SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [__]
Check the appropriate box:
[ ] Preliminary Proxy Statement [__] Confidential, For Use of
the Commission Only
(as permitted by Rule
14a-6(e)(2)
[ X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AMERICAN ASSET ADVISERS TRUST, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE
REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction
applies: Common Stock, $.01 par value, of American Asset
Advisers Trust, Inc. (the "Common Stock").
(2) Aggregate number of securities to which transaction
applies: up to 900,000 shares of Common Stock.
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth
the amount on which the filing fee is calculated and
state how it was determined): Pursuant to Rules 14a-
6(i)(1) and 0-11(a)(4) and (c)(1) under the Exchange Act,
a fee of $92.88 has been paid herewith, which is equal to
1/50th of 1% of the book value of all of the outstanding
shares of American Asset Advisers Realty Corporation as
of September 30, 1997.
(4) Proposed maximum aggregate value of transaction: $464,416
(5) Total fee paid: $92.88
[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing Party:
(4) Date Filed:
Dear Shareholder:
You are being asked to consider and vote on the merger (the
"Merger") of American Asset Advisers Realty Corporation (the
"Adviser") with American Asset Advisers Trust, Inc. (the
"Company") and the related transactions to that Merger. This
Merger will allow the Company to take advantage of the many
rapidly developing trends in our industry by becoming self-
administered and self-managed.
This Merger is described in great detail in the accompanying
Proxy Statement, which I urge you to read thoroughly.
The Company has undergone significant growth since its formation
in August 1993. With your help and support, we have raised over
$17,000,000 in equity capital. The net proceeds of these
offerings have been used to assemble an attractive portfolio of
high-quality, commercial properties, leased by substantial
tenants. In the past year, we have added five properties with a
value of over $4 1/2 million and have contracted to purchase an
additional four properties with a value of over $11 million. We
have added a prudent amount of leverage to the portfolio, thereby
increasing shareholder returns. The Adviser has also expanded
the depth and quality of its staff to effectively manage the
existing portfolio and enhance returns by developing new
properties.
When the Company was initially formed, we decided to use external
management until the asset base grew to a size that would support
an internal management structure. With the new and potentially
profitable Management Subsidiary structure that many of our
competitors have adopted, we are now at that point.
This next step in the growth of the Company complements the
recent amendments to the Company's Bylaws and Articles of
Incorporation which were approved at the shareholder's meeting
held on November 12, 1997. We continue to seek to increase
shareholder value. By becoming a self-managed REIT with internal
acquisition and turnkey development capabilities, the Company
will position itself for accelerated, high quality growth. This
growth, within a self-managed structure, will in turn create
attractive circumstances in which we can list the Company's
shares on a national exchange and maintain a liquid market for
the shares.
There are numerous risks associated with this transaction. For
further discussion of these and other risks, I urge you to review
the summary of risks contained in this brochure and the more
detailed description of risks as contained in the section "Risk
Factors" in the Proxy Statement.
Your Board of Directors has carefully considered both the risks
and benefits of the Merger and has unanimously recommended that
you vote "YES" to the proposal.
The Real Estate Investment Trust Industry has preformed well over
the past five years, as less expensive capital has become
available. The companies that have created value for their
shareholders have taken advantage of this by growing their asset
base and growing their earnings base. I believe that by voting
"YES" to this proposal, you will position the Company to follow
the same path and successfully compete with the larger and more
established REITs.
Should you have any questions or need assistance with the proper
completion and return of the accompanying Ballot, please contact
me personally or my office, toll free at 1-800-888-4400.
In your Company, we have assembled a strong portfolio of
properties. This Merger will combine this portfolio with the
Adviser's strong management and acquisition team. The next phase
of growth and the success of our long-term growth plan require
this step. I look forward to our exciting progress in the coming
years.
Sincerely,
/s/
H. Kerr Taylor
Chairman of the Board of Directors
AMERICAN ASSET ADVISERS TRUST, INC.
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 1998
TO THE SHAREHOLDERS OF AMERICAN ASSET ADVISERS TRUST, INC.:
A Special Meeting of the shareholders of American Asset
Advisers Trust, Inc. (the "Company") will be held at Eight Greenway
Plaza, Suite 824, Houston, Texas on Friday, June 5, 1998 at 10:00
a.m., Local Time for the following purposes:
1. To approve the acquisition of the Adviser by the Company
and the Company's change to self-management.
2. To approve an amendment to the Company's Bylaws
authorizing the Company's acquisition of the Adviser.
3. To approve an amendment to the Company's Bylaws removing
certain policy restrictions regarding the nature and
leasing of the Company's properties.
4. To approve an amendment to the Company's Articles of
Incorporation to change the Company's name to AmREIT,
Inc.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY APPROVED
THESE PROPOSALS AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF EACH
ITEM LISTED ON THIS NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.
Shareholders of record at the close of business on April 14,
1998, are the only persons entitled to notice of and to vote at the
meeting.
Your attention is directed to the attached Proxy Statement.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING,
PLEASE FILL IN, SIGN, DATE AND MAIL THE ENCLOSED PROXY AS PROMPTLY
AS POSSIBLE IN ORDER TO SAVE THE COMPANY FURTHER SOLICITATION
EXPENSE. If you are present at the meeting, you may then revoke
your proxy and vote in person, as explained in the Proxy Statement
in the section entitled "SPECIAL MEETING OF SHAREHOLDERS - JUNE 5,
1998." A return envelope is enclosed for your convenience.
Secretary
Dated: May 6, 1998
________________________________________
PROXY STATEMENT
________________________________________
AMERICAN ASSET ADVISERS TRUST, INC.
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
SPECIAL MEETING OF SHAREHOLDERS - June 5, 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. to be held on June 5, 1998 at
10:00 A.M. at Eight Greenway Plaza, Suite 824, Houston, Texas, and
at any adjournments thereof. Management of the Company is
soliciting proxies from the holders of the Company's common shares
for use at the Special Meeting.
-1-
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 April
14, 1998 may vote at the Special Meeting or any adjournments
thereof. As of that date there were issued and outstanding
2,027,143 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 June 4, 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 May 6, 1998.
The date of this Proxy Statement is May 6, 1998.
-2-
INCORPORATION BY REFERENCE
THIS PROXY STATEMENT INCORPORATES CERTAIN COMPANY DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
THESE DOCUMENTS (OTHER THAN THE EXHIBITS TO SUCH DOCUMENTS, UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH
DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON ORAL OR WRITTEN
REQUEST FROM H. KERR TAYLOR, SECRETARY, AT THE COMPANY'S EXECUTIVE
OFFICES AT EIGHT GREENWAY PLAZA, SUITE 824, HOUSTON, TEXAS 77046,
TELEPHONE (713) 850-1400. IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JUNE 1, 1998. ANY
DOCUMENTS REQUESTED WILL BE SENT BY FIRST CLASS MAIL WITHIN ONE
BUSINESS DAY OF RECEIPT OF SUCH REQUEST.
The following documents, which have been filed with the
Commission pursuant to the Exchange act, are hereby incorporated
herein by reference (Commission File No. 0-28378):
All documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and
prior to the date of the Special Meeting shall be deemed to be
incorporated herein by reference and to be a part hereof from the
date of filing of such documents. All information appearing in
this Proxy Statement or in any document incorporated herein by
reference is not necessarily complete and is qualified in its
entirety by the information and financial statements (including
notes thereto) appearing in this Proxy Statement or the documents
incorporated by reference herein and should be read together with
such information and documents.
Any statement contained in a document incorporated or deemed
to be incorporated herein by reference shall be deemed to be
modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any other
subsequently filed document that is deemed to be incorporated
herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Proxy Statement.
-3-
TABLE OF CONTENTS
Page
INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . -3-
FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . -6-
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-
Proposal 1 - Acquisition of the Adviser . . . . . . . . . . . . . . . -6-
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. . . . . . . -9-
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . -10-
PROPOSAL 1 - THE ACQUISITION . . . . . . . . . . . . . . . . . . . . . . -10-
Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
The Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
Common Stock Ownership Before and After the Acquisition . . . . . . -18-
Reasons for Self-Administration; Background and General
Information. . . . . . . . . . . . . . . . . . . . . . . . . . -19-
Deliberations Of The Independent Directors. . . . . . . . . . . . . -20-
Recommendation of the Independent Directors . . . . . . . . . . . . -25-
Description of The Acquisition Agreement. . . . . . . . . . . . . . -29-
Employment of Mr. Taylor. . . . . . . . . . . . . . . . . . . . . . -33-
Competitive Real Estate Ventures. . . . . . . . . . . . . . . . . . -34-
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . -35-
Financial Information . . . . . . . . . . . . . . . . . . . . . . . -35-
Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company. . . . . . . . . . . . . -35-
Material Federal Income Tax Consequences. . . . . . . . . . . . . . -38-
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . -42-
No Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . -43-
Vote Required to Approve the Acquisition. . . . . . . . . . . . . . -43-
The Adviser's Recommendations and Reasons for the Acquisition . . . -43-
Bishop-Crown Fairness Opinion . . . . . . . . . . . . . . . . . . . -45-
Houlihan Lokey Valuation Opinion. . . . . . . . . . . . . . . . . . -52-
PROPOSAL 2 - AMENDMENT TO BYLAWS TO AUTHORIZE THE ACQUISITION . . . . . -55-
Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
Background and General Information. . . . . . . . . . . . . . . . . -56-
Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . . . -56-
PROPOSAL 3 - AMENDMENT TO BYLAWS TO CHANGE INVESTMENT POLICY
RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
-4-
Background and General Information. . . . . . . . . . . . . . . . . -57-
PROPOSAL 4 - AMENDMENT TO ARTICLES OF INCORPORATION TO CHANGE THE
COMPANY'S NAME . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Background and General Information. . . . . . . . . . . . . . . . . -58-
Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . . . -58-
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Purpose of the Meeting. . . . . . . . . . . . . . . . . . . . . . . -59-
Date, Time and Place; Record Date . . . . . . . . . . . . . . . . . -59-
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-
SHAREHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . . . . -60-
DISCRETIONARY AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . . -60-
INDEX TO FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . F-1
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, THE AMENDMENTS
TO THE BYLAWS AND THE CHANGE IN THE COMPANY'S NAME.
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
-6-
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
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 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, Jr., (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 Inc. ("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 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 which are discussed in greater detail under
"PROPOSAL 1 - Risk Factors."
* 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
AmREIT Development Corp. See "PROPOSAL 1 - THE
-7-
ACQUISITION - Risk Factors - Conflicts of Interest with
Mr. Taylor", "Significant Influence of Mr. Taylor" and -
Interests of Mr. Taylor in the Acquisition."
* 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. Thus, the Share
Consideration represents a substantial premium in price
paid for the Adviser's identifiable Assets, all of which
is payable to Mr. Taylor as the Adviser's sole
shareholder. See "PROPOSAL 1 - THE ACQUISITION -
Recommendation of the Independent Directors" and " -
Description of the Acquisition Agreement."
* No independent representatives were retained to negotiate
the terms of the Transaction on behalf of the Company or
the Shareholders. See "PROPOSAL 1 - THE ACQUISITION -
Deliberations of the Independent Directors."
* There are alternative methods of determining the value of
the Adviser which result in higher or lower valuations
for such management companies. See "PROPOSAL 1 - THE
ACQUISITION - Bishop-Crown Fairness Opinion" and " -
Houlihan Opinion."
* 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. See "PROPOSAL 1 - THE ACQUISITION -
Risk Factors - Risks Associated with the Adviser
Activities" and " - and Impact on the Company's Financial
Position."
* 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. See "PROPOSAL 1
- THE ACQUISITION - Recommendation of the Independent
Directors" and " - Risk Factors - Risks That the Company
may not Realize Significant Potential Benefits."
* 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. See "PROPOSAL 1 - THE
ACQUISITION - Recommendation of the Independent
Directors" and "Risk Factors - Risks That the Company may
not Realize Significant Potential Benefits."
* Upon 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. See "PROPOSAL 1 - THE ACQUISITION -
Common Stock Ownership Before and After the Acquisition."
* 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. See "PROPOSAL 1 - THE
ACQUISITION - Common Stock Ownership Before and After the
-8-
Acquisition" and "Risk Factors - Significant Influence of
Mr. Taylor."
* 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 - Common Stock Ownership
Before and After the Acquisition."
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, to 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 approved, management will
consider a broader range of potential tenants including, when
deemed appropriate, smaller regional and local tenants. Management
will have unlimited discretion to determine each tenant's financial
ability to fulfill their lease obligations. In making these
determinations, Management may rely on, among other things, the
tenant's financial status, operating history, credit history and/or
credit references. 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
-9-
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
10:00 a.m., local time, on Friday, June 5, 1998, at Eight Greenway
Plaza, Suite 824, Houston Texas 77046. The Board of Directors has
fixed the close of business on April 14, 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 the date
of this Proxy Statement, 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.
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
-10-
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. The Adviser will become the Company's
wholly owned subsidiary, the Company's Omnibus Service Agreement
with the Adviser 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 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 scheduled annual 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.
-11-
The Adviser
General. 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
the account of managed real estate investment programs, including
the Company.
Services to the Company. 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 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.
-12-
For the years ended December 31, 1997 and 1996, reimbursement
and fee payments to the Adviser from all sources aggregated
$1,331,294 and $359,189, 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 years ended December 31, 1997 and
1996, the Adviser incurred general and administrative expenses of
$1,409,133 and $475,143, 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.
Real Estate Development Activities. 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.
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.
-13-
Non-Company Related Activities. 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.
Upon consummation of the Acquisition, if it should occur, the
Company will commence to provide administrative, management,
development and related services to the AAA Partnerships, AAA Net
Developers, Ltd. and AmREIT Development Corp under current Adviser
contracts for these services. Each of these entities is a
Competitive Real Estate Venture controlled by the Stockholder.
These contracts presently account for approximately $185,000 of the
Adviser's total annual revenues. In general, these contracts are
subject to cancellation upon no more than 60 days prior written
notice by either party and certain provisions and conditions of
each contract, including those relating to compensation, expense
reimbursement and indemnification and liability, are subject to
limitations under the respective contractee's charter documents.
Following consummation of the Acquisition, the Company also intends
to enter into personnel and/or facilities sharing arrangements with
one or more of these entities, whereby each party pays its
proportionate share of the cost of jointly used personnel and/or
facilities. Also, as discussed under "Comparative Real Estate
Ventures", under the Acquisition Agreement the Stockholder must
cause any other Competitive Real Estate Venture over which he may
exert control, at the election of the Company and subject to the
approval of the Independent Directors, to contract with the Company
for certain administrative and management services and functions.
The Company's ability to continue these contractual arrangements or
to enter into such contractual arrangements in the future, or to
realize income therefrom, may be significantly limited under
current and possible future changes to the REIT Rules. See "Risk
Factors - Possible Federal Tax Legislation" and "Material Federal
Income Tax Consequences" below.
Because of the Stockholder's proprietary interests in and
control of, these Competitive Real Estate Ventures, significant
conflicts of interest exist between the Stockholder and the Company
in establishing and maintaining such contractual arrangements.
These conflicts of interest include divergent interests in
connection with compensation, performance standards and in the
Allocation of costs and the monitoring of performance compliance.
To limit these conflicts of interest, the Stockholder must, as a
condition to the Adviser Acquisition, agree to limit his activities
in connection with existing Competitive Real Estate Ventures and
restrict his future participation in such ventures. See
"Competitive Real Estate Ventures" 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
-14-
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.
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 With 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. See "Employment of Mr. Taylor"
and "Common Stock Ownership Before and after the Acquisition."
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 AmREIT
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 "Competitive Real Estate
Ventures."
-15-
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. 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. See "Description of the Acquisition
Agreement - Consideration and Payment."
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. See "Common Stock Ownership Before and After the
Acquisition."
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. See "Employment of Mr.
Taylor."
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. See "Recommendation of
the Independent Directors."
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.
-16-
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.
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.
See "The Adviser," "The Company" and "Material Federal Income
Tax Consequences."
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."
Possible 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 Company intends to provide services to
the AAA partnerships and to other persons after the Acquisition.
See "The Adviser - Non-Company Related Services." 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 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
-17-
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. Also, on March 27, 1998, Bill
H.R.3558 was introduced in committee in the House of
Representatives. This Bill, if passed into law as currently
written, would severely restrict the ability of "stapled" real
estate investment trusts, as defined in the Bill, from realizing
benefits from services and activities conducted by certain non-REIT
qualified subsidiaries in which they have an interest. See
discussion under "Material Federal Income Tax Consequences -
Qualified REIT Subsidiaries" below. It does not appear that H.R.
3558 if adopted into law in its present form would have a material
adverse effect on the Company. If the Administration's Proposal is
adopted or H.R. 3558 is amended so as to apply to the Company and
adopted, or if a similar proposal is 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."
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 AmREIT 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. See Index to Financial Information."
Common Stock Ownership Before and After the Acquisition
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
April 14, 1998, and on a pro forma basis, assuming all the Share
Consideration is paid. As of April 14, 1998 there were 2,027,143
shares of Common Stock outstanding. If and when all of the Share
Consideration is issued, there would be outstanding, on a pro forma
basis, at least 9,183,673 shares of Common Stock.
-18-
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 April 14, 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 (10.02%)
Timothy W. Kelley (Vice
President-Operations --- --- ---
L. Lawrence Mangum (Vice
President-Financial) --- --- ---
George A. McCanse, Jr.
(Director) 770 (0.03%) 770 (<0.01%) 770 (<0.01%)
Robert C. Cartwright, Jr.
(Director) 2,005 (0.07%) 2,005 (<0.01%) 2,005 (<0.01%)
(1) Based on 2,027,143 shares outstanding on April 14, 1998 and
213,260 shares to be issued on the closing date. Assumes no
additional shares issued by the Company between April 14, 1998
and the Closing Date.
(2) Based on a total of 9,183,673 shares outstanding, which amount
assumes the issuance of an additional 6,408,673 shares, the
minimum necessary number of shares necessary for the payment
of the Share Balance.
_______________________
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 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
-19-
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.
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)
-20-
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 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
-21-
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 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 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
-22-
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 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 annual
base salary of $25,000 the first year and $30,000 the second year
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
-23-
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 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 certain 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 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.
-24-
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, 1997, 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, 1997, 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 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;
* As a self-managed REIT, the Company will be better
positioned to attract additional capital investment in
the financial markets pursuant to which it can effect
asset growth.
-25-
* Under the Acquisition Agreement, the Company will pay the
Share Balance only if and when it achieves minimum
capital growth during the 72-month Share Balance period
and during such period of growth, if any, the Company
will not pay external acquisition and property management
fees.
* 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;
* 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,
-26-
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 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:
-27-
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 opinion of Deloitte & Touche LLP, dated as of
the Closing Date, 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.
See "Material Federal Income Tax Matters" for a
more detailed discussion;
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; (c) 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 is
derived 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.
-28-
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 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 will
-29-
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:
(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;
-30-
(iii) In the event the Company terminates the
Stockholder's employment without cause
or the Stockholder terminates his
employment for good reason, as defined in
his employment agreement 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 June 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
June 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 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 June 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
-31-
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.
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 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.
-32-
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.
Employment of Mr. Taylor
Pursuant to the Acquisition Agreement, the Stockholder, Mr.
Taylor, must enter into an employment contract with the Company.
This contract will have a term of three years and provide for an
annual base salary of $25,000 and $30,000 respectively, for the
first two years. Mr. Taylor's compensation for the third year, as
well as any cash or non-cash bonuses which may be paid to him
during the term of the agreement will be determined in the
discretion of the Board of Directors. Mr. Taylor will also be
entitled to such group life, hospitalization and disability
insurance as the Company may provide to its other senior
executives. The agreement provides for severance payments in the
event of Mr. Taylor's death or disability, if he is terminated by
the Company without cause or if he terminates the agreement for
good reason. In any such event, Mr. Taylor will be entitled to
receive a cash payment equal to his annual base salary at the time
of termination, health benefits for a period of twelve months
following such termination and immediate vesting of any stock
options of the Company then held by him. In addition, such
termination would obligate the Company to repurchase Mr. Taylor's
stock as discussed above under "Description of the Acquisition
Agreement - Consideration and Payment". For the purposes of the
agreement, "cause" for termination by the Company includes Mr.
Taylor's conviction or nolo contendere to any felony or misdemeanor
involving moral turpitude or the indictment therefore which is not
discharged or otherwise resolved within eighteen months, his
commission of an act of fraud, theft or dishonesty, his willful or
-33-
continuing failure to perform his duties, any material violation of
his employment covenants or his willful and continuing uncured
breach of his employment terms. "Good reason" for Mr. Taylor's
termination of the agreement includes the material reduction by the
Company of his duties or responsibilities or its assignment to him
of duties materially inconsistent with his position or positions
with the Company, a reduction in his base salary, the occurrence of
an Event of Acceleration in payment of the Share Balance as
discussed above, or the Company's uncured material and willful
breach of his employment terms. Mr. Taylor will not be entitled to
receive any additional compensation, except that which was due and
payable to him through the date of termination, in the event he is
terminated by the Company for cause or he terminates his employment
without good reason.
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.
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,
-34-
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 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.
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.
Financial Information.
Attached on pages F-1 through F-20 of this Proxy Statement are
the financial statements of the Company for the years ended
December 31, 1997 and 1996 and certain pro forma and other
financial information with respect to the Company and the Adviser.
Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company
The following discussion should be read in conjunction with
the Consolidated Financial Statements of the Company and
accompanying Notes included elsewhere in this Prospectus.
Liquidity and Capital Resources. The initial issuance of
20,001 shares of stock for $200,010 was to the Company. On March
17,1994, the Company commenced an offering of 2,000,000 Shares of
Common Stock, together with 1,000,000 Warrants (collectively
"Securities"). Until the completion of the offering in March 1996,
the Securities were offered on the basis of two (2) Shares of
Common Stock and one (1) Warrant for a total purchase price of
$20.00. The Shares and Warrants were separately transferable by an
investor. Each Warrant entitled the holder to purchase one Share
for $9.00 until March 15, 1998. As of December 31, 1997, 501,583
Warrants were outstanding. The offering period for the initial
public offering terminated on March 15, 1996 with gross proceeds
totaling $10,082,520 (1,008,252 shares). On April 30, 1998, the
Company commenced a follow-on offering of up to $29,250,000
(2,853,659 shares) of additional shares of its common stock. The
Offering terminated on April 30, 1998. As of December 31, 1997,
-35-
gross proceeds had been received for $8,606,419 (839,960 shares) in
this second offering bringing the total gross proceeds to
$18,888,949 (1,868,213 shares).
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended Credit
Agreement") with a borrowing capacity up to $15,000,000 through
February 1999. The actual amount available to the Company is
dependent on certain covenants such as the value of unencumbered
assets. The Amended Credit Agreement currently bears interest at
2.00% over varying London Interbank Offered Rates and it is being
used to acquire additional properties. As of December 31, 1997,
$5,981,489 was outstanding under the Amended Credit Agreement.
These funds were advanced to third parties and entities with common
management to develop properties that will be acquired by the
Company upon completion.
The Company has an investment strategy of acquiring properties
and leasing them under net-leases to corporations having a minimum
net worth of $40 million, which strategy minimizes the Company's
operating expenses. The Company believes that the leases will
continue to generate cash flow in excess of operating expenses. Due
to low operating expenses and ongoing cash flow, the Company does
not believe that large working capital reserves are necessary at
this time. In addition, because all leases of the Company's
Properties are and are intended to continue to be on a net-lease
basis, it is not anticipated that a large reserve for maintenance
and repairs will be necessary. The Company intends to distribute
a significant portion of its funds from operations unless it
becomes necessary to maintain additional reserves.
As of December 31, 1997, the Company had acquired six
Properties directly and five Properties through joint ventures with
entities with common management and had invested $12,270,249,
exclusive of any minority interests, including certain acquisition
expenses related to the Company's investment in these properties.
These expenditures resulted in a corresponding decrease in the
Company's liquidity.
Until Properties are acquired by the Company, proceeds are
held in short-term, highly liquid investments which the Company
believes to have appropriate safety of principal. This investment
strategy has allowed, and continues to allow, high liquidity to
facilitate the Company's use of these funds to acquire properties
at such time as properties suitable for acquisition are located.
At December 31, 1997, the Company's cash and cash equivalents
totaled $1,401,740.
The Company made cash distributions to the Shareholders during
each quarter of 1997 and 1996, distributing a total of $1,093,439
and $737,277, respectively, for each such fiscal year to the
investors.
On February 20, 1998, the Company acquired a newly constructed
property on lease to OfficeMax, Inc. for the purchase price of
$2,392,442. This property is being operated as an OfficeMax store
in Lake Jackson, Texas.
Inflation has had very little effect on income from
operations. Management expects that increases in store sales
volumes due to inflation as well as increases in the Consumer Price
Index (C.P.I.), may contribute to capital appreciation of the
Company Properties. These factors, however, also may have an
adverse impact on the operating margins of the tenants of the
Properties.
The Company has conducted a comprehensive review of its
computer systems to identify the systems that could be affected by
the Year 2000 Issue. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define
-36-
the applicable year. Any programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the
year 2000. The Company's hardware and software are believed to be
Year 2000 compliant. Accordingly, the Company does not expect to
incur any material costs in connection with the Year 2000 Issue.
Funds From Operations. Funds from operations (FFO) increased
$311,211 or 47% to $967,762 in 1997 from $656,551 in 1996. The
Company has adopted the National Association of Real Estate
Investment Trusts (NAREIT) definition of FFO. FFO is calculated as
net income (computed in accordance with generally accepted
accounting principles) excluding gains or losses from sales of
property, depreciation and amortization of real estate assets, and
nonrecurring items of income or expense. For purposes of the table
below, FFO excludes the nonrecurring potential acquisition costs.
FFO is generally considered by industry analysts to be the most
appropriate measure of performance and does not necessarily
represent cash provided by operating activities in accordance with
generally accepted accounting principles and are not necessarily
indicative of cash available to meet cash needs. Management
considers FFO an appropriate measure of performance of an equity
REIT because it is predicated on cashflow analysis. The Company's
computation of FFO may differ from the methodology for calculating
FFO utilized by other equity REITs and, therefore, may not be
comparable to such other REITs. FFO is not defined by generally
accepted accounting principles and should not be considered an
alternative to net income as an indication of the Company's
performance.
Below is the reconciliation of net income to funds from
operations:
1997 1996
Net Income $ 538,857 $ 542,807
Plus Depreciation 146,015 113,744
Plus Potential Acquisition Costs 282,890 ---
Total Funds From Operations 967,762 656,551
Cashflows from operating activities, investing activities, and
financing activities are presented below:
1997 1996
Operating Activities $ 1,080,157 $ 810,614
Investing Activities $(11,708,075) $(3,034,526)
Financing Activities $ 10,413,347 $ 2,275,262
Results of Operations. Years Ended December 31, 1997 and
1996. During the years ended December 31, 1997 and 1996, the
Company owned and leased 11 and 8 properties, respectively. During
the years ended December 31, 1997 and 1996, the Company earned
$1,556,815 and $924,788, respectively, in rental income from
operating leases and earned income from direct financing leases.
The 68 percent increase in rental income and earned income during
1997, as compared to 1996, is primarily attributable to rental
income earned on the three properties acquired during 1997. In
addition, rental and earned income increased during 1997 as a
result of the fact that the three properties acquired during 1996
were operational for a full fiscal year in 1997. Rental and earned
-37-
income is expected to increase in 1998 as the Company acquires
additional properties and due to the fact that the three properties
acquired during 1997 will contribute to the Company's income for a
full fiscal year in 1998.
During the years ended December 31, 1997 and 1996, the
Company's expenses were $716,627 and $302,857, respectively. The
$413,770 increase in expenses is primarily attributable to $282,890
of costs incurred during 1997 in relation to potential acquisition
costs related to the proposed acquisition of the Company's adviser.
The increase is also attributable to (i) a $68,594 increase in
reimbursements and fees to a related party as a result of increased
rental income for the year ended December 31, 1997, (ii) a $28,050
increase in general operating and administrative expenses primarily
attributable to an increase in legal fees and director fees since
more director meetings were held during 1997, and (iii) a $32,271
increase in depreciation as a result of the depreciation of the
additional properties acquired during 1997 and a full year of
depreciation on the properties acquired during 1996.
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 will obtain as of the date of the closing, an opinion
from Deloitte & Touche LLP("Deloitte & Touche") that, for federal
income tax purposes, based upon current law and interpretations thereof,
and provided that (i) 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
-38-
and including the first year for which the Company made the election to
be taxed as a REIT; and (ii) the assumptions and representations referred
to below are true upon and following the Acquisition, the Merger 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 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)
-39-
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 Subsidiaries. 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.
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
-40-
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) 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.
-41-
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). 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 AmREIT Development Corp 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.
-42-
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
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 PERSONNEL AND FACILITIES SHARING ARRANGEMENTS. The
Arrangements whereby the Company shares the costs of
personnel and/or facilities with the Stockholder's
Competitive Real Estate Ventures will, subject to
compliance with the Code and the Treasury Regulations,
significantly offset the Company's costs of self-management
and allow 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 such sharing arrangements.
* 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
-43-
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 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 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.
-44-
* 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
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
-45-
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.
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
-46-
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 the Acquisition, 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 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"), ranged from $5.2
million to $6.8 million. Please see "Houlihan Valuation Opinion"
below.
-47-
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:
(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 cashflow 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.
Comparable Transaction Analysis. Bishop-Crown reviewed
transactions by certain other publicly traded real estate companies
pursuant to which they purchased their adviser (or 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.
-48-
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.
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.
-49-
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. There were no
material factors considered by Bishop-Crown which did not support
its opinion that the Acquisition is fair 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 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.
-50-
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.
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
-51-
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: 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
-52-
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. Management 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
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
transctions 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 (ten percent to twenty 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
-53-
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 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 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
-54-
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
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 March 31, 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, 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.
-55-
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.
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
-56-
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. Management will require the Company's
tenants, their co-signees and/or guarantors to demonstrate the
ability to meet their lease obligations. Management will have
unlimited discretion to make this determination. In making this
determination, management may review and rely upon, among other
factors, the person's financial status, operating history, credit
history and/or credit references. 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 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
-57-
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.
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
-58-
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 10:00 a.m.,
local time, on Friday, June 5, 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 April 14,
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
April 14, 1998, there were 2,027,143 Common Shares outstanding and
the Company had approximately 1,050 record holders. As of April 14,
1998, the Adviser and the Company's Directors and executive
officers beneficially owned an aggregate of 23,299 Common Shares or
approximately 1.15% 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 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
-59-
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 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.
May 6, 1998 BY ORDER OF THE BOARD OF DIRECTORS,
Houston, Texas /s/ H. Kerr Taylor, Secretary
-60-
INDEX TO FINANCIAL INFORMATION
American Asset Advisers Trust, Inc. Financial Statements
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet at December 31, 1997 . . . . . . . . . . . F-3
Consolidated Statements of Income
for the Years Ended December 31, 1997 and 1996. . . . . . . . . . . . F-4
Consolidated Statements of Shareholder's Equity
for the Years Ended December 31, 1997 and 1996. . . . . . . . . . . . F-5
Consolidated Statements of Cashflows
for the Years Ended December 31, 1997 and 1996. . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-7
Pro Forma Financial Information
Introductory Statement. . . . . . . . . . . . . . . . . . . . . . . F-15
Unaudited Pro Forma Balance Sheet as of December 31, 1997 . . . . . F-16
Notes to Unaudited Pro Forma Balance Sheet. . . . . . . . . . . . . F-17
Unaudited Pro Forma Statement of Operations
for the Year Ended December 31, 1997. . . . . . . . . . . . . . . . F-18
Notes to Unaudited Pro Forma Statement of Operations. . . . . . . . F-19
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American Asset Advisers Trust, Inc.
We have audited the accompanying consolidated balance sheet of
American Asset Advisers Trust, Inc. (the "Company") as of
December 31, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index.
These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 1997, and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 10, 1998
F-2
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash and cash equivalents $ 1,401,740
Accounts receivable 124,600
Property:
Escrow deposits 11,100
Land 6,379,675
Land under development 750,000
Buildings 8,037,003
Construction in progress 6,991,360
22,169,138
Accumulated depreciation (341,272)
Total property 21,827,866
Net investment in direct financing leases 3,161,196
Other assets:
Prepaid acquisition costs 372,686
Accrued rental income 168,179
Organization costs, net of accumulated amortization
OF $223,672 90,096
Total other assets 630,961
TOTAL ASSETS $27,146,363
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 6,131,489
Accounts payable 108,823
Security deposit 15,050
TOTAL LIABILITIES 6,255,362
Minority interest 5,260,795
Commitments (Note 10)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued
Common stock, $.01 par value, 100,000,000 shares
authorized, 1,868,213 shares issued and outstanding 18,682
Capital in excess of par value 16,665,300
Accumulated distributions in excess of earnings (1,053,776)
TOTAL SHAREHOLDERS' EQUITY 15,630,206
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $27,146,363
See Notes to Consolidated Financial Statements.
F-3
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1997 1996
Revenues:
Rental income from operating leases $1,217,187 $ 780,768
Earned income from direct financing leases 339,628 144,020
Interest income 153,895 137,528
Total revenues 1,710,710 1,062,316
Expenses:
General operating and administrative 112,464 84,414
Reimbursements and fees to related party 106,504 37,910
Interest 6,000 5,000
Depreciation and amortization 208,769 175,533
Potential acquisition costs 282,890 -
Total expenses 716,627 302,857
Income before minority interest in net income of
consolidated joint ventures 994,083 759,459
Minority interest in net income of consolidated
joint ventures (455,226) (216,652)
Net income to common shareholders $ 538,857 $ 542,807
Basic earnings per share $ 0.34 $ 0.51
Diluted earnings per share $ 0.33 $ 0.48
Weighted average number of common shares outstanding 1,563,048 1,066,353
Weighted average number of common shares outstanding
plus dilutive potential common shares 1,624,217 1,127,832
See Notes to Consolidated Financial Statements.
F-4
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Accumulated
Capital in distributions
Common Stock excess of in excess of
Number Amount par value earnings Total
Balance at December 31, 1995 827,876 $ 8,279 $ 7,438,368 $ (304,724) $ 7,141,923
Net income - - - 542,807 542,807
Distributions ($.71 per share) - - - (737,277) (737,277)
Issuance of common stock 377,049 3,770 3,810,883 - 3,814,653
Stock issuance costs - - (468,404) - (468,404)
Balance at December 31, 1996 1,204,925 12,049 10,780,847 (499,194) 10,293,702
Net income - - - 538,857 538,857
Distributions ($.72 per share) - - - (1,093,439) (1,093,439)
Issuance of common stock 663,288 6,633 6,783,642 - 6,790,275
Stock issuance costs - - (899,189) - (899,189)
Balance at December 31, 1997 1,868,213 $18,682 $16,665,300 $ (1,053,776) $15,630,206
See Notes to Consolidated Financial Statements.
F-5
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996
Cash flows from operating activities:
Net income $ 538,857 $ 542,807
Adjustments to reconcile net income to net cash
flows from operating activities:
Amortization 62,754 61,789
Depreciation 146,015 113,744
Increase in accounts receivable (119,481) (5,119)
Increase (decrease) in accounts payable 72,588 (31,246)
Cash receipts from direct financing leases
greater (less) than income recognized (9,398) 1,017
Decrease (increase) in escrow deposits, net of
minority interest partners 27,150 (38,250)
Increase in accrued rental income (93,554) (50,780)
Increase in minority interest 455,226 216,652
Net cash provided by operating activities 1,080,157 810,614
Cash flows from investing activities:
Acquisition of real estate:
Accounted for under the operating lease method (3,668,365) (1,695,146)
Accounted for under the direct financing lease - (1,342,805)
Land under development (750,000) -
Construction in progress (6,991,360) -
Change in prepaid acquisition costs (298,350) 3,425
Net cash used in investing activities (11,708,075) (3,034,526)
Cash flows from financing activities:
Proceeds from issuance of stock, net 5,891,086 3,346,249
Prepaid issuance costs 101,399 (101,399)
Proceeds from note payable 5,981,489 -
Distributions paid to shareholders (1,093,439) (737,277)
Distributions to minority interest partners (467,188) (232,311)
Net cash provided by financing activities 10,413,347 2,275,262
Net (decrease) increase in cash and cash
equivalents (214,571) 51,350
Cash and cash equivalents at beginning of year 1,616,311 1,564,961
Cash and cash equivalents at end of year $ 1,401,740 $1,616,311
Supplemental disclosure of non-cash financing
activities:
Real estate and escrow deposit contributed by
partners of the consolidated joint ventures
(minority interest) $ 1,677,659 $2,051,337
See Notes to Consolidated Financial Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
American Asset Advisers Trust, Inc. ("the Company") was
incorporated on August 17, 1993 as a Maryland corporation. The
initial issuance of 20,001 shares of stock for $200,010 was to
American Asset Advisers Realty Corporation ("AAA"). Commencing
March 17, 1994, the Company offered up to 2,000,000 additional
shares of common stock together with 1,000,000 warrants. The
warrants were exercisable at $9 per share between March 17,
1997 and March 15, 1998. As of December 31, 1997, 501,583
warrants were outstanding. The offering period of the initial
public offering terminated on March 15, 1996 with 1,008,252
shares being issued. On June 18, 1996, the Company commenced a
follow-on offering of up to 2,853,659 additional shares of its
common stock. The offering will terminate June 17, 1998 unless
terminated earlier. As of December 31, 1997, 839,960 shares in
this second offering were issued, bringing the total shares
issued and outstanding to 1,868,213 shares.
The Company was formed to acquire commercial and industrial
real estate properties using invested and borrowed funds. The
selection, acquisition and supervision of the operation of the
properties are managed by AAA, a related party.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
American Asset Advisers Trust, Inc. and its six joint ventures
with related parties. The Company owns greater than 50% of
these joint ventures and exercises control over operations.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the
accrual basis of accounting whereby revenues are recognized
when earned and expenses are recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds.
REAL ESTATE
Real estate is leased to others on a net lease basis whereby
all operating expenses related to the properties, including
property taxes, insurance and common area maintenance are the
responsibility of the tenant. The leases are accounted for
under the operating lease method or the direct financing lease
method.
F-7
Under the operating lease method, the properties are recorded
at cost. Rental income is recognized ratably over the life of
the lease and depreciation is charged based upon the estimated
useful life of the property. Under the direct financing lease
method, properties are recorded at their net investment (see
Note 3). Unearned income is deferred and amortized to income
over the life of the lease so as to produce a constant periodic
rate of return.
Expenditures related to the development of real estate are
carried at cost plus capitalized carrying charges, acquisition
costs and development costs. Carrying charges, primarily
interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are
capitalized as part of construction in progress. Interest of
$132,950 was capitalized on properties under construction
during 1997.
Management reviews its properties for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets, including accrued rental income, may not
be recoverable through operations. Management determines
whether an impairment in value occurred by comparing the
estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with
the carrying cost of the individual property. If an impairment
is indicated, a loss will be recorded for the amount by which
the carrying value of the asset exceeds its fair value.
DEPRECIATION
Buildings are depreciated using the straight-line method over
an estimated useful life of 39 years.
ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are
amortized on a straight-line basis over five years.
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the
sale of common stock are treated as a reduction of
shareholders' equity.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
No cash was paid for interest during 1997 or 1996.
FEDERAL INCOME TAXES
The Company is qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, and is,
therefore, not subject to Federal income taxes provided it
meets all conditions specified by the Internal Revenue Code for
retaining its REIT status, including the requirement that at
least 95% of its real estate investment trust taxable income is
distributed by March 15 of the following year.
F-8
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net
income to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share has been
computed by dividing net income to common shareholders (as
adjusted) by the weighted average number of common shares
outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate
basic and diluted earnings per share for the periods indicated,
with 1996 being restated to conform with the requirements of
the Statement of Financial Accounting Standards No. 128,
Earnings Per Share, described below:
For the Year Ended December 31,
1997 1996
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding 1,563,048 1,066,353
Basic earnings per share $ .34 $ .51
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding 1,563,048 1,066,353
Shares issuable from assumed conversion of
warrants 61,169 61,479
Weighted average common shares outstanding,
as adjusted 1,624,217 1,127,832
Diluted earnings per share $ .33 $ .48
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income to common shareholders (basic and
diluted earnings per share computation) $ 538,857 $ 542,807
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying value of financial
instruments consisting of cash, cash equivalents, accounts
receivable and accounts and notes payable approximate their
fair value.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which was
effective for periods ending after December 15, 1997, specifies
the computation, presentation and disclosure requirements of
earnings per share and supercedes Accounting Principles Board
Opinion No. 15. SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share,
which excludes the impact of common share equivalents, replaces
primary earnings per share. Diluted earnings per share, which
utilizes the average market price per share as opposed to the
greater of the average market price per share or ending market
F-9
price per share when applying the treasury stock method in
determining common share equivalents, replaces fully diluted
earnings per share.
In February 1997, the FASB also issued SFAS No. 129, Disclosure
of Information about Capital Structure, which establishes
standards for disclosing information about an entity's capital
structure. SFAS No. 129 was effective for periods ending after
December 15, 1997. The adoption of SFAS No. 129 did not impact
the Company's capital structure disclosures as the Company was
already in compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 130
establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments and
related information in interim and annual financial statements.
SFAS No. 131 will not impact the Company's financial statements
as it reports as a single segment. SFAS Nos. 130 and 131 are
effective for periods beginning after December 15, 1997.
Management is evaluating what, if any, additional disclosures
or reporting may be required upon the implementation of SFAS
No. 130.
2. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals,
under noncancellable operating leases in existence at December
31, 1997 is as follows:
1998 $ 1,510,662
1999 $ 1,536,879
2000 $ 1,561,707
2001 $ 1,570,744
2002 $ 1,605,727
2003-2016 $ 11,005,543
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at
December 31, 1997 included:
Minimum lease payments receivable $ 7,110,814
Unguaranteed residual value 1,557,904
Less: Unearned income 5,507,522
$ 3,161,196
A summary of minimum future rentals, exclusive of any renewals,
under the noncancellable direct financing leases are summarized
as follows:
1998 $ 330,229
1999 $ 333,165
2000 $ 336,590
2001 $ 343,251
2002 $ 363,233
2003-2016 $ 5,404,346
F-10
4. CONSOLIDATED JOINT VENTURES
The Company consolidates all of its joint ventures due to its
ability to control operations. Pursuant to the Joint Venture
Agreements that incorporate the provisions to the Texas Revised
Partnership Act, the Company as majority owner may make
management decisions, such as the sale of the property, without
the consent of the minority joint venture interests.
On October 16, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd., an entity with common management.
The joint venture was formed for the purchase of a property,
which is being operated as a Hollywood Video store in
Lafayette, Louisiana. The property was purchased on October 31,
1997 after the construction was completed. The Company's
interest in the joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd. The joint venture was formed for
the purchase of a property, which is being operated as a Just
For Feet retail store in Baton Rouge, Louisiana. The property
was purchased on June 9, 1997 after the construction was
completed. The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company formed a joint venture, AAA
Joint Venture 96-2, with AAA Net Realty Fund XI, Ltd. The
joint venture was formed for the purpose of acquiring a parcel
of land in The Woodlands, Texas upon which the tenant, Bank
United, constructed a branch bank building at its cost. At the
termination of the lease the improvements will be owned by the
joint venture. The Company?s interest in the joint venture is
51%.
On April 5, 1996, the Company formed a joint venture, AAA Joint
Venture 96-1, with AAA Net Realty Fund XI, Ltd. and AAA Net
Realty Fund X, Ltd., entities with common management, for the
purpose of acquiring a property which is being operated as a
Just For Feet retail store in Tucson, Arizona. The property
was purchased on September 11, 1996 after construction was
completed. The Company's interest in the joint venture is
51.9%.
On September 12, 1995, the Company formed a joint venture, AAA
Joint Venture 95-2, with AAA Net Realty Fund XI, Ltd. for the
purpose of acquiring a property in Wichita, Kansas on lease to
Blockbuster Music Retail, Inc. The Company's interest in the
joint venture is 51%.
On October 27, 1994, the Company formed a joint venture, AAA
Joint Venture 94-1, with AAA Net Realty Fund X, Ltd. for the
purpose of acquiring a property in Independence, Missouri on
lease to Blockbuster Music Retail, Inc. The Company's interest
in the joint venture is 54.84%.
5. NOTES PAYABLE
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement currently
bears interest at 2.00% over varying London Interbank Offered
Rates and it is being used to acquire additional properties.
As of December 31, 1997, $5,981,489 was outstanding under the
Amended Credit Agreement.
F-11
In addition, the Company has a note payable to its president in
the amount of $150,000 plus accrued interest totaling $17,000
as of December 31, 1997. This note is unsecured, payable upon
demand and bears interest at 8%. Interest incurred on this
note was $12,000 in 1997 (of which $6,000 was capitalized) and
$5,000 in 1996.
6. MAJOR TENANTS
The Company's operations are related to the acquisition and
leasing of commercial real estate properties. The following
schedule summarizes rental income by lessee for 1997 and 1996
under both operating lease and direct financing lease methods
of accounting:
1997 1996
Tandy Corporation (Mesquite, Texas) $ 108,900 $ 108,900
America's Favorite Chicken Company (Smyrna, Georgia) 97,931 91,875
Blockbuster Music Retail, Inc. (Independence, Missouri
and Wichita, Kansas) 377,901 377,901
OneCare Health Industries, Inc. (Houston, Texas) 201,638 201,638
Just For Feet, Inc. (Tucson, Arizona and Baton Rouge,
Louisiana) 590,192 123,244
Bank United (The Woodlands, Texas and Houston, Texas) 157,801 21,230
Hollywood Entertainment Corp. (Lafayette, Louisiana and
Ridgeland, Mississippi) 22,452 -
Total $1,556,815 $ 924,788
7. FEDERAL INCOME TAXES
The differences between net income for financial reporting
purposes and taxable income before distribution deductions
relate primarily to temporary differences and to certain
organization costs which are amortized for financial reporting
purposes only.
For income tax purposes, distributions paid to shareholders
consist of ordinary income, capital gains and return of capital
as follows:
1997 1996
Ordinary Income $ 795,918 $ 545,967
Capital gains - -
Return of capital 297,521 191,310
$ 1,093,439 $ 737,277
F-12
8. RELATED PARTY TRANSACTIONS
AAA owns 20,001 shares of the Company's stock. The common
stock of AAA is wholly owned by the president and director of
the Company. In addition, the Company has entered into an
Omnibus Services Agreement with AAA whereby AAA provides
property acquisition, leasing, administrative and management
services for the Company. Reimbursements and fees of $106,504
and $37,910 were incurred and charged to expense in 1997 and
1996, respectively.
AAA has incurred certain costs in connection with the
organization and syndication of the Company. Reimbursement of
these costs become obligations of the Company in accordance
with the terms of the offering. Costs of $164,985 and $98,494
were incurred by AAA in 1997 and 1996, respectively, in
connection with the issuance and marketing of the Company's
stock. These costs are reflected as issuance costs and are
recorded as a reduction to capital in excess of par value.
Acquisition fees, including real estate commissions, finders
fees, consulting fees and any other non-recurring fees incurred
in connection with locating, evaluating and selecting
properties and structuring and negotiating the acquisition of
properties are included in the basis of the properties.
Acquisition fees of $1,059,805 and $222,785 were incurred and
paid to AAA during 1997 and 1996, respectively. Acquisition
fees paid to AAA in 1997 included $372,686 that was earned
prior to purchasing certain properties.
On August 8, 1997, the Company entered into a loan agreement as
the lender with AmReit Development Corp., an entity with common
management, in the amount of $2,247,254 for the purpose of
developing a property in Lake Jackson, Texas that will be
acquired by the Company upon completion of the property. As of
December 31, 1997, $1,928,974 was outstanding on the loan. The
loan bears interest at the prime lending rate and matures on
May 1, 1998.
On September 18, 1997, the Company entered into a loan
agreement as the lender with Centurion Video, Ltd. in the
amount of $1,153,794 for the purpose of developing a property
in Ridgeland, Mississippi that was acquired by the Company upon
completion of the property. AAA Net Developers, Ltd., an
entity with common management, was the limited partner in
Centurion Video, Ltd. As of December 31, 1997, the loan was
repaid in full. The loan had interest at the prime lending rate
plus .5%.
See Note 4 for joint venture agreements with related parties.
9. PROPERTY ACQUISITIONS IN 1997
On December 30, 1997, the Company acquired a newly constructed
property on lease to Hollywood Entertainment Corporation for
the purchase price of $1,285,854. The property is being
operated as a Hollywood Video store in Ridgeland, Mississippi.
The lease agreement extends for fifteen years, however the
tenant has the option to renew the lease for four additional
terms of five years each. The lease has provisions for an
escalation in the rent after the fifth year of the lease. The
Company did not record any income from Hollywood Entertainment
Corporation in 1997 related to this property.
F-13
On October 31, 1997, the Company acquired a 74.58% interest in
a newly constructed property on lease to Hollywood
Entertainment Corporation through a joint venture with an
entity with common management for the purchase price of
$863,407. The property is being operated as a Hollywood Video
store in Lafayette, Louisiana. The lease agreement extends for
fifteen years, however the tenant has the option to renew the
lease for four additional terms of five years each. The lease
has provisions for an escalation in the rent after the fifth
year of the lease. The Company recorded $22,452 of income from
Hollywood Entertainment Corporation in 1997.
On June 9, 1997, the Company acquired a 51% interest in a newly
constructed property on lease to Just For Feet, Inc. through a
joint venture with an entity with common management for the
purchase price of $1,517,005. The property is being operated
as a Just For Feet retail store in Baton Rouge, Louisiana. The
lease agreement extends for fifteen years, however the tenant
has the option to renew the lease for two additional terms of
five years each. The lease has provisions for an escalation in
the rent after the fifth and tenth years of the lease. The
Company recorded $184,296 of income from this Just For Feet
location in 1997.
As no buildings had previously been constructed on any of the
properties acquired by the Company during 1997, the rental
income received by the Company from these properties represents
the initial results of operations. Consequently, no pro-forma
information is presented.
10. COMMITMENTS
At December 31, 1997, the Company is committed to incur
additional costs of approximately $3,880,000 in connection with
properties under development.
At a special meeting of the Company's Board of Directors held
on December 31, 1997, the Board of Directors, other than Mr. H.
Kerr Taylor, who abstained from the vote due to his interest in
the transaction, approved the Company's becoming a self-managed
REIT through the acquisition of AAA. In pursuing this
acquisition, the Company will incur additional costs of
approximately $100,000. Such costs incurred in 1997 of
$282,890 were charged to expense. If approved by the
shareholders and consummated, the Company will initially issue
213,260 shares. The fair market value of the shares paid in
consideration will be charged to expense. In addition, the
Company may issue 686,740 additional shares upon the
achievement of certain goals. The fair market value of such
shares will be charged to expense.
F-14
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following 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 December 31, 1997. The pro forma statement of
operations assumes that the merger occurred on January 1, 1997.
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 annual financial statements of
the Company.
F-15
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
Historical Pro Forma Pro Forma
Company Adjustments (1) Total
ASSETS
Cash and cash equivalents $ 1,401,740 $ - $ 1,401,740
Accounts receivable 124,600 - 124,600
Property, net 21,827,866 68,439 (2) 21,896,305
Net investment in direct
financing leases 3,161,196 - 3,161,196
Other assets 630,961 - 630,961
Total assets $ 27,146,363 $ 68,439 $ 27,214,802
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable $ 6,131,489 $ - $ 6,131,489
Estimated obligation to
shareholder - 200,000 (3) 200,000
Accounts payable 108,823 117,110 (3) 225,933
Capital lease payable - 6,854 (4) 6,854
Security deposit 15,050 - 15,050
Total liabilities 6,255,362 323,964 6,579,326
MINORITY INTEREST 5,260,795 - 5,260,795
SHAREHOLDERS' EQUITY
Common stock, $.01 par value,
100,000,000 shares authorized,
1,868,213 and 2,081,473 shares
issued and outstanding on
historical and pro-forma basis,
respectively 18,682 2,133 (3) 20,815
Capital in excess of par value 16,665,300 2,183,782 (3) 18,910,667
68,439 (2)
(6,854) (4)
Accumulated distributions in
excess of earnings (1,053,776) (2,503,025) (3) (3,556,801)
Total shareholders' equity 15,630,206 (255,525) 15,374,681
Total liabilities and
shareholders' equity $27,146,363 $ 68,439 $ 27,214,802
See Notes to Pro Forma Balance Sheet
F-16
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(1) Adjustments are reflected as if the acquisition of the
Adviser was completed on December 31, 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, the selling price under the Company's current
offering, plus an estimated obligation to the shareholder of the
Adviser in the amount of $200,000 plus estimated transaction
costs of $400,000. 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 December 31, 1997 and the
issuance of any additional shares is dependent upon the
achievement of events subsequent to the closing of the merger.
As of December 31, 1997, $282,890 of transaction costs had been
incurred and charged to expense.
Consideration for the Adviser $2,385,915
Additional transaction costs incurred in 1998 117,110
Additional costs incurred to acquire Adviser $2,503,025
(to be expensed upon consummation of transaction)
Common Stock issued $ 2,133
Capital in excess of par value 2,183,782
Retained earnings (2,503,025)
Net decrease in equity $ 317,110
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.
In addition, up to 686,740 shares of stock are contingently
issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end
of each calendar quarter, shares will be issued up to the
level where the shareholder of the Adviser's total stock
ownership does not exceed 9.8% of the Company's total shares
issued and outstanding. The issuance of these additional
shares will be expensed as they are issued.
(4) Represents a capital lease obligation related to office
equipment.
F-17
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
Historical Pro Forma Pro Forma
Company Adviser Adjustments (1) Total
REVENUES
Rental income from operating leases $ 1,217,187 $ - $ - $ 1,217,187
Earned income from direct financing
leases 339,628 - - 339,628
Service fee income - 1,380,461 (1,213,026) (2) 167,435
Commission income, net - 141,813 - 141,813
Dividend income - 14,429 (14,429) (2) -
Interest income 153,895 12,539 - 166,434
TOTAL REVENUES 1,710,710 1,549,242 (1,227,455) 2,032,497
EXPENSES
General operating and administrative 218,968 1,409,133 (1,332,220) (2) 295,881
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 - 161,446
Interest 6,000 18,202 - 24,202
Potential acquisition costs 282,890 - (282,890) (2) -
Taxes - 21,626 (21,626) (2) -
TOTAL EXPENSES 716,627 1,464,424 (1,636,736) (3) 544,315
PRO FORMA INCOME BEFORE MINORITY INTEREST
IN NET INCOME OF CONSOLIDATED JOINT
VENTURES 994,083 84,818 409,281 1,488,182
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - - (455,226)
PRO FORMA NET INCOME $ 538,857 $ 84,818 $ 409,281 $ 1,032,956
PRO FORMA EARNINGS PER SHARE:
Basis $ 0.34 $ 0.58
Diluted $ 0.33 $ 0.56
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 1,563,048 1,776,308
Diluted 1,624,217 1,837,477
See Notes to Pro Forma Statement Of Operations
F-18
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1) Adjustments are reflected as if the acquisition of the
Adviser was effective as of January 1, 1997.
(2) Includes pro forma adjustments as follows:
o 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.
o Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
o 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.
o Elimination of potential acquisition costs recorded by the
Company as these costs would have been incurred prior to January 1,
1997.
o 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, 1997, this pro forma expense
would have been $2,124,330 based on the issuance of 213,260
shares at closing on January 1, 1997 in accordance with the
partial satisfaction of the share balance issuance criteria
described in the Agreement and Plan of Merger. In addition,
up to 686,740 shares of stock are contingently issuable for a
period of up to 24 calendar quarters following the closing of
the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where
the shareholder of the Adviser's total stock ownership does
not exceed 9.8% of the Company's total shares issued and
outstanding. The issuance of these additional shares will be
expensed as they are issued.
F-19
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
March ____, 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 Trust, Inc.
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-
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
AMERICAN ASSET ADVISERS TRUST, INC.
Special Meeting of Shareholders - June 5, 1998
The undersigned shareholder of AMERICAN ASSET ADVISERS TRUST,
INC., a Maryland corporation, hereby acknowledges receipt of the
Notice of Special Meeting of Shareholders and Proxy Statement for
the Special Meeting of Shareholders to be held on Friday, June 5,
1998 at 10:00 a.m. Local Time, at Eight Greenway Plaza, Suite 824,
Houston, Texas (telephone no. (713) 850-1400), and hereby appoints
H. Kerr Taylor and Larry Mangum, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the
undersigned at said Special Meeting and at any adjournment or
adjournments thereof, and to vote all shares of Common Stock which
the undersigned would be entitled to vote if then and there
personally present, on the matters set forth on the reverse side.
Either of such attorneys or their substitutes has and may
exercise all of the powers of said attorneys-in-fact hereunder.
[SEE REVERSE SIDE]
________________________________________
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
[ X ] Please mark votes as in this example.
Recommendation of This Proxy will be voted as directed or, if no
the direction is indicated, will be voted FOR
Board of Directors proposals 1 through 4, inclusive, below, and as
said proxies deem advisable on such other matters
as may properly come before the meeting.
Management will not vote proxies voting against
the transaction for adjournment of the meeting.
FOR 1. TO APPROVE THE ACQUISITION OF THE
ADVISER, AMERICAN ASSET ADVISERS REALTY
CORPORATION, A TEXAS CORPORATION, BY
THE CORPORATION AND THE COMPANY
BECOMING A SELF-ADMINISTERED AND
SELF-MANAGED REIT (the "ACQUISITION").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
FOR 2. TO AMEND ARTICLE III, SECTION 3.13 OF
THE CORPORATION'S BYLAWS TO AUTHORIZE
THE ACQUISITION.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
FOR 3. TO AMEND ARTICLE III OF THE COMPANY'S
BYLAWS TO CHANGE INVESTMENT POLICY
RESTRICTIONS REGARDING THE NATURE AND
LEASING OF PROPERTIES.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
FOR 4. TO AMEND ARTICLE I OF THE CORPORATION'S
ARTICLES OF INCORPORATION TO CHANGE THE
CORPORATION'S NAME TO "AMREIT, INC."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(This proxy should be marked, dated, signed by the shareholder(s)
exactly as his or her name appears hereon, and returned promptly in
the enclosed envelope. Persons signing in a fiduciary capacity
should so indicate. If shares are held by joint tenants or as
community property, both should sign.)
Signature: Date:
Signature: Date:
(Joint owners must each sign. Please sign exactly as your name(s)
appear(s) on this Proxy. When signing as an attorney, trustee,
executor, administrator or guardian, please give your full title.
If signer is a corporation, please sign the full corporation name
and full title of signing officer.)