PRELIMINARY PROXY MATERIAL
________________________________________
PROXY STATEMENT
________________________________________
AMERICAN ASSET ADVISERS TRUST, INC.
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
SPECIAL MEETING OF SHAREHOLDERS - April ___, 1998
This Proxy Statement relates to the proposed transaction whereby
American Asset Advisers Trust, Inc. (the "Company") will, acquire
American Asset Advisers Realty Corp., the adviser to the Company (the
"Adviser") pursuant to a merger and related transactions (the
"Acquisition") or "Adviser Acquisition"). As a result of the
Acquisition, the current Omnibus Services Agreement pursuant to which
the Adviser and its Affiliates provide administrative and management
services to the Company will be terminated, Mr. H. Kerr Taylor and
the other employees of the Adviser will become full-time employees of
the Company and the Company will become a self-administered and self-managed
real estate investment trust, capable of internally acquiring,
developing, operating and managing its real estate investments.
In connection with the Acquisition, the Company will issue to Mr.
Taylor, the sole shareholder of the Adviser, up to 900,000 shares of
the Company's $.01 par value common stock (the "Share Consideration"),
of which 213,260 shares (the "Initial Shares") will be issued on the
date of consummation of the Acquisition (the "Closing Date"). Up to
all of the 686,740 remaining shares (the "Share Balance") will be
issuable at the end of one or more of the 24 consecutive calendar
quarters immediately following the Closing Date only if and to the
extent upon issuance they do not, when added to the previously issued
portion of the Share Consideration, exceed 9.8% of the total Common
Shares of the Company then outstanding. The terms and conditions of
the Acquisition are set forth in the Agreement and Plan of Merger (the
"Acquisition Agreement"), a copy of which is attached to this Proxy
Statement as Annex A and is incorporated by reference.
Under the Acquisition Agreement, the Acquisition will be
consummated only if and when, among other things, it is approved by
the Company's Shareholders holding a majority of the shares eligible
to vote thereon. Pending completion of the Acquisition, the Adviser
is obligated under the Acquisition Agreement to continue to conduct
its activities within its current ordinary scope of business and the
Adviser and its Affiliates will continue to provide services to the
Company pursuant to the Omnibus Services Agreement dated May 2, 1994,
as amended (the "Omnibus Services Agreement").
The enclosed Proxy is solicited by the Board of Directors of
American Asset Advisers Trust, Inc. (the "Board") in connection with
the Special Meeting of Shareholders (the "Special Meeting") of
American Asset Advisers Trust, Inc. (the "Company") to be held on
April ___, 1998 at __:00 __.M. at Eight Greenway Plaza, Suite 824,
Houston, Texas, and at any adjournments thereof. Management of the
-1-
Company is soliciting proxies from the holders of the Company's common
shares for use at the Special Meeting.
Giving his or her Proxy will not in any way affect the
stockholder's right to attend the Special Meeting and to vote in
person. Any stockholder executing a Proxy has the power to revoke the
Proxy at any time before it is voted by (i) executing a subsequently
dated Proxy; (ii) filing a written request to revoke or amend his (or
her) Proxy with the Secretary of the Company at the principal
executive offices of the Company; or (iii) attending the Special
Meeting and revoking the Proxy prior to the start of the Special
Meeting.
A Proxy with respect to the Company may be revoked before the
Special Meeting by giving written notice of revocation to the
Secretary of the Company, or may be revoked at the Special Meeting,
prior to voting. Unless revoked, properly executed Proxies with
respect to the Company will be voted as indicated in this Proxy
Statement. In instances where choices are specified by shareholders
in their Proxies, those Proxies will be voted or the vote will be
withheld in accordance with each shareholder's choice. An
"abstention" on any proposal will be counted as present for purposes
of determining whether a quorum of shares is present at the Special
Meeting with respect to the proposal on which the abstention is noted,
but will be counted as a vote "against" such proposal. Should any
other matters come before the meeting, it is the intention of the
persons named as proxies in the enclosed Proxy to act upon them
according to their best judgment.
The cost of soliciting proxies will be borne by the Company. In
addition to the solicitation of proxies by use of the mails, certain
officers and regular employees (who will receive no compensation
therefore in addition to their regular salaries) may be used to
solicit proxies personally and/or by telephone or telegraph. In
addition, banks, brokers and other custodians, nominees and
fiduciaries will be requested to forward copies of the Proxy material
to their principals and to request authority for the execution of
proxies. The Company will reimburse such persons for their expenses
in doing so.
Only shareholders of record at the close of business on March 31,
1998 may vote at the Special Meeting or any adjournments thereof. As
of that date there were issued and outstanding approximately
__________ common shares of the Company. Each shareholder of the
Company is entitled to one vote for each share of the Company held.
None of the matters to be presented at the Special Meeting will
entitle any shareholder of the Company to appraisal rights. In the
event that Proxies which are sufficient in number to constitute a
quorum are not received by April ___, 1998, the persons named as
Proxies may propose one or more adjournments of the Special Meeting to
permit further solicitation of Proxies; provided, however, proxies
voting against the Acquisition may not be voted by management in favor
of such an adjournment. Such adjournments will require the
affirmative vote of the holders of a majority of the shares present in
person or by Proxy at the Special Meeting. The persons named as
proxies will vote in favor of such adjournment.
It is anticipated that this Proxy Statement will first be mailed
to Shareholders on or about April ___, 1998.
The date of this Proxy Statement is April ___, 1998.
-2-
ANNUAL AND QUARTERLY REPORT
The Annual Report to the Shareholders of the Company,
containing financial statements for the fiscal year ended
December 31, 1996, was mailed to shareholders on or about April
29, 1997. The Company's audited financial statements for the
years ended December 31,1997 and 1996 are set forth in the
Company's Report on Form 10-KSB filed with the Securities and
Exchange Commission on March ___, 1998. A copy of such report is
included with this Proxy Statement.
-3-
TABLE OF CONTENTS
Page
ANNUAL AND QUARTERLY REPORT. . . . . . . . . . . . . . . . . . . . . . . . -3-
FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . -6-
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-
Proposal 1 - Acquisition of the Adviser . . . . . . . . . . . . . . . -7-
Proposal 2 - Amendment to Bylaws Authorizing the Acquisition . . . . -9-
Proposal 3 - Amendment to Bylaws to Change Investment Policy
Restrictions . . . . . . . . . . . . . . . . . . . . . -9-
Proposal 4 - Change of the Company's Name to AmREIT, Inc. . . . . . -10-
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . -10-
PROPOSAL 1 - THE ACQUISITION . . . . . . . . . . . . . . . . . . . . . . -11-
Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
The Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
Reasons for Self-Administration; Background and General Information -20-
Deliberations Of The Independent Directors. . . . . . . . . . . . . -22-
Recommendation of the Independent Directors . . . . . . . . . . . . -27-
Description of The Acquisition Agreement. . . . . . . . . . . . . . -32-
Competitive Real Estate Ventures. . . . . . . . . . . . . . . . . . -35-
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
Conduct of Business Prior to Closing. . . . . . . . . . . . . . . . -37-
Conditions to Closing . . . . . . . . . . . . . . . . . . . . . . . -37-
Representations and Warranties. . . . . . . . . . . . . . . . . . . -38-
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-
Financial Information . . . . . . . . . . . . . . . . . . . . . . . -38-
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . -39-
Material Federal Income Tax Consequences. . . . . . . . . . . . . . -39-
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . -44-
No Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . -44-
Vote Required to Approve the Acquisition. . . . . . . . . . . . . . -44-
The Adviser's Recommendations and Reasons for the Acquisition . . . -44-
Bishop-Crown Fairness Opinion . . . . . . . . . . . . . . . . . . . -47-
Houlihan Lokey Valuation Opinion. . . . . . . . . . . . . . . . . . -55-
PROPOSAL 2 - AMENDMENT TO BYLAWS TO AUTHORIZE THE ACQUISITION
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
-4-
Background and General Information. . . . . . . . . . . . . . . . . -59-
Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . . . -60-
PROPOSAL 3 - AMENDMENT TO BYLAWS TO CHANGE INVESTMENT POLICY
RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-
Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-
Background and General Information. . . . . . . . . . . . . . . . . -61-
PROPOSAL 4 - AMENDMENT TO ARTICLES OF INCORPORATION TO CHANGE THE COMPANY'S
NAME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -62-
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . -63-
Purpose of the Meeting. . . . . . . . . . . . . . . . . . . . . . . -63-
Date, Time and Place; Record Date . . . . . . . . . . . . . . . . . -63-
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . -64-
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
SHAREHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . . . . -65-
DISCRETIONARY AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . . -65-
Annex A - Acquisition Agreement
Annex B - Opinion of Bishop-Crown Investment Research, Inc.
Annex C - Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
-5-
FORWARD LOOKING STATEMENTS
The statements contained in this Proxy Statement that are
not historical facts are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act. These forward-looking statements are based on
current expectations, estimates and projections about the
industry and markets in which the Company operates, management's
beliefs and assumptions made by management. Words such as
"expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and
assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed
or forecasted in such forward-looking statements. The Company's
operating results depend primarily on income from leased
properties which is substantially influenced by (I) the demand
for and supply of net leased properties in the Company's primary
target markets, (ii) the continued financial resources of the
Company's individual commercial tenants, (iii) the Company's
operating expense levels, (iv) the effectiveness of the Company's
property acquisitions and development strategies, and (v) capital
and credit market conditions which affect the Company's cost of
capital and also influence the continued viability of the
Company's tenants and the Company's operating results.
SUMMARY
At the Special Meeting, the shareholders of the Company will
be asked to approve three proposals, Proposal 1 - The
Acquisition, the approval of the Company's acquisition of the
Adviser under the terms and conditions described; Proposal 2 -
Amendment of the Bylaws to authorize the Acquisition, an
amendment to the Bylaws of the Company to expressly authorize the
Acquisition; Proposal 3 - Amendment to the Bylaws to change
Investment Policy Restrictions, an amendment to the Bylaws of the
Company to remove certain restrictions on the Company's property
investments and leases; and Proposal 4 - The Amendment of the
Company's Articles of Incorporation to change the Company's name
to "AmREIT, Inc." The approval of both Proposal 2 and Proposal
3 are conditioned upon the approval of the acquisition of the
Adviser. The following summary is qualified in its entirety by
the detailed information appearing elsewhere in this Proxy
Statement, including the Annexes hereto. Shareholders are urged
to review the entire Proxy Statement and the Annexes hereto.
THE INDEPENDENT DIRECTORS HAVE UNANIMOUSLY APPROVED THE
ACQUISITION AGREEMENT AND THE ACQUISITION, THE AMENDMENTS TO THE
BYLAWS AND THE CHANGE IN THE COMPANY'S NAME AND RECOMMEND THAT
HOLDERS OF COMMON SHARES VOTE "FOR" THE APPROVAL OF THE
ACQUISITION AGREEMENT AND THE ACQUISITION, THE AMENDMENT TO THE
BYLAWS AND THE CHANGE IN THE COMPANY'S NAME.
-6-
Proposal 1 - Acquisition of the Adviser
Under this Proposal, the Company will become a self-managed
REIT by acquiring American Asset Advisers Realty Corp., the
Company's Adviser. The Company would acquire the Adviser
pursuant to a merger of the Adviser into the Company's newly
formed wholly-owned subsidiary corporation, AAA Acquisition, Inc.
("AAA Acquisition"), which would be the surviving corporation.
Pursuant to the Acquisition, Mr. H. Kerr Taylor, the Company's
Chairman and Chief Executive Officer, the sole shareholder of the
Adviser, would receive the Share Consideration of up to 900,000
shares, of which 213,260 Initial Shares would be issued upon the
Closing Date. Up to an additional 686,740 shares would be
issuable over the 24 calendar quarters immediately following the
Closing Date, subject to the satisfaction of certain conditions.
Following the acquisition of the Adviser, if it is
consummated, management will endeavor to significantly increase
the Company's asset base through an asset group acquisition
and/or secondary offering of its securities and in conjunction
therewith or immediately thereafter management intends to cause
the Company's common stock to be traded on a national securities
exchange. Management believes that by listing the common stock
on a national securities exchange the Company can provide
liquidity for its shareholders. There is no assurance that the
Company's attempts to significantly increase its asset base will
be successful or that a liquid secondary market for the Company's
common stock can be established within the time frame intended or
at all.
Pursuant to the Acquisition, the Adviser will merge with and
into AAA Acquisition, Inc., the assets and liabilities of the
Adviser will become those of AAA Acquisition, Inc., the Adviser
will disappear and AAA Acquisition, Inc. will be the surviving
corporation. As a self-managed REIT, the Company would
thereafter acquire, develop and manage its own real property
investments and to internally administer its affairs and
activities. See "Background and General Information,"
"Description of the Acquisition Agreement" and "Conditions to
Closing" below. See "Recommendation of the Independent
Directors" below.
The determination of the fairness of the Acquisition to the
Company and its shareholders was made on behalf of the Board of
Directors of the Company (the "Board") by the two members of the
Company's Board of Directors who are unaffiliated with Mr. Taylor
and the Adviser, Messrs. Robert S. Cartwright, Jr., and George A.
McCanse (the "Independent Directors"). The Independent Directors
engaged Broocks, Baker & Lange, LLP ("Broocks Baker") to advise
them regarding but not to negotiate the terms of the Acquisition.
The Independent Directors engaged Bishop- Crown Investment
Research, Inc. ("Bishop-Crown") as their financial adviser to
advise them in analyzing and evaluating, and to provide a written
opinion with respect to, the fairness of the Acquisition to the
Company and to the shareholders of the Company (other than Mr.
Taylor). The Independent Directors also engaged Houlihan Lokey
Howard & Zukin, Financial Advisors ("Houlihan"), to opine as to
the likely range of strategic values of the Adviser for the
purposes of the Acquisition. Both the Adviser and the
Independent Directors believe that the Adviser Acquisition will
be in the best interests of the Company and its shareholders. In
-7-
reaching their conclusion, the Independent Directors have
requested and obtained a fairness opinion from Bishop-Crown and
have requested and obtained the opinion of Houlihan regarding the
valuation of the Adviser. See "Bishop-Crown Fairness Opinion"
and "Houlihan Valuation Opinion" below. The Independent
Directors have unanimously approved the Acquisition.
In considering whether to approve the Acquisition, the
Company's shareholders (the "Shareholders") should consider the
following matters in addition to the matters described in greater
detail herein under "PROPOSAL 1 - Risk Factors" below.
* Mr. Taylor initiated and structured the Acquisition
proposal and substantial conflicts of interest exist
between Mr. Taylor and the Shareholders because he both
controls the Adviser and serves as chairman of the
board and president of the Company. Conflicts of
interest will continue to exist as a result of Mr.
Taylor's continuing ownership of a majority of the
voting securities of Development Corp.
* No independent representatives were retained to
negotiate the terms of the Transaction on behalf of the
Company or the Shareholders.
* There are alternative methods of determining the value
of the Adviser which result in higher or lower
valuations for such management companies.
* The Company shares are not currently traded and there
may be no public trading market in which Shareholders
can dispose of their common shares.
* The value of the Share Consideration substantially
exceeds the value of the Adviser's identifiable net
assets, which are estimated to be $50,000. The Company
will acquire the Adviser in exchange for up to 900,000
Common Shares which could be valued as high as approximately
$9,225,000 based on the price of $10.25 per share, the
highest price at which the Company's shares were last
sold to public investors. Of this amount, $7,039,085
consists of the Share Balance, the issuance of which is
conditional upon future growth in equity capital investment
in the Company. Accordingly, the Share Consideration represents
a substantial premium in price paid for the Adviser's identifiable
Assets.
* The Company's General and Administrative costs will
increase substantially and the Company will incur
property development and acquisition risks as a result
of the Acquisition.
* Significant benefits to the Company expected to result
from the Acquisition will be realized only to the
extent the Company can benefit from the non-Company
related services currently being provided by the
Adviser to third parties, including the AAA
Partnerships.
-8-
* Significant benefits to the Company expected to result
from the Acquisition will be realized only if the
Company obtains significant future growth in real
estate assets owned and/or under management.
* Upon the Closing Date of the Acquisition, should it
occur, Mr. Taylor would own ____________ shares of the
Company's common stock which, would represent
approximately _____% of the Company's total outstanding
shares at that time.
* Mr. Taylor will continue to exercise significant
influence over the business and policies of the Company
after the Acquisition due to his presence as the
largest Shareholder of the Company.
* As a result of the Acquisition, if it is consummated,
the current shareholders of the Company, as a group,
would experience significant dilution in their
ownership percentage of the common stock of the
Company.
SEE PROPOSAL 1 - "THE ACQUISITION--" OF THIS PROXY STATEMENT FOR
A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
EVALUATING THE ACQUISITION.
Proposal 2 - Amendment to Bylaws Authorizing the Acquisition
Under this proposal, the Bylaws of the Company will be
amended to specifically authorize the Acquisition, including the
transactions necessary and appropriate to consummate the
Acquisition. See "PROPOSAL 2 - AMENDMENT TO BYLAWS TO AUTHORIZE
ACQUISITION - Background and General Information" below.
Proposal 3 - Amendment to Bylaws to Change Investment Policy Restrictions
Under this Proposal, the Company's investment policies would
be changed by removing the current restriction which requires the
Company to acquire properties only if they are under long-term
net lease to tenants having a demonstrable net worth of $40
million or more, as defined. If approved, management intends to
implement these changes immediately, whether or not the
Acquisition is approved and consummated. These changes consist of
no longer requiring, as an investment policy, that the tenants of
the Company's property demonstrate on the basis of their
financial statements or other reliable documentation, that their
net worth is $40 million and the requirement that the companies
be subject to long-term net leases when acquired. It is
management's intent, upon consummation of the Acquisition, if it
occurs, seek investments in one or more development projects
involving separate contiguous or closely situated building sites
on which retail buildings are or may be constructed for lease to
unrelated tenants (i.e. "multiple pad developments").
Management would also consider, when deemed appropriate "gross"
or "semi-gross" leases where the Company remains responsible for
certain maintenance or other property costs in exchange for
higher and/or escalating rental rates. If the proposal is
-9-
approved, management will consider a broader range of potential
tenants including, when deemed appropriate, smaller regional and
local tenants who are able to demonstrate a financial ability to
fulfill their lease obligations. It would continue to be the
Company's policy to require that its tenants, their co-signees
and/or guarantors have sufficient net worth, in the opinion of
management, to indicate their financial capability of performing
under their respective leases. See "PROPOSAL 3 - AMENDMENT TO
THE BYLAWS TO CHANGE INVESTMENT POLICY RESTRICTIONS - Background
and General Information" below.
Proposal 4 - Change of the Company's Name to AmREIT, Inc.
Under this proposal, the Company will amend its Articles of
Incorporation ("Charter") to change the Company's name to
"AmREIT, Inc." or such other name as similar thereto as the Board
of Directors of the Company may determine as appropriate. The
Board of Directors of the Company believes that a change in the
Company's name to AmREIT, Inc. will better identify the Company
than its current name which is substantially longer and, in the
opinion of management, less distinctive. See "PROPOSAL 4 -
AMENDMENT TO ARTICLES OF INCORPORATION TO CHANGE THE COMPANY'S
NAME - Background and General Information" below.
The Special Meeting
The Meeting. The Special Meeting is schedule to be held at
__________ a.m., local time, on _________, April ___, 1998, at
Eight Greenway Plaza, Suite 824, Houston Texas 77046. The Board
of Directors has fixed the close of business on March 31,1998 as
the record date (the "Record Date") for the determination
of holders of Common Shares entitled to notice of and to vote at
the Special Meeting. See "The Special Meeting."
Required Vote. The Company's Articles of Incorporation (the
"Charter") provide that merger transactions such as the
Acquisition and amendments to the Charter such as the proposed
amendment to change the Company's name require the affirmative
vote of a simple majority of the outstanding Common Shares
eligible to vote. The Company's Bylaws also provide that the
proposed amendment authorizing the Acquisition requires the
affirmative vote of a simple majority vote of the Outstanding
Common Shares eligible to vote thereon. Therefore, the
affirmative vote of the holders of at least a majority of the
outstanding Common Shares is required to approve the Acquisition
Agreement and the Acquisition of the Adviser, to approve the
amendment to the Bylaws and to approve the amendment to the
Charter to change the Company's name. The approval by
Shareholders of the amendment to the Bylaws is a condition to
the consummation of the Acquisition. As of December 31, 1997,
Mr. Taylor beneficially owned approximately 1% of the outstanding
Common Shares. See "The Special Meeting--Voting Rights." Mr.
Taylor has agreed, subject to certain conditions, to vote all
Common Shares owned by him in favor of the proposals.
-10-
PROPOSAL 1 - THE ACQUISITION
PROPOSAL TO ACQUIRE THE COMPANY'S ADVISER IN EXCHANGE FOR
UP TO 900,000 SHARES OF THE COMPANY'S COMMON STOCK AND TO BECOME
A SELF-ADMINISTERED AND SELF-MANAGED REAL ESTATE INVESTMENT TRUST
Proposal
At the special meeting, the shareholders of the Company will
be asked to approve the Acquisition whereby the Company will
acquire all of the business and operations of the Adviser
pursuant to a merger transaction subject to the terms and
conditions set forth in the Acquisition Agreement. If the
Proposal is approved and the conditions to consummation of the
Acquisition are satisfied, the Adviser will merge into AAA
Acquisition, Inc. (the Company's wholly owned subsidiary) which
will be the surviving corporation in such merger. As a result of
the merger, all outstanding common stock of the Adviser will be
converted into the right to receive up to 900,000 shares of the
Company's common stock (the "Share Consideration") of which
213,260 shares will be issued upon consummation of the merger
(the "Initial Shares") and up to 686,740 shares (the "Share
Balance") will be issuable at the end of each of the 24 calendar
quarters immediately following the date the merger is consummated
(the "Closing Date") in an amount which, when added to the Share
Consideration previously issued, does not exceed 9.8% of the
total number of the Company's common shares outstanding after
giving effect to such issuance. Based on the price of $9.17 per
share (the $10.25 public offering price net of 10.5% underwriting
costs, which is the price which Mr. Taylor, as sole shareholder
of the Adviser, has the right to purchase shares in the Company's
most recent public offering), the Initial Shares would have a
value of $1,955,594 and, if all issued on the Closing Date, the
total Share Consideration would have a value at $8,253,000. The
value of the consideration paid by the Company represents a
substantial premium over the fair value of the identifiable net
assets of the Adviser, which at December 31, 1997 had a book
value of approximately $50,000. Adviser will become the
Company's wholly owned subsidiary, the Company's Omnibus Service
Agreement with the Adviser and its Affiliates will terminate, Mr.
Taylor and the other executive and administrative employees of
the Adviser will become full-time employees of the Company and
the Company will become a self-administered and self-managed real
estate investment trust whereby the Company will perform through
its proprietary facilities and personnel all of its acquisition,
administrative, operational and management functions.
The Company
The Company was organized on August 17, 1993, as a Maryland
business corporation and operates as a real estate investment
trust ("REIT") under the federal income tax laws. The Company
acquires, owns and manages a diversified portfolio of quality,
frontage retail properties leased to national and regional retail
tenants. Each of the Company's properties is initially leased
under a full-credit, long-term net lease, under which the tenant
is responsible for the operation costs of the property, including
taxes, insurance and maintenance costs. As of the date of this
-11-
Proxy Statement, the Company owned a total of 14 properties and
has contracted to acquire one additional property in development.
The term "development" means that acquisition of the underlying land
is contracted for, the property is under lease, subject to timely
completion, and construction is anticipated to commence within
six months. The aggregate purchase prices of these 15 properties
are approximately $22,985,000 and total annualized rents on these
15 properties are approximately $2,458,000. These 15 properties
produced an annual capitalization rate of approximately 10.7%
based on purchase price. These 15 properties are leased to a
total of 8 different tenants and are located in 7 states. The
Company's properties contain an aggregate of approximately
149,000 square feet of gross leasable area. The Company's
principal executive offices are located at Eight Greenway Plaza,
Suite 824, Houston, Texas 77046, and its telephone number is
(713) 850-1400.
The property under development is being developed for the
Company by the Adviser through a joint venture with an unrelated
party. The Company intends to continue its focus on acquiring
frontage retail properties and may acquire one or more multi-structure
properties leased to two or more unrelated tenants.
Substantially all aspects of the Company's business and
affairs are currently administered, under the direction of the
Company's Board of Directors, by the Adviser, American Assets
Advisers Realty Corporation. The Adviser provides
administrative, acquisition, development, management and
operational services to the Company pursuant to the Omnibus
Services Agreement. The terms and conditions of the Omnibus
Services Agreement are described under "The Adviser" below.
Currently, the Company has only one part-time employee, Mr. H.
Kerr Taylor, the Company's Chairman and Chief Executive Officer.
Mr. Taylor also serves in similar capacities to the Adviser and
each of its affiliates. Mr. Taylor is the sole shareholder, the
principal officer and a director of the Adviser. The Company's
objective is to be an efficient and competitive real estate
operating company focusing on a diversified portfolio of frontage
retail properties located throughout the United States.
The Adviser
American Asset Advisers Realty Corporation has served as
Adviser to the Company since the Company's organization in May
1994. Under the direction of the Board, the Adviser has the
responsibility for the day-to-day operations of the Company,
including raising capital, the investigation and identification
of investment acquisitions, the negotiation of acquisitions, due
diligence in investment research, property management and
administrative and accounting services. The Adviser's executive
officers are in the same location as those of the Company, Eight
Greenway Plaza, Suite 824, Houston, Texas 77046.
Mr. Taylor is the sole owner of the Adviser and serves as
the Adviser's Chairman of the Board and Chief Executive Officer.
American Asset Advisers Realty Corporation was organized on
April 4, 1989 and since that time has been acquiring, developing,
operating and managing real property for its own account and for
-12-
the account of managed real estate investment programs, including
the Company. In addition to the Company, the Adviser has co-
sponsored with Mr. Taylor eleven (eight (8) privately owned and
three (3) publicly owned) real estate investment limited
partnerships (the "AAA Partnerships") and Mr. Taylor, the sole
shareholder of the Adviser, serves as individual general partner
and is the sole or majority owner of the corporate general
partner. In addition to services for the Company, the Adviser
provides acquisition, management and administrative services to
the AAA Partnerships and development and management services to
AAA Net Developers, Ltd., a privately held Texas limited
partnership for which Mr. Taylor and his solely owned
corporation, AmREIT Development Corp, serve as general partners.
Each of the AAA Partnerships has investment objectives similar to
that of the Company and certain of the AAA Partnerships own
properties in joint ownership with the Company. AAA Net
Developers, Ltd. is in the business of developing for resale,
frontage retail properties under net lease to retail tenants.
The Adviser provides services to the Company pursuant to the
Omnibus Services Agreement. Under the Omnibus Services
Agreement, the Adviser (including its Affiliates is entitled to
the following compensation from the Company (the "Adviser Fees"):
a. Acquisition fees and, to the extent incurred by
the Adviser, Acquisition Expenses provided that the total of such
fees may not exceed six percent (6%) of the contract price of a
property. Currently, the Company pays Acquisition Fees equal to
four and one-half percent (4.5%) of equity capital raised by the
Company and five percent (5%) of financing proceeds.
b. To the extent provided Property management fees of
up to four percent (4.0%) of the gross rental revenues of the
Company's properties.
c. To the extent such expenses are incurred by the
Adviser, general administrative and overhead expense
reimbursement fees. Currently, the Company pays such amounts
equal to approximately six percent (6%) of the Company's gross
property rental revenues.
d. Reasonable compensation for any real estate
mortgage brokerage or leasing services it may provide from time
to time to the Company.
e. A commission for substantial real estate brokerage
services upon the resale or other disposition of the Company's
properties not to exceed three percent (3%) of the sales price of
the property. To date, the Company has not sold or otherwise
disposed of any of its property investments.
The Omnibus Services Agreement is subject to annual review
by the Company's Independent Directors and may be terminated at
any time upon sixty (60) days notice by either the Adviser or the
Company. Irrespective of the substantial influence on the
Company's Board of Directors by Mr. Taylor as both Chairman of
the Board and President of the Company and sole shareholder of
-13-
the Adviser, management believes that the advisory fees and other
compensation paid to the Adviser are, in the aggregate, no less
favorable than fees and cost reimbursements which would be paid
by the Company to another third party adviser. The Board
believes that no other advisory Company could provide the same
level of experience and expertise as the Adviser and therefore
has not actively pursued any other advisory companies or
arrangements.
For the nine months ended September 30, 1997 and the years
ended December 31, 1996 and 1995, reimbursements and fee payments
to the Adviser from all sources aggregated $1,003,800, $359,189 and
$297,226 respectively. Other than compensation to Mr. Taylor as
President of the Company, the Adviser pays all expenses,
including salaries, wages, payroll taxes, costs of employee
benefit plans and charges for incidental help, attributable to
its own operations in connection with providing services under
the Omnibus Services Agreement. The Adviser also pays its own
accounting fees and related expenses, legal fees, insurance,
rent, telephone, utilities and travel expenses of its officers
and employees. For the nine months ended September 30, 1997, and
the years ended December 31, 1996 and 1995, the Adviser incurred
general and administrative expenses of $377,863, $475,143 and
$500,632 respectively. The Adviser has not allocated these
expenses between providing services under the Omnibus Services
Agreement vs. the other activities of the Adviser. If the
Acquisition is approved and consummated, the Company will no
longer pay any of the Adviser Fees and will pay directly for the
overhead necessary to provide the services that the Adviser
currently provides to the Company under the Omnibus Services
Agreement.
In addition to providing the administrative, acquisition and
management services described above, the Adviser also conducts
various real estate development activities both for its own
account and for the account of others, including AmREIT
Development Corp., a Texas Corporation which is wholly owned by Mr.
Taylor ("Development Corp."). The Adviser typically develops, pursuant to
joint ventures with third-party developers and tenants, whereby
the Adviser is responsible for arranging the design, construction
and financing of the property which, upon completion, is leased
to the tenant. Typically, the third-party developer provides
construction, supervision and onsite administration of the
development project. Once completed, the property is sold by the
joint venturer at a price which includes the total development
costs of the property and the joint venturers development fees
and expenses. The Company has purchased or is under contract to
purchase, a total of five properties developed by the Adviser. In
each case, the purchase price paid by the Company for the
property represented the joint venturer's total investment costs
for the property, including the third-party's development fees
and expenses. To date, the Adviser has not included a
development fee in the price of these properties but was paid an
acquisition fee by the Company in connection with such purchase.
The Adviser has, however, informed the Company that in the future
the Adviser would not charge an acquisition fee in connection
with the sale to the Company of properties developed by the
Adviser and that the price at which such properties are offered
to the Company would include developer's profits which,
depending upon the price at which the property is offered, would
equal from 5% to 10% of the Adviser's cost of developing the
property.
-14-
The Adviser has developed the expertise and ability to
develop properties for tenants in order to be more competitive in
obtaining attractive acquisitions for the REIT and the Adviser's
other affiliates. The Adviser believes that its ability to
competitively construct and deliver completed properties on a
timely basis will continue to be an important consideration for
many actively growing and expanding retail and commercial
tenants. Also, the Adviser has developed substantial experience
and long-term relationships in the commercial net leased property
industry, including but not limited to relationships with the
Company's significant tenants and the tenants of the other AAA
Partnerships. The Independent Directors believe that the
Adviser's experience and relationships benefit the Company in
selecting, acquiring and managing its properties, thereby
providing the Company with a competitive advantage in the
management and operation of its properties and in the
identification and acquisition of attractive investments. At the
time the Company retained the Adviser in 1994, the Company was a
newly organized REIT and owned no properties. The entire growth
to date of the Company's real estate investment portfolio was due
to the expertise and efforts of the Adviser.
Also, upon consummation of the Acquisition, if it should
occur, Mr. Taylor is required to cause his controlled Affiliates,
including the AAA general partners and AmREIT Development Corp,
to enter into Affiliate contracts with the Company. Each of the
entities currently contracts for property management,
administrative and/or development services with the Adviser. In
general, each of these contracts is subject to cancellation upon
no more than sixty (60) days prior written notice by either
party. The Adviser currently provides similar services to each
of these entities and such services currently account for
approximately $185,000 in total annual revenues. Following
consummation of the Acquisition, the Company, through AAA
Acquisition or another related entity, will provide property
management, general administration and acquisition services,
personnel and facilities. However, its ability to do so may be
significantly limited under current and possible future changes
to the REIT Rules. See "Material Federal Income Tax
Consequences" below.
The Adviser also develops frontage retail properties both
directly and through joint ventures with unrelated developers.
The cost of developing properties, including development fees and
development cost reimbursements charged by the Adviser, are
substantially below the market price for the completed properties
which would be paid for such properties if they were developed
and sold by unrelated third parties. Mr. Taylor believes that
the Adviser's ability to provide development services in the
turnkey development of properties for third-party tenants is an
important consideration in the Company's ability to obtain
attractive real estate investments. The Adviser commenced its
development activities in 1996 and for the year ended 1997, the
Adviser has developed or has under contract for development, a
total of 15 properties, 6 of which have been sold or are under
contract for sale to the Company and 3 of which have been sold or
are under contract for sale to other persons. In connection with
properties it developed and has sold to the Company, the Adviser
has charged an Acquisition Fee but has not charged a development
fee. The Adviser has historically developed properties for third
parties. Following the Acquisition, should it occur, the Adviser
may provide services to third parties in connection with the
development of real property.
-15-
Risk Factors
The shareholders should consider carefully the specific risk
considerations set forth below as well as the other information
contained in this Proxy Statement in evaluating the potential
advantages, disadvantages, terms and conditions of the
Acquisition.
Conflicts of Interests Between the Company and Mr. Taylor.
The Acquisition was initiated and structured by Mr. Taylor, who
is the Chief Executive Officer and the sole owner of the Adviser.
Mr. Taylor is also the Chairman of the Board, Chief Executive
Officer and a shareholder of the Company. No independent
representatives have been retained to negotiate the terms of the
Acquisition on behalf of the Company. The interests of Mr.
Taylor differ from the interests of the shareholders as a result
of his significant ownership of Company stock and the benefits
which he will realize as a result of the Adviser Acquisition,
should it be consummated, including the benefits of the Share
Consideration, the Registration Rights Agreement regarding such
shares. and his long-term employment contract with the Company.
As a result of these interests and potential benefits, there is
an incentive to Mr. Taylor to place the interests of the Adviser
over those of the Company shareholders.
Significant Influence of Mr. Taylor. As of December 31,
1997, Mr. Taylor beneficially owned approximately 1% of the
issued and outstanding Common Shares of the Company. As a
result, Mr. Taylor currently controls approximately 1% of the
vote on matters submitted for action by the Company's
shareholders, including the Acquisition. Upon consummation of
the Acquisition, Mr. Taylor's ownership could increase from
approximately 1% to approximately 11%, if no other shareholders
or third parties subscribe for Common Shares and none of the
Deferred Shares are issued. Under the Company's Articles of
Incorporation, no other shareholder may hold more than 9.8% of
the shares of the Company, unless such restriction is waived by
the Board. As a result of the Acquisition, should it be
consummated, Mr. Taylor could initially own as much as 11% of the
Company's Common Shares, and in connection with its approval of
the Acquisition, the Board has waived the 9.8% limitation as to
Mr. Taylor. As the owner of up to 11% of the outstanding Common
Shares, Mr. Taylor would be in a position to exercise even
greater control or significant influence over the affairs of the
Company.
After the Acquisition, certain potential conflicts of
interests will exist between the Company and Mr. Taylor regarding
Mr. Taylor's continuing affiliated business interests separate
from the Company, including his continued ownership of
Development Corp. and each of the corporate General Partners of
the AAA Partnerships (the "AAA General Partners"). In order to
limit and eliminate such conflicts of interest, Mr. Taylor will
be subject to certain anti-competitive covenants and will be
required to cause his affiliates to enter into certain
contractual relationships with the Company. See "The
Acquisition--Affiliate Agreements."
Risks in Valuation. In determining the value of the
Adviser, Mr. Taylor and the Adviser's management considered the
Adviser's capitalized annualized net income as of December 31,
1997 and the capitalized financial benefits forecasted to result
to the Company from the Acquisition following the Closing Date.
-16-
The value of the Adviser so determined by the Adviser's
management does not, and is not intended to, reflect what Mr.
Taylor could obtain in an actual sale of the Adviser. Different
valuation methodologies may have resulted in higher or lower
values for the Adviser. Mr. Taylor did not obtain a third party
valuation of the projected net operating income anticipated to be
received by the Adviser. Therefore, no assurance can be given
that the value of the Common Shares being issued to Mr. Taylor
will not be greater than the value of the operations being
merged.
Interests of Mr. Taylor in The Acquisition. The
Acquisition, if consummated, will result in the following
benefits to Mr. Taylor as the principal of the Adviser:
Additional Issuance of Stock. Mr. Taylor will receive
the Share Consideration which consists of 213,260 Initial Shares
issued on the closing date and the right to receive the Share
Balance of 686,740 shares. As a result, Mr. Taylor is expected
to retain ownership of the Company's shares representing
approximately 9.8% of the total outstanding shares over a period
of up to six years following the closing date or, if sooner, at
such time as equity investment in the Company from sources other
than Mr. Taylor, pursuant to the Acquisition, increases by
approximately $60,000,000.
Employment Agreements. Mr. Taylor will enter into an
employment agreement with the Company. Previously, Mr. Taylor
was employed by the Company without any written employment
agreement. The employment agreement provides for significant
cash and non-cash benefits that differ from and are in general
more beneficial to Mr. Taylor than his current employment
arrangements with the Company, the Adviser and the Company's
Affiliates.
Value of Share Consideration Substantially Exceeds Value of
Net Assets Acquired. Share Consideration is substantially higher
than the value of Adviser's identifiable Net Assets. The value
of the Share Consideration substantially exceeds the value of the
Adviser's identifiable Net Assets, which are estimated to be
$50,000. The Company will acquire the Adviser in exchange for up
to 900,000 Common Shares valued at approximately $9,225,000,
based on a price of $10.25 per share, $7,039,085 of which
consists of the Share Balance, the issuance of which is
conditional upon future growth in equity capital investment in
the Company. Accordingly, the Share Consideration represents a
substantial premium in price paid for the Adviser's identifiable
Assets.
Risks Associated With the Adviser Activities. The following
risks to the Company associated with the activities of the
Adviser to be acquired in the Acquisition and continued
thereafter.
o Increased fixed overhead expenses resulting from
engagement of additional personnel and expansion of
development activities. Company's ability to cover
expanded overhead may be impaired if Company's expected
growth in capital is not realized or realized at a
slower rate and development/acquisition activities
contract.
-17-
o Exposure to risks involved in real estate development
activities, including risks of litigation by third-party
contractors, claims based on alleged failure to
perform services properly.
o Risk that the Company will not be able to capitalize
qualifying acquisition and development costs and to be
able to match the occurrence of costs associated with
the acquisition or development of properties with
revenues generated by such properties.
o Risk that there is no assurance that the cost to the
Company of providing for its acquisition, development
and management functions internally will not exceed the
fees which would otherwise be payable to the Adviser or
to another outside adviser.
o Risk that the Company will not realize sufficient
economies of scale by internalizing its acquisition,
development and management functions.
Risks That the Company May Not Realize Significant Potential
Benefits. The Company will realize certain benefits from the
Adviser Acquisition only if the Advisers' contracts to provide
administrative, management, acquisition and/or development
services to the AAA Partnerships and AAA Net Developers, Ltd.
continue after consummation of the Acquisition. Each of these
contracts are subject to cancellation by the consumer partnership
on not less than sixty (60) days prior notice. While Mr. Taylor,
as controlling person of the respective AAA General Partner,
intends to cause these respective general partners to continue
their respective partnership's contracts indefinitely following
the Acquisition, there is no assurance that he will be able to do
so. For example, events may arise where one or more of these
general partners is required to terminate its partnership's
contract (for example, where the limited partners by a majority
vote elect to terminate a contract pursuant to their right to do
so under the partnership agreement). Also, gross income
resulting from these contracts will not count towards satisfying
the income tests for REIT qualification under the Code and the
Company could face terminating one or more contracts in order to
continue to qualify as a REIT. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES - Income Tests" and "- Failure to Qualify as a
REIT."
Proposed Federal Tax Legislation. The President's 1998
fiscal year budget released on February 2, 1998 contains certain
proposals relating to the federal income taxation of REITs
which, if enacted in the form proposed, could severely restrict
and could eliminate entirely certain benefits the Company expects
to receive from the Adviser Acquisition. The Adviser currently
provides services to the AAA partnerships and to other persons
unrelated to the Company. The Company intends to continue to
provide these non-Company related services after the Acquisition.
Income generated from these activities would not qualify as
permissible income for the purposes of the 95% and 75% income
tests. Under current law, if the gross income realized from
these activities would not permit the Company to satisfy the
requirements of the 95% gross income test, the Company could
cancel these service contracts and require Mr. Taylor to cause
these affiliated entities to contract for these services and
functions with a corporation of which the Company holds non-voting
-18-
equity securities entitling it to all or substantially all
of the net after tax income resulting from these activities.
Such income received by the Company through dividends would
qualify for the 95% income test. Current federal income tax law,
in general, does not restrict the percent of a class of an
issuer's non-voting securities a REIT may own. Thus, under
current law, through the retention of such non-voting stock, the
Company could retain most, if not all, of the income net of
corporate income tax, generated by non-REIT business activities.
Current law does, however, provide that such non-REIT subsidiary
cannot represent more than 5% of the Company's assets. It is not
anticipated that this limitation will be exceeded. Under the
Administration's proposal, these provisions would be amended to
prohibit a REIT from owning more than 10% of the value of all
classes of securities of an issuer. This proposal, if adopted,
would be effective with respect to stock acquired on or after the
date of the first committee action. Should this or a similar
proposal be adopted and applicable to the Company's investments
in non-REIT subsidiaries, this avenue of investment would be
restricted and/or eliminated entirely. See "Material Federal
Income Tax Consequences" below.
Impact of Acquisition on The Company's Financial Position.
To date the Company has incurred fees for necessary acquisition,
development, administrative, management and advisory related
services provided by the Adviser and its Affiliates under the
Omnibus Services Agreement. After completion of the Acquisition,
the Company will no longer pay fees for the acquisition or
development of its properties or for its administration or
management of its properties. Instead, it will directly incur
all costs for the personnel and facilities required to perform
its property acquisition, development administration, and
management functions. The Company will also directly incur all
future increases in administration and management costs that
currently are borne by the Adviser. The fees paid by the Company
for services for the nine months ended September 30, 1997, and
the years ended December 31, 1996 and 1995, were approximately
$1,003,800, $359,200 and $297,200 respectively. The Independent
Directors believe that the Company will have sufficient size to
realize economies of scale by internalizing its administrative,
management and property development functions as proposed by the
Acquisition. Moreover, since it would have sufficient depth of
its management and personnel the Independent Directors believe
that the Company will be able to acquire, develop and manage
additional real estate assets without a significant increase in
personnel or other costs. Also, through the Affiliate
Agreements, the Company will be able to share certain of its
costs for personnel and facilities with certain affiliates of Mr.
Taylor. As a result of the Acquisition, the Company will obtain
all or a significant portion of its future property acquisitions
on attractive terms and conditions. In addition, as a result of
the Acquisition, the Company will capitalize qualifying
acquisition and development costs. However, no assurance can be
given that the cost to the Company of providing such services
internally will not exceed the fees payable to the Adviser and
its Affiliates under the current Omnibus Services Agreement. By
internalizing its development and acquisition functions, the
Company will be able to match the incurrence of costs associated
with the acquisition or development of properties with the
revenue generated by these properties. With this synergistic
relationship with Development Corp and the other Taylor
Affiliates, both Mr. Taylor and the Independent Directors believe
that the Company will realize the benefits of self-administration
and management immediately upon consummation of the Acquisition.
-19-
Common Stock Ownership Before and After the Merger
The following table presents information regarding the
beneficial ownership of the Common Stock by the Directors and
executive officers of the Company, including Mr. Taylor, as of
March 31, 1998, and on a pro forma basis, assuming all the Share
Consideration is paid. As of March 31, 1998 there were 1,875,000
shares of Common Stock outstanding. If and when the Share
Consideration is issued, there would be outstanding, on a pro
forma basis, at least 5,403,596 shares of Common Stock.
Maximum No. of Shares
Current No. of Shares Maximum No. of Shares Beneficially Owned
Beneficially Owned Beneficially Owned Upon Full Payment of
Name of Beneficial at March 31, 1998 as of the Closing Date Share Consideration
Owner (% of Class) (% of Class) (1) (% of Class) (2)
H. Kerr Taylor
(Chairman and CEO) 20,201 (1.08%) 233,461 (11.18%) 920,201 (10.33%)
Timothy Kelley
(V. Pres.- Operations) --- --- ---
Lawrence Mangum
(V. Pres.- Finance) ___ ___ ___
George McCanse
(Director) 500 (0.03%) 500 (<0.01%) 500 (<0.01%)
Robert Cartwright
(Director) 1,250 (0.07%) 1,250 (<0.01%) 1,250 (<0.01%)
(1) Based upon 213,260 shares to be issued on the closing date. Assumes no
additional shares issued by the Company between March 31, 1998 and the
Closing Date.
(2) Assumes satisfaction to the conditions precedent of the issuance of the
Share Balance including the issuance of 2,990,465 shares of Common Stock
in addition to the Share Balance. Assumes no other shares are issued
after the Closing Date.
Reasons for Self-Administration; Background and General Information
Both the Adviser and the Independent Directors believe that
for the Company to compete with its larger and more established
competitors it is essential that the Company become a self-
managed REIT. As a self-managed REIT, the Company would
internally conduct its own administrative, investment
identification, selection, acquisition and property management
functions and would no longer depend on external advisers for
these functions. Practically all of the Company's major
competitors are self-managed REITs and most, to some extent, have
the ability to develop their own property investments. An
increasing number of these competitors have established or are
-20-
establishing the ability to provide potential tenants with
complete "turnkey" development services, including site
identification and acquisition, project design and
implementation, construction supervision and construction and
permanent financing, including sale leaseback capabilities.
Management believes that the ability to offer such complete
"turnkey" property development to prospective tenants offers such
REITs substantial competitive advantages and therefore, in order
to successfully compete with such REITs, management believes it
is essential that the REIT be able to offer such capabilities.
It is difficult to quantify the advantage of a self-management
structure. Management believes that REITs that depend
on external advisers for their key functions are generally
penalized in the marketplace in that the prices of the securities
of such REITs are discounted to varying degrees in the public
securities markets. Many investment analysts familiar with the
public markets for real estate debt and equity securities have
expressed a strong preference for self-managed REITs. These
analysts point out that the securities of externally managed
REITs generally trade at prices reflecting a demand by the market
for higher yields of dividends or interest (and thus discounted
prices) over securities of otherwise comparable self-managed
REITs. As a basis for their preference for self-managed REITs,
investment analysts cite a number of factors, including conflicts
of interest between externally-managed REITs and their external
advisers regarding the advisers' other business interests, duties
and responsibilities, including the advising and management of
competing real estate ventures. Moreover, external advisers are
typically paid compensation based on the REIT's total assets or
total revenues irrespective of the quality of, or yield on the
REIT's investments. Also, key personnel providing services to
the REIT are generally the employees of the Adviser and as such
have no continued obligations to serve the REIT in the event the
advisory contract is terminated. Finally, at some point, the
REIT will reach a level of assets and revenues where the costs of
contracting for external administration, acquisition and property
management services will exceed the costs of internally providing
those functions.
By becoming self-managing as a result of the Acquisition,
each of these factors will be entirely or substantially
mitigated. Also, management believes that control over costs and
timing of real property investments gained by the ability to
internally acquire and develop properties will greatly facilitate
the Company's future growth. Management believes that with the
ability to internally develop and acquire properties, it will be
able to acquire properties at more attractive prices. Management
believes that if the Adviser is not acquired, the Company's costs
for acquiring and managing its properties would exceed the value
of the Share Consideration to be paid to the Adviser.
The Independent Directors concur with management in this
regard and believe that by acquiring the Adviser and establishing
an internal management team, the interests of the current Adviser
staff upon which the Company depends will be better aligned with
the interests of the Company's stockholders and the conflicts of
interest between Mr. Taylor and the Company will be mitigated.
Also, the Independent Directors believe that by becoming self-managed,
the Company will be in a better position to raise capital in the public
markets.
-21-
Based on these reasons, the Independent Directors have
determined that it is in the best interests of the Company to
acquire the Adviser on the terms and conditions of the Adviser
Acquisition. The Independent Directors were chosen to consider
and evaluate the advantages of becoming self-managed and to the
Acquisition of the Adviser because the Independent Directors are
not affiliated with Mr. Taylor, the Adviser or any other person
or entity which provides services to or has any material dealings
with the Company.
The Independent Directors were compensated for their time
and efforts in evaluating the Adviser Acquisition proposal at the
rate of $5,000 plus $1000 for each meeting attended.
Deliberations Of The Independent Directors
In early 1997, Mr. Taylor began to explore equitable and
practical circumstances under which he could offer to transfer to
the Company the Adviser's Company-Specific acquisition,
management and administrative functions to enable the Company to
become a self-managed REIT. Mr. Taylor believed it to be in the
Company's best interests to implement a self-management
structure. His belief was based in part on his observations and
those of various financial advisers and potential underwriters
that, in general, the financial markets penalized externally
managed REIT's because their securities typically trade at higher
yields (and thus lower prices) than the securities of comparable
self-managed REITs. Also, Mr. Taylor believed Underwriters,
money managers and institutional investors generally prefer self-
managed REITs because of the unity of purpose, and the absence of
conflicts of interest, between management and shareholders in a
self-managed REIT and the efficiency of self-management by reason
of direct control over of investment acquisition and management
functions. Also, self-managed REITs should be able to retain,
for the benefit of their shareholders at least in significant
part any profits resulting from fees paid to external advisers.
Mr. Taylor believed that, by becoming self-managed, the Company
could more quickly grow by more easily and timely attracting
additional investment capital. By directly controlling its costs
for acquisition and management the Company would be positioned to
reduce its costs for these functions, thereby increasing
shareholder value. To examine the possible effects of self-
management on the Company's performance, the Adviser's staff was
directed to prepare various operational scenarios and internal
forecasts and projections reflecting the Company's performance as
a self-managed REIT under various growth and operational
scenarios.
Based on his analysis, Mr. Taylor was convinced that the
REIT, even at its relatively small size, could efficiently and
cost effectively become self-managed, if it acquired necessary
facilities and personnel from the Adviser for voting stock,
rather than cash. Mr. Taylor noted that most REITs which were
organized with an external management structure and later became
self-managed did so after reaching a significant asset base, in
general about $70 million. Mr. Taylor noted disadvantages in
this typical REIT industry pattern. As most adviser fees are
compensation and revenue based, as these REITs grow in size, the
fees payable to the adviser increase substantially. Thus, during
the growth process, not only does the REIT incur adviser fees at
accelerated rates but, when the adviser is acquired, the price
paid is typically based on a multiple of fee income at the time
-22-
of acquisition. Mr. Taylor believed that it would be in the best
interest of the Company if it could become self-managed as early
as possible and thereby (i) end the payment of fees for
acquisition and management services; (ii) pay a price for the
adviser based on then current adviser income levels; and (iii)
sooner obtain direct control over the costs and expenses of its
vital administration and management functions, thereby achieving
costs and efficiencies from operations sooner.
During March and April of 1997, Mr. Taylor informally
conferred with the Independent Directors regarding their general
impressions regarding the Company's adoption of a self-management
structure through the purchase from the Adviser's Company-specific
facilities and personnel. It was determined that
because they were the Company's only directors not affiliated
with either Mr. Taylor or the Adviser, Messrs. Cartwright and
McCanse, the Independent Directors, would be responsible for
approving the Acquisition on behalf of the Board of Directors of
the Company. Based on these informal discussions with the
Independent Directors, Mr. Taylor concluded that the Independent
Directors would be receptive to a plan for the Company to become
self-managed.
On July 12, 1997, Mr. Taylor presented to the Independent
Directors an informal proposal, whereby the Company would acquire
the Company-specific employees and facilities of the Adviser for
approximately 400,000 shares of the Company's common stock, all
of which would be issued on the closing of the transaction. The
function to be transferred did not include the Adviser's
commercial real estate and mortgage brokerage and leasing
brokerage operations and non-Company related administration and
management functions. Also excluded were any of the Adviser's
development functions. Upon receipt of the offer, the Board
approved the engagement of Mr. Lange as legal counsel to
represent the Independent Directors. After considering the
proposal and conferring with Mr. Taylor, the Independent
Directors communicated their general interest in the Company's
acquisition of the Adviser but only if essentially all of the
Adviser's business activities were acquired and the significant
employees of the Adviser, including Mr. Taylor, became full-time
employees of the Company. The Independent Directors requested
that Mr. Taylor prepare a proposal within these guidelines and
provide further information, including current financial
information, forecasts and projections supporting his proposal.
At the request of the Independent Directors, the Board also
approved the engagement of Bishop-Crown as financial adviser to
the Independent Directors.
On July 14, 1997, Mr. Taylor presented a revised proposal to
the Board of Directors whereby the Company would acquire all of
the Adviser's functions except its non-company related
development activities. The price offered for the Adviser was up
to 947,000 shares of the Company's common stock, approximately
400,000 shares of which would be issued upon closing and up to
545,000 shares of which would be payable over an 84 month period
following the closing date, subject to growth of the Company's
real estate assets from $100 million to $500 million during that
period. Following the meeting, the Independent Directors
conferred with Mr. Lange and Mr. Heilbron regarding the proposal.
Mr. Taylor based the price for the Adviser offered on the
Adviser's revenues, net income and earnings before interest,
taxes, depreciation and amortization ("EBITDA") as annualized as
-23-
of June 30, 1997. Because the Adviser's business was growing at
accelerated rates, Mr. Taylor stated that the price would be
subject to adjustment based on the Adviser's annualized
performance as of September 30, 1997, as those results became
available. The Independent Directors informed Mr. Taylor that
they believed that the acquisition should include Mr. Taylor's other
real estate related interests because of their concern over
conflicts of interest between the Company and Mr. Taylor
The Independent Directors also expressed concern regarding the dilution
to the Company shareholders resulting from the terms of payment of the
shares both in terms of decrease in percentage ownership (and increase
in percentage ownership of Mr. Taylor) and decrease in book value per share.
Mr. Taylor then withdrew the proposal.
Thereafter, additional exchanges of information and
discussions took place between the Independent Directors and Mr.
Taylor regarding possible structures and terms and conditions for
the Company's acquisition of the Adviser. During this period,
the Independent Directors consulted Mr. Lange and Mr. Heilbron of
Bishop-Crown regarding these matters.
On August 9, 1997, Mr. Taylor submitted a revised proposal
to the Independent Directors whereby the Company would acquire
all business activities of the Adviser, including the Adviser's
non-Company development and management functions and its
commercial real estate, loan and leasing brokerage functions, and
commercial real estate loan and brokerage, in exchange for up to
1,096,422 shares of the Company's common stock. The Company
would issue 500,008 shares upon closing and up to 588,000 shares
would be issuable over the following 84 month period subject to
the Company's FFO per share and dividends meeting certain
inflation index criteria. The Independent Directors conferred
with Mr. Heilbron and Mr. Lange and requested and received
additional information from Mr. Taylor and the other officers of
the Adviser. In late August, the Independent Directors
communicated their continued concern that the issuance of a large
percentage of the share consideration upon closing would cause
unacceptable dilution to the Company's shareholders. Also, the
Independent Directors were concerned as to the interpretation and
effectiveness of the conditions as proposed for the issuance of
the deferred portion of the share consideration. The Independent
Directors communicated to Mr. Taylor that they would be more
receptive to terms whereby the share consideration is paid by the
Company if and when the Company realized substantial benefits
from the acquisition. This structure was appealing in that it
would require the Company to incur the cost of the additional
share issuance (and the dilution to shareholders resulting
therefrom) only if and when the Company received substantial
benefits. The Independent Directors believed this structure
would not only confirm the value of the Adviser but also allow
the Company to more closely time its payment for the Adviser to
its receipt of benefits therefrom.
For the remainder of August to November 25, 1997, Mr. Taylor
reviewed updated financial information of the Adviser and the
Company, updated financial forecasts and pro forma operating
statements based thereon, and reconsidered the structure of the
Adviser Acquisition. During this time, the Independent Directors
further considered the proposal and conferred with Mr. Lange and
Bishop-Crown. In November 1997, the Board authorized the
engagement of Deloitte & Touche, LLP to review and consult with
-24-
the Independent Directors and Mr. Taylor regarding the tax
consequences of various structures for the Company's acquisition
of the Adviser.
In early November, at the request of the Independent
Directors, the Board authorized the engagement of Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. to render their opinion to
the Independent Directors of the valuation of the Adviser. Thereafter,
Houlihan commenced compiling information and data concerning the
Adviser.
On November 24, 1997, the Board of Directors met to consider
revisions to the August 9th proposal by Mr. Taylor whereby the
Adviser would be acquired by the Company pursuant to a statutory
merger with the Company's wholly-owned subsidiary. The
acquisition price would be up to 1,030,094 shares of common
stock, comprised of 213,260 initial shares and up to 816,834
shares issuable quarterly thereafter, but only to the extent such
issuance would not, when added to all shares previously issued in
connection with the acquisition, exceed 9.8% of the outstanding
common stock, after giving effect to such issuance. The deferred
shares would be subject to issuance indefinitely at such time, if
any, as the conditions for issuance were met. As part of the
transaction, Mr. Taylor proposed to also transfer with the
Adviser, AmREIT Development Corp. Attending the meeting were
representatives of Bishop-Crown and Houlihan. The
Independent Directors discussed the revisions to the proposal
with Mr. Lange and their financial advisers. The Independent
Directors informed Mr. Taylor that the proposed structure of the
acquisition would be acceptable overall if the time during which
the deferred portion of the share consideration could be issued
was limited to 84 months and if, as part of the transaction, Mr.
Taylor agreed to specific terms and conditions of employment for
at least a 2-year period.
On December 31, 1997, the Board of Directors held a
telephonic meeting to consider Mr. Taylor's revised written
proposal dated December 23, 1997. This proposal for the Adviser
Acquisition was essentially the same as last proposed, except
that the total consideration to be paid for the adviser would be
limited to 900,000 shares, a deferred portion of which would be
payable, if at all, within the 72 month period following the
closing date of the acquisition. Also, the Adviser transaction
would not include transfer of AmREIT Development Corp. because of
potential adverse tax consequences to the Company. Included with
the proposal were the terms and conditions of Mr. Taylor's
employment for the initial 24 months following the closing date
whereby Mr. Taylor would be the exclusive employee of the Company
and be entitled to base compensation of $1.00 per annum, subject
to certain adjustment, and additional incentive compensation if
and when awarded by the Independent Directors, in their sole
discretion. The terms of Mr. Taylor's employment would limit his
outside activities to those approved by the Board, from time to
time, and would require him to cause his controlled affiliates to
enter into the affiliate contracts as described elsewhere in this
proxy statement. Attending the meeting by telephone was Mr.
Lange. Prior to the meeting, Houlihan had delivered their
opinion dated December 16, 1997 and their report setting forth
their opinion as to the value of the Adviser. Also, prior to the
meeting, Bishop-Crown rendered its oral opinion that the
acquisition, on the terms and conditions proposed by Mr. Taylor
would be fair to the Company and to its shareholders (other than
Mr. Taylor) from a financial point-of-view. After consideration
-25-
of the revised proposal and these opinions, the Independent
Directors approved the Company's acquisition of the Adviser under
the terms and conditions stated in Mr. Taylor's revised proposal
subject to their review of the substantive merger agreement and
related agreements and their receipt of written opinions from
their financial advisers and Deloitte & Touche regarding the
material Federal income tax consequences of the transaction.
During their deliberations, the Independent Directors also
considered the following alternatives to the Acquisition:
Renegotiation of the Omnibus Services Agreement; Termination of
the Adviser and the internal creation of a self-management
structure; Acquisition of another outside adviser; and Continuing
the Omnibus Services Agreement and reconsideration of acquiring
the adviser at a later date. After considering each of these
alternatives, the Independent Directors determined that none was
as favorable to the Company and its shareholders as the
Acquisition.
Renegotiation of the Omnibus Services Agreement, if
successful, could provide for reduced future service fees but
would not accomplish the Company's goals of self-management, the
elimination of conflicts of interest between the Adviser and the
Company and the alignment of management's interests with those of
the Company. Moreover, based on discussions with Mr. Taylor, the
Independent Directors concluded that it was unlikely that the
Omnibus Services Agreement could be successfully renegotiated at
this time in light of the relative small size of the Company's
current investment portfolio and the absence of economies of
scale based thereon. Also, the Independent Directors determined
that renegotiation was unlikely to be successful because of the
Adviser's unique experience and existing relationships with the
Company's tenants and potential development partners. All of
these factors significantly reduced the Company's ability to
negotiate advisory service price concessions.
Under the Omnibus Services Agreement, either party has the
option to extend the Agreement for one-year periods by mutual
consent. The Omnibus Services Agreement may be terminated
without cause by either party upon no more than 60 days prior
written notice. However, termination would cause a significant
disruption of the Company's affairs and, it is unlikely that the
Company could retain key personnel of the Adviser. The
Independent Directors determined that the internal creation of a
management structure by terminating the Adviser and hiring of key
personnel of the Adviser was not feasible because the Adviser's
management indicated their unwillingness to work for the Company
except in the event of the Acquisition. Also, the Independent
Directors determined that hiring new management is an undesirable
alternative because of the difficulty of identifying and
employing the experienced management professionals with
comparable expertise and professional relationships as the
management of the Adviser. Also weighing against the internal
creation of a self-management structure is the expected lead
time necessary to identify, interview and consider qualified
personnel to fill key management positions. Compounding this
process are the uncertainties in hiring and integrating new
personnel into a new and evolving management culture where
personnel are inexperienced with each other and the Company's
business. The Independent Directors also believe that in order
to induce experienced personnel to join the Company at its
current size, the Company would likely be required to provide
such persons at the top executive levels significant equity
participations through the grants of options and/or stock in
order to provide performance incentives and alignment of purpose
-26-
with key management personnel. Thus, termination of the Omnibus
Services Agreement would prevent the Company from continuing to
benefit from the experience and expertise of current Adviser
management and would require the Company to identify and engage
new management professionals who may not have comparable
experience and relationships with the Company's existing or
potential tenants.
The Independent Directors rejected the alternative of
acquiring another adviser for similar reasons. The Independent
Directors noted that the acquisition of an unrelated adviser
would, as with the Acquisition, allow the Company to acquire an
in-place management team with at least some identifiable
experience and operating history. However, Independent Directors
rejected this approach because of uncertainties as to such
unrelated advisers' ability to manage the Company's existing
asset portfolio and because the acquisition of a successful
unrelated adviser would also require a significant, dilutive
issuance of equity ownership in the Company in order to assure
continuation of the in-place management and to align in place
management's interests with those of the Company. Also , the
Independent Directors believe that no other advisory company
could provide the same level of experienced expertise and
attention to the Company and its affairs as the Adviser, and
therefore did not actively pursue other advisory companies.
The Independent Directors determined that operating under
the existing Omnibus Services Agreement with the intention of
reconsidering the acquisition of the Adviser at a future date was
an unfavorable alternative in that the delay would increase the
cost of the company associated with the advisory services, would
defer unnecessarily the elimination of conflicts of interest and
alignment of management's interests and would delay the benefits
from establishing a self-management structure, which the
Independent Directors believe would significantly facilitate the
Company's ability to grow through public equity investments.
Also, the Independent Directors expected that the price and/or
terms of an acquisition of the Adviser in the future would be
less favorable than those of the Acquisition.
On December 31, 1998, the Independent Directors voted to
approve the Adviser Acquisition under the terms and conditions
set forth in the Acquisition Agreement attached hereto as Annex
A. Also, on December 31, 1998, the Board of Directors, the basis
of the approval of the Independent Directors, the Houlihan
valuation opinion and the Bishop-Crown fairness opinion, approved
the Acquisition and the Acquisition Agreement (with Mr. Taylor
abstaining).
Recommendation of the Independent Directors
In reaching its determination that the proposed Adviser
Acquisition is in the best interests of the Company and its
shareholders, the Independent Directors considered, without
assigning relative weights of importance to, the following
factors, each of which the Independent Directors found weigh in
favor of the Adviser Acquisition:
* The ability of the Company to position itself to
successfully compete with the larger and more
established REITs by becoming a self-managed REIT
-27-
capable of acquiring, developing and managing its own
property investments and administering its own affairs;
* The belief of the Independent Directors that the
structure of the Adviser Acquisition, including the
deferred, conditional payment of the Share Balance and
the anticipated availability of revenues from ongoing
third-party services to partially offset the Company's
increased general and administrative costs will allow
the Company to support and receive the benefits of
self- management status at its current asset size;
* Self-management, as a result of the Adviser
Acquisition, will better position the Company to
attract growth through capital investment while
allowing the Company during such growth, if any, to
forego the payment of external adviser acquisition and
management fees, the total amounts of which, during the
up to 72 month period during which the Share Balance
may be issued, the Independent Directors believe, would
be comparable to, or be possibly greater than, the
Company's cost for the Share Consideration paid for the
Adviser during such period growth;
* The belief of the Independent Directors that the
Company's ability to develop its real property
investments "in-house" from site selection to sale
leaseback financing will allow the Company to acquire
its property investment at higher yields than it might
otherwise be available from third-parties and will
attract and allow the Company to maintain long-term
relationships with key regional and national tenants;
* The ability to engage, as a result of the Adviser
Acquisition, experienced and capable employees and
personnel who have specific experience with the
Company's properties and property management procedures
and have long-standing relationships with the tenants
of the Company;
* The anti-competitive covenants and requirements of the
Acquisition Agreement which require Mr. Taylor to
devote substantially all of his time to the Company,
require Mr. Taylor to cause his other real estate
affiliates to enter into continuing contractual
relationships with the Company and limit Mr. Taylor's
compensation from non-Company sources, essentially
mitigate all conflicts of interest between Mr. Taylor
and the Company relating to Mr. Taylor's other real
estate interests;
* The belief of the Independent Directors that Mr.
Taylor's substantial stock ownership in the Company
resulting from the Adviser Acquisition and the
limitations on his outside real estate related business
activities will align Mr. Taylor's interests with those
of the Company and cause Mr. Taylor to look to the
long-term success of the Company for both his ongoing
compensation and the value of his investment in the
Company's common shares;
-28-
* The belief of the Independent Directors that the
Adviser Acquisition structure will enable the Company
to sooner experience the benefits of self-management of
development, management and retaining for itself any
profit differential between the costs of providing its
own acquisition, development, management and
administrative functions and the price charged for such
services by an external adviser;
* The belief of the Independent Directors that a self-management
structure will make the Company more attractive to analysts and
institutional investors, allow the Company's stock, when and if
traded on a public market, to trade at lower yields (and thus
higher prices) than would otherwise be obtainable by
the Company if it remained externally managed and
thereby allowing the Company to more efficiently
attract equity and debt investment and create greater
shareholder wealth in terms of market values for its
securities;
* The opportunity through the Adviser Acquisition to
orderly move from an externally managed structure to a
self-management structure without loss or displacement
of personnel currently providing acquisition,
development, management and administrative services to
the Company, without a change in office facilities and
without delays in timing, the occurrence of any of
which would, in the belief of the Independent
Directors, cause significant disruption in the
Company's affairs and ultimately lead to greater cost
in achieving self-management status;
* The structure of the Adviser Acquisition whereby the
Company will incur the costs of the deferred Share
Consideration if and only to the extent the Company
achieves the prescribed growth in equity capital during
the 72-month deferred payment period which structure,
to a significant extent, requires the Company to pay a
significant portion of the Share Consideration only if
and to the extent the Company experiences a growth in
assets and is actually relieved from the payment of
substantial acquisition, management and administrative
fees which would otherwise be payable to the Adviser.
In reaching its determination that the Adviser Acquisition
is in the best interests of the Company and its shareholders, the
Independent Directors also considered, without assigning relative
weights to, the following factors, each of which the Independent
Directors believes weigh against the merger proposal. The
Independent Directors believe that the total weight of each of
the following factors is significantly outweighed, in total, by
the positive factors discussed above:
* The risk that the financial performance of the Company
as a whole and the per share financial performance of
the Company with respect to income, funds from
operations and earnings before interest, taxes and
amortization ("EBITDA") will not increase (or may
-29-
decrease) following the Adviser Acquisition and the
issuance of the Share Consideration, although the
Independent Directors believe that the structure of the
Acquisition, including the terms and conditions for the
Share Balance and the anticipated growth of the Company
greatly reduce the significance of this risk;
* The risk that, while greatly reduced under the terms of
the Adviser Acquisition, the conflicts of interest
between Mr. Taylor and the Company will not be
completely mitigated and that potential conflicts of
interest may arise between the Company and Mr. Taylor
and/or his affiliated real estate interests in the
future;
* The risk that the conclusions of the Independent
Directors as to the value of the Adviser are inaccurate
and that the overall financial benefits to the Company
resulting from the Adviser Acquisition will be less
than anticipated or, by operation of federal income tax
or other regulatory restrictions on the Company's
operations, the Company is unable to fully benefit from
one or more aspects of the Adviser's ongoing business
operations;
* The risk that the value of the Share Consideration
substantially exceeds the value of the Adviser's
identifiable net assets.
In reaching their conclusion that the consideration to be
paid for the Adviser is fair, from a financial point of view, to
the Company and its shareholders (other than Mr. Taylor), the
Independent Directors, without assigning relative weights to,
considered the following factors:
o the terms and conditions of the Acquisition,
including the type, amount and timing of the Share
Consideration to be paid and the amount and timing
of anticipated financial benefits to be received
from the Adviser;
o the independent representation of the Independent
Directors by their special counsel and their
financial advisers, Bishop-Crown and Houlihan
to insure that the determinations made by
the Independent Directors would not be affected by
conflicts of interest between the Adviser and the
Company;
o the conclusion of Deloitte & Touche LLP that the
Acquisition will be treated for federal income tax
purposes as a reorganization within the meaning of
Section 368(a) of the Code and that, accordingly,
the Company will not recognize income, gain or
loss upon the consummation of the Acquisition of
the Adviser;
-30-
o the opinion of Houlihan dated December 16,
1997 as to the current value of the Adviser, based
on the conditions and assumptions stated therein;
and
o the fairness opinion of Bishop-Crown dated January
15, 1998 stating that on such date and based on
various assumptions and considerations, the
Adviser Acquisition is fair, from a financial
point of view, to the Company and its shareholders
(other than Mr. Taylor).
In considering the fairness of the Adviser Acquisition to
the Company, the Independent Directors also took into account,
among other things: (a) the amount of shares constituting the
Share Consideration; (b) the terms and conditions for the payment
of the Share Balance which in significant part requires that the
benefits of the Adviser Acquisition are realized by the Company
during the deferred payment period; the anti-competitive
provisions of the Acquisition Agreement whereby Mr. Taylor's non-Company
real estate activities are restricted and regulated; (d)
the ongoing employment relationship between the Company and Mr.
Taylor required under his Employment Agreement and the
substantial share ownership of Mr. Taylor in the Company
resulting from the Adviser Acquisition, each of which greatly
align Mr. Taylor's long-term interests to those of the Company;
and (e) the continued oversight of the Independent Directors
during the period over which the Share Consideration is to be
paid, thereby mitigating certain conflicts of interest that night
arise between management and the Company during this time.
The Independent Directors noted that the Share Consideration
to be paid for the Adviser represents a substantial premium over
the fair value of the identifiable net assets of the Adviser to
be acquired by the Company. In considering the reasonableness of
the payment of such a premium in the context of the fair value of
identifiable net assets acquired, the Independent Directors
considered the value basis of the Adviser's business which
almost entirely of service-related income and is not
dependent upon and does not require a substantial investment in
tangible assets. In determining the fairness of the Acquisition to
the Company and its shareholders, the Independent Directors placed
most weight upon the past service revenues of the Adviser and the
potential savings to the Company resulting from the internalization
of acquisition, development and management activity resulting from the
Adviser Acquisition. This analytical approach was also followed by
Houlihan and Bishop-Crown in their respective valuation and fairness opinions.
The Independent Directors also considered that the payment
of the Share Consideration is expected to be accretive to (i.e.,
enhance) the Company's FFO per share, a commonly used indicator
of REIT performance. In light of the anticipated increase in the
Company's portfolio and the projected timing of payment of the
Share Consideration, the Independent Directors believe that the
Adviser Acquisition will be accretive on FFO per share, during
the period the Share Balance is projected to be paid. The
Independent Directors believe that the Adviser Acquisition will
be more accretive to FFO per share during periods thereafter as
compared to FFO per share that would be obtained under the same
assumptions if the Adviser Acquisition had not occurred. In
-31-
arriving at these conclusions, the Independent Directors reviewed
and considered internal management projections regarding property
acquisition, development and property management activities and
anticipated initial investment yields and operating expenses
under portfolio growth rates of 10%, 30% and 50% per annum, both
under presumption that the Adviser Acquisition is consummated as
well as under the presumption that the Adviser is not acquired
and the Omnibus Services Agreement remains in place.
There can be no assurance that these internal management
projections will be met and that the assumptions, relating to
property acquisitions, development, equity capital, payment of
the Share Balance, pre-acquisition capitalization rates, interest
rates and dividends, on which the projections are based, are
materially accurate or will be prevented from occurring by reason
of future events. Moreover, certain known and unknown risks,
uncertainties and other factors may cause actual results,
performance or achievements of the Company with respect to the
Acquisition to be materially different from the projected
results. Therefore, there can be no assurance that the
Acquisition of the Adviser will be accretive to the Company's net
income, FFO, or that management's internal projections and
assumptions will materially differ from actual future results.
Description of The Acquisition Agreement
THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS OF THE
ACQUISITION AGREEMENT. A COPY OF THE ACQUISITION AGREEMENT IS
ATTACHED AS ANNEX A TO THIS PROXY STATEMENT AND IS INCORPORATED
HEREIN IN ITS ENTIRETY BY REFERENCE THERETO. SUCH SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACQUISITION
AGREEMENT.
General. Pursuant to the Acquisition Agreement, the
Company, the Adviser and Mr. Taylor will take all actions
necessary to cause the Adviser to be merged with and into AAA
Acquisition, with AAA Acquisition as the surviving corporation.
Upon consummation of the merger, the Adviser will be a wholly
owned subsidiary of the Company. The articles and bylaws of the
Adviser in effect prior to the Closing Date will be the articles
and bylaws of the surviving corporation, until such may later be
amended as provided therein and under applicable law. In
addition, the officers and directors of the Adviser will be the
officers and directors of the surviving corporation.
Subject to the terms and conditions set forth in the
Acquisition Agreement, upon consummation of the merger the issued
and outstanding shares of the Adviser will be converted into the
right to receive newly issued shares of Common Shares. No
fractional shares of Common Shares will be issued in the merger.
In lieu thereof, the Company will pay cash based on a current
price of $10.25 per share.
The Common Shares issued to Mr. Taylor in connection with
the Acquisition will not be registered under the Securities Act
of 1933, as amended (the "Securities Act"). As such, these shares
-32-
will be "restricted securities" as that term is defined by Rule
144 under the Securities Act. Mr. Taylor has agreed not to
resale these shares unless such offer and sale is first
registered under the Securities Act or exempt from registration
requirement thereunder. Mr. Taylor will enter into a
Registration Rights Agreement with the Company pursuant to which
the holders of the restricted securities will be permitted, in
certain circumstances and subject to meeting certain procedural
requirements, to sell their Common Shares received in connection
with the Acquisition without an exemption from the registration
requirements of the Securities Act. The Registration Rights
Stockholders may exercise piggyback registration rights and, if
the aggregate offering price of all such Common Shares to be
registered equals $5 million or more, exercise demand
registration rights; provided that a maximum of two demand
registration statements may be exercised.
Consideration and Payment. Under the Acquisition Agreement,
the Company has agreed to issue up to 900,000 Common Shares as
the Share Consideration for the Adviser Acquisition, all of which
will be issued to Mr. Taylor as sole shareholder of the Adviser.
The Company will issue the 213,260 Initial Shares on the Closing
Date and will issue up to the Share Balance of 686,740 shares,
subject to adjustment as described below, as follows: No later
than thirty (30) days after the end of the calendar quarter in
which the Closing Date occurs, and within thirty (30) days after
the end of each calendar quarter thereafter until the twenty-
fourth (24th) consecutive calendar quarter following the Closing
Date, or, if sooner, until the entire Share Balance has been
issued. The Company will issue a portion of the then unissued
Share Balance (the "Remaining Share Balance") equal to when added
to the aggregate shares of the Share Consideration theretofore
issued, 9.8% of the total number of Common Shares outstanding at
the end of the respective calendar quarter after giving effect to
the issuance of such additional shares.
At the Closing Date of the Acquisition, should it occur, Mr.
Taylor would own 233,461 shares of the Company's common stock
which, would represent approximately 11.18% of the Company's
total outstanding shares at that time (assuming no additional
substantial share issuances other than the initial shares). For
the 24 calendar quarters following the Closing Date, Mr. Taylor's
additional share ownership by reason of his receipt of the Share
Consideration could not exceed the number of shares which
represent 9.8% of the Company's total outstanding shares.
The Acquisition Agreement requires that, in the event of Mr.
Taylor's death, the Company must promptly purchase from his
estate his right, title and interest in the Remaining Share
Balance at a price determined on a value of $10.25 per share or,
if the Company's Common Shares are then traded in a national
securities market, the average closing price of the Company's
Common Shares on the ten (10) consecutive trading days preceding
the Date of Death, whichever is greater. To fund this
obligation, the Company must maintain one or more insurance
policies, payable to the Company, insuring Mr Taylor's life in
the amount necessary to purchase the Remaining Share Balance.
The foregoing notwithstanding, the Remaining Share Balance
is immediately issuable in the event any of the following should
occur:
-33-
(i) An event which results in or is likely to
result in a Change in Control of the Company;
(ii) The failure by the Company to timely issue
the Share Balance, or any portion thereof as
required above;
(iii) In the event the Stockholder's
employment by the Company is terminated
without cause as defined in the
employment agreement between the Company
and the Stockholder then in effect; or
(iv) The Company's failure to purchase, upon the
death of Mr. Taylor, all of his right, title
and interest in the Remaining Share Balance,
which interest will be valued as of the date
of death at the greater of $10.25 per share
or, if the common shares are traded in a
national securities market, the average
closing price of such shares during the ten
(10) consecutive trading days immediately
preceding the date of death. Under the
Acquisition Agreement, the Company is
required to maintain insurance on the life of
Mr. Taylor to fund this obligation.
For the purposes of the foregoing, a "Change in Control"
means (I) the sale or transfer of substantially all of the assets
of the Company, whether in one transaction or a series of
transactions, except a sale to a successor corporation in which
the stockholders immediately prior to the transaction hold,
directly or indirectly, at least 50% of the total voting power of
the successor corporation immediately after the transaction, (ii)
any merger or consolidation between the Company and another
corporation immediately after which the stockholders hold,
directly or indirectly, less than 50% of the total voting power
of the surviving corporation, (iii) the dissolution or
liquidation of the Company, (iv) the acquisition by any person or
group of persons of direct or indirect beneficial ownership of
the Company's common shares representing more than 50% of the
Company's common shares, or (v) the date the Board Changes. For
the purposes of the foregoing, a "Board Change" means the date
that a majority of the Board is comprised of persons other than
persons (I) whose election proxies shall have been solicited by
management, or (ii) who are serving as directors appointed by the
Board to fill vacancies caused by death or resignation (but not
by removal) or to fill newly created directorships.
As an illustration of the foregoing, if the Closing Date
should occur on April 20, 1998, then up to all of the Share
Balance would first be issuable on or before July 30, 1998 based
on the number of the Company's Common Shares outstanding on the
last day of the calendar quarter ended June 30, 1998, and up to
all of the remainder of the Remaining Share Balance would be
issuable within 30 days of the end of each calendar quarter
thereafter based on the number of the Company's common shares
outstanding as of the last day of such calendar quarter until the
entire Share Balance has been issued or until the calendar
quarter ending March 31, 2004, whichever is the first to occur.
If, assuming a Closing Date of April 20, 1998, on September 30,
-34-
1999 the Company had outstanding a total of 4,630,500 Common
Shares, of which 213,260 constituted the Initial Shares and
150,000 constituted the previously issued portion of the Share
Balance, then as of such Payment Date, the Company would issue an
additional 100,364 shares of the Share Balance (plus cash at the
rate of $10.25 per share for 0.7 share). Upon this issuance
there would be 4,730,864 Company Common Shares outstanding of
which 463,624 shares would have been issued in the merger. If,
assuming a Closing Date of April 20, 1998, or if on March 31,
2004, the Company had a total of 8,248,571 Common Shares
outstanding, of which 213,260 shares represented the Initial
Shares and 550,000 shares constituted the previously issued
portion of the Share Balance, then the Company would issue 50,000
shares of the Remaining Share Balance on or before April 30,
2004. Upon this issuance there would be 8,298,571 Common Shares
outstanding of which 813,260 shares would have been issued in the
merger. Also, this issuance would complete the remaining
obligation of the Company to issue the Share Balance (i.e. there
would be no further obligation to issue the then unissued 86,740
shares of the resulting Remaining Share Balance). In the event of
a Change in Control of the Company, the remaining Share Balance
shall be immediately issued and paid to the Stockholder.
If the current liabilities of the Adviser exceed its current
assets as of the Closing Date (the "Current Liability Excess")
the number and kind of securities comprising the Remaining Share
Balance will be adjusted by the number of shares equal to Current
Liability Excess divided by $10.25, following the Closing Date,
to reflect certain events causing a change in the number or
classification of the Common Shares, including the payment of
stock dividends with respect thereto, the subdivision, split or
reclassification of the Common Shares or the merger,
consolidation or reorganization of the Company. The Adviser
estimates the amount of such Current Liability Excess to be
approximately $200,000 as of the Closing Date.
Competitive Real Estate Ventures
Under the Acquisition Agreement, so long as the Stockholder
serves as an officer or director of the Company he may not,
without the Company's express authorization, engage or
participate directly or indirectly as a principal, agent, or
owner (including serving as a partner of or owning any stock or
other equity investment or debt of) any Competitive Real Estate
Venture, as defined. Excluded from the foregoing are Competitive
Real Estate Ventures in which Mr. Taylor is currently interested,
including AAA Net Developers, Ltd. and the AAA Partnerships and
their respective general partners. Also excluded from the
foregoing restriction is the present or future ownership of not
more than one percent (1%) of the total outstanding class of
equity or debt securities of any Competitive Real Estate Venture
whose equity or debt securities are publicly traded.
"Competitive Real Estate Venture" is defined as any
enterprise entered into for profit whose activities in at least
material part consist of the acquisition, development, ownership
and/or management of real estate leased or intended to be leased
to commercial or retail tenants.
-35-
In addition, the Acquisition Agreement provides that Mr.
Taylor must cause any Competitive Real Estate Venture over which
he exerts control, to, at the election of the Company, at any
time or from time to time, enter into the following contractual
arrangements with the Company or its designated affiliate, the
form and terms of each such contract to be subject to the final
approval of the Board.
A facilities and personnel agreement whereby the Competitive
Real Estate Venture is obligated to first satisfy its
requirements for personnel and/or facilities by the use of
available, qualified Company facilities and personnel. Under
this Agreement, the Competitive Real Estate Venture will be
required to reimburse the Company for its use of such facilities
and personnel at a rate equal to the Company's cost for such
facilities or personnel, including a reasonable allocation of its
general administrative and overhead expenses and other indirect
costs determined on a reasonable accounting basis. Upon
completion of the Acquisition, the Company intends to enter into
facilities and personnel agreements with each of the respective
AAA General Partners pursuant to which the Company would provide
facilities and personnel necessary for the administration and
management of each of the AAA Partnerships. The Company also
intends to enter into such contractual arrangements with AmREIT
Development Corp to provide administrative and development
services, facilities and personnel. However, its ability to do
so may be significantly limited under current and possible future
changes to the REIT Rules. See "Material Federal Income Tax
Consequences" below.
An agreement whereby the Competitive Real Estate Venture
must offer to the Company the right to purchase any property
which the Competitive Real Estate Venture acquires or contracts
to acquire, subject to its then-existing fiduciary obligations of
the Competitive Real Estate Venture to any other persons. The
purchase price for any such property to the Company would be the
cost of the property to the Competitive Real Estate Venture,
including an allocable portion of its general, administrative and
overhead expenses and other indirect expenses incurred in
connection with identifying, selecting and acquiring such
property. The Competitive Real Estate Venture could be required
to communicate the offer to purchase no later than twenty (20)
days following its entering into a binding contract to acquire a
property. The Competitive Real Estate Venture will not be
required to offer any such property to the Company it may have
had as of the Closing Date or, if later, at the time it attained
status of a Competitive Real Estate Venture within the meaning of
the Acquisition Agreement.
Under the Acquisition Agreement, Mr. Taylor may not receive
any compensation from any Competitive Real Estate Venture under
his control except as may, from time to time, be approved by the
Board. It is the Board's intent to use this restriction to limit
the aggregate compensation received by Mr. Taylor from the
Company and his other controlled Competitive Real Estate
Ventures, if any. Expressly excluded from the foregoing agreement
-36-
would be any compensation in connection with Mr. Taylor's ownership of
the general partners of the AAA Partnerships. In general, these general
partners have a one percent (1%) interest in the profits, losses and
distributions of their respective AAA Partnership.
Closing
The Acquisition Agreement provides that the Closing will
occur after all of the conditions set forth in the Acquisition
Agreement have been satisfied or waived (the "Closing Date"). It
is contemplated that the Closing Date will occur on or prior to
May 31, 1998. If the Closing has not occurred by September 1,
1998, Mr. Taylor, so long as he is not then in default under the
Acquisition Agreement, may in his sole discretion terminate the
Acquisition Agreement.
Conduct of Business Prior to Closing
The Adviser and Mr. Taylor have agreed, among other things,
that prior to the Closing Date the Adviser will not take certain
actions without the Company's prior written consent, including
but not limited to: (I) issuing any new Adviser securities; (ii)
repurchasing or redeeming any existing Adviser securities; (iii)
effecting any stock splits; (iv) adopting any amendment to its
articles of incorporation or its bylaws; (v) incurring or
guaranteeing any indebtedness for borrowed money; (vi)
mortgaging, pledging, selling or transferring any material assets
of the Adviser; or (vii) engaging in any business the nature of
which is materially different from the business the Adviser
engaged in at the time the Acquisition Agreement was signed. As
an exception to the foregoing, the Agreement does provide that
the Adviser may transfer such assets, incur such debt and make
such distributions as may be necessary in order for the Adviser
to reduce to zero its accumulated and current earnings and
profits within the meaning of Section 312 of the Code.
The Company has agreed, among other things, that prior to
the Closing Date, the Company will continue to conduct activities
within the ordinary scope of its business and will continue to
contract for acquisition, management and administrative services
from the Adviser under the Omnibus Services Agreement, including
the payment of acquisition fees in connection with the Company's
properties the acquisition of which is contracted for by the
Company prior to the Closing Date. The Adviser has agreed,
however, that it will not receive acquisition fees with respect
to borrowed funds used to acquire such properties which are
acquired more than sixty (60) days after the Closing Date.
Conditions to Closing
The obligations of the Company, AAA Acquisition, the Adviser
and Mr. Taylor to effect the Acquisition are subject to the
fulfillment or waiver at or prior to the Closing of certain
conditions, including the approval of the Acquisition by the
stockholders of the Company. In addition, the obligations of the
Company and AAA Acquisition to effect the Acquisition are subject
to the fulfillment or waiver at or prior to Closing of certain
additional conditions, including that the representations and
-37-
warranties made by the Adviser and Mr. Taylor with respect to the
Adviser and its business set forth in the Acquisition Agreement
are true and correct in all material respects as of the Closing
Date.
Representations and Warranties
The Acquisition Agreement includes customary representations
and warranties of the Adviser and the Stockholder as to, among
other things: (I) the corporate organization, standing and power
of the Adviser to enter into the merger and the transactions in
connection therewith; (ii) the Adviser's capitalization; (iii)
authorization of the merger by the Adviser and the Adviser
Stockholders; (iv) the Acquisition Agreement's noncontravention
of any law or governmental order, any charter or bylaw provision,
or any contract or other agreement; (v) compliance with laws;
(vi) ownership and title or license to tangible and intangible
property and assets owned or used by the Adviser; (vii) the
Adviser's financial statements; (viii) pending or threatened
litigation; (ix) lack of undisclosed liabilities of the Adviser;
(x) payment of taxes; (xi) certain contracts and leases of the
Adviser; (xii) existence of insurance; (xiii) certain matters
with respect to employees and employee benefits; and (xiv)
disclosure of affiliated business relationships. In addition, the
Acquisition Agreement includes various customary representations
and warranties by the Stockholder as to, among other things: (I)
authority of the Stockholder to enter into the transactions
contemplated by the Acquisition Agreement; (ii) noncontravention
of any agreement to which the Stockholder is a party; (iii) title
to shares of common stock of the Adviser held by the Stockholder;
(iv) certain matters with respect to federal and state securities
laws; and (v) lack of intention to dispose of the Share
Consideration received in the Acquisition above a certain amount.
The foregoing representations and warranties survive until the
later of two years from the Closing Date or the date upon which
the Share Balance is paid in full, with the exception of certain
tax matters representations and warranties, which survive until
the expiration of the applicable statute of limitations with the
exception of certain representations as to authorization to issue
the Common Shares in connection with the merger, which survive
until the expiration of the applicable statute of limitations) of
the Company as to, among other things: (I) the corporate
organization, standing and power of the Company to enter into the
merger and the transactions in connection therewith; (ii) the
Company's capitalization; (iii) authorization of the merger by
the Company; (iv) the Acquisition Agreement's noncontravention of
any law or governmental order, any charter or bylaw provision, or
any contract or other agreement; and (v) compliance with law.
Expenses
The Company will bear the costs and expenses (including
legal fees and expenses) incurred in connection with the
Acquisition.
Financial Information
Attached on pages F-1 through F-15 of this Proxy Statement
is certain pro forma and other financial information with respect
to the Company and the Adviser.
-38-
Accounting Treatment
The Acquisition will be accounted for as costs incurred in
acquiring the Adviser from a related party to the extent the
consideration paid exceeds the fair value of the net tangible
assets received. Such costs will be reflected as an expense when
incurred.
Material Federal Income Tax Consequences
The following discussion summarizes the material federal
income tax consequences in connection with the merger to a holder
of Common Shares who is a U.S. citizen or resident. Such
discussion is based on current law. The discussion is not
exhaustive of all possible tax considerations, nor does the
discussion give a detailed description of any state, local, or
foreign tax considerations. This discussion does not describe all
of the aspects of federal income taxation that may be relevant to
a stockholder in light of his or her particular circumstances or
to certain types of stockholders (including insurance companies,
financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax
laws. No ruling has been or will be requested from the Internal
Revenue Service ("IRS"). 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).
SINCE THE DISCUSSION MAY NOT ADDRESS IN DEPTH ALL OF THE
MATERIAL INCOME TAX CONSIDERATIONS FOR EACH SHAREHOLDER'S
PERSONAL TAX SITUATION, DOES NOT DISCUSS STATE AND LOCAL INCOME
TAX CONSIDERATIONS, AND IS NOT TO BE INTERPRETED AS TAX ADVICE TO
PROSPECTIVE SHAREHOLDERS, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISERS REGARDING THEIR PERSONAL TAX SITUATION.
General. The Company expects to continue to be taxed as a
REIT for federal income tax purposes. Management believes that
the Company was organized, has operated and, assuming
consummation of the Acquisition, will continue to operate after
the Acquisition in such a manner as to meet the requirements for
qualification and taxation as a REIT under the Code, and intends
to continue to operate the Company in such a manner. No
assurance, however, can be given that the Company will continue
to operate in a manner so as to remain qualified as a REIT.
The Company has obtained an opinion from Deloitte & Touche
LLP ("Deloitte & Touche") that, for federal income tax purposes,
based on current law and interpretations thereof, assuming the
Company was organized in conformity with and has satisfied, prior
to the Acquisition, the requirements for qualification and
taxation as a REIT under the Code for each of its taxable years
from and including the first year for which the Company made the
election to be taxed as a REIT and the assumptions and
representations referred to below are true upon and following the
-39-
Acquisition, the Acquisition will be consummated in conformity
with the requirements for continued qualification and taxation of
the Company as a REIT, and the proposed methods of operation of
the Company and the surviving corporation following the merger,
and the ownership of assets contemplated in the Acquisition
Agreement, will permit the Company to continue to so qualify for
its current and subsequent taxable years. This analysis is based
on certain assumptions relating to the organization and operation
of the Company and the surviving corporation and is conditioned
upon certain representations made by the Company as to certain
factual matters relating to the Acquisition and the intended
manner of operation after the Acquisition of the Company and the
surviving corporation. The opinion is further conditioned upon
the Company not otherwise being allocated more non-qualifying
income than is consistent with the 95 percent gross income test.
See "--Income Tests." Unlike a tax ruling, an analysis of a tax
adviser is not binding on the IRS, and no assurance can be given
that the IRS will not challenge the status of the Company as a
REIT for federal income tax purposes. The Company's qualification
and taxation as a REIT has depended and will depend upon, among
other things, the Company's ability to meet on a continuing
basis, through ownership of assets, actual annual operating
results, receipt of qualifying real estate income, distribution
levels and diversity of stock ownership, the various
qualification tests imposed under the Code discussed below. See
"--Failure to Qualify."
Unless specifically referenced and referred to, Deloitte &
Touche has rendered no opinion on the other issues discussed
under this "Material Federal Income Tax Consequences" because of
the prospective or hypothetical nature of the facts and
circumstances associated with such an opinion as, for example,
the tax treatment of distributions to specific shareholders.
Deloitte & Touche's opinion represents only its best professional
judgment as to the most likely outcome of an issue if the matter
were litigated and has no binding effect on the Service or the
courts. There is, therefore, no assurance that the conclusions
expressed below would be sustained by a court if contested, or
that future legislative or administrative changes or court
decisions may not significantly modify the statements and
opinions expressed herein. Any such future changes could be
retroactive with respect to any transactions effective prior to
the time they are made.
The following is a summary of all material considerations
concerning applicable Code sections that affect the Acquisition.
These sections of the Code are highly technical and complex. This
summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder
("Treasury Regulations"), and administrative and judicial
interpretations thereof as currently in effect. There is no
assurance that there will not be future changes in the Code,
Treasury Regulations or administrative or judicial
interpretations thereof that could adversely affect the Company's
ability to continue to qualify as a REIT or adversely affect the
taxation of holders of Common Shares or that could further limit
the amount of income the Company may derive from the management
and development activities to be performed after the Acquisition.
The Acquisition will be executed in accordance with the
Texas General Corporation Law, and the Adviser Stockholder will
receive Common Shares and cash in lieu of fractional Common
Shares. Cash in lieu of Fractional Shares is a mechanical
adjustment and not separately bargained for consideration. The
-40-
Acquisition is intended to be a reorganization under Section
368(a) of the Code, and the federal income tax consequences
summarized below are based on the assumption that the Acquisition
will qualify as a reorganization. In addition to satisfying the
statutory provisions of Section 368(a) of the Code,
reorganization must comply with the revised continuity-of-interest
doctrine set out in section 1.368-1(e) of the Treasury
Regulations, which requires that there be certain continuity-of-interest
on the part of the transferor corporation or its
stockholders. Article 9.8 of the Acquisition Agreement requires
that the Stockholder retain at least one-half of its Common
Shares for at least 12 months following the receipt of such
shares. In addition, Article 9.7 prohibits the Stockholder from
disposing of the Common Shares received through the Acquisition
in such a manner as to violate the current continuity of
stockholder interest requirements set forth in section 1.368-1(e)
of the Treasury Regulations. Based upon the foregoing, Deloitte
& Touche has rendered its opinion to the Company that the Merger
of AAA Acquisition will qualify as a reorganization under the
provisions of Section 368(a).
Assuming that the Merger qualifies as a reorganization under
Section 368(a) of the Code, the Adviser Stockholder who will
receive solely the Company's Common Shares in exchange for his
shares of the Adviser in the Merger will not recognize any gain
or loss on such exchange. If the Stockholder receives the
Company's Common Shares and cash in lieu of a fractional Common
Share, Stockholder will recognize taxable gain or loss solely
with respect to such cash equal to the difference between such
cash amount and the tax basis allocated to such Stockholder's
fractional share interest. Such gain or loss generally will
constitute capital gain or loss provided that the Adviser Stock
was held as a capital asset. Adviser Stockholder will have an
aggregate tax basis in his Company Common Shares received in the
Merger equal to his aggregate tax basis in the shares of Adviser
common stock (reduced by the amount of any tax basis allocable to
a fractional share interest for which cash is received) exchanged
therefor. No gain or loss should be recognized by the Company,
AAA Acquisition or the Adviser as a Result of the Merger.
Qualified REIT Subsidiary. A REIT is permitted to have a
wholly owned subsidiary (also referred to as a "qualified REIT
subsidiary") provided that such subsidiary satisfies certain
conditions. A qualified REIT subsidiary is not treated as a
separate entity for federal income tax purposes. Rather, all of
the assets, liabilities and items of income, deduction and credit
of a qualified REIT subsidiary are treated as if they were those
of the REIT. AAA Acquisition, if formed in the manner
represented by the Company, will be and will continue to be a
"qualified REIT subsidiary" of the Company, and the assets,
liabilities and items of income of AAA Acquisition will be
treated as assets, liabilities and items of income of the
Company.
Income Tests. In order for the Company to maintain its
qualification as a REIT, there are three gross income tests that
must be satisfied annually.
At least 75 percent of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year
must be rents from real property and interest and certain other
income earned from mortgages on real property, gain from the sale
of real property or mortgages (other than in prohibited transactions) or
income from qualified types of temporary investments.
-41-
At least 95 percent of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year
must be derived from the same items that qualify under the 75
percent gross income test or from dividends, interest and gain
from the sale or disposition of stock or securities, or from any
combination of the foregoing.
Less than 30 percent of the Company's gross income
(including gross income from prohibited transactions) must be
derived from gain in connection with the sale or other
disposition of stock or securities held for less that one year,
property in a prohibited transaction, and real property held for
less than four years (other than involuntary conversions and
foreclosure property). Under the 1997 Act, for the Company's
1998 taxable year and all taxable years thereafter, this third
test is no longer applicable.
The Company may receive fees in exchange for the performance
of certain management activities for third parties with respect
to properties in which the Company does not own an interest. Such
fees will result in nonqualifying income to the Company under the
95% and 75% gross income tests. If the sum of the income
realized by the Company which does not satisfy the requirements
of the 95% gross income test (collectively, "Non- Qualifying
Income") exceeds 5% of the Company's gross income for any taxable
year, the Company's status as a REIT would be jeopardized. The
Company has represented that the amount of its Non-Qualifying
Income in any taxable year, including such fees, will not exceed
5% of the Company's annual gross income for any taxable year.
If the Company fails to satisfy one or both of the 75
percent or 95 percent gross income tests for any taxable year, it
may nevertheless qualify as a REIT for such year if it is
entitled to relief under certain provisions of the Code. These
relief provisions generally will be available if the Company's
failure to meet such tests was due to reasonable cause and not
due to willful neglect, the Company attaches a schedule of the
sources of its income to its return, and any incorrect
information on the schedules was not due to fraud with the intent
to evade tax. It is not possible, however, to state whether in
all circumstances the Company would be entitled to the benefit of
these relief provisions. Even if these relief provisions apply,
a tax would be imposed with respect to the excess net income.
Asset Tests. In addition to its own assets, the Company
will be deemed to hold directly all real estate and other assets
of AAA Acquisition. Subsequent to the Acquisition, the Company
will be deemed to hold directly any real estate and other assets
of the Adviser. Management anticipates that more than 75 percent
of the Company's assets will be real estate assets. In addition,
management expects that the Company may in the future invest in
the voting and non-voting securities of one or more issuers
("non-REIT subsidiaries"). However, management does not expect
the Company to hold (1) any securities representing more than ten
percent (10%) of any one issuer's voting securities (other than
AAA Acquisition, which is a qualified REIT subsidiary), nor (2)
-42-
securities of any one issuer exceeding five percent (5%) of the
value of the Company's gross assets (determined in accordance
with generally accepted accounting principles). Under current
law, the Company would not lose its qualifying status as a REIT
under the asset tests merely by reason of changes in asset values
in a subsequent quarter. This requirement must be satisfied not
only upon the initial acquisition of such securities, however,
but also each time the Company increases ownership of securities.
If the failure to satisfy the asset tests results wholly or
partly from an acquisition of securities or other property during
the quarter, the failure could be cured by disposition of
sufficient non-qualifying assets within 30 days after the close
of any quarter as may be required to cure any noncompliance.
There can be no assurance, however, that such steps will always
be successful. Proposed future tax legislation included in the
President's 1998 fiscal year budget could, if enacted, severely
restrict or eliminate the Company's ability to benefit from
investments in non-REIT subsidiaries. See "RISK FACTORS" above.
Other REIT Requirements. One of the requirements for
qualification as a REIT in any year is that at the end of the
year the REIT has no accumulated earnings and profits from a
prior non-REIT year. As a result of the Merger, the Company
would succeed to any earnings and profits of the Adviser existing
at the time of the Merger. Prior to the Merger, the Adviser will
distribute to its stockholders an amount equal to its earnings
and profits. Furthermore, within 90 days of the Merger, the
Company will make a nondeductible pro rata distribution equal to
any remaining accumulated earnings and profits of the Adviser.
Failure to Qualify. 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 stockholders
in any year in which the Company fails to qualify will not be
deductible by the Company, nor will they be required to be made.
In such event, to the extent of current and accumulated earnings
and profits, all distributions to stockholders will be taxable to
them as ordinary income, and, subject to certain limitations of
the Code, 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.
If assets of a C corporation are transferred to a REIT in a
transaction in which the REIT has a carryover basis in the assets
acquired, such C corporation generally will be treated as if it
sold all of its assets to such REIT at their respective fair
market values and liquidated immediately thereafter, recognizing
and paying tax on all gain. However, under present law, the REIT
is permitted to make an election under which the C corporation
will not recognize gain and instead the REIT will be required to
recognize gain and pay any tax thereon only if it disposes of
such asset(s) during the subsequent 10-year period (the "10-Year
Rule"). The Company intends to make the appropriate election to
obtain the above-described tax consequences. Having acquired
assets from a C corporation as a result of the Merger, the
Company will recognize gain on the disposition of such asset(s)
during the 10-year period following acquisition of the asset(s).
-43-
Such gain will be subject to tax at the highest regular corporate
rate to the extent the Built-in Gain (the excess of (a) the fair
market value of such asset(s) as of the date of the Merger over
(b) the Company's adjusted basis in such asset(s) as of such
date) on the sale of such asset(s) exceeds any Built-in Loss
arising from the disposition during the same taxable year of any
other asset(s) acquired in the same transaction, where Built-in
Loss equals the excess of (x) the Company's adjusted basis in
such other asset(s) as of the date of Merger over (y) the fair
market value of such other asset(s) as of such date.
Regulatory Matters
The Company and the Adviser are not aware of any license or
regulatory permit which is material to the business of the
Company, the Adviser or the Development Company and which is
likely to be adversely affected by the consummation of the
Acquisition or of any material approval or other action by any
state, federal or foreign government agency that would be
required prior to the consummation of the Acquisition.
No Appraisal Rights
Under Maryland law and the Charter, holders of Common Shares
will not be entitled to rights of appraisal in connection with
the Acquisition.
Vote Required to Approve the Acquisition
In order to approve the Acquisition, a majority of the
Common Shares eligible to vote at the Special Meeting must vote
in favor of the Acquisition. Accordingly, shares that are not
voted (whether by abstention, broker non-vote or otherwise) will
have the effect of counting against the requirement that a
majority of the Common Shares vote on the Acquisition, but will
not count as a vote against the Acquisition itself.
A VOTE FOR PROPOSAL 1 SHALL BE DEEMED A VOTE PERMITTING THE
BOARD OF DIRECTORS TO EFFECT THE ACQUISITION PURSUANT TO THE
ACQUISITION AGREEMENT APPROVED BY THE STOCKHOLDERS OF THE
COMPANY; ANNEX A SETS FORTH THE ACQUISITION AGREEMENT AS IF
PROPOSAL 1 HAS BEEN APPROVED.
The Adviser's Recommendations and Reasons for the Acquisition
For the reasons described below, Mr. Taylor and the Adviser
believe that it would be in the best interests of the Company and
its shareholders to internalize its administrative and management
functions and the ability to acquire and develop its own real
estate developments. Because of the interests of the Company and
the Adviser in the Proposed Acquisition, Mr. Taylor's goal was to
structure the Acquisition in a manner that would maximize
shareholder values for each party. Mr. Taylor has agreed to vote
-44-
all of the 20,201 shares he owns in favor of the Acquisition. Mr. Taylor
and the Adviser expect that they will benefit from the Acquisition.
The following were all of the material factors presented by
the Adviser to the Independent Directors with regard to the
Acquisition:
* IMPACT ON FUNDS FROM OPERATIONS. The Adviser believes
that the Acquisition will be accretive to the Company's
funds from operations. Currently, the Company pays
fees to the Adviser and its Affiliates based on a fixed
percentage of the Company's Real Estate Assets and
revenues, which fees increase proportionately as the
Company adds assets.
* THE BENEFITS OF INTERNAL ACQUISITION AND DEVELOPMENT OF
REAL PROPERTY INVESTMENTS. The Adviser believes that
the Company's capability of acquiring and developing
its own real estate investments will provide the
Company substantial economic benefits by allowing the
Company to identify, acquire and develop attractive
investments at costs which will be, in general, less
than those of comparable investments acquired and/or
developed through third-party services.
* THE FACILITIES AND PERSONNEL ARRANGEMENTS. The F&P
arrangements with the AAA General Partners will,
subject to compliance with the Code and the Treasury
Regulations, provide reimbursements to the Company for
the use of its personnel and facilities, including
allocable portions of general indirect expenses,
including administrative and overhead expenses related
thereto. These reimbursements will thereby
significantly offset the Company's costs for
maintaining such personnel and facilities and allowing
the Company to engage expert personnel and acquire
equipment and other administrative and management
facilities it may not be able to justify or afford
without the F&P reimbursements.
* ABILITY TO ACQUIRE AND DEVELOP PROPERTIES. The Company
will acquire the Adviser's staff, which has
demonstrated the ability to locate, negotiate and
develop groups of properties for creditworthy tenants
at competitive costs. The Adviser believes these
acquisition and development capabilities will allow the
Company to acquire real estate for investment at
attractive costs.
* GREATER OPPORTUNITY TO GROW. The Adviser believes that
the REIT industry is undergoing a period of significant
consolidation. The Adviser believes that an internally
managed REIT will have much greater flexibility to
participate in this industry consolidation than does an
externally managed REIT as an acquirer of other asset
groups because of the inherent conflicts of interest
with external management. Also, the Company's
internalized management would, through such
management's commonality of interest with the Company
and its shareholders, assure that the Company would be
-45-
well positioned to demand and negotiate favorable price
and term considerations in the event it receives an
offer to be acquired.
* PUBLIC MARKET VALUATION. The Adviser examined the
public market valuation and funds from operations
multiples of comparable public REITs that were
internally managed. The Adviser believes that
investors and analysts will view an internally managed
structure more favorably since the Company's costs,
after capitalization of qualifying acquisition and
development costs in accordance with GAAP, will be more
comparable to other REITs. These acquisition and
development activities are currently provided by the
Adviser and its Affiliates and paid for by separate
fees, which fees are capitalized by the Company.
Further, the Adviser has historically experienced a
timing difference between the costs and expenses
associated with the acquisition and development of
properties and the revenues it will receive from rents
in future periods as these properties generate
operating cash flow. Management believes that the
increased comparability resulting from the Company's
capitalization of qualifying acquisition and
development costs, in addition to the opportunity for
increased growth in funds from operations due to the
economies of scale, as discussed above, will result in
a higher multiple on the Company's funds from
operations and an enhancement to shareholder value.
The following are potential detriments of the Acquisition:
* The number of Common Shares issuable to Mr. Taylor in
the Acquisition could represent as much as 9.8% of the
total outstanding Common Shares at the time they are
issued.
* Since the number of Common Shares issuable to Mr.
Taylor in the Acquisition is fixed, the value of those
shares at the time the Acquisition is completed may be
greater than the value placed on the Adviser by the
Board of Trustees.
* The Acquisition would result in the Company incurring
higher general and administrative expenses related to
the internalization of its administrative and
operational functions in lieu of paying fees to the
Adviser and its Affiliates for such services. The
Adviser anticipates that the Company would incur
approximately $500,000 of additional unreimbursed
administrative and operational expenses in 1998 by
reason of its internalization of administrative and
operational functions. The Company would, however, no
longer pay any fees for services under the Omnibus
Services Agreement. Also, the Company would no longer
pay fees to the Adviser's Affiliates for acquisition,
development, administration and management services,
which would be performed by proprietary personnel and
facilities. The increased administrative costs of
internalizing administrative and operational functions
-46-
may be greater than anticipated and no assurance can be
given that the cost to the Company of providing such
functions internally will not exceed the fees payable
to the Adviser and its Affiliates under the current
Agreement.
* The Company will initially offset a significant portion
of its increased general and administrative expenses by
reimbursements for services and facilities from the AAA
General Partners. However, there is no assurance that
it will continue to be able to do so.
* Although the Acquisition is expected to be immediately
accretive to the Company's funds from operations, the
Acquisition may not result in a corresponding increase
in the price at which Common Shares may be traded,
should such shares be traded in a regular public
market.
Based primarily on these reasons, and after consideration of
the potential detriments, Mr. Taylor recommended the Acquisition
to the Independent Directors.
Bishop-Crown Fairness Opinion
Bishop-Crown Investment Research, Inc. was engaged by the
Independent Directors to evaluate the fairness of the Adviser
Acquisition, from a financial point of view, to the Company and
its Shareholders (other than Mr. Taylor). Bishop-Crown's
fairness evaluation is only from a financial point of view of the
consideration to be paid by the Company and to be received by the
Company and its shareholders (other than Mr. Taylor). For the
purposes of its evaluation, Bishop-Crown assumed certain
conditions will exist as of the Closing Date which will occur, if
at all, on or before September 30, 1998. Bishop-Crown delivered
its oral opinion to the Independent Directors on December 31,
1997 to the effect that, as of such date, and based on the terms
and conditions described therein, the amount and nature of the
consideration to be paid by the Company and to be received by the
Company and its Shareholders (other than Mr. Taylor) pursuant to
the Adviser Acquisition, was fair, from a financial point of
view, to the Company and its Shareholders (other than Mr.
Taylor). Bishop-Crown has subsequently confirmed its oral
opinion by delivery of its written opinion. The complete text of
Bishop-Crown's opinion, dated January 15, 1998 is attached hereto
as Annex B.
The summary below contains all of the material elements of
Bishop-Crown's opinion, but is qualified in its entirety by
reference to the entire opinion. Accordingly, the Shareholders
are urged to read Bishop-Crown's opinion carefully in its
entirety for a description of the procedures followed, the
factors considered and the assumptions made by Bishop-Crown.
Bishop-Crown's opinion does not constitute a recommendation to
any shareholder as to how the shareholder should vote at the
Special Meeting.
In connection with the preparation of its opinion, Bishop-Crown
among other things: (a) reviewed financial information
relating to the Adviser, including historical information and
-47-
various scenarios of forecasted performance; (b) reviewed certain
financial models provided by the Adviser relating to future
financial performance of the Adviser; (c) reviewed certain
financial projected and pro forma results (the "financial
models") provided by the Adviser, together with the comments
thereon by the Independent Directors regarding the future
financial performance of the Company; (d) reviewed the terms and
conditions of the Acquisition Agreement; (e) reviewed this Proxy
Statement; (f) reviewed publicly available information regarding
past acquisitions of their advisers and/or external managers by
other REITs; (g) held discussions with Mr. Taylor and other
members of the Advisers' management concerning the business,
operations and prospects of the Adviser and the Company as each
is currently situated; (h) held discussions independently of and
together with Mr. Taylor and the Independent Directors concerning
the business, operation and prospects of the Company combined
with the Adviser as proposed under the Adviser Acquisition; (i)
reviewed the share price and trading history of other publicly
traded REITs which have successfully made the transition from
externally administered and managed status to internally
administered and managed status; (j) compared the financial terms
of the Adviser Acquisition as proposed, with other transactions
which Bishop-Crown deemed relevant; (k) prepared and analyzed
discounted cash flow analysis of the Adviser as currently
situated; (l) analyzed the combined funds from operation per
share of the Company combined with the Adviser on both an
historical basis and so proposed under the terms of the Adviser
Acquisition; and (m) made such other studies and inquiries and
reviewed such other data as it deemed relevant.
In providing its oral opinion to the Independent Directors
and in preparing its written opinion, Bishop-Crown relied upon
financial information provided by Mr. Taylor, management of the
Adviser and the Company, including financial forecasts and
projections. Bishop-Crown assumed without independent
verification that such financial information was reasonably
prepared and reflects the best current available estimates or
future financial results and the condition of the Company and the
Adviser, and that there has been no material change to the
assets, financial conditions, business or prospects of the
Company or the Adviser since the date the most recent financial
statements made available to it. Included in this financial
information were projected operating results of the combined
Company and Adviser based on various financial models assuming
various rates of asset growth ranging from 10% to 50% over
various periods extending up to and including 2004. These
financial models incorporated numerous assumptions with respect
to the real estate industry performance, general business and
economic conditions, assumptions as to future conditions of the
financial markets and the continuation of certain current trends
within the real estate industry. Most of these assumptions are
beyond the control of the Adviser and the Company, and as
predictions, no matter how reasonable, are subject to the impact
and influence of future events. Primary among the assumptions
made were that interest rates, rates of inflation, and yields on
leased properties would continue, overall, to compare with rates
currently available. The financial models also assumed that
under current and future Company investment lease provisions,
same store net operating income would increase at the average
rate of 1% per annum, as adjusted after the end of each fifth
year of the lease. Bishop- Crown was not engaged to opine and
does not express any opinion as to any other aspect of the
Acquisition other than the fairness of the consideration to be
paid by the Company and to be received by the Company and its
Shareholders (other than Mr. Taylor), from a financial point of
view.
-48-
Share Consideration Analysis. For purposes of its analysis
of the fairness of the transaction, Bishop-Crown valued the Share
Consideration by annualizing the value of the Company's shares
based on Common Stock multiples of annual dividends and annual
FFO. The appropriate range of multiples was determined by
reference to the reported multiples of publicly traded share
prices to dividends and FFO per share reported for the following
REITs which Bishop-Crown deemed to be comparable to the Company
in terms of investment objectives and real estate investments.
These REITs (the "Comparable REITs") included Alexander Haagon
REIT, TriNet REIT, Boddie-Noell Properties, Inc., Burnham Pacific
Properties, Commercial Net Lease Realty, Franchise Finance Corp.
of America, Realty Income Corporation, Glimcher Realty Trust,
Price REIT, Saul Center, Excel Realty Trust, Inc., National Golf
Properties, Macerich Company, Golf Trust of America, Alexandria
Real Estate Equities and Western Investment R.E. Trust. This
analysis resulted in multiples of dividends per share ranging
from 11.53x to 19.53x, with a median of 14.33 and a mean of
14.65, and multiples of FFO per share ranging from 9.80x to
17.91x, with a median of 12.89x and a mean of 13.29x. For the
purposes of its analysis, Bishop-Crown focused on the median
dividend and FFO multiples which resulted in share prices equal
to a multiple of 14.33x dividends per share and 12.89x FFO per
share. Bishop-Crown noted that the Company has, through 1997,
paid dividends in excess of FFO per share. Bishop-Crown noted
that the dividends per share paid by these REITs was less than
the REIT's FFO per share except for Alexander Haagon (dividend
equaled 105% of FFO), National Golf Properties (dividend equaled
101% of FFO) and Saul Centers (dividend equaled 102% of FFO).
Bishop-Crown also noted that the Company currently pays dividends
at the rate of 113% of FFO. Bishop-Crown therefore determined,
for the purposes of comparison, to adjust the Company's dividend
per share to 100% of FFO of $0.66 per share as annualized at
December 31, 1997. Based on this analysis multiples, Bishop-Crown
determined for the purposes of valuing the Share
Consideration, the Company's common stock had a value ranging
from $8.50 to $9.46 per share based on FFO per share of $0.66 as
annualized at December 31, 1997. Based on the foregoing, Bishop-Crown
found the value of the Initial Shares at a range of $1.81
million to $2.02 million. Bishop-Crown valued the Share Balance
as discounted at a rate appropriate to reflect the receipt of the
Share Consideration ratably over the six year period over which
the Share Balance is payable. Bishop-Crown discounted the shares
received at the end of each quarter of this 14-quarter period
using discount rates ranging from 12.0% and 20.0%. These
discount rates reflected Bishop-Crown's qualitative judgment
regarding the risks of nonpayment and/or delayed payment of the
Share Balance. This analysis resulted in a current value for the
Share Balance ranging from $4.64 million to $5.23 million.
Based on its analysis, Bishop-Crown determined an implied value
for the Share Consideration ranging from $5.23 million to $6.66 million.
Bishop-Crown also noted that, as there is currently no
regular public market for the Common Shares, such valuations may
differ significantly, and without limitation as to such higher or
lower value as of the Closing Date. Also, due to the contingent
and deferred nature of payment of the Share Balance, estimates of
the value of the Share Consideration would differ significantly.
Thus, Bishop-Crown did not recommend to the Company that any
specific consideration would constitute the appropriate amount or
form of payment by the Company for the Adviser, nor did Bishop-Crown
recommend to the Company that any specific consideration
-49-
received by the Company or its shareholders would constitute
appropriate consideration to be received in the transaction.
Bishop-Crown is not required to update its opinion. Management
is not aware of any event which has occurred after the date
of Bishop-Crown's opinion or of any significant changes to the information
upon which it relied in giving its opinion which would cause
Bishop-Crown to alter its opinion regarding the fairness of the
Acquisition from a financial point of view.
Because the Adviser has obtained current operating levels
only as a result of significant growth during 1997, Bishop-Crown
determined that the Adviser's pre-1997 operating results were not
directly relevant for valuation consideration. Accordingly,
Bishop-Crown performed its revenue, EBITDA and cashflow analysis
based on the Adviser's operating results for the year 1997 and
its forecasted results for 1998. In reaching its opinion,
Bishop-Crown considered the structure of the Acquisition
transactions, whereby the consideration to be paid by the Company
is both deferred and conditional upon future growth in third-party
equity investment in the Company. Bishop-Crown noted that
the present value of the total consideration to be paid by the
Company for the Adviser, on current value analysis, would be
decreased by both the deferred time of payment and the higher
risk of non-payment or reduced payment due to the growth in
equity investment condition.
Houlihan Valuation Opinion. In analyzing the fairness
of the Acquisition, Bishop-Crown considered and relied upon the
Houlihan opinion included as Annex C to this Proxy Statement.
The Houlihan opinion concluded that the value of the Adviser for
the purposes of the Acquisition (the "Adviser Value"), without
deduction for net liabilities, ranged from $5.2 million to $6.8
million. Please see "Houlihan Valuation Opinion" below.
Bishop-Crown also analyzed the Adviser Value pursuant to (I)
a discounted cashflow analysis, (ii) a comparable transaction
analysis, and (iii) a pro forma forecast analysis.
Discounted Cashflow Analysis. Under its discounted
cashflow analysis, Bishop-Crown valued the future stream of net
cashflow (debt-free earnings) that the Adviser would realize if
the Merger does not occur for each of the years ended December
31, 1998, 1999 and 2000. Bishop-Crown then assumed a sale of the
Adviser at the end of 2000. After analyzing operating projections
provided by the Company and management of the Adviser, Bishop-Crown
determined representative projected cashflow for the years 1998,
1999 and 2000 to be $1.08 million, $1.19 million, and $1.31 million,
respectively, based on forecasted 1998 operating results and assuming
a growth rate for the Company's portfolio of 10% in 1999 and 2000.
Bishop-Crown determined representative projected net cashflow by taking into
account the Adviser's historical and projected operating expenses
for each year, which included the Adviser's general
administrative expenses, including executive salaries. Bishop-Crown
assumed a combined income tax rate for the Adviser of 40%.
Based on this analysis, Bishop-Crown calculated a range of
equity values for the Adviser based upon:
-50-
(i) the present value of the Adviser's net cashflows
for 1998, 1999 and 2000; and
(ii) the present value of the estimated terminal value
of the Adviser, assuming that it was sold at the
end of the year 2000, based on annualized cash flow in 2001.
In applying its discounted cashflow analysis, Bishop-Crown
assumed, among other things, discount rates ranging from 12% to
20% (depending on the predictability of the income from various
fees from the Company under the Omnibus Services Agreement and
income from services fees rendered to non-Company related users
and real estate investment activities). Bishop-Crown also noted
such discount rates are consistent with those used in cashflow
analysis of Advisers in the comparable Transactions section
discussed below. For valuation of the adviser at the time of
sale, Bishop-Crown used terminal multiples of 6.0x to 9.0x, where
the smaller end of the range is more reflective of a greater discount
rate range by reason of the more speculative future sale prediction.
Based on Bishop-Crown's quantitative judgments concerning the specific
risks associated with an investment and the Adviser's business, the
historical and projected operating performance of the Adviser, and
the increased speculative value of projections of future performance,
the relatively modest growth rate of 10% assumed and the relatively short
36 month projection period, Bishop-Crown focused on a range of multiples
from 7.5x to 8.0x. This analysis resulted in a range of implied present
values for the Adviser of $5.35 million to $6.71 million. Bishop-Crown
focused its analysis on the lower ranges of values resulting from these
discount rates and terminal multiples and believes that the
implied equity value range for the Adviser is $5.78 million to
$6.8 million.
Comparable Transaction Analysis. Bishop-Crown reviewed
transactions by certain other publicly traded real estate
companies pursuant to which they purchased their adviser (a
manager) which Bishop-Crown considered had comparable terms and
conditions to those of the Acquisition. These comparable
transactions involved the following companies: Boddie-Noell
Properties, Inc., Burnham Pacific Properties, Commercial Net
Lease Realty, Franchise Finance Corp. of America, Realty Income
Corporation, Security Capital Pacific Trust, and U.S. Restaurant
Properties Master Partnership. For each of these transactions,
Bishop-Crown analyzed the calculated multiples obtained by
comparing prices paid by each of these companies to acquire its
respective adviser/manager with the aggregate advisory fees
earned by the adviser/or manager during the last full fiscal year
prior to their acquisition by their customer company. Bishop-Crown
calculated the following ranges of multiples: a range of
purchase price to adviser revenues of 1.8x to 6.7x, with a mean
of 4.1x; a range of purchase price to adviser EBITDA of 4.4 to
15.5, with a mean of 10.2; and a range of purchase price to
adviser EBIT of 5.6 to 17.8, with a mean of 14.2. Applying the
applicable range of these multiples to the Adviser's revenue,
EBITDA and EBIT, as annualized at December 31, 1997, Bishop-Crown
concluded from this analysis that a range of implied values for
the Adviser of $6.48 million to $12.3 million. None of these
transactions, however, was the same as the Acquisition in terms
of payment structure. However, Bishop-Crown concluded that this
analysis supported an implied value for the Adviser in the range
of $6.0 million to $6.8 million.
-51-
In each comparable transaction, the real estate company
acquired its respective adviser after the company had reached a
significantly higher asset base than that of the Company and
that, for the purposes of the acquisition, the adviser was valued
based on the greater asset-based fee income resulting from the
larger company asset base at that time. Under such
circumstances, the respective adviser had not only received fees
during the acquiring company's asset growth but had received fees
and compensation from the company in connection with the value of
the adviser enhanced as a result of the company's growth. Under
the terms of the proposed Acquisition, the value of the Adviser
is based on the current size of the Adviser and the Adviser and
the Company's growth only through 1998. Under the proposed
Acquisition, the Company will be able to acquire the Adviser at
its current asset level and will not be required to pay for the
Adviser unless and until its assets grow, through third-party
equity investment, thereby offsetting to a great extent the
dilution costs through the payment of the Share Consideration.
While the Company will incur costs of self-administration and the
internal acquisition of its properties, the Company will, upon
acquisition of the adviser, no longer pay adviser fees, including
acquisition fees. Accordingly, the Company will in essence be
able to apply the profit, if any, which would have otherwise been
realized by the Adviser from the adviser fees through this period
of growth to the economic cost of the Share Consideration paid
for the Adviser. Bishop-Crown considered this feature of the
structure of the Acquisition to be of substantial benefit to the
Company.
Pro forma Acquisition Analysis. Bishop-Crown also
analyzed the effect of the Acquisition on the financial
projections of the REIT and on the price to be paid by the REIT
for the Adviser. For the purposes of this analysis, Bishop-Crown
considered the various financial models, including those assuming
scenarios for growth in the Company's real estate assets based on
growth rates of 10%, 30% and 50% through 2004. Pursuant to these
financial models, Bishop-Crown compared anticipated FFO per share
for (I) of the Company without giving effect to the Adviser
Acquisition, (ii) of the Adviser without giving effect to the
Acquisition; and (iii) of the Company and the Adviser on a pro
forma basis after giving effect to the Acquisition. Pursuant to
this analysis, Bishop-Crown observed that under each of the
resulting nine possible scenarios, the transaction could be
expected to be accretive to funds from operations for the Company
in each year for the seven year period ending December 31, 2004.
Conclusions. Based on the foregoing, Bishop-Crown
determined that the mean average value of the Share Consideration
to be paid in the Acquisition is within the range of Adviser
Values stated in the Houlihan Opinion and the range of Advisor
Values resulting from Bishop-Crown' analysis. Bishop-Crown
therefore believes these analyses support its conclusion that the
Share Consideration is fair to the Company and its Shareholders
(other than Mr. Taylor) from a financial point of view.
Bishop-Crown also considered Mr. Taylor's willingness to
receive consideration in the form of the Common Shares in payment
for the Adviser. Bishop-Crown noted that the Company's net
economic cost per share will be, in general, less than the
economic cost of cash payment because, in general, the Company's
transaction costs for the Acquisition are expected to be less
than its costs for equity or debt financing would be in the
event cash consideration were paid.
-52-
Bishop-Crown noted the current rates of the Company's equity
growth from its offerings of Common Shares on a best-efforts
basis and the Company's current lack of a regular secondary
market for its Common Shares. In considering the fairness of the
transaction, Bishop-Crown also considered the significant
benefits to the Company which would result from self-management
status. Bishop-Crown believes that the Company's ability to
attract significant asset growth in equity investment will depend
on its ability to attract underwriters capable of placing
significant public offerings of the Company's Common Shares and
the establishment of a secondary market for the Common Shares.
Bishop-Crown believes that the Company, as a self-managed and
self-administered REIT which internally acquires and develops its
own real property investments, will greatly enhance the Company's
appeal to any investment banking community. Bishop- Crown also
believes that the capability to internally acquire and develop
its own real property investments will make the Company
substantially more competitive with other REITs with similar
investment objectives. Bishop-Crown believes that the
Acquisition of the Adviser on the terms proposed provide the
Company with the best means of achieving self-management status
within the shortest time frame. None of the foregoing factors
considered by Bishop-Crown failed to support the fairness of the
Acquisition to the Company and the shareholders (other than Mr.
Taylor) from a financial point of view.
In arriving at its opinion, Bishop-Crown did not attribute
any particular weight to any analysis or factor considered by it,
but rather made the qualitative judgments as to the significance
and relevance of each analysis and factor, including its
consideration and analyses of the projections. Bishop-Crown
believes that all of its analyses must be considered as a whole
and that selecting portions of its analyses, without considering
all analyses, could create an incomplete view of the processes
underlying the analyses undertaken by it in connection with its
opinion. Furthermore, in its analyses, Bishop-Crown made
numerous assumptions with respect to the Adviser, the Company,
industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond
the control of the Adviser and the Company. The estimates
contained in such analyses are not necessarily indicative of
actual values or predictive of future results or values, which
may be more or less favorable than suggested by such analyses.
Additionally, analyses relating to the value of businesses or
securities are not appraisals. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
Bishop-Crown's opinion and the analyses and findings in
connection therewith are not readily susceptible to summary
description. Therefore, Bishop-Crown believes its analysis must
be considered as a whole, and that considering any portion of its
analysis or any one or selected number of its conclusions,
without considering its analysis and conclusions in total, could
create a misleading or incomplete view of the process underlying
its opinion.
In conducting its analysis and rendering its opinion,
Bishop-Crown has made numerous assumptions with respect to
general real estate industry performance, general business and
other conditions, including conditions of the financial markets,
most of which are and will be outside the control of the Company
and its management. Thus, estimates used in Bishop-Crown's
analysis are not necessarily indicative of actual results and
circumstances of future events. Therefore, the actual events and
circumstances and resulting values at future times may be
significantly more or less favorable to the Company than those
-53-
considered and assumed in Bishop-Crown's opinion. Bishop-Crown's
analyses were prepared solely for the purposes of providing its
opinion to the Independent Director as to the fairness of the
consideration to be paid by the Company and to be received by the
Company and its Shareholders (other than Mr. Taylor) in the
Adviser Acquisition, from a financial point of view, and do not
purport to be appraisals or to reflect the prices at which the
subject businesses or assets may be bought or sold.
Bishop-Crown's fairness opinion was one of many factors
taken into consideration by the Independent Directors in
determining to approve the Acquisition and to recommend approval
of the Acquisition to the shareholders of the Company. The
foregoing summary does not purport to be a complete description
of the analyses performed by Bishop-Crown and is qualified by
reference to its written opinion included as a part of Annex B to
this Proxy Statement. The preparation of its fairness opinion
involves Bishop-Crown's determinations as to the most appropriate
and relevant quantitative and qualitative methods of financial
analysis and the application of those methods to the particular
circumstances resulting from the Acquisition given the existence
of facts and conditions assumed.
Bishop-Crown is a nationally recognized investment due
diligence and financial advisory firm among member firms of the
National Association of Securities Dealers, Inc (the "NASD").
Over the past ten years Bishop-Crown has provided due diligence
underwriting and valuation services to individual member firms
and industry groups. The Independent Directors selected Bishop-Crown
to act as their financial adviser based on its experience
with and expertise in small and emerging companies, including
real-estate investment companies and REITs, its experience in
evaluating the fairness of acquisitions of asset groups by their
sponsors and/or affiliated managers, its experience and expertise
in the due diligence examination and analysis of both private and
public companies and its recognition among NASD member firms.
Bishop-Crown had no restrictions or limitations imposed by
either the Company or the Adviser with respect to its
investigation made or the procedures followed in rendering its
opinion. Bishop-Crown did not receive any instructions from
either the Company, Mr. Taylor, or his affiliates in connection
with its engagement and analyses. Bishop-Crown is not affiliated
with the Company, Mr. Taylor or Houlihan.
Bishop-Crown was formally engaged to render its opinion to
the Independent Directors pursuant to a letter of engagement
dated November 5, 1997 (the "Engagement Letter"). The Company
has agreed to pay Bishop-Crown a fee of $47,500, all of which was
paid upon delivery of its written opinion as of the date of this
Proxy Statement. All of such fee was payable to Bishop-Crown
whether or not its opinion was favorable as to the fairness of
the Adviser Acquisition. In addition, the Company has agreed to
reimburse Bishop-Crown for disbursements and to indemnify Bishop-
Crown against certain liabilities, including liabilities under
the Federal Securities Laws.
-54-
Mr. Heilbron, founder and President of Bishop-Crown and a
significant Shareholder of Bishop-Crown's parent corporation, has
personally known Mr. Taylor since 1987. During this time, an
affiliate of Bishop-Crown, PIM Financial Services, Inc., a
registered broker-dealer, has provided securities distribution
services to the Company and other affiliates of Mr. Taylor. Also,
in February 1998, the Independent Directors engaged Bishop-Crown
as a financial adviser regarding certain potential asset
acquisitions currently under consideration. Bishop-Crown's
engagement in such capacity was not contingent upon its issuance
of a favorable opinion in connection with the Adviser
Acquisition.
Houlihan Lokey Valuation Opinion
At the request of the Independent Directors, Houlihan Lokey
Howard & Zukin Financial Advisors, Inc., has delivered its
opinion that as of the date of its opinion letter, the fair
market value of the Adviser, on a controlling interest basis, is
reasonably stated in the range of $5.2 million to $6.8 million.
For the purposes of their opinion, "fair market value" is defined
as the amount at which the capital stock of the Adviser would
change hands between a willing buyer and a willing seller, each
having reasonable knowledge of all relevant facts, neither being
under any compulsion to act, with equity to both. Houlihan
rendered their opinion on the fair market value assuming that
100% of the controlling interest of the Adviser would be
transferred in the Adviser Acquisition. A copy of Houlihan's
opinion is included as Annex C to this Proxy Statement.
Houlihan rendered its opinion to serve as a basis for the
Independent Directors' evaluation of the Acquisition and for
Bishop-Crown's evaluation of the fairness of the Acquisition
transactions, from a financial point of view. Houlihan
understood, in rendering its opinion, that the Company's Board of
Directors, and any other recipient of the opinion, would consult
with and rely solely upon their own legal counsel with respect to
the definitions used therein. Houlihan makes no representation,
directly or indirectly by the opinion, as to any legal matter or
as to the sufficiency of the definition of fair market value or
the other definitions used in the opinion for any purpose other
than setting forth the scope of its opinion.
In connection with its opinion, Houlihan made such reviews,
analysis and inquiries as they deemed necessary and appropriate
under the circumstances. Among other things, Houlihan: (i) met
with certain members of the senior management of the Adviser to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Adviser; (ii) visited
certain facilities and business offices of the Adviser; (iii)
reviewed the Adviser's internally prepared financial statements
for the three fiscal years ended December 31, 1996 and interim
financial statements ended October 31, 1997, which the Adviser's
management has identified as being the most current financial
statements available; (iv) reviewed a forecast prepared by the
Adviser's management with respect to the Adviser for the year
ended December 31, 1998; (v) reviewed the Trust's annual report
to shareholders and Form 10-K for the fiscal year ended December
31, 1996 and quarterly report on Form 10-QSB for the quarter
ended September 30, 1997; (vi) reviewed the Adviser's listing of
affiliated entities (the Partnerships), related partnership
agreements, and certain financial data regarding the
Partnerships; (vii) reviewed copies of the following agreements:
-55-
1) Omnibus Services Agreement dated May 2, 1994, 2) Proposal to
Transfer Adviser Memorandum to the Independent Directors from H.
Kerr Taylor dated December 23, 1997; (viii) reviewed certain
other publicly available financial data for certain companies
that they deemed comparable to the Adviser and other financial
data for certain transactions that they deemed comparable to the
Transaction; and (ix) conducted such other studies, analysis and
inquiries as we have deemed appropriate.
In reaching its opinion, Houlihan relied upon and assumed,
without independent verification, that the financial forecasts
and projections provided to it by the Company and the Adviser
were reasonably prepared and reflect the best current available
estimates of future financial results and the condition of the
Company and the Adviser, and that there has been no material
change in the assets, financial condition, business or prospects
of the Company or the Adviser since the date of the most recent
financial statements available to them. Houlihan did not
independently verify the accuracy and completeness of the
information supplied to it with respect to the Company or the
Adviser and does not assume any responsibility with respect to
it. Also, Houlihan did not make any physical inspection or
independent appraisal of any of the properties or assets of the
Company.
In reaching its opinion, Houlihan gave consideration to the
income-and-cash-generating capability of the Adviser. In its
analysis, Houlihan valued the Adviser as a going concern, meaning
that the underlying tangible assets of the Adviser were assumed,
in the absence of a qualified appraisal of such assets, to attain
their highest values as integral components of a business entity
in continued operation and that liquidation of said assets would
likely diminish the value of the whole to the shareholders and
creditors of the Adviser. Typically, an investor contemplating
investment in a company with income-and-cash-generating
capability similar to the Adviser will evaluate the risks and
returns of its investment on a going-concern basis.
In arriving at its opinion, Houlihan made its determination
as to the fair market value of the Adviser on the basis of the
analyses described below. Houlihan's opinion is not
intended to be and does not constitute a fairness opinion with
respect to the Adviser Acquisition, nor is Houlihan's opinion a
recommendation to any security holder whether to vote in favor of
or reject the proposed Adviser Acquisition. Houlihan will not
update its opinion. Managment is not aware of any significant
change to any information which would alter Houlihan's valuation
opinion.
Houlihan used several methodologies to assess the fair
market value of the Adviser. Each methodology provided an
estimate as to the value of the Adviser. Furthermore, certain
methodologies provided an estimate as to the value of the Adviser
when owned by the REIT. With respect to arriving at the value of
the Adviser, Houlihan performed the following analyses:
One methodology was a "Market Analysis" which utilized the
total invested capital ("TIC") expressed as a multiple of the
latest fiscal year end's, the latest twelve months's and next
fiscal year's earnings before interest, taxes, depreciation and
amortization ("EBITDA") for a group of companies comparable to
the Adviser and based upon such multiples arrived at a valuation
indication for the Adviser. The public companies which Houlihan
-56-
deemed comparable (the "Comparable Public Companies") to the
Adviser were Cardinal Realty Services, Inc., Grubb and Ellis Co.,
Insignia Financial Group, Inc., Intergroup Corp., Inc., LaSalle
Partners, Inc., Commercial Net Lease Realty, Inc., Excel Realty
Trust, Inc., Franchise Finance Corp. of America, TriNet Corporate
Realty Trust, Inc., and U.S. Restaurant Properties Master L.P.
These public companies exhibited TIC/EBITDA multiples which
ranged from 5.0 to 48.0 based upon EBITDA for the last fiscal
year, the latest twelve months, and the projected next fiscal
year. Likewise, Houlihan analyzed certain transactions in which
publicly traded real estate companies acquired their external
adviser and determined the purchase price paid for such adviser
expressed as a multiple of such adviser's EBITDA. The
transactions (the "Comparable Transactions") considered by
Houlihan included Captec Net Lease Realty, INMC Mortgage
Holdings, Inc., Commercial Net Lease Realty, U.S. Restaurant
Properties, LaSalle Partners, Berkshire Realty Company, Inc.,
Insignia Financial Group, Apartment Investment Management
Company, Cross Country Group Inc., Cardinal Realty Services,
First Service Corp., Realty Income Corporation, Surgard Storage
Centers, Freeman Spogli and Co., and Equity Residential
Properties Trust. The multiples of TIC/EBITDA in these
transactions ranged from 6.4 to 18.8. Houlihan also considered
the purchase price paid for the adviser in the Comparable
Transactions as a ratio of the acquirer's total market value of
equity, which ranged from 4.9 percent to 14.4 percent. Based
upon the aforementioned multiples of TIC/EBITDA, Houlihan
considered TIC/EBITDA multiples of 4.5 to 6.0 times EBITDA
appropriate for the Adviser. Houlihan then multiplied such
multiples by the Adviser's adjusted EBITDA to arrive at a
valuation indication for the Adviser. The Adviser's EBITDA was
adjusted for any non-recurring income or expenses, as well as, in
certain cases, for the cost savings available to the REIT if the
REIT owned the Adviser.
An alternative methodology was a "Discounted Cash Flow
Analysis" which utilized the Adviser's adjusted latest and
forecasted EBITDA, adjusted for taxes, and assumed certain
perpetual growth rates (3 percent to 7 percent) and certain
discount rates (10 percent to 20 percent) to arrive at a
valuation indication for the Adviser. Such growth rates and
discounts rates are similar to the growth rates and weighted
average costs of capital exhibited by the Public Comparables
considered by Houlihan in the Market Analysis. Moreover,
Houlihan considered certain cost savings available to the REIT as
the owner of the Adviser, such as savings on development costs,
administrative costs, certain other fees and expenses. Such cost
savings were assumed to be available only for a finite period of
time, which Houlihan assumed to be two years. Moreover, to
reflect the increased risk of achieving such cost savings,
Houlihan discounted such savings to the present with discount
rates which ranged from 18 percent to 22 percent.
Based on all of the aforementioned analyses Houlihan Lokey
reached a conclusion as to the fair market value of the total
capital of the Adviser in the range of $5.2 million to $6.8
million.
The foregoing summary describes the material points of more
detailed analysis performed by Houlihan in arriving at its
opinion. The preparation of a valuation opinion is a complex
analytical process involving various determinations as to the
most appropriate and relevant methods of financial analysis and
application of those methods to the particular circumstances and
-57-
is therefore not readily susceptible to summary description. In
arriving at its opinion, Houlihan did not attribute any
particular weight to any analysis or factor considered by it, but
rather made the qualitative judgements as to the significance and
relevance of each analysis and factor, including its
consideration and analysis of the projections. Houlihan believes
that its analysis must be considered as a whole and that
selecting portions of its analysis, without considering all
analysis, could create an incomplete view of the processes
underlying the analysis undertaken by it in connection with its
opinion. Furthermore, in its analysis, Houlihan made numerous
assumptions with respect to the Adviser, the Company, industry
performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the
control of the Adviser and the Company. The estimates contained
in such analysis are not necessarily indicative of actual values
predictive of future results or values, which may be more or less
favorable than suggested by such analysis. Additionally,
analysis to the value of businesses or securities are not
appraisals. Accordingly, such analysis and estimates are
inherently subject to substantial uncertainty.
The Independent Directors retained Houlihan to render
valuation opinions based upon Houlihan's experience in the
valuation of businesses and their securities in connection with
mergers and acquisitions, and valuation for corporate purposes
especially with respect to REITs and other real estate companies.
Houlihan had no restrictions or limitations imposed by either the
Company or the Adviser with respect to its investigation made or
the procedures followed in rendering its opinion. Houlihan did
not receive any instructions from either the Company, Mr. Taylor,
or his affiliates in connection with its engagement and analysis.
Houlihan has no material relationship with Mr. Taylor, his
Affiliates, or Bishop-Crown.
Houlihan was formally engaged to render its opinion to the
Independent Directors pursuant to a letter of engagement dated
November 7, 1997. The Company has agreed to pay Houlihan a fee
of $40,000, all of which was paid upon delivery of its written
opinion as of the date of this Proxy Statement. All of such fee
was payable to Houlihan whether or not its opinion was favorable
as to the fairness of the Acquisition and Houlihan's engagement
in such capacity was not contingent upon its issuance of a
favorable opinion in connection with the Acquisition. In
addition, the Company has agreed to reimburse Houlihan for
disbursements and to indemnify Houlihan against certain
liabilities, including liabilities under the Federal Securities
Laws.
THE INDEPENDENT DIRECTORS HAVE UNANIMOUSLY APPROVED THE
ACQUISITION AGREEMENT AND THE ACQUISITION TRANSACTIONS AND
RECOMMEND THAT THE SHAREHOLDERS OF THE COMPANY VOTE "FOR" THE
APPROVAL OF THE ACQUISITION. UNLESS OTHERWISE INSTRUCTED, THE PROXIES
WILL VOTE "FOR" THE APPROVAL OF THE ACQUISITION.
Shareholder Approval. Under the Company's Charter and the
Maryland General Corporation Law, approval of the shareholders of
the Company requires the affirmative vote of the holders of a
majority of the outstanding Shares of the Company. For this
-58-
purpose, the term "majority of the outstanding shares" means the
vote of the holders of more than 50% of the Company's outstanding
shares eligible to vote as of the Record Date at the Special
Meeting.
In the event this proposal is not approved, the Company will
continue to rely on services from the Adviser and its affiliates
under the Omnibus Services Agreement. The Independent Directors
may also consider other means of becoming a self-administered
and/or self-managed REIT, including a request that the
shareholders of the Company reconsider this proposal or a similar
proposal at a future meeting of Shareholders.
PROPOSAL 2 - AMENDMENT TO BYLAWS TO AUTHORIZE THE ACQUISITION
PROPOSAL TO AMEND THE BYLAWS OF THE COMPANY AUTHORIZING THE
ACQUISITION OF THE ADVISER UNDER THE TERMS PROPOSED IN PROPOSAL 1.
Proposal
At the special meeting, the shareholders will be asked to
approve that the Bylaws of the Company be amended by adding the
following paragraph to the end of Section 3.13 of Article III
thereof.
"Notwithstanding anything to the contrary contained
herein, including, without limitation, the provisions
of this Article III, Section 13, the Company shall be
authorized to perform all of its obligations and
exercise all of its rights under the terms of that
certain Acquisition Agreement, dated as of January ___,
1998, as amended (the "Acquisition Agreement"), between
the Company and American Asset Advisers Realty
Corporation, a Texas corporation (the "Adviser") and
its affiliates and each of the other agreements and
transactions contemplated thereby, including, without
limitation, the following agreements (as each of such
agreements are defined in the Acquisition Agreement)
and the transactions contemplated by such agreements:
(i) Agreement and Plan of Merger; (ii) the Facilities
and Personnel Agreement, and (iii) the Property
Purchase Rights Agreement."
Background and General Information
The Bylaws of the Company contain certain provisions which
could prohibit the Acquisition from being completed. For
example, Article III, Section 13 of the Bylaws currently
restricts the Company from selling properties to its Manager,
a sponsor of the Company, trustees or affiliates thereof. Other
transactions with affiliates (including purchases of property
from the Adviser or its affiliates) are also restricted but the
Company may enter into such transactions with the approval of a
majority of the Board of Directors, including the approval of a
majority of the Independent Directors. It is not clear that the
Acquisition could be considered to include the sale of property
to or a purchase of property from the Adviser. Article III,
-59-
Section 13 also requires that any transaction between the Company
and the Adviser or its affiliates must be approved by a majority
of the Independent Directors.
Since the Independent Directors and the Board of Directors
have approved the Acquisition, the Independent Directors have
determined to amend the Bylaws in order to be able to enter into
various obligations contemplated by the Acquisition Agreement.
Therefore, in order to remove any doubt as to the ability of the
Company to consummate the Acquisition, shareholders are being
asked to consider and vote upon the amendment to the Bylaws.
THE INDEPENDENT DIRECTORS HAVE UNANIMOUSLY APPROVED THIS PROPOSAL
AND RECOMMEND THAT THE SHAREHOLDERS OF THE COMPANY VOTE IN FAVOR
OF THE PROPOSAL. UNLESS OTHERWISE INSTRUCTED, THE PROXIES WILL
VOTE IN FAVOR OF THE PROPOSAL TO AMEND THE COMPANY'S BYLAWS.
Shareholder Approval
The Proposal to amend the Bylaws of the Company is not
contingent upon the approval by the Shareholders of any other
Proposal. The affirmative vote of the holders of a majority of
the outstanding Common Shares is required to approve and adopt
this proposal.
PROPOSAL 3 - AMENDMENT TO BYLAWS TO CHANGE INVESTMENT POLICY
RESTRICTIONS
PROPOSAL TO DELETE CERTAIN INVESTMENT POLICY RESTRICTIONS
REQUIRING THE COMPANY TO INVEST ONLY IN PROPERTIES SUBJECT TO
LONG-TERM NET LEASES TO TENANTS (AND/OR GUARANTORS) HAVING A
SPECIFIED MINIMUM DEMONSTRABLE NET WORTH.
Proposal
At the Special Meeting the Shareholders of the Company will
be asked to approve an amendment to the Company's Bylaws to
authorize the Acquisition and to approve a change in the
Company's investment policy restrictions regarding leases of the
Company's properties.
Background and General Information
The Bylaws of the Company and its stated investment policy
restrictions generally require the Company to invest only in
properties subject to a long-term net lease; that is a lease with
an initial term of 7 years or longer and requires the tenant to
pay essentially all costs related to the maintenance and
operation of the leased premises, including, but not limited to,
taxes, insurance and maintenance costs.
-60-
The Company's Bylaws under Section 3.13 provide that the
Board may not make a material change in the Company's investment
policies, prohibitions or restrictions without the prior approval
of the shareholders owning a majority of the outstanding common
shares. While the foregoing investment policies are not
expressly provided for in the Company's Bylaws, the Company has
expressed such policies in its prospectuses and in other
communications to its shareholders.
If the Proposal is adopted under the proposed amendment to
the Company's investment policy restrictions, the Company will no
longer require tenants for its properties to demonstrate through
financial statements or other reliable documentation, a net worth
of at least $40 million. Also, the Company will no longer require
that a property, at the time it is acquired, be subject to a
long-term net lease to a national or regional tenant. Instead,
the Company's management will determine on an individual basis,
appropriate tenant requirements and lease terms for its
properties. In circumstances where management deems appropriate,
properties may be leased to local tenants under shorter term
"semi-gross" leases which provide for greater and more frequent
increases in tenant rents in consideration for other Company's
obligation to pay certain, of the properties' operating expenses.
Also, the Company will no longer, as an investment policy,
confine its property investments to stand-alone single tenant
properties. In circumstances deemed appropriate by management,
the Company may acquire and develop multi-pad parcels which may
be developed and leased to multiple tenants and may also acquire
multi-unit properties. If approved, management intends to
implement these changes immediately, whether or not the
Acquisition is approved and consummated.
Accordingly, if this proposed amendment is approved, the
Company plans to pursue three general areas of real property
investments: (i) the Company will continue to seek attractively
located single-tenant properties under lease to national and
regional tenants, (ii) the Company will seek attractively located
multi-pad tracts and develop thereon multiple structures for
lease, and (iii) the Company will seek multi-unit retail
properties leased to two or more tenants, which are attractively
located at main intersections in close proximity to other high-grade
retail rental properties, such as properties located
adjacent to or in close proximity to regional or larger urban
shopping centers or malls. As tenants for its multi tenant and
smaller single pad properties, management plans to consider a
broader range of potential tenants including, when deemed
appropriate, smaller regional and local tenants who are able to
demonstrate a financial ability to fulfill their lease
obligations. It would continue to be the Company's policy to
require that its tenants, their co-signees and/or guarantors have
sufficient net worth, in the opinion of management, to indicate
their financial capability of performing under their respective
leases. The Company believes that the expansion in its
acquisition and development targets will enable the Company to
better diversify its real estate holdings and enhance and
preserve the value of its real estate portfolio.
THE INDEPENDENT DIRECTORS HAVE UNANIMOUSLY APPROVED THIS PROPOSAL
AND RECOMMEND THAT THE SHAREHOLDERS OF THE COMPANY VOTE IN FAVOR
-61-
OF THE PROPOSAL. UNLESS OTHERWISE INSTRUCTED, THE PROXIES WILL
VOTE IN FAVOR OF THE PROPOSAL TO AMEND THE COMPANY'S BYLAWS.
PROPOSAL 4 - AMENDMENT TO ARTICLES OF INCORPORATION
TO CHANGE THE COMPANY'S NAME
At the Special Meeting, the shareholders of the Company will
be asked to approve an amendment to Article I of the Company's
Charter to change the Company's name to "AmREIT, Inc.," or such
other name as similar thereto as the Board of Directors of the
Company may determine as appropriate.
Proposal. It is proposed that Article I of the Articles of
Incorporation of the Company be amended to read as follows:
"ARTICLE I
Name
The name of the corporation is AmREIT, Inc. (Hereinafter
called the "Corporation")."
Background and General Information. The name change is
being proposed to provide a charter name for both convenience of
use and distinctive identification of the company in its market.
The name change, if approved, will not affect the rights of any
Company shareholder and is being proposed solely to clarify the
Company's present and proposed business emphasis.
If approved, the name of the Company will be changed to
"AmREIT, Inc." The name change will not become effective until
approved by the shareholders. The proposal to amend the
Company's Articles of Incorporation has been approved by a
majority of the Board of Directors.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE
SHAREHOLDERS OF THE COMPANY VOTE IN FAVOR OF THE PROPOSAL. UNLESS
OTHERWISE INSTRUCTED, THE PROXIES WILL VOTE IN FAVOR OF THE
PROPOSAL TO APPROVE THE AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION TO CHANGE THE COMPANY'S NAME.
Shareholder Approval. The vote of a majority of the shares
of the Company eligible to vote at the Special Meeting, provided
at least a quorum (a majority of the outstanding shares) is
represented in person or by proxy, is sufficient for the approval
of the proposed Amendment to the Company's Articles of
Incorporation to change the Company's name. The resolution to
change the Company's name is contingent upon shareholder approval
of the other Proposals set forth in this Proxy Statement.
-62-
If the proposed Amendment is approved, the Company's name
will be changed to AmREIT, Inc. (or a name as similar thereto as
the Board of Directors may determine as appropriate) effective
upon the filing of an amendment to the Company's Articles of
Incorporation with the Secretary of State of the State of
Maryland. Such amendment will be filed promptly after
shareholder approval is obtained.
If the shareholders of the Company fail to approve the
proposed Amendment to the Company's Articles of Incorporation,
the name of the Company will remain unchanged. The Board of
Directors, in its discretion, may determine not to change the
name of the Company, notwithstanding shareholder approval, if the
proposals in this Proxy Statement are not approved. The Board
may, however, consider further action and could request the
shareholders of the Company to reconsider the amendment to the
Company's Articles of Incorporation.
THE SPECIAL MEETING
Purpose of the Meeting
At the Special Meeting, the holders of Common Shares will be
asked to (i) consider and vote upon a proposal to approve and
adopt the Acquisition, (ii) consider and vote upon the amendment to
the Bylaws necessary to consummate the Acquisition, and (iii) consider
and vote upon the amendment to the Articles of Incorporation necessary
to change the name of the Company.
Date, Time and Place; Record Date
The Special Meeting is scheduled to be held at _______ a.m.,
local time, on ___________, _____________, 1998, at the offices
of the Company at Eight Greenway Plaza, Suite 824, Houston, Texas
77046. The Board of Directors has fixed the close of business on
__________, 1998 as the record date for the determination of
holders of Common Shares entitled to notice of and to vote at the
Special Meeting. On ___________, 1998, there were
_________________ Common Shares outstanding and the Company had
approximately _________ record holders. As of ___________, 1998,
the Adviser and the Company's Directors and executive officers
beneficially owned an aggregate of ______________ Common Shares
or approximately ____% of the outstanding Common Shares. Mr.
Taylor has agreed, subject to certain conditions, and each of
such other persons has indicated his or her intent, to vote his
or her Common Shares in favor of the Acquisition Agreement and
the Acquisition as well as in favor of the amendments to the
Bylaws and the Articles of Incorporation.
Any shareholder of the Company who executes and returns a
proxy card may revoke such proxy at any time before it is voted
by (i) notifying in writing the Secretary of the Company at
American Asset Advisers Trust, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046; (ii) granting a subsequent proxy or
(iii) appearing in person and voting at the Special Meeting. As
described above, no person will be admitted to the Special
Meeting without verification of ownership and, therefore, if a
-63-
person is not admitted to the Special Meeting, such person will
not be able to revoke a previously granted proxy by appearing in
person.
Voting Rights
The Charter of the Company provides that any amendments
require the affirmative vote of a majority of the outstanding
Common Shares. Because amendment of the Bylaws is required to
consummate the Acquisition, the Board of Directors has also
conditioned the Acquisition on the approval by the holders of at
least a majority of the outstanding Common Shares. Therefore,
assuming the existence of a quorum, the affirmative vote of the
holders of a majority of the outstanding Common Shares is
required to approve the Acquisition. The affirmative vote of the
holders of at least a majority of the outstanding Common Shares is
required to approve and adopt the amendments to the Bylaws and the
Articles of Incorporation. Holders of record of Common Shares on
the Company Record Date are entitled to one vote per Common Share at the
Special Meeting. The presence, either in person or by proxy, of
the holders of a majority of the outstanding Common Shares is
necessary to constitute a quorum at the Special Meeting.
If a shareholder attends the Special Meeting, he or she may
vote by ballot. However, since many shareholders may be unable
to attend the Special Meeting, the Board of Trustees is
soliciting proxies so that each holder of Common Shares on the
Company Record Date has the opportunity to vote on the proposals
to be considered at the Special Meeting. When a proxy card is
returned, properly signed and dated, the Common Shares
represented thereby will be voted in accordance with the
instructions on the proxy card. If a shareholder does not return
a signed proxy card, his or her Common Shares will not be voted
and thus will have the effect of a vote against the amendments to
the Bylaws and Articles of Incorporation and the Acquisition
Agreement and the Acquisition. Similarly, broker non-votes and
abstentions have the effect of a vote against the amendments to
the Bylaws and the Articles of Incorporation and the Acquisition
Agreement and the Acquisition. Shareholders are urged to mark
the box on the proxy card to indicate how their Common Shares are
to be voted. If a shareholder returns a signed proxy card, but
does not indicate how his or her Common Shares are to be voted,
the Common Shares represented by the proxy card will be voted
"FOR" the Acquisition, "FOR" approval and adoption of the amendment
to the Bylaws and "FOR" approval and adoption of the amendment to the
Articles of Incorporation. The proxy card also confers discretionary
authority on the individuals appointed by the Board of Directors
and named on the proxy card to vote the Common Shares represented
thereby on any other matter that is properly presented for action
at the Special Meeting. Such discretionary authority will not be
used to vote for adjournment of the Special Meeting to permit
further solicitation of proxies if the shareholder votes against
any proposal.
Any shareholder of the Company who executes and returns a
proxy card may revoke such proxy at any time before it is voted
by (i) notifying in writing the Secretary of the Company at
Eight Greenway Plaza, Suite 824, Houston, Texas 77046, (ii)
granting a subsequent proxy or (iii) appearing in person and
-64-
voting at the Special Meeting. Attendance at the Special Meeting
will not in and of itself constitute revocation of a proxy.
Other Matters
The Company is not aware of any business or matter other
than those indicated above which may be properly presented at the
Special Meeting. If, however, any other matter properly comes
before the Special Meeting, the proxy holders will vote thereon
in their discretion.
SHAREHOLDER PROPOSALS
Any shareholder intending to submit to the Company a
proposal for inclusion in the Company's Proxy Statement and Proxy
for the 1999 Annual Meeting must submit such proposal so that it
is received by the Company no later than December 8, 1999.
DISCRETIONARY AUTHORITY
While the Notice of the Special Meeting of Shareholders
calls for the transaction of such other business as may properly
come before the meeting, the Board of Directors of the Company
has no knowledge of any matters to be presented for action by the
shareholders other than as set forth above. The enclosed Proxy
gives discretionary authority, however, in the event any
additional matters should be presented.
SHAREHOLDERS ARE URGED TO IMMEDIATELY MARK, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED, TO WHICH NO
POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS,
April ___, 1998 /s/ H. Kerr Taylor, Secretary
Houston, Texas
-65-
INDEX TO FINANCIAL INFORMATION
Pro Forma Financial Statements:
Unaudited Pro Forma Financial Information F-2
Unaudited Pro Forma Balance Sheet as of September 30, 1997 F-3
Unaudited Pro Forma Statement of Operations for the Nine
Months Ended September 30, 1997 F-4
Unaudited Pro Forma Statement of Operations for the Year
Ended December 31, 1996 F-5
Notes to Pro Forma Statement of Operations F-6
American Asset Advisers Realty Corporation's Audited Financial Statements:
(Historical financial statements of the Adviser are herein
included for informational purposes only and are not required
as part of this document.)
F-1
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected unaudited pro forma financial information
for American Asset Advisers Trust, Inc. (the "Company") gives
effect to the merger and is based on estimates and assumptions
set forth in the notes to the financial statements which include
pro forma adjustments. This unaudited pro forma financial
information has been prepared from the historical financial
statements of the Company and of American Asset Advisers Realty
Corp. (the "Adviser"). The pro forma balance sheet assumes that
the merger occurred on September 30, 1997. The pro forma
statements of operations assume that the merger occurred on
January 1, 1996. The pro forma adjustments do not reflect the
final amounts which will be determined at closing. Management
does not anticipate that final amounts will be materially
different.
The unaudited pro forma financial information does not purport to
be indicative of the results which actually would have been
obtained if the merger had been effected on the dates indicated
or of the results which may be obtained in the future and should
be read in conjunction with the interim and annual financial
statements of the Adviser and the Company.
F-2
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
Historical Pro Forma Pro Forma
Company Adjustments (1) Total
ASSETS
Cash and cash equivalents $ 3,344,633 $ - $ 3,344,633
Accounts receivable 20,262 - 20,262
Property 16,452,247 43,463 (2) 16,495,710
Net investment in direct
financing leases 3,158,778 - 3,158,778
Other assets 636,824 (89,035) (3) 547,789
Total assets $23,612,744 $ (45,572) $23,567,172
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Note payable $ 3,375,400 $ - $ 3,375,400
Estimated obligation to shareholder - 200,000 (3) 200,000
Acquisition fees payable 520,361 - 520,361
Accounts payable 39,765 210,965 (3) 250,730
Compensation payable 150,000 - 150,000
Capital lease payable - 7,437 (4) 7,437
Security deposit 15,050 - 15,050
Total liabilities 4,100,576 418,402 4,518,978
Minority Interest 4,979,293 - 4,979,293
Shareholder's equity 14,532,875 43,463 (2) 14,068,901
(500,000) (3)
(7,437) (4)
Total liabilities and shareholders'
equity $23,612,744 $ (45,572) $23,567,172
_________________________
(1) Adjustments are reflected as if the acquisition of the Adviser was
completed on September 30, 1997.
(2) Represents the addition of office furniture and equipment.
(3) Represents the issuance of 213,260 shares of Common Stock in
consideration for the acquisition of the Adviser at a price of $10.25 per
share plus an estimated obligation to the shareholder of the Adviser in the
amount of $200,000 plus estimated transaction costs of $300,000. This
amount has been accounted for as costs incurred in acquiring the Adviser
from a related party because the Adviser has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No.16, "Business
Combinations". This adjustment does not include any shares potentially
issuable in accordance with the Agreement and Plan of Merger described in
this Proxy Statement since the Pro Forma Balance Sheet was prepared as if
the merger occurred on September 30, 1997 and the issuance of any
additional shares is dependent upon the achievement of events subsequent to
the closing of the merger. As of September 30, 1997, $89,035 of
transaction costs had been incurred.
Consideration for the Adviser $2,385,915
Transaction Costs 300,000
Costs incurred to acquire Adviser $2,685,915
Common Stock issued $2,185,915
Retained earnings (2,685,915)
Net decrease in equity $ 500,000
The $200,000 estimated obligation to the shareholder of the Adviser
represents the estimated excess current liabilities over the current
assets of the Adviser at the closing date ("Current Liability Excess").
This amount is payable at the election of the Company in either cash or
common stock valued at a price of $10.25 per share. The remaining share
balance will be reduced by the number of shares equal to the Current
Liability Excess divided by $10.25.
(4) Represents a capital lease obligation related to office equipment.
F-3
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
Historical Pro Forma Pro Forma
Company Adviser Adjustments (1) Total
REVENUES
Rental income from operating leases $ 859,158 $ - $ - $ 859,158
Earned income from direct
financing leases 254,653 - - 254,653
Service fee income - 1,026,784 (884,333) (2) 142,451
Commission income, net - 103,395 - 103,395
Dividend income - 10,815 (10,815) (2) -
Interest income 119,473 6,502 - 125,975
TOTAL REVENUES 1,233,284 1,147,496 (895,148) 1,485,632
EXPENSES
General operating and administrative 137,751 451,114 (387,958) (2) 200,907
Amortization 47,066 24 - 47,090
Depreciation 101,408 10,698 - 112,106
Interest 6,000 14,603 - 20,603
Taxes - 220,298 (220,298) (2) -
TOTAL EXPENSES 292,225 696,737 (608,256) (3) 380,706
PRO FORMA INCOME BEFORE MINORITY INTEREST IN
NET INCOME OF CONSOLIDATED JOINT VENTURES 941,059 450,759 (286,892) 1,104,926
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (322,367) - - (322,367)
PRO FORMA NET INCOME $ 618,692 $ 450,759 $(286,892) $ 782,559
PRO FORMA NET INCOME PER SHARE:
Primary $ 0.42 $ 0.46
Fully Diluted $ 0.41 $ 0.45
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 1,478,942 1,692,202
Fully Diluted 1,642,538 1,855,798
See Notes to Pro Forma Financial Information
F-4
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
Historical Pro Forma Pro Forma
Company Adviser Adjustments (1) Total
REVENUES
Rental income from operating leases $ 780,768 $ - $ - $ 780,768
Earned income from direct
financing leases 144,020 - - 144,020
Service fee income - 526,598 (169,671) (2) 356,927
Commission income, net - 16,921 - 16,921
Dividend income - 14,156 (14,156) (2) -
Interest income 137,528 8,058 - 145,586
TOTAL REVENUES 1,062,316 565,733 (183,827) 1,444,222
EXPENSES
General operating and administrative 122,324 489,587 (169,671) (2) 442,240
Amortization 61,789 32 - 61,821
Depreciation 113,744 13,482 - 127,226
Interest 5,000 27,580 - 32,580
Taxes - 14,131 (14,131) (2) -
TOTAL EXPENSES 302,857 544,812 (183,802) (3) 663,867
PRO FORMA INCOME BEFORE MINORITY INTEREST
IN NET INCOME OF CONSOLIDATED JOINT
VENTURES 759,459 20,921 (25) 780,355
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (216,652) - - (216,652)
PRO FORMA NET INCOME $ 542,807 $ 20,921 $ (25) $ 563,703
PRO FORMA NET INCOME PER SHARE:
Primary $ 0.51 $ 0.44
Fully Diluted $ 0.50 $ 0.45
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 1,066,353 1,279,613
Fully Diluted 1,329,494 1,542,754
See Notes to Pro Forma Financial Information
F-5
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(1) Adjustments are reflected as if the acquisition of the
Adviser was effective as of January 1, 1996.
(2) Includes pro forma adjustments as follows:
* Elimination of service fee income recorded by the Adviser
for administrative, acquisition and management services provided
to the Company. Administrative service fees were previously
expensed by the Company and the remaining fees were previously
capitalized.
* Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
* Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have been
capitalized in connection with the acquisition and development of
properties acquired during the period.
* Elimination of income tax provision recorded by the Adviser
as the Company is qualified as a real estate investment trust and
is not a tax paying entity.
(3) To the extent that the consideration paid for the Adviser
exceeds the fair market value of the net tangible assets
received, an expense will be recorded as an operating
expense on the Company's Statement of Operations. Because
the purpose of the pro forma statement of operations is to
reflect the expected continuing impact of the merger on the
Company, this adjustment has not been included. At the
closing of the merger, this expense will be recorded as an
operating expense. For the year ended December 31, 1996,
this pro forma expense would have been $2,144,037 based on
the issuance of 213,260 shares at closing on January 1, 1996
in accordance with the partial satisfaction of the share
balance issuance criteria described in the Agreement and
Plan of Merger.
F-6
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
AMERICAN ASSET ADVISERS TRUST, INC.
AND
AAA ACQUISITION CORP.
AND
AMERICAN ASSET ADVISERS REALTY CORPORATION
AND
THE STOCKHOLDER OF AMERICAN ASSET ADVISERS REALTY CORPORATION
January ____, 1998
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS -2-
1.1 Terms Defined in This Agreement -2-
ARTICLE 2
MERGER; EFFECTIVE TIME; CLOSING -7-
2.1 Merger -7-
2.2 Effective Time -7-
2.3 The Closing -7-
ARTICLE 3
ARTICLES OF INCORPORATION; BY-LAWS; AND DIRECTORS AND
OFFICERS OF SURVIVING CORPORATION -8-
3.1 Articles of Incorporation -8-
3.2 By-Laws -8-
3.3 Directors and Officers -8-
ARTICLE 4
SHARE CONSIDERATION; PAYMENT OF SHARE CONSIDERATION -8-
4.1 Share Consideration -8-
4.2 Payment of Share Consideration -9-
4.3 Events of Acceleration. -9-
4.4 Adjustments to Share Consideration -10-
4.5 Fractional Company Common Shares -12-
4.6 Transfer of Adviser Common Shares -12-
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER -13-
5.1 Authorization of Transaction -13-
5.2 Noncontravention -13-
5.3 Investment -13-
5.4 Adviser Common Shares -13-
5.5 Compensation Owed by the Company -14-
5.6 Broker's Fees -14-
-i-
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF AAA ACQUISITION AND
THE COMPANY -14-
6.1 Organization of AAA Acquisition and the Company -14-
6.2 Capital Stock -14-
6.3 Authorization for Common Stock -15-
6.4 Authorization of Transaction -15-
6.5 Noncontravention -15-
6.6 Brokers' Fees -15-
6.7 Information -15-
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER AND
THE ADVISER -16-
7.1 Organization, Qualification, and Corporate Power -16-
7.2 Capitalization -16-
7.3 Authorization of Transaction -17-
7.4 Noncontravention -17-
7.5 Title to Assets -17-
7.6 Subsidiaries and Affiliates -17-
7.7 Financial Statements -17-
7.8 Events Subsequent to Most Recent Fiscal Year End -18-
7.9 Undisclosed Liabilities -20-
7.10 Legal Compliance -20-
7.11 Tax Matters -21-
7.12 Real Property -22-
7.13 Intellectual Property -22-
7.14 Tangible Assets -23-
7.15 Contracts -23-
7.16 Notes and Accounts Receivable -24-
7.17 Powers of Attorney -24-
7.18 Insurance -25-
7.19 Litigation -25-
7.20 Construction Liability -25-
7.21 Employees -25-
7.22 Employee Benefits -26-
7.23 Guaranties -26-
7.24 Environment, Health, and Safety -26-
7.25 Proxy Statement -26-
7.26 Relationships with Tenants -26-
7.27 Disclosure -27-
-ii-
ARTICLE 8
PRE-CLOSING COVENANTS -27-
8.1 General -27-
8.2 Notices and Consents -27-
8.3 Maintenance of Business; Prohibited Acts -27-
8.4 Full Access -29-
8.5 Meeting of Stockholders -30-
8.6 Proxy Materials -30-
8.7 Notice of Further Developments -30-
8.8 Tax Matters -31-
8.9 Reorganization -31-
8.10 Letter of Deloitte & Touche, LLP -31-
8.11 Adviser Stockholder Approval -31-
8.12 Delivery of Certain Financial Statements -31-
8.13 State Takeover Statutes -32-
8.14 Exclusivity -32-
ARTICLE 9
POST-CLOSING COVENANTS -32-
9.1 General -32-
9.2 Litigation Support -32-
9.3 Transition -33-
9.4 Confidentiality -33-
9.5 Competitive Real Estate Ventures -33-
9.6 The Company's Common Shares -34-
9.7 Continuity of Interest -35-
9.8 Share Consideration -35-
9.9 Tax Matters -36-
9.10 Purchase of Remaining Share Balance Upon Death of the
Stockholder -36-
ARTICLE 10
CONDITIONS TO OBLIGATION TO CLOSE -38-
10.1 Conditions to Each Party's Obligation -38-
10.2 Conditions to Obligation of AAA Acquisition and the
Company -39-
10.3 Conditions to Obligation of the Stockholder and the
Adviser -40-
ARTICLE 11
TERMINATION -41-
11.1 Termination by Mutual Consent -41-
11.2 Termination by Either the Company or the Adviser -41-
11.3 Effect of Termination and Abandonment -41-
-iii-
ARTICLE 12
INDEMNIFICATION -42-
12.1 Indemnity Obligations of the Stockholder -42-
12.2 Indemnity Obligations of the Company -42-
12.3 Notification of Claims -42-
12.4 Survival -43-
12.5 Exclusive Provisions: No Rescission -43-
ARTICLE 13
MISCELLANEOUS -43-
13.1 Press Releases and Public Announcements -43-
13.2 No Third Party Beneficiaries -44-
13.3 Entire Agreement -44-
13.4 Succession and Assignment -44-
13.5 Counterparts -44-
13.6 Headings -44-
13.7 Notices -44-
13.8 Governing Law -45-
13.9 Amendments and Waivers -45-
13.10 Severability -45-
13.11 Expenses -45-
13.12 Construction -45-
13.13 Incorporation of Exhibits and Schedules -46-
13.14 Specific Performance -46-
13.15 Submission to Jurisdiction -46-
SCHEDULES AND EXHIBITS
Exhibit No. Exhibit
A Form of Employment Contract
B Form of Registration Rights Agreement
C Disclosure Schedule
-iv-
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is
entered into as of this _____ day of _____________ 1998, by and
among American Asset Advisers Trust, Inc., a Maryland corporation
(the "Company"), and AAA Acquisition Corp., a Texas corporation
and wholly-owned subsidiary of the Company ("AAA Acquisition"),
and American Asset Advisers Realty Corporation, a Texas
corporation (the "Adviser"), and H. Kerr Taylor, the principal
stockholder of the Adviser (the "Stockholder"). The Company, AAA
Acquisition, the Adviser and the Stockholder are referred to
collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger
(the "Merger") whereby the Adviser will be merged with and into
AAA Acquisition and the AAA Acquisition will be the surviving corporation
in the Merger, upon the terms and subject to the conditions of
this Agreement and in accordance with the Texas Business
Corporation Act (the "TBCA");
WHEREAS, the parties anticipate that the Merger will further
the Company's objectives and strategies (including, without
limitation, the Company's objective of becoming a self-
administered and self-managed real estate investment trust
capable of internally acquiring and developing commercial real
estate);
WHEREAS, the independent members of the Board of Directors
of the Company (the "Independent Directors") have received a
fairness opinion (the "Fairness Opinion") from Bishop-Crown
Investment Research, Inc. as to the fairness of the Merger, to
the Company and its stockholders (other than the Stockholder)
from a financial point of view;
WHEREAS, the Board of Directors of the Company ("the
Board"), excluding the Stockholder, has unanimously approved the
Merger (the "Proposed Merger") and the related transactions and
has resolved to recommend that the stockholders of the Company
approve the Proposed Merger;
WHEREAS, the Board of Directors of the Adviser and the
Stockholder have unanimously approved the Proposed Merger; and
WHEREAS, for federal income tax purposes, it is intended
that the Merger shall qualify as a reorganization under Section
368(a)of the Internal Revenue Code of 1986, as amended (the
"Code"), pursuant to which each issued and outstanding share of
the Adviser common stock shall be converted into the right to
receive shares of the Company's common stock.
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein made, and in consideration of the
representations, warranties, and covenants herein contained, the
Parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Terms Defined in This Agreement. As used in this
Agreement, the following terms shall have the respective meanings
set forth below:
"Adviser" has the meaning set forth in the preface above.
"Adviser Common Shares" means the shares of the common
stock, $0.01 par value of the Adviser.
"Adviser Common Share Certificates" has the meaning set
forth in Subsection 4.1(a) below.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the
meaning of Code Section 1504, or any similar group defined under
a similar provision of state, local or foreign law.
"AAA Acquisition" has the meaning set forth in the preface above.
"AAA Acquisition Certificate of Merger" has the meaning set
forth in Section 2.2 below.
"Agreement" has the meaning set forth in the preface above.
"Basis" means any past or present fact, situation,
circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or
transaction that forms the basis for any specified consequence.
"Board Changes" shall mean the date that a majority of the
Board of Directors of the Company shall be persons other than
persons (i) whose election proxies shall have been solicited by
the Stockholder as Chief Executive Officer of the Company or (ii)
who are serving as directors appointed by the Board of Directors
to fill vacancies caused by death or resignation (but not by
removal) or to fill newly created directorships.
"Business Combination" has the meaning set forth in
Subsection 4.4(b) below.
"Change in Control" means (i) the sale or transfer of
substantially all of the assets of the Company, whether in one
transaction or a series of transactions, except a sale to a
successor corporation in which the stockholders immediately prior
to the transaction hold, directly or indirectly, at least 50% of
the Total Voting Power of the successor corporation immediately
-2-
after the transaction, (ii) any merger or consolidation between
the Company and another corporation immediately after which the
stockholders hold, directly or indirectly, less than 50% of the
Total Voting Power of the surviving corporation, (iii) the
dissolution or liquidation of the Company, (iv) the acquisition
by any Person acting in concert (and excluding Persons or a group
of Persons affiliated with the Stockholder) or group of Persons
of direct or indirect beneficial ownership of the Company's
Common Shares representing more than 50% of the common stock of
the Company, or (v) the date the Board Changes.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the preface above.
"Company's Common Shares" shall mean the shares of common
stock, par value $0.01, of the Company.
"Company's Stockholders Meeting" has the meaning set forth
in Section 8.5 below.
"Competitive Real Estate Venture" means any enterprise
entered into for profit whose activities in at least material
part consist of the acquisition, development, ownership and/or
management of real estate leased or intended to be leased to
commercial or retail tenants.
"Confidential Information" means any information concerning
the businesses and affairs of the Adviser or the Company, if any,
that is not already generally available to the public.
"Disclosure Schedule" has the meaning set forth in the first
paragraph of Article 7 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an
Employee Pension Benefit Plan, (b) tax-qualified defined
contribution retirement plan or arrangement which is an Employee
Pension Benefit Plan, (c) tax-qualified defined benefit
retirement plan or arrangement which is an Employee Pension
Benefit Plan (including any Multiemployer Plan), or (d) Employee
Welfare Benefit Plan or material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Section 3(1).
-3-
"Environmental, Health, and Safety Laws" means the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Resource Conservation and Recovery Act of 1976,
and the Occupational Safety and Health Act of 1970, each as
amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of federal, state,
local, and foreign governments (and all agencies thereof)
concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including laws
relating to emissions, discharges, releases, or threatened
releases of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes into ambient air, surface
water, ground water, or lands or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or
chemical, industrial, hazardous, or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Extremely Hazardous Substance" has the meaning set forth in
Section 302 of the Emergency Planning and Community Right-to-Know
Act of 1986, as amended.
"Event of Acceleration" has the meaning set forth in Section
4.3 below.
"Fairness Opinion" has the meaning set forth in the third
paragraph of the Recitals above.
"Fiduciary" has the meaning set forth in ERISA Section
3(21).
"Financial Statements" has the meaning set forth in Section
7.7 below.
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"Initial Shares" has the meaning set forth in Section 4.2 below.
"Intellectual Property" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all patents, patent
applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks,
service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations,
and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in
connection therewith, (c) all copyright able works, all
copyrights, and all applications, registrations, and renewals in
connection therewith, (d) all trade secrets and confidential
business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost
information, and business and marketing plans and proposals), (e)
-4-
all computer software (including data and related documentation),
(f) all other proprietary rights, and (g) all copies and tangible
embodiments thereof (in whatever form or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means the collective knowledge of all of the
stockholders after reasonable investigation. For the purposes of
this Agreement, the knowledge of one stockholder shall be
attributed to the other stockholders.
"Liability" means any liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due), including any liability for
Taxes.
"Material Adverse Effect" means, as to any Party, a material
adverse effect on the business, properties, operations, condition
or future prospects (financial or otherwise) of such Party.
"Merger" shall mean the merger of the Adviser with and into
AAA Acquisition in accordance with the terms of this Agreement.
"Most Recent Balance Sheet" means the balance sheet
contained within the Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth
in Section 7.7 below.
"Most Recent Fiscal Month End" has the meaning set forth in
Section 7.7 below.
"Most Recent Fiscal Year End" has the meaning set forth in
Section 7.7 below.
"Most Recent Pro Forma Balance Sheet" means the balance
sheet contained within the Most Recent Pro Forma Financial
Statements.
"Most Recent Pro Forma Financial Statements" has the meaning
set forth in Section 7.7 below.
"Multiemployer Plan" has the meaning set forth in ERISA
Section 3(37).
"Omnibus Services Agreement" means that certain Agreement
between the Adviser and the Company dated May 2, 1994.
"Ordinary Course of Business" means the ordinary course of
business consistent with past custom and practice (including with
respect to quantity and frequency).
"Party" or "Parties" has the meaning set forth in the
preface above.
-5-
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Liens" means those liens, claims and encumbrances
listed or described on Schedule 7.
"Person" means an individual, a partnership, a corporation,
a limited liability company, an association, a joint stock
company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
"Prohibited Transaction" has the meaning set forth in ERISA
Section 406 and Code Section 4975.
"Proposed Merger" has the meaning set forth in fourth
paragraph of the Recitals above.
"Proxy Statement" has the meaning set forth in Section 8.6 below.
"Remaining Share Balance" has the meaning set forth in
Section 4.2 below.
"Reportable Event" has the meaning set forth in ERISA
Section 4043.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act
of 1934, as amended.
"Security Interest" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest.
"Share Balance" has the meaning set forth in Section 4.2 below.
"Share Consideration" has the meaning set forth in
Subsection 4.1(a) below.
"Stockholder" has the meaning set forth in the preface above.
"Subsidiary" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the
common stock or has the power to vote or direct the voting of
sufficient securities to elect a majority of the directors.
"Surviving Corporation" has the meaning set forth in Section
2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.13.
-6-
"Tax" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental
(including taxes under Code Section 59A), customs duties, capital
stock, franchise, profits, withholding, social security (or
similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any
kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim
for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
"TBCA" has the meaning set forth in the first paragraph of
the Recitals above.
"Third Party Claim" has the meaning set forth in Section
12.3 below.
"Total Voting Power" means the total number of votes which
may be cast in the election of directors of a company by all
stockholders entitled to vote in such an election.
ARTICLE 2
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger. Subject to the terms and conditions of this
Agreement, the TBCA, at the Effective Time, AAA Acquisition and
the Adviser shall consummate the Merger in which (i) the Adviser
shall be merged with and into AAA Acquisition and the separate
corporate existence of the Adviser shall thereupon cease,
(ii) AAA Acquisition shall be the successor or surviving corporation
in the Merger and shall continue to be governed by the laws of
the State of Texas and (iii) the separate corporate existence of
AAA Acquisition with all its rights, privileges, immunities, powers
and franchises shall continue unaffected by the Merger. The
corporation surviving the Merger is sometimes hereinafter
referred to as the "Surviving Corporation." The Merger shall
have the effects set forth in the TBCA.
2.2 Effective Time. On the Closing Date, subject to the
terms and conditions of this Agreement, AAA Acquisition and the
Adviser shall (i) cause to be executed a Certificate of Merger in
the form required by the TBCA (the "AAA Acquisition Certificate
of Merger"), and (ii) cause the AAA Acquisition Certificate of
Merger to be filed with the Texas Secretary of State as provided
in the TBCA. The Merger shall become effective at (a) such time
as the AAA Acquisition Certificate of Merger has been duly filed
with the Texas Secretary of State or (b) such other time as is
agreed upon by the Representative and the Company and specified
in the AAA Acquisition Certificate of Merger. Such time is
hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place
at the offices of the Company at Suite 824, 8 Greenway Plaza,
Houston, Texas, commencing at 9:00 A. M. local time on such date
-7-
as within five (5) business days following the fulfillment or
waiver of the conditions set forth in Article 10 (other than
conditions which by their nature are intended to be fulfilled at
the Closing) or such other place or time or on such other date as
the Company and the Representative may agree or as may be
necessary to permit the fulfillment or waiver of the conditions
set forth in Article 10 (the "Closing Date").
ARTICLE 3
ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
3.1 Articles of Incorporation. The articles of
incorporation of the Adviser, as in effect immediately prior to
the Effective Time, shall be the articles of incorporation of the
Surviving Corporation until thereafter amended as provided
therein and under the TBCA.
3.2 By-Laws. The by-laws of the Adviser, as in effect
immediately prior to the Effective Time, shall be the by-laws of
the Surviving Corporation.
3.3 Directors and Officers. The directors and officers of
the Adviser immediately prior to the Effective Time, as elected
and approved by the Stockholder and approved by the Company's
Board of Directors, shall be the directors and officers of the
Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified
or until their earlier death, resignation or removal in
accordance with the articles of incorporation and by-laws of the
Surviving Corporation.
ARTICLE 4
SHARE CONSIDERATION; PAYMENT OF SHARE CONSIDERATION
4.1 Share Consideration; Conversion or Cancellation of
Adviser Common Shares in Merger.
(a) At the Effective Time, by virtue of the Merger and
without any action by the Parties, all of the outstanding Adviser
Common Shares (i) shall be converted into the right to receive up
to nine hundred thousand (900,000) of the Company's Common Shares
(the "Share Consideration") pursuant to the terms of Section 4.2
below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and the
Stockholder, as the holder of certificates representing such the
Adviser Common Shares (the "Adviser Common Share Certificates"),
shall cease to have any rights with respect thereto, except the
right to receive the Company's Common Shares therefor upon the
surrender of such certificates in accordance with this Section
4.1 and cash in lieu of fractional Common Shares as set forth in
Section 4.5.
-8-
(b) At the Effective Time, by virtue of the Merger and
without any action by holders thereof, all of the Company's
Common Shares issued and outstanding immediately prior to the
Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, upon
surrender to the Company of the Adviser Common Share Certificates
by the Stockholder of the Adviser for cancellation, together with
any other required documents, the Stockholder shall receive,
subject to adjustment as provided in Section 4.4 below, two
hundred thirteen thousand two hundred sixty (213,260) Shares of
the Share Consideration (the "Initial Shares") and the Adviser
Common Share Certificates so surrendered shall
forthwith be canceled. The balance of six hundred eighty-six
thousand seven hundred forty (686,740) shares of the Share
Consideration (the "Share Balance") will, subject to adjustment
as provided in Section 4.4 below, be issuable to the Stockholder
as follows: No later than thirty (30) days after the end of the
calendar quarter in which this Closing Date occurs, and within
thirty (30) days after the end of each calendar quarter
thereafter until all of the Share Balance shall be issued or
until and including the twenty-fourth (24th) consecutive calendar
quarter following the Closing Date, whichever is the first to
occur, the Company shall issue to the Stockholder the number of
shares of the then unissued Share Balance (the "Remaining Share
Balance") equal the number of shares, which when added to the
aggregate shares of the Share Consideration theretofore issued,
equals nine and eight tenths percent (9.8%) of the total number
of Common Shares outstanding at the end of the respective
calendar quarter after giving effect to the issuance of such
additional shares.
As an illustration of the foregoing, if the Closing Date
should occur on April 20, 1998, then up to all of the Share
Balance would first be issuable on or before July 30, 1998 based
on the number of the Company's Common Shares outstanding on the
last day of calendar quarter ended June 30, 1998, and up to all
of the remainder of Remaining Share Balance would be issuable
within 30 days of the end of each calendar quarter thereafter
based on the number of Common Shares of the Company outstanding
as of the last day of such calendar quarter. If, assuming a
Closing Date of April 20, 1998, on September 30, 1999 the Company
had outstanding a total of 4,630,500 Common Shares, of which
213,260 constituted the Initial Shares and 150,000 constituted
the previously issued portion of the Share Balance, then as of
such Payment Date, the Company would issue an additional 100,364
shares of the Share Balance (plus cash for 0.7 share). Upon this
issuance there would be 4,730,864 Common Shares outstanding of
which 463,624 shares would have been issued in the Merger. If,
assuming a Closing Date of April 20, 1998, or if on March 31,
2004, the Company had a total of 8,248,571 Common Shares
outstanding, of which 213,260 shares represented the Initial
Shares and 550,000 shares constituted the previously issued
portion of the Share Balance, then the Company would issue 49,999
shares of the Remaining Share Balance on or before April 30, 2004
together with cash in the amount of $8.80 in the payment of 0.953
Share as required by Section 4.5 below. Upon this issuance there
would be 8,298,570 Common Shares outstanding of which 813,259
shares would have been issued in the Merger. Also, this issuance
would complete the remaining obligation of the Company to issue
the Share Balance (i.e. there would be no further obligation to
issue the then unissued 86,740 shares of the resulting Remaining
Share Balance).
-9-
4.3 Events of Acceleration. Anything to the contrary
herein notwithstanding, the then Remaining Share Balance shall be
immediately issuable to the Stockholder upon the sooner to occur
of any of the following events (an "Event of Acceleration"):
(a) an event which results in a change of control of
the Company;
(b) the failure by the Company to issue the Share
Balance, or any portion thereof, by the time required for
issuance under Section 4.2 above, within five (5) business days
after written notice of demand for such issuance is made by the
Stockholder unless such failure is cased by the actions or
inaction of Stockholder;
(c) in the event the Stockholder's employment by the
Company is terminated without Cause as defined in the employment
agreement between the Company and the Stockholder then in
effect.; or
(d) the Company's failure to purchase the Remaining
Share Balance in the event of the Stockholder's death as required
in Section 9.10 below.
4.4 Adjustments to Share Consideration
(a) The number of shares constituting the Share
Balance shall be decreased to the extent the current liabilities
of the Adviser exceed the current assets of the Adviser as of the
Effective Time (the ACurrent Liability Excess@) by the number of
shares equal to Current Liability Excess divided by $10.25.
(b) Prior to the Effective Time, the Company shall not
split or combine the Company's Common Shares, or pay a stock
dividend or other stock distribution in the Company's Common
Shares, or in rights or securities exchangeable or convertible
into or exercisable for the Company's Common Shares, or otherwise
change the Company's Common Shares into, or exchange the
Company's Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation of
the Company as a result of which the Company's stockholders
receive cash, stock or other property in exchange for, or in
connection with, their Company Common Shares (a "Business
Combination") or otherwise), or pay any other dividend or
distribution on or of Company Common Shares (other than regular
quarterly cash dividends paid on the Company's Common Shares or
any distribution pursuant to the Company's dividend reinvestment
plan), without the parties hereto having first entered into an
amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split,
combination, dividend, distribution, Business Combination or
change.
(c) Following the Effective Time, the number and kind
of securities comprising the Remaining Share Balance shall be
subject to adjustment from time to time upon the happening of
certain events, as follows:
-10-
(i) In case the Company shall (i) pay a dividend
in the Common Shares, (ii) subdivide its outstanding Common
Shares, (iii) combine its outstanding Common Shares into a
smaller number of Common Shares, or (iv) issue by
reclassification of its Common Shares other securities, the
number and kind of securities comprising the Remaining Share
Balance immediately prior thereto shall be adjusted so that the
Stockholder shall be entitled to receive the number and kind of
securities of the Company which it would have owned or would have
been entitled to receive after the happening of any of the events
described above had the Remaining Share Balance been issued
immediately prior to the happening of such event or any record
date with respect thereto. Any adjustment made pursuant to this
Subsection 4.4 (c)(i) shall become effective on the effective
date of such event retroactive to the record date, if any, for
such event.
(ii) No adjustment in the number of securities
issuable with respect to the Remaining Share Balance shall be
required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of securities
(calculated to the nearest full share) issuable in the future
with respect to the Remaining Share Balance, whether or not then
issuable, provided, however, that any adjustment which by reason
of this Section 4.4 is not required to be made immediately shall
be carried forward and taken into account in any subsequent
adjustment.
(iii) Whenever the number of the securities
issuable with respect to the Remaining Share Balance is adjusted
as herein provided, the price of the Company's Common Shares
stated in Section 4.4, Subsection 7.8(b), and Section 9.10
hereof shall be adjusted by multiplying such Price immediately
prior to such adjustment by a fraction, of which the numerator
shall be the number of securities constituting one Common Share
immediately prior to the adjustment and of which the denominator
shall be the number of the securities constituting one Common
Share immediately after the adjustment.
(iv) For the purposes of this Section 4.4, the
term "Common Shares" shall include any other class of stock
resulting from successive changes or reclassifications of such
Common Shares consisting solely of changes in par value, or from
par value to no par value, or from no par value to par value. In
the event that at any time, as a result of an adjustment made
pursuant to this Section 4.4, the Stockholder shall become
entitled to receive any securities of the Company other than the
Common Shares, thereafter the number of such other securities so
issuable shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the securities contained in this
Section 4.4.
(v) Whenever the number of the securities
issuable with respect to the Remaining Share Balance or the price
of the Common Shares is adjusted as herein provided, the Company
shall cause to be promptly mailed to the Stockholder by first
class mail, postage prepaid, notice of such adjustment and a
certificate of a firm of independent certified public accountants
selected by the Board (who may be the regular accountants
employed by the Company) setting forth the number of the
securities issuable with respect to the Remaining Share Balance
after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was
made.
-11-
(vi) In case of any reclassification, capital
reorganization or other change in the outstanding shares of
Common Shares of the Company (other than a change in par value,
or from par value to no par value, or from no par value to par
value), or as a result of an issuance of the Common Shares by way
of dividend or other distribution, or of a subdivision or
combination of the Common Shares for which an adjustment to the
Remaining Share Balance is made by reason of Subsection 4.4(c)(i)
hereof, or in case of any consolidation or merger of the Company
with or into another corporation or entity (other than a merger
with a subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification or
capital reorganization of the Company) as a result of which the
holders of the Company's Common Shares become holders of other
shares or securities of the Company or of another corporation or
entity, or such holders receive cash or other assets, or in case
of any sale or conveyance to another corporation of the property,
assets or business of the Company as an entirety or substantially
as an entirety, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the
Stockholder an agreement that the Stockholder shall have the
right thereafter to receive the Remaining Share Balance, at such
time or times as such shares are otherwise issued hereunder, in
effect immediately prior to such action to purchase the kind and
number of securities and property which it would have owned or
have been entitled to have received after the happening of such
reclassification, capital reorganization, change in the
outstanding Common Shares, consolidation, merger, sale or
conveyance had the Remaining Share Balance been issued
immediately prior to such action. The agreement referred to in
this Subsection 4.4(c)(vi) shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4.4. The provisions of
this Subsection 4.4(c)(vi) shall similarly apply to successive
reclassifications, capital reorganizations, changes in the
outstanding shares of the Common Shares, consolidations, mergers,
sales or conveyances.
(vii) Except as provided in this Section 4.4, no
adjustment to the Remaining Share Balance shall be required by
reason of payment by the Company of any dividends.
(viii) No adjustments shall be made pursuant to this
Section 4.4 in connection with the public or private sale and
issuance of, for good and fair consideration, Common Shares, or
the options or warrants issued in connection therewith, or for
any warrants or options outstanding on the date of this Agreement
or for any Common Shares issuable upon the exercise of any such
warrants or options.
4.5 Fractional Company Common Shares. No certificates
representing fractional Company Common Shares shall be issued
upon surrender of any Adviser Common Share Certificates. In lieu
of any fractional Company Common Shares, there shall be paid to
each holder of Adviser Common Shares who otherwise would be
entitled to receive a fractional Company Common Share an amount
of cash (without interest) determined by multiplying such
fraction by $10.25.
4.6 Transfer of Adviser Common Shares. (a) No transfers
of Adviser Common Shares shall be made on the stock transfer
-12-
books of the Adviser after the date of this Agreement, and (b)
the Stockholder agrees not to transfer any Adviser Common Shares
after the date of this Agreement and before the Closing Date.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
The Stockholder represents and warrants to AAA Acquisition
and the Company that the statements contained in this Article 5
are correct and complete as of the date hereof with respect to
himself:
5.1 Authorization of Transaction. The Stockholder has full
power and authority to execute and deliver this Agreement and to
perform his obligations hereunder. This Agreement constitutes the
valid and legally binding obligation of the Stockholder,
enforceable in accordance with its terms and conditions. The
Stockholder need not give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government
or governmental agency in order to consummate the transactions
contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities
laws.
5.2 Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (A) violate any
constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the
Stockholder is subject, or (B) result in a breach of, constitute
a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which the Stockholder is a
party or by which he is bound or to which any of his assets is
subject.
5.3 Investment. The Stockholder (A) understands that the
Company's Common Shares acquired by such stockholder pursuant to
this Agreement have not been registered under the Securities Act,
or under any state securities laws, and are being exchanged in
reliance upon federal and state exemptions for transactions not
involving a public offering, (B) is acquiring the Company's
Common Shares solely for his own account for investment purposes,
and not with a view towards the distribution thereof, (C) is a
sophisticated investor with knowledge and experience in business
and financial matters, (D) has received certain information
concerning the Company, including, without limitation, (i) the
most recent annual report on Form 10-K, (ii) the three most
recent quarterly reports on Form 10-Q, (iii) any current reports
on Form 8-K since December 31, 1996, in each case as filed by the
Company under the Securities Exchange Act, and (iv) the most
recent annual report to stockholders of the Company, and has had
the opportunity to obtain additional information desired in order
to evaluate the merits and the risks inherent in holding the
Company's Common Shares, and (E) is able to bear the economic
risk and lack of liquidity inherent in holding the Company's
Common Shares which have not been registered under the Securities
Act, and (F) Stockholder is the Chairman of the Board, President
and Secretary, and a director of the Company and as such is
intimately familiar with its assets and business.
-13-
5.4 Adviser Common Shares. Except as set forth in Section
7.2 of the Disclosure Schedule, the Stockholder holds of record
and owns beneficially the number of the Adviser Common Shares set
forth next to his name in Section 7.2 of the Disclosure Schedule,
free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws),
Taxes, Security Interests, options, warrants, purchase rights,
contracts, commitments, equities, claims, and demands. Except for
the agreements set forth on Section 5.4 of the Disclosure
Schedule (which, except as otherwise provided on the Disclosure
Schedule, will be terminated prior to the execution of this
Agreement), the Stockholder is not a party to any option,
warrant, purchase right, or other contract or commitment that
could require the Stockholder to sell, transfer, or otherwise
dispose of any of the Adviser Common Shares (other than pursuant
to this Agreement) or is a party to any voting trust, proxy, or
other agreement or understanding with respect to the voting of
any of the Adviser Common Shares.
5.5 Compensation Owed by Company. At the Effective Time,
the Stockholder shall have no claim for payment by the Company
for compensation or reimbursement for costs in connection with
his past service as a director or officer or in any other
capacity as an employee of the Company.
5.6 Broker's Fees. Stockholder has no Liability of
obligation to pay any fees, commissions or other consideration to
any broker, finder, agent or other Person with respect to the
transactions contemplated by this Agreement (other than legal and
accounting fees incurred in connection with the negotiation and
consummation of the transactions contemplated by this Agreement).
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF AAA ACQUISITION AND THE COMPANY
AAA Acquisition and the Company jointly and severally
represent and warrant to the Stockholder and the Adviser that the
statements contained in this Article 6 are correct and complete
as of the date hereof:
6.1 Organization of AAA Acquisition and the Company. The
Company and AAA Acquisition are corporations duly organized,
validly existing, and in good standing under the laws of the
states of Maryland and Texas, respectively.
6.2 Capital Stock. The authorized capital stock of the
Company consists of 110,000,000 shares of $0.01 par value stock
including up to 100,000,000 shares of common stock (the
"Company's Common Shares") and up to 10,000,000 shares of
preferred stock (the "Company's Preferred Shares"). As of
December 31, 1997, the Company had outstanding 1,848,213 Company
Common Shares and no Company Preferred Shares. Since December
31, 1997, the Company has not issued any shares of capital stock
except pursuant to the exercise of warrants and options
-14-
outstanding on such date to purchase Company Common Shares. All
outstanding Company Common Shares are, and all Company Common
Shares issuable under stock option plans of, or pursuant to the
Company's dividend reinvestment plan, will be when issued in
accordance with the terms thereof, duly authorized, validly
issued, fully paid and nonassessable. Except for 604,952 the
Company's Common Shares reserved for issuance pursuant to any
outstanding warrants of the Company described in its currently
effective Registration Statement on Form S-3 or pursuant to any
director or employee stock options of the Company, there are
outstanding on the date hereof no options, warrants, calls,
rights, commitments or any other agreements of any character to
which the Company is a party or by which it may be bound,
requiring it to issue, transfer, sell, purchase, register, redeem
or acquire any shares of capital stock or any securities or
rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock.
6.3 Authorization for Common Stock. The Share
Consideration will, when issued, be duly authorized, validly
issued, fully paid and nonassessable, and no stockholder of the
Company will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share
Consideration will, subject to the accuracy of the Stockholder's
representations contained in Section 5.3 hereof, be exempt from
registration under the Securities Act and will be registered or
exempt from registration under all applicable state securities
laws.
6.4 Authorization of Transaction. Each of AAA Acquisition
and the Company has full power and authority (including full
corporate power and authority) to execute and deliver this
Agreement and to perform its respective obligations hereunder.
This Agreement constitutes the valid and legally binding
obligation of each of AAA Acquisition and the Company,
enforceable in accordance with its terms and conditions. Neither
AAA Acquisition nor the Company need give any notice to, make any
filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection
with federal securities laws and any applicable "Blue Sky" or
state securities laws.
6.5 Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (A) violate any
constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which either AAA
Acquisition or the Company is subject or any provision of its
articles of incorporation or by-laws or (B) result in a breach
of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract,
lease, license, instrument, or other arrangement to which either
AAA Acquisition or the Company is a party or by which it is bound
or to which any of its assets is subject.
6.6 Brokers' Fees. Neither AAA Acquisition nor the Company
has any Liability or obligation to pay any fees or commissions to
any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
-15-
6.7 Information. The Proxy Statement will, at the time
filed with the SEC, at the time of mailing the Proxy Statement to
the Company's stockholders, at the time of the Company's
Stockholders Meeting and at the Effective Time, not contain any
untrue statement of a material fact or omit to state any 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 that no
representation is made by the Company with respect to statements
made therein based on information supplied by the Stockholder or
the Adviser for inclusion in the Proxy Statement. The Proxy
Statement will comply as to form in all material respects with
the provisions of the Securities Exchange Act and the rules and
regulations promulgated thereunder.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF
THE STOCKHOLDER AND THE ADVISER
The Stockholder and the Adviser represent and warrant to AAA
Acquisition and the Company that the statements contained in this
Article 7 are correct and complete as of the date hereof, except
as set forth in the disclosure schedule delivered by the
Stockholder and the Adviser to AAA Acquisition and the Company on
the date hereof (the "Disclosure Schedule"). Nothing in the
Disclosure Schedule shall be deemed adequate to disclose an
exception to a representation or warranty made herein, however,
unless the Disclosure Schedule identifies the exception with
particularity and describes the relevant facts in reasonable
detai. Without limiting the generality of the foregoing, the
mere listing (or inclusion of a copy) of a document or other item
shall not be deemed adequate to disclose an exception to a
representation or warranty made herein (unless the representation
or warranty has to do with the existence of the document or other
item itself). The Disclosure Schedule will be arranged in
paragraphs corresponding to the lettered and numbered paragraphs
contained in this Article 7.
7.1 Organization, Qualification, and Corporate Power. The
Adviser is a corporation duly organized, validly existing, and in
good standing under the laws of Texas. The Adviser is duly
authorized to conduct business and is in good standing under the
laws of each jurisdiction where such qualification is required,
except where the failure to so qualify or obtain authorization
would not have a Material Adverse Effect on the Adviser. Except
as set forth in Section 7.1(a) of the Disclosure Schedule, the
Adviser has full corporate power and authority and all licenses,
permits, and authorizations necessary to carry on the businesses
in which it is engaged and to own and use the properties owned
and used by it. Section 7.1(b) of the Disclosure Schedule lists
the directors and officers of the Adviser. The Stockholder has
delivered to AAA Acquisition and the Company correct and complete
copies of the articles of incorporation and by-laws of the
Adviser (as amended to date). The minute books (containing the
records of meetings of the stockholders, the board of directors,
and any committees of the board of directors), the stock
certificate books, and the stock record books of the Adviser are
correct and complete. The Adviser is not in default under or in
violation of any provision of its articles of incorporation or by-
laws.
-16-
7.2 Capitalization. The entire authorized capital stock of
the Adviser (the "Adviser Common Shares") consists of (i) one
thousand (1,000) shares of common stock, $0.01 par value, of
which one thousand (1,000) shares are issued and outstanding. No
Adviser Common Shares are held in treasury. All of the issued and
outstanding the Adviser Common Shares have been duly authorized,
are validly issued, fully paid, and nonassessable, and are held
of record by the Stockholder as set forth in Section 7.2 of the
Disclosure Schedule. There are no outstanding or authorized
options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or
commitments that could require the Adviser to issue, sell, or
otherwise cause to become outstanding any of its capital stock.
There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with
respect to the Adviser. There are no voting trusts, proxies, or
other agreements or understandings with respect to the voting of
the Adviser Common Shares.
7.3 Authorization of Transaction. The Adviser has full
power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform
its respective obligations hereunder. This Agreement constitutes
the valid and legally binding obligation of the Adviser,
enforceable in accordance with its terms and conditions. The
Adviser is not required to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection
with federal securities laws and any applicable "Blue Sky" or
state securities laws.
7.4 Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (i) violate any
constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Adviser is
subject or any provision of the charter or bylaws of the Adviser
or (ii) result in a breach of, constitute a default under, result
in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or
other arrangement to which the Adviser is a party or by which it
is bound or to which any of its assets is subject (or result in
the imposition of any Security Interest upon any of its assets).
7.5 Title to Assets. The Adviser has good title to, or a
valid leasehold interest in, the properties and assets used by
it, located on its premises, or shown on the Most Recent Balance
Sheet and the Most Recent Pro Forma Balance Sheet and acquired
after the date thereof, free and clear of all liens, claims and
encumbrances (other than Permitted Liens), except for properties
and assets disposed of in the Ordinary Course of Business since
the date of the Most Recent Balance Sheet or the Most Recent Pro
Forma Balance Sheet.
7.6 Subsidiaries and Affiliates. The Adviser has no
Subsidiaries, operating or otherwise. Listed on Schedule 7.6 of
the Disclosure Schedule are all of the Affiliates of the Adviser
and the Stockholder, which list shows all shareholders and/or
other equity owners thereof.
-17-
7.7 Financial Statements. The Adviser has delivered
(collectively, the "Financial Statements") to the Company its (i)
audited balance sheets and statements of operations, statements
of shareholder's equity, and statements of cash flows as of and
for the fiscal years ended December 31, 1996 and 1995; and (ii)
unaudited balance sheets and statements of operations, statements
of shareholder's equity, and statements of cash flows (the "Most
Recent Financial Statements") as of and for the nine months ended
September 30, 1997 (the "Most Recent Fiscal Month End"). In
addition, the Adviser has delivered to the Company unaudited pro
forma statement of operations for the fiscal year ended December
31, 1996, which gives effect to the Proposed Merger Acquisition
(the "Pro Forma Financial Statements") and unaudited pro forma
balance sheet and statement of operations as of and for the nine
months ended September 30, 1997 (the "Most Recent Pro Forma
Financial Statements"). The Financial Statements and the Pro
Forma Financial Statements (including the notes thereto) have
been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby, present fairly the
financial condition of the Adviser as of such dates and the
results of operations of the Adviser for such periods, and are
consistent with the books and records of the Adviser (which books
and records are correct and complete in all material respects).
7.8 Events Subsequent to Most Recent Fiscal Year End
(a) Except as provided in subsection (b) below and as
set forth in the Disclosure Schedule, at the Effective Time,
there will not have been since the Most Recent Fiscal Year any
Material Adverse Effect in the business, financial condition,
operations, results of operations, or future prospects of the
Adviser. Without limiting the generality of the foregoing, since
that date the Adviser shall not have:
(i) sold, leased, transferred, or assigned any of
its assets, tangible or intangible, other
than for a fair consideration in the Ordinary
Course of Business;
(ii) entered into any agreement, contract, lease,
or license (or series of related agreements,
contracts, leases, and licenses) either
involving more than $25,000 or outside the
Ordinary Course of Business;
(iii) incurred any obligation under a contract, a
party of which has accelerated, terminated,
modified, or canceled any agreement,
contract, lease, or license (or series of
related agreements, contracts, leases, and
licenses) to which the Adviser is a party or
by which it is bound;
(iv) imposed or had imposed any lien, claim or
encumbrance (other than Permitted Liens) upon
any of its assets, tangible or intangible;
-18-
(v) made any capital expenditure (or series of
related capital expenditures) either
involving more than $25,000 or outside the
Ordinary Course of Business;
(vi) made any capital investment in, any loan to,
or any acquisition of the securities or
assets of, any other Person (or series of
related capital investments, loans, and
acquisitions);
(vii) issued any note, bond, or other debt security
or created, incurred, assumed, or guaranteed
any indebtedness for borrowed money or
capitalized lease obligation;
(viii) delayed or postponed the payment of accounts
payable and other Liabilities outside the
Ordinary Course of Business;
(ix) canceled, compromised, waived, or released
any right or claim (or series of related
rights and claims) outside the Ordinary
Course of Business;
(x) granted any license, sublicense or other
right to use any rights under or with respect
to any Intellectual Property;
(xi) has not changed or authorized any change in
the articles of incorporation or by-laws of
the Adviser;
(xii) issued, sold, or otherwise disposed of any of
its capital stock, or granted any options,
warrants, or other rights to purchase or
obtain (including upon conversion, exchange,
or exercise) any of its capital stock;
(xiii) declared, set aside, or paid any dividend or
made any distribution with respect to its
capital stock (whether in cash or in kind) or
redeemed, purchased, or otherwise acquired
any of its capital stock;
(xiv) experienced any material damage, destruction,
or loss (whether or not covered by insurance)
to its property;
(xv) made any loan to, or entered into any other
transaction with, any of its directors,
officers and employees without first
obtaining the approval of the Board of
Directors of the Company;
-19-
(xvi) entered into any employment contract or
collective bargaining agreement, written or
oral, or modified the terms of any existing
such contract or agreement;
(xvii) granted any increase in the base compensation
of any of its directors, officers, and
employees without first obtaining the
approval of the Board of Directors of the
Company;
(xviii) adopted, amended, modified, or terminated any
bonus, profit-sharing, incentive, severance,
or other plan, contract, or commitment for
the benefit of any of its directors,
officers, and employees (or taken any such
action with respect to any other Employee
Benefit Plan);
(xix) made any other change in employment terms for
any of its directors and officers, without
first obtaining the approval of the Board of
Directors of the Company, or with respect to
employees outside the Ordinary Course of
Business or in the terms of its agreements
with any independent contractors;
(xx) made or pledged to make any charitable or
other capital contribution outside the
Ordinary Course of Business;
(xxi) been any other material occurrence, event,
incident, action, failure to act, or
transaction outside the Ordinary Course of
Business involving the Adviser; and
(xxii) incurred any legal obligation, whether
written or oral, to do any of the foregoing.
(b) The foregoing notwithstanding, the Adviser may
make such transfers of assets in payment of distributions and/or
compensation as the Stockholder may deem, in his sole discretion,
as necessary to reduce to zero as of the Effective Time the
Adviser's accumulated and current earnings and profits within the
meaning of Section 312 of the Code; provided, however, that any
liabilities payable to the Stockholder and or his Affiliates as
of the Effective Time shall be current liabilities and the
Company shall have the right to repay such liabilities, at its
election, in cash or in the Company's Common Shares valued at
$10.25 per share.
7.9 Undisclosed Liabilities. The Adviser has no Liability
(and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or
demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance
Sheet (rather than in any notes thereto) or the Most Recent Pro
Forma Balance Sheet (rather than in any notes thereto) and (ii)
Liabilities which have arisen after the Most Recent Fiscal Month
-20-
End in the Ordinary Course of Business (none of which results
from, arises out of, relates to, is in the nature of, or was
caused by any breach of contract, breach of warranty, tort,
infringement, or violation of law).
7.10 Legal Compliance. The Adviser has complied in all
material respects with all applicable laws (including rules,
regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of federal, state,
local, and foreign governments (and all agencies thereof), and no
action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced
against it alleging any failure to so comply.
7.11 Tax Matters
(a) The Adviser has filed all Tax Returns that it was
required to file, including, without limitation, any Tax Returns
required to be filed with any state. All such Tax Returns were
correct and complete in all respects. All Taxes owed by the
Adviser (whether or not shown on any Tax Return) have been paid.
The Adviser currently is not the beneficiary of any extension of
time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Adviser does not
file Tax Returns that it is or may be subject to taxation by that
jurisdiction. There are no liens, claims or encumbrances (other
than Permitted Liens) on any of the assets of the Adviser that
arose in connection with any failure (or alleged failure) to pay
any Tax.
(b) The Adviser has withheld and paid all Taxes
required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party.
(c) The Adviser at the Effective Time shall have no
cumulative Earnings and Profits as defined under the Code.
(d) The Stockholder does not expect any authority to
assess any additional Taxes for any period for which Tax Returns
have been filed. There is no dispute or claim concerning any Tax
Liability of the Adviser either (A) claimed or raised by any
authority in writing or (B) as to which the Stockholder has
Knowledge. The Stockholder has delivered to AAA Acquisition and
the Company correct and complete copies of all federal income Tax
Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Adviser since the inception
of the Adviser.
(e) The Adviser has not waived any statute of
limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
(f) The Adviser has not filed a consent under Code
Section 341(f) concerning collapsible corporations. The Adviser
has not made any payments, is not obligated to make any payments,
or is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will
not be deductible under Code Section 280G. The Adviser has not
-21-
been a United States real property holding corporation within the
meaning of Code Section 897(c)(2) during the applicable period
specified in Code Section 897(c)(1)(A)(ii). The Adviser has
disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of
federal income Tax within the meaning of Code Section 6662. The
Adviser is not a party to any Tax allocation or sharing
agreement. The Adviser (A) has not been a member of an
Affiliated Group filing a consolidated federal income Tax Return
(other than a group the common parent of which was the Adviser)
or (B) has no Liability for the Taxes of any Person (other than
the Adviser) under Treas. Reg. Section 1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
7.12 Real Property
(a) Except for the lease to it of free space at its
principal place of business, the Adviser owns no real property
either directly or indirectly through one or more joint venture
partnerships or other relationships or entities. The Stockholder
has delivered to AAA Acquisition and the Company a correct and
complete copy of the lease for such office space and
(i) Such is legal, valid, binding, enforceable,
and in full force and effect;
(ii) No consent is required with respect to any
lease as a result of this Agreement, and the
actions contemplated by this Agreement will
not result in the change of any terms of such
lease or otherwise affect the ongoing
validity of such lease;
(iii) No party to such lease is in breach or
default, and no event has occurred which,
with notice or lapse of time, would
constitute a breach or default or permit
termination, modification, or acceleration
thereunder;
(iv) No party to such lease has repudiated any
provision thereof;
(v) There are no disputes, oral agreements, or
forbearance programs in effect as to such
lease;
(vi) The Adviser has not assigned, transferred,
conveyed, mortgaged, deeded in trust, or
encumbered any interest in the leasehold or
subleasehold;
(vii) All facilities leased thereunder have
received all approvals of governmental
authorities (including licenses and permits)
required by the Adviser in connection with
the operation thereof and have been operated
and maintained by the Adviser in accordance
with applicable laws, rules, and regulations;
and
-22-
(viii) All facilities leased thereunder are supplied
with utilities and other services necessary
for the operation of said facilities.
7.13 Intellectual Property
(a) The Adviser owns or has the right to use pursuant
to license, sublicense, agreement, or permission all Intellectual
Property used in the operation of the businesses of the Adviser
as presently conducted. Each item of Intellectual Property owned
or used by the Adviser immediately prior to the Closing hereunder
will be owned or available for use by the Adviser on identical
terms and conditions immediately subsequent to the Closing
hereunder. The Adviser has taken all necessary action to maintain
and protect each item of Intellectual Property that it owns or
uses.
(b) The Adviser has not interfered with, infringed
upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of third parties, and neither the
Stockholder nor the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Adviser
has ever received any charge, complaint, claim, demand, or notice
alleging any such interference, infringement, misappropriation,
or violation (including any claim that the Adviser must license
or refrain from using any Intellectual Property rights of any
third party). No third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any
Intellectual Property rights of the Adviser.
(c) The Adviser has no patent or registration which
has been issued to the Adviser with respect to any of its
Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule
identifies each item of Intellectual Property that any third
party owns and that the Adviser uses pursuant to license,
sublicense, agreement, or permission. The Stockholder has
delivered to AAA Acquisition and the Company correct and complete
copies of all such licenses, sublicenses, agreements, and
permissions (as amended to date).
(e) Nothing will interfere with, infringe upon,
misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the
continued operation of its business as presently conducted.
7.14 Tangible Assets. The Adviser owns or leases all
equipment, and other tangible assets used in the conduct of its
business as presently conducted and as presently proposed to be
conducted. Each such tangible asset is free from all material
defects (patent and latent), has been maintained in accordance
with normal industry practice, is in good operating condition and
repair (subject to normal wear and tear), and is suitable for the
purposes for which it presently is used. As of the Effective
-23-
Time, the Adviser will have all of the assets necessary to
conduct its business as it is currently being conducted and as it
is contemplated to be conducted in the future.
7.15 Contracts. Section 7.15 of the Disclosure Schedule
lists the following contracts and other agreements to which the
Adviser is a party:
(a) Any agreement (or group of related agreements) for
the lease of personal property to or from any Person providing
for lease payments in excess of $10,000 per annum;
(b) Any agreement concerning a partnership or joint
venture in which the Adviser or any of the Affiliates listed in
the Disclosure Schedule is a partner or equity owner, or for
which Adviser or any of such Affiliates serves as a manager or
adviser;
(c) Any agreement (or group of related agreements)
under which it has created, incurred, assumed, or guaranteed any
indebtedness for borrowed money, or any capitalized lease
obligation or under which it has imposed a lien claim or
encumbrance (other than a Permitted Lien) on any of its assets,
tangible or intangible;
(d) Any agreement concerning confidentiality or
noncompetition;
(e) Any agreement with the Stockholder and his
Affiliates;
(f) Any profit sharing, stock option, stock purchase,
stock appreciation, deferred compensation, severance, or other
material plan or arrangement for the benefit of its current or
former directors, officers, and employees;
(g) Any agreement for the employment of any individual
on a full-time, part-time, consulting, or other basis providing
annual compensation in excess of $10,000 or providing severance
benefits;
(h) Any agreement under which it has advanced or
loaned any amount to any of its directors, officers, and
employees;
(i) Any agreement under which the consequences of a
default or termination could have a Material Adverse Effect.
The Stockholder has delivered to AAA Acquisition and the
Company a correct and complete copy of each written agreement
listed in Section 7.15 of the Disclosure Schedule (as amended to
date) and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 7.15 of
the Disclosure Schedule. With respect to each such agreement: (A)
the agreement is legal, valid, binding, enforceable, and in full
force and effect; (B) the agreement will continue to be legal,
valid, binding, enforceable, and in full force and effect on
identical terms following the consummation of the transactions
contemplated hereby; (C) no party is in breach or default, and no
-24-
event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination,
modification, or acceleration, under the agreement; and (D) no
party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts
receivable of the Adviser as of the Effective Time will be
reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are
current and collectible in accordance with their terms at their
recorded amounts.
7.17 Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of either Adviser.
7.18 Insurance. Section 7.18 of the Disclosure Schedule
sets forth the following information with respect to each
insurance policy (including policies providing property,
casualty, liability, and workers' compensation coverage and bond
and surety arrangements) to which the Adviser has been a party, a
named insured, or otherwise the beneficiary of coverage at any
time within the past five years: (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the
name of the policyholder, and the name of each covered insured;
(iii) the policy number and the period of coverage; (iv) the
scope (including an indication of whether the coverage was on a
claims made, occurrence, or other basis) and amount (including a
description of how deductibles and ceilings are calculated and
operate) of coverage; and (v) a description of any retroactive
premium adjustments or other loss-sharing arrangements. With
respect to each such insurance policy to the knowledge of the
Stockholder and the respective Adviser: (A) the policy is legal,
valid, binding, enforceable, and in full force and effect; (B)
the policy will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms
following the consummation of the transactions contemplated
hereby; (C) neither Adviser nor any other party to the policy is
in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a
breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy
has repudiated any provision thereof. The Adviser has been
covered during the past five years by insurance in scope and
amount customary and reasonable for the businesses in which it
has engaged during the aforementioned period. Section 7.18 of the
Disclosure Schedule describes any self-insurance arrangement
affecting the Adviser.
7.19 Litigation. The Adviser is not subject to any
outstanding injunction, judgment, order, decree, ruling, or
charge or (i) a party or (ii) threatened to be made a party to
any action, suit, proceeding, hearing, or investigation thereof
(a "proceeding") in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator, which proceeding could
result in any Material Adverse Effect on the Adviser. The
Stockholder has no reason to believe that any such action, suit,
proceeding, hearing, or investigation may be brought or
threatened against either Adviser.
-25-
7.20 Construction Liability. The Adviser does not have any
Liability (and there is no Basis for any present or future
action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand against it giving rise to any
Liability) arising out of any injury to individuals or property
as a result of faulty or inadequate construction or development
by the Adviser.
7.21 Employees. To the Knowledge of the Stockholder and the
Adviser, no executive, key employee, or group of employees
currently has any plans to terminate employment with the Adviser
or as a result of this Agreement. The Adviser has not committed
any unfair labor practice. Neither the Stockholder nor the
Adviser has any Knowledge of any organizational effort presently
being made or threatened by or on behalf of any labor union with
respect to employees of the Adviser. The Disclosure Schedule
sets forth the names of all employees and independent contractors
necessary in order to conduct the Adviser's business as it is
currently being conducted and as it is contemplated to be
conducted in the future.
7.22 Employee Benefits. Other than its Code Section 401
Plan, the Adviser has not implemented and does not contribute to
any Employee Benefit Plan or any Employee Welfare Benefit Plan
providing medical, health, or life insurance or other welfare-
type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in
accordance with Code Section 4980B).
7.23 Guaranties. The Adviser is not a guarantor or
otherwise liable for any Liability or obligation (including
indebtedness) of any other Person except as set forth in the
Disclosure Schedule.
7.24 Environment, Health, and Safety. Except as set forth
in the Disclosure Schedule:
(a) The Adviser has complied with all Environmental,
Health, and Safety Laws, and no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or
notice has been filed or commenced against it alleging any
failure so to comply. Without limiting the generality of the
preceding sentence, the Adviser has obtained and been in
compliance with all of the terms and conditions of all permits,
licenses, and other authorizations which are required under, and
has complied with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules, and timetables which are contained in all
Environmental, Health, and Safety Laws;
(b) The Adviser has no Liability and has not handled
or disposed of any substance, arranged for the disposal of any
substance, exposed any employee or other individual to any
substance or condition, or owned or operated any property or
facility in any manner that could form the Basis for any present
or future action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand against the Adviser giving
rise to any Liability for damage to any site, location, or body
of water (surface or subsurface), for any illness of or personal
injury to any employee or other individual, or for any reason
under any Environmental, Health, and Safety Law; and
-26-
(c) All properties and equipment used in the business
of the Adviser have been free of asbestos, PCB's, methylene
chloride, trichloroethylene, 1,2-trans-dichloroethylene, dioxins,
dibenzofurans, and Extremely Hazardous Substances.
7.25 Proxy Statement. None of the information supplied or
to be supplied by the Stockholder or the Adviser for inclusion in
the Proxy Statement will, at the time of filing the Proxy
Statement with the SEC, at the time of mailing the Proxy
Statement to the stockholders of the Company, at the time of the
Company's Stockholders Meeting or at the Effective Date, contain
any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein,
in light of the circumstances under which they are made, not
misleading.
7.26 Relationships with Tenants. The Stockholder and the
Adviser believe that the Adviser's relationships with the
Company's existing tenants are sound, and there is no Basis to
believe that any of the Company's primary tenants will materially
and adversely change the manner in which they currently conduct
business with the Company.
7.27 Disclosure. The representations and warranties
contained in this Article 7 do not contain any untrue statement
of a material fact or omit to state any material fact necessary
in order to make the statements and information contained in this
Article 7 not misleading.
ARTICLE 8
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period
between the execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use his or its
reasonable best efforts to take all action and to do all things
necessary, proper, or advisable in order to consummate and make
effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing
conditions set forth in Article 10 below).
8.2 Notices and Consents. The Adviser shall give any
notices to third parties and shall use its reasonable best
efforts to obtain any third party consents that the Company and
AAA Acquisition may reasonably request in connection with the
matters referred to in Section 7.3 above. Each of the Parties
shall give any notices to, make any filings with, and use its
reasonable best efforts to obtain any authorizations, consents,
and approvals of governments and governmental agencies in
connection with the matters referred to in Section 5.1, Section
6.4, and Section 7.3 above.
8.3 Maintenance of Business; Prohibited Acts
(a) During the period from the date of this Agreement
to the Effective Time, the Company will not, and the Stockholder
will not, and will not cause the Adviser to, take any action that
adversely affects the ability of the Company or the Adviser (i)
to pursue its business in the ordinary course, (ii) to seek to
-27-
preserve intact its current business organizations (iii) to keep
available the service of its current officers and employees and
(iv) preserve its relationships with its employees, independent
contractors, lenders, joint venturers, and others having business
dealings with it.
(b) The Stockholder will not, except to the extent
resulting from a transaction permitted under Section 7.8(b)
hereof, allow the Adviser to, without the Company's prior written
consent:
(i) Issue, deliver, sell, dispose of, pledge or
otherwise encumber, or authorize or propose the issuance,
delivery, sale, disposition or pledge or other encumbrances of
(i) any additional shares of its capital stock of any class
(including the Adviser Common Shares), or any securities or
rights convertible into, exchangeable for or evidencing the right
to subscribe for any shares of its capital stock, or any rights,
warrants, options, calls, commitments or any other agreements of
any character to purchase or acquire any shares of its capital
stock or any other securities or rights convertible into,
exchangeable for or evidencing the right to subscribe for any
shares of its capital stock, or (ii) any other securities in
respect of, in lieu of or in substitution for the Adviser Common
Shares outstanding on the date hereof;
(ii) Redeem, purchase or otherwise acquire, or
propose to redeem, purchase or otherwise acquire, any of its
outstanding securities;
(iii) Split, combine, subdivide or reclassify any
shares of its capital stock or otherwise make any payments to the
Stockholder in his capacity as stockholder of the Adviser
provided, however, that nothing shall prohibit: (i) the payment
of any ordinary distribution or dividend in respect of its
capital stock at such times and in such manner and amount as may
be consistent with Section 7.8 hereof (which in any event shall
include any and all compensation paid or payable or expenses
reimbursed or reimbursable for the period from October 1, 1997
through the Effective Time, to the extent not otherwise paid or
distributed to the Stockholder), (ii) the payment of any dividend
as shall be required to be paid by the Adviser in order to permit
Deloitte & Touche, LLP, to issue the letter required by Section
10.2(c), or (iii) any distribution of property necessary for the
representation and warranty set forth in Section 7.11 to be true
and correct.
(iv) (i) grant any increases in the compensation
of any of its directors, officers or executives (except as
approved by the Independent Directors) or grant any increases in
compensation to any of its employees outside the Ordinary Course
of Business (except as approved by the Independent Directors),
(ii) pay or agree to pay any pension retirement allowance or
other employee benefit not required or contemplated by any
Employee Benefit Plan as in effect on the date hereof to any such
director, officer or employee, whether past or present, (iii)
enter into any new or amend any existing employment or severance
agreement with any such director, officer or employee, except as
approved by the Company in its sole discretion, (iv) pay or agree
to pay any bonus to any director, officer or employee (whether in
the form of cash, capital stock or otherwise) except as approved
by the Independent Directors, or (v) except as may be required to
-28-
comply with applicable law, amend any existing, or become
obligated under any new Employee Benefit Plan, except in the case
of (i) through (v) inclusive, under and pursuant to the
employment agreements referred to in Section 10.1(e);
(v) Adopt a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization (other than the Proposed
Merger);
(vi) Except with regard to the Proposed Merger,
make any acquisition, by means of merger, consolidation or
otherwise, of any direct or indirect ownership interest in or
assets comprising any business enterprise or operation;
(vii) Adopt any amendments to its articles of
incorporation or by-laws;
(viii) Incur any indebtedness for borrowed money or
guarantee such indebtedness or agree to become contingently
liable, by guaranty or otherwise, for the obligations or
indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other
corporation, any partnership or other legal entity or to any
other persons, except for financing of properties and their
development, bank deposits and other investments in marketable
securities and cash equivalents so long as any such transaction
is made in the Ordinary Course of Business;
(ix) Engage in the conduct of any business the
nature of which is materially different from the business in
which the Adviser is currently engaged;
(x) Enter into any agreement providing for
acceleration of payment or performance or other consequence as a
result of a change of control of the Adviser;
(xi) Forgive any indebtedness owed to the Adviser
or convert or contribute by way of capital contribution any such
indebtedness owed;
(xii) Mortgage, pledge, encumber, sell, lease or
transfer any material assets of the Adviser except with the prior
written consent of the Company or as contemplated by this
Agreement,
(xiii) Authorize or announce an intention to do any
of the foregoing, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing; or
(xiv) Perform any act or omit to take any action
that would make any of the representations made above inaccurate
or materially misleading as of the Effective Time.
(c) Anything in the foregoing not withstanding, until
the Effective Time the Adviser and the Company (subject to action
by its shareholders otherwise) shall maintain in full force and
-29-
effect the Omnibus Services Agreement, the Adviser shall continue
to provide services to the Company pursuant thereto and the
Company shall continue to compensate the Adviser for such
services in the manner currently in effect, including those with
respect to acquisition, development, loan brokerage, leasing and
property management services, until the Effective Time. Until
the Effective Time, the Company shall continue to pay Acquisition
Fees to the Adviser in accordance with its current practice, four
and one-half percent (4.5%) of equity funds when received by the
Company and five percent (5.0%) on funds borrowed by the Company
when funded. The parties agree that the Adviser shall earn an
Acquisition Fee on any properties contracted for acquisition by
the Company prior to the Effective Time provided that title to
any such property is acquired by the Company within sixty (60)
days following the Closing Date. In such event, the Company
shall be obligated to pay any Acquisition Fee to the Adviser to
the extent such Acquisition Fee has not been paid on or before
the Effective Time.
8.4 Full Access. The Adviser shall permit representatives
of the Company and AAA Acquisition to have full access at all
reasonable times, and in a manner so as not to interfere with the
normal business operations of the Adviser to all premises,
properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Adviser.
8.5 Meeting of Stockholders. The Company will take all
action necessary in accordance with applicable law and the
Company's articles of incorporation and by-laws to arrange for
its stockholders to consider and vote upon the Proposed Merger
and the issuance of the Company's Common Shares in the Merger at
the annual or special stockholders' meeting (the "Company's
Stockholders Meeting") to be held in connection with the
transactions contemplated by this Agreement. Subject to the
fiduciary duties of the Company's Board of Directors under
applicable law and as advised by counsel, the Board of Directors
of the Company shall recommend that the Company's stockholders
approve the Proposed Merger. In connection with such
recommendation, the Company shall take all lawful action to
solicit, and use all reasonable efforts to obtain, such approval,
including, without limitation, the inclusion of the
recommendation of the Company's Board of Directors and of the
Independent Directors in the Proxy Statement that the
stockholders of the Company vote in favor of the Proposed Merger
and the adoption of this Agreement.
8.6 Proxy Materials. After the date hereof, the Company
shall promptly prepare, and the Adviser and the Stockholder shall
cooperate in the preparation of, a proxy statement and a form of
proxy to be used in connection with the vote of the Company's
stockholders with respect to the Merger (such proxy statement,
together with any amendments thereof or supplements thereto, in
each case in the form or forms mailed to the Company's
stockholders, is herein called the "Proxy Statement"). The
Company shall file the Proxy Statement with the SEC as soon as
practicable, shall use all reasonable efforts to cause the Proxy
Statement to be mailed to stockholders of the Company at the
earliest practicable date as permitted by the SEC and shall take
all such action as may be necessary to qualify the Share
Consideration for offering and sale under state securities or
blue sky laws. If at any time prior to the Effective Time any
event relating to or affecting the Adviser, the Stockholder or
the Company shall occur as a result of which it is necessary, in
the opinion of counsel for the Adviser and the Stockholder or of
counsel for the Company to supplement or amend the Proxy
-30-
Statement in order to make such document not misleading in light
of the circumstances existing at the time approval of the
stockholders of the Company is sought, the Adviser, the
Stockholder and the Company, respectively, will notify the others
thereof and, in the case of the Adviser or the Stockholder, they
will cooperate with the Company in the preparation of, and, in
the case of the Company, it will prepare and file, an amendment
or supplement with the SEC and applicable state securities
authorities, such that the Proxy Statement, as so supplemented or
amended, will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances existing at
such time, not misleading, and the Company will, as required by
law, disseminate to its stockholders such amendment or
supplement.
8.7 Notice of Further Developments. Each of the
Stockholder and the Adviser shall give prompt written notice to
the Company and AAA Acquisition of any material adverse
development causing a breach of any of the representations and
warranties in Article 7 above. Each Party will give prompt
written notice to the others of any material adverse development
causing a breach of any of his own representations and warranties
in Article 5 above. No disclosure by any Party pursuant to this
Section 8.7, however, shall be deemed to amend or supplement the
Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
8.8 Tax Matters. Each of the Stockholder, the Adviser and
the Company agrees to report the Merger on all Tax Returns and,
if applicable, other filings as a reorganization under Section
368(a)(2)(D) of the Code to the extent permitted by law.
8.9 Reorganization. From and after the date hereof and
prior to the Effective Time, except for the transactions
contemplated or permitted herein, none of the Adviser, the
Stockholder or the Company shall knowingly take any action that
would be inconsistent with the representations and warranties
made by it herein, including, but not limited to, knowingly
taking any action, or knowingly failing to take any action, that
is known to cause disqualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
Furthermore, from and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or
permitted herein, each of the Company, the Stockholder and the
Adviser shall use reasonable efforts to conduct its business and
file Tax Returns in a manner that would not jeopardize the
qualification of the Company after the Effective Time as a real
estate investment trust as defined within Section 856 of the
Code.
8.10 Letter of Deloitte & Touche, LLP. The Adviser shall
use reasonable efforts to cause to be delivered to the Company an
"agreed-upon procedures" report of Deloitte & Touche, LLP
covering the financial statements and other financial and
statistical information of the Adviser set forth in the Proxy
Statement and dated a date within five business days before the
date on which the Proxy Statement shall be mailed to the
stockholders of the Company. Such report shall be addressed to
the Company, in form and substance reasonably satisfactory to the
Company and customary in scope and substance for reports
delivered by independent public accountants in connection with
-31-
proxy statements relating to mergers where the consideration paid
is registered on Form S-4 under the Securities Act.
8.11 Adviser Stockholder Approval. The Stockholder hereby
agrees to vote, at the Company's Stockholders Meeting, the
Company's Common Shares owned by the Stockholder in favor of the
Agreement and the transactions contemplated hereby.
8.12 Delivery of Certain Financial Statements. Promptly
after they are available, and in any event not later than the
tenth business day prior to the Closing Date, the Adviser shall
provide to the Company true and correct copies of its unaudited
consolidated balance sheet as of December 31, 1997 and an
unaudited balance sheet as of the last day of each month
occurring after December 31, 1997 and prior to the Closing Date
and the related unaudited statements of income and cash flows for
the year to date ending on the last day of each such month.
Delivery of such financial statements shall be deemed to be a
representation by the Adviser and the Stockholder that such
balance sheet (including the related notes, if any) presents
fairly, in all material respects, the financial position of the
Adviser (which for the purposes of this Section 8.12 includes the
Adviser) as of the specified date, and the other related
statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its
operations and cash flows for the respective periods or as of the
respective dates set forth therein, all in conformity with GAAP
consistently applied during the periods involved, except as
otherwise stated in the notes thereto, subject to normal year-end
audit adjustments.
8.13 State Takeover Statutes. The Company and its Board of
Directors shall (i) take all action necessary so that no "fair
price," "business combination," "moratorium," "control share
acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States
or similar statute or regulation, including without limitation,
the control share acquisition provisions of Section 3-701 et seq.
of the Maryland GCL and the business combination provisions of
Section 3-601 et seq. of the Maryland GCL (a "Takeover Statute")
is or becomes applicable to the Merger, this Agreement or any of
the other transactions contemplated by this Agreement (and so
that following the Merger, such takeover statute shall not apply
to the Stockholder or any persons acting in concert with him) and
(ii) if any Takeover Statute becomes applicable to the Merger,
this Agreement or any other transaction contemplated by this
Agreement, take all action necessary to minimize the effect of
such Takeover Statute on the Merger and the other transactions
contemplated by this Agreement.
8.14 Exclusivity. Neither the Stockholder nor the Adviser
shall (i) solicit, initiate, or encourage the submission of any
proposal or offer from any Person relating to the acquisition of
any capital stock or other voting securities or any substantial
portion of the assets of the Adviser (including any acquisition
structured as a merger, consolidation, or share exchange) or (ii)
participate in any discussions or negotiations regarding, furnish
any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing. The Stockholder shall
not vote his Adviser Common Shares in favor of any such
acquisition structured as a merger, consolidation, or share
exchange. The Stockholder and the Adviser shall notify the
-32-
Company immediately if any Person makes any proposal, offer,
inquiry, or contact with respect to any of the foregoing.
ARTICLE 9
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period
following the Closing:
9.1 General. In the event that at any time after the
Closing any further action is necessary or desirable to carry out
the purposes of this Agreement, each of the Parties will take
such further action (including the execution and delivery of such
further instruments and documents) as any other Party reasonably
may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification
therefor under Article 12 below). The Stockholder acknowledges
and agrees that from and after the Closing, the Surviving
Corporation and the Company will be entitled to possession of all
documents, books, records (including Tax records), agreements,
and financial data of any sort relating to the Adviser.
9.2 Litigation Support. In the event and for so long as
any Party actively is contesting or defending against any action,
suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand in connection with (i) any transaction
contemplated under this Agreement or (ii) any fact, situation,
circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or
transaction on or prior to the Closing Date involving the
Adviser, each of the other Parties will cooperate with him and
his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books
and records as shall be necessary in connection with the contest
or defense, all at the sole cost and expense of the contesting or
defending Party (unless the contesting or defending Party is
entitled to indemnification therefor under Article 12 below).
9.3 Transition. The Stockholder will not take any action
that is designed or intended to have the effect of discouraging
any lessor, licensor, customer, supplier, or other business
associate of the Adviser from maintaining the same business
relationships with the Surviving Corporation after the Closing as
it maintained with the Adviser prior to the Closing.
9.4 Confidentiality. The Stockholder will treat and hold
as such all of the Confidential Information, refrain from using
any of the Confidential Information except in connection with
this Agreement, and deliver promptly to the Company or destroy,
at the request and option of the Company, all tangible
embodiments (and all copies) of the Confidential Information
which are in his possession. In the event that the Stockholder is
requested or required (by oral question or request for
information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to
disclose any Confidential Information, the Stockholder will
notify the Company promptly of the request or requirement so that
the Company may seek an appropriate protective order or waive
compliance with the provisions of this Section 9.4. If, in the
-33-
absence of a protective order or the receipt of a waiver
hereunder, the Stockholder is, on the advice of counsel,
compelled to disclose any Confidential Information to any
tribunal or else stand liable for contempt, then the Stockholder
may disclose the Confidential Information to such tribunal;
provided, however, that the disclosing stockholder shall use his
best efforts to obtain, at the request of the Company, an order
or other assurance that confidential treatment will be accorded
to such portion of the Confidential Information required to be
disclosed as the Company shall designate. The foregoing
provisions shall not apply to any Confidential Information which
is generally available to the public immediately prior to the
time of disclosure.
9.5 Competitive Real Estate Ventures
(a) So long as the Stockholder serves as an officer
and director of the Company, and for one (1) year thereafter, the
Stockholder hereby covenants and agrees, except to the extent as
may be expressly authorized by the Board from time to time, that
the Stockholder will not engage or participate, directly or
indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual
capacity whatsoever, in the conduct or management of, or own any
stock or any other equity investment in or debt of any
Competitive Real Estate Venture. The foregoing restriction shall
not apply to ownership by the Stockholder of publicly traded
equity or debt securities where such ownership does not
constitute ownership of more than one percent (1.0%) of the total
outstanding amount of any class of equity or debt securities.
(b) The Stockholder shall cause any Competitive Real
Estate Venture under his control, at the election of the Company,
at any time or from time to time, to enter into the following
agreements with the Company, the form each of which shall be
approved by the Board prior to its execution.
(i) Facilities and Personnel Agreement. An
agreement whereby a Competitive Real Estate Venture is obligated
to first satisfy its requirements for personnel and/or facilities
by the use of available qualified personnel or facilities of the
Company. Pursuant to this agreement, the Competitive Real Estate
Venture will be required to reimburse the Company for its use of
such personnel or facilities at a rate equal to the Company's
costs of such personnel and/or facilities, including its general
administrative and overhead expenses and other indirect expenses
as determined on a reasonable accounting basis consistently
applied.
(ii) Right of Purchase Agreement. An agreement
whereby the Competitive Real Estate Venture will give the Company
a right to purchase any property or right to acquire any
property, that the Competitive Real Estate Venture acquires or
contracts to acquire, subject to any then-existing fiduciary
obligation by the Competitive Real Estate Venture to other
persons or entities. Pursuant to this contract, the Competitive
Real Estate Venture will, within a specified time after it
contracts to acquire a property, offer to the Company for a
period of not less than twenty (20) business days, the right to
acquire all of the Competitive Real Estate Venture's interest in
such property at the Competitive Real Estate Venture's price
therefor, including an allocable portion of its general,
administrative and overhead expenses and other indirect expenses
-34
incurred in connection with identifying, selecting and
contracting for the acquisition of the property. The foregoing
notwithstanding, the Competitive Real Estate Venture shall not be
required to offer the Company the right to purchase any property
or right to acquire a property it may have at the time it becomes
a Competitive Real Estate Venture within the meaning of this
Agreement.
(iii) Compensation Restriction Agreement. An
agreement whereby the Stockholder will cause any Competitive Real
Estate Venture under his control to limit any compensation
payable to him by such entity to amounts first approved by the
Company.
(c) If the final judgment of a court of competent
jurisdiction declares that any term or provision of this Section
9.5 is invalid or unenforceable, the Parties agree that the court
making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term
or provision, to delete specific words or phrases, or to replace
any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified
after the expiration of the time within which the judgment may be
appealed.
9.6 The Company's Common Shares. Each certificate issued
to the Stockholder representing the Company's Common Shares will
be imprinted with a legend substantially in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"), IN RELIANCE UPON THE
EXEMPTION FROM REGISTRATION CONTAINED IN SECTION 4(2)
OF THE 1933 ACT AND REGULATION D OF THE RULES AND
REGULATIONS PROMULGATED UNDER THE 1933 ACT, AND IN
RELIANCE UPON THE REPRESENTATION BY THE HOLDER THAT
THEY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY
AND NOT WITH A VIEW TO RESALE OR FURTHER DISTRIBUTION.
SUCH SHARES MAY NOT BE OFFERED FOR SALE, SOLD,
DELIVERED AFTER SALE, HYPOTHECATED, NOR WILL ANY
ASSIGNEE OR ENDORSEE HEREOF BE RECOGNIZED AS AN OWNER
HEREOF BY THE ISSUER FOR ANY PURPOSE, UNLESS A
REGISTRATION STATEMENT FILED WITH THE SEC WITH RESPECT
TO SUCH SHARES SHALL THEN BE IN EFFECT OR UNLESS THE
AVAILABILITY OF AN EXEMPTION FROM REGISTRATION SHALL BE
ESTABLISHED TO THE REASONABLE SATISFACTION OF COUNSEL
OF THE ISSUER.
Subject to such other restrictions as may be imposed on
transfer of the Company's Common Shares hereunder, or under any
other agreements to which Stockholder is a party, in the event
the Stockholder desires to transfer any of the Company's Common
Shares received in connection with the Merger, other than in a
-35-
registered offering or pursuant to a sale which counsel for the
Company confirms is in compliance with Rule 144 of the Securities
Act, he must first furnish the Company with (i) a written opinion
satisfactory to the Company in form and substance from counsel
reasonably satisfactory to the Company to the effect that the
Stockholder may transfer the Company Common Shares as desired
without registration under the Securities Act and (ii) a written
undertaking executed by the desired transferee reasonably
satisfactory to the Company in form and substance agreeing to be
bound by the restrictions on transfer contained herein.
9.7 Continuity of Interest. The Stockholder shall not
dispose of any of the Company's Common Shares received in the
transaction in a manner that would cause the transaction to
violate the continuity of stockholder interest requirement set
forth in the then current Treas. Reg. Section 1.368-1(b) or its
successor Regulation. If the Stockholder wishes to dispose of
any the Company's Common Shares received in the transaction, he
shall provide the Company written notice, not less than 15 days
prior to the intended date of disposition, specifying the number
of shares which the Stockholder proposes to dispose of and an
opinion of counsel reasonably satisfactory to the Company that
such transfer or disposition will not violate the continuity of
stockholder interest requirement set forth in the then current
Treas. Reg. Section 1.368-1(b) or its successor Regulation.
9.8 Share Consideration. Unless there should first occur a
change in control, the Stockholder shall retain at least one-half
of the Company's Common Shares received by the Stockholder on the
Closing Date and any of the Company's Common Shares received from
the Share Balance for a period of 12 months following the date of
receipt of such shares.
9.9 Tax Matters
(a) If there is an adjustment to any item reported on
a pre-closing Tax Return that results in an increase in the Taxes
payable by Adviser or the Stockholder, and such adjustment
results in a corresponding adjustment to items reported on a post-
closing Tax Return with the result that the Taxes payable either
by the Company, AAA Acquisition or any of their Subsidiaries or
by any Consolidated Group of companies of which the Company, AAA
Acquisition, or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any Company Indemnity Claim
that the Stockholder owe the Company pursuant to Article 11 below
shall be reduced by the amount by which such Taxes are reduced or
such refunds are increased. The amount of reduction of any
Company Indemnity Claim under this Section 9.9(a) shall be the
excess of (i) the Tax liability of the Company, AAA Acquisition,
such Subsidiary or, if applicable, the Company's, AAA
Acquisition's or such Subsidiary's consolidated group for the tax
period in question computed without regard to such adjustment or
amendment, over (ii) the actual Tax liability of the Company, AAA
Acquisition, or such Subsidiary or, if applicable, the Company's,
AAA Acquisition's or such Subsidiary's consolidated group for the
tax period in question.
(b) Any refund or credit of Taxes (including any
statutory interest thereon) received by the Company, AAA
Acquisition or any of their Subsidiaries attributable to periods
ending on or prior to or including the Closing Date that were
paid by Adviser pursuant to this Agreement shall reduce the
-36-
Company Indemnity Claim that the Stockholder owes the Company
pursuant to Article 11 below by an amount equal to the amount of
such refund or credit.
(c) In the event that the Company, AAA Acquisition or
any of their Subsidiaries receives notice, whether orally or in
writing, of any pending or threatened federal, state, local or
foreign tax examinations, claims settlements, proposed
adjustments or related matters with respect to Taxes that could
affect the Adviser or the Stockholder, or if the Adviser or the
Stockholder receives notice of such matters that could affect the
Company, AAA Acquisition or any of their Subsidiaries, the party
receiving such notice shall notify in writing the potentially
affected party within ten (10) days thereof. The failure of
either party to give the notice required by this Section shall
not impair such party's rights under this Agreement except to the
extent that the other party demonstrates that it has been damaged
thereby.
(d) The Stockholder shall have the responsibility for,
and shall be entitled, at their expense, to contest, control,
compromise, settle or appeal all proceedings with respect to pre-
closing Taxes.
9.10 Purchase of Remaining Share Balance Upon Death of the
Stockholder
(a) Within sixty (60) days after the death of the
Stockholder (the "Date of Death"), the Company shall, at the
price (the "Purchase Price") and on the terms and conditions set
forth in this Section 9.10, purchase from the decedent's estate
all right, title and interest in and to the Remaining Share
Balance as of the Date of Death.
(b) The term "decedent's estate" as used herein means:
(i) The duly appointed and qualified personal
representative of the Stockholder's estate;
(ii) The surviving joint tenant of the Stockholder
when shares are owned as joint tenants by the
Stockholder and a person who is not active in
the business of the Company;
(iii) Any other person who may, because of the
community property or other law of any
jurisdiction, acquire without formal probate
proceedings any right, title, or interest in
or to the Remaining Share Balance by reason
of the Stockholder's death; or
(iv) Any intervivos or testamentary trust settled
by the Stockholder during his lifetime or by
his will and testament upon his death.
(c) The Purchase Price shall be equal to the greater
of (x) the Remaining Share Balance as of the Date of Death
multiplied by $10.25, or (y), if the Company's Common Shares are
-37-
then traded on a national securities exchange, the average
closing price of the Company's Common Shares on such exchange for
the ten consecutive trading days immediately preceding the Date
of Death. The Purchase Price determined in accordance with the
foregoing shall be binding on the parties.
(d) The Purchase Price shall be paid to the decedent's
estate in a lump sum from the proceeds of any insurance policy
promptly after their receipt. The Purchase Price shall not be
less than the amount of the life insurance in force on the
Stockholder's life under the terms of Subsection 9.10(e) below.
If the proceeds of the insurance policy(ies) are less than the
Purchase Price, the balance shall be paid in cash. The Company,
not the decedent's estate, shall pay all costs and filing fees
required to secure any court orders, court decrees, court
approvals, and tax clearances required to enable the decedent's
estate to transfer to the Company full legal and equitable tax-
free title to the Remaining Share Balance.
(e) The Company shall obtain and maintain one or more
insurance policies on the life of the Stockholder in such amounts
as shall be necessary to assure performance of its obligation to
pay the Purchase Price in the amount determined as if the Date of
Death was the Closing Date; provided that the Company shall
obtain additional insurance, or shall reduce the amount of
insurance, from time to time, but not less frequently than
annually, so as to maintain the face value of such insurance
policies in an amount equal to the Purchase Price as if it was
determined as of the effective date of such additional insurance
policy or reduction in amount. The insurance policies shall be
term policies or other similar low-cost insurance, and shall be
in a form acceptable to the Stockholder. The Company shall pay
all premiums, name itself as beneficiary, and reserve all rights
of ownership of such policies. All proceeds of such policy or
policies shall first be used by the Company to purchase the
Remaining Share Balance and any amounts remaining shall be the
exclusive property of the Company.
ARTICLE 10
CONDITIONS TO OBLIGATION TO CLOSE
10.1 Conditions to Each Party's Obligation. The respective
obligations of the Company, AAA Acquisition, the Adviser and the
Stockholder to consummate the transactions contemplated by this
Agreement are subject to the fulfillment at or prior to the
Closing Date of each of the following conditions, which
conditions may be waived upon the written consent of the Company
and the Stockholder:
(a) The Company Stockholder Approval. This Agreement
and the transactions contemplated hereby shall have been duly
approved, in each case by the requisite holders of the Company's
Common Shares in accordance with the applicable provisions of the
Maryland GCL and the Company's articles of incorporation and by-
laws.
(b) Governmental Approvals. The Parties shall have
received all other authorizations, consents, and approvals of
governments and governmental agencies referred to in Section 5.1,
Section 6.4, and Section 7.3 above.
-38-
(c) No Injunction or Proceedings. There shall not be
in effect any action, suit, or proceeding pending or threatened
before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge that would, in the reasonable judgment
of the Company or the Adviser, (A) prevent consummation of any of
the transactions contemplated by this Agreement, (B) cause any of
the transactions contemplated by this Agreement to be rescinded
following consummation, (C) affect adversely the right of the
Company to own the capital stock of the Surviving Corporation, or
(D) affect adversely the right of the Surviving Corporation to
own its assets and to operate its businesses (and no such
injunction, judgment, order, decree, ruling, or charge is in
effect).
(d) No Suspension of Trading, Etc. At the Effective
Time, there shall be no declaration of a banking moratorium by
federal or state authorities or any suspension of payments by
banks in the United States (whether mandatory or not) or of the
extension of credit by lending institutions in the United States,
or commencement of war or other international, armed hostility or
national calamity directly or indirectly involving the United
States, which war, hostility or calamity (or any material
acceleration or worsening thereof), in the sole judgment of the
Company, would have a Material Adverse Effect on the Adviser or,
in the sole judgment of the Stockholder, would have a Material
Adverse Effect on the Company.
(e) Employment Agreement. The employment agreement
with the Company in substantially the form attached hereto as
Exhibit A, except for such changes therein as may be agreed upon
by the Stockholder and the Company, shall have been executed and
delivered by the parties thereto.
(f) Registration Rights Agreement. The registration
rights agreement in substantially the form attached hereto as
Exhibit B, except for such changes therein as may be agreed upon
by the Stockholder and the Company, shall have been executed and
delivered by the parties thereto.
10.2 Conditions to Obligation of AAA Acquisition and the
Company. The obligations of AAA Acquisition and the Company to
consummate the transactions to be performed by each in connection
with the Closing is subject to satisfaction of the following
conditions:
(a) The Stockholder and the Adviser shall have
delivered to AAA Acquisition and the Company a certificate to the
effect that:
(i) The representations and warranties set forth
in Article 5 and Article 7 above are true and correct in all
material respects at and as of the Closing Date;
(ii) The Stockholder and the Adviser have
performed and complied with all of their covenants hereunder
in all material respects at and as of the Closing Date;
-39-
(iii) The Adviser has procured all of the third
party consents specified in Section 7.3 above; and
(iv) No action, suit, or proceeding is pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or
charge that would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any
of the transactions contemplated by this Agreement to be
rescinded following consummation, (C) affect adversely the
right of the Company to own the capital stock of the
Surviving Corporation, or (D) affect adversely the right of
the Surviving Corporation to own its assets and to operate
its businesses;
(b) AAA Acquisition and the Company shall have
received an opinion dated as of the Closing Date from Deloitte &
Touche, LLP, tax adviser to the Company, addressed and in form
satisfactory to AAA Acquisition and the Company;
(c) The Company shall have received written comfort in
form and substance reasonably satisfactory to it from Deloitte &
Touche, LLP that the Adviser will not have any accumulated and
current earnings and profits within the meaning of Section 312 of
the Code as of the Effective Time. The Stockholder shall provide
to Deloitte & Touche, LLP all information reasonably available to
the Stockholder that is necessary to calculate the accumulated
and current earnings and profits of the Adviser as of the
Effective Time, including, but not limited to, all federal income
Tax Returns of the Adviser and any consolidated group of which
the Adviser and the Stockholder are or have been members, working
papers created with respect to such Tax Returns, and information
with respect to any federal income Tax controversy, either
pending or resolved, with respect to such returns. Any
information shall be treated as strictly confidential by Deloitte
& Touche, LLP and every employee of, and advisor to, the Company
and Deloitte & Touche, LLP.
(d) Bishop-Crown Investment Research, Inc. shall have
not withdrawn its Fairness Opinion issued in connection with the
Merger;
(e) Houlihan Lokey Howard & Zukin Financial Advisers,
Inc. shall not have withdrawn their valuation opinion regarding
the Adviser.
(f) The execution and delivery by the respective
Affiliates of the Stockholder designated in the Disclosure
Schedule of each of the agreements referenced in Subsection 9.5
(b) in the form approved by the Company's Board of Directors.
(g) The Company shall have received the resignations,
effective as of the Closing, of each director and officer of the
Adviser other than those whom the Company shall have specified in
writing prior to the Closing;
-40-
(h) The Company shall have received satisfactory
evidence that all bonus plans under which officers, directors or
employees of the Adviser are beneficiaries have been terminated
as of the Closing Date. The Company may waive any condition
specified in this Section 10.2 if it executes a writing so
stating at or prior to the Closing.
10.3 Conditions to Obligation of the Stockholder and the
Adviser. The obligation of the Stockholder and the Adviser to
consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following
conditions:
(a) AAA Acquisition and the Company shall have
delivered to Stockholder and the Adviser a certificate to the
effect that:
(i) The representations and warranties set forth
in Article 6 above shall be true and correct in all material
respects at and as of the Closing Date;
(ii) AAA Acquisition and the Company shall have
performed and complied with all of their covenants hereunder
in all material respects through the Closing; and
(iii) No action, suit, or proceeding shall be
pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or
foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B) cause any
of the transactions contemplated by this Agreement to be
rescinded following consummation (and no such injunction,
judgment, order, decree, ruling, or charge shall be in
effect);
(b) The Company shall have delivered to the
Stockholder the Share Consideration pursuant to Section 4.2.
(c) Since December 31, 1996, there shall not have
occurred or been threatened any material adverse changes in the
business, properties, operations or condition (financial or
otherwise) of the Company; and
The Stockholder may waive any condition specified in this
Section 10.3 if he executes a writing so stating at or prior to
the Closing.
ARTICLE 11
TERMINATION
11.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval by the
Stockholder or the stockholders of AAA Acquisition, respectively,
either by the mutual written consent of the Company and the
-41-
Representative or by mutual action of the Board of Directors of
the Adviser and the Independent Directors.
11.2 Termination by Either the Company or the Adviser. This
Agreement may be terminated and the Merger may be abandoned (a)
by the Independent Directors in the event of a failure of a
condition to the obligations of the Stockholder or the Adviser
set forth in Section 10.3 of this Agreement; or (b) by the
Stockholder in the event of a failure of a condition to the
obligations of the Company and AAA Acquisition set forth in
Section 10.2 of this Agreement; (c) by the Stockholder if the
Closing has not occurred by 5:00 PM Central Time on September 1,
1998, or (d) if a United States federal or state court of
competent jurisdiction or United States federal or state
governmental agency shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall
have become final and non-appealable; and provided, in the case
of a termination pursuant to clause (a), (b) or (c) above, that
the terminating party shall not have breached in any material
respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the
failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger
pursuant to this Article 11, no party hereto (or any of its
directors or officers) shall have any liability or further
obligation to any other party to this Agreement, except that
nothing herein will relieve any party from liability for any
breach of this Agreement.
ARTICLE 12
INDEMNIFICATION
12.1 Indemnity Obligations of the Stockholder. Subject to
Section 12.5, the Stockholder hereby agrees to indemnify and hold
the Company and the Surviving Corporation harmless from, and to
reimburse the Company and the Surviving Corporation for, any the
Company Indemnity Claims arising under the terms and conditions
of this Agreement. For purposes of this Agreement, the term "the
Company Indemnity Claim" shall mean any loss, damage, deficiency,
claim, liability, obligation, suit, action, fee, cost or expense
of any nature whatsoever resulting from (i) any breach of any
representation and warranty of the Stockholder or the Adviser
which is contained in this Agreement or any Schedule, Exhibit or
certificate delivered pursuant hereto; (ii) any breach or non-
fulfillment of, or any failure to perform, any of the covenants,
agreements or undertakings of the Stockholder or the Adviser
which are contained in or made pursuant to this Agreement; and
(iii) all interest, penalties and costs and expenses (including,
without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made
under this Section 12.1.
-42-
12.2 Indemnity Obligations of the Company. The Company
hereby agrees to indemnify and hold the Stockholder harmless
from, and to reimburse the Stockholder for, any Stockholder
Indemnity Claims arising under the terms and conditions of this
Agreement. For purposes of this Agreement, the term "Stockholder
Indemnity Claim" shall mean any loss, damage, deficiency, claim,
liability, suit, action, fee, cost or expense of any nature
whatsoever incurred by the Stockholder resulting from (i) any
breach of any representation or warranty of AAA Acquisition or
the Company which is contained in this Agreement or any Schedule,
Exhibit or certificate delivered pursuant thereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the
covenants, agreements or undertakings of AAA Acquisition or the
Company which are contained in or made pursuant to the terms and
conditions of this Agreement; and (iii) all interest, penalties,
costs and expenses (including, without limitation, all reasonable
fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.2.
12.3 Notification of Claims. Subject to the provisions of
Section 12.5, in the event of the occurrence of an event which
any party asserts constitutes a the Company Indemnity Claim or a
stockholder Indemnity Claim, as applicable, such party shall
provide the indemnifying party with prompt notice of such event
and shall otherwise make available to the indemnifying party all
relevant information which is material to the claim and which is
in the possession of the indemnified party. If such event
involves the claim of any third party (a "Third-Party Claim"),
the indemnifying party shall have the right to elect to join in
the defense, settlement, adjustment or compromise of any such
Third-Party Claim, and to employ counsel to assist such
indemnifying party in connection with the handling of such claim,
at the sole expense of the indemnifying party, and no such claim
shall be settled, adjusted or compromised, or the defense thereof
terminated, without the prior consent of the indemnifying party
unless and until the indemnifying party shall have failed, after
the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim,
to join in the defense, settlement, adjustment or compromise of
the same. An indemnified party's failure to give timely notice
or to furnish the indemnifying party with any relevant data and
documents in connection with any Third-Party Claim shall not
constitute a defense (in part or in whole) to any claim for
indemnification by such party, except and only to the extent that
such failure shall result in any material prejudice to the
indemnifying party. If so desired by any indemnifying party,
such party may elect, at such party's sole expense, to assume
control of the defense, settlement, adjustment or compromise of
any Third-Party Claim, with counsel reasonably acceptable to the
indemnified parties, insofar as such claim relates to the
liability of the indemnifying party, provided that such
indemnifying party shall obtain the consent of all indemnified
parties before entering into any settlement, adjustment or
compromise of such claims, or ceasing to defend against such
claims, if as a result thereof, or pursuant thereto, there would
be imposed on an indemnified party any material liability or
obligation not covered by the indemnity obligations of the
indemnifying parties under this Agreement (including, without
limitation, any injunctive relief or other remedy). In
-43-
connection with any Third-Party Claim, the indemnified party, or
the indemnifying party if it has assumed the defense of such
claim pursuant to the preceding sentence, shall diligently pursue
the defense of such Third-Party Claim.
12.4 Survival. All representations and warranties, and,
except as otherwise provided in this Agreement, all covenants and
agreements of the parties contained in or made pursuant to this
Agreement, and the rights of the parties to seek indemnification
with respect thereto, shall survive for a period equal to the
later of (i) two years from the Closing Date or (ii) the date
upon which the Share Balance is zero; provided, however, the
representations and warranties contained in Section 6.3 and
Section 7.11 shall survive until the expiration of the applicable
statute of limitations with respect to the matters covered
thereby. No claim shall be made after the applicable survival
period.
12.5 Exclusive Provisions: No Rescission. Except as set
forth in this Agreement, no party hereto is making any
representation, warranty, covenant or agreement with respect to
the matters contained herein. Anything herein to the contrary
notwithstanding, no breach of any representation, warranty,
covenant or agreement contained herein or in any certificate or
other document delivered pursuant hereto relating to the Merger
shall give rise to any right on the part of any party hereto,
after the consummation of the Merger, to rescind this Agreement
or the transactions contemplated by this Agreement. Following
the consummation of the Merger, the rights of the parties under
the provisions of this Article 12 shall be the sole and exclusive
remedy available to the parties with respect to claims,
assertions, events or proceedings arising out of or relating to
the Merger.
ARTICLE 13
MISCELLANEOUS
13.1 Press Releases and Public Announcements. No Party
shall issue any press release or make any public announcement
relating to the subject matter of this Agreement prior to the
Closing without the prior written approval of the Company and the
Representative; provided, however, that any Party may make any
public disclosure it believes in good faith is required by
applicable law or any listing or trading agreement concerning its
publicly-traded securities (in which case the disclosing Party
will use its best efforts to advise the other Parties prior to
making the disclosure).
13.2 No Third Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the
Parties and their respective successors and permitted assigns.
13.3 Entire Agreement. This Agreement (including the
documents referred to herein) constitutes the entire agreement
among the Parties and supersedes any prior understandings,
agreements, or representations by or among the Parties, written
or oral, to the extent they related in any way to the subject
matter hereof.
-44-
13.4 Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the Parties named herein
and their respective successors and permitted assigns. No Party
may assign either this Agreement or any of his rights, interests,
or obligations hereunder without the prior written approval of
the Company and the Representative; provided, however, that the
Company may (i) assign any or all of its rights and interests
hereunder to one or more of its Affiliates and (ii) designate one
or more of its Affiliates to perform its obligations hereunder
(in any or all of which cases the Company nonetheless shall
remain responsible for the performance of all of its obligations
hereunder).
13.5 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but
all of which together will constitute one and the same
instrument.
13.6 Headings. The section headings contained in this
Agreement are inserted for convenience only and shall not affect
in any way the meaning or interpretation of this Agreement.
13.7 Notices. All notices, requests, demands, claims, and
other communications hereunder will be in writing. Any notice,
request, demand, claim, or other communication hereunder shall be
deemed duly given if (and then two business days after) it is
sent by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the intended recipient as set
forth below:
If to the Adviser or the Stockholder:
c/o H. Kerr Taylor
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Telecopy: (713) 850-0498
If to the Company and AAA Acquisition:
H. Kerr Taylor, President
American Asset Advisers Trust, Inc.
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Telecopy: (713) 850-0498
Any Party may send any notice, request, demand, claim, or
other communication hereunder to the intended recipient at the
address set forth above using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex,
ordinary mail, or electronic mail), but no such notice, request,
demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the
intended recipient. Any Party may change the address to which
-45-
notices, requests, demands, claims, and other communications
hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
13.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF
TEXAS WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW
PROVISION OR RULE (WHETHER OF THE STATE OF TEXAS OR ANY OTHER
JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF TEXAS.
13.9 Amendments and Waivers. No amendment of any provision
of this Agreement shall be valid unless the same shall be in
writing and signed by the Company and the Representative. No
waiver by any Party of any default, misrepresentation, or breach
of warranty or covenant hereunder, whether intentional or not,
shall be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
13.10 Severability. Any term or provision of this
Agreement that is invalid or unenforceable in any situation in
any jurisdiction shall not affect the validity or enforceability
of the remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
13.11 Expenses. The Company will bear all costs and
expenses (including legal fees and expenses) incurred by the
Company, the Adviser and the Stockholder in connection with this
Agreement and the transactions contemplated hereby.
13.12 Construction. The Parties have participated
jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly
by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of
any of the provisions of this Agreement. Any reference to any
federal, state, local, or foreign statute or law shall be deemed
also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word
"including" shall mean including without limitation. The Parties
intend that each representation, warranty, and covenant contained
herein shall have independent significance. If any Party has
breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity)
which the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first
representation, warranty, or covenant.
13.13 Incorporation of Exhibits and Schedules. The
Exhibits and Schedules identified in this Agreement are
incorporated herein by reference and made a part hereof.
-46-
13.14 Specific Performance. Each of the Parties
acknowledges and agrees that the other Parties would be damaged
irreparably in the event any of the provisions of this Agreement
are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees
that the other Parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court
of the United States or any state thereof having jurisdiction
over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to
which they may be entitled, at law or in equity.
13.15 Submission to Jurisdiction. Each of the Parties
submits to the jurisdiction of any state or federal court sitting
in the State of Texas, in any action or proceeding arising out of
or relating to this Agreement and agrees that all claims in
respect of the action or proceeding may be heard and determined
in any such court.
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written.
The Company
AMERICAN ASSET ADVISERS TRUST, INC.
/s/
By: H. KERR TAYLOR
Its: President
AAA ACQUISITION CORP.
By: /s/
Its: Chief Executive Officer
ADVISER
AMERICAN ASSET ADVISERS REALTY CORPORATION
By: /s/
Its: Chief Executive Officer
STOCKHOLDER:
/s/
H. KERR TAYLOR
-47-
EXHIBIT A
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is dated as of _________, 1998, by
and between AMERICAN ASSET ADVISERS TRUST, INC., a Maryland
corporation (hereinafter referred to as the "Company"), and H.
Kerr Taylor (hereinafter referred to as the "Executive") in
connection with the acquisition by the Company from the Executive
of American Asset Advisers Realty Corp. (the "Merger") pursuant
to that certain Agreement and Plan of Merger dated ___________,
1998 (the "Merger Agreement").
1. Term. The Company hereby employs the Executive, and the
Executive hereby accepts such employment for an initial term
commencing as of the date hereof and ending on ___________, 2000,
unless sooner terminated in accordance with the provisions of Section 4
or Section 5 (the period during which the Executive is employed hereunder
being hereinafter referred to as the "Term"). The Term shall be subject
to successive automatic one-year renewals unless either party hereto notifies
the other, in accordance with Section 7.5, of non-renewal at least 90 days
prior to the end of any such Term.
2. Duties. The Executive, in his capacity as Chairman of the
Board and President shall faithfully perform for the Company the duties of
said office and shall perform such other duties of an executive,
managerial or administrative nature as shall be specified and
designated from time to time by the Board of Directors of the
Company (the "Board") (including the performance of services for,
and serving on the Board of Directors of, any subsidiary of the
Company without any additional compensation). It is expressly
understood that the Executive shall devote substantially all (90% or
more) of the Executive's business time and effort to the performance of
the Executive's duties hereunder and he shall be required to
devote such of his business time and effort as may be necessary
to the performance of his duties hereunder, provided that in no
event shall this sentence prohibit the Executive from performing
personal and charitable activities and such other activities as may be
approved by the Board.
3. Compensation
3.1 Base Salary. The Company shall pay the Executive
during the initial two twelve-month periods of the Term a Base
Salary at the rate of $25,000 and $30,000, respectively, per annum,
payable upon the commencement of each twelve-month period. Upon the
end of each such twelve-month period, the Base Salary for such period shall
be increased by, and the Executive shall be promptly paid, an
amount, if any, equal to $150,000, less the aggregate dividends
paid by the Company during such annual period on the shares
of the Share Consideration (as defined in the Merger Agreement)
issued to Executive before or during such annual period by reason
of the Merger, whether or not such dividends were paid to the Executive
or a subsequent holder of such shares.
3.2 Bonus. The Board shall, at least annually, consider
awarding the Executive bonus and/or incentive compensation in the
form of cash, options or stock grants in amounts commensurate
with such awards by other real estate investment trusts investing in
net-leased retail and/or commercial real estate to their chief executive
officers with a base compensation level of $150,000, or if higher,
the Executive's then Base Salary (a "Bonus Award"). The
Executive will be eligible, but shall not be entitled, to
participate in any cash or non-cash bonus program (a "Bonus
Plan"), which may from time to time be implemented by the
Company.
-1-
with such awards by comparable companies to their chief executive
officers with base compensation levels of $150,000, or if higher,
the Executive's then Base Salary (a "Bonus Award"). The
Executive will be eligible, but shall not be entitled, to
participate in any cash or non-cash bonus program (a "Bonus
Plan"), which may from time to time be implemented by the
Company.
3.3 Benefits - In General. The Executive shall be
permitted during the Term to participate in any group life,
hospitalization or disability insurance plans, health programs,
pension and profit sharing plans and similar benefits that may be
available to other senior executives of the Company generally, on
the same terms as may be applicable to such other executives, in
each case to the extent that the Executive is eligible under the
terms of such plans or programs.
3.4 Disability Benefits and Life Insurance. The Executive
shall be entitled to long-term disability coverage providing
benefits (to continue for such period as is provided in the
applicable disability plan or program, as amended from time to
time) equal to the greater of $100,000, or two-thirds of Base
Salary in the case of a covered disability and life insurance
benefits with a face amount equal to the greater of $150,000, or
Base Salary.
3.5 Expenses. The Company shall pay or reimburse the
Executive for all ordinary and reasonable out-of-pocket expenses
actually incurred (and, in the case of reimbursement, paid) by
the Executive during the Term in the performance of the
Executive's services under this Agreement; provided that the
Executive submits such expenses in accordance with the policies
applicable to senior executives of the Company generally.
4. Termination upon Death or Disability. If the Executive dies
during the Term, the obligations of the Company to or with
respect to the Executive, under this Agreement, shall terminate
in their entirety except as otherwise provided under this Section
4. If the Executive becomes eligible for disability benefits
under the Company's long-term disability plans and arrangements
(or, if none apply, would have been so eligible under the most
recent plan or arrangement), the Company shall have the right, to
the extent permitted by law, to terminate the employment of the
Executive upon notice in writing to the Executive; provided that
the Company will have no right to terminate the Executive's
employment if, in the opinion of a qualified physician reasonably
acceptable to the Company, it is reasonably certain that the
Executive will be able to resume the Executive's duties on a
regular full-time basis within 90 days of the date the Executive
receives notice of such termination. Upon death or other
termination of employment by virtue of disability, (i) the
Executive (or the Executive's estate or beneficiaries in the case
of the death of the Executive) shall have no right to receive
any compensation or benefit hereunder on and after the effective
date of the termination of employment other than Base Salary and
other benefits (including any bonuses thereto for awarded or then
as provided in any Bonus Plan in which the Executive theretofore
has been designated for participation, or in clause (ii) below)
earned and accrued under this Agreement prior to the date of
termination (and reimbursement under this Agreement for expenses
incurred prior to the date of termination); (ii) the Executive
(or the Executive's estate or beneficiaries in the case of the
death of the Executive) shall be entitled to a cash payment equal
to the Executive's Base Salary (as in effect on the effective
date of such termination) payable no later than 30 days after
-2-
such termination; and (iii) this Agreement shall otherwise
terminate upon such death or other termination of employment and
there shall be no further rights with respect to the Executive
hereunder (except as provided in Section 7.15).
5. Certain Terminations of Employment
5.1 Termination for Cause; Termination of Employment by the
Executive Without Good Reason
(1) For purposes of this Agreement, "Cause" shall mean:
(1) the Executive's (A) conviction for (or
pleading nolo contendere to) any felony, or a
misdemeanor involving moral turpitude, or (B)
indictment for any felony or misdemeanor
involving moral turpitude, if such indictment
is not discharged or otherwise resolved
within 18 months;
(2) the Executive's commission of an act of
fraud, theft or dishonesty related to the
performance of the Executive's duties
hereunder;
(3) the willful and continuing failure or
habitual neglect by the Executive to perform
the Executive's duties hereunder;
(4) any material violation by the Executive of
the covenants contained in Section 6; or
(5) the Executive's willful and continuing
material breach of this Agreement.
Notwithstanding the foregoing, if there exists (without regard to
this sentence) an event or condition that constitutes Cause under
clause (iii) or (v) above, the Executive shall have 30 days from
the date such notice is given to cure such event or condition
and, if the Executive does so, such event or condition shall not
constitute Cause hereunder.
(2) For purposes of this Agreement, "Good Reason"
shall mean, unless otherwise consented to by the Executive:
(1) the material reduction of the Executive's
authority, duties and responsibilities, or
the assignment to the Executive of duties
materially inconsistent with the Executive's
position or positions with the Company and
its subsidiaries;
(2) a reduction in Base Salary of the Executive;
-3-
(3) upon the occurrence of an Event of
Acceleration as defined in Subsection 4.3(a)
or Subsection 4.3(b) of the Merger Agreement;
or
(4) the Company's material and willful breach of
this Agreement.
Notwithstanding the foregoing, if there exists (without regard to
this sentence) an event or condition that constitutes Good Reason
under clause (i), (ii) or (iv) above, the Company shall have 30
days from the date on which the Executive gives the notice
thereof to cure such event or condition and, if the Company does
so, such event or condition shall not constitute Good Reason
hereunder.
(3) The Company may terminate the Executive's
employment hereunder for Cause. If the Company terminates the
Executive for Cause, (i) the Executive shall have no right to
receive any compensation or benefit hereunder on and after the
effective date of the termination of employment other than Base
Salary and other benefits (but excluding any bonuses except as
provided in the Bonus Plan) earned and accrued under this
Agreement prior to the effective date of the termination of
employment (and reimbursement under this Agreement for expenses
incurred prior to the effective date of the termination of
employment); and (ii) this Agreement shall otherwise terminate
upon such termination of employment and the Executive shall have
no further rights hereunder (except as provided in Section 7.15).
(4) The Executive may terminate his employment without
Good Reason. If the Executive terminates the Executive's
employment with the Company without Good Reason: (i) the
Executive shall have no right to receive any compensation or
benefit hereunder on and after the effective date of the
termination of employment other than Base Salary and other
benefits (but excluding any bonuses except as provided in the
Bonus Plan) earned and accrued under this Agreement prior to the
effective date of the termination of employment (and
reimbursement under this Agreement for expenses incurred prior to
the effective date of the termination of employment); and (ii)
this Agreement shall otherwise terminate upon such termination of
employment and the Executive shall have no further rights
hereunder (except as provided in Section 7.15).
5.2 Termination Without Cause; Termination for Good Reason.
The Company may terminate the Executive's employment at any time
for any reason or no reason and the Executive may terminate the
Executive's employment with the Company for Good Reason. If the
Company or the Executive terminates the Executive's employment
and such termination is not described in Section 4 or Section
5.1, (i) the Executive shall have no right to receive any
compensation or benefit hereunder on and after the effective date
of the termination of employment other than Base Salary and other
benefits (but excluding any bonuses except as provided in a Bonus
Award or Bonus Plan previously awarded to the Executive and
clause (ii) below) earned and accrued under this Agreement prior
to the effective date of the termination of employment (and
reimbursement under this Agreement for expenses incurred prior to
the effective date of the termination of employment); (ii) the
Executive shall receive (A) a cash payment equal to one (1) times
the Executive's Base Salary (as in effect on the effective date
of such termination) payable no later than 30 days after such
-4-
termination and (B) for a period of one (1) year after
termination of employment such continuing health benefits
(including any medical, vision or dental benefits), under the
Company's health plans and programs applicable to senior
executives of the Company generally as the Executive would have
received under this Agreement (and at such costs to the
Executive) as would have applied in the absence of such
termination (but not taking into account any post-termination
increases in Base Salary that may otherwise have occurred without
regard to such termination and that may have favorably affected
such benefits) it being expressly understood and agreed that
nothing in this clause (ii)(B) shall restrict the ability of the
Company to amend or terminate such plans and programs from time
to time in its sole discretion; provided, however, that the
Company shall in no event be required to provide such coverage
after such time as the Executive becomes entitled to receive
health benefits from another employer or recipient of the
Executive's services (and provided, further, that such
entitlement shall be determined without regard to any individual
waivers or other arrangements); (iii) all outstanding unvested
options held by the Executive shall vest and such options shall
remain exercisable for ninety (90) days following termination
(or, if shorter, the balance of the regular term of the options);
and (iv) this Agreement shall otherwise terminate upon such
termination of employment and the Executive shall have no further
rights hereunder (except as provided in Section 7.15).
6. Covenants of the Executive
6.1 Covenant Against Competition; Other Covenants. The
Executive acknowledges that (i) the principal business of the
Company is the acquisition, development, ownership and management
of a diversified portfolio of commercial real estate (the
"Business"); (ii) the Company knows of a limited number of
persons who have developed the Company's Business; (iii) the
Company's Business is, in part, national in scope; (iv) the
Executive's work for the Company and its subsidiaries (and the
predecessors of either) has given and will continue to give the
Executive access to the confidential affairs and proprietary
information of the Company; (v) the covenants and agreements of
the Executive contained in this Section 6 are essential to the
business and goodwill of the Company; and (vi) the Company would
not have entered into this Agreement but for the covenants and
agreements set forth in this Section 6. In light of the
foregoing, during the Term and for a period of one year
thereafter (and, as to Section 6.1(b), at any time during and
after the Executive's employment with the Company and its
subsidiaries (and the predecessors of either)):
(1) The Executive shall not, without the consent of
the Board, directly or indirectly, own, manage, control or
participate in the ownership, management, or control of, or be
employed or engaged by or otherwise affiliated or associated as
an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director or in any other
individual or representative capacity, engage or participate in
any business, a material part of which is in direct competition
with the Business of the Company in any state in which the
Company conducts its Business. In the case of a termination by
the Company without Cause or by the Executive for Good Reason,
the preceding covenant shall expire on the date of termination;
provided, however, that, notwithstanding the foregoing, the
Executive may invest in securities of any entity, solely for
investment purposes and without participating in the business
thereof, if (i) such securities are traded on any national
-5-
securities exchange or the National Association of Securities
Dealers, Inc. Automated Quotation System, (ii) the Executive is
not a controlling person of, or a member of a group which controls,
such entity, and (iii) the Executive does not, directly or indirectly,
own one percent or more of any class of securities of such entity.
(2) The Executive shall keep secret and retain in
strictest confidence, and shall not use for his benefit or the
benefit of others, except in connection with the business and
affairs of the Company and its affiliates, all confidential
matters relating to the Company's Business and the business of
any of its affiliates and to the Company and any of its
affiliates, learned by the Executive heretofore or hereafter
directly or indirectly from the Company or any of its
subsidiaries (or any predecessor of either) (the "Confidential
Company Information"), including, without limitation, information
with respect to the Business and any aspect thereof, profit or
loss figures, and the Company's or its affiliates, (or any of
their predecessors) properties, and shall not disclose such
Confidential Company Information to anyone outside of the Company
except with the Company's express written consent and except for
Confidential Company Information which (i) at the time of receipt
or thereafter becomes publicly known through no wrongful act of
the Executive, (ii) is clearly obtainable in the public domain,
(iii) was not acquired by the Executive in connection with the
Executive's employment or affiliation with the Company, (iv) was
not acquired by the Executive from the Company or its representatives
or from a third-party who has an agreement with the Company not to
disclose such information, or (v) is required to be disclosed by rule
of law or by order of a court or governmental body or agency.
(3) The Executive shall not, without the consent of
the Board, directly or indirectly, (i) knowingly solicit or
encourage to leave the employment or other service of the Company
or any of its affiliates, any employee thereof or hire (on behalf
of the Executive or any other person or entity) any employee who
has left the employment or other service of the Company or any of
its affiliates (or any predecessor of either) within one year of
the termination of such employee's or independent contractor's
employment or other service with the Company and its affiliates,
or (ii) whether for the Executive's own account or for the
account of any other person, firm, corporation or other business
organization, intentionally interfere with the Company's or any
of its affiliates, relationship with, or endeavor to entice away
from the Company or any of its affiliates, any person who during
the Executive's employment with the Company and its affiliates
(or the predecessors of either) is or was a customer or client of
the Company or any of its affiliates (or any predecessor of
either).
6.2 Rights and Remedies upon Breach. The Executive
acknowledges and agrees that any breach by him of any of the
provisions of Section 6.1 (the "Restrictive Covenants") would
result in irreparable injury and damage for which money damages
would not provide an adequate remedy. Therefore, if the Executive
breaches, or threatens to commit a breach of, any of the
Restrictive Covenants, the Company and its affiliates shall have
the right and remedy to have the Restrictive Covenants
specifically enforced (without posting bond and without the need
to prove damages) by any court having equity jurisdiction,
-6-
including, without limitation, the right to an entry against the
Executive of restraining orders and injunctions (preliminary,
mandatory, temporary and permanent) against violations,
threatened or actual, and whether or not then continuing, of such
covenants. This right and remedy shall be in addition to, and
not in lieu of, any other rights and remedies available to the
Company and its affiliates under law or in equity (including,
without limitation, the recovery of damages). The existence of
any claim or cause of action by the Executive, whether predicated
on this Agreement or otherwise, shall not constitute a defense to
the enforcement of the Restrictive Covenants.
7. Other Provisions.
7.1 Severability. The Executive acknowledges and agrees
that (i) the Executive has had an opportunity to seek advice of
counsel in connection with this Agreement and (ii) the
Restrictive Covenants are reasonable in geographical and temporal
scope and in all other respects. If it is determined that any of
the provisions of this Agreement, including, without limitation,
any of the Restrictive Covenants, or any part thereof, is invalid
or unenforceable, the remainder of the provisions of this
Agreement shall not thereby be affected and shall be given full
affect, without regard to the invalid portions.
7.2 Duration and Scope of Covenants. If any court or other
decision maker of competent jurisdiction determines that any of
the Executive's covenants contained in this Agreement, including,
without limitation, any of the Restrictive Covenants, or any part
thereof, are unenforceable because of the duration or
geographical scope of such provision, then, after such
determination has become final and unappealable, the duration or
scope of such provision, as the case may be, shall be reduced so
that such provision becomes enforceable and, in its reduced form,
such provision shall then be enforceable and shall be enforced.
7.3 Enforceability; Jurisdictions. The Company and the
Executive intend to and hereby confer jurisdiction to enforce the
Restrictive Covenants upon the courts of any jurisdiction within
the geographical scope of the Restrictive Covenants. If the
courts of any one or more of such jurisdictions hold the
Restrictive Covenants wholly unenforceable by reason of breadth
of scope or otherwise it is the intention of the Company and the
Executive that such determination not bar or in any way affect
the Company's right, or the right of any of its affiliates, to
the relief provided above in the courts of any other jurisdiction
within the geographical scope of such Restrictive Covenants, as
to breaches of such Restrictive Covenants in such other
respective jurisdictions, such Restrictive Covenants as they
relate to each jurisdiction's being, for this purpose, severable,
diverse and independent covenants, subject, where appropriate, to
the doctrine of res judicata. Any controversy or claim arising
out of or relating to this Agreement or the breach of this
Agreement that is not resolved by the Executive and the Company
(or its affiliates, where applicable), other than those arising
under Section 6, to the extent necessary for the Company (or its
affiliates, where applicable) to avail itself of the rights and
remedies provided under Section 6.2, shall be initiated and
contested in Houston, Texas.
-7-
7.4 Attorneys' Fees. In the event of any legal proceeding
(including an arbitration proceeding) relating to this Agreement
or any term or provision thereof, the losing party shall be
responsible to pay or reimburse the prevailing party for all
reasonable attorneys' fees incurred by the prevailing party in
connection with such proceeding.
7.5 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered
personally, telegraphed, telexed, sent by facsimile transmission
or sent by certified, registered or express mail, postage
prepaid. Any such notice shall be deemed given when so delivered
personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, five days after the date of deposit
in the United States mails as follows:
(1) If to the Company, to:
The Board of Directors
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
Attn:
Facsimile: (713) 850-0498
(2) If to the Executive, to:
H. Kerr Taylor
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
Any such person may by notice given in accordance with this
Section to the other parties hereto designate another address or
person for receipt by such person of notices hereunder.
7.6 Parachute Provisions. If any amount payable to or
other benefit receivable by the Executive pursuant to this
Agreement is deemed to constitute a Parachute Payment (as defined
below), alone or when added to any other amount payable or paid
to or other benefit receivable or received by the Executive which
is deemed to constitute a Parachute Payment (whether or not under
an existing plan, arrangement or other agreement), and would
result in the imposition on the Executive of an excise tax under
Section 4999 of the Internal Revenue Code of 1986, as amended,
then, in addition to any other benefits to which the Executive is
entitled under this Agreement, the Executive shall be paid by the
Company an amount in cash equal to the sum of the excise taxes
payable by the Executive by reason of receiving Parachute
Payments plus the amount necessary to put the Executive in the
same after-tax position (taking into account any and all
applicable federal, state and local excise, income or other taxes
at the highest applicable rates on such Parachute Payments and on
any payments under this Section 7.17) as if no excise taxes had
been imposed with respect to Parachute Payments. The amount of
any payment under this Section 7.17 shall be computed by a
certified public accounting firm mutually and reasonably
acceptable to the Executive and the Company, the computation
expenses of which shall be paid by the Company. "Parachute
Payment" shall mean any payment deemed to constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code
of 1986, as amended.
-8-
7.7 Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the employment of
the Executive by the Company and supersedes all prior agreements,
written or oral, with the Company or its subsidiaries (or any
predecessor of either); provided, however, that this Agreement
shall in no respect alter, modify or supercede the rights and
obligations of the respective parties under the Merger Agreement.
7.8 Waivers and Amendments. This Agreement may be amended,
superseded, canceled, renewed or extended, and the terms hereof
may be waived, only by a written instrument signed by the parties
or, in the case of a waiver, by the party waiving compliance. No
delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any such right, power or
privilege nor any single or partial exercise of any such right,
power or privilege, preclude any other or further exercise
thereof or the exercise of any other such right, power or
privilege.
7.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of Texas
without regard to principles of conflicts of law.
7.10 Assignment. This Agreement, and the Executive's rights
and obligations hereunder, may not be assigned by the Executive;
any purported assignment by the Executive in violation hereof
shall be null and void. In the event of any sale, transfer or
other disposition of all or substantially all of the Company's
assets or business, whether by merger, consolidation or
otherwise, the Company may assign this Agreement and its rights
hereunder.
7.11 Withholding. The Company shall be entitled to withhold
from any payments or deemed payments any amount of withholding
required by law. No other taxes, fees, impositions, duties or
other charges or offsets of any kind shall be deducted or
withheld from amounts payable hereunder, unless otherwise
required by law.
7.12 No Duty to Mitigate. The Executive shall not be
required to mitigate damages or the amount of any payment
provided for under this Agreement by seeking other employment or
otherwise, nor will any payments hereunder be subject to offset
in the event the Executive does mitigate.
7.13 Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective
successors, permitted assigns, heirs, executors and legal
representatives.
7.14 Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original but all such
counterparts together shall constitute one and the same
instrument. Each counterpart may consist of two copies hereof
each signed by one of the parties hereto.
-9-
7.15 Survival. Anything contained in this Agreement to the
contrary notwithstanding, the provisions of Sections 6, 7.3, 7.4
and 7.10 and the other provisions of this Section 7 (to the
extent necessary to effectuate the survival of Sections 6, 7.3,
7.4 and 7.10) shall survive termination of this Agreement and any
termination of the Executive's employment hereunder.
7.16 Existing Agreements. Executive represents to the
Company that the Executive is not subject or a party to any
employment or consulting agreement, non-competition covenant or
other agreement, covenant or understanding which might prohibit
the Executive from executing this Agreement or limit the
Executive's ability to fulfill the Executive's responsibilities
hereunder.
7.17 Headings. The headings in this Agreement are for
reference only and shall not affect the interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have signed their
names as of the day and year first above written.
"COMPANY"
AMERICAN ASSET ADVISERS TRUST, INC.
/s/
By:
"EXECUTIVE"
/s/
H. Kerr Taylor
-10-
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is
dated as of __________, 1998, by and among AMERICAN ASSET ADVISERS
TRUST, INC., a Maryland corporation (the "REIT"), and H. KERR
TAYLOR (the "Stockholder").
PREFACE
1. Pursuant to an Agreement and Plan of Merger among the
REIT, AAA Acquisition Corp., a Texas corporation and wholly-owned
subsidiary of the REIT ("AAA Acquisition"), American Asset
Advisers Realty Corporation, a Texas corporation (the Adviser"),
and the Stockholder, dated as of ____________, 1998 (the "Merger
Agreement"), the Stockholder received up to 900,000 shares of the
REIT's common stock, $.01 par value (the "REIT Common Shares"),
in exchange for 100% of the outstanding shares of capital stock
of the Adviser;
2. The Stockholder has been granted certain registration
rights with respect to the REIT Common Shares the Stockholder
received in consideration for the merger of the Adviser into and
with AAA Acquisition (the "Merger") under the terms of the Merger
Agreement; and
3. The REIT and the Stockholder desire to set forth the
rights and obligations of the parties with respect to such
registration rights.
AGREEMENT
In consideration of the foregoing premises and the mutual
covenants and agreements herein contained and other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
1. Certain Definitions
As used in this Agreement, the following terms shall
have the following meanings:
"Demand Registration Request" shall have the meaning
set forth in Section 4.1 hereof.
"Demand Registration Rights" shall mean the rights of
the Holders to have a Registration Statement filed by the REIT
with respect to the Registrable Securities held by the Holders in
accordance with the provisions of Section 4 hereof.
"Demanding Holders" shall have the meaning set forth in
Section 4.1 hereof.
"Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
"Filing Notice" shall have the meaning set forth in
Section 3.1 hereof.
"Holders" shall mean the Stockholder and/or any
Permitted Transferee, but only if the Stockholder has granted
rights under this Agreement to such Permitted Transferee; and
"Holder" shall mean any one of them.
"Merger" shall have the meaning set forth in Paragraph
1 of the Preface.
"Permitted Transferee" shall have the meaning set forth
in Section 2 hereof.
-1-
"Piggyback Registration Rights" shall mean the rights
of the Holders, in accordance with the provisions of Section 3
hereof, to have their Registrable Securities included in any
Registration Statement filed by the REIT with respect to the sale
of REIT Common Shares or filed by any other shareholders of the
REIT.
"Prospectus" means the prospectus included in any
Registration Statement, as amended or supplemented by any
prospectus supplement with respect to the terms of the offering
of any of the Registrable Securities covered by such Registration
Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material
incorporated by reference in such prospectus.
"Registrable Securities" means the REIT Common Shares
issued by, or to be issued by, the REIT to the Stockholder in
connection with the Merger and shall include all shares of REIT
Common Shares received by the Holders pursuant to a stock split,
stock dividend or other recapitalization of the REIT. For the
purposes of this Agreement, such shares of REIT Common Shares
shall cease to be Registrable Securities on the Rule 144
Eligibility Date or, if earlier, on such date on which (a) a
Registration Statement covering such shares has been declared
effective and such shares have been disposed of pursuant to such
effective Registration Statement, or (b) all of the Registrable
Securities are eligible for sale (other than pursuant to Rule 904
of the Securities Act), in the opinion of counsel to the REIT, in
a single or multiple transactions exempt from the registration
and prospectus delivery requirements of the Securities Act, so
that all transfer restrictions with respect to such shares and
all restrictive legends with respect to the certificates
evidencing such shares are or may be removed upon the
consummation of such sale.
"Registration Period" shall mean the period commencing
on the date the Merger is effective and ending at the earlier of
(i) such time as no Holder owns any Registrable Securities or
(ii) the Rule 144 Eligibility Date.
"Registration Statement" means any registration
statement filed by the REIT under the Securities Act that covers
any of the Registrable Securities, including the Prospectus, any
amendments and supplements to such registration statement,
including post-effective amendments, and all exhibits thereto and
all material incorporated by reference in such registration
statement.
"REIT" shall mean AMERICAN ASSET ADVISERS TRUST, INC.,
a Maryland corporation.
-2-
"REIT Common Shares" shall have the meaning set forth
in Paragraph 1 of the Preface.
"Rule 144 Eligibility Date" means the date on which all
shares of REIT Common Shares issued by the REIT to the
Stockholder in the Merger and the other shares of REIT Common
Shares defined as Registrable Securities herein may be sold under
Rule 144 of the Securities Act by each holder within three months
of such date within the volume limitations of Rule 144(e).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933,
as amended.
"Selling Holder Information" shall mean information
either furnished in writing by or on behalf of a Selling Holder
for use in the Registration Statement or Prospectus.
"Selling Holders" when used with respect to a
Registration Statement, shall mean those Holders whose
Registrable Securities are included in a Registration Statement
pursuant to an exercise by such Holders of their Piggyback
Registration Rights or their Demand Registration Rights.
"Stockholder" shall mean H. Kerr Taylor.
"Underwriter(s)" shall mean any one or more investment
banking or brokerage firms to or through whom the Holders or the
REIT, as the case may be, may offer and sell Registrable
Securities pursuant to a transaction requiring the filing of a
Registration Statement under the Securities Act, including one or
more of such firms who shall manage such public offering through
such Underwriters and that are referred to herein as "Managing
Underwriter(s)."
2. Permitted Transferees
The Stockholder may transfer any of the Registrable
Securities held by him, (i) to the spouse, siblings or issue or
spouses of siblings or issue of the Stockholder; (ii) to a trust
or custodial account for the sole benefit of the Stockholder
and/or his spouse, siblings or issue or spouses of siblings or
issue of the Stockholder, (iii) to a partnership, limited
liability company or other entity, the majority and controlling
equity owners of which are the Stockholder or his spouse,
siblings or issue or spouses of siblings or issue of the
Stockholder or any trust referred to in clause (ii) above; (iv)
to the personal representative of the Stockholder upon his death
for the purposes of administration of the Stockholder's estate or
upon his incompetency for the purposes of the protection and
management of the Stockholder's assets, but such personal
representative may not transfer such Registrable Securities other
than as permitted under this Agreement; (v) to a charitable
foundation (subject to receipt by the Stockholder of written
approval from the REIT, such approval not to be unreasonably
withheld); or (vi) to the REIT (a "Permitted Transferee").
-3-
3. Piggyback Registration Rights
3.1 If the REIT proposes to file a registration
statement under the Securities Act with respect to any proposed
public offering by the REIT or by any holders of any class of
securities of the REIT (i) prior to the Registration Period, and
the REIT reasonably expects such registration statement to be
declared effective during the Registration Period, or (ii) during
the Registration Period, the REIT shall, not later than 30 days
prior to the proposed date of filing of such registration
statement with the SEC under the Securities Act, give written
notice (a "Filing Notice") of the proposed filing to each Holder,
which notice shall describe in detail the proposed registration
and distribution (including those jurisdictions where
registration under the securities or blue sky laws is intended).
During the Registration Period, each Holder has the right to
elect ("Piggyback Registration Rights"), by written notice to the
REIT (which notice shall specify the aggregate number of
Registrable Securities proposed to be offered and sold by such
Holder pursuant to such Registration Statement, the identity of
the proposed seller thereof, and a general description of the
manner in which such person intends to offer and sell such
Registrable Securities) given within 15 days after receipt of the
Filing Notice from the REIT, to have any or all of the
Registrable Securities owned by such Holder included in such
Registration Statement, and the REIT shall include such
Registrable Securities in such Registration Statement. If the
Managing Underwriter(s) or Underwriters (in the case of an
underwritten registration) or the REIT (in the case of a
nonunderwritten registration covering a primary offering by the
REIT) should reasonably object to the exercise of the Piggyback
Registration Rights with respect to such Registration Statement,
then in the discretion of the REIT, either:
(1) the Registrable Securities of the Selling
Holders shall nevertheless be included in such
Registration Statement subject to the condition
that the Selling Holders may not offer or sell
their Registrable Securities included therein for
a period of up to 90 days after the initial
effective date of such Registration Statement,
whereupon the REIT shall be obligated to file one
or more post-effective amendments to such
Registration Statement to permit the lawful offer
and sale of such Registrable Securities for a
reasonable period thereafter beginning at the end
of such lock-up period and continuing for such
period, not exceeding 120 days, as may be
necessary for the Selling Holders, Underwriters
and selling agents to dispose of such Registrable
Securities; or
(2) if the Managing Underwriter(s) (in the case
of an underwritten registration) or the REIT (in
the case of a nonunderwritten registration
covering a primary offering by the REIT) should
reasonably determine that the inclusion of such
Registrable Securities, notwithstanding the
provisions of the preceding clause (i), would
materially adversely affect the offering
contemplated in such Registration Statement, and
based on such determination recommends inclusion
in such Registration Statement of fewer or none of
the Registrable Securities of the Holders, then
-4-
(x) if the Managing Underwriter(s) or the REIT, as
applicable, recommends the inclusion of fewer
Registrable Securities, the number of Registrable
Securities of the Holders included in such
Registration Statement shall be reduced pro-rata
among such Holders (based upon the number of
Registrable Securities requested to be included in
the registration), or (y) if the Managing
Underwriter(s) or the REIT, as applicable,
recommends the inclusion of none of such
Registrable Securities, none of the Registrable
Securities of the Holders shall be included in
such Registration Statement
3.2 Unless otherwise required by law, rule or
regulation, if Registrable Securities owned by Holders who have
made the election provided in Section 3.1 are included in such
Registration Statement, the REIT shall bear and pay all fees,
costs, and expenses incident to such inclusion, including,
without limitation, registration fees, exchange listing fees and
expenses, legal fees of REIT counsel (including blue sky
counsel), printing costs and costs of any special audits or
accounting fees. Each Selling Holder shall pay all underwriting
discounts and commissions with respect to its Registrable
Securities included in the Registration Statement, as well as
fees or disbursements of counsel, accountants or other advisors
for the Selling Holder and all internal overhead and other
expenses of the Selling Holder.
3.3 The rights of the Holders under this Section 3 are
solely piggyback in nature, and nothing in this Section 3 shall
prevent the REIT from reversing a decision to file a Registration
Statement or from withdrawing any such Registration Statement
before it has become effective.
3.4 The Holders shall have the right, at any time
during the Registration Period, to exercise their Piggyback
Registration Rights pursuant to the provisions of this Section 3
on any number of occasions that the REIT shall determine to file
a registration statement.
3.5 The Piggyback Registration Rights granted pursuant
to this Section 3 shall not apply to (a) a registration relating
solely to employee stock option, purchase or other employee
plans, (b) a registration related solely to a dividend
reinvestment plan or (c) a registration on Form S-4 or Form S-8
or any successor Forms thereto.
3.6 In the event that there is a reduction in the
number of Registrable Securities to be included in a registration
statement to which Holders have exercised Piggyback Registration
Rights, the REIT shall so advise all Holders participating that
the number of securities of Registrable Securities that may be
included in the registration shall be reduced pro rata among such
Holders (based on the number of Registrable Securities requested
to be included in the registration); provided, however, that the
percentage of the reduction of such Registrable Securities shall
be no greater than the percentage reduction of securities of
other selling securityholders who also have exercised piggyback
registration rights pursuant to agreements other than this
Agreement, as such percentage reductions shall be determined in
the good faith judgment of the REIT based on the advice of the
managing underwriter of the offering. If Holders have exercised
Piggyback Registration Rights with respect to a registration
statement which is being filed as a result of the exercise of
-5-
demand registration rights by other securityholders, the
securityholders exercising their demand registration rights shall
have the right, in the event of any reduction of securities
covered by such registration statement, to have all of their
registrable securities included in such registration statement
before inclusion of any Registrable Securities of Holders
exercising their Piggyback Registration Rights.
4. Demand Registration Rights
4.1 In addition to, and not in lieu of, the Piggyback
Registration Rights set forth under Section 3, at any time after
the effective date of the Merger and during the Registration
Period, Holders may deliver to the REIT a written request (a
"Demand Registration Request") that the REIT register any or all
of the Registrable Securities owned by such Demanding Holders (as
hereinafter defined) (provided that the aggregate offering price
of all such Registrable Securities actually included in the
Demand Registration equals $5 million or more) and any other
Holders that may elect to be included pursuant to Section 4.2
hereof under the Securities Act and the state securities or blue
sky laws of any jurisdiction designated by such Selling Holders
(subject to Section 9), subject to the provisions of this Section
4. The requisite Holders making such demand are sometimes
referred to herein as the "Demanding Holders." The REIT shall,
as soon as practicable following the Demand Registration Request,
prepare and file a Registration Statement (on the then
appropriate form or, if more than one form is available, on the
appropriate form selected by the REIT) with the SEC under the
Securities Act, covering such number of the Registrable
Securities as the Selling Holders request to be included in such
Registration Statement and to take all necessary steps to have
such Registrable Securities qualified for sale under state
securities or blue sky laws. The REIT shall use its best efforts
to file such Registration Statement no later than 30 days
following the Demand Registration Request. Further, the REIT
shall use its best efforts to have such Registration Statement
declared effective by the SEC (within the meaning of the
Securities Act) as soon as practicable thereafter and shall take
all necessary action (including, if required, the filing of any
supplements or post-effective amendments to such Registration
Statement) to keep such Registration Statement effective to
permit the lawful sale of such Registrable Securities included
thereunder for the period set forth in Section 6 hereof, subject,
however, to the further terms and conditions set forth in
Sections 4.3, 4.4, 4.5, 4.6, and 4.7 hereof.
4.2 No later than 10 days after the receipt of the
Demand Registration Request, the REIT shall notify all Holders
who have not joined in such request of the proposed filing, and
such Holders may, if they desire to sell any Registrable
Securities owned by them, by notice in writing to the REIT given
within 15 days after receipt of such notice from the REIT, elect
to have all or any portion of their Registrable Securities
included in the Registration Statement.
4.3 The Holders, in the aggregate, may only exercise
the Demand Registration Rights granted pursuant to this Section 4
two times. The REIT shall only be required to file one
Registration Statement (as distinguished from supplements or
pre-effective or post-effective amendments thereto) in response
to the exercise by the Demanding Holders of their Demand
Registration Rights pursuant to the provisions of this Section 4.
-6-
4.4 In the event that preparation of a Registration
Statement is commenced by the REIT in response to the exercise by
the Demanding Holders of the Demand Registration Right, but such
Registration Statement is not filed with the SEC, either at the
request of the REIT or at the request of the Demanding Holders,
for any reason, the Demanding Holders shall not be deemed to have
exercised a Demand Registration Right pursuant to this Section 4,
except that, if such Registration Statement is not filed after
the commencement of preparation thereof at the request of the
Demanding Holders, then the Selling Holders whose Registrable
Securities were proposed to be included therein shall be required
to bear the fees, expenses and costs incurred in connection with
the preparation thereof.
4.5 In the event that any Registration Statement filed
by the REIT with the SEC pursuant to the provisions of this
Section 4 is withdrawn prior to the completion of the sale or
other disposition of the Registrable Securities included
thereunder, then the following provisions, whichever applicable,
shall govern:
(1) If such withdrawal is effected at the request
of the REIT for any reason other than the failure
of all the Selling Holders to comply with their
obligations hereunder with respect to such
registration, then the filing thereof by the REIT
shall be excluded in determining whether the
Holders have exercised their Demand Registration
Rights hereunder with respect to the filing of
such Registration Statement.
(2) If such withdrawal is effected at the request
of the Selling Holders, then the filing thereof by
the REIT shall be deemed an exercise of a Demand
Registration Right with respect to the filing of
such Registration Statement.
4.6 The REIT shall bear and pay all fees, costs and
expenses incident to such Registration Statement and incident to
keeping it effective and in compliance with all federal and state
securities laws, rules, and regulations for the period set forth
in Section 6 hereof (including, without limitation, registration
fees, blue sky qualification fees, exchange listing fees and
expenses, legal fees of REIT counsel (including blue sky
counsel), printing costs, costs of any special audits and
accounting fees). Each Selling Holder shall pay fees or
disbursements of counsel, accountants or other advisers for the
Selling Holder and any underwriting discounts and commissions
with respect to its Registrable Securities and any internal,
overhead and other expenses of the Selling Holders.
4.7 Whenever a decision or election is required to be
made hereunder by the Demanding Holders or the Selling Holders,
such decision or election shall be made by a vote of holders of a
majority of the Registrable Securities owned by such Demanding
Holders or Selling Holders, as the case may be; provided,
however, any decision to withdraw a Demand Notice shall be made
unanimously by the Demanding Holders.
-7-
4.8 In the event that there is a limitation on the
number of securities which may be covered by such Registration
Statement, the Selling Holders shall have the right with respect
to any such Registration Statement filed as a result of their
Demand Registration Request to include their Registrable
Securities prior to the inclusion of any other securityholder
exercising piggyback registration rights.
4.9 The Selling Holders shall have the right, with
respect to any Registration Statement to be filed as a result of
a Demand Registration Request, to determine whether such
registration shall be underwritten or not and to select any such
underwriter, provided such underwriter is satisfactory to the
REIT, which consent will not be unreasonably withheld.
5. Information to be Furnished
In the event any of the Registrable Securities are to
be included in a Registration Statement under Section 3 or 4, the
Selling Holders and the REIT shall furnish the following
information and documents:
5.1 The Selling Holders will furnish to the REIT all
information required by the Securities Act to be furnished by
sellers of securities for inclusion in the Registration
Statement, together with all such other information which the
Selling Holders have or can reasonably obtain and which may
reasonably be required by the REIT in order to have such
Registration Statement become effective and such Registrable
Securities qualified for sale under applicable state securities
laws.
5.2 The REIT, before filing a Registration Statement,
amendment or supplement thereto, will furnish copies of such
documents to legal counsel selected by the Selling Holders. In
addition, the REIT will make available for inspection by any
Selling Holder or by any Underwriter, attorney or other agent of
any Selling Holder or Underwriter all information reasonably
requested by such persons. All nonpublicly available information
provided to any Selling Holder, Underwriter or any attorney or
agent of any Selling Holder or Underwriter shall be kept strictly
confidential by such Selling Holder, Underwriter or attorney or
agent of such Selling Holder or Underwriter so long as such
information remains nonpublic.
5.3 The REIT will promptly notify each Selling Holder
of the occurrence of any event which renders any Prospectus then
being circulated among prospective purchasers misleading because
such Prospectus contains an untrue statement of a material fact
or omits to state a material fact necessary to make the
statements made, in light of the circumstances in which they were
made, not misleading, and the REIT will amend the Prospectus so
that it does not contain any material misstatements or omissions
and deliver the number of copies of such amendments to each
Selling Holder as each Selling Holder may require.
6. Registration to Be Kept Effective
-8-
In connection with any registration of Registrable
Securities pursuant to this Agreement, the REIT shall, at its
expense, keep effective and maintain such registration and any
related qualification of Registrable Securities under state
securities laws for such period not exceeding 120 days as may be
necessary for the Selling Holders, Underwriters and selling
agents to dispose of such Registrable Securities, from time to
time to amend or supplement the Prospectus used in connection
therewith to the extent necessary to comply with applicable laws,
and to furnish to such Selling Holders such number of copies of
the Registration Statement, the Prospectus constituting a part
thereof, and any amendment or supplement thereto as such Selling
Holders may reasonably request in order to facilitate the
disposition of the registered Registrable Securities.
7. Conditions to REIT's Obligations
The obligations of the REIT to cause the Registrable
Securities owned by the Holders to be registered under the Act
are subject to each of the following limitations, conditions and
qualifications:
(1) The REIT shall be entitled to postpone for a
reasonable period of time up to three (3) months the
filing of any Registration Statement otherwise required
to be prepared and filed by it pursuant to Section 4
hereof, if the REIT determines, in its reasonable
judgment, that such registration and offering would
materially interfere with any financing, acquisition,
corporate reorganization or other material transaction
involving the REIT, and the REIT promptly gives the
Holders written notice including an explanation of such
determination. If the REIT shall so postpone the
filing of a Registration Statement, the Selling Holders
shall have the right to withdraw the Demand
Registration Request by giving written notice to the
REIT within 30 days after receipt of the notice of
postponement (and, in the event of such withdrawal,
such Demand Registration Request shall not be counted
for purposes of the Demand Registration Requests to
which the Holders are entitled pursuant to Section 4
hereof).
(2) The REIT shall not be required to file any
Registration Statement pursuant to this Agreement in
connection with a Demand Registration Request made less
than 90 days after the effective date of any
Registration Statement filed by the REIT (other than
registration statements filed on Form S-4, Form S-8, or
any successor forms thereto) if (i) the Managing
Underwriter(s) associated with such prior Registration
Statement reasonably objects to such Demand
Registration Request or has otherwise precluded the
REIT from filing a registration statement within such
90-day period and (ii) the Selling Holders filing such
Demand Registration Request were able to include in
such prior Registration Statement pursuant to their
Piggyback Registration Rights at least one-third of the
amount of the Registrable Securities that they had
notified the REIT they desired to have been included in
such prior Registration Statement.
-9-
(3) The REIT may require, as a condition to
fulfilling its obligations to register the Registrable
Securities under Sections 3 or 4 hereof, that the
Selling Holders execute reasonable and customary
indemnification agreements for the benefit of the
Underwriters of the registration; provided, however,
that a Selling Holder shall not be required to
indemnify the Underwriters except with respect to
Selling Holder information.
(4) The REIT shall not be required to fulfill any
registration obligations under this Agreement, if the
REIT provides the Holders with an opinion of counsel
reasonably acceptable to such Holders stating that the
Holders are free to sell in the manner proposed by them
the Registrable Securities that they desired to
register without registering such Registrable
Securities or such Registrable Securities can be sold
under Rule 144 of the Securities Act, or otherwise
without registration in the open market in compliance
with the Securities Act, without regard to volume
restrictions.
(5) The REIT shall not be obligated to file any
Registration Statement pursuant to this Agreement in
connection with a Demand Registration Request at any
time if the REIT would be required to include financial
statements audited as of any date other than the end of
its fiscal year, unless the Selling Holder(s) agree to
pay the cost of any such additional audit.
8. Exchange Listing
In the event any Registrable Securities are included in
a Registration Statement under Section 3 or 4 hereof, the REIT
will exercise reasonable efforts to cause all such Registrable
Securities to be listed on the New York Stock Exchange or any
other exchange(s) on which the REIT Common Shares are then
listed.
9. Registration Under State Securities Laws
The REIT shall use its best efforts to register or
qualify any Registrable Securities included in a Registration
Statement pursuant to Section 3 or 4 hereof under state "blue
sky" or similar securities laws in such jurisdictions as the
Selling Holders reasonably request and to take such other action
as may be reasonably necessary to enable the Selling Holders to
sell their shares of Registrable Securities in the jurisdictions
where such registration or qualification was made, provided that
the REIT will not be required to qualify to do business in any
jurisdiction in which it is not so qualified or to execute a
general consent to service of process in any jurisdiction in
which it has not executed such a consent.
10. Indemnification
-10-
10.1 The REIT will indemnify and hold each Selling
Holder, its partners, officers, directors and agents (including
sales agents and Underwriters) and each person, if any, who
controls (within the meaning of the Securities Act or the
Exchange Act) the Selling Holder or any of the foregoing,
harmless to the maximum extent permitted by law, from and against
any loss, claim, liability, damage or expense (including
attorneys' fees) resulting from a claim that any Registration
Statement, Prospectus or amendment thereof or supplement thereto,
which includes Registrable Securities to be sold by such Selling
Holder, contains a material misstatement or omission, unless such
claim is based upon Selling Holder Information or resulting from
the Selling Holder's failure to deliver a current Prospectus as
required under the Securities Act; and each such Selling Holder
will indemnify and hold harmless the REIT, its directors,
officers and agents and each person, if any, who controls (within
the meaning of the Securities Act or the Exchange Act) the REIT
against any loss, claim, liability, damage or expense (including
attorneys' fees) resulting from any such claim relating to
Selling Holder Information.
10.2 Promptly after receipt by an indemnified party
under this Section 10 of notice of the commencement of any
action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this
Section 10, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which
it may have to any indemnified party under this Section 10 or
otherwise to the extent such omission did not materially
prejudice the indemnifying party. In case any such action is
brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein, and to the extent
that it may elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there exists a
conflict of interest between the indemnifying party and any
indemnified party or that there may be legal defenses available
to it and/or other indemnified parties which are different from
or additional to, and inconsistent or in conflict with, those
available to the indemnifying party, the indemnified party or
parties shall have the right to select separate counsel to assert
such legal defenses and to otherwise participate in the defense
of such action on behalf of such indemnified party or parties.
Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party
under this Section 10 for any legal or other expenses
subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall
have employed separate counsel in accordance with the proviso to
the preceding sentence, (ii) the indemnifying party shall not
have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time
after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party;
and except that, if clause (i) or (iii) is applicable, such
liability shall be only in respect of the counsel referred to in
such clause (i) or (iii). No settlement of an action against any
party under this Section 10 shall bind the other party unless
such other party agrees in writing to the terms of such
settlement (which agreement will not be unreasonably withheld).
-11-
10.3 The obligation of the indemnifying party to
indemnify the indemnified party under this Section 10 shall, in
each case, be in addition to any liability which the indemnifying
party may otherwise have hereunder or otherwise at law or in
equity.
10.4 If the indemnification provided for in this
Section 10 from the indemnifying party is applicable in
accordance with its terms but for any reasons is held to be
unavailable to an indemnified party hereunder in respect of any
losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative faults of the indemnifying
party and indemnified party in connection with the actions which
resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations.
The relative faults of such indemnifying party and indemnified
party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates
to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set
forth in Section 10.1 and 10.2 hereof, any legal or other fees or
expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 10.4 were
determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable
considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall
be entitled to contribution from any person.
11. Rule 144
The REIT covenants that it shall file any reports
required to be filed by it under the Exchange Act and the rules
and regulations adopted by the SEC thereunder, and that it shall
take such further action as any Holder of Registrable Securities
may reasonably request, all to the extent required from time to
time to enable such holder to sell the Registrable Securities
without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such rule may be amended from time to time, or
(b) any similar rule or regulation adopted by the SEC. The REIT
shall, upon the request of any holder of Registrable Securities,
deliver to such Holder a written statement as to whether it has
complied with such requirements.
12. Miscellaneous
-12-
12.1 Amendments and Waivers. Subject to Section 12.2,
this Agreement may be modified or amended only by a writing
signed by the REIT and the Stockholder. No modification or
amendment to this Agreement shall require the consent of any
Permitted Transferee.
12.2 Third Party Beneficiaries. Any Permitted
Transferee shall be a third party beneficiary or intended
beneficiary to the agreement made hereunder by the Stockholder so
long as the Stockholder has granted rights under this Agreement
to the Permitted Transferee, and any such third party beneficiary
shall have the right to enforce such Agreement directly to the
extent it deems such enforcement necessary or advisable.
12.3 No Waiver. No failure to exercise and no delay in
exercising, on the REIT's or the Holders' part, of any right,
power or privilege hereunder shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.
12.4 Survival of Agreements. All agreements,
representations and warranties contained herein or made in
writing by or on behalf of the REIT in connection with the
transactions contemplated hereby shall survive the execution and
delivery of this Agreement.
12.5 Limitation of Registration Rights. Nothing
contained in this Agreement shall create any obligation on behalf
of the REIT to register under the Securities Act any securities
which are not shares of REIT Common Shares.
12.6 Binding Effect and Benefits. This Agreement shall
be binding upon and shall inure to the benefit of the REIT and
the Holders and their respective successors and assigns. Without
limiting the generality of the foregoing, each Holder's
registration rights granted hereunder shall be transferable to
and exercised by any Permitted Transferee of Registrable
Securities.
12.7 Entire Agreement. This Agreement constitutes the
full and entire understanding and agreement between the parties
with regard to the subjects hereof.
12.8 Separability of Provisions. In case any provision
of this Agreement shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby.
12.9 Notices. All notices, requests, consents and
other communications hereunder shall be in writing and shall be
by telecopy, facsimile transmission (confirmed by U.S. mail),
telegraph, hand delivery or mailed by certified or registered
mail postage prepaid, returned receipt requested, to the
addresses set forth below or to such other address as any party
may advise the other party in a written notice given in
accordance with this Section.
-13-
If to the REIT: American Asset Advisers Trust, Inc.
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
Telephone (713) 850-1400
If to the Holders: the respective addresses set
forth in the records of the REIT
Any notice or other communication so addressed and so mailed
shall be deemed to have been given when duly delivered or sent.
12.10 Construction. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas,
without giving effect to the conflict of laws provisions thereof.
The descriptive headings of the several sections and subsections
hereof are for convenience only and shall not control or affect
the meaning of construction of any of the provisions hereof.
12.11 Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed be an
original, but all of which together shall constitute a single
original instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
THE COMPANY:
AMERICAN ASSET ADVISERS TRUST, INC.
/s/
By:
Title:
THE SHAREHOLDER:
/s/
H. Kerr Taylor
-14-
EXHIBIT C
DISCLOSURE SCHEDULE
7.1 Organization, Qualification, and Corporate Power
7.2 Capitalization
7.3 Authorization of Transaction
7.4 Noncontravention
7.5 Title to Assets
7.6 Subsidiaries and Affiliates
7.7 Financial Statements
7.8 Events Subsequent to Most Recent Fiscal Year End
7.9 Undisclosed Liabilities
7.10 Legal Compliance
7.11 Tax Matters
7.12 Real Property
7.13 Intellectual Property
7.14 Tangible Assets
7.15 Contracts
7.16 Notes and Accounts Receivable
7.17 Powers of Attorney
7.18 Insurance
7.19 Litigation
7.20 Construction Liability
7.21 Employees
7.22 Employee Benefits
7.23 Guaranties
7.24 Environment, Health, and Safety
7.25 Proxy Statement
7.26 Relationships with Tenants
7.27 Disclosure
ANNEX B
[Bishop-Crown Letterhead]
January 15, 1998
Independent Directors
AMERICAN ASSET ADVISERS TRUST, INC.
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Re: Proposed Acquisition of American Asset Advisers Realty Corp.
Gentlemen:
In your capacity as Independent Directors of American Asset
Advisers Trust, Inc. (the "Company") you have requested our
opinion as independent investment analysts as to the fairness to
the Company and to its shareholders (other than Mr. H. Kerr
Taylor), from a financial point of view, of the Company's
proposed acquisition of American Asset Advisers Realty Corp (the
"Adviser") under the terms and conditions set forth in the form
of Agreement and Plan of Merger (the "Agreement") by and between
the Company, the Adviser, AAA Acquisition, Inc., and Mr. Taylor.
Under the terms of the Agreement, the Adviser will be merged with
and into AAA Acquisition, Inc., a newly formed, wholly owned
subsidiary of the Company, and upon completion of the merger, the
Company will internalize its real estate acquisition, development
and management functions and its administrative functions,
thereby becoming a self-administered and self-managed real estate
investment trust.
In reaching our opinions stated herein, we have reviewed,
analyzed and considered the following:
(i) The draft of the Agreement;
(ii) The audited financial statements for the Company
for the years ended December 31, 1996 and 1995 and
the unaudited financial statements of the Company
for the nine months ended September 30, 1997;
(iii) The audited financial statements of the
Adviser for the years ended December 31, 1996 and
1995 and the unaudited financial statements of the
Adviser for the nine months ended September 30,
1997;
(iv) Properties currently contracted for development by
the Adviser and its affiliates;
(v) Certain data and information prepared on a
confidential basis by management of the Adviser
for its internal use concerning the business and
operations of the Company and the Adviser,
including pro forma consolidated projections of
projects and operating strategy;
(vi) Certain cash flow forecasts for the Company and
the Adviser furnished to us by management of the
Adviser;
(vii) A draft of the proposed Proxy Statement of
the Company to be filed with the Securities and
Exchange Commission in connection with the
solicitation of the vote of the Company's
shareholders for approval of the merger;
-1-
(viii) Certain publicly available financial and
stock market data with respect to the operation of
selected publicly traded REITs deemed by us to be
relevant in our consideration of the fairness of
the subject transactions;
(ix) Certain publicly available information concerning
the terms and conditions of certain acquisition
transactions involving publicly traded REITs and
their advisers we deemed relevant in connection
with our examination of the subject transactions;
and
(x) The available information concerning the Company
and the Adviser, including past filings by the
Company with the Securities and Exchange
Commission.
In addition, we have examined such other financial
information and performed such other analyzes and investigations
of the Company and the Adviser and considered such other
information as we have deemed appropriate in rendering our
opinion herein.
In conducting our investigations, reviews and analysis, we
have held meetings and discussions with Mr. Taylor and other
officers and employees of the Company and the Adviser concerning
the operations, financial condition and future prospects of the
Company and the Adviser, as separate enterprises, and of the
Company and the Adviser as a combined company. During our review
and analysis, we have had the opportunity to meet with and to
hold several discussions with the Independent Directors.
-2-
In connection with our investigations and review, we have
relied, without independent verification, on the accuracy and
completeness of all information that was publicly available and
information which was supplied or otherwise communicated to us by
the Company and the Adviser. We have further relied on assurance
of management of the Adviser that they are unaware of any facts
that would make the information provided to us inaccurate or
misleading. We have assumed that all financial forecasts and pro
forma forecasted financial information regarding the Company, the
Adviser and the combined Company and Adviser provided to us by
the Company or the Adviser was prepared on a reasonable basis and
reflected the best currently available good faith estimates and
judgments of management of the Adviser as to the future
performance of the Company and the Adviser.
In rendering our opinion herein, we have assumed, based on
representations of the management of the Adviser, that (i) the
merger will be a tax free reorganization under the Internal
Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder; (ii) the merger will not be
accounted for under the purchase method of accounting; (iii)
following completion of the merger, the Company will continue to
qualify as a real estate investment trust under the Code and the
regulations; and (iv) any material liabilities (including any
contingent or unknown liabilities) of the Company or the Adviser
are reflected in the pro forma consolidated financial statements
of the Company and the Adviser.
In rendering our opinion herein, our determinations of
reasonable and likely ranges of fair value of the Adviser within
the context of the merger were based, in part, on the opinion on
the fair market value of a 100 percent interest in the Adviser on
a controlling interest basis rendered by Houlihan Lokey Howard &
Zukin, Financial Advisors ("Houlihan Lokey"), in that firm's
letter on its findings dated December 16, 1997, a copy of which
is included with this letter. We note that the opinion of
Houlihan Lokey is advisory in nature only, and is subject to the
conditions and limitations set forth in their report. Our
determination regarding the valuation of the Adviser for the
purposes of our opinion herein is necessarily based on the
financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as investment consultant and financial adviser
to the Independent Directors of the Company and will receive a
fee for services. While we have not in the past performed
investment banking services for the Company or the Adviser, our
affiliate broker-dealer has in the past, from time to time, acted
as a selling broker for the Company and certain affiliated
investment programs sponsored by the Adviser or Mr. Taylor. Our
compensation in regards for these services is no greater than
that paid to other broker-dealer firms participating in the
respective offering. We may provide investment and/or financial
services to the Company in the future.
-3-
Our opinion herein is for the information of the Independent
Directors in connection with the merger for use in their
evaluation of the merger. We express no opinion as to the price
or trading range at which the shares of the Company's stock will
trade in the future. Our opinion does not constitute a
recommendation to any shareholder of the Company as to how such
persons should vote on the merger. This letter is not to be
quoted or referred to, in whole or in part, in any registration
statement, prospectus, or in any other document used in
connection with the offer or sale of securities, nor shall this
letter be used for any other purposes, without our prior written
consent; provided, however, that this letter may be included in
its entirety in any filing made by the Company with the
Securities and Exchange Commission with respect to the merger,
including the Company's Proxy Statement furnished to stockholders
in connection with the solicitation of their vote on the merger.
Subject to the foregoing conditions and restrictions, it is
our opinion that, as of the date hereof, the merger is fair to
this Company and to the shareholders of the Company (other than
Mr. Taylor), from a financial point of view.
Very truly yours,
BISHOP-CROWN INVESTMENT RESEARCH, INC.
-4-
ANNEX C
[Houlihan Lokey Letterhead]
December 16, 1997
To the Independent Directors
American Asset Advisers Realty Corporation
8 Greenway Plaza
Suite 824
Houston, TX 77046
Gentlemen:
At your request we have analyzed certain financial information
regarding American Asset Advisers Realty Corporation
(hereinafter sometimes referred to as the "Advisor" or the
"Company") as set forth herein, and submit this letter on our
findings to supplement our formal report.
We understand that the Advisor is advisor to the American Asset
Advisors Trust (the "Trust") and the Advisor is 100% owned and
controlled by Kerr Taylor. Mr. Taylor is also a shareholder of
the Trust. The Advisor provides various services to the Trust
pursuant to an Advisory Agreement (the "Advisory Agreement").
In this transaction the Trust will purchase the Advisor and all
its rights to collect fees and reimbursement revenues. For the
purpose of this Agreement, the transaction (the "Transaction")
will be defined to include the Trusts purchase of the Advisor,
its rights to collect fee and reimbursement revenues and other
transactions related to the purchase of the Advisor by the Trust.
It is our understanding that the Trust has retained Bishop Crown
Investment Research ("Bishop Crown") to render an opinion
regarding the fairness of the Transaction, from a financial point
of view, to Trust and its shareholders.
The purpose of this analysis was to express an opinion (the
"Opinion") on the fair market value, as of the date of this
letter, of a 100 percent interest in the Company on a controlling
interest basis to serve as a valuation basis for the Independent
Directors evaluation of the Transaction and Bishop Crown's
evaluation of the fairness of the Transaction.
-1-
The Advisor is a privately held corporation engaged in managing
and developing real property. Corporate headquarters are located
in Houston, Texas.
The term "fair market value," as used herein, is defined as the
amount at which the capital stock would change hands between a
willing buyer and a willing seller, each having reasonable
knowledge of all relevant facts, neither being under any
compulsion to act, with equity to both.
It is Houlihan Lokey's understanding, upon which it is relying,
that the Company's Board of Directors and any other recipient of
the Opinion will consult with and rely solely upon their own
legal counsel with respect to said definitions. No representation
is made herein, or directly or indirectly by the Opinion, as to
any legal matter or as to the sufficiency of said definitions for
any purpose other than setting forth the scope of Houlihan
Lokey's Opinion hereunder.
In connection with this Opinion, we have made such reviews,
analyses and inquiries as we have deemed necessary and
appropriate under the circumstances. Among other things, we have:
1. met with certain members of the senior management of the
Advisor to discuss the operations, financial condition,
future prospects and projected operations and performance of
the Advisor;
2. visited certain facilities and business offices of the
Advisor;
3. reviewed the Advisor's internally prepared financial
statements for the three fiscal years ended December 31,
1996 and interim financial statements ended October 31, 1997
which the Advisor's management has identified as being the
most current financial statements available;
4. reviewed forecast prepared by the Advisor's management with
respect to the Advisor for the year ended December 31, 1998;
5. reviewed the Trust's annual report to shareholders and on
Form 10-K for the fiscal year ended December 31, 1996 and
quarterly report on Form 10-Q for the quarter ended
September 30, 1997;
6. reviewed Advisor's listing of affiliated entities including
three public and nine private partnerships (the
APartnerships@), related partnership agreements, and certain
financial data regarding the Partnerships;
-2-
7. reviewed copies of the following agreements:
i) Omnibus Services Agreement dated May 2, 1994,
ii) Proposal to Transfer Advisor Memorandum to the
Independent Directors from H. Kerr Taylor dated
December 23, 1997; and
8. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Advisor and
other financial data for certain transactions that we deem
comparable to the Transaction; and
9. conducted such other studies, analyses and inquiries as we
have deemed appropriate.
We have relied upon and assumed, without independent
verification, that the financial forecasts and projections
provided to us have been reasonably prepared and reflect the best
currently available estimates of the future financial results and
condition of the Company, and that there has been no material
change in the assets, financial condition, business or prospects
of the Company since the date of the most recent financial
statements made available to us.
We have not independently verified the accuracy and completeness
of the information supplied to us with respect to the Company and
do not assume any responsibility with respect to it. We have not
made any physical inspection or independent appraisal of any of
the properties or assets of the Company.
In our analysis of the Advisor we have taken into consideration
the income- and cash-generating capability of the Company.
Typically, an investor contemplating an investment in a company
with income- and cash-generating capability similar to Advisor
will evaluate the risks and returns of its investment on a going-
concern basis. Accordingly, after due consideration of other
appropriate and generally accepted valuation methodologies, the
value of the Advisor has been developed primarily on the basis of
capitalization of earnings and cash flow approaches.
Additionally, a discounted cash flow approach was considered.
Furthermore, we valued the Advisor as a going-concern, meaning
that the underlying tangible assets of the Company are presumed,
in the absence of a qualified appraisal of such assets, to attain
their highest values as integral components of a business entity
in continued operation and that liquidation of said assets would
likely diminish the value of the whole to the shareholders and
creditors of the Advisor.
All valuation methodologies that estimate the worth of an
enterprise as a going-concern are predicated on numerous
assumptions pertaining to prospective economic and operating
-3-
conditions. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter. Unanticipated events
and circumstances may occur and actual results may vary from
those assumed. The variations may be material.
Based upon the investigation, premises, provisos, and analyses
outlined above, and more fully described in the previously
submitted presentation materials, it is our opinion that, as of
the date of this letter, the fair market value of the Advisor on
a controlling interest basis is reasonably stated in the range of
FIVE MILLION TWO HUNDRED THOUSAND DOLLARS ($5,200,000) to SIX
MILLION EIGHT HUNDRED THOUSAND DOLLARS ($6,800,000).
In accordance with recognized professional ethics, our fees for
this service are not contingent upon the opinion expressed
herein, and neither Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. nor any of its employees have a present or
intended financial interest in the Company.
The Opinion, expressed above, is advisory in nature only. The
previously submitted presentation materials more fully present
the premises, analyses and logic upon which the Opinion is
founded. The abbreviated format of the Opinion, as requested, may
not conform to specific guidelines set forth in the Uniform
Standards of Professional Appraisal Practice (U.S.P.A.P.)
pertaining only to the narrative content of reports. Nonetheless,
our work files contain all necessary analyses and documentation
to prepare a conforming narrative report, if so requested, and
our work product is otherwise in compliance with applicable
standards of U.S.P.A.P. Before relying upon the Opinion, the
accompanying documentation and exhibits should be read and
analyzed in their entirety.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
-4-