partner By: Clyde J. Berg Its: Trustee BERG & BERG DEVELOPERS, L.P., A DELAWARE LIMITED PARTNERSHIP By: Berg & Berg Developers, LLC, a Delaware limited liability company Its: General Partner By: Carl E. Berg Its: Manager By: Carl E. Berg Its: Limited Partner By: Mary Ann Berg Its: Limited Partner By: Clyde J. Berg Its: Limited Partner KONTRABECKI ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP By: John T. Kontrabecki Its: General Partner CONTRIBUTING ENTITIES KONTRABECKI ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP By: John T. Kontrabecki Its: General Partner TRIANGLE DEVELOPMENT, A CALIFORNIA LIMITED PARTNERSHIP By: Berg Ventures I Its: General Partner By: John T. Kontrabecki Its: General Partner BERG VENTURES II, A CALIFORNIA LIMITED PARTNERSHIP By: John T. Kontrabecki Its: General Partner BACCARAT FREMONT DEVELOPERS, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY By: Michael L. Knapp Its: Managing Member BACCARAT CAMBRIAN, A CALIFORNIA GENERAL PARTNERSHIP By: Carl E. Berg Its: General Partner BERG & BERG ENTERPRISES INC., A CALIFORNIA CORPORATION By: Carl E. Berg Its: President DE ANZA OFFICE PARTNERS, A CALIFORNIA GENERAL PARTNERSHIP By: Carl E. Berg Its: General Partner THE COMPANY MISSION WEST PROPERTIES, A CALIFORNIA CORPORATION By: Michael J. Anderson Its: Vice President and Chief Operating Officer EX-10.4-3 13 FORM OF PARTNERSHIP INTEREST DEMAND NOTE EXHIBIT G July 1, 1998 Cupertino, California _____________ Partnership Interest Purchase Demand Note On demand, Mission West Properties ("Maker") promises to pay to the order of [INSERT NAME OF LIMITED PARTNERSHIP] or any person or entity to whom this Note has been endorsed for payment or order (collectively the "Holder"), the principal sum of ____________________________________ ($____________) (the "principal sum") and interest on the principal sum at the rate of seven and one quarter percent (7.25%) per annum, from the date of this Note until paid in full, but in no case higher than the maximum rate allowed by law. Interest shall accrue and compound semiannually on the unpaid balance, computed on the basis of a 360-day year. Principal and interest will be paid in lawful money of the United States of America at the address of the Holder of this Note. All payments on this Note shall be applied first to the reduction of any accrued and unpaid interest before any reduction in the principal sum outstanding. Notwithstanding the foregoing, the Holder shall make no demand under this Note until the earlier of (i) the date on which the Maker receives funds from the sale of its equity securities in the Private Placement (as identified in the Acquisition Agreement among Mission West Properties, Certain Partnerships and the Berg Group (as defined therein), dated as of May 14, 1998); and (ii) the second anniversary of the issuance of this Note. Any demand by [INSERT NAME OF LIMITED PARTNERSHIP] may be made by action of the holders of a majority of the outstanding L.P. Units in such partnership. The following is a statement of additional rights of the Holder of this Note and the conditions to which this Note is subject, to which the Holder hereof, by the acceptance of this Note, agrees: 1. ATTORNEYS' FEES. If the indebtedness represented hereby is not paid in full when due, Maker promises to pay all costs of collection, including, but not limited to, reasonable attorneys' fees. 2. REPLACEMENT. On receipt of evidence reasonably satisfactory to Maker of loss, theft, destruction or mutilation of this Note and, in the case of loss, theft or destruction, on delivery of an indemnity agreement or bond reasonably satisfactory in form and amount to Maker, or in the case of mutilation, on surrender and cancellation of this Note, Maker, at Maker's expense, will execute and deliver, in lieu of this Note, a new Note of like tenor. 3. MODIFICATION. This Note and any of its terms may be changed, waived or terminated only by a written instrument signed by the party against which enforcement of that change, waiver or termination is sought. 4. GOVERNING LAW. This Note shall be governed by and construed and enforced in accordance with the laws of the State of California. 5. SEVERABILITY. If any provision of this Note should be found to be invalid or unenforceable, all other provisions shall nevertheless remain in full force and effect to the maximum extent permitted by law. 6. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the day sent by facsimile transmission if a true and correct copy is sent the same day by first class mail, postage prepaid, or by dispatch by an internationally recognized express courier services, to the proper parties at the appropriate business addresses. MISSION WEST PROPERTIES By: Its: EX-10.5-1 14 STOCK PURCHASE AGREEMENT, DATED AS OF MAY 4, 1998 STOCK PURCHASE AGREEMENT - INGALLS & SNYDER LLC PRIVATE PLACEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the ____ day of ________, 1998, by and between the investors identified on Appendix I to this Agreement (the "Schedule of Purchasers") (individually a "Purchaser" and collectively the "Purchasers") and Mission West Properties, a California corporation (the "Company"). RECITALS WHEREAS, the Company intends to submit to its shareholders for approval: an acquisition by the Company of the general partnership interest in four limited partnerships in which the limited partners will receive the right to exchange limited partner interests for Common Stock (the "Berg Acquisition"); the purchase and sale of up to 5,777,778 shares (the "Shares") of common stock of the Company (the "Common Stock") pursuant to this Agreement (the "Private Placement"); and the merger of the Company with and into Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland") which will elect to become a Real Estate Investment Trust (the "Reincorporation Merger"), (collectively the "Proposed Transactions"); WHEREAS, the Company intends to file a Registration Statement on Form S-4 (the "Registration Statement") to register shares of Common Stock and other securities to be issued by Mission West-Maryland in exchange for securities of the Company pursuant to the Securities Act of 1933, as amended (the "Securities Act') and will deliver to the shareholders of the Company the proxy statement/prospectus (the "Proxy Statement/Prospectus") included in such Registration Statement in connection with the special meeting of shareholders at which the shareholders will be asked to approve the purchase and sale of the Shares (the "Special Meeting"); WHEREAS, the Company's confidential Private Placement Memorandum dated as of April __, 1998 (the "Private Placement Memorandum"), has been delivered to each of the Purchasers in connection with the Private Placement; WHEREAS, the firm of Ingalls & Snyder LLC, a registered broker dealer ("Ingalls & Snyder") has acted as the placement agent for the Purchasers in connection with this Private Placement of Shares; and WHEREAS, subject to shareholder approval, the Purchasers wish to purchase from the Company, and the Company wishes to sell to the Purchasers, the Shares pursuant to the terms of the Agreement; AGREEMENT NOW, THEREFORE the Purchasers and the Company agree as follows: 1. AUTHORIZATION AND SALE OF COMMON STOCK. 1.1 AUTHORIZATION OF THE SHARES. The Board of Directors of the Company has approved and authorized the Shares for issuance. 1.2 SALE OF THE SHARES. Subject to the terms and conditions hereof, on the Closing Date (as defined in Section 2.1), the Company will issue and sell to each Purchaser, and each Purchaser agrees, severally, to purchase from the Company, the number of Shares of Common Stock specified opposite such Purchaser's name on the Schedule of Purchasers, as amended from time to time, at a purchase price of Four Dollars and Fifty Cents ($4.50) per share for the aggregate purchase price set forth opposite each such Purchaser's name on the Schedule of Purchasers. 1.3 SEPARATE AGREEMENTS. The Company's agreement with each Purchaser is a separate agreement, and the sale of the shares of Common Stock to each Purchaser is a separate sale. 1.4 PLACEMENT AGENT COMMISSION. In addition to the purchase price paid for the Shares, each Purchaser agrees, severally, to pay to Ingalls & Snyder a fee of Five Cents ($.05) per share on the Closing Date (as defined in Section 2.1) for each Share that Purchaser agrees to purchase from the Company pursuant to this Agreement. 2. CLOSING DATE; DELIVERY. 2.1 CLOSING DATE. Subject to shareholder approval, the closing of the purchase and sale of the Shares hereunder (the "Closing") with each of the Purchasers shall be held at the offices of the Company at 10050 Bandley Drive, Cupertino, California on the first business day immediately following the Special Meeting, or at such other time and place to which the Company and Purchasers of a majority of the Shares may agree upon orally or in writing (the "Closing Date"). 2.2 DELIVERY. At the Closing, the Company will deliver to each Purchaser, a certificate representing the Shares to be purchased by such Purchaser from the Company (which shall be issued in such Purchaser's name as set forth on the Schedule of Purchasers) against payment of the applicable purchase price (as set forth on the Schedule of Purchasers) in immediately available funds by cashier's check or by wire transfer no later than the 5:00 p.m. on the Closing Date to the Company at Mellon Bank, Pittsburgh, Pennsylvania, ABA #043 000261, for credit to: Merrill Lynch, Account #101 1730; for further credit to: Mission West Properties, Account #291 07M35. In addition, each Purchaser will deliver to Ingalls & Snyder an amount equal to Five Cents ($.05) per share for each Share purchased by Purchaser hereunder in immediately available funds by cashier's check or by wire transfer no later than the 5:00 p.m. on the Closing Date to ____________________. Upon the consummation of the Reincorporation Merger and after the SEC has declared the Registration Statement effective, each of the Shares shall be exchanged automatically for one share of Common Stock of Mission West-Maryland in the manner described in the Registration Statement. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, subject to and except as set forth in a Schedule of Exceptions (the "Schedule of Exceptions") delivered to the Purchasers, specifically identifying the relevant subsections hereof: 3.1 ORGANIZATION AND STANDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has all requisite corporate power and authority to carry on its business as presently conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its business or properties. 3.2 SUBSIDIARIES. Other than Mission West Executive Aircraft Center, Inc., MIT Realty, Inc., and Mission West Properties, Inc., a Maryland corporation (the "Company Subsidiaries") which are wholly owned by the Company, the Company does not own or control, directly or indirectly, any interest in any other corporation, association, partnership or other business entity. As used in this Section 3, references to the Company include the Company Subsidiaries. The Company is not a participant in any joint venture, partnership, or similar arrangement. 3.3 CAPITALIZATION. The authorized capital stock of the Company as of the Closing Date will consist of Two Hundred Million (200,000,000) shares of Common Stock, of which 1,698,535 shares are issued and outstanding. All such issued and outstanding shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all applicable state and federal laws concerning the issuance of securities. The Company has reserved Five Million Five Hundred Thousand (5,500,000) shares of Common Stock for issuance under the Company's 1997 Stock Option Plan (the "Plan"), of which options to acquire Six Hundred Five Thousand (605,000) shares have been granted as of the date hereof. The Company has reserved Five Million Seven Hundred Seventy-Seven Thousand Seven Hundred Seventy-Eight (5,777,778) shares of Common Stock for issuance hereunder. Except for the foregoing, and the other securities to be issued in connection with the Proposed Transactions, there are no outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. 3.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and thereunder, and the authorization, sale and issuance of the Shares pursuant hereto has been taken or will be taken prior to the Closing Date. This Agreement, when executed and delivered by the Company, will constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.5 VALID ISSUANCE OF COMMON STOCK. The Shares that are being purchased by the Purchasers hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, and under applicable state and federal securities laws. 3.6 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any term of the Amended and Restated Articles of Incorporation (the "Articles"), or Bylaws of the Company, nor is the Company in violation or default of any term of any contract, agreement, instrument, judgment, decree, order, statute, rule or regulation (collectively, "Instruments and Laws") to which the Company is subject and a violation of which would have a material adverse effect on the condition, financial or otherwise, or operations of the Company. The execution, delivery and performance of this Agreement, and the consummation of the transactions pursuant hereto, will not result in a violation of or be in conflict with the Articles, as amended, or the Bylaws of the Company or constitute, with or without the passage of time and giving of notice, a material default under any such Instrument or Law, except where such violations or defaults, singularly or in the aggregate, would not have a material adverse effect on the business, operations, property or condition (financial or otherwise) of the Company, require any consent or waiver (which has not been obtained) under any such Instrument or Law, or result in the creation of any lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such Instrument or Law. 3.7 LITIGATION. There are no actions, suits, proceedings or investigations pending or, to the best of the Company's knowledge, threatened against the Company. 3.8 GOVERNMENTAL CONSENT, ETC. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing (other than filing a proxy statement with the SEC with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement. 3.9 COMPANY SEC INFORMATION. As of their respective filing dates (except as thereafter amended) all documents that the Company has filed with the SEC, including the Proxy Statement/Prospectus, ("Company SEC Documents") have complied in all material respects with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and none of the Company SEC Documents has contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading except to the extent corrected by a subsequently filed Company SEC Document. 3.10 OFFERING. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 4 of this Agreement, the offer, sale and issuance of the Shares as contemplated by this Agreement are exempt from the registration requirements under Section 5 of the Securities Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 3.11 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, loans, liens and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 3.12 TAX RETURNS AND PAYMENTS. The Company has filed all tax returns and reports as required by law. All such returns and reports are true and correct in all material respects. The Company has paid in full all taxes and other assessments due. 3.13 APPROVAL BY BOARD OF DIRECTORS. The Board of Directors of the Company has approved this Agreement and all of the transactions contemplated by this Agreement. 3.14 FINANCIAL STATEMENTS. The Company has delivered true and accurate copies of the Company's annual report on SEC Form 10-K for the fiscal year ended December 31, 1997 and the Proxy Statement/Prospectus. The Company shall furnish copies of the Registration Statement, of the Proxy Statement/Prospectus forms a part, to all Purchasers requesting the same prior to the Closing. The financial statements set forth in the SEC Form 10-K and the Proxy Statement/Prospectus are in accordance with the books and records of the Company and the other entities for which financial information is presented (the "Berg Entities"), have been prepared in conformity with generally accepted accounting principles consistently applied (except as described in the notes included therein), and fairly present the financial condition of the Company and the Berg Entities as of the dates thereof and the results of its operations for the periods then ended. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser severally represents and warrants to the Company as follows: 4.1 EXISTENCE AND POWER. Purchaser, if a corporation, partnership or limited liability company, is a corporation, partnership or limited liability company duly organized, validly existing and in good standing under the laws of the state under which it was organized, with full power and authority to enter into this Agreement and to perform its obligations under this Agreement. 4.2 AUTHORIZATION. Purchaser's execution, delivery and performance of this Agreement, and the consummation by Purchaser of the transactions contemplated by this Agreement have been duly authorized by all requisite corporate, partnership or limited liability company action of the Purchaser. 4.3 BINDING EFFECT. This Agreement has been duly executed and delivered by Purchaser, and constitutes a valid and binding agreement of Purchaser. 4.4 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Purchaser nor the consummation by Purchaser of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of the articles of incorporation, bylaws, partnership agreement or operating agreement of Purchaser; (b) require any filing with, or the obtaining of any permit, authorization, consent or approval of, any court or governmental or regulatory authority; (c) to the best knowledge of Purchaser, result in a default (give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its assets may be bound, except for defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained; or (d) to the best knowledge of Purchaser, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Purchaser; or any of its assets; PROVIDED, that the foregoing clauses (b), (c) and (d) shall not apply to requirements, defaults or violations which would not have a material adverse effect on the business, operations or financial condition of Purchaser. 4.5 BROKERS' FEES. Except for the fee to be paid to Ingalls & Snyder, no investment banker, broker, finder or other intermediary has been retained by or is authorized to act on behalf of Purchaser who might be entitled to any fee or commission from the Company upon consummation of the transactions contemplated by this Agreement. 4.6 SUITABILITY. Purchaser is an "accredited investor," as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act. 4.7 INVESTMENT. Purchaser is acquiring the number of Shares set forth opposite Purchaser's name on the Schedule of Purchasers for investment for Purchaser's own account and not with a view to, or for, resale in connection with, any distribution of the Shares. Purchaser understands that the Shares have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the BONA FIDE nature of Purchaser's investment intent as expressed herein. 4.8 RULE 144. Purchaser acknowledges that, because they have not been registered under the Securities Act, the Shares constitute "restricted securities" as defined in Rule 144(a)(3) and must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the securities, the availability of certain current public information about the issuer, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of securities being sold during any three-month period not exceeding specified limitations (unless the securities satisfy the requirements of Rule 144(k)). 4.9 REIT QUALIFICATION OF THE COMPANY. For the purposes of Section 856(a)(6) and (h) of the Internal Revenue Code of 1986, as amended (the "Code"), each Purchaser represents and warrants that upon and as a result of the Purchase's acquisition of the Shares at the Closing Date: (i) no individual who is a Purchaser or owns a direct or indirect interest in such Purchaser will own (within the meaning of Section 544(a) of the Code) more than 10% of the total value of the Company's outstanding stock (as determined for purposes of Section 542(a)(2) of the Code); (ii) for purposes of the ownership attribution rules under Section 856(d)(5) of the Code, Purchaser would not be deemed to own 50% or more of the value of the Company's outstanding stock; (iii) no Purchaser which is a qualified trust (within the meaning of Section 856(h)(3)(E) of the Code) will own (within the meaning of Section 544(a) of the Code) more than 10% of the value of the outstanding stock of the Company; (iv) Purchaser does not own, directly or indirectly, 10% or more of the total combined voting power of all classes of stock of any tenant of any of the properties listed in the Private Placement Memorandum; and (v) Purchaser has no plan or intention, and has not entered into any agreement or arrangement, to transfer Shares at any time after the Closing Date such that as a consequence of the transfer any of the Purchaser's representations and warranties in clauses (i) through (iv) would cease to be true. 5. COVENANTS OF THE COMPANY. 5.1 INVESTIGATION. Upon reasonable notice, prior to the Closing Date the Company shall afford to Purchasers or to any of Purchaser's officers, employees, accountants, counsel and other authorized representatives full and complete access during normal business hours to its plants, properties, contracts, commitments, books and records (including, but not limited, to tax returns) and to the employees and accountants of the Company responsible for such matters, and shall use its reasonable best efforts to cause its representatives to furnish promptly to Purchasers such additional financial and operating data and other information as any Purchaser or its duly authorized representatives may from time to time reasonably request. 5.2 CONSENTS AND APPROVALS. Prior to the Closing Date, the Company shall use its best efforts to obtain the authorizations, consents, orders and approvals of federal, state and local regulatory bodies and officials, courts and other third parties that may be necessary for the performance of its obligations under this Agreement and the consummation of the transactions contemplated by this Agreement, and shall cooperate fully with each other in seeking promptly to obtain such authorizations, consents, orders and approvals as may be necessary for the performance of its obligations pursuant to this Agreement. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER. Except to the extent expressly waived in writing by Purchaser, all obligations of Purchaser under this Agreement are subject to the fulfillment, at or before the Closing, of all of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Each of the representations and warranties of the Company contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though made on and as of such date. 6.2 PERFORMANCE. The Company shall have performed in all material respects its obligations to be performed on or prior to the Closing pursuant to this Agreement. 6.3 SHAREHOLDER APPROVAL. The shareholders of the Company shall have approved the purchase and sale of the Shares at the Special Meeting. 6.4 LISTING REQUIREMENTS. The Shares shall have been listed with the American Stock Exchange and the Pacific Exchange, subject to shareholder approval of the purchase and sale of the Shares. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. Except to the extent expressly waived in writing by the Company, the obligations of the Company set forth in this Agreement are subject to the fulfillment, at or before the Closing, of all of the following conditions: 7.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Each of the representations and warranties of each Purchaser contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though made on and as of such date. 7.2 PERFORMANCE. Each Purchaser shall have performed in all material respects each of the obligations of such Purchaser to be performed on or prior to the Closing pursuant to this Agreement. 8. GENERAL. 8.1 SURVIVAL. The covenants, representations and warranties of the parties to this Agreement shall survive the Closing for a period of one year. 8.2 BINDING EFFECT; BENEFITS; ASSIGNMENT. All of the terms of this Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the successors and permitted assigns of the Company and Purchaser. Nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies under or by reason of this Agreement except as expressly indicated in this Agreement. Neither the Company nor Purchaser shall assign any of their respective rights or obligations under this Agreement to any other person, firm or corporation without the prior written consent of the other party to this Agreement. 8.3 FURTHER ACTION. Each of the parties to this Agreement shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and the transactions contemplated in this Agreement or, at or after the Closing Date, to evidence the consummation of the transactions contemplated in this Agreement. Each of the parties to this Agreement shall take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, to satisfy the conditions to this Agreement and to obtain in a timely manner all necessary waivers, consents, and approvals and to effect all necessary registrations and filings. 8.4 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California without regard to its principles governing conflicts of laws. 8.5 NOTICES. All notices, requests, demands and other communications to be given pursuant to the terms of this Agreement shall be in writing and shall be delivered personally, telecopied or sent by nationally recognized overnight delivery service, and shall be deemed given and effective when so delivered personally, telecopied or sent, as follows: (a) If to Purchaser: At the address set forth in the Schedule of Purchasers. with a copy to: Ingalls & Snyder LLC 61 Broadway New York, New York 10006 Telecopier: Attention: ___________ (b) If to the Company: Mission West Properties 10050 Bandley Drive Cupertino, California 95014 Telecopier: 408/725-1626 Attention: Carl E. Berg with a copy to: Graham & James LLP 600 Hansen Way Palo Alto, California 94304 Telecopier: 650/856-3619 Attention: Alan B. Kalin Each Purchaser may change its address or telecopier number for purposes of this Agreement by prior written notice to the Company. The Company may change its address or telecopier number by prior written notice to the Purchasers. 8.6 COUNTERPARTS. This Agreement may be executed in counterparts and transmitted by facsimile, each of which when so executed and transmitted shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument. 8.7 EXPENSES. Purchasers and the Company shall pay their own respective expenses, costs and fees (including, without limitation, attorneys' and accountants' fees) incurred in connection with the negotiation, preparation, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement. 8.8 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the Company and Purchasers with respect to the transactions contemplated by this Agreement, and supersedes all prior agreements, arrangements and understandings relating to the subject matter of this Agreement. 8.9 AMENDMENT AND WAIVER. This Agreement may be amended, modified, superseded or canceled, and any of the terms, covenants, representations, warranties or conditions of this Agreement may be waived, only by a written instrument executed by the Company and Purchasers who are record holders of or subscribers for a majority of the Shares subject to this Agreement, or, in the case of a waiver, by or on behalf of the party waiving compliance. The failure of any party at any time to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or of any breach of any such term, covenant, representation or warranty or any other term, covenant, representation or warranty set forth in this Agreement. 8.10 HEADINGS. The headings of the sections and paragraphs of this agreement have been inserted for convenience or reference only and shall in no way restrict or otherwise modify any of the terms or provisions of this Agreement. 8.11 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, express or implied, is intended to or shall (a) confer on any person other than the parties hereto and their respective successors or assigns any rights (including third-party beneficiary rights), remedies, obligations or liabilities under or by reason of this Agreement or (b) constitute the parties hereto as partners or as participants in a joint venture. This Agreement shall not provide third parties with any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to the terms of this Agreement. No third party shall have any right, independent of any right that exists irrespective of this Agreement, under or granted by this Agreement, to bring any suit at law or equity for any matter governed by or subject to the provisions of this Agreement. 8.12 RULES OF CONSTRUCTION. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation or rule of construction providing that ambiguities in any agreement or other document will be construed against the party drafting such agreement or document. 8.13 SEVERABILITY. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT IN WITNESS WHEREOF, the Company and each Purchaser has executed this Agreement as of the day and year first above written. PURCHASER: (Print or type name of Purchaser) By: (signature) Name: (Print or type if signing on Purchaser's behalf) Title: (if applicable) THE COMPANY: MISSION WEST PROPERTIES By: (signature) Name: (print or type name) Title: (if applicable) APPENDIX I SCHEDULE OF PURCHASERS
NAME AND ADDRESS OF NUMBER OF SHARES PURCHASE PRICE/OTHER PURCHASERS CONSIDERATIONS
SUBSCRIPTION AND REGISTRATION FORM FOR MISSION WEST PROPERTIES COMMON STOCK I. PURCHASE OF COMMON STOCK A. By executing this Subscription and Registration Form for Mission West Properties Common Stock (the "Common Stock"), and the counterpart signature pages to the Stock Purchase Agreement (the "Purchase Agreement"), the undersigned hereby irrevocably agrees for the benefit of Mission West Properties, a California corporation (the "Company") (i) to purchase ______________ shares of the Common Stock of the Company, at a purchase price of $4.50 per share for a total purchase price of $_____________ (the "Purchase Price") and (ii) to tender the Purchase Price at the Closing (as that term is defined in the Purchase Agreement) by wire transfer no later than the 5:00 p.m., P.D.T., on ______ __, 1998 to Mellon Bank, Pittsburgh, Pennsylvania, ABA #043 000261, for credit to: Merrill Lynch, Account #101 1730; for further credit to: Mission West Properties, Account #291 07M35 or other appropriate consideration approved by the Company in advance. B. Unless the Company is instructed otherwise in writing by the undersigned, the Purchase Price will be returned promptly in the event that for any reason the purchase and sale of the Common Stock subscribed hereby is not consummated or in the event that the undersigned's subscription is rejected. II. REGISTER COMMON STOCK AS FOLLOWS: A. Corporation, Trust, Other Organization or any other Fiduciary Capacity ______________________________________________________________________ (Name of Corporation, Other Organization or Trustees) If Trust, date of Trust Instrument:___________________________________ Tax ID Number:________________________________________________________ Number of Shares:_____________________________________________________ B. Individual, Joint Tenants, Tenants in Common, Community Property: (Type of Ownership) ______________________________________________________________________ (First Name) (Last Name) (M.I.) (Social Security No.) ______________________________________________________________________ (First Name) (Last Name) (M.I.) (Social Security No.) ______________________________________________________________________ (First Name) (Last Name) (M.I.) (Social Security No.) Number of Shares:_____________________________________________________ (Joint tenancy with rights of survivorship will be presumed unless otherwise indicated.) C. Custodian for a Minor: Number of Shares:_____________________________________________________ ______________________________________________________________________ (Custodian's First Name) (Last Name) ______________________________________________________________________ (Minor's First Name) (Last Name) (Minor's Social Security No.) ______________________________________________________________________ Under the Uniform Gifts to Minor Act. (State of Residence of Minor) Number of Shares:_____________________________________________________ ______________________________________________________________________ (Custodian's First Name) (Last Name) ______________________________________________________________________ (Minor's First Name) (Last Name) (Minor's Social Security No.) ______________________________________________________________________ Under the Uniform Gifts to Minor Act. (State of Residence of Minor) Number of Shares:_____________________________________________________ ______________________________________________________________________ (Custodian's First Name) (Last Name) ______________________________________________________________________ (Minor's First Name) (Last Name) (Minor's Social Security No.) ______________________________________________________________________ Under the Uniform Gifts to Minor Act. (State of Residence of Minor) III. SUBSCRIBER'S NAME AND ADDRESS: ______________________________________________________________________ (Print or type name(s) ______________________________________________________________________ (Street Address) ______________________________________________________________________ (City, State, Country) ______________________________________________________________________ (Telephone Number) (Facsimile Number) IV. ACKNOWLEDGEMENT AND ACCEPTANCE The undersigned purchaser(s) hereby acknowledge(s) receipt of the Company's Private Placement Memorandum and hereby subscribe(s) to purchase shares of Common Stock of the Company and deliver(s) the following documents to the Company: (a) a completed and signed Subscription and Registration Form for Mission West Properties Common Stock, (b) one counterpart signature page to the Purchase Agreement; (c) a completed Prospective Investor Questionnaire (for individual investors only) and (d) a signed Substitute IRS Form W-9. DATE: BY: (Signature) DATE: BY: (Signature) EX-10.5-2 15 STOCK PURCHASE AGREEMENT, DATED AS OF MAY 4, 1998 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the ____ day of ________, 1998, by and between the investors identified on Appendix I to this Agreement (the "Schedule of Purchasers") (individually a "Purchaser" and collectively the "Purchasers") and Mission West Properties, a California corporation (the "Company"). RECITALS WHEREAS, the Company intends to submit to its shareholders for approval: a $26,100,000 investment in the Company by a group of accredited investors (the "Ingalls & Snyder Private Placement"); an acquisition by the Company of the general partnership interest in four limited partnerships in which the limited partners will receive the right to exchange limited partner interests for Common Stock (the "Berg Acquisition"); the purchase and sale of shares (the "Shares") of common stock of the Company (the "Common Stock") pursuant to this Agreement; and the merger of the Company with and into Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland") which will elect to become a Real Estate Investment Trust (the "Reincorporation Merger"), (collectively the "Proposed Transactions"); WHEREAS, the Company intends to file a Registration Statement on Form S-4 (the "Registration Statement") to register shares of Common Stock and other securities to be issued by Mission West-Maryland in exchange for securities of the Company pursuant to the Securities Act of 1933, as amended (the "Securities Act') and will deliver to the shareholders of the Company the proxy statement/prospectus included in such Registration Statement in connection with the special meeting of shareholders at which the shareholders will be asked to approve the purchase and sale of the Shares (the "Special Meeting"); and WHEREAS, subject to shareholder approval, the Purchasers wish to purchase from the Company, and the Company wishes to sell to the Purchasers, the Shares pursuant to the terms of the Agreement. AGREEMENT NOW, THEREFORE, the Purchasers and the Company agree as follows: 1. AUTHORIZATION AND SALE OF COMMON STOCK. 1.1. AUTHORIZATION OF THE SHARES. The Board of Directors of the Company has approved and authorized the Shares for issuance. 1.2. SALE OF THE SHARES. Subject to the terms and conditions hereof, on the Closing Date (as defined in Section 2.1), the Company will issue and sell to each Purchaser, and each Purchaser agrees, severally, to purchase from the Company, the number of Shares of Common Stock specified opposite such Purchaser's name on the Schedule of Purchasers, as amended from time to time, at a purchase price of Four Dollars and Fifty Cents ($4.50) per share for the aggregate purchase price or other consideration set forth opposite each such Purchaser's name on the Schedule of Purchasers. 1.3. SEPARATE AGREEMENTS. The Company's agreement with each Purchaser is a separate agreement, and the sale of the shares of Common Stock to each Purchaser is a separate sale. 2. CLOSING DATE; DELIVERY. 2.1. CLOSING DATE. Subject to shareholder approval, the closing of the purchase and sale of the Shares hereunder (the "Closing") with each of the Purchasers shall be held at the offices of the Company at 10050 Bandley Drive, Cupertino, California on the first business day immediately following the Special Meeting, or at such other time and place to which the Company and Purchasers of a majority of the Shares may agree upon orally or in writing (the "Closing Date"). 2.2. DELIVERY. At the Closing, the Company will deliver to each Purchaser, a certificate representing the Shares to be purchased by such Purchaser from the Company (which shall be issued in such Purchaser's name as set forth on the Schedule of Purchasers) against payment of the applicable purchase price in immediately available funds by cashier's check or by wire transfer no later than the 5:00 p.m. on the Closing Date to the Company at Mellon Bank, Pittsburgh, Pennsylvania, ABA #043 000261, for credit to: Merrill Lynch, Account #101 1730; for further credit to: Mission West Properties, Account #291 07M35, or the Company's receipt of other consideration as set forth on the Schedule of Purchasers. Upon the consummation of the Reincorporation Merger and after the SEC has declared the Registration Statement effective, each of the Shares shall be exchanged automatically for one share of Common Stock of Mission West-Maryland in the manner described in the Registration Statement. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, subject to and except as set forth in a Schedule of Exceptions (the "Schedule of Exceptions") delivered to the Purchasers, specifically identifying the relevant subsections hereof: 3.1. ORGANIZATION AND STANDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has all requisite corporate power and authority to carry on its business as presently conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its business or properties. 3.2. SUBSIDIARIES. Other than Mission West Executive Aircraft Center, Inc. and MIT Realty, Inc. (the "Company Subsidiaries") which are wholly owned by the Company, the Company does not own or control, directly or indirectly, any interest in any other corporation, association, partnership or other business entity. As used in this Section 3, references to the Company include the Company Subsidiaries. The Company is not a participant in any joint venture, partnership, or similar arrangement. 3.3. CAPITALIZATION. The authorized capital stock of the Company as of the Closing Date will consist of Two Hundred Million (200,000,000) shares of Common Stock, of which 1,698,536 shares are issued and outstanding. All such issued and outstanding shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all applicable state and federal laws concerning the issuance of securities. The Company has reserved Five Million Five Hundred Thousand (5,500,000) shares of Common Stock for issuance under the Company's 1997 Stock Option Plan (the "Plan"), of which options to acquire 605,000 shares have been granted and are outstanding as of the date hereof. The Company has also reserved Five Million Eight Hundred Thousand (5,800,000) shares of Common Stock for issuance pursuant to the Ingalls & Snyder Private Placement and has reserved the Shares for issuance hereunder. Except for the foregoing, and the other securities to be issued in connection with the Proposed Transactions, there are no outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. 3.4. AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and thereunder, and the authorization, sale and issuance of the Shares pursuant hereto has been taken or will be taken prior to the Closing Date. This Agreement, when executed and delivered by the Company, will constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.5. VALID ISSUANCE OF COMMON STOCK. The Shares that are being purchased by the Purchasers hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, and under applicable state and federal securities laws. 3.6. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any term of the Amended and Restated Articles of Incorporation (the "Articles"), or Bylaws of the Company, nor is the Company in violation or default of any term of any contract, agreement, instrument, judgment, decree, order, statute, rule or regulation (collectively, "Instruments and Laws") to which the Company is subject and a violation of which would have a material adverse effect on the condition, financial or otherwise, or operations of the Company. The execution, delivery and performance of this Agreement, and the consummation of the transactions pursuant hereto, will not result in a violation of or be in conflict with the Articles or the Bylaws of the Company or constitute, with or without the passage of time and giving of notice, a material default under any such Instrument or Law, except where such violations or defaults, singularly or in the aggregate, would not have a material adverse effect on the business, operations, property or condition (financial or otherwise) of the Company, require any consent or waiver (which has not been obtained) under any such Instrument or Law, or result in the creation of any lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such Instrument or Law. 3.7. LITIGATION. There are no actions, suits, proceedings or investigations pending or, to the best of the Company's knowledge, threatened against the Company. 3.8. GOVERNMENTAL CONSENT, ETC. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing (other than filing a proxy statement with the SEC with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement. 3.9. COMPANY SEC INFORMATION. As of their respective filing dates (except as thereafter amended) all documents that the Company has filed with the SEC ("Company SEC Documents") have complied in all material respects with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and none of the Company SEC Documents has contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading except to the extent corrected by a subsequently filed Company SEC Document. 3.10. OFFERING. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 4 of this Agreement, the offer, sale and issuance of the Shares as contemplated by this Agreement are exempt from the registration requirements under Section 5 of the Securities Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 3.11. TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, loans, liens and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 3.12. TAX RETURNS AND PAYMENTS. The Company has filed all tax returns and reports as required by law. All such returns and reports are true and correct in all material respects. The Company has paid in full all taxes and other assessments due. 3.13. APPROVAL BY BOARD OF DIRECTORS. The Board of Directors of the Company has approved this Agreement and all of the transactions contemplated by this Agreement. 3.14. FINANCIAL STATEMENTS. The Company has delivered true and accurate copies of the Company's annual report on SEC Form 10-K for the fiscal years ended November 30, 1996 and December 31, 1997 to all Purchasers who have requested such information. The Company shall furnish copies of the Registration Statement to all Purchasers requesting the same prior to the Closing. All of the financial statements set forth in such SEC reports are in accordance with the books and records of the Company, have been prepared in conformity with generally accepted accounting principles consistently applied (except as described in the notes included therein), and fairly present the financial condition of the Company as of the dates thereof and the results of its operations for the periods then ended, subject, in the case of unaudited financial statements, to year-end adjustments. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser severally represents and warrants to the Company as follows: 4.1 EXISTENCE AND POWER. Purchaser, if a corporation, partnership or limited liability company, is a corporation, partnership or limited liability company duly organized, validly existing and in good standing under the laws of the state under which it was organized, with full power and authority to enter into this Agreement and to perform its obligations under this Agreement. 4.2 AUTHORIZATION. Purchaser's execution, delivery and performance of this Agreement, and the consummation by Purchaser of the transactions contemplated by this Agreement have been duly authorized by all requisite corporate, partnership or limited liability company action of the Purchaser. 4.3 BINDING EFFECT. This Agreement has been duly executed and delivered by Purchaser, and constitutes a valid and binding agreement of Purchaser. 4.4 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Purchaser nor the consummation by Purchaser of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of the articles of incorporation, bylaws, partnership agreement or operating agreement of Purchaser; (b) require any filing with, or the obtaining of any permit, authorization, consent or approval of, any court or governmental or regulatory authority; (c) to the best knowledge of Purchaser, result in a default (give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its assets may be bound, except for defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained; or (d) to the best knowledge of Purchaser, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Purchaser; or any of its assets; PROVIDED, that the foregoing clauses (b), (c) and (d) shall not apply to requirements, defaults or violations which would not have a material adverse effect on the business, operations or financial condition of Purchaser. 4.5 BROKERS' FEES. No investment banker, broker, finder or other intermediary has been retained by or is authorized to act on behalf of Purchaser who might be entitled to any fee or commission from the Company upon consummation of the transactions contemplated by this Agreement. 4.6 SUITABILITY. Purchaser is an "accredited investor" or is represented by a "purchaser representative" as defined in Rule 501 of Regulation D promulgated under the Securities Act. 4.7 INVESTMENT. Purchaser is acquiring the number of Shares set forth opposite Purchaser's name on the Schedule of Purchasers for investment for Purchaser's own account and not with a view to, or for resale in connection with, any distribution of the Shares. Purchaser understands that the Shares have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the BONA FIDE nature of Purchaser's investment intent as expressed herein. 4.8 RULE 144. Purchaser acknowledges that, because they have not been registered under the Securities Act, the Shares constitute "restricted securities" as defined in Rule 144(a)(3) and must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the securities, the availability of certain current public information about the issuer, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of securities being sold during any three-month period not exceeding specified limitations (unless the securities satisfy the requirements of Rule 144(k)). 5. COVENANTS OF THE COMPANY. 5.1 INVESTIGATION. Upon reasonable notice, prior to the Closing Date the Company shall afford to Purchasers or to any of Purchaser's officers, employees, accountants, counsel and other authorized representatives full and complete access during normal business hours to its plants, properties, contracts, commitments, books and records (including, but not limited, to tax returns) and to the employees and accountants of the Company responsible for such matters, and shall use its reasonable best efforts to cause its representatives to furnish promptly to Purchasers such additional financial and operating data and other information as any Purchaser or its duly authorized representatives may from time to time reasonably request. 5.2 CONSENTS AND APPROVALS. Prior to the Closing Date, the Company shall use its best efforts to obtain the authorizations, consents, orders and approvals of federal, state and local regulatory bodies and officials, courts and other third parties that may be necessary for the performance of its obligations under this Agreement and the consummation of the transactions contemplated by this Agreement, and shall cooperate fully with each other in seeking promptly to obtain such authorizations, consents, orders and approvals as may be necessary for the performance of its obligations pursuant to this Agreement. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER. Except to the extent expressly waived in writing by Purchaser, all obligations of Purchaser under this Agreement are subject to the fulfillment, at or before the Closing, of all of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Each of the representations and warranties of the Company contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though made on and as of such date. 6.2 PERFORMANCE. The Company shall have performed in all material respects its obligations to be performed on or prior to the Closing pursuant to this Agreement. 6.3 SHAREHOLDER APPROVAL. The shareholders of the Company shall have approved the purchase and sale of the Shares at the Special Meeting. 6.4 LISTING REQUIREMENTS. The Company shall have complied with all rules and requirements of the American Stock Exchange and the Pacific Exchange, and the Shares shall be listed with the American Stock Exchange and the Pacific Exchange, subject to shareholder approval of the purchase and sale of the Shares. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. Except to the extent expressly waived in writing by the Company, the obligations of the Company set forth in this Agreement are subject to the fulfillment, at or before the Closing, of all of the following conditions: 7.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Each of the representations and warranties of each Purchaser contained in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though made on and as of such date. 7.2 PERFORMANCE. Each Purchaser shall have performed in all material respects each of the obligations of such Purchaser to be performed on or prior to the Closing pursuant to this Agreement. 8. GENERAL. 8.1 SURVIVAL. The covenants, representations and warranties of the parties to this Agreement shall survive the Closing for a period of one year. 8.2 BINDING EFFECT; BENEFITS; ASSIGNMENT. All of the terms of this Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the successors and permitted assigns of the Company and Purchaser. Nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies under or by reason of this Agreement except as expressly indicated in this Agreement. Neither the Company nor Purchaser shall assign any of their respective rights or obligations under this Agreement to any other person, firm or corporation without the prior written consent of the other party to this Agreement. 8.3 FURTHER ACTION. Each of the parties to this Agreement shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions of this Agreement and the transactions contemplated in this Agreement or, at or after the Closing Date, to evidence the consummation of the transactions contemplated in this Agreement. Each of the parties to this Agreement shall take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, to satisfy the conditions to this Agreement and to obtain in a timely manner all necessary waivers, consents, and approvals and to effect all necessary registrations and filings. 8.4 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California without regard to its principles governing conflicts of laws. 8.5 NOTICES. All notices, requests, demands and other communications to be given pursuant to the terms of this Agreement shall be in writing and shall be delivered personally, telecopied or sent by nationally recognized overnight delivery service, and shall be deemed given and effective when so delivered personally, telecopied or sent, as follows: (a) If to Purchaser: At the address set forth in the Schedule of Purchasers. (b) If to the Company: Mission West Properties 10050 Bandley Drive Cupertino, California 95014 Telecopier: 408/725-1626 Attention: Carl E. Berg with a copy to: Graham & James LLP 600 Hansen Way Palo Alto, California 94304 Telecopier: 650/856-3619 Attention: Alan B. Kalin Each Purchaser may change its address or telecopier number for purposes of this Agreement by prior written notice to the Company. The Company may change its address or telecopier number by prior written notice to the Purchasers. 8.6 COUNTERPARTS. This Agreement may be executed in counterparts and transmitted by facsimile, each of which when so executed and transmitted shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument. 8.7 EXPENSES. Purchasers and the Company shall pay their own respective expenses, costs and fees (including, without limitation, attorneys' and accountants' fees) incurred in connection with the negotiation, preparation, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement. 8.8 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the Company and Purchasers with respect to the transactions contemplated by this Agreement, and supersedes all prior agreements, arrangements and understandings relating to the subject matter of this Agreement. 8.9 AMENDMENT AND WAIVER. This Agreement may be amended, modified, superseded or canceled, and any of the terms, covenants, representations, warranties or conditions of this Agreement may be waived, only by a written instrument executed by the Company and Purchasers who are record holders of or subscribers for a majority of the Shares subject to this Agreement, or, in the case of a waiver, by or on behalf of the party waiving compliance. The failure of any party at any time to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or of any breach of any such term, covenant, representation or warranty or any other term, covenant, representation or warranty set forth in this Agreement. 8.10 HEADINGS. The headings of the sections and paragraphs of this agreement have been inserted for convenience or reference only and shall in no way restrict or otherwise modify any of the terms or provisions of this Agreement. 8.11 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, express or implied, is intended to or shall (a) confer on any person other than the parties hereto and their respective successors or assigns any rights (including third-party beneficiary rights), remedies, obligations or liabilities under or by reason of this Agreement or (b) constitute the parties hereto as partners or as participants in a joint venture. This Agreement shall not provide third parties with any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to the terms of this Agreement. No third party shall have any right, independent of any right that exists irrespective of this Agreement, under or granted by this Agreement, to bring any suit at law or equity for any matter governed by or subject to the provisions of this Agreement. 8.12 RULES OF CONSTRUCTION. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation or rule of construction providing that ambiguities in any agreement or other document will be construed against the party drafting such agreement or document. 8.13 SEVERABILITY. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT IN WITNESS WHEREOF, the Company and each Purchaser has executed this Agreement as of the day and year first above written. PURCHASER: (Print or type name of Purchaser) By: (signature) Name: (Print or type if signing on Purchaser's behalf) Title: (if applicable) THE COMPANY: MISSION WEST PROPERTIES By: (signature) Name: (print or type name) Title: (if applicable) APPENDIX I SCHEDULE OF PURCHASERS
NAME AND ADDRESS OF NUMBER OF SHARES PURCHASE PRICE/OTHER PURCHASERS CONSIDERATIONS
SUBSCRIPTION AND REGISTRATION FORM FOR MISSION WEST PROPERTIES COMMON STOCK I. PURCHASE OF COMMON STOCK A. By executing this Subscription and Registration Form for Mission West Properties Common Stock (the "Common Stock"), and the counterpart signature pages to the Stock Purchase Agreement (the "Purchase Agreement"), the undersigned hereby irrevocably agrees for the benefit of Mission West Properties, a California corporation (the "Company") (i) to purchase ______________ shares of the Common Stock of the Company, at a purchase price of $4.50 per share for a total purchase price of $_____________ (the "Purchase Price") and (ii) to tender the Purchase Price at the Closing (as that term is defined in the Purchase Agreement) by wire transfer no later than the 5:00 p.m., P.D.T., on ______ __, 1998 to Mellon Bank, Pittsburgh, Pennsylvania, ABA #043 000261, for credit to: Merrill Lynch, Account #101 1730; for further credit to: Mission West Properties, Account #291 07M35 or other appropriate consideration approved by the Company in advance. B. Unless the Company is instructed otherwise in writing by the undersigned, the Purchase Price will be returned promptly in the event that for any reason the purchase and sale of the Common Stock subscribed hereby is not consummated or in the event that the undersigned's subscription is rejected. II. REGISTER COMMON STOCK AS FOLLOWS: A. Corporation, Trust, Other Organization or any other Fiduciary Capacity ______________________________________________________________________ (Name of Corporation, Other Organization or Trustees) If Trust, date of Trust Instrument:___________________________________ Tax ID Number:________________________________________________________ Number of Shares:_____________________________________________________ B. Individual, Joint Tenants, Tenants in Common, Community Property: (Type of Ownership) ______________________________________________________________________ (First Name) (Last Name) (M.I.) (Social Security No.) ______________________________________________________________________ (First Name) (Last Name) (M.I.) (Social Security No.) ______________________________________________________________________ (First Name) (Last Name) (M.I.) (Social Security No.) Number of Shares:_____________________________________________________ (Joint tenancy with rights of survivorship will be presumed unless otherwise indicated.) C. Custodian for a Minor: Number of Shares:_____________________________________________________ ______________________________________________________________________ (Custodian's First Name) (Last Name) ______________________________________________________________________ (Minor's First Name) (Last Name) (Minor's Social Security No.) ______________________________________________________________________ Under the Uniform Gifts to Minor Act. (State of Residence of Minor) Number of Shares:_____________________________________________________ ______________________________________________________________________ (Custodian's First Name) (Last Name) ______________________________________________________________________ (Minor's First Name) (Last Name) (Minor's Social Security No.) ______________________________________________________________________ Under the Uniform Gifts to Minor Act. (State of Residence of Minor) Number of Shares:_____________________________________________________ ______________________________________________________________________ (Custodian's First Name) (Last Name) ______________________________________________________________________ (Minor's First Name) (Last Name) (Minor's Social Security No.) ______________________________________________________________________ Under the Uniform Gifts to Minor Act. (State of Residence of Minor) III. SUBSCRIBER'S NAME AND ADDRESS: ______________________________________________________________________ (Print or type name(s) ______________________________________________________________________ (Street Address) ______________________________________________________________________ (City, State, Country) ______________________________________________________________________ (Telephone Number) (Facsimile Number) IV. ACKNOWLEDGEMENT AND ACCEPTANCE The undersigned purchaser(s) hereby acknowledge(s) receipt of the Company's Private Placement Memorandum and hereby subscribe(s) to purchase shares of Common Stock of the Company and deliver(s) the following documents to the Company: (a) a completed and signed Subscription and Registration Form for Mission West Properties Common Stock, (b) one counterpart signature page to the Purchase Agreement; (c) a completed Prospective Investor Questionnaire (for individual investors only) and (d) a signed Substitute IRS Form W-9. DATE: BY: (Signature) DATE: BY: (Signature) EX-10.6 16 PENDING PROJECTS ACQUISITION AGREEMENT PENDING PROJECTS ACQUISITION AGREEMENT This Pending Project Acquisition Agreement ("Agreement") is entered into as of ___________, 1998 by and between Mission West Properties, a California corporation (the "Company"), Mission West Properties, L.P., a Delaware limited partnership ("MWP"), Mission West Properties, L.P. I, a Delaware limited partnership ("MWP I"), Mission West Properties, L.P. II, a Delaware limited partnership ("MWP II") and Mission West Properties, L.P. III, a Delaware limited partnership ("MWP III"; MWP, MWP I, MWP II and MWP III are referred to as the "Operating Partnership"; the Company and the Operating Partnership are referred to collectively as the "Purchaser"), on the one hand, and the individuals and entities listed on Appendix I who own the properties set forth opposite such individuals' and entities' names thereon (the "Sellers") on the other hand. RECITALS A. The Sellers are the owners of certain real property located in Santa Clara County, California, and described in attached EXHIBIT A, together with all rights, privileges, easements, and appurtenances (collectively, the "Pending Projects"); and all personal property, entitlements, licenses, permits, development rights, air rights, authorizations, certificates, surveys, plans, specifications, reports, studies, test results and all unexpired warranties and guaranties given by unaffiliated third parties owned by the Sellers and pertaining to or used exclusively in connection with the Pending Projects (the "Personal Property"); (the Pending Projects and Personal Property shall be collectively referred to herein as the "Pending Projects"). B. In connection with the Acquisition Agreement dated as of May 14, 1998 (the "Acquisition Agreement"), to which the Purchaser and the Sellers all are parties, the Operating Partnership has agreed to issue L.P. Units to all of the limited partners therein, the Company has agreed to become the general partner of the Operating Partnership, and the Company has agreed to permit holders of L.P. Units to exchange them for shares of the Company's common stock ("Common Stock") under certain circumstances. C. The Operating Partnership is governed by the Operating Partnership Agreement and the Acquisition Agreement. D. The Purchaser desires to acquire the Pending Projects and the Sellers desire to convey the Pending Projects on the terms and conditions of this Agreement, and pursuant to the Acquisition Agreement have agreed that the Company or the Operating Partnership shall acquire each of the 12 buildings comprising the Pending Projects as soon as such building (each an "acquired property" herein) has been completed and fully leased by issuing additional L.P. Units to the Sellers at a value of $4.50 per L.P. Unit, or at the Sellers' option, they may receive cash or a combination of cash and L.P. Units. AGREEMENT For good and valuable consideration, the receipt and adequacy of which are acknowledged, the parties agree as follows: 1. ACQUISITION. At the Closing Date (as defined herein) for the acquisition of each of the buildings included in the Pending Projects, the Sellers who own that building (as indicated on Appendix I) (the "Participating Sellers") agree to convey, and the Purchaser agrees to acquire, such property subject to the terms and conditions of this Agreement. The Sellers' shall appoint one representative to act as their agent in connection with the acquisition and conveyance of each acquired property (the "Sellers' Representative"). The Sellers' Representative is authorized to receive written notices from the Purchaser on behalf of all of the Sellers of such property. 2. ACQUISITION VALUE. The acquisition value for the conveyance of each of the buildings in the Pending Projects will be the amount set forth in Appendix I, subject to adjustment if the actual average monthly rental per square foot for the term of the lease or leases in effect with respect thereto as of the Closing Date (as defined herein) differs from the projected rental rate set forth in Appendix I. Consequently, the actual Acquisition Value will be equal to the acquisition value set forth in Appendix I multiplied by the ratio of the actual average monthly rental rate per square foot divided by the projected rental rate set forth in Appendix I (the "Acquisition Value"): 3. CONSIDERATION. (a) ITEMS. The Purchaser shall provide the following items of consideration to the Sellers upon the Purchaser's acquisition of the Pending Projects: (i) the Acquisition Value of each building as set forth in Appendix I, as such amount shall be adjusted as of the Closing Date (as defined herein), payable, at the election of the Participating Sellers, as provided in Section 3(b), (A) in cash in an amount equal to (x) such Acquisition Value minus (y) the sum of the principal amount of all debt encumbering the building as of the Closing Date, and all accrued, unpaid interest and other financing charges applicable to such debt (the "Net Acquisition Value"), or (ii) through the issuance to the Participating Sellers of that number of L.P. Units (with each receiving his, her or its proportionate share based on their ownership interests in the acquired property) equal to the quotient obtained by dividing the Net Acquisition Value by $4.50; (ii) the assumption of all indebtedness encumbering the acquired property as of the Closing Date; and (iii) assumption and payment of all prorations and reimbursements which the Purchaser is obligated to pay pursuant to Section 10. (b) The Participating Sellers shall decide among themselves whether to receive cash or L.P. Units, or both, upon their conveyance of the acquired property to the Purchaser, and through one representative who they select, shall deliver to the Purchaser, a written notice of election specifying the number of L.P. Units, the amount of cash, or the number and amount of each, to be delivered to each Participating Seller not less than __ days prior to the Closing Date. (c) The purchaser of each acquired property at the Closing may be the Operating Partnership or the Company; provided that pursuant to the terms of the Operating Partnership Agreement the Company shall contribute such property to the Operating Partnership in exchange for additional partnership interests as provided therein. The Purchaser shall notify the Sellers which entity will be acquiring the property not less than __ days prior to the Closing Date. 4. CLOSING DATE. The acquisition of each building in the Pending Projects shall occur on the __ business day after the last to occur of (i) the completion of the building and receipt of required occupancy permits; (ii) the execution of written leases with respect to 100% of the rentable square footage in such building, (iii) satisfaction of all closing conditions set forth in Section 5 and 6 as set forth in certificates which each party shall deliver to the other, and (iv) the Participating Sellers' delivery to the Purchaser of their election as to the form of consideration they intend to receive for the acquired property (the "Closing Date"). 5. CONDITIONS TO THE PURCHASER'S PERFORMANCE. The Purchaser's obligation to acquire any of the buildings included in the Pending Projects is subject in each instance to the following conditions precedent: (a) The Sellers' representations and warranties in this Agreement being correct in all material respects as of each Closing Date; (b) The Sellers' compliance with the provisions of Section I5 with respect to such acquired property; (c) There shall not have occurred after the date hereof any material adverse physical change in the acquired property, other than as contemplated by the parties in connection with the completion of the property, from its condition as of the date hereof. (d) The Purchaser shall not have elected to terminate such obligation in conformity with the provisions of Section II or Section 12. The foregoing conditions shall be for the benefit of, and may be waived by, the Purchaser. Upon the non-satisfaction of any of the foregoing conditions, unless waived by the Purchaser, the Purchaser's obligations to acquire the particular property shall terminate. 6. CONDITIONS TO THE SELLERS' PERFORMANCE. The Sellers' obligation to convey each building included in the Pending Projects is subject in each instance to the following conditions precedent: (a) The Purchaser's representations and warranties in this Agreement being correct in all material respects as of each Closing Date; and (b) The Purchaser's performance of all of its obligations to acquire such property under this Agreement. (c) The Purchaser shall not have elected to terminate such obligation in conformity with the provisions of Section II or Section 12. The foregoing conditions shall be for the benefit of, and may be waived only by, the Participating Sellers with respect to each acquired property. Upon the non-satisfaction of any of the foregoing conditions, unless waived by such Participating Sellers, their obligation to convey the particular property shall terminate. 7. ACCESS. (a) Access to the Pending Projects prior to the Closing Date shall be given to the Purchaser during normal business hours upon at least one (1) business day's prior notice to the Seller. (b) The Purchaser and the Purchaser's contractors and consultants shall have the right, from the date hereof until the Closing Date for an acquired property, to enter onto such property, at its own cost and risk, for any purposes, including but not limited to, inspecting the property. The Purchaser's contractors and consultants shall be duly licensed and insured. As a condition of such entry, the Purchaser shall provide evidence reasonably satisfactory to the Sellers of the existence of general liability insurance prior to any such entry, inspection, test or study. The Sellers agree to cooperate reasonably with the Purchaser in the inspection of the Pending Projects and agree to make available to the Purchaser all information in the Sellers' possession or control pertaining to the condition of the Pending Projects, including engineering and environmental reports, studies, tests, monitoring results, and related documentation. (c) The Purchaser shall indemnify and defend the Sellers against and hold the Sellers harmless from all losses, costs, damages, liabilities, and expenses, arising out of any personal injury or physical damage to the Pending Projects in connection with the Purchaser's inspection of or presence, prior to the Closing Date, on the Pending Projects. Furthermore, the Purchaser shall indemnify, defend and hold the Sellers harmless from and against any mechanic's lien claims that may arise in connection with the Purchaser's inspection of or presence, prior to the Closing Date, on the Pending Projects. 8. TITLE. Title to the Pending Projects shall be such as will be insured, solely in the name of the applicable Sellers as good and marketable title by a title insurance company acceptable to the Purchaser at regular rates pursuant to the standard stipulations and conditions of the 1970 Form B ALTA Owner's Title Insurance Policy as revised in 1984, and as the same may be modified by such endorsements, affirmative coverage and other matters which have been requested by the Purchaser prior to each of the Closing Dates, free and clear of all liens and encumbrances, except those liens and encumbrances which the Purchaser agrees to accept and/or assume in writing as of each Closing Date. 9. CLOSE OF THE PURCHASE AND SALE. (a) CONVEYANCE OF TITLE. At each close of escrow, good and marketable title to the Pending Projects shall be conveyed by the Sellers to the Purchaser by the Deed (as defined below) subject only to the following permitted liens: (i) A lien for real property taxes and assessments not then delinquent; (ii) Matters of title respecting the Pending Projects approved or deemed approved by the Purchaser in accordance with this Agreement; (iii) Title and survey matters which would be disclosed by an ALTA survey and approved or deemed approved by the Purchaser; (iv) Matters affecting the condition of title to the Pending Projects created by or with the written consent of the Purchaser; and (v) Indebtedness for borrowed funds incurred by the Sellers with their written agreement. As of each of the Closing Dates, all of the Sellers' right, title and interest in and to the Personal Property shall be conveyed by the Sellers to the Purchaser by the Warranty Bill of Sale in the form attached hereto as EXHIBIT B (the "Bill of Sale"). (b) THE SELLERS' DELIVERIES ON THE CLOSING DATE. The Sellers shall deliver to the Purchaser on every Closing Date the following documents: (i) Statutory grant deeds executed and acknowledged by the Sellers (the "Deed"); (ii) The Sellers' affidavits of non-foreign status as contemplated by Section 1445 of the Internal Revenue Code of 1986, as amended, or a release from the Internal Revenue Service in form and content reasonably acceptable to the Purchaser, indicating that the Purchaser is excused from any withholding requirements under federal law ("FIRPTA Affidavit") executed by the Sellers, but undated; (iii) The Sellers' affidavits as contemplated by Revenue and Taxation Code Section 18662 or a release from the California Franchise Tax Board in form and content reasonably acceptable to the Purchaser, indicating that the Purchaser is excused from any withholding requirements under California law (the "Withholding Affidavit") executed by the Sellers, but undated; (iv) Bills of Sale duly executed by the Sellers, but undated; and (v) Such other documents as the Purchaser may reasonably require in order to close the transactions in accordance with the terms hereof. (c) PURCHASER'S DELIVERIES ON THE CLOSING DATE. The Purchaser shall to the Sellers on every Closing Date the following: (i) The consideration in accordance with Section 3(a) together with the Purchaser's share of closing costs; and (ii) Such other documents as the Sellers may reasonably require to close the transactions in accordance with the terms hereof. (d) CLOSING COSTS. The closing costs shall be allocated and prorated as follows: (i) THE SELLERS SHALL PAY: (A) any costs of clearing title to the Pending Projects; (B) any document preparation fees for the Deed; and (C) all documentary and/or real property transfer taxes due upon the transfer of the Pending Projects. (ii) THE PURCHASER SHALL PAY: (A) all charges in connection with the issuance of a title policy; and (B) the recording charges in connection with recordation of the Deed. Any closing costs not addressed herein shall be allocated in accordance with the custom and practice then prevailing in Santa Clara County. (iii) REAL ESTATE TAXES, BONDS AND ASSESSMENTS. Current real property taxes, any current installment of any bond or assessment that constitutes a lien on the Pending Projects, rents and license fees, if any, including any additional property taxes or installments of any bond or assessment lien that may be assessed after the Closing Date, but that relate to a period prior to the Closing Date, regardless of when notice of those taxes, dues or assessments are received or who receives the notice shall be prorated as of the Closing Date. 10. POSSESSION. Exclusive possession of the Pending Projects shall be delivered to the Purchaser on each Closing Date. 11. DAMAGE AND DESTRUCTION. (a) In the event of damage or destruction of a building included in the Pending Projects or any portion of the Pending Projects prior to a Closing Date in an amount not exceeding ______________ Dollars ($__________), the Purchaser and the Sellers shall consummate the transaction, provided that the Sellers shall assign to the Purchaser such Sellers' rights under any insurance policy covering the damage or destruction and shall indemnify the Purchaser with respect to any costs incurred by the Purchaser in repairing and restoring the building after the Closing Date that are not paid by the insurance up to the amount of _______________ Dollars ($___________) or may, at the Sellers' election, grant the Purchaser a credit in said amount against the Acquisition Value. (b) In the event of damage or destruction of a building included in the Pending Projects or any portion of the Pending Projects prior to the Closing Date in an amount in excess of ______________ Dollars ($__________), the Purchaser may elect within ten (10) days following such event of damage or destruction, either to terminate its obligation to acquire such property under the terms of this Agreement upon written notice to the Sellers, or to consummate the transaction, in which event the Sellers shall assign to the Purchaser the Sellers' rights under any insurance policy covering the damage or destruction, but without the indemnity provided in subSection (a) above. The Purchaser's failure to affirmatively elect whether to terminate or consummate the transaction within said ten (10) day period shall be deemed the Purchaser's election to consummate the transaction. If the Purchaser elects to terminate its obligation to acquire such property under the terms of this Agreement pursuant to this provision, neither party shall have any further obligations to acquire or convey such property under this Agreement. 12. CONDEMNATION. (a) If any portion of a building included in the Pending Projects is taken by condemnation or eminent domain or is the subject of a threatened or pending condemnation or eminent domain proceeding that has not been consummated prior to the Closing Dates resulting in a decrease in the value of the Pending Projects in an amount not exceeding ______________ Dollars ($__________), the Purchaser and the Sellers shall consummate the transaction, provided that the Sellers shall assign to the Purchaser such Sellers' rights to all awards for the condemnation or taking and shall indemnify the Purchaser with respect to any costs incurred by the Purchaser in repairing and restoring the property that are not paid by the condemnation awards up to the amount of ______________ Dollars ($_________) or may, at the Sellers' election, grant the Purchaser a credit in such amount against the consideration payable for the acquired property. (b) If any portion of a building included in the Pending Projects is taken by condemnation or eminent domain or is the subject of a threatened or pending condemnation or eminent domain proceeding that has not been consummated prior to the Closing Date resulting in a decrease in the value of such property in an amount in excess of ____________ Dollars ($_______), the Purchaser may elect within ten (10) days following such event, either to terminate its obligation, to acquire the property under this Agreement upon written notice to the Sellers, or to consummate the transaction, in which event the Sellers shall assign to the Purchaser such Sellers' rights to all awards for the condemnation or taking, but without the indemnity provided in subsection (a) above. The Purchaser's failure to affirmatively elect whether to terminate or consummate the transaction within said ten (10) day period shall be deemed the Purchaser's election to consummate the transaction. If the Purchaser elects to terminate its obligation to acquire the property under this Agreement pursuant to this provision, neither party shall have any further obligations to acquire or convey such property under this Agreement, except as otherwise provided in this Agreement. 13. SELLERS' REPRESENTATIONS AND WARRANTIES. The Sellers jointly and severally represent and warrant to the Purchaser that as of the date of this Agreement and as of each of the respective Closing Dates: (a) The Sellers have full right, power and authority to enter into and perform the Sellers' obligations under this Agreement in accordance with its terms; (b) None of the Sellers is a "foreign person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1954, as amended, and is a "resident" of the State of California within the meaning of Section 18662 of the California Revenue and Taxation Code, as amended; (c) There is not pending, or to the Sellers' actual knowledge, threatened, any litigation with respect to the Pending Projects (excluding any properties conveyed to the Purchaser hereunder prior to the Closing Date); and (d) Except as disclosed to the Purchaser and to the Sellers' actual knowledge, no toxic or hazardous chemicals, waste, or substances of any kind have ever been spilled, disposed of, or stored on, under, or at the Pending Projects in violation of any applicable law, rule or regulation (excluding any properties conveyed to the Purchaser hereunder prior to the Closing Date). The continued accuracy in all respects of the Sellers' foregoing representations and warranties of the Sellers shall be a condition precedent to the Purchaser's obligation to close the acquisition of each property. All such representations and warranties contained in this Agreement shall be deemed remade as of the Closing Dates for each acquired property. 14. PURCHASER REPRESENTATIONS AND WARRANTIES. The Purchaser represents and warrants to the Sellers that as of the date of this Agreement and as of each of the respective Closing Dates the Purchaser has full right, power and authority to buy the Pending Projects from the Sellers and to perform the Purchaser's obligations under this Agreement in accordance with its terms. 15. SELLERS' COVENANTS. Commencing on the date hereof and continuing with respect to each building included in the Pending Projects until the Closing Date for the acquisition of such property: (a) The Sellers shall not create or consent to any liens, encumbrances, or easements on or affecting the Pending Projects, except for the permitted liens described in Section 9(a) as contemplated by the submitted plans and issued permits for such Projects and for secured debt. (b) The Sellers shall not permit any act of waste or act that would materially to diminish the value of the Pending Projects for any reason, except that caused by ordinary wear and tear. (c) The Sellers will promptly (after learning of same) notify the Purchaser in writing of any adverse material changes affecting the physical condition of the Pending Projects. (d) The Sellers shall complete and maintain the Pending Projects in conformity with applicable building codes, laws, and sound construction and property management practices. (e) Unless the acquisition of an acquired property is sooner terminated by the Purchaser (when permitted under this Agreement), the Sellers will not make, accept, negotiate or otherwise pursue any offers for the disposition (whether directly, through a joint venture, ground lease, financing, or otherwise) of any interest in the Pending Projects. 16. "AS-IS" SALE. Except as expressly set forth herein, the Purchaser acknowledges that it is buying the Pending Projects in "As-Is, Where-Is" condition, in reliance on its own investigations. 17. BROKERS AND FINDERS. The Purchaser and the Sellers each represent and warrant to the other party that no broker or finder has been utilized in the purchase and sale contemplated by this Agreement. In the event of a claim for broker's fees, finder's fees, commissions or other similar compensation in connection herewith: (i) the Purchaser, if such claim is based upon any agreement alleged to have been made by the Purchaser, shall indemnify, defend, and hold the Sellers harmless (using counsel reasonably satisfactory to the Sellers) from and against any and all damages, liabilities, costs, expenses and losses (including, but not limited to, attorneys' fees and costs) that the Sellers sustain or incur by reason of such claim; and (ii) the Sellers, if such claim is based upon any agreement alleged to have been made by the Sellers, shall indemnify, defend and hold the Purchaser harmless (using counsel reasonably satisfactory to the Purchaser) from and against any and all damages, liabilities, costs, expenses and losses (including, but not limited to, attorneys' fees and costs) that the Purchaser sustains or incurs by reason of such claim. 18. SURVIVAL. Except to the extent specifically provided to the contrary hereunder, each and every covenant, agreement, representation and warranty of each of the parties hereto shall survive the Closing Date and shall not merge with the Sellers' deliveries of the Deeds or other documents to the Purchaser. 19. ASSIGNMENT; SUCCESSORS AND ASSIGNS. The Purchaser shall have the right to assign this Agreement with the prior written consent of the Sellers' Representative or all Sellers, which consent shall not be unreasonably withheld. This Agreement, and the terms, covenants and conditions herein contained, shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs and assigns. 20. NOTICES. All notices to be given under this Agreement shall be in writing and sent by: (a) certified mail, return receipt requested, in which case notice shall be deemed delivered three (3) business days after deposit, postage prepaid in the United States Mail, (b) a nationally recognized overnight courier, in which case notice shall be deemed delivered one (1) business day after deposit with that courier, or (c) facsimile or similar means if a copy of the notice is also sent by United States Certified Mail, in which case notice shall be deemed delivered on transmittal by facsimile or other similar means, provided that a transmission report is generated by reflecting the accurate transmission of the notices, as follows: If to the Purchaser: Mission West Properties 10050 Bandley Drive Cupertino, CA 95014 Attention: Independent Directors Committee Fax No. (408) 725-1626 If to the Sellers: c/o Berg & Berg Enterprises, Inc. 10050 Bandley Drive Cupertino, CA 95014 Attention: Carl E. Berg Fax No. (408) 725-1626 21. ARBITRATION OF DISPUTES. Any dispute or claim in law or equity solely between the Purchaser and Sellers arising out of this Agreement shall be decided by neutral, binding arbitration. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association ("AAA") then obtaining using a single arbitrator. The decision of the arbitrator shall be final and binding. In all other respects, the arbitration shall be conducted in accordance with Part III, Title 9 of the California Code of Civil Procedure. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The parties shall have the right to discovery in accordance with code of Civil Procedure Section 1283.05. The arbitration shall take place in the County of Santa Clara. The filing of a judicial action to enable the recording of a notice of pending action, for order of attachment, receivership, injunction, or other provisional remedies, shall not constitute a waiver of the right to arbitrate under this provision. 22. ATTORNEYS' FEES. If any arbitration or court action is commenced between the parties, the prevailing party in that arbitration or court action shall be entitled to recover from the non-prevailing party all reasonable attorneys' fees and costs. 23. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties to this Agreement and shall not be modified in any manner except by an instrument in writing executed by the parties or their respective successors in interest. 24. SEPARATE CONTENTS. The acquisition and conveyance of the real property and improvements constituting each of the buildings included in the Pending Projects or identified on Appendix I is a separate transaction, and the parties' obligations with respect to each such property constitutes a separate contract under this Agreement. 25. SEVERABILITY. If any term or provision of this Agreement shall, to any extent, be held invalid or unenforceable, the remainder of this Agreement shall not be affected. 26. WAIVERS. A waiver or breach of covenant or provision in this Agreement shall not be deemed a waiver of any other covenant or provision in this Agreement, and no waiver shall be valid unless in writing and executed by the waiving party. An extension of time for performance of any obligation or act shall not be deemed an extension of the time for performance of any other obligation or act. 27. CONSTRUCTION. The section headings and captions of this Agreement are, and the arrangement of this instrument is, for the sole convenience of the parties to this Agreement. The section headings, captions, and arrangement of this instrument do not in any way affect, limit, amplify, or modify the terms and provisions of this Agreement. The singular form shall include plural, and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties have prepared it. Unless otherwise indicated, all references to sections are to this Agreement. All exhibits referred to in this Agreement are attached to it and incorporated in it by this reference. Capitalized terms used in this Agreement have the meaning ascribed to them in the Acquisition Agreement under indicated otherwise. 28. MERGER. All of the terms, provisions, representations and covenants of the parties under this Agreement shall survive the Closing Dates and shall not be merged in the Deeds. 29. COUNTERPARTS. This Agreement may be executed in one or more counterparts. 30. TIME OF THE ESSENCE. Time is of the essence in this Agreement. 31. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of California. 32. EXHIBITS. Each exhibit to which reference is made in this Agreement is deemed incorporated into this Agreement in its entirety by such reference. The exhibits to this Agreement are the following: Exhibit A Legal Description of Pending Projects Exhibit B Warranty Bill of Sale IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. PURCHASER: SELLERS: By: By: Its: Its: By: By: Its: Its: APPENDIX I LIST OF PENDING PROJECTS, OWNERS AND INITIAL ACQUISITION VALUE
Projected Projected Average Triple Monthly Approximate Net Rental Rate Acquisition PENDING PROJECT AND BUILDING Annual Per SQUARE VALUE OWNERS SIZE BASE RENT FOOT GREAT OAKS 54,240 $ 715,968 $1.10 $ 5,226,043 Carl Berg and Clyde Berg MEMOREX DRIVE 52,800 $ 535,560 $0.85 $ 3,347,250 Carl Berg and Clyde Berg RICHARD AVE. 58,740 $ 599,148 $0.85 $ 3,744,675 Carl Berg and Clyde Berg AUTOMATION PARK [______________] Bldg. 1 114,028 $1,778,036 $1.30 $12,705,971 Bldg. 2 80,640 $1,257,984 $1.30 $ 8,985,600 Bldg. 3 80,640 $1,257,984 $1.30 $ 8,985,600 Bldg. 4 61,056 $ 952,474 $1.30 $ 6,803,386 L'AVENIDA Baccarat Fremont, LLC, a California limited liability company, Thelmer Aalgaard and Patricia Aalgaard, husband and wife, and Clyde Berg, Trustee of the 1981 Kara Ann Berg Trust Bldg. 1 94,134 $3,219,382 $2.85 $18,937,541 Bldg. 2 101,622 $3,475,724 $2.85 $20,445,435 Bldg. 3 93,314 $3,191,339 $2.85 $18,772,582 Bldg. 4 126,236 $4,317,271 $2.85 $25,395,717 Bldg. 5 98,166 $3,357,277 $2.85 $19,748,688
EXHIBIT A LEGAL DESCRIPTION OF THE PENDING PROJECTS THE LAND REFERRED TO IN THIS REPORT IS SITUATED IN THE STATE OF CALIFORNIA, AND IS DESCRIBED AS FOLLOWS: GREAT OAKS: This land is located in south San Jose, California and consists of approximately 3 gross acres of unimproved land. The land is described by the following Assessor's Parcel Number: 706-02-025 MEMOREX DRIVE AND RICHARD AVE.: This land is located in north Santa Clara, California and consists of approximately a 6 acre portion of land. This portion of land is described by the following Assessor's Parcel Number: 224-65-006 AUTOMATION PARKWAY: This land is located in north San Jose, California and consists of approximately 21 gross acres of unimproved land. The land is described by the following Assessor's Parcel Numbers: Portions of 244-13-10, and 244-15-18. L' AVENIDA: This land is located in Mountain View, California and consists of approximately 32 gross acres of unimproved land. The land is described by the following Assessor's Parcel Numbers: 116-16-63, 116-16-60, 116-16-65, 116-16-59, 116-16-75, 116-16-70, 116-16-69, 116-16-74 EXHIBIT B WARRANTY BILL OF SALE This Warranty Bill of Sale ("Bill of Sale") is executed as of March _, 1998 by the individuals and entities listed on Appendix I ("Sellers") in favor of Mission West Properties, a California corporation (the "Company"), Mission West Properties, L.P. ("MWP"), Mission West Properties, L.P. I ("MWP I"), Mission West Properties, L.P. II ("MWP II"), Mission West Properties, L.P. III ("MWP III, and collectively with the Company, MWP, MWP I and MWP II, the "Purchaser") RECITALS A. The Sellers and the Purchaser have entered into that certain Pending Projects Acquistion Agreement dated of even date herewith (the "Purchase Agreement"), in which the Purchaser has agreed to purchase real property in Santa Clara County, State of California, more particularly described in attached Schedule 1, (the "Pending Projects") incorporated in this Bill of Sale. B. Pursuant to the Purchase Agreement, the Sellers have agreed to transfer to the Purchaser all the Sellers' right, title and interest in all licenses, permits, development rights, air rights, authorizations, certificates, surveys, plans, specifications, reports, studies, test results and all unexpired warranties and guaranties given by unaffiliated third parties owned by the Sellers and pertaining to or used exclusively in connection with the Pending Projects (collectively, "Personal Property") concurrent with the Closing Dates (as defined in the Purchase Agreement). For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Sellers agree as follows: AGREEMENT 1. TRANSFER. Effective as of the Closing Dates, the Sellers hereby transfer, sell, assign, grant and convey to the Purchaser all of the Sellers' right, title, and interest in the Personal Property. 2. SELLERS'S COVENANTS. The Sellers covenant to the Purchaser that the Sellers have good and marketable title to the Personal Property, free of all liens, and has the right to transfer the Personal Property. The Sellers further agree that the Sellers will defend the Purchaser's title to the Personal Property against the demands of anyone claiming through the Sellers. 3. ATTORNEYS' FEES. If any suit, action or other proceeding is instituted to enforce the rights of either party under this Bill of Sale, the successful party, as adjudicated by a court, shall be entitled to reasonable attorney fees and court costs. 4. GOVERNING LAW. This Bill of Sale shall be governed and construed in accordance with California law. The Sellers have executed this Bill of Sale as of the date first above written. SELLERS: By: Its: By: Its: EX-10.7 17 BERG LANDHOLDINGS OPTION AGREEMENT BERG LAND HOLDINGS OPTION AGREEMENT OPTIONEE: Mission West Properties, a California corporation, 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 OPTIONOR: , a California corporation ------------------------------- PROPERTY: King Ranch Business Park, San Jose, CA Hellyer and Piercy, San Jose, CA Fremont and Cushing, Fremont, CA Dated: , 1998 ---------------- BERG LAND HOLDINGS OPTION AGREEMENT This Berg Land Holdings Option Agreement ("Agreement") is entered into as of _________ __, 1998 by and between Mission West Properties, a California corporation (the "Company"), Mission West Properties, L.P., a Delaware limited partnership ("MWP"), Mission West Properties, L.P. I, a Delaware limited partnership ("MWP I"), Mission West Properties, L.P. II, a Delaware limited partnership ("MWP II") and Mission West Properties, L.P. III, a Delaware limited partnership ("MWP III"; MWP, MWP I, MWP II and MWP III are referred to as the "Operating Partnership"; the Company and the Operating Partnership are referred to collectively as the "Optionee"), on the one hand, and the individuals and entities listed on Appendix I who own or have the right to acquire the properties set forth opposite such individuals' and entities' names thereon (the "Optionors") on the other hand. RECITALS A. The Optionors are the owners of, or have the right to acquire, three (3) tracts of real property located in Santa Clara County and Alameda County, California, commonly known as King Ranch Business Park, Hellyer and Piercy, and Fremont and Cushing, and described in attached Exhibit A, together with all rights, privileges, easements, and appurtenances (collectively, the "Berg Land Holdings"); and all personal property, entitlements, licenses, permits, development rights, air rights, authorizations, certificates, surveys, plans, specifications, reports, studies, test results and all unexpired warranties and guaranties given by unaffiliated third parties owned by the Optionors and pertaining to or used exclusively in connection with the Berg Land Holdings (the "Personal Property"); (the Berg Land Holdings and Personal Property shall be collectively referred to herein as the "Berg Land Holdings"). B. In connection with the Acquisition Agreement dated as of May 14, 1998 (the "Acquisition Agreement"), to which the Optionee and the Optionors all are parties, the Operating Partnership has agreed to issue L.P. Units to all of the limited partners therein, the Company has agreed to become the general partner of the Operating Partnership, and the Company has agreed to permit holders of L.P. Units to exchange them for shares of the Company's common stock ("Common Stock") under certain circumstances. C. The Operating Partnership is governed by the Operating Partnership Agreement and the Acquisition Agreement. D. The Optionee desires to have an option to acquire the Berg Land Holdings and the Optionors desire to grant such an option to Optionee on the terms and conditions of this Agreement, and pursuant to the Acquisition Agreement have agreed that the Company or the Operating Partnership shall have the option to acquire each of the buildings comprising the Berg Land Holdings as soon as such building (each an "acquired property" herein) has been completed and fully leased by issuing either additional L.P. Units to the Optionors based upon the Acquisition Value (as defined below), or at the Optionors' option, they may receive cash or a combination of cash and L.P. Units equal to the Acquisition Value. E. This Agreement shall become effective (the "Option Effective Date"). AGREEMENT NOW THEREFORE, in consideration of the mutual covenants and promises of the parties, the parties hereto agree as follows: 1. OPTION. Optionor grants Optionee an exclusive option ("Option") to purchase each of the acquired properties comprising the Berg Land Holdings. The Option shall be "rolling" and shall apply to each acquired property. The fact that Optionee does not exercise the Option with respect to a given acquired property shall not impact Optionee's right to exercise the Option with respect to a subsequent acquired property. The Optionors' shall appoint one representative to act as their agent in connection with the acquisition and conveyance of each acquired property (the "Optionors' Representative"). The Optionors' Representative is authorized to receive written notices from the Optionee on behalf of all of the Optionors of such property. This Option does not create any right to acquire any portion of the Berg Land Holdings prior to the development of a completed building thereon, fully leased. 2. TERM OF OPTION. The term of the Option ("Term") shall commence on the Option Effective Date and, unless Optionee has timely exercised the Option in accordance with the provisions hereof, shall terminate on the sooner of (i) the "Percentage Interest Date" (as defined below), or (ii) 11:59 p.m. on December 31, 2010. The Percentage Interest Date shall be the date on which the "Berg Group" as defined in the Acquisition Agreement no longer owns or has the right to acquire 65% of the Company's Common Stock, determined as though all L.P. Units owned in the aggregate by the Berg Group were exchanged for shares of Common Stock at the Exchange Factor. 3. CONSIDERATION. As consideration for the Option, Optionee has paid to Optionor the sum of Ten and No/100 Dollars ($10. 00) ("Option Consideration"), the receipt and sufficiency of which are hereby acknowledged. 4. DEVELOPMENT OF BERG LAND HOLDINGS. Optionor intends to develop the Berg Land Holdings and construct thereon various industrial buildings, subject to obtaining the necessary governmental permits and approvals. This development will occur over several years and shall be accomplished in a manner that Optionor determines, in its sole discretion, is prudent based upon market conditions. This development will occur over several years and shall be accomplished in a manner that Optionor determines, in its sole discretion, is prudent based upon market conditions. The properties commonly known as Hellyer and Piercy and Fremont and Cushing are not yet owned by Optionors, but are subject to acquisition agreements wherein the Optionors have the right to acquire such properties. If the Optionors decide not to exercise their rights to acquire such properties, then such properties shall no longer be deemed to be part of the Berg Land Holdings and shall no longer be subject to the terms of this Option. 5. EXERCISE. The exercise of the Option with respect to a given acquired property must occur within thirty (30) days of receipt of the "Completion Notice" from Optionor's Representative to Optionee. The Completion Notice shall be delivered by Optionor's Representative to Optionee with respect to each acquired property in the Berg Land Holdings once the following has occurred (i) the completion of the building and receipt of required occupancy permits; (ii) the execution of written leases with respect to one hundred percent (100%) of the rentable square footage in such building, and (iii) the Optionors' election as to the form of consideration they intend to receive for the acquired property. Optionee may exercise the Option at any time during such thirty (30)-day period by written notice ("Notice") to Optionor, stating the date upon which Optionee desires to close escrow (provided that escrow shall not close later than the sixtieth (60th) day following receipt of the Completion Notice). 6. ACQUISITION VALUE. In the event that Optionee exercises the Option, the Acquisition Value for the subject acquired property shall be equal to (i) the full construction cost of all improvements on or servicing the acquired property, plus (ii) 10% of the amount set forth in subsection (i), plus (iii) the acquisition value of the parcel on which the improvements were constructed as set forth in the schedule below and interest at LIBOR from January 1, 1998 until the close of escrow, plus (iv) property tax and assessment payments on such property prorated from January 1, 1998, plus (v) interest at LIBOR on the amounts set forth in subsections (i) and (iv) from the date paid by Optionor and ending at the close of escrow, minus (v) the sum of the principal amount of all debt encumbering the subject acquired property as of the closing. Optionee shall assume all assessments that are a lien against the subject acquired property. The acquisition value of each parcel of the Berg Land Holdings shall be as follows:
- ------------------------------------------------------------------ LOCATION: ACQUISITION VALUE PER ACQUISITION VALUE PER SQUARE FOOT OF ACRE OF ACQUIRED ACQUIRED PROPERTY: PROPERTY: - ------------------------------------------------------------------ - ------------------------------------------------------------------ King Ranch $10.00 per square foot $435,600 Business Park - ------------------------------------------------------------------ - ------------------------------------------------------------------ Hellyer and Piercy $8.50 per square foot $370,260 - ------------------------------------------------------------------ - ------------------------------------------------------------------ Fremont and Cushing $20.00 per square foot $871,200 - ------------------------------------------------------------------
7. PAYMENT OF ACQUISITION VALUE. The Acquisition Value shall be paid in cash or L.P. Units, at the election of the Optionor's Representative. To the extent the Optionor's Representative elects to receive L.P. Units, the number of L.P. Units (N) paid to Optionor shall be determined as follows: (A-B)/C=N; where: A = Acquisition Value B = Any cash portion of the Acquisition Value paid to Optionor C = The average market value of the Common Stock over the 30 trading-day period preceding the exercise of the Option. 8. AGREEMENT OF PURCHASE AND SALE. Within seven (7) days after exercise of the Option by Optionee, Optionee and Optionors each shall execute an agreement of purchase and sale for the purchase of the subject acquired property by Optionee from Optionors. The Purchase Agreement shall be in the form of the agreement of purchase and sale ("Form Purchase Agreement) attached hereto as Exhibit B; provided, however, the Form Purchase Agreement shall be modified to reflect (a) the date of execution of the Purchase Agreement, (b) the method of payment and the amount of the Acquisition Value, and (c) the outside date of the close of escrow, and (d) the legal description of the acquired property to be transferred. 9. REPRESENTATIONS AND WARRANTIES. Optionors warrant that Optionors are the owners of, or have a valid and binding agreement to acquire, the Berg Land Holdings, and have (or will have prior to the close of escrow under the Purchase Agreement) insurable fee simple title to the acquired property clear of restrictions, leases, liens, and other encumbrances, except as permitted in the Purchase Agreement. If this option is exercised by Optionee, Optionors will convey title to the acquired property by California statutory grant deed. 10. ASSIGNMENT. Optionee shall have the right to assign the Option with the prior consent of Optionors (whose consent shall be subject to their sole and absolute discretion). 11. NO TRANSFER OF PARCEL. From and after the Option Effective Date, unless and until this Agreement is terminated, Optionors shall not sell or convey or grant an option to sell or convey all or any portion of the Berg Land Holdings if such sale, conveyance or grant might in any way impair Optionors' ability to transfer the Berg Land Holdings to Optionee. 12. MISCELLANEOUS. (A) SUCCESSORS AND ASSIGNS. The terms, covenants and conditions herein contained shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. (B) ENTIRE AGREEMENT. This Agreement contains all of the covenants, conditions and agreements between the parties and shall supersede all prior correspondence, agreements and understandings, both oral and written. (C) GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. (D) NOTICES. All notices required or permitted to be given hereunder shall be in writing and mailed postage prepaid by certified or registered mail, return receipt requested, or by personal delivery, to the appropriate address indicated in this paragraph, or at such other place or places as either Optionee or Optionors' Representative respectively may designate from time to time in a written notice given to the other. Notices shall be deemed sufficiently given upon receipt if by personal delivery, overnight carrier or facsimile or three (3) days after the date of mailing thereof. (i) Optionee's Address for Notice: Mission West Properties 10050 Bandley Drive Cupertino, CA 95014 Attention: Independent Directors Committee Facsimile No.: (408) 725-0700 (ii) Optionors' Address for Notice: Mission West Properties 10050 Bandley Drive Cupertino, CA 95014 Attention: Carl E. Berg Facsimile No.: (408) 725-0700 (E) HEADINGS. The title and headings of the paragraphs hereof are intended solely for means of reference and are not intended to modify, explain or place any construction on any of the provisions of this Agreement. (F) THIRD-PARTY RIGHTS. Nothing in this Agreement, express or implied, is intended to confer on any person, other than the parties to this Agreement and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. (G) AUTHORITY OF PARTIES. All persons executing this Agreement on behalf of any party to this Agreement warrant that they have the authority to execute this Agreement on behalf of that party. (H) PARTIAL INVALIDITY. Any provisions of this Agreement that is unenforceable or invalid or the inclusion of which would adversely affect the validity, or enforceability of this Agreement shall be of no effect, but all the remaining provisions of this Agreement shall remain in full force. (I) COUNTERPARTS. This Agreement may be executed in one or more counterparts. (J) AMENDMENT. This Agreement may not be modified, amended or otherwise changed in any manner except by a writing executed by both Optionee and Optionor. (K) TIME. Time is of the essence of every provision herein contained. (L) EXHIBITS. The following exhibits are attached to, and made a part of, this Agreement: (M) CONSTRUCTION. The section headings and captions of this Agreement are, and the arrangement of this instrument is, for the sole convenience of the parties to this Agreement. The section headings, captions, and arrangement of this instrument do not in any way affect, limit, amplify, or modify the terms and provisions of this Agreement. The singular form shall include plural, and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties have prepared it. Unless otherwise indicated, all references to sections are to this Agreement. All exhibits referred to in this Agreement are attached to it and incorporated in it by this reference. As used herein all capitalized terms shall have the meanings ascribed to them in the Acquisition Agreement, unless otherwise expressed. Exhibit A - Description of the Berg Land Holdings Exhibit B - Form of Purchase Agreement IN WITNESS WHEREOF, the parties hereto have executed this Agreement in one or more counterparts, on the date(s) set forth below, effective as of the day and year first above written. "Optionor" _______________________________, a California corporation By Its By Its "Optionee" ______________________________, a California limited partnership By Its By Its APPENDIX I OPTIONORS OF THE BERG LAND HOLDINGS
OPTIONOR PROPERTY BB&K, a California general King Ranch Business Park, San partnership Jose, CA Baccarat Fremont Developers, LLC, Hellyer and Piercy, San Jose, CA a California limited liability company Baccarat Fremont Developers, LLC, Fremont and Cushing, Fremont, CA a California limited liability company
EXHIBIT A LEGAL DESCRIPTION OF THE BERG LAND HOLDINGS THE LAND REFERRED TO IN THIS REPORT IS SITUATED IN THE STATE OF CALIFORNIA, AND IS DESCRIBED AS FOLLOWS: KING RANCH BUSINESS PARK: This land is located in south San Jose, California and consists of approximately 123 gross acres of unimproved land. The land is described by the following Assessor's Parcel Numbers: 678-14-033, 678-14-052, 678-14-058, 678-14-060, 678-14-62, 678-14-066, 678-14-74, 678-14-079, 678-14-081, 678-16-005, 678-16-006, 678-16-007, 678-16-008, and 678-16-011 HELLYER AND PIERCY: This land is located in south San Jose, California and consists of approximately 7 gross acres of unimproved land. The land is described by the following Assessor's Parcel Number: 678-08-003 FREMONT AND CUSHING: This land is located in Fremont, California and consists of approximately 32 gross acres of unimproved land. The land is described by the following Assessor's Parcel Numbers: 519-0850-014-57, and 519-0850-014-54 EXHIBIT B PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS This Purchase and Sale Agreement and Joint Escrow Instructions ("Agreement") is entered into as of ____________________ (the "Effective Date") by and between _______________________________ (the "Seller"), and ____________________, a California limited partnership (the "Purchaser") with reference to the following facts: RECITALS A. Seller is the owner of certain real property comprising approximately acres of improved real property located at _____________________________, _____________ County, California, commonly known as ________________________, as more particularly described in attached Exhibit A, together with all rights, privileges, easements, and appurtenances (collectively, the "Property"); and all personal property, entitlements, licenses, permits, development rights, air rights, authorizations, certificates, surveys, plans, specifications, reports, studies, test results and all unexpired warranties and guaranties given by unaffiliated third parties owned by Seller and pertaining to or used exclusively in connection with the Property (the "Personal Property"); (the Property and Personal Property shall be collectively referred to herein as the "Property"). B. Purchaser desires to purchase the Property and Seller desires to sell the Property on the terms and conditions in this Agreement. AGREEMENT For good and valuable consideration, the receipt and adequacy of which are acknowledged, the parties agree as follows: 1. PURCHASE AND SALE. Seller agrees to sell and Purchaser agrees to purchase the Property subject to the terms and conditions in this Agreement. 2. ACQUISITION VALUE. The Acquisition Value for the Property shall be ________________ (the "Acquisition Value") and shall be payable as follows: (a) A cash deposit of $50,000 (the "Deposit") shall be placed in escrow by Purchaser and held in the Escrow in an interest bearing account. [SEE PARAGRAPH 7 OF BERG LAND HOLDINGS OPTION AGREEMENT ON HOW THE BALANCE OF THE ACQUISITION VALUE SHALL BE PAID TO SELLER] 3. ESCROW. By this Agreement, Purchaser and Seller establish an escrow ("Escrow") with ______________________________________________ (the "Escrow Agent"), subject to the provisions of the standard conditions for acceptance of escrow, but only to the extent that the standard conditions impose no additional obligations or liabilities on the parties, and further subject to the terms and conditions in this Agreement, the latter to control in the case of conflict, with a signed counterpart of this document to be delivered as escrow instructions to Escrow Agent. Escrow Agent shall promptly execute a copy of this Agreement in the places indicated below and return fully executed counterparts to each of the parties; provided, however, the failure of Escrow Agent to promptly do so shall not affect the rights and obligations of Purchaser and Seller hereunder. 4. LIQUIDATED DAMAGES. IN THE EVENT THAT THIS AGREEMENT DOES NOT CLOSE BY THE CLOSE OF ESCROW AS A CONSEQUENCE OF A MATERIAL DEFAULT BY BUYER, AND PROVIDED THAT SELLER HAS COMPLIED WITH ALL TERMS OF THIS AGREEMENT, BUYER SHALL PAY SELLER AS LIQUIDATED DAMAGES, AN AMOUNT EQUAL TO THE DEPOSIT (FOR THE TOTAL SUM OF DOLLARS ($ ). THE PARTIES AGREE THAT SELLER'S ACTUAL DAMAGES WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE IF BUYER DEFAULTS, AND THE AMOUNT SET FORTH IN THIS PARAGRAPH 4 IS THE BEST ESTIMATE OF THE AMOUNT OF DAMAGES SELLER WOULD SUFFER AND SUCH AMOUNT SHALL BE THE AMOUNT THAT SELLER IS ENTITLED TO RECEIVE AS LIQUIDATED DAMAGES PURSUANT TO SECTIONS 1671, 1676 AND 1677 OF THE CALIFORNIA CIVIL CODE; AND SELLER SHALL HAVE NO RIGHT, AND HEREBY WAIVES ALL RIGHTS, TO AN ACTION FOR SPECIFIC PERFORMANCE OF THIS AGREEMENT. THE PARTIES WITNESS THEIR AGREEMENT TO THIS LIQUIDATED DAMAGES PROVISION AND SELLER'S WAIVER OF SPECIFIC PERFORMANCE BY EXECUTION OF THIS PARAGRAPH Buyer: Seller: By: By: Its: Its: By: By: Its: Its: 5. FEASIBILITY PERIOD. (a) During the period commencing on the Effective Date and terminating ten (10) days thereafter (the "Feasibility Period"), Purchaser may undertake at Purchaser's expense a review and inspection of the Property, including, but not limited to a review of the title to the Property, a review of the physical condition of the Property, including, but not limited to, inspection and examination of soils, environmental factors, hazardous substances, if any, and archeological information relating to the Property; a review and investigation of the effect of any zoning, maps, permits, reports, engineering data, regulations, ordinances, and laws affecting the Property; a review, after such examination and study it may deem appropriate, as to whether the Property can be economically and timely operated in accordance with Purchaser's proposed plan for the Property, including but not limited, to a marketing and finance analysis; a review to determine whether Purchaser can obtain any and all final governmental and private approvals as may be deemed necessary by Purchaser in Purchaser's sole and absolute discretion to permit Purchaser's future development and operation of the Property; a review to determine whether or not water, sewer or electrical and other utilities can be brought to the Property in an economical and timely fashion in sufficient quality and quantity to permit the development and operation in the manner, currently contemplated by Purchaser's current development and operation plan for the Property, as that plan may be modified from time to time hereinafter; and such other tests, investigations or analysis as Purchaser deems necessary in its sole and absolute discretion and otherwise subject to the restrictions set forth below. Within five (5) days following the Effective Date, Seller shall deliver to (or otherwise make available for reasonable inspection by) Purchaser copies of all architectural plans, surveys, specifications, contracts, licenses, reports, environmental reports, seismic reports, studies, test results, tax bills, expense information and other documents pertaining to the Property that are owned by and in the possession of Seller (the "Operative Documents"). (b) If Purchaser disapproves of the results of the inspection and review for any reason, which determination may be made by Purchaser in its sole and absolute discretion, Purchaser may elect, prior to the expiration of the Feasibility Period, to terminate this Agreement by giving Seller written notification thereof, and the Deposit together with all interest earned thereon shall be returned to Purchaser. If Purchaser fails to properly notify Seller of the intent to terminate this Agreement, Purchaser shall be deemed to be satisfied with the results of the inspection and shall be deemed to have waived the right to terminate this Agreement pursuant to this provision. 6. CONDITIONS TO PURCHASER'S PERFORMANCE. Purchaser's obligation to perform under this Agreement is subject to the following conditions: (a) Purchaser's approval of the Property as provided in Section 5; (b) Seller's representations in this Agreement being correct in all material respects as of the date of this Agreement and as of the Closing Date; (c) Seller's performance of all of its obligations under this Agreement; (d) Escrow Agent being prepared to issue the Title Policy (as defined below) on the Closing Date (as defined below), subject only to the Approved Exceptions, and containing such endorsements as may be reasonably required by Purchaser; and (e) There shall not have occurred after the Effective Date any material adverse physical change in the Property from its condition as of the Effective Date. The conditions (a) through (e) shall be for the benefit of, and may be waived by, Purchaser. Upon the non-satisfaction of any of the foregoing conditions, unless waived by Purchaser, the Agreement shall be terminated and any Deposit then held by Escrow Agent together with all interest thereon shall be returned to Purchaser. 7. CONDITIONS TO SELLER'S PERFORMANCE. Seller's obligation to perform under this Agreement is subject to the following conditions: (a) Purchaser's representations in this Agreement being correct in all material respects as of the date of this Agreement and as of the Closing Date; and (b) Purchaser's performance of all of its obligations under this Agreement. The conditions (a) and (b) shall be for the benefit of, and may be waived by, Seller. Upon the non-satisfaction of any of the foregoing conditions, unless waived by Seller, the Agreement shall be terminated and any Deposit then held by Escrow Agent together with all interest thereon and any sums previously released to Seller shall be returned to Purchaser. 8. ACCESS. (a) Access to the Property prior to the Closing Date shall be given to Purchaser during normal business hours upon at least one (1) business day's prior notice to Seller. (b) Purchaser and Purchaser's contractors and consultants shall have the right, from the Effective Date until the Closing Date, to enter onto the Property, at their own cost and risk, for any purposes, including but not limited to, inspecting the Property, taking samples of the soil, and conducting an environmental audit (including an investigation of past and current uses of the Property). In addition, Purchaser shall have the right to contact any federal, state, or local governmental authority or agency to investigate any matters relating to the Property. Purchaser's contractors and consultants shall be duly licensed and insured. As a condition of such entry, Purchaser shall provide evidence reasonably satisfactory to Seller of the existence of general liability insurance prior to any such entry, inspection, test or study. Seller agrees to cooperate reasonably with Purchaser in the inspection of the Property and agrees to make available to Purchaser all information in Seller's possession or control pertaining to the condition of the Property, including engineering and environmental reports, studies, tests, monitoring results, and related documentation. (c) Purchaser shall indemnify and defend Seller against and hold Seller harmless from all losses, costs, damages, liabilities, and expenses, arising out of any personal injury or physical damage to the Property in connection with Purchaser's inspection of or presence, prior to the Closing Date, on the Property. Furthermore, Purchaser shall indemnify, defend and hold Seller harmless from and against any mechanic's lien claims that may arise in connection with Purchaser's inspection of or presence, prior to the Closing Date, on the Property. 9. TITLE. (a) Immediately following the execution of this Agreement by both parties, Purchaser shall cause Escrow Agent to issue to Purchaser (with a copy to Seller) a preliminary report for a CLTA Owner's Policy for the Property, setting forth all liens, encumbrances, easements, restrictions, conditions, and other record matters affecting Seller's title to the Property (the "Preliminary Report"), together with copies of all documents relating to title exceptions referred to in the Preliminary Report. Purchaser shall have the right, prior to the expiration of the Feasibility Period, to obtain an ALTA survey, at its own expense, sufficient for the issuance of an ALTA Owner's Extended Coverage Policy of Title Insurance. (b) Purchaser shall approve or disapprove each exception shown on the Preliminary Report and in any ALTA supplement issued in connection therewith (each an "Exception") by the date which is the later to occur of (i) the expiration of the Feasibility Period or (ii) five (5) days following the receipt of each of the Preliminary Report, the underlying exceptions, and any ALTA supplement to the Preliminary Report, as the case may be. Any Exception not so timely disapproved shall be deemed an "Approved Exception." (c) If any Exception is disapproved (each a "Disapproved Exception") Seller shall have the option either to notify Purchaser (i) that Seller will attempt to remove or cure such Disapproved Exception prior to the Closing Date or (ii) that Seller will take no action whatsoever; provided, however, Seller's failure to notify Purchaser of Seller's election of any of its foregoing options within five (5) business days after Seller's receipt of Purchaser's notice of a Disapproved Exception shall be deemed Seller's election of option (ii). In the event that Seller elects or is deemed to have selected option (ii) then Purchaser shall, within five (5) days after Purchaser's receipt or deemed receipt of Seller's election, either elect to waive such Disapproved Exception and proceed to the Close of Escrow without offset or deduction or to terminate this Agreement, in which latter event Purchaser shall pay all reasonable charges to the Escrow Agent in connection with this transaction and all the funds and documents deposited with Escrow Agent shall be promptly refunded or returned, as the case may be by Escrow Agent to the depositing party. Purchaser's failure to so timely notify Seller of Purchaser's election will be deemed Purchaser's election to waive the Disapproved Exception. In the event Seller elects option (i) Seller shall, prior to the Closing Date, use its good faith reasonable efforts to cause each Disapproved Exception to be discharged, satisfied, released, or terminated, as the case may be, of record, and in a form that is reasonably satisfactory to Purchaser and Escrow Agent, all at Seller's sole cost and expense. Seller shall have no liability if despite the use of its good faith reasonable efforts, it cannot cure the Disapproved Exception and Purchaser shall again have the option to either terminate this Agreement or waive such Disapproved Exception and proceed to closing without offset or deduction. (d) Notwithstanding anything contained in this Agreement to the contrary, it is agreed that any monetary encumbrance affecting title to the Property, other than a lien for current real property taxes and assessments not then delinquent, shall be discharged by Seller on the Closing Date and need not be formally disapproved by Purchaser. Seller hereby authorizes Escrow Agent to disburse from the cash portion of the Acquisition Value and proceeds otherwise disbursable to Seller upon the Close of Escrow the sum sufficient to discharge any monetary encumbrances that may be discharged only by the payment of money. 10. CLOSE OF ESCROW. (A) CONVEYANCE OF TITLE. At the Close of Escrow, good and marketable title to the Property shall be conveyed by Seller to Purchaser by the Deed (as defined below) subject only to: (i) A lien for real property taxes and assessments not then delinquent (notwithstanding anything to the contrary contained herein, the purchaser shall assume all assessments that are a lien against the Property); (ii) Matters of title respecting the Property approved or deemed approved by Purchaser in accordance with this Agreement; (iii) Title and survey matters which would be disclosed by an ALTA survey and approved or deemed approved by Purchaser; and (iv) Matters affecting the condition of title to the Property created by or with the written consent of Purchaser. At the Close of Escrow all of Seller's right, title and interest in and to the Personal Property shall be conveyed by Seller to Purchaser by the Warranty Bill of Sale in the form attached hereto as Exhibit B (the "Bill of Sale"). (B) SELLER'S DEPOSITS INTO ESCROW. Seller shall deposit with Escrow Agent at least three (3) business days prior to the Close of Escrow, the following documents: (i) A statutory grant deed executed and acknowledged by Seller (the "Deed"); (ii) Seller's affidavit of non-foreign status as contemplated by Section 1445 of the Internal Revenue Code of 1986, as amended, or a release from the Internal Revenue Service in form and content reasonably acceptable to Purchaser, indicating that Purchaser is excused from any withholding requirements under federal law ("FIRPTA Affidavit") executed by Seller, but undated; (iii) Seller's affidavit as contemplated by Revenue and Taxation Code Section 18662 or a release from the California Franchise Tax Board in form and content reasonably acceptable to Purchaser, indicating that Purchaser is excused from any withholding requirements under California law (the "Withholding Affidavit") executed by Seller, but undated; (iv) The Bill of Sale duly executed by Seller, but undated; (v) An Assignment of any leases approved by Purchaser wherein such lease is assigned to Purchaser, Purchaser assumes all obligations of landlord with respect thereto, and Seller is indemnified with respect to any liability thereunder; and (vi) Notwithstanding the foregoing, at any time prior to the Close of Escrow Seller shall deposit with Escrow Agent such other documents as Purchaser, Title Company or Escrow Agent may reasonably require in order to close this transaction of purchase and sale in accordance with the terms hereof. (C) PURCHASER'S DEPOSITS INTO ESCROW. Purchaser shall deposit with Escrow Agent, on or prior to the Close of Escrow, the following: (i) Balance of the Acquisition Value in accordance with Section 2(b) together with Purchaser's share of closing costs; and (ii) Such other documents as Seller, Title Company or Escrow Agent may reasonably require to close this transaction of purchase and sale in accordance with the terms hereof. (D) CLOSING DATE. The closing hereunder (the "Close of Escrow") shall be the date the Deed is recorded (the "Closing Date"). Subject to the terms hereof, the Close of Escrow shall occur on that date which is no later than the sixtieth (60th) day following receipt of the Completion Notice with respect to the acquired property (the "Expected Closing Date"), or as soon thereafter as the Escrow is in condition for. Close of Escrow; provided, however, that if the Close of Escrow does not occur by the Expected Closing Date and the Expected Closing Date is not extended by written agreement by the parties, a party hereto not then in default under this Agreement may notify the other party and Escrow Agent, in writing that, unless the Close of Escrow occurs within five (5) business days following said notice, the Escrow and this Agreement shall be deemed terminated without further notice or instructions and, in which event, the party which is not in position to close shall be deemed to be in material breach of this Agreement and the party that has fully complied may exercise its remedies in accordance with the terms hereof. (E) CLOSE OF ESCROW. On the Closing Date and provided that Escrow Agent is irrevocably committed to issue a CLTA Owner's Policy of title insurance showing good and marketable fee simple title to the Property in the amount of the Acquisition Value vested in Purchaser, subject only to the Approved Exceptions (the "Title Policy"), Escrow Agent shall date all undated documents as of the Closing Date and shall close Escrow as follows: (i) Record the Deed (marked for return to Purchaser) in the _______________________________ County Recorder's Office (which shall be deemed delivery to Purchaser); (ii) Issue the Title Policy; (iv) Distribute the balance of the Acquisition Value to Seller after deducting therefrom the prorated amounts and charges to be paid by or on behalf of Seller; (v) Charge Purchaser for those costs and expenses to be paid by Purchaser pursuant to this Agreement and disburse any net funds remaining after the preceding disbursements to Purchaser; (vi) Prepare and deliver to both Purchaser and Seller one signed copy of Escrow Agent's closing statement showing all receipts and disbursements of the Escrow; (vii) Deliver to Purchaser the FIRPTA Affidavit and the Withholding Affidavit, Warranty Bill of Sale, the counterpart of the Assignment Agreement executed by Seller and the items referenced in Section 10(b)(vi) above; and (viii) Deliver to each of the parties such additional documents as either party may direct. (F) CLOSING COSTS. Escrow Agent shall allocate and prorate the following costs at the Close of Escrow: (I) SELLER SHALL PAY: (A) any costs of clearing title to the Property; (B) any document preparation fees for the Deed; and (C) all documentary and/or real property transfer taxes due upon the transfer of the Property. (II) PURCHASER SHALL PAY: (A) all charges in connection with the issuance of the Title Policy; (B) the recording charges in connection with recordation of the Deed; and (C) the escrow fee charged by Escrow Agent. Any closing costs not addressed herein shall be allocated in accordance with the custom and practice then prevailing in the County in which the Property is located. (III) REAL ESTATE TAXES, BONDS AND ASSESSMENTS. Current real property taxes, any current installment of any bond or assessment that constitutes a lien on the Property, rents, security deposits, and license fees, if any, including any additional property taxes or installments of any bond or assessment lien that may be assessed after the Close of Escrow, but that relate to a period prior to the Close of Escrow, regardless of when notice of those taxes, dues or assessments are received or who receives the notice shall be prorated as of the Close of Escrow. (IV) BALANCE OUTSIDE OF ESCROW. Any item to be prorated in accordance with the terms of this Agreement which is not determined or determinable on the Closing Date shall be adjusted by the parties by appropriate cash payment outside of the Escrow within five (5) business days after the amount due is determined. 11. POSSESSION. Exclusive possession of the Property shall be delivered to Purchaser at the Close of Escrow. 12. DAMAGE AND DESTRUCTION. (a) In the event of damage or destruction of the Property or any portion of the Property prior to the Close of Escrow in an amount not exceeding Ten Thousand Dollars ($10,000.00), Purchaser and Seller shall consummate this Agreement, provided that Seller shall assign to Purchaser Seller's rights under any insurance policy covering the damage or destruction and shall indemnify and guarantee Purchaser with respect to any costs incurred by Purchaser in repairing and restoring the Property after the Close of Escrow that are not paid by the insurance up to the amount of Ten Thousand Dollars ($10,000.00) or may, at Seller's election, grant Purchaser a credit in said amount against the Acquisition Value. (b) In the event of damage or destruction of the Property or any portion of the Property prior to the Close of Escrow in an amount in excess of Ten Thousand Dollars ($10,000.00), Purchaser may elect within ten (10) days following such event of damage or destruction, either to terminate this Agreement upon written notice to Seller and Escrow Agent or to consummate this Agreement, in which event Seller shall assign to Purchaser Seller's rights under any insurance policy covering the damage or destruction, but without the indemnity and guarantee provided in subsection (a) above. Purchaser's failure to affirmatively elect whether to terminate or consummate this Agreement within said ten (10) day period shall be deemed Purchaser's election to consummate this Agreement. If Purchaser elects to terminate this Agreement pursuant to this provision, Escrow Agent and/or Seller, as the case may be, shall, within five (5) days following receipt of Purchaser's notice, return the Deposit, to Purchaser. Upon termination, neither party shall have any further obligations under this Agreement except as otherwise provided in this Agreement. 13. CONDEMNATION. (a) If any portion of the Property is taken by condemnation or eminent domain or is the subject of a threatened or pending condemnation or eminent domain proceeding that has not been consummated prior to the Close of Escrow resulting in a decrease in the value of the Property in an amount not exceeding Ten Thousand Dollars ($10,000.00), Purchaser and Seller shall consummate this Agreement, provided that Seller shall assign to Purchaser Seller's rights to all awards for the condemnation or taking and shall indemnify and guarantee Purchaser with respect to any costs incurred by Purchaser in repairing and restoring the Property that are not paid by the awards up to the amount of Ten Thousand Dollars ($10,000.00) or may, at Seller's election, grant Purchaser a credit in such amount against the Acquisition Value. (b) If any portion of the Property is taken by condemnation or eminent domain or is the subject of a threatened or pending condemnation or eminent domain proceeding that has not been consummated prior to the Close of Escrow resulting in a decrease in the value of the Property in an amount in excess of Ten Thousand Dollars ($10,000.00), Purchaser may elect within ten (10) days following such event, either to terminate this Agreement upon written notice to Seller and Escrow Agent or to consummate this Agreement, in which event Seller shall assign to Purchaser Seller's rights to all awards for the condemnation or taking, but without the indemnity and guarantee provided in subSection (a) above. Purchaser's failure to affirmatively elect whether to terminate or consummate this Agreement within said ten (10) day period shall be deemed Purchaser's election to consummate this Agreement. If Purchaser elects to terminate this Agreement pursuant to this provision, Escrow Agent and/or Seller, as the case may be, shall, within five (5) days following receipt of Purchaser's notice, return the Deposit to Purchaser. Upon termination, neither party shall have any further obligations under this Agreement except as otherwise provided in this Agreement. 14. SELLER REPRESENTATIONS. Seller represents to Purchaser that as of the date of this Agreement and as of the Closing Date: (a) Seller has full right, power and authority to enter into and perform Seller's obligations under this Agreement in accordance with its terms; (b) That Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1954, as amended, and is a "resident" of the State of California within the meaning of Section 18662 of the California Revenue and Taxation Code, as amended; (c) There is not pending, or to Seller's actual knowledge, threatened, any litigation with respect to the Property; and (d) Except as disclosed to Purchaser and to Seller's actual knowledge, no toxic or hazardous chemicals, waste, or substances of any kind have ever been spilled, disposed of, or stored on, under, or at the Property in violation of any applicable law, rule or regulation. The continued accuracy in all respects of Seller's representations shall be a condition precedent to Purchaser's obligation to close. All representations contained in this Agreement shall be deemed remade as of the Closing Date and shall survive the Closing Date. If, after the Effective Date hereof, but prior to the Closing Date, Seller becomes aware that any of the representations set forth herein are no longer true and correct, then Seller may provide Purchaser with written notice stating that Seller believes that such representations are no longer accurate and the general nature of the change. Within five (5) business days after receipt of such notice, Purchaser shall either: (i) terminate this Agreement and the Deposit shall be returned to Purchaser; or (ii) waive its rights on such account not to consummate the transaction herein contemplated, in which case Purchaser shall be deemed to have waived all rights and remedies with respect to those matters specifically set forth in such notice. Notwithstanding the foregoing, nothing in this paragraph shall limit Purchaser's rights and remedies if the representation or warranty was inaccurate as of the date of this Agreement. 15. PURCHASER REPRESENTATIONS. Purchaser represents to Seller that as of the date of this Agreement and as of the Close of Escrow as follows: (a) Purchaser has full right, power and authority to buy the Property from Seller and to perform Purchaser's obligations under this Agreement in accordance with its terms. The continued accuracy in all respects of Purchaser's representations shall be a condition precedent to Seller's obligation to close. All representations contained in this Agreement shall be deemed remade as of the Closing Date and shall survive the Closing Date. 16. SELLER COVENANTS. Commencing on the Effective Date and continuing until the Close of Escrow: (a) Seller shall not create or consent to any liens, encumbrances, or easements on or affecting the Property. Seller shall not enter into any agreement regarding the sale, rental, lease, management, repair, improvement, or any other matter affecting the Property without the prior written consent of Purchaser, which consent shall not be unreasonably withheld or delayed. (b) Seller shall not permit any act of waste or act that would tend to diminish the value of the Property for any reason, except that caused by ordinary wear and tear. (d) Seller shall maintain the Property in substantially the same manner as it has been maintained prior to the Effective Date until the Close of Escrow and shall not make any material changes to the Property or enter into any agreement affecting the Property without Purchaser's prior consent, which consent shall not be unreasonably withheld or delayed. (e) That on the Closing Date there shall be no outstanding contracts made by Seller for any improvements to the Property that have not been fully paid for and that Seller shall cause to be discharged all mechanics' and materialmen's liens arising from any labor or materials furnished prior to Closing which pertain to the Property. (f) Unless this Agreement is sooner terminated by Purchaser, the Seller will not make, accept, negotiate or otherwise pursue any offers for the disposition (whether directly, through a joint venture, ground lease, financing, or otherwise) of any interest in the Property. 17. "AS-IS" SALE. Except as expressly set forth herein, Purchaser acknowledges that it is buying the Property in its "As-Is, Where-Is" condition, in reliance on its own investigations. 18. BROKERS AND FINDERS. Purchaser and Seller each represent and warrant that no broker or finder has been utilized in the purchase and sale contemplated by this Agreement. In the event of a claim for broker's fees, finder's fees, commissions or other similar compensation in connection herewith: (i) Purchaser, if such claim is based upon any agreement alleged to have been made by Purchaser, shall indemnify, defend, and hold Seller harmless (using counsel reasonably satisfactory to Seller) from and against any and all damages, liabilities, costs, expenses and losses (including, but not limited to, attorneys' fees and costs) that Seller sustains or incurs by reason of such claim; and (ii) Seller, if such claim is based upon any agreement alleged to have been made by Seller, shall indemnify, defend and hold Purchaser harmless (using counsel reasonably satisfactory to Purchaser) from and against any and all damages, liabilities, costs, expenses and losses (including, but not limited to, attorneys' fees and costs) that Purchaser sustains or incurs by reason of such claim. 19. SURVIVAL. Except to the extent specifically provided to the contrary hereunder, each and every covenant, agreement, representation and warranty of each of the parties hereto shall survive the Closing Date and shall not merge with Seller's delivery of the Deed or other documents to Purchaser. 20. ASSIGNMENT; SUCCESSORS AND ASSIGNS. Purchaser shall have the right to assign this Agreement with Seller's prior written consent, which consent shall not be unreasonably withheld. This Agreement, and the terms, covenants and conditions herein contained, shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs and assigns. 21. NOTICES. All notices to be given under this Agreement shall be in writing and sent by: (a) certified mail, return receipt requested, in which case notice shall be deemed delivered three (3) business days after deposit, postage prepaid in the United States Mail, (b) a nationally recognized overnight courier, in which case notice shall be deemed delivered one (1) business day after deposit with that courier, or (c) facsimile or similar means if a copy of the notice is also sent by United States Certified Mail, in which case notice shall be deemed delivered on transmittal by facsimile or other similar means, provided that a transmission report is generated by reflecting the accurate transmission of the notices, as follows: If to Purchaser: If to Seller: Mission West Properties Mission West Properties 10050 Bandley Drive 10050 Bandley Drive Cupertino, CA 95014 Cupertino, CA 95014 Attention: Independent Directors Committee Attention: Carl E. Berg Facsimile No.: (408) 725-0700 Facsimile No.: (408)725-0700 22. ARBITRATION OF DISPUTES. ANY DISPUTE OR CLAIM IN LAW OR EQUITY BETWEEN PURCHASER AND SELLER ARISING OUT OF THIS AGREEMENT SHALL BE DECIDED BY NEUTRAL, BINDING ARBITRATION. THE ARBITRATION SHALL BE CONDUCTED IN ACCORDANCE WITH THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA") THEN OBTAINING USING A SINGLE ARBITRATOR. THE DECISION OF THE ARBITRATOR SHALL BE FINAL AND BINDING. IN ALL OTHER RESPECTS, THE ARBITRATION SHALL BE CONDUCTED IN ACCORDANCE WITH PART III, TITLE 9 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR(S) MAY BE ENTERED IN ANY COURT HAVING JURISDICTION THEREOF. THE PARTIES SHALL HAVE THE RIGHT TO DISCOVERY IN ACCORDANCE WITH CODE OF CIVIL PROCEDURE Section 1283.05. THE ARBITRATION SHALL TAKE PLACE IN THE CITY AND COUNTY OF SAN FRANCISCO. THE FOLLOWING MATTERS ARE EXCLUDED FROM ARBITRATION HEREUNDER: (A) A JUDICIAL OR NON-JUDICIAL FORECLOSURE OR OTHER ACTION OR PROCEEDING TO ENFORCE A DEED OF TRUST, MORTGAGE, OR INSTALLMENT LAND SALE CONTRACT AS DEFINED IN CIVIL CODE SECTION 2985, (B) AN UNLAWFUL DETAINER ACTION, (C) THE FILING OR ENFORCEMENT OF A MECHANIC'S LIEN, (D) ANY MATTER WHICH IS WITHIN THE JURISDICTION OF A PROBATE OR SMALL CLAIMS COURT, AND (E) AN ACTION FOR BODILY INJURY OR WRONGFUL DEATH TO WHICH CODE OF CIVIL PROCEDURE SECTION 337.1 OR SECTION 337.15 APPLIES. THE FILING OF A JUDICIAL ACTION TO ENABLE THE RECORDING OF A NOTICE OF PENDING ACTION, FOR ORDER OF ATTACHMENT, RECEIVERSHIP, INJUNCTION, OR OTHER PROVISIONAL REMEDIES, SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT TO ARBITRATE UNDER THIS PROVISION. "NOTICE: BY INITIALING THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTE' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY." "WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISIONS TO NEUTRAL ARBITRATION." Purchaser's Initials: Seller's Initials: ---------- ---------- 23. ATTORNEYS' FEES. If any arbitration or court action is commenced between the parties, the prevailing party in that arbitration or court action shall be entitled to recover from the non-prevailing party all reasonable attorneys' fees and costs. 24. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties to this Agreement and shall not be modified in any manner except by an instrument in writing executed by the parties or their respective successors in interest. 25. SEVERABILITY. If any term or provision of this Agreement shall, to any extent, be held invalid or unenforceable, the remainder of this Agreement shall not be affected. 26. WAIVERS. A waiver or breach of covenant or provision in this Agreement shall not be deemed a waiver of any other covenant or provision in this Agreement, and no waiver shall be valid unless in writing and executed by the waiving party. An extension of time for performance of any obligation or act shall not be deemed an extension of the time for performance of any other obligation or act. 27. CONSTRUCTION. The section headings and captions of this Agreement are, and the arrangement of this instrument is, for the sole convenience of the parties to this Agreement. The Section headings, captions, and arrangement of this instrument do not in any way affect, limit, amplify, or modify the terms and provisions of this Agreement. The singular form shall include plural, and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties have prepared it. Unless otherwise indicated, all references to Sections are to this Agreement. All exhibits referred to in this Agreement are attached to it and incorporated in it by this reference. 28. MERGER. All of the terms, provisions, representations and covenants of the parties under this Agreement shall survive the Close of Escrow and shall not be merged in the Deed. 29. PERFORMANCE DUE ON DAY OTHER THAN BUSINESS PAY. If the time period for the performance of any act called for under this Agreement expires on a Saturday, Sunday, or any other day on which banking institutions in the State of California are authorized or obligated by law or executive order to close (a "Holiday"), the act in question may be performed on the next succeeding day that is not a Saturday, Sunday, or Holiday. 30. COUNTERPARTS. This Agreement may be executed in one or more counterparts. 31. TIME OF THE ESSENCE. Time is of the essence in this Agreement. 32. SUCCESSORS. This Agreement shall inure to the benefit of and shall be binding upon the parties to this Agreement and their respective heirs, successors, and permitted assigns. 33. GOVERNING LAW. This Agreement shall be governed and construed in accordance with California law. 34. EXHIBITS. Each exhibit to which reference is made in this Agreement is deemed incorporated into this Agreement in its entirety by such reference. The exhibits to this Agreement are the following: Exhibit A Legal Description of Property Exhibit B Warranty Bill of Sale IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. Buyer: Seller: By: By: Its: Its: By: By: Its: Its: ESCROW AGENT: FIRST AMERICAN TITLE GUARANTY COMPANY, a California corporation By: Its: Escrow No. EXHIBIT A TO BE COMPLETED AT TIME OF TRANSACTION. EXHIBIT B WARRANTY BILL OF SALE This Warranty Bill of Sale ("Bill of Sale") is executed as of __, ________ by _______________________________, a California corporation ("Seller") in favor of _______________________________, a California limited partnership ("Purchaser"). RECITALS A. Seller and Purchaser have entered into that certain Purchase and Sale Agreement and Joint Escrow Instructions dated _______________ (the "Purchase Agreement"), in which Purchaser has agreed to purchase improved real property in _______________ County, State of California, more particularly described in attached Schedule 1, (the "Property") incorporated in this Bill of Sale. B. Pursuant to the Purchase Agreement, Seller has agreed to transfer to Purchaser all Seller's right, title and interest in all licenses, permits, development rights, air rights, authorizations, certificates, surveys, plans, specifications, reports, studies, test results and all unexpired warranties and guaranties given by unaffiliated third parties owned by Seller and pertaining to or used exclusively in connection with the Property (collectively, "Personal Property") concurrent with the Closing Date (as defined in the Purchase Agreement). For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller agrees as follows: 1. TRANSFER. Effective as of the Closing Date, Seller hereby transfers, sells, assigns, grants and conveys to Purchaser all of Seller's right, title, and interest in the Personal Property. 2. SELLER'S COVENANTS. Seller covenants to Purchaser that Seller has good and marketable title to the Personal Property, free of all liens, and has the right to transfer the Personal Property. Seller further agrees that Seller will defend Purchaser's title to the Personal Property against the demands of anyone claiming through Seller. 3. ATTORNEY FEES. If any suit, action or other proceeding is instituted to enforce the rights of either party under this Bill of Sale, the successful party, as adjudicated by a court, shall be entitled to reasonable attorney fees and court costs. 4. GOVERNING LAW. This Bill of Sale shall be governed and construed in accordance with California law. Seller has executed this Bill of Sale as of the date first above written. SELLER: a California corporation By: Its: By: Its: EX-10.8 18 EXHIBIT 10.8 - -------------------------------------------------------------------------------- STANDARD FORM LEASE - -------------------------------------------------------------------------------- PARTIES: This Lease, executed in duplicate at Cupertino, California, on May 19, 1998, by and between Berg & Berg Enterprises, Inc., a California Corporation, and Mission West Properties, a California corporation, hereinafter called respectively Lessor and Lessee, without regard to number or gender. USE: WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hires from Lessor, for the purpose of conducting therein office, research and development, light manufacturing, and warehouse activities, and any other legal activity; and for no other purpose without obtaining the prior written consent of Lessor. PREMISES: The real property with appurtenances as shown on Exhibit A (the "Premises") situated in the City of Cupertino, County of Santa Clara, State of California, and more particularly described as follows: Lessee's portion of the Premises is 3,200 square feet of an approximately 7,500 square foot building, including all improvements thereto, as shown on Exhibit A.1 including the right to use its pro-rata share of the parking spaces located at the Premises. The address for the leased portion of the Premises is 10050 Bandley Drive, Cupertino, California. Lessee's pro-rata share of the building is approximately 42.67%. TERM: The term shall be for thirty-six (36) months unless extended pursuant to Section 35 of this Lease (the "Lease Term"), commencing on April 1, 1998 and ending thirty-six (36) months thereafter. RENT: Base rent shall be payable in monthly installments as follows:
Base rent Estimated CAC* Total --------- -------------- ----- Months 1 through 36 $5,600 $1,120* $6,720
* CAC charges to be adjusted per Common Area Charges Section below. Base rent and CAC as scheduled above shall be payable in advance on or before the first day of each calendar month during the Lease Term. The term "Rent," as used herein, shall be deemed to be and to mean the base monthly rent and all other sums required to be paid by Lessee pursuant to the terms of this Lease. Rent shall be paid in lawful money of the United States of America, without offset or deduction, and shall be paid to Lessor at such place or places as may be designated from time to time by Lessor. Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. Upon execution of this Lease, Lessee shall deposit with Lessor the first month's rent. SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of Six Thousand Seven Hundred Twenty Dollars ($6,720) (the "Security Deposit"). The Security Deposit shall be held by Lessor as security for the faithful performance by Lessee of all of the terms, covenants, and conditions of this Lease applicable to Lessee. If Lessee commits a default as provided for herein, including but not limited to a default with respect to the provisions contained herein relating to the condition of the Premises, Lessor may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any amount which Lessor may spend by reason of default by Lessee. If any portion of the Security Deposit is so used or applied, Lessee shall, within ten days after written demand therefor, deposit cash with Lessor in an amount sufficient to restore the Security Deposit to its original amount. Lessee's failure to do so shall be a default by Lessee. Any attempt by Lessee to transfer or encumber its interest in the Security Deposit shall be null and void. Upon execution of this Lease, Lessee shall deposit with Lessor the Security Deposit. Notwithstanding the above, Lessor agrees to waive the requirement for Lessee to make a security deposit provided Lessee's shareholder's equity exceeds $7.5 million. If at any time during this Lease, Lessee's shareholder's equity is less than $7.5 million, Lessee shall deposit with Lessor the Security Deposit referenced above within ten days after the issuance of Lessee's financial statements indicating the reduction in shareholder's equity below $7.5 million. If Lessee fails to make the Security Deposit as required, Lessee shall be deemed to be in default per Section 14.1 (a) of this Lease. COMMON AREA CHARGES: Lessee shall pay to Lessor, as additional Rent, an amount equal to Lessee's pro-rate share of the total common area charges of the Premises as defined below (the common area charges for the Premises is referred to herein as ("CAC")). Lessee shall pay to Lessor as Rent, on or before the first day of each calendar month during the Lease Term, subject to adjustment and reconciliation as provided hereinbelow, the sum of One Thousand One Hundred Twenty Dollars ($1,120), said sum representing Lessee's estimated monthly payment of Lessee's percentage share of CAC. It is understood and agreed that Lessee's obligation under this paragraph shall be prorated to reflect the Commencement Date and the end of the Lease Term. Upon execution of this Lease, Lessee shall deposit with Lessor the first month's estimated CAC. Lessee's estimated monthly payment of CAC payable by Lessee during the calendar year in which the Lease commences is set forth above. At or prior to the commencement of each succeeding calendar year term (or as soon as practical thereafter), Lessor shall provide Lessee with Lessee's estimated monthly payment for CAC which Lessee shall pay to Lessor as Rent. Within 120 days of the end of the calendar year and the end of the Lease Term, Lessor shall provide Lessee a statement of actual CAC incurred including capital reserves for the preceding year or other applicable period in the case of a termination year. If such statement shows that Lessee has paid less than its actual percentage, then Lessee shall on demand pay to Lessor the amount of such deficiency. If such statement shows that Lessee has paid more than its actual percentage, then Lessor shall, at its option, promptly refund such excess to Lessee or credit the amount thereof to the Rent next becoming due from Lessee. Lessor reserves the right to revise any estimate of CAC if the actual or projected CAC show an increase or decrease in excess of 10% from an earlier estimate for the same period. In such event, Lessor shall provide a revised estimate to Lessee, together with an explanation of the reasons therefor, and Lessee shall revise its monthly payments accordingly. Lessor's and Lessee's obligation with respect to adjustments at the end of the Lease Term or earlier expiration of this Lease shall survive the Lease Term or earlier expiration. As used in this Lease, CAC shall include but is not limited to: (i) items as specified in Sections 5(b), 6, 12, 16 and 31; (ii) all costs and expenses including but not limited to supplies, materials, equipment and tools used or required in connection with the operation and maintenance of the Premises; (iii) licenses, permits and inspection fees; (iv) all other costs incurred by Lessor in maintaining and operating the Premises; (v) all reserves for capital replacements and government regulations imposed on the Premises not related to Lessee's use and occupancy of the Premises; and (vi) an amount equal to five percent (5%) of the aggregate of all CAC, as compensation for Lessor's accounting and processing services. Lessee shall have the right to review the basis and computation analysis used to derive the CAC applicable to this Lease annually. LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee to Lessor of Rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges, which may be imposed on Lessor according to the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of Rent or any other sum due from Lessee is not received by Lessor or Lessor's designee within ten (10) days after such amount is due, Lessee shall pay to Lessor a late charge equal to five (5%) percent of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payments made by Lessee. Acceptance of such late charges by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor shall it prevent Lessor from exercising any of the other rights and remedies granted hereunder. QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee paying Rent and performing its covenants and conditions under this Lease, Lessee shall and may peaceably and quietly have, hold and enjoy the Premises for the Lease Term, subject, however, to the rights reserved by Lessor hereunder. OFFICE/OVERHEAD SHARING: It is understood and acknowledged that the Premises described herein shall be utilized for the business operations of both Lessor and Lessee. Lessee shall pay for or reimbursement Lessor for its prorata share, to be determined by Lessor on an equitable basis, of all building and operational expenses related to the use of the office, the equipment in the office, office supplies, personnel costs, management costs, and any other costs necessary for the operation of a professional management organization at the Premises. In addition, Lessee and Lessor shall each be responsible for the exclusive costs of their own organization. The primary purpose of this arrangement is to utilize the existing resources of Lessor and its staff to benefit Lessee at a reasonable cost to Lessee. Notwithstanding the above, Lessee's obligation under this Lease, including base rent, CAC, and office/overhead sharing shall not exceed Fifteen Thousand Dollars ($15,400) per month during the first thirty-six months of the Lease Term. IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS: 1. POSSESSION: Possession shall be deemed tendered and the term shall commence effective April 1, 1998. PAGE 2 2.1 ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: Lessee accepts the Premises in an "AS IS" condition and "AS IS" state of repair, subject to Lessor's representation that the Premises are in good order and repair, and comply with all requirements for occupancy as of the Commencement Date. Lessee agrees on the last day of the Lease Term, or on the sooner termination of this Lease, to surrender the Premises to Lessor in Good Condition and Repair. Good Condition and Repair ("Good Condition and Repair") shall not mean original condition, but shall mean that the Premises are in a commercially acceptable condition suitable for occupancy by a reasonable lessee. The interior walls of all office and warehouse areas, the floors of all office and warehouse areas, all suspended ceilings and any carpeting are to be cleaned and in Good Condition and Repair. Lessee, on or before the end of the Lease Term or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all such property not so removed shall be deemed to be abandoned by Lessee. Lessee shall reimburse Lessor for all disposition costs incurred by Lessor relative to Lessee's abandoned property. If the Premises are not surrendered at the end of the Lease Term or earlier termination of this Lease, Lessee shall indemnify Lessor against loss or liability resulting from any delay caused by Lessee in surrendering the Premises including, without limitation, any claims made by any succeeding Lessee founded on such delay. 3. USES PROHIBITED: Lessee shall not commit, or suffer to be committed, any waste upon the Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in or around the buildings in which the subject Premises are located or allow any sale by auction upon the Premises, or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, or place any loads upon the floor, walls, or ceiling which may endanger the structure, or use any machinery or apparatus which will in any manner vibrate or shake the Premises or the building of which it is a part, or place any harmful liquids in the drainage system of the building. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the building proper. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building structure, unless approved by the local, state federal or other applicable governing authority. Lessor consents to Lessee's use of materials which are incidental to the normal, day-to-day operations of any office user, such as copier fluids, cleaning materials, etc., but this does not relieve Lessee of any of its obligations not to contaminate the Premises and related real property or violate any Hazardous Materials Laws. 4. ALTERATIONS AND ADDITIONS: Lessee shall not make, or suffer to be made, any alteration or addition to said Premises, or any part thereof, without the express, advance written consent of Lessor; any addition or alteration to said Premises, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Lessor at the end of the Lease Term or earlier termination of this Lease. Alterations and additions which are not deemed as trade fixtures shall include HVAC systems, lighting systems, electrical systems, partitioning, carpeting, or any other installation which has become an integral part of the Premises. Lessee agrees that it will not proceed to make such alterations or additions until all required government permits have been obtained and after having obtained consent from Lessor to do so, until five (5) days from the receipt of such consent, so that Lessor may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Lessee's improvements. Lessee shall at all times permit such notices to be posted and to remain posted until the completion of work. At the end of the Lease Term or earlier termination of this Lease, Lessee shall remove and shall be required to remove its special tenant improvements, all related equipment, and any additions or alterations installed by Lessee at or during the Lease Term and Lessee shall return the Premises to the condition that existed before the installation of the tenant improvements. Notwithstanding the above, Lessor agrees to allow any reasonable alterations and improvements and will use its best efforts to notify Lessee at the time of approval if such improvements or alterations are to be removed at the end of the Lease Term or earlier termination of this Lease. 5. MAINTENANCE OF PREMISES: (a) Lessee shall at its sole cost and expense keep, repair, and maintain the interior of the Premises, including, but not limited to, all lighting systems, temperature control systems, and plumbing systems in Good Condition and Repair, including any required replacements. Lessee shall maintain all wall surfaces and floor coverings in Good Condition and Repair, free of holes, gouges, or defacements and provide interior and exterior window washing as needed. PAGE 3 (b) Lessor shall, at Lessee's expense, keep, repair, and maintain in Good Condition and Repair including replacements (based on a pro-rata share of (i) costs based on square footage or (ii) costs directly related to Lessee's use of the Premises) the following, which shall be included in the monthly CAC: 1. The exterior of the building, any appurtenances and every part thereof, including but not limited to, glazing, sidewalks, parking areas, electrical systems, HVAC systems, roof membrane, and painting of exterior walls. The parking lot to receive a finish coat every five to seven years. 2. The HVAC by a service contract with a licensed air conditioning and heating contractor which contract shall provide for a minimum of quarterly maintenance of all air conditioning and heating equipment at the Premises including HVAC repairs or replacements which are either excluded from such service contract or any existing equipment warranties. 3. The landscaping by a landscape contractor to water, maintain, trim and replace, when necessary, any shrubbery and landscaping at the Premises. 4. The roof membrane by a service contract with a licensed reputable roofing contractor which contract shall provide for a minimum of semi-annual maintenance, cleaning of storm gutters, drains, removing of debris, and trimming overhanging trees, repair of the roof and application of a finish coat every five years to the building at the Premises. 5. Exterior pest control. 6. Fire monitoring services. (c) Lessee hereby waives any and all rights to make repairs at the expense of Lessor as provided in Section 1942 of the Civil Code of the State of California, and all rights provided for by Section 1941 of said Civil Code. (d) Lessor shall be responsible for the repair of any structural defects in the Premises including the roof structure (not membrane), exterior walls and foundation during the Lease Term. 6. INSURANCE: A) HAZARD INSURANCE: Lessee shall not use, or permit said Premises, or any part thereof, to be used, for any purpose other than that for which the Premises are hereby leased; and no use shall be made or permitted to be made of the Premises, nor acts done, which may cause a cancellation of any insurance policy covering the Premises, or any part thereof, nor shall Lessee sell or permit to be kept, used or sold, in or about said Premises, any article which may be prohibited by a fire and extended coverage insurance policy. Lessee shall comply with any and all requirements, pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and extended coverage insurance, covering the Premises. Lessor shall, at Lessee's sole cost and expense, purchase and keep in force fire and extended coverage insurance, covering loss or damage to the Premises in an amount equal to the full replacement cost of the Premises, as determined by Lessor, with proceeds payable to Lessor. In the event of a loss per the insurance provisions of this paragraph, Lessee shall be responsible for deductibles up to a maximum of $5,000 per occurrence. Lessee acknowledges that the insurance referenced in this paragraph does not include coverage for Lessee's personal property. B) LOSS OF RENTS INSURANCE: Lessor shall, at Lessee's sole cost and expense, purchase and maintain in full force and effect, a policy of rental loss insurance, in an amount equal to the amount of Rent payable by Lessee commencing on the date of loss for the next ensuing one (1) year, as reasonably determined by Lessor with proceeds payable to Lessor ("Loss of Rents Insurance"). C) LIABILITY AND PROPERTY DAMAGE INSURANCE: Lessee, as a material part of the consideration to be rendered to Lessor, hereby waives all claims against Lessor and Lessor's Agents for damages to goods, wares and merchandise, and all other personal property in, upon, or about the Premises, and for injuries to persons in, upon, or about the Premises, from any cause arising at any time, and Lessee will hold Lessor and Lessor's Agents exempt and harmless from any damage or injury to any person, or to the goods, wares, and merchandise and all other personal property of any person, arising from the use or occupancy of the Premises by Lessee, or from the failure of Lessee to keep the Premises in Good Condition and Repair, as herein provided. Lessee shall, at Lessee's sole cost and expense, purchase and keep in force a standard policy of commercial general liability insurance and property damage policy covering the Premises and all related areas insuring the PAGE 4 Lessee having a combined single limit for both bodily injury, death and property damage in an amount not less than five million dollars ($5,000,000.00) and Lessee's insurance shall be primary. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. Lessee shall, at its sole cost and expense, comply with all of the insurance requirements of all local, municipal, state and federal authorities now in force, or which may hereafter be in force, pertaining to Lessee's use and occupancy of the said Premises. D) PERSONAL PROPERTY INSURANCE: Lessee shall obtain, at Lessee's sole cost and expense, a policy of fire and extended coverage insurance including coverage for direct physical loss special form, and a sprinkler leakage endorsement insuring the personal property of Lessee. The proceeds from any personal property damage policy shall be payable to Lessee. All insurance policies required in 6 C) and 6 D) above shall: (i) provide for a certificate of insurance evidencing the insurance required herein, being deposited with Lessor ten (10) days prior to the Commencement Date, and upon each renewal, such certificates shall be provided 30 days prior to the expiration date of such coverage, (ii) be in a form reasonably satisfactory to Lessor and shall provide the coverage required by Lessee in this Lease, (iii) be carried with companies with a Best Rating of A+ minimum, (iv) specifically provide that such policies shall not be subject to cancellation, reduction of coverage, or other change except after 30 days prior written notice to Lessor, (v) name Lessor, Lessor's lender, and any other party with an insurable interest in the Premises as additional insureds by endorsement to policy, and (vi) shall be primary. Lessee agrees to pay to Lessor, as additional Rent, on demand, the full cost of the insurance polices referenced in 6 A) and 6 B) above as evidenced by insurance billings to Lessor which shall be included in the CAC. If Lessee does not occupy the entire Premises, the insurance premiums shall be allocated to the portion of the Premises occupied by Lessee on a pro-rata square footage or other equitable basis, as determined by Lessor. It is agreed that Lessee's obligation under this paragraph shall be prorated to the reflect the Commencement Date and the end of the Lease Term. Lessor and Lessee hereby waive any rights each may have against the other related to any loss or damage caused to Lessor or Lessee as the case may be, or to the Premises or its contents, and which may arise from any risk generally covered by fire and extended coverage insurance. The parties shall provide that their respective insurance policies insuring the property or the personal property include a waiver of any right of subrogation which said insurance company may have against Lessor or Lessee, as the case may be. 7. ABANDONMENT: Lessee shall not vacate or abandon the Premises at any time during the Lease Term; and if Lessee shall abandon, vacate or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and left on the Premises shall be deemed to be abandoned, at the option of Lessor. Notwithstanding the above, the Premises shall not be considered vacated or abandoned if Lessee maintains the Premises in Good Condition and Repair, provides security and is not in default. 8. FREE FROM LIENS: Lessee shall keep the subject Premises and the property in which the subject Premises are situated, free from any and all liens including but not limited to liens arising out of any work performed, materials furnished, or obligations incurred by Lessee. However, the Lessor shall allow Lessee to contest a lien claim, so long as the claim is discharged prior to any foreclosure proceeding being initiated against the property and provided Lessee provides Lessor a bond if the lien exceeds $5,000. 9. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Lessee shall, at its sole cost and expense, comply with all of the requirements of all local, municipal, state and federal authorities now in force, or which may hereafter be in force, pertaining to the Premises, and shall faithfully observe in the use and occupancy of the Premises all local and municipal ordinances and state and federal statutes now in force or which may hereafter be in force. 10. INTENTIONALLY OMITTED. 11. ADVERTISEMENTS AND SIGNS: Lessee shall not place or permit to be placed, in, upon or about the Premises any unusual or extraordinary signs, or any signs not approved by the city, local, state, federal or other applicable governing authority. Lessee PAGE 5 shall not place, or permit to be placed upon the Premises, any signs, advertisements or notices without the written consent of the Lessor, and such consent shall not be unreasonably withheld. A sign so placed on the Premises shall be so placed upon the understanding and agreement that Lessee will remove same at the end of the Lease Term or earlier termination of this Lease and repair any damage or injury to the Premises caused thereby, and if not so removed by Lessee, then Lessor may have the same removed at Lessee's expense. 12. UTILITIES: Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities supplied to the Premises which shall be included in Lessee's monthly estimated CAC. Any charges for sewer usage, PG&E and telephone site service or related fees shall be the obligation of Lessee and paid for by Lessee and shall be included in Lessee's monthly estimated CAC. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion of all charges which are jointly metered, the determination to be made by Lessor acting reasonably and on any equitable basis. Lessor and Lessee agree that Lessor shall not be liable to Lessee for any disruption in any of the utility services to the Premises. 13. ATTORNEY'S FEES: In case suit should be brought for the possession of the Premises, for the recovery of any sum due hereunder, because of the breach of any other covenant herein, or to enforce, protect, or establish any term, conditions, or covenant of this Lease or the right of either party hereunder, the losing party shall pay to the Prevailing Party reasonable attorney's fees which shall be deemed to have accrued on the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgment. The term "Prevailing Party" shall mean the party that received substantially the relief requested, whether by settlement, dismissal, summary judgment, judgment, or otherwise. 14.1 DEFAULT: The occurrence of any of the following shall constitute a default and breach of this Lease by Lessee: a) Any failure by Lessee to pay Rent or to make any other payment required to be made by Lessee hereunder when due if not cured within ten (10) days after written notice thereof by Lessor to Lessee; b) The abandonment or vacation of the Premises by Lessee except as provided in Section 7; c) A failure by Lessee to observe and perform any other provision of this Lease to be observed or performed by Lessee, where such failure continues for thirty days after written notice thereof by Lessor to Lessee; provided, however, that if the nature of such default is such that the same cannot be reasonably cured within such thirty (30) day period, Lessee shall not be deemed to be in default if Lessee shall, within such period, commence such cure and thereafter diligently prosecute the same to completion; d) The making by Lessee of any general assignment for the benefit of creditors; the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy; e) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets or Lessee's interest in this Lease, or the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease. 14.2 SURRENDER OF LEASE: In the event of any such default by Lessee, then in addition to any other remedies available to Lessor at law or in equity, Lessor shall have the immediate option to terminate this Lease before the end of the Lease Term and all rights of Lessee hereunder, by giving written notice of such intention to terminate. In the event that Lessor terminates this Lease due to a default of Lessee, then Lessor may recover from Lessee: a) the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus b) the worth at the time of award of unpaid Rent which would have been earned after termination until the time of award exceeding the amount of such rental loss that the Lessee proves could have been reasonably avoided; plus c) the worth at the time of award of the amount by which the unpaid Rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; plus d) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform his obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; and e) at Lessor's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. As used in (a) and (b) above, the "worth at the time of award" is computed by allowing interest at the rate of Wells Fargo's prime rate plus two percent (2%) per annum. As used in (c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). PAGE 6 14.3 RIGHT OF ENTRY AND REMOVAL: In the event of any such default by Lessee, Lessor shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Lessee. 14.4 ABANDONMENT: In the event of the vacation or abandonment, except as provided in Section 7, of the Premises by Lessee or in the event that Lessor shall elect to re-enter as provided in paragraph 14.3 above or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, and Lessor does not elect to terminate this Lease as provided in Section 14.2 above, then Lessor may from time to time, without terminating this Lease, either recover all Rent as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental rates and upon such other terms and conditions as Lessor, in its sole discretion, may deem advisable with the right to make alterations and repairs to the Premises. In the event that Lessor elects to relet the Premises, then Rent received by Lessor from such reletting shall be applied; first, to the payment of any indebtedness other than Rent due hereunder from Lessee to Lessor; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises; fourth, to the payment of Rent due and unpaid hereunder; and the residue, if any, shall be held by Lessor and applied to the payment of future Rent as the same may become due and payable hereunder. Should that portion of such Rent received from such reletting during any month, which is applied by the payment of Rent hereunder according to the application procedure outlined above, be less than the Rent payable during that month by Lessee hereunder, then Lessee shall pay such deficiency to Lessor immediately upon demand therefor by Lessor. Such deficiency shall be calculated and paid monthly. Lessee shall also pay to Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. 14.5 NO IMPLIED TERMINATION: No re-entry or taking possession of the Premises by Lessor pursuant to Section 14.3 or Section 14.4 of this Lease shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Lessee or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Lessor because of any default by Lessee, Lessor may at any time after such reletting elect to terminate this Lease for any such default. 15. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subleases or sub tenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such subleases or sub tenancies. 16. TAXES: Lessee shall pay and discharge punctually and when the same shall become due and payable without penalty, all real estate taxes, personal property taxes, taxes based on vehicles utilizing parking areas in the Premises, taxes computed or based on rental income (other than federal, state and municipal net income taxes), environmental surcharges, privilege taxes, excise taxes, business and occupation taxes, school fees or surcharges, gross receipts taxes, sales and/or use taxes, employee taxes, occupational license taxes, water and sewer taxes, assessments (including, but not limited to, assessments for public improvements or benefit), assessments for local improvement and maintenance districts, and all other governmental impositions and charges of every kind and nature whatsoever, regardless of whether now customary or within the contemplation of the parties hereto and regardless of whether resulting from increased rate and/or valuation, or whether extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing (all of the foregoing being hereinafter collectively called "Tax" or "Taxes") which, at any time during the Lease Term, shall be applicable or against the Premises, or shall become due and payable and a lien or charge upon the Premises under or by virtue of any present or future laws, statutes, ordinances, regulations, or other requirements of any governmental authority whatsoever. The term "Environmental Surcharge" shall include any and all expenses, taxes, charges or penalties imposed by the Federal Department of Energy, Federal Environmental Protection Agency, the Federal Clean Air Act, or any regulations promulgated thereunder, or any other local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy in regard to the use, operation or occupancy of the Premises. The term "Tax" shall include, without limitation, all taxes, assessments, levies, fees, impositions or charges levied, imposed, assessed, measured, or based in any manner whatsoever (i) in whole or in part on the Rent payable by Lessee under this Lease, (ii) upon or with respect to the use, possession, occupancy, leasing, operation or management of the Premises, (iii) upon this transaction or any document to which Lessee is a party creating or transferring an PAGE 7 interest or an estate in the Premises, (iv) upon Lessee's business operations conducted at the Premises, (v) upon, measured by or reasonably attributable to the cost or value of Lessee's equipment, furniture, fixtures and other personal property located on the Premises or the cost or value of any leasehold improvements made in or to the Premises by or for Lessee, regardless of whether title to such improvements shall be in Lessor or Lessee, or (vi) in lieu of or equivalent to any Tax set forth in this Section 16. In the event any such Taxes are payable by Lessor and it shall not be lawful for Lessee to reimburse Lessor for such Taxes, then the Rent payable thereunder shall be increased to net Lessor the same net rent after imposition of any such Tax upon Lessor as would have been payable to Lessor prior to the imposition of any such Tax. It is the intention of the parties that Lessor shall be free from all such Taxes and all other governmental impositions and charges of every kind and nature whatsoever. However, nothing contained in this Section 16 shall require Lessee to pay any Federal or State income, franchise, estate, inheritance, succession, transfer or excess profits tax imposed upon Lessor. If any general or special assessment is levied and assessed against the Premises, Lessor agrees to use its best reasonable efforts to cause the assessment to become a lien on the Premises securing repayment of a bond sold to finance the improvements to which the assessment relates which is payable in installments of principal and interest over the maximum term allowed by law. It is understood and agreed that Lessee's obligation under this paragraph will be prorated to reflect the Commencement Date and the end of the Lease Term. It is further understood that if Taxes cover the Premises and Lessee does not occupy the entire Premises, the Taxes will be allocated to the portion of the Premises occupied by Lessee based on a pro-rata square footage or other equitable basis, as determined by Lessor. Taxes billed by Lessor to Lessee shall be included in the monthly CAC. Subject to any limitations or restrictions imposed by any deeds of trust or mortgages now or hereafter covering or affecting the Premises, Lessee shall have the right to contest or review the amount or validity of any Tax by appropriate legal proceedings but which is not to be deemed or construed in any way as relieving, modifying or extending Lessee's covenant to pay such Tax at the time and in the manner as provided in this Section 16. However, as a condition of Lessee's right to contest, if such contested Tax is not paid before such contest and if the legal proceedings shall not operate to prevent or stay the collection of the Tax so contested, Lessee shall, before instituting any such proceeding, protect the Premises and the interest of Lessor and of the beneficiary of a deed of trust or the mortgagee of a mortgage affecting the Premises against any lien upon the Premises by a surety bond, issued by an insurance company acceptable to Lessor and in an amount equal to one and one-half (1 1/2) times the amount contested or, at Lessor's option, the amount of the contested Tax and the interest and penalties in connection therewith. Any contest as to the validity or amount of any Tax, whether before or after payment, shall be made by Lessee in Lessee's own name, or if required by law, in the name of Lessor or both Lessor and Lessee. Lessee shall defend, indemnify and hold harmless Lessor from and against any and all costs or expenses, including attorneys' fees, in connection with any such proceedings brought by Lessee, whether in its own name or not. Lessee shall be entitled to retain any refund of any such contested Tax and penalties or interest thereon which have been paid by Lessee. Nothing contained herein shall be construed as affecting or limiting Lessor's right to contest any Tax at Lessor's expense. 17. NOTICES: Unless otherwise provided for in this Lease, any and all written notices or other communication (the "Communication") to be given in connection with this Lease shall be given in writing and shall be given by personal delivery, facsimile transmission or by mailing by registered or certified mail with postage thereon or recognized overnight courier, fully prepaid, in a sealed envelope addressed to the intended recipient as follows: (a) to the Lessor at: 10050 Bandley Drive Cupertino, California 95014 Attention: Carl E. Berg Fax No: (408) 725-1626 (b) to the Lessee at: 10050 Bandley Drive Cupertino, California Attention: Michael J. Anderson Fax No: (408) 725-1626 or such other addresses, facsimile number or individual as may be designated by a Communication given by a party to the other parties as aforesaid. Any Communication given by personal delivery shall be conclusively deemed to have been given and PAGE 8 received on a date it is so delivered at such address provided that such date is a business day, otherwise on the first business day following its receipt, and if given by registered or certified mail, on the day on which delivery is made or refused or if given by recognized overnight courier, on the first business day following deposit with such overnight courier and if given by facsimile transmission, on the day on which it was transmitted provided such day is a business day, failing which, on the next business day thereafter. 18. ENTRY BY LESSOR: Lessee shall permit Lessor and its agents to enter into and upon said Premises at all reasonable times using the minimum amount of interference and inconvenience to Lessee and Lessee's business, subject to any security regulations of Lessee, for the purpose of inspecting the same or for the purpose of maintaining the building in which said Premises are situated, or for the purpose of making repairs, alterations or additions to any other portion of said building, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required, without any rebate of Rent and without any liability to Lessee for any loss of occupation or quiet enjoyment of the Premises; and shall permit Lessor and his agents, at any time within ninety (90) days prior to the end of the Lease Term, to place upon said Premises any usual or ordinary "For Sale" or "For Lease" signs and exhibit the Premises to prospective tenants at reasonable hours. 19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the said Premises during the Lease Term from any cause which is covered by Lessor's property insurance, Lessor shall forthwith repair the same, provided such repairs can be made within ninety (90) days after receipt of building permit under the laws and regulations of State, Federal, County, or Municipal authorities, but such partial destruction shall in no way annul or void this Lease, except that Lessee shall be entitled to a proportionate reduction of Rent while such repairs are being made to the extent of payments received by Lessor under its Loss of Rents Insurance coverage. With respect to any partial destruction which Lessor is obligated to repair or may elect to repair under the terms of this paragraph, the provision of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California are waived by Lessee. In the event that the building in which the subject Premises may be situated is destroyed to an extent greater than thirty-three and one-third percent (33 1/3%) of the replacement cost thereof, Lessor may, at its sole option, elect to terminate this Lease, whether the subject Premises is insured or not. A total destruction of the building in which the subject Premises are situated shall terminate this Lease. Notwithstanding the above, Lessor is only obligated to repair or rebuild to the extent of available insurance proceeds including any deductible amount. Should Lessor determine that insufficient or no insurance proceeds are available for repair or reconstruction of Premises, Lessor, at its sole option, may terminate the Lease. Lessee shall have the option of continuing this Lease by agreeing to pay all repair costs to the subject Premises. 20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any interest therein, and shall not sublet the said Premises or any part thereof, or any right or privilege appurtenant thereto, or cause any other person or entity (a bona fide subsidiary or affiliate of Lessee excepted) to occupy or use the Premises, or any portion thereof, without the advance written consent of Lessor. Any such assignment or subletting without such consent shall be void, and shall, at the option of the Lessor, terminate this Lease. This Lease shall not, or shall any interest therein, be assignable, as to the interest of Lessee, by operation of law, without the written consent of Lessor. Notwithstanding Lessor's obligation to provide reasonable approval, Lessor reserves the right to withhold its consent for any proposed sublessee or assignee of Lessee if the proposed sublessee or assignee is a user or generator of Hazardous Materials. If Lessee desires to assign its rights under this Lease or to sublet, all or a portion of the subject Premises to a party other than a bona fide subsidiary or affiliate of Lessee, Lessee shall first notify Lessor of the proposed terms and conditions of such assignment or subletting. Lessor shall have the right of first refusal to enter into a direct Lessor-lessee relationship with such party under such proposed terms and conditions, in which event Lessee shall be relieved of its obligations hereunder to the extent of the Lessor-lessee relationship entered into between Lessor and such third party. Notwithstanding the foregoing, Lessee may assign this Lease to a successor in interest, whether by merger or acquisition, provided there is no substantial reduction in the net worth of the resulting entity and the resulting entity is not a user or generator of Hazardous Materials. Whether or not Lessor's consent to a sublease or assignment is required, in the event of any sublease or assignment, Lessee shall be and shall remain primarily liable for the performance of all conditions, covenants, and obligations of Lessee hereunder and, in the event of a default by an assignee or sublessee, Lessor may proceed directly against the original Lessee hereunder and/or any other predecessor of such assignee or sublessee without the necessity of exhausting remedies against said assignee or sublessee. PAGE 9 21. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and a part thereof remains which is susceptible of occupation hereunder, this Lease shall as to the part so taken, terminate as of the date title vests in the condemnor or purchaser, and the Rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the Lease Term only that portion of Rent as the value of the part remaining. The rental adjustment resulting will be computed at the same Rental rate for the remaining part not taken; however, Lessor shall have the option to terminate this Lease as of the date when title to the part so taken vests in the condemnor or purchaser. If all of the Premises, or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall thereupon terminate. If a part or all of the Premises be taken, all compensation awarded upon such taking shall be payable to the Lessor. Lessee may file a separate claim and be entitled to any award granted to Lessee. 22. EFFECTS OF CONVEYANCE: The term "Lessor" as used in this Lease, means only the owner for the time being of the land and building constituting the Premises, so that, in the event of any sale of said land or building, or in the event of a Lease of said building, Lessor shall be and hereby is entirely freed and relieved of all covenants and obligations of Lessor hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser of any such sale, or the Lessor of the building, that the purchaser or lessor of the building has assumed and agreed to carry out any and all covenants and obligations of the Lessor hereunder. If any security is given by Lessee to secure the faithful performance of all or any of the covenants of this Lease on the part of Lessee, Lessor may transfer and deliver the security, as such, to the purchaser at any such sale of the building, and thereupon the Lessor shall be discharged from any further liability. 23. SUBORDINATION: This Lease, in the event Lessor notifies Lessee in writing, shall be subordinate to any ground lease, deed of trust, or other hypothecation for security now or hereafter placed upon the real property at which the Premises are a part and to any and all advances made on the security thereof and to renewals, modifications, replacements and extensions thereof. Lessee agrees to promptly execute any documents which may be required to effectuate such subordination. Notwithstanding such subordination, if Lessee is not in default and so long as Lessee shall pay the Rent and observe and perform all of the provisions and covenants required under this Lease, Lessee's right to quiet possession of the Premises shall not be disturbed or effected by any subordination. 24. WAIVER: The waiver by Lessor of any breach of any term, covenant or condition, herein contained shall not be construed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition therein contained. The subsequent acceptance of Rent hereunder by Lessor shall not be deemed to be a waiver of Lessee's breach of any term, covenant, or condition of the Lease. 25. HOLDING OVER: Any holding over after the end of the Lease Term requires Lessor's written approval prior to the end of the Lease Term, which, notwithstanding any other provisions of this Lease, Lessor may withhold. Such holding over shall be construed to be a tenancy at sufferance from month to month. Lessee shall pay to Lessor monthly base rent equal to one and one-half (1.5) times the monthly base rent installment due in the last month of the Lease Term and all other additional rent and all other terms and conditions of the Lease shall apply, so far as applicable. Holding over by Lessee without written approval of Lessor shall subject Lessee to the liabilities and obligations provided for in this Lease and by law, including, but not limited to those in Section 2 of this Lease. Lessee shall indemnify and hold Lessor harmless against any loss or liability resulting from any delay caused by Lessee in surrendering the Premises, including without limitation, any claims made or penalties incurred by any succeeding lessee or by Lessor. No holding over shall be deemed or construed to exercise any option to extend or renew this Lease in lieu of full and timely exercise of any such option as required hereunder. 26. LESSOR'S LIABILITY: If Lessee should recover a money judgment against Lessor arising in connection with this Lease, the judgment shall be satisfied only out of the Lessor's interest in the Premises and neither Lessor or any of its partners shall be liable personally for any deficiency. 27. ESTOPPEL CERTIFICATES: Lessee shall at any time during the Lease Term, upon not less than ten (10) days prior written notice from Lessor, execute and deliver to Lessor a statement in writing certifying that, this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the dates to which the Rent and other charges have been paid PAGE 10 in advance, if any, and acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder or specifying such defaults if they are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Lessee's failure to deliver such a statement within such time shall be conclusive upon the Lessee that (a) this Lease is in full force and effect, without modification except as may be represented by Lessor; (b) there are no uncured defaults in Lessor's performance. 28. TIME: Time is of the essence of the Lease. 29. CAPTIONS: The headings on titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. This instrument contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties hereto or their respective successors in interest. 30. PARTY NAMES: Landlord and Tenant may be used in various places in this Lease as a substitute for Lessor and Lessee respectively. 31. EARTHQUAKE INSURANCE: As a condition of Lessor agreeing to waive the requirement for earthquake insurance, Lessee agrees that it will pay, as additional Rent, which shall be included in the monthly CAC, an amount not to exceed One Thousand Two Hundred Eighty Dollars ($1,280) per year for earthquake insurance if Lessor desires to obtain some form of earthquake insurance in the future, if and when available, on terms acceptable to Lessor as determined in the sole and absolute discretion of Lessor. 32. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in Section 14 herein, Lessor and Lessee agree that if Lessee shall have defaulted in the payment of Rent for three or more times during any twelve month period during the Lease Term, then such conduct shall, at the option of the Lessor, represent a separate event of default which cannot be cured by Lessee. Lessee acknowledges that the purpose of this provision is to prevent repetitive defaults by the Lessee under the Lease, which constitute a hardship to the Lessor and deprive the Lessor of the timely performance by the Lessee hereunder. 33. HAZARDOUS MATERIALS 33.1 DEFINITIONS: As used in this Lease, the following terms shall have the following meaning: a. The term "Hazardous Materials" shall mean (i) polychlorinated biphenyls; (ii) radioactive materials and (iii) any chemical, material or substance now or hereafter defined as or included in the definitions of "hazardous substance" "hazardous water", "hazardous material", "extremely hazardous waste", "restricted hazardous waste" under Section 25115, 25117 or 15122.7, or listed pursuant to Section 25140 of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as "hazardous substance" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substances Account Act), (iii) defined as "hazardous material", "hazardous substance", or "hazardous waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release, Response, Plans and Inventory), (iv) defined as a "hazardous substance" under Section 25181 of the California Health and Safety Code, Division 20l, Chapter 6.7 (Underground Storage of Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as "hazardous" or "extremely hazardous" pursuant to Article II of Title 22 of the California Administrative Code, Division 4, Chapter 20, (viii) defined as "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section 1004 of the Federal Water Pollution Control Act (33 U.S.C. 1317), (ix) defined as a "hazardous waste", pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined as "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Responsibility Compensations, and Liability Act, 42 U.S.C. 9601 et seq., or (xi) regulated under the Toxic Substances Control Act, 156 U.S.C. 2601 et seq. b. The term "Hazardous Materials Laws" shall mean any local, state and federal laws, rules, regulations, or ordinances relating to the use, generation, transportation, analysis, manufacture, installation, release, discharge, storage or disposal of Hazardous Material. PAGE 11 c. The term "Lessor's Agents" shall mean Lessor's agents, representatives, employees, contractors, subcontractors, directors, officers and partners. d. The term "Lessee's Agents" shall mean Lessee's agents, representatives, employees, contractors, subcontractors, directors, officers, partners, invitees or any other person in or about the Premises. 33.2 LESSEE'S RIGHT TO INVESTIGATE: Lessee shall be entitled to cause such inspection, soils and ground water tests, and other evaluations to be made of the Premises as Lessee deems necessary regarding (i) the presence and use of Hazardous Materials in or about the Premises, and (ii) the potential for exposure to Lessee's employees and other persons to any Hazardous Materials used and stored by previous occupants in or about the Premises. Lessee shall provide Lessor with copies of all inspections, tests and evaluations. Lessee shall indemnify, defend and hold Lessor harmless from any cost, claim or expense arising from such entry by Lessee or from the performance of any such investigation by such Lessee. 33.3 LESSOR'S REPRESENTATIONS: Lessor hereby represents and warrants to the best of Lessor's knowledge that the Premises are, as of the date of this Lease, in compliance with all Hazardous Material Laws. 33.4 LESSEE'S OBLIGATION TO INDEMNIFY: Lessee, at its sole cost and expense, shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless from and against any and all cost or expenses, including those described under subparagraphs i, ii and iii herein below set forth, arising from or caused in whole or in part, directly or indirectly by: a. Lessee's or Lessee's Agents' use, analysis, storage, transportation, disposal, release, threatened release, discharge or generation of Hazardous Material to, in, on, under, about or from the Premises; or b. Lessee's or Lessee's Agents failure to comply with Hazardous Material laws; or c. Any release of Hazardous Material to, in, on, under, about, from or onto the Premises caused by or occurring as a result of acts or omissions of Lessee or Lessee's Agents or occurring during the Lease Term, except ground water contamination from other parcels where the source is from off the Premises not arising from or caused by Lessee or Lessee's Agents. The cost and expenses indemnified against include, but are not limited to the following: i. Any and all claims, actions, suits, proceedings, losses, damages, liabilities, deficiencies, forfeitures, penalties, fines, punitive damages, cost or expenses; ii. Any claim, action, suit or proceeding for personal injury (including sickness, disease, or death), tangible or intangible property damage, compensation for lost wages, business income, profits or other economic loss, damage to the natural resources of the environment, nuisance, pollution, contamination, leaks, spills, release or other adverse effects on the environment; iii. The cost of any repair, clean-up, treatment or detoxification of the Premises necessary to bring the Premises into compliance with all Hazardous Material Laws, including the preparation and implementation of any closure, disposal, remedial action, or other actions with regard to the Premises, and expenses (including, without limitation, reasonable attorney's fees and consultants fees, investigation and laboratory fees, court cost and litigation expenses). 33.5 LESSEE'S OBLIGATION TO REMEDIATE CONTAMINATION: Lessee shall, at its sole cost and expense, promptly take any and all action necessary to remediate contamination of the Premises by Hazardous Materials during the Lease Term. 33.6 OBLIGATION TO NOTIFY: Lessor and Lessee shall each give written notice to the other as soon as reasonably practical of (i) any communication received from any governmental authority concerning Hazardous Material which related to the Premises and (ii) any contamination of the Premises by Hazardous Materials which constitutes a violation of any Hazardous Material Laws. 33.7 SURVIVAL: The obligations of Lessee under this Section 33 shall survive the Lease Term or earlier termination of this Lease. 33.8 CERTIFICATION AND CLOSURE: On or before the end of the Lease Term or earlier termination of this Lease, Lessee shall deliver to Lessor a certification executed by Lessee stating that, to the best of Lessee's knowledge, there exists no violation of Hazardous Material Laws resulting from Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or federal law, Lessee is required, at the expiration of the Lease Term, to submit a closure plan for the Premises to a local, state or federal agency, then Lessee shall furnish to Lessor a copy of such plan. PAGE 12 33.9 PRIOR HAZARDOUS MATERIALS: Lessee shall have no obligation to clean up or to hold Lessor harmless with respect to, any Hazardous Material or wastes discovered on the Premises which were not introduced into, in, on, about, from or under the Premises during the Lease Term or ground water contamination from other parcels where the source is from off the Premises not arising from or caused by Lessee or Lessee's Agents. 34. BROKERS: Lessor and Lessee represent that they have not utilized or contacted a real estate broker or finder with respect to this Lease. and Lessee agrees to indemnify and hold Lessor harmless against any claim, cost, liability or cause of action asserted by any broker or finder claiming through Lessee Lessor represents and warrants that it has not utilized or contacted a real estate broker or finder with respect to this Lease and Lessor agrees to indemnify and hold Lessee harmless against any claim, cost, liability or cause of action asserted by any broker or finder claiming through Lessor. 35. OPTION TO EXTEND A. OPTION: Lessor hereby grants to Lessee one (1) option to extend the Lease Term, with the extended term to be for a period of three (3) years, on the following terms and conditions: (i) Lessee shall give Lessor written notice of its exercise of its option to extend no earlier than twenty-four (24) calendar months, nor later than six (6) calendar months before the Lease Term would end but for said exercise. Time is of the essence. (ii) Lessee may not extend the Lease Term pursuant to any option granted by this Section 35 if Lessee is in default as of the date of the exercise of its option. If Lessee has committed a default by Lessee as defined in Section 14 or 32 that has not been cured or waived by Lessor in writing by the date that any extended term is to commence, then Lessor may elect not to allow the Lease Term to be extended, notwithstanding any notice given by Lessee of an exercise of this option to extend. (iii) All terms and conditions of this Lease shall apply during the extended term, except that the base rent and rental increases for each extended term shall be determined as provided in Section 35 (B) below (iv) Lessee must provide Lessor written notice of its exercise of its option as provided hereunder at least nine (9) months before the Lease Term would end but for said exercise for purposes of negotiating rental terms. Lessee may withdraw its notice of exercise of an extension option for any reason prior to six (6) months before the Lease Term would end but for said exercise. Lessor shall provide Lessee with Lessor's proposed base monthly rent for the option period within twenty (20) days of Lessee's written request. However, once Lessee delivers a notice of exercise of an option to extend the Lease Term it may not be withdrawn unless notice in writing is provided to Lessor at least six (6) months before the Lease Term would end but for said exercise and, subject to the provisions of this Section 35, such notice shall operate to extend the Lease Term. Upon any extension of the Lease Term pursuant to this Section 35, the term "Lease Term" as used in this Lease shall thereafter include the then extended term. (v) The option rights of Mission West Properties granted under this Section 35 are granted for Mission West Properties' personal benefit and may not be assigned or transferred by Mission West Properties or exercised if Mission West Properties is not occupying the Premises at the time of exercise. B. EXTENDED TERM RENT - OPTION PERIOD: The monthly Rent for the Premises during the extended term shall equal the fair market monthly Rent for the Premises as of the commencement date of the extended term, but in no case, less than the Rent during the last month of the prior Lease term. Promptly upon Lessee's exercise of the option to extend, Lessee and Lessor shall meet and attempt to agree on the fair market monthly Rent for the Premises as of the commencement date of the extended term. In the event the parties fail to agree upon the amount of the monthly Rent for the extended term prior to commencement thereof, the monthly Rent for the extended term shall be determined by appraisal in the manner hereafter set forth; provided, however, that in no event shall the monthly Rent for the extended term be less than in the immediate preceding period. Annual base rent increases during the extended term shall be four percent (4%) per year. In the event it becomes necessary under this paragraph PAGE 13 to determine the fair market monthly Rent of the Premises by appraisal, Lessor and Lessee each shall appoint a real estate appraiser who shall be a member of the American Institute of Real Estate Appraiser ("AIREA") and such appraisers shall each determine the fair market monthly Rent for the Premises taking into account the value of the Premises and the amenities provided by the outside areas, the common areas, and the Building, and prevailing comparable Rentals in the area. Such appraisers shall, within twenty (20) business days after their appointment, complete their appraisals and submit their appraisal reports to Lessor and Lessee. If the fair market monthly Rent of the Premises established in the two (2) appraisals varies by five percent (5%) or less of the higher Rent, the average of the two shall be controlling. If said fair market monthly Rent varies by more than five percent (5%) of the higher Rental, said appraisers, within ten (10) days after submission of the last appraisal, shall appoint a third appraiser who shall be a member of the AIREA and who shall also be experienced in the appraisal of Rent values and adjustment practices for commercial properties in the vicinity of the Premises. Such third appraiser shall, within twenty (20) business days after his appointment, determine by appraisal the fair market monthly Rent of the Premises taking into account the same factors referred to above, and submit his appraisal report to Lessor and Lessee. The fair market monthly Rent determined by the third appraiser for the Premises shall be controlling, unless it is less than that set forth in the lower appraisal previously obtained, in which case the value set forth in said lower appraisal shall be controlling, or unless it is greater than that set forth in the higher appraisal previously obtained in which case the Rent set for in said higher appraisal shall be controlling. If either Lessor or Lessee fails to appoint an appraiser, or if an appraiser appointed by either of them fails, after his appointment to submit his appraisal within the required period in accordance with the foregoing, the appraisal submitted by the appraiser properly appointed and timely submitting his appraisal shall be controlling. If the two appraisers appointed by Lessor and Lessee are unable to agree upon a third appraiser within the required period in accordance with the foregoing, application shall be made within twenty (20) days thereafter by either Lessor or Lessee to AIREA, which shall appoint a member of said institute willing to serve as appraiser. The cost of all appraisals under this subparagraph shall be borne equally be Lessor and Lessee. 36. APPROVALS: Whenever in this Lease the Lessor's or Lessee's consent is required, such consent shall not be unreasonably or arbitrarily withheld or delayed. In the event that the Lessor or Lessee does not respond to a request for any consents which may be required of it in this Lease within ten business days of the request of such consent in writing by the Lessee or Lessor, such consent shall be deemed to have been given by the Lessor or Lessee. 37. AUTHORITY: Each party executing this Lease represents and warrants that he or she is duly authorized to execute and deliver the Lease. If executed on behalf of a corporation, that the Lease is executed in accordance with the by-laws of said corporation (or a partnership that the Lease is executed in accordance with the partnership agreement of such partnership), that no other party's approval or consent to such execution and delivery is required, and that the Lease is binding upon said individual, corporation (or partnership) as the case may be in accordance with its terms. 38. INDEMNIFICATION OF LESSOR: Except to the extent caused by the sole negligence or willful misconduct of Lessor or Lessor's Agents, Lessee shall defend, indemnify and hold Lessor harmless from and against any and all obligations, losses, costs, expenses, claims, demands, attorney's fees, investigation costs or liabilities on account of, or arising out of the use, condition or occupancy of the Premises or any act or omission to act of Lessee or Lessee's Agents or any occurrence in, upon, about or at the Premises, including, without limitation, any of the foregoing provisions arising out of the use, generation, manufacture, installation, release, discharge, storage, or disposal of Hazardous Materials by Lessee or Lessee's Agents. It is understood that Lessee is and shall be in control and possession of the Premises and that Lessor shall in no event be responsible or liable for any injury or damage or injury to any person whatsoever, happening on, in, about, or in connection with the Premises, or for any injury or damage to the Premises or any part thereof. This Lease is entered into on the express condition that Lessor shall not be liable for, or suffer loss by reason of injury to person or property, from whatever cause, which in any way may be connected with the use, condition or occupancy of the Premises or personal property located herein. The provisions of this Lease permitting Lessor to enter and inspect the Premises are for the purpose of enabling Lessor to become informed as to whether Lessee is complying with the terms of this Lease and Lessor shall be under no duty to enter, inspect or to perform any of Lessee's covenants set forth in this Lease. Lessee shall further indemnify, defend and hold harmless Lessor from and against any and all claims arising from any breach or default in the performance of any obligation to Lessee's part to be performed under the terms of this Lease. The provisions of Section 38 shall survive the Lease Term or earlier termination of this Lease with respect to any damage, injury or death occurring during the Lease Term. PAGE 14 39. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. 40. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law and are in addition to all other rights or remedies in law and in equity. 41. CHOICE OF LAW: This lease shall be construed and enforced in accordance with the substantive laws of the State of California. The language of all parts of this lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Lessor or Lessee. 42. ENTIRE AGREEMENT: This Lease is the entire agreement between the parties, and there are no agreements or representations between the parties except as expressed herein. Except as otherwise provided for herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease, the day and year first above written. LESSOR LESSEE BERG & BERG ENTERPRISES, INC. MISSION WEST PROPERTIES By: By: --------------------------- --------------------------- signature of authorized Signature of authorized representative representative Carl E. Berg Michael J. Anderson - ------------------------------ ------------------------------ printed name printed name - ------------------------------ ------------------------------ title Title - ------------------------------ ------------------------------ date Date PAGE 15 EX-10.9 19 EXHIBIT 10.9 EXHIBIT 10.9 GRANT PURSUANT TO 1997 STOCK OPTION PLAN MICHAEL J. ANDERSON, OPTIONEE: Mission West Properties, a California corporation (the "Company"), hereby grants to Optionee, an option ("Option") to purchase a total of two hundred thousand (200,000) shares of Common Stock ("Shares") of the Company, at the price set forth herein, and in all respects subject to the terms, definitions and provisions of the Company's 1997 Stock Option Plan ("Plan"), which is incorporated herein by this reference. THE DETAILS OF YOUR OPTION ARE AS FOLLOWS: 1. NATURE OF THE OPTION The Option is intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). To the extent that the Option, or any portion thereof, does not qualify as an incentive stock option under the Code because the aggregate fair market value (determined at the grant date) of the Shares for which the Option or portion thereof first becomes exercisable hereunder will, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Shares or other securities for which the Option or one or more other incentive stock options granted to the Optionee prior to the grant date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first becomes exercisable during the calendar year, exceed $100,000 in the aggregate, the Option or portion thereof shall constitute an incentive stock option under the Plan in such calendar year only to the extent of such $100,000 limitation. To the extent that the fair market value of the Shares for which the Option first becomes exercisable in any calendar year exceeds such $100,000 limitation, the Option may nevertheless be exercised for those excess Shares in such calendar year as a "Nonstatutory Stock Option", as defined in Section 2.o of the Plan. 2. OPTION PRICE The Option Price is four dollars and fifty cents ($4.50) for each Share. 3 VESTING AND EXERCISE OF OPTION The Option shall vest and become exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: a. VESTING AND RIGHT TO EXERCISE i. The Option shall vest as follows, subject to the Optionee's Continuous Employment with the Company:
DATE OF EARLIEST EXERCISE NUMBER OF SHARES (VESTING) (INSTALLMENT) ---------------------------------------------------------------------- Six months from date of grant 12,500 One year from date of grant 25,000 Each month thereafter for 35 months 4,514 48th month from date of grant 4,510
Subject to the provisions of subparagraphs ii and iii below, the Optionee can exercise any portion of the Option until the expiration of the Option term. Notwithstanding the foregoing, but subject to the provisions of subparagraph ii below, at the election of the Optionee, the Option can be exercised in whole or in part at any time as to the Shares which have not vested, provided that the Optionee shall, as a condition of such exercise, execute and deliver the Restricted Stock Purchase Agreement in the form attached hereto ("Restricted Stock Purchase Agreement"), pursuant to which the Company shall be granted a Repurchase Option as to all Unvested Shares (as such term is defined in the Restricted Stock Purchase Agreement). ii. In the event of the Optionee's death, disability or other termination of employment, the exercisability of the Option shall be governed by Sections 9.d, e and f of the Plan. iii. The Option may not be exercised for fractional shares or for less than ten (10) Shares b. METHOD OF EXERCISE In order to exercise any portion of this Option, the Optionee shall notify the Company in writing of the election to exercise the Option, the number of shares in respect of which the Option is being exercised by executing and delivering the Notice of Exercise of Stock Option in the form attached hereto, and shall execute and deliver to the Chief Financial Officer of the Company the Restricted Stock Purchase Agreement, together with the Stock Assignments, Escrow Agreement and, if applicable, the Consent of Spouse, Promissory Note, and Security Agreement, forms of which are attached as exhibits to the Restricted Stock Purchase Agreement. The Restricted Stock Purchase Agreement must be accompanied by payment in full of the aggregate purchase price for the Shares to be purchased. The certificate or certificates representing Shares as to which this Option has been exercised shall be registered in the name of the Optionee. b. RESTRICTIONS ON EXERCISE This Option may not be exercised if the issuance of the Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable Federal or state securities law or other law or regulation. Furthermore, the method and manner of payment of the Option Price will be subject to the rules under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board if such rules apply to the Company at the date of exercise. As a condition to the exercise of this Option, the Company may require the Optionee to make any representation or warranty to the Company at the time of exercise of this Option as in the opinion of legal counsel for the Company may be required by any applicable law or regulation, including the execution and delivery of an appropriate representation statement. Accordingly, the stock certificates for the Shares issued upon exercise of this Option may bear appropriate legends restricting transfer. 4. NON-TRANSFERABILITY OF OPTION This Option may be exercised during the lifetime of the Optionee only by the Optionee and, subject to the provisions of Sections 9.f and 10 of the Plan, may not be transferred in any manner other than by will or by the laws of descent and distribution. The terms of this Option shall be binding upon the executors, administrators, heirs and successors of the Optionee. 5. METHOD OF PAYMENT Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: a. cash; b. certified or bank cashier's check; c. full recourse promissory note secured by the Shares or equivalent collateral; or d. in the event there exists a public market for the Company's Common Stock on the date of exercise, by delivery of a sell order to a broker for the shares being purchased and an agreement to pay (or have the broker remit payment for) the purchase price of the shares being purchased on or before the settlement date for the sale of such shares to the broker; or e. in the event there exists a public market for the Company's Common Stock on the date of exercise, by surrender of shares of the Company's Common Stock, provided that if such shares were acquired upon exercise of an incentive stock option, the Optionee must have first satisfied the holding period requirements under Section 422(a)(1) of the Code. In this case payment shall be made as follows: i. In addition to the execution and delivery of the Restricted Stock Purchase Agreement, Optionee shall deliver to the Secretary of the Company a written notice which shall set forth the portion of the purchase price the Optionee wishes to pay with Common Stock, and the number of shares of such Common Stock the Optionee intends to surrender pursuant to the exercise of this Option, which shall be determined by dividing the aforementioned portion of the purchase price by the average of the last reported bid and asked prices per share of Common Stock of the Company, as reported in THE WALL STREET JOURNAL, for the day on which the notice of exercise is sent or delivered; ii. Fractional shares shall be disregarded and the Optionee shall pay in cash an amount equal to such fraction multiplied by the price determined under subparagraph i above; iii. The written notice shall be accompanied by a duly endorsed blank stock power with respect to the number of Shares set forth in the notice, and the certificate(s) representing said Shares shall be delivered to the Company at its principal offices within three (3) working days from the date of the notice of exercise; iv. The Optionee hereby authorizes and directs the Secretary of the Company to transfer so many of the Shares represented by such certificate(s) as are necessary to pay the purchase price in accordance with the provisions herein; v. If any such transfer of Shares requires the consent of the California Commissioner of Corporations or of some other agency under the securities laws of any other state, or an opinion of counsel for the Company or Optionee that such transfer may be effected under applicable Federal and state securities laws, the time periods specified herein shall be extended for such periods as the necessary request for consent to transfer is pending before said Commissioner or other agency, or until counsel renders such an opinion, as the case may be. All parties agree to cooperate in making such request for transfer, or in obtaining such opinion of counsel, and no transfer shall be effected without such consent or opinion if required by law; and vi. Notwithstanding any other provision herein, the Optionee shall only be permitted to pay the purchase price with Shares of the Company's Common Stock owned by him as of the exercise date in the manner and within the time periods allowed under 17 CFR ss.240.16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as such regulation is presently constituted, as it is amended from time to time, and as it is interpreted now or hereafter by the Securities and Exchange Commission. 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. The number of Shares covered by this Option shall be adjusted in accordance with the provisions of Section 11 of the Plan in the event of changes in the capitalization or organization of the Company, or if the Company is a party to a merger or other corporate reorganization. 7. TERM OF OPTION This Option may not be exercised more than six (6) years from the date of grant of this Option, as set forth below, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 8. REPURCHASE RIGHTS The Optionee hereby agrees that any Shares acquired upon the exercise of this Option shall be subject to the rights of the Company to repurchase such Shares to the extent such Shares have not yet vested and to certain restrictions on transfer specified in the Restricted Stock Purchase Agreement. 9. NOT EMPLOYMENT CONTRACT Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Company or shall interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause, subject to the provisions of applicable law. This is not an employment contract. 10. INCOME TAX WITHHOLDING a. The Optionee authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld by Federal, state or local laws as a result of the exercise of this Option. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the shares acquired upon exercise of an incentive stock option. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the exercise of this Option, or a disqualifying disposition of the shares acquired upon exercise of an incentive stock option, the Optionee agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not Optionee is an employee of the Company at that time. b. At such time as the Optionee is required to pay to the Company an amount with respect to tax withholding obligations as set forth in subparagraph a, the Optionee may elect prior to the date the amount of such withholding tax is determined to make such payment, or such increased payment as the Optionee elects to make up to the maximum federal, state and local marginal tax rates (including any related FICA obligation) applicable to the Optionee and the particular transaction in accordance with the provisions of Section 9.g of the Plan. c. Any adverse consequences incurred by an Optionee with respect to the use of shares of Common Stock to pay any part of the Option Price or of any tax in connection with the exercise of an Option, including, without limitation, any adverse tax consequences arising as a result of a disqualifying disposition within the meaning of Section 422 of the Code, shall be the sole responsibility of the Optionee. 11. TERMINATION a. Should optionee voluntarily terminate for Good Cause (as defined below) or be involuntarily terminated for other than Bad Cause (as defined below) more than twelve (12) months from Optionee's date of employment with the Company, then any portion of this option that would have vested in the six (6) months following Optionee's termination date, shall vest on Optionee's termination date. b. GOOD CAUSE shall be defined as any of the following condition, which condition(s) remain(s) in effect ten (10) days after written notice to the Board of Directors of the Company from Optionee of such condition(s): i. a decrease in Optionee's base salary and/or a material decrease in Optionee's standard management bonus plan or employee benefits; ii. a material reduction in Optionee's title, authority, responsibilities or duties, as measured against Optionee's title, authority or responsibility or duties immediately prior to such reduction; iii. Optionee is not promoted to President of the Company within eighteen (18) months following his date of employment; iv. the relocation of the Optionee's work place for the Company to a location outside Santa Clara County, California; or v. the Company is in breach of the employment agreement (attached) with Optionee. b. BAD CAUSE shall be defined as: i. theft, dishonesty, or intentional falsification of any employment or Company records; ii. intentional and improper disclosure of the Company's confidential or proprietary information; or iii. Optionee's conviction for any criminal act which materially impairs Optionee's ability to perform his duties. Dated the 1st day of January 1998 MISSION WEST PROPERTIES By --------------------------------- Duly authorized on behalf of the Board of Directors The Optionee acknowledges receipt of copies of the Plan, the Restricted Stock Purchase Agreement and the exhibits referred to therein, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan. - ---------------------------------- Optionee CONSENT OF SPOUSE I, _________________________, spouse of the Optionee who executed the foregoing Agreement, hereby agree that my spouse's interest in the shares of Common Stock subject to said Agreement shall be irrevocably bound by the Agreement's terms. I further agree that my community property interest in such shares, if any, shall similarly be bound by said Agreement and that such consent is binding upon my executors, administrators, heirs and assigns. I agree to execute and deliver such documents as may be necessary to carry out the intent of said Agreement and this consent. - ---------------------------------- Spouse EX-10.10 20 RESTRICTED STOCK PURCHASE AGREEMENT FOR ANDERSON MISSION WEST PROPERTIES RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made and entered into as of March 30, 1998, between Mission West Properties, a California corporation (the "Company") and Michael J. Anderson ("Purchaser"). R E C I T A L S: A. Pursuant to the exercise of a stock option (the "Option") granted to Purchaser by the Company under the Stock Option Agreement dated March 30, 1998 (the "Option Agreement"), Purchaser has elected to purchase Two Hundred Thousand (200,000) shares of the Company's Common Stock (the "Shares"). B. Purchaser is a key employee of the Company. The securities described in this Agreement are being offered and sold pursuant to a written compensatory benefit plan of the Company. NOW, THEREFORE, in consideration of the mutual covenants exchanged, the parties agree as follows: 1. PURCHASE AND SALE OF SHARES. (a) PURCHASE AND SALE OF SHARES. The Company agrees to sell to Purchaser, and Purchaser agrees to purchase from the Company, Two Hundred Thousand (200,000) shares of the Company's Common Stock (the "Shares"), at a purchase price of Four Dollars and Fifty Cents ($4.50) per share, for a total purchase price of Nine Hundred Thousand Dollars ($900,000). All of the Shares shall be subject to this Agreement and the restrictions herein contained. (b) CLOSING. The purchase and sale of the Shares shall be held at the principal office of the Company on the date hereof, or at such other time and place as shall be mutually agreed between Purchaser and the Company. At the closing, Purchaser shall deliver to the Company the total purchase price for the Shares paid in a form and manner authorized by the Option Agreement, and the Company will issue, as promptly thereafter as practicable, a certificate representing the Shares issued in the name of Purchaser. In the event Purchaser delivers his Promissory Note in the form attached hereto as Exhibit A in payment of the purchase price, the following shall apply: (i) Purchaser shall assign, transfer and pledge the Shares, or collateral of equivalent value acceptable to the Company, to the Company as security for payment of the Promissory Note in accordance with the provisions of a Security Agreement in the form of Exhibit B attached hereto. (ii) In the event Purchaser's employment by the Company is terminated for any reason whatsoever, including death, the Company shall have the right, upon ninety (90) days' prior written notice to Purchaser, or his legal representative or successor, to accelerate the full payment of the Promissory Note, in which event such payment shall be due and payable to the Company within thirty (30) days after the expiration of the ninety (90)-day period, unless Purchaser is in default under the Promissory Note or the Security Agreement on the date such notice is sent. In the event of such default, the provisions regarding acceleration of payment due under the Promissory Note contained in Section 6 of the Security Agreement shall apply. 2. REPURCHASE OPTION. (a) SHARES SUBJECT TO REPURCHASE. Purchaser hereby grants to the Company the option (the "Repurchase Option") to repurchase all or part of the Unvested Shares (as defined in Section 2(b) below) at the price per share paid for them by Purchaser (the "Option Price"), subject to adjustment pursuant to Section 3, upon the occurrences set forth in subSection (c), but only to the extent such Shares have not been released from the Repurchase Option as provided in subSection (b). All of the Shares shall initially be subject to the Repurchase Option. (b) RELEASE DATES. The Shares subject to the Repurchase Option shall be released from the Repurchase Option in accordance with the vesting schedule set forth in Section 3(a) of the Option Agreement to the extent and as of the dates provided therein. Shares subject to the Repurchase Option are referred to herein as "Unvested Shares," and Shares which have been released from the Repurchase Option are referred to herein as "Vested Shares." (c) OCCURRENCES PERMITTING EXERCISE. The Company may exercise the Repurchase Option if during the term of this Agreement any one of the following events (an "Offering Event") takes place: (i) Purchaser shall cease to be employed by the Company (including a Parent or Subsidiary of the Company) for any reason, or no reason, with or without cause, including involuntary termination, death or disability; or (ii) any event occurs which causes the involuntary transfer to creditors or to any other person or entity of all or any part of the Shares still subject to the Repurchase Option at the time of such transfer; or (iii) upon designation by the Company in writing to Purchaser, any acceleration of payment due as provided under the terms of the Promissory Note. (d) EXERCISE OF REPURCHASE OPTION. Upon the occurrence of an Offering Event, the Company may exercise the Repurchase Option by delivering personally, or by registered or certified mail, to Purchaser (or the Purchaser's permitted transferee or legal representative, as the case may be), within ninety (90) days after the date of the Offering Event, a notice in writing indicating the Company's election to exercise its Repurchase Option and the number of Shares to be purchased by the Company or the Company's designee, who shall be identified in such notice, and setting forth a date for closing not later than thirty (30) days from the date of giving such notice. (e) CLOSING FOR REPURCHASE OF SHARES. The closing for the repurchase of the Shares pursuant to the exercise of the Repurchase Option shall take place at the Company's principal offices. At the closing, the holder of the certificate(s) representing the Shares being transferred shall deliver said certificate or certificates evidencing the Shares to the Company, duly endorsed for transfer, and the Company (or its designee) shall tender payment of the purchase price for the Shares being purchased. The purchase price shall be payable in full in cash, or by check, provided that the Company may elect to offset against and deduct from any payment of the purchase price any indebtedness then owed by Purchaser to the Company. 3. ADJUSTMENTS. (a) GENERAL. If, from time to time during the term of this Agreement: (i) there is any stock dividend, distribution or dividend, stock split, or other change in the character or amount of any of the outstanding securities of the Company; or (ii) there is any consolidation, merger or sale of all, or substantially all, of the assets of the Company; then in such event, any and all new, substituted or additional securities, cash, or other property to which Purchaser is entitled by reason of his ownership of the Shares (the "New Consideration") shall be included in the word "Shares" for all purposes with the same force and effect as the Shares presently subject to the Repurchase Option and other terms of this Agreement, and shall be subject to the Repurchase Option in the same manner and to the same extent as the Unvested Shares with respect to which the New Consideration was provided. While the total Option Price shall remain the same after any such event, the Option Price per share shall be appropriately adjusted to reflect any change in the number of shares. (b) QUARTERLY DISTRIBUTIONS. Notwithstanding the provisions of subsection (a) above to the contrary, Purchaser shall be entitled to receive and retain dividends or other distributions declared on the Common Stock of the Company by the board of directors quarterly or on any other regular, periodic basis, including but not limited to distributions required for compliance with the provisions of Section 857(a) of the Internal Revenue Code of 1986, as amended. 4. RESTRICTIONS ON TRANSFER. (a) NO TRANSFER OF SHARES SUBJECT TO REPURCHASE OPTION. Purchaser shall not sell, transfer, pledge, assign or otherwise dispose of any of the Unvested Shares which are subject to the Repurchase Option. (b) GIFTS OF SHARES. Notwithstanding any other term of this Section 4, Purchaser may make a gift of all or any part of the Shares to any of Purchaser's parents, spouse, issue, siblings, nephews or nieces or to a trust for the exclusive benefit of any of the foregoing parties. The donee or donees shall hold such Shares subject to all the provisions of this Agreement. 5. ASSIGNMENT OF RIGHTS. The Company may assign its rights under Section 2 hereof to one or more persons or entities, who shall have the right to so exercise such rights in his or its own name and for his or its own account. If any such transfer of the Shares requires the consent of any agency pursuant to the securities laws of any state, the time periods specified herein shall be extended for such period as the necessary request for consent to transfer is pending before such agency. All parties agree to cooperate in making such request for transfer, and no transfer shall be executed without such consent if required by law. 6. RELEASE OF SHARES FROM REPURCHASE OPTION. The number of Shares subject to the Repurchase Option will decline as set forth in Section 2(b), and the Repurchase Option shall terminate following the expiration of the notice specified in Section 2(d). Subject to the provisions of the Promissory Note and the Security Agreement, the Company shall release and deliver to Purchaser, from time to time as Purchaser may reasonably request, a certificate representing that number of Shares set forth in a written request made to the Secretary of the Company, to the extent that such Shares are no longer subject to the Repurchase Option. The Company shall cause new certificates to be issued as necessary to effectuate the release and delivery of such Shares to Purchaser. 7. LEGENDS. (a) ENDORSEMENT ON CERTIFICATES. The certificates representing the Shares subject to this Agreement shall be endorsed with a legend substantially in the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OR HIS PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. THE AGREEMENT MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE COMPANY DURING NORMAL BUSINESS HOURS. (b) TERMINATION OF ALL RESTRICTIONS. In the event the restrictions imposed by this Agreement shall be terminated as herein provided, a new certificate or certificates representing the Shares shall be issued, on request, without the legend referred to in Subsection 7(a). (c) SECURITIES LAW LEGENDS. Any transfer or sale of the Shares is further subject to all restrictions on transfer imposed by state or federal securities laws. Accordingly, it is understood and agreed that the certificates representing the Shares shall bear any legends required by such state or federal securities laws. 8. PURCHASER'S REPRESENTATIONS. In connection with the purchase of the Shares, Purchaser hereby represents and warrants to the Company as follows: (a) INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS. Purchaser is purchasing the Shares solely for his or her own account for investment and not with a view to or for sale in connection with any distribution of the Shares or any portion thereof and not with any present intention of selling, offering to sell or otherwise disposing of or distributing the Shares or any portion thereof in any transaction other than a transaction exempt from registration under the Securities Act of 1933, as amended (the "Act"). Purchaser also represents that the entire legal and beneficial interest of the Shares is being purchased, and will be held, for Purchaser's account only, and neither in whole or in part for any other person. Purchaser either (i) has a pre-existing business or personal relationship with the Company or any of its officers, directors or controlling persons, or (ii) by reason of Purchaser's business or financial experience or the business or financial experience of Purchaser's professional advisors who are unaffiliated with and who are not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, could be reasonably assumed to have the capacity to evaluate the merits and risks of an investment in the Company and to protect Purchaser's own interests in connection with this transaction. (b) INFORMATION CONCERNING COMPANY. Purchaser has heretofore discussed the Company and its plans, operations and financial condition with the Company's officers and has heretofore received all such information as Purchaser has deemed necessary and appropriate to enable the Purchaser to evaluate the financial risk inherent in making an investment in the Shares. Purchaser has received satisfactory and complete information concerning the business and financial condition of the Company in response to all inquiries in respect thereof. (c) ECONOMIC RISK. Purchaser realizes that the purchase of the Shares will be a highly speculative investment and involves a high degree of risk, and Purchaser is able, without impairing his or her financial condition, to hold the Shares for an indefinite period of time and to suffer a complete loss of Purchaser's investment. (d) RESTRICTED SECURITIES. Purchaser understands and acknowledges that: (i) the sale of the Shares has not been registered under the Act, and the Shares must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available and the Company is under no obligation to register the Shares; (ii) the share certificate representing the Shares will be stamped with the legends specified in Section 7 hereof; and (iii) the Company will make a notation in its records of the aforementioned restrictions on transfer and legends. (e) DISPOSITION UNDER RULE 144. Purchaser understands that the Shares are restricted securities within the meaning of Rule 144 promulgated under the Act; that unless the Shares have been issued pursuant to Rule 701 promulgated under the Act the exemption from registration under Rule 144 will not be available in any event for at least one year from the date of purchase and payment of the Shares (AND THAT PAYMENT BY A NOTE IS NOT DEEMED PAYMENT UNLESS IT IS SECURED BY ASSETS OTHER THAN THE SHARES), and even then will not be available unless: (i) a public trading market then exists for the Common Stock of the Company; (ii) adequate information concerning the Company is then available to the public; and (iii) other terms and conditions of Rule 144 are complied with; and that any sale of the Shares may be made only in limited amounts in accordance with such terms and conditions. (f) FURTHER LIMITATIONS ON DISPOSITION. Purchaser agrees that he shall not make any disposition of all or any portion of the Shares unless and until: (i) (A) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said Registration Statement; OR, (B)(1) Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, (2) Purchaser shall have furnished the Company with an opinion of the Purchaser's counsel to the effect that such disposition will not require registration of such shares under the Securities Act, AND (3) such opinion of Purchaser's counsel shall have been concurred in by counsel for the Company and the Company shall have advised Purchaser of such concurrence; AND, (ii) The Shares proposed to be transferred are no longer subject to the Repurchase Option set forth in Section 2 hereof. 9. ESCROW. As security for his faithful performance of the terms of this Agreement and to ensure the availability for delivery of Purchaser's Shares upon exercise of the Repurchase Option herein provided for, Purchaser agrees to deliver to and deposit with Graham & James LLP, legal counsel to the Company (the "Escrow Agent"), as Escrow Agent in this transaction, two Stock Assignments duly endorsed (with date and number of Shares blank) in the form attached hereto as Exhibit C, together with the certificate or certificates evidencing the Shares; said documents are to be held by the Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit E attached hereto and incorporated by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder. 10. COMPLIANCE WITH INCOME TAX LAWS. (a) WITHHOLDING TAX. Purchaser authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld by Federal, state or local laws as a result of the purchase of the Shares. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the purchase of the Shares, Purchaser agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not Purchaser is an employee of the Company at that time. (b) INTEREST ON NOTE. In the event that any Promissory Note issued by the Purchaser under this Agreement is subject to the provisions of Section 1274 of the Internal Revenue Code of 1986, as amended (the "Code"), and would have original issue discount subject to Section 1272 of the Code, the Company and the Purchaser agree to make and file a timely election under Section 1274A(c) of the Code and regulations thereunder to account for all of the interest on such Note on the cash receipts and disbursements method for Federal income tax purposes. 11. ELECTION PURSUANT TO SECTION 83(B) OF INTERNAL REVENUE CODE OF 1986, AS AMENDED. Purchaser shall be responsible for filing with the Internal Revenue Service an appropriate written notice of election pursuant to Section 83(b) of the Code, if Purchaser wishes to make such an election. Purchaser shall notify the Company in writing if Purchaser files such an election within thirty (30) days of the date of the sale herein contemplated. The Company intends, in the event it does not receive from Purchaser evidence of such filing, to claim a tax deduction for any amount which would otherwise be taxable to Purchaser in the absence of such an election. 12. ENFORCEMENT. Purchaser agrees that a violation on his or her part of any of the terms of this Agreement (other than those contained in Sections 12 and 13, above) may cause irreparable damage to the Company, the exact amount of which is impossible to ascertain, and for that reason agrees that the Company shall be entitled to exercise its right to effect a repurchase and transfer of the Shares pursuant to Section 2 hereof or to a decree of specific performance of the terms hereof or an injunction restraining further violation, said right to be in addition to any other remedies of said parties. 13. CONTROLLING PROVISIONS. The Shares are subject to the provisions of the Company's 1997 Stock Option Plan, and unless stated otherwise terms defined therein have the same meaning when used in this Agreement. To the extent that there may be any conflict between the provisions of this Agreement and the provisions contained in the Company's Bylaws on the transfer or restriction on transfer of Shares, the terms of this Agreement shall be controlling. This Agreement may not be modified except by a writing signed by the party to be bound. 14. OWNERSHIP, VOTING RIGHTS, DUTIES. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 15. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the day sent by facsimile transmission if a true and correct copy is sent the same day by first class mail, postage prepaid, or by dispatch by an internationally recognized express courier service. 16. BINDING EFFECT. This Agreement shall inure to the benefit of the Company and its successors and assigns and, subject to the restrictions on transfer set forth herein, be binding upon Purchaser, his permitted transferees, heirs, legatees, executors, administrators and legal successors, who shall hold the Shares subject to the terms hereof. 17. GOVERNING LAW. This Agreement, together with the exhibits hereto, shall be governed by and construed in accordance with the laws of the State of California, as such laws are applied to contracts entered into by residents of such state and performed in such state. 18. ENTIRE AGREEMENT. This Agreement supersedes all previous written or oral agreements between the parties regarding the subject matter hereof, and constitutes the entire agreement of the parties regarding such subject matter. This Agreement may not be modified or terminated except by a writing executed by all of the parties hereto. 19. NOT EMPLOYMENT CONTRACT. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Purchaser or the Company to terminate Purchaser's employment, for any reason or for no reason, with or without cause, subject to the provisions of applicable law. This Agreement is not an employment contract. 20. GENDER. The masculine, feminine or neuter pronouns used herein shall be interpreted without regard to gender. 21. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 22. SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way and shall be construed in accordance with the purposes and tenor and effect of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. MISSION WEST PROPERTIES PURCHASER By: By: ------------------------- --------------------------------- Michael J. Anderson Title: Address: 858 Fielding Drive, ---------------------- Palo Alto, CA 94303 EX-10.11 21 PROMISSORY NOTE FROM MICHAEL ANDERSON EXHIBIT A PROMISSORY NOTE SECURED BY PLEDGE OF STOCK March 30, 1998 Cupertino, California $900,000 FIVE - YEAR NOTE The undersigned, Michael J. Anderson, for value received, promises to pay to Mission West Properties (the "Company") or any person or entity to whom this Note has been endorsed for payment, or order (collectively the "Holder"), the principal sum of Nine Hundred Thousand Dollars ($900,000) (the "principal sum") and interest on the principal sum from time to time remaining unpaid hereon from the date of this Note until paid in full at the rate of percent (5.59%) compounded annually. Subject to the provisions of Sections 3 and 5 of this Note, interest shall be paid annually on each anniversary of the date of this Note; the principal sum and any accrued but unpaid interest to be paid in full on or before the fifth anniversary of the date of this Note. Principal and interest will be paid in lawful money of the United States of America at the address of the Holder of this Note as shown on the books of the Company. The undersigned shall have the right to prepay all or any portion of the indebtedness represented hereby without premium or penalty upon ten (10) days notice. The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, to which the Holder hereof, by the acceptance of this Note, agrees: 1. ATTORNEYS' FEES. If the indebtedness represented hereby is not paid in full when due, the undersigned promises to pay all costs of collection, including, but not limited to, reasonable attorneys' fees. 2. REPLACEMENT. On receipt of evidence reasonably satisfactory to the undersigned of the loss, theft, destruction or mutilation of this Note and, in the case of loss, theft or destruction, on delivery of an indemnity agreement or bond reasonably satisfactory in form and amount to the Company and the undersigned, or in the case of mutilation, on surrender and cancellation of this Note, the undersigned, at his expense, will execute and deliver, in lieu of this Note, a new Note of like tenor. 3. RIGHT TO ACCELERATE PAYMENT. This Note shall become immediately due and payable in the full amount of the principal sum then unpaid, together with all accrued and unpaid interest thereon, at the option of the Holder of this Note without notice or demand, upon the occurrence of any of the following events: (a) the undersigned becomes insolvent in that either a petition is filed by or against the undersigned under any bankruptcy law, or he is unable to pay his debts as they fall due, or he makes a general assignment for the benefit of his creditors or takes any other action to take advantage of any insolvency laws; or (b) the undersigned fails to make payment when due of any part or installment of principal or interest, and such default is not cured within ten (10) days of the Holder's giving notice of such default to the undersigned; or (c) the election by the Company to accelerate payment of the Note pursuant to Section 1(b) of the Restricted Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement") between the Company and the undersigned; or (d) any default by the undersigned under the terms of the Stock Purchase Agreement or the Security Agreement (described below) which is not otherwise specified in paragraphs (a), (b) or (c) above. 4. MODIFICATION. This Note and any of its terms may be changed, waived or terminated only by a written instrument signed by the party against which enforcement of that change, waiver or termination is sought. 5. SECURITY. This Note is given pursuant to the terms of the Restricted Stock Purchase Agreement and is secured under the terms of a Security Agreement of even date herewith made between the undersigned and the Company. The Holder shall be entitled to all the benefits of the security as provided in the Security Agreement, provided that the Holder shall not be obligated to proceed first against the collateral, but may proceed directly on this Note. In the event the Holder proceeds against the collateral and the proceeds of same are inadequate to pay any amounts due on this Note, the undersigned shall remain liable for any deficiency. Upon the occurrence of certain events stated in the Security Agreement and in the Stock Purchase Agreement, the entire amount of this Note may become payable prior to the maturity date stated herein. 6. GOVERNING LAW. This Note shall be governed by and construed and enforced in accordance with the laws of the State of California without regard to any principles governing conflicts of laws. 7. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the day sent by facsimile transmission if a true and correct copy is sent the same day by first class mail, postage prepaid, or by dispatch by an internationally recognized express courier service, or at such other address as any party may designate by ten (10) days' advance written notice to the other party. 8. SEVERABILITY. If any provision of this Note should be found to be invalid or unenforceable, all other provisions shall nevertheless remain in full force and effect to the maximum extent permitted by law. Michael J. Anderson Address: 858 Fielding Drive Palo Alto, CA 94303 EX-23.3 22 EXHIBIT 23.3 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. PRICEWATERHOUSECOOPERS LLP San Diego, California July 15, 1998 EX-23.4 23 EXHIBIT 23.4 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 July 20, 1998 /s/ PricewaterhouseCoopers LLP EX-99.3 24 EXHIBIT 99.3 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 10.91% of the total partnership interests in each of four existing limited partnerships (collectively the "Operating Partnerships") owning from approximately 4.2 to 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 100,825,478 shares of Common Stock upon the future redemption or exchange of 100,825,478 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 -----END PRIVACY-ENHANCED MESSAGE-----