<PAGE>
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 (AMENDMENT NO. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
[ ] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AMERICAN INDUSTRIAL PROPERTIES REIT
(Name of Registrant as Specified in Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] 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:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(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):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] 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:
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
_______________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 30, 1997
_______________
TO THE SHAREHOLDERS OF AMERICAN INDUSTRIAL PROPERTIES REIT:
You are cordially invited to attend the Annual Meeting of Shareholders of
American Industrial Properties REIT to be held at 2200 Ross Avenue, 40th Floor,
Dallas, Texas 75201, on Monday, June 30, 1997, at 9:00 a.m. (Dallas time), for
the following purposes:
1. To approve the authorization of an additional 490,000,000 Shares of
Beneficial Interest ("Common Shares").
2. To approve the adoption of the Third Amended and Restated Declaration
of Trust which includes provisions limiting share ownership, dealing
with business combinations, allowing dividends to be paid in cash and
shares and allowing the Trust Managers to take any action necessary to
preserve the Trust's status as a real estate investment trust.
3. To approve the authorization of 50,000,000 preferred shares.
4. To approve a proposal to eliminate cumulative voting.
5. To approve a transaction which would allow the conversion of debt by
USAA Real Estate Company into Common Shares, and, if proposal one is
not approved, an increase in the number of authorized Common Shares to
enable such conversion to occur.
6. To approve a transaction which would allow the conversion of debt by
MS Real Estate Special Situations, Inc. and certain clients of Morgan
Stanley Asset Management, Inc. into Common Shares and, if proposal one
is not approved, an increase in the number of authorized Common Shares
to enable such conversion to occur.
7. To approve the issuance by the Trust of up to $15 million of
additional senior convertible debt securities and, if proposal one is
not approved, an increase in the number of authorized Common Shares to
enable such conversion to occur.
8. To approve the Employee and Trust Manager Incentive Share Plan.
9. To elect five Trust Managers.
10. To ratify the selection of Ernst & Young LLP as independent auditors
for the year ended December 31, 1996.
11. To approve the postponement or adjournment of the Annual Meeting for
the solicitation of additional votes, if necessary.
12. To transact such other business as may properly come before the Annual
Meeting or any postponements or adjournments thereof.
Only holders of record of Shares of Beneficial Interest of the Trust on May
12, 1997 will be entitled to notice of, and to vote at, the Annual Meeting or
any postponements or adjournments thereof.
In connection with the election of Trust Managers, shareholders may
cumulate their votes by giving written notice of their intention to cumulate
votes to the Trust Managers at the Trust's principal executive office, on or
before 5:00 p.m. Dallas time on Sunday, June 29, 1997. Faxed notices to (972)
550-6037 will be accepted.
<PAGE>
A copy of the Proxy Statement relating to the Annual Meeting accompanies
this Notice of Annual Meeting of Shareholders. Each shareholder is urged to
read the Proxy Statement in its entirety.
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING
REGARDLESS OF THE NUMBER OF SHARES OF BENEFICIAL INTEREST YOU HOLD. YOU ARE
INVITED TO ATTEND THE ANNUAL MEETING IN PERSON BUT WHETHER OR NOT YOU PLAN TO
ATTEND, YOU MAY ENSURE YOUR REPRESENTATION BY COMPLETING, SIGNING, DATING AND
PROMPTLY RETURNING THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE. IF YOU
ATTEND THE ANNUAL MEETING, YOU MAY, IF YOU PREFER, REVOKE YOUR PROXY AND VOTE
YOUR SHARES IN PERSON.
By Order of the Trust Managers
Marc A. Simpson
Secretary and Chief Financial Officer
6220 North Beltline
Suite 205
Irving, Texas 75063
(972) 550-6053
May 12, 1997
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
6220 NORTH BELTLINE
SUITE 205
IRVING, TEXAS 75063
(972) 550-6053
----------------
PROXY STATEMENT
----------------
ANNUAL MEETING OF SHAREHOLDERS
MONDAY, JUNE 30, 1997
-----------------
This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Trust Managers of American Industrial Properties REIT, a Texas
real estate investment trust (the "Trust"), for use at the Annual Meeting of
Shareholders to be held at 2200 Ross Avenue, 40th Floor, Dallas, Texas 75201 at
9:00 a.m. Dallas time on Monday, June 30, 1997. Accompanying this Proxy
Statement is the Proxy for the Annual Meeting, which you may use to indicate
your vote as to each of the proposals described in this Proxy Statement. This
Proxy Statement and the accompanying Proxy are first being mailed to
shareholders on or about May 14, 1997. The Annual Report outlining the Trust's
operations for the fiscal year ended December 31, 1995 (the "1995 Annual
Report") was mailed to shareholders on or about August 5, 1996 and the Annual
Report for the fiscal year ended December 31, 1996 was mailed to shareholders on
or about March 13, 1997 (the "1996 Annual Report").
The close of business on May 12, 1997 has been fixed as the record date for
the determination of shareholders entitled to notice of and to vote at the
Annual Meeting. As of the record date, the Trust had outstanding 10,000,000
shares of beneficial interest, $0.10 par value, the only outstanding security of
the Trust (the "Common Shares").
At the Annual Meeting, action will be taken to: (i) approve the
authorization of an additional 490,000,000 Common Shares; (ii) approve the
adoption of the Third Amended and Restated Declaration of Trust (the "Amended
Declaration of Trust") which includes provisions limiting share ownership,
dealing with business combinations, allowing dividends to be paid in cash and
shares and allowing the Trust Managers to take any action necessary to preserve
the Trust's status as a real estate investment trust ("REIT"); (iii) approve the
authorization of 50,000,000 preferred shares; (iv) approve a proposal to
eliminate cumulative voting; (v) approve a transaction which would allow the
conversion of the Trust's debt by USAA Real Estate Company ("USAA REALCO") into
Common Shares, and, if proposal one is not approved, an increase in the number
of authorized Common Shares to enable such conversion to occur; (vi) approve a
transaction which would allow the conversion of the Trust's debt by MS Real
Estate Special Situations, Inc. ("MSRE") and certain clients of Morgan Stanley
Asset Management, Inc. ("MSAM") (collectively, the "Purchasers") into Common
Shares and, if proposal one is not approved, an increase in the number of
authorized Common Shares to enable such conversion to occur; (vii) approve the
issuance by the Trust of up to $15 million of additional senior convertible debt
securities and, if necessary, an increase in the number of authorized Common
Shares to enable such conversion to occur; (viii) approve the Employee and Trust
Manager Incentive Share Plan; (ix) to elect five Trust Managers to hold office
until their successors, if any, are duly elected and qualified at the next
annual meeting of shareholders; (x) ratify the selection of Ernst & Young LLP as
independent auditors for the Trust for the fiscal year ended December 31, 1996
(the "1996 Fiscal Year"); (xi) approve the postponement or adjournment of the
Annual Meeting for the solicitation of additional votes, if necessary; and (xii)
to transact such other business as may properly come before the Annual Meeting
or any postponements or adjournments thereof.
Management of the Trust believes the approval of proposals one and three
are necessary to improve the Trust's capital structure to enable the Trust the
ability to attempt to raise capital through the public and/or private equity or
convertible debt markets. The increase in authorized Common Shares and
Preferred Shares will also allow the Trust the ability to attempt to acquire
properties by issuing securities to the owners of such properties. Each
issuance of additional Common Shares or securities convertible into Common
Shares will result in dilution in the percentage ownership of the Trust by its
current shareholders. The authorization of additional securities may also have
the effect of discouraging a third party from making an acquisition proposal for
the Trust. See "PROPOSAL ONE --
<PAGE>
AUTHORIZATION OF ADDITIONAL COMMON SHARES" and "PROPOSAL THREE -- AUTHORIZATION
OF PREFERRED SHARES -- DETRIMENTS."
The shareholders are being asked to approve the Amended Declaration of
Trust which contains provisions which may have the effect of discouraging a
third party from making an acquisition proposal for the Trust, allowing
dividends to be paid in shares or cash, and eliminating the requirement that the
Board of Trust Managers consist of a majority of independent Trust Managers.
Management believes the proposed amendments are necessary, in certain instances,
to comply with the Texas REIT Act and to conform to industry standards. See
"PROPOSAL TWO --ADOPTION OF THE THIRD AMENDED AND RESTATED DECLARATION OF
TRUST."
Management has proposed the elimination of cumulative voting for the
election of Trust Managers. Management believes the elimination of this
provision will enable the Trust to conform to industry standards, thereby making
the Trust a more attractive investment. There can be no assurance, however,
that elimination of this provision will attract new investors. Generally,
cumulative voting provides minority shareholders the opportunity to elect a
trust manager to a trust's board of trust managers. The elimination of
cumulative voting will have the effect of eliminating the minority shareholders'
ability to elect a representative to the Board of Trust Managers. See "PROPOSAL
FOUR --ELIMINATION OF CUMULATIVE VOTING."
Management believes proposal five offers the advantage of allowing a
creditor to convert the Trust's debt into Common Shares thus enhancing the
Trust's financial position. The elimination of this debt should afford the
Trust the opportunity to borrow additional funds at more favorable interest
rates to acquire additional properties. Further it will eliminate the
restriction on the Trust from paying dividends on its Common Shares. By
converting the debt, USAA REALCO will be able to purchase Common Shares at a
discount to its current market price per share. If USAA REALCO had converted
the debt on April 1, 1997 at $2.00 per share and the aggregate principal balance
of the Modified Note was $5,449,618, it would have received 2,724,809 Common
Shares upon conversion, representing a $0.625 per share discount ($1,703,006
aggregate discount) from the closing price of $2.625 per share on March 31,
1997. See "PROPOSAL FIVE -- CONVERSION OF USAA REALCO DEBT INTO COMMON SHARES."
As with proposal five, management believes proposal six offers the Trust
the ability to enhance its financial position. If proposal six is approved, all
debt securities issued to the Purchasers will automatically be converted into
Common Shares. If the Purchasers had converted $20 million of debt on April 1,
1997 at $2.45 per share, it would have received 8,163,265 Common Shares upon
conversion, representing a $0.175 per share discount ($1,428,571 aggregate
discount) from the closing price of the Common Shares on March 31, 1997. The
conversion into Common Shares will result in ownership dilution to current
shareholders. See "PROPOSAL SIX -- CONVERSION OF ADDITIONAL DEBT INTO COMMON
SHARES."
Proposal seven gives the Trust the flexibility to issue up to an additional
$15 million of convertible debt securities on terms no more favorable than the
convertible debt issued to the Purchasers. The proceeds from any such issuance
would be used to purchase additional properties. The conversion of any debt
issued under proposal seven would result in ownership dilution to current
shareholders. See "PROPOSAL SEVEN -- ISSUANCE OF ADDITIONAL CONVERTIBLE DEBT
SECURITIES."
Management believes the approval of proposal eight is necessary for the
Trust to attract and retain qualified employees and Trust Managers and to align
their interests with those of the Trust and its shareholders. The issuance of
Common Shares under the incentive plan will result in ownership dilution to
current shareholders. See "PROPOSAL EIGHT -- EMPLOYEE AND TRUST MANAGER
INCENTIVE SHARE PLAN."
A shareholder is entitled to cast one vote for each Common Share held on
the record date on all matters to be considered at the Annual Meeting; however,
the Trust's current Declaration of Trust (the "Current Declaration of Trust")
provides that if the Trust becomes aware than any person beneficially owns 30%
or more of the Trust's outstanding Common Shares, there shall be cumulative
voting for the election of Trust Managers. USAA REALCO, as of the record date,
beneficially owns 31.82% of the Trust's outstanding Common Shares. Accordingly,
all shareholders entitled to vote at the Annual Meeting may cumulate their votes
for the election of Trust Managers. See "PROPOSAL NINE: ELECTION OF TRUST
MANAGERS." Any shareholder desiring to cumulate votes must give written notice
of their intention to do so, addressed to the Board of Trust Managers at the
Trust's principal executive office, on or before 5:00 p.m. Dallas time on
Sunday, June 29, 1997. Faxed notices to (972) 550-6037 will be accepted.
2
<PAGE>
Shareholders are urged to sign the accompanying Proxy, and after reviewing
the information contained in this Proxy Statement to return the Proxy in the
envelope enclosed for that purpose. Valid Proxies will be voted at the Annual
Meeting and at any adjournments thereof in the manner specified therein. If no
direction is given, but the Proxy is validly executed, such Proxy will be voted
FOR each of the eleven proposals. IN THEIR DISCRETION, THE PERSONS AUTHORIZED
UNDER THE PROXIES WILL VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE
THE ANNUAL MEETING.
A shareholder may revoke his, her or its Proxy at any time before it is
voted either by filing with the Secretary of the Trust at its principal
executive office a written notice of revocation, by submitting a duly executed
Proxy bearing a later date, or by attending the Annual Meeting and expressing a
desire to vote his, her or its Common Shares in person.
The holders of a majority of the Common Shares issued and outstanding and
entitled to vote, present in person or represented by Proxy (5,000,001 Common
Shares), shall constitute a quorum for the transaction of business at the Annual
Meeting. If such quorum should not be present at the Annual Meeting, the Annual
Meeting may be adjourned from time to time without notice, other than
announcement at the Annual Meeting, until a quorum shall be present.
If necessary, the Annual Meeting may be postponed or adjourned for the
solicitation of additional votes. Adoption of the proposal to adjourn or
postpone the Annual Meeting for the solicitation of additional votes requires
approval by the holders of a majority of the Common Shares present in person or
represented by proxy, and entitled to vote at the Annual Meeting.
Abstentions and broker non-votes (where a nominee holding Common Shares for
a beneficial owner has not received voting instructions from the beneficial
owner with respect to a particular matter and such nominee does not possess or
choose to exercise discretionary authority with respect thereto) will be
included in the determination of the number of Common Shares present at the
Annual Meeting for quorum purposes. Abstentions and broker non-votes will have
the same effect as a vote against the proposals. Failure to return the Proxy or
failure to vote at the Annual Meeting will have the same effect as a vote
against the proposals.
The Trust's principal executive offices are located at 6220 North Beltline,
Suite 205, Irving, Texas 75063.
3
<PAGE>
PROPOSAL ONE
AUTHORIZATION OF ADDITIONAL COMMON SHARES
In order to afford greater flexibility with respect to the future
capitalization of the Trust, it is proposed that the Trust be authorized to
issue up to 490,000,000 Common Shares in addition to the 10,000,000 Common
Shares presently authorized and outstanding for a total authorization of
500,000,000 Common Shares. Common Shares may be automatically deemed "Excess
Securities" under certain circumstances described below under "PROPOSAL TWO --
ADOPTION OF THE THIRD AMENDED AND RESTATED DECLARATION OF TRUST."
DESCRIPTION OF COMMON SHARES
Subject to the preferential rights of any other shares or series of shares
and to the provisions of the Amended Declaration of Trust regarding Excess
Securities, holders of Common Shares are entitled to receive dividends on the
Common Shares if, as and when authorized and declared by the Board out of assets
legally available therefor and to share ratably in the assets of the Trust
legally available for distribution to its shareholders in the event of its
liquidation, dissolution or winding-up after payment of, or adequate provision
for payment of, all known debts and liabilities of the Trust.
Subject to the provisions of the Amended Declaration of Trust regarding
Excess Securities, each outstanding Common Share entitles the holder to one vote
on all matters submitted to a vote of shareholders, including the election of
Trust Managers, and, except as otherwise required by law or except as provided
with respect to any other class or series of shares, the holders of Common
Shares possess the exclusive voting power.
Subject to the provisions of the Amended Declaration of Trust regarding
Excess Securities, Common Shares have equal dividend, distribution, liquidation
and other rights and will have no preference, appraisal or exchange rights.
Holders of Common Shares have no conversion, sinking fund, redemption or
preemptive rights to subscribe for any securities of the Trust.
As discussed below under "PROPOSAL FIVE: CONVERSION OF USAA REALCO DEBT
INTO COMMON SHARES," if proposal five is approved by the shareholders, then
certain debt of the Trust owned by USAA REALCO may be converted to Common Shares
pursuant to an agreement between the Trust and USAA REALCO. Additionally, as
discussed under "PROPOSAL SIX -- CONVERSION OF ADDITIONAL DEBT INTO COMMON
SHARES" and "PROPOSAL SEVEN -- ISSUANCE OF ADDITIONAL SENIOR CONVERTIBLE DEBT,"
if proposals six and seven are approved by the shareholders, then certain other
debt securities of the Trust will be converted into Common Shares. The Trust
currently has no other agreements for issuance of additional Common Shares.
Nevertheless, the Trust may, in the future, pursue a variety of transactions
that involve such an issuance, whether in exchange for cash or real properties,
on such terms and conditions as are to be determined by the Board. Accordingly,
it is currently not possible to predict the precise terms of any such
transactions, or whether such transactions will be consummated. No further
shareholder approval would be sought in connection with these transactions,
unless shareholder approval is required under the Texas REIT Act or by the rules
of the New York Stock Exchange ("NYSE") or any other national securities
exchange on which securities of the Trust may become listed.
BENEFITS AND DETRIMENTS
The Trust Managers believe the proposed increase in the number of
authorized Common Shares is necessary to continue the Trust's strategy of
pursuing the opportunities available in today's real estate and capital markets.
Management believes these opportunities include the ability to acquire and
develop additional properties at investment yields in excess of the Trust's cost
of capital, in order to achieve positive spread investing and increased cash
flow to the Trust. There can be no assurance that such investments will be
available, however, or if available, that such investments will result in
investment yields in excess of the Trust's cost of capital. The following
potential benefits and detriments should be considered when determining whether
to vote for or against proposal one which includes an increase in the number of
authorized Common Shares:
Improved Capital Structure. On October 23, 1993, the shareholders of the
--------------------------
Trust approved a modification to the Declaration of Trust which had the
effect of converting the Trust from a finite life entity with a maximum
4
<PAGE>
term of 15 years of existence into an infinite life entity with no
predetermined date of termination. The finite life status of the Trust had
limited the Trust's access to more competitively priced sources of capital.
Consistent with the removal of the finite life limitation on the Trust, the
increase in the number of authorized Common Shares provides a capital
structure under the proposed Amended Declaration of Trust which is expected
to allow the Trust improved access to the capital markets which should
enable it to adapt to changing capital market conditions while expanding
and diversifying its investment portfolio. The Current Declaration of
Trust authorizes the issuance of only 10,000,000 Common Shares, all such
Common Shares being equal in rights and preferences. As of May 1, 1997,
all 10,000,000 Common Shares were outstanding. The Amended Declaration of
Trust will authorize the Trust to issue a total of 500,000,000 Common
Shares and, if proposal three is adopted, 50,000,000 Preferred Shares.
Among other things, this greater number of authorized Common Shares and
Preferred Shares provides the Trust with greater flexibility to issue
shares, options or warrants to raise capital for the Trust. Also, the
Trust would not have to amend its Declaration of Trust to increase the
authorized capital stock of the Trust each time it proposes to enter into a
transaction involving the issuance of securities. The time and expense
required to obtain such approvals would likely cause such transactions to
be impracticable.
Purchase of Property With Securities. Under the Amended Declaration of
------------------------------------
Trust, the Trust would have a greater number of authorized Common Shares
and other securities, which could be used by the Trust to acquire
additional properties which meet the investment objectives and policies of
the Trust. The availability of these additional Common Shares or other
securities allows for additional flexibility in negotiating and structuring
an acquisition from a potential seller. There can be no assurance,
however, that the Trust will be able to acquire properties through the
issuance of Common Shares or other securities.
Ownership Dilution. The approval of proposals one and three will result in
------------------
a substantially greater number of authorized shares than the Trust has
under the Current Declaration of Trust. Under the Amended Declaration of
Trust, the Trust's additional authorized Common Shares may be offered in
capital raising transactions on behalf of the Trust. Such transactions
would result in ownership dilution to then-current shareholders. The
authorized but unissued Common Shares or Preferred Shares of the Trust
under the Amended Declaration of Trust may be issued for any corporate
purpose, including the purchase of additional properties and the investment
in, or acquisition of, interests in other entities, including other
corporations, REITs or limited partnerships whose assets consist of
investments suitable for the Trust. Authorized and unissued Common Shares
or Preferred Shares could also be issued in one or more transactions which
would make it more difficult, and therefore less likely, to effect a
takeover of the Trust. Any such issuance of additional Common Shares or
Preferred Shares could have the effect of diluting the earnings per share,
book value per share, voting power of existing Common Shares and the
ownership of persons seeking to obtain control of the Trust.
Anti-takeover Effects. The authorization of additional Common Shares,
---------------------
including the authorization of the Preferred Shares, may have the effect of
discouraging a third party from making an acquisition proposal for the
Trust and may thereby inhibit a change in control of the Trust under
circumstances that could give shareholders the opportunity to realize a
premium over the then-prevailing market prices of Common Shares.
Furthermore, the ability of the Trust's shareholders to effect a change in
management control of the Trust would be substantially impeded by such
anti-takeover provisions.
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding Common
Shares (6,666,667 Common Shares) is required to approve an increase in the
number of authorized Common Shares. Abstentions and broker non-votes will have
the same effect as a vote against the proposal. The Trust Managers have
unanimously approved and adopted the proposed amendment to increase the number
of authorized Common Shares, subject to the approval of the shareholders, and
intend to vote Common Shares held by them in favor of proposal one. The Trust
Managers and the executive officers of the Trust own a total of 117,250 Common
Shares (1.17%). Additionally, USAA REALCO owns a total of 3,182,206 Common
Shares (31.82%). USAA REALCO has expressed its intent to vote Common Shares
held by it in favor of proposal one.
USAA REALCO has advised the Trust that if proposal one is not approved by
the shareholders, it is highly doubtful that it would convert the Modified Notes
(as defined below) into Common Shares. SEE "PROPOSAL FIVE--CONVERSION OF USAA
REACLO DEBT INTO COMMON SHARES."
5
<PAGE>
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL ONE.
PROPOSAL TWO
ADOPTION OF THE THIRD AMENDED AND RESTATED
DECLARATION OF TRUST
BACKGROUND
As noted in the discussion that follows, certain proposed amendments to the
Current Declaration of Trust are specifically drafted to comport to industry
standards and with corresponding sections of the Texas Real Estate Investment
Trust Act (the "Texas REIT Act"), which was amended effective September 1, 1995.
The proposed addition of Articles Nineteen and Twenty-One to the Trust's charter
is proposed pursuant to the terms of the Settlement Agreement entered into by
the Trust in connection with the settlement of the litigation involving the
Trust, Pure World, Inc. and Robert Strougo (the "Settlement Agreement"). This
summary is not intended to be complete and is subject to, and qualified in its
entirety by, reference to the proposed Amended Declaration of Trust, a copy of
which is attached hereto as Appendix A.
----------
FEATURES OF THIRD AMENDED AND RESTATED DECLARATION OF TRUST
Set forth below is a discussion of the proposed material amendments to the
Current Declaration of Trust.
ELIMINATION OF 15-YEAR MAJOR CAPITAL IMPROVEMENTS RESTRICTION. Article
Three of the Current Declaration of Trust is proposed to be eliminated because
it is no longer required by the Texas REIT Act. The prior Section 3.1(A)(3) of
the Texas REIT Act mandated that a REIT organized under the Texas REIT Act
include in its declaration of trust a provision requiring the REIT to make major
capital improvements to any real property acquired by such REIT within 15 years
of purchasing the real property. If such major capital improvements were not
made within the 15-year period, the REIT was required to sell the property. The
Texas REIT Act also afforded a private right of action to any citizen of Texas
to enforce the 15-year major capital improvements provision. This provision was
rescinded by the Texas legislature when the Texas REIT Act was amended effective
September 1, 1995.
Article Three of the Current Declaration of Trust was adopted when the
Trust had a finite life and in order to comply with the former Texas REIT Act's
15-year major capital improvements requirement. The Trust Managers believe this
provision should be removed because it unnecessarily and unreasonably restricts
the Trust's investment policy and operations, particularly in light of the
Trust's infinite life, and potentially exposes the Trust to private rights of
action that are no longer sanctioned by the Texas REIT Act. As a result, the
Amended Declaration of Trust removes the 15-year major capital improvements
requirement in its entirety. The general effect of the proposed provision is to
allow the Trust greater flexibility in investing in, holding, selling and
improving real property.
CONSIDERATION FOR TRUST SHARES. Article Eight of the proposed Amended
Declaration of Trust has been revised to comport to amendments made by the Texas
legislature to the Texas REIT Act providing that consideration for shares in a
REIT formed thereunder may be in forms other than money paid or property
received. The amended Texas REIT Act provisions regarding consideration the
Trust may accept in exchange for its shares now allows the Trust to accept any
tangible or intangible benefit to the Trust, including cash, promissory notes,
services performed, contracts for services to be performed or other securities
of the Trust. The proposed Article Eight comports with these amendments to the
Texas REIT Act. Among other things, the proposed provision will afford the
Trust greater flexibility in financing its operations and raising capital.
BUSINESS COMBINATIONS. Article Thirteen of the proposed Amended
Declaration of Trust establishes special voting and procedural requirements
designed to deter certain partial or "two-step" tender offers. The Current
Declaration of Trust does not contain any similar provision.
6
<PAGE>
The Amended Declaration of Trust will require that, except in certain
circumstances, a Business Combination (as defined below) between the Trust and a
Related Person (as defined below) be approved by the affirmative vote of the
holders of 80% of the outstanding Common Shares and Preferred Shares, including
the vote of the holders of not less than 50% of the Common Shares and Preferred
Shares not owned by the Related Person.
The Amended Declaration of Trust provides that a "Business Combination" is:
(i) any merger or consolidation, if and to the extent permitted by law, of the
Trust or a subsidiary with or into a Related Person; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition, of more than 35% of
the book value of the total assets of the Trust as of the end of the last fiscal
year, to or with a Related Person; (iii) the issuance or transfer by the Trust
(other than by way of a pro rata dividend to all shareholders) of any securities
of the Trust or a subsidiary to a Related Person; (iv) any reclassification of
securities (including a reverse share split) or recapitalization by the Trust
that would increase the voting power of the Related Person; (v) the adoption of
any plan or proposal for the liquidation or dissolution of the Trust proposed by
or on behalf of a Related Person which involves any transfer of assets or any
other transaction in which the Related Person has any direct or indirect
interest (except proportionately as a shareholder); (vi) any series or
combination of transactions having, directly or indirectly, substantially the
same effect as the foregoing; and (vii) any agreement, contract or other
arrangement providing, directly or indirectly, for any of the foregoing.
A "Related Person" generally is defined in the Amended Declaration of Trust
to include any individual, corporation, partnership or other person and their
affiliates and associates which, individually or together, is the beneficial
owner in the aggregate of more than 50% of the outstanding shares of the Trust,
except that an individual, corporation, partnership or other person which,
individually or together, beneficially owns or upon conversion of debt
securities (owned or with regard to which such individual, corporation,
partnership or other person is committed to purchase as of the date of adoption
of the Amended Declaration of Trust) would own in excess of 20% of the Trust's
Common Shares at the time the Amended Declaration of Trust is adopted by the
shareholders will become a Related Person only at such time as his, her, its or
their beneficial ownership exceeds 80% of the outstanding shares of the Trust.
The voting requirements outlined above will not apply, however, if: (i) the
Board by a vote of not less than 80% of the Trust Managers then holding office
(a) have expressly approved in advance the acquisition of shares that caused the
Related Person to become a Related Person, or (b) have expressly approved the
Business Combination prior to the date on which the Related Person involved in
the Business Combination shall have become a Related Person; or (ii) the
Business Combination is solely between the Trust and an entity, 100% of the
voting shares of which is owned directly or indirectly by the Trust; or (iii)
the Business Combination is proposed to be consummated within one year of the
consummation of a Fair Tender Offer (as defined below) by the Related Person in
which Business Combination the cash or the Fair Market Value (as defined below)
of the property, securities or other consideration to be received per share by
all remaining holders of shares in the Business Combination is not less than the
price offered in the Fair Tender Offer; or (iv) the Rights (as defined below)
shall have become exercisable; or (v) all of the following conditions shall have
been met: (a) the Business Combination is a merger or consolidation,
consummation of which is proposed to take place within one year of the date of
the transaction pursuant to which such person became a Related Person and the
cash or Fair Market Value of the property, securities or other consideration to
be received per share by all remaining holders of shares in the Business
Combination is not less than the highest per share price paid by the Related
Person in acquiring any of its holdings of shares, determined as of the date of
consummation of such Business Combination (a "Fair Price"); (b) the
consideration to be received by such holders is either cash or, if the Related
Person shall have acquired the majority of its holdings of shares for a form of
consideration other than cash, in the same form of consideration with which the
Related Person acquired such majority; (c) after such person has become a
Related Person and prior to consummation of such Business Combination (1) except
as approved by a majority of the Trust Managers continuing in office, there
shall have been no reduction in the annual rate of dividends, if any, paid per
share on the shares except any reduction proportionate with any decline in the
Trust's net income, and (2) such Related Person shall not have received the
benefit, directly or indirectly, of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax advantages provided
by the Trust prior to the consummation of such Business Combination (other than
in connection with financing a Fair Tender Offer); and (d) a proxy statement
that conforms in all respects with the provisions of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), shall be mailed to shareholders of the
Trust at least 30 days prior to the consummation of the Business Combination for
the purpose of soliciting shareholder approval of the Business Combination.
If a person has become a Related Person and within one year after the date
(the "Acquisition Date") of the transaction pursuant to which the Related Person
became a Related Person (x) a Business Combination meeting all of
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the requirements of clause (v) above regarding the applicability of the 80%
voting requirement shall not have been consummated, and (y) a Fair Tender Offer
shall not have been consummated, and (z) the Trust shall not have been dissolved
and liquidated, then, in such event, the beneficial owner of each share (not
including shares beneficially owned by the Related Person) (each such beneficial
owner being hereinafter referred to as a "Holder") shall have the right
(individually a "Right" and collectively the "Rights"), which may be exercised
subject to certain conditions, commencing at the opening of business on the one-
year anniversary date of the Acquisition Date and continuing for a period of 90
days thereafter (the "Exercise Period"), to sell to the Trust one share upon the
exercise of such Right. At 5:00 p.m., Dallas, Texas time, on the last day of the
Exercise Period, each Right not exercised shall become void, and, except as
otherwise provided in the Amended Declaration of Trust, the certificates
representing shares beneficially owned by a Holder shall no longer represent
Rights. The purchase price for a share upon exercise of an accompanying Right
generally shall be equal to the then-applicable Fair Price paid by the Related
Person pursuant to the exercise of the Right relating thereto.
The Fair Price provision is designed to prevent a purchaser from utilizing
two-tier pricing and similar tactics in an attempted takeover of the Trust, and
it may have the overall effect of making it more difficult to acquire and
exercise control of the Trust. The Fair Price provision may provide the Trust
Managers with enhanced ability to block any proposed acquisition of the Trust
and to retain their positions in the event of a takeover bid. In certain
situations, the Fair Price provision may require a Related Person to pay a
higher price for shares or structure his, her or its transaction differently
than would be the case in the absence of the Fair Price provision. For example,
in order to comply with the fair price provision's minimum price criteria, the
Related Person may be required to pay a price for shares that does not
necessarily reflect current market prices. In certain cases, the Fair Price
provision's minimum price provision, while providing objective pricing criteria,
could be arbitrary and not indicative of value. In addition, a Related Person
may be unable, as a practical matter, to comply with all of the procedural
requirements of the Fair Price provision. In these circumstances, unless a
potential purchaser were willing to purchase 80% of the shares as the first step
in a Business Combination (or unless a potential purchaser were assured of
obtaining the affirmative votes of at least 80% of the shares), the purchaser
would be required either to negotiate with the Board and offer terms acceptable
to it or to abandon the proposed Business Combination.
The foregoing provisions are designed to deter partial or "two-step" tender
offers. The first step in this technique is a tender offer made by another
person or entity seeking control of the target entity at a price that often
substantially exceeds the market value of the target entity's stock or
comparable interest. After acquiring a controlling number of shares, the
acquirer will then effectuate the second step: a business combination with the
target entity designed to eliminate the then-remaining shareholders' interest in
the target. The terms of the second step business combination may not reflect
arm's length bargaining and therefore may not assure proper treatment of the
shareholders remaining after the first-step tender offer. Although it may,
under certain circumstances, have the effect of discouraging unilateral tender
offers or other takeover proposals and enhance the ability of the Trust Managers
to retain their positions in the event of a takeover bid, inclusion of the
Business Combination provision in the Amended Declaration of Trust may assure,
to some degree, fair treatment of all shareholders in the event of a two-step
takeover attempt.
SHARE DIVIDENDS. Article Fourteen of the proposed Amended Declaration of
Trust has been revised to allow for dividends of the Trust to be paid in shares
of the Trust, cash and property, rather than only cash and property as currently
provided. The general effect of the proposed provision is to afford the Trust
greater flexibility in the means by which it pays distributions to its
shareholders.
REDEMPTION OF TRUST SHARES. Article Fifteen of the proposed Amended
Declaration of Trust allows the Trust to purchase or acquire its own shares,
subject to the limitations of the Texas REIT Act. The Texas REIT Act allows
REITs formed thereunder to redeem or purchase shares unless (i) after giving
effect thereto, the Trust would be insolvent, or (ii) the amount paid therefor
exceeds the surplus of the Trust. The term "surplus" is defined by reference to
the Texas Business Corporation Act as the excess of the net assets of a
corporation over its stated capital. Moreover, if the net assets of the Trust
are not less than the proposed distribution, the Trust may make a distribution
to purchase or redeem any of its shares if the purchase or redemption is made,
for example, to effect the purchase or redemption of redeemable shares in
accordance with the Texas REIT Act. The proposed provision comports with the
requirement of Section 3.30(A)(2) of the Texas REIT Act that requires rights of
redemption to be enumerated by a Texas REIT in its operative declaration of
trust. The proposed provision affords the Trust a means of distributing assets
of the Trust by acquiring outstanding shares, as well as the ability to redeem
shares in transactions in which such a redemption may be beneficial to the Trust
and its shareholders.
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INDEMNIFICATION. The Trust Managers are accountable to the Trust as
fiduciaries and, consequently, must exercise good faith and integrity in
handling its affairs. Pursuant to the Texas REIT Act, the proposed Amended
Declaration of Trust provides that the Trust shall indemnify every Indemnitee
(as defined below) against all judgments, penalties, fines, amounts paid in
settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding (as defined in Article Sixteen of the Amended
Declaration of Trust) in which such Indemnitee was, is or is threatened to be
named as a defendant or respondent or called as a witness, by reason of his or
her serving or having served in various capacities for the Trust if it is
determined that the Indemnitee conducted himself or herself in good faith,
reasonably believed that his or her conduct was in the Trust's best interests
(or, in certain cases, not opposed to the Trust's best interests) and, in the
case of any criminal proceeding, had no reasonable cause to believe that his or
her conduct was unlawful. For purposes of the Amended Declaration of Trust,
"Indemnitee" means: (i) any present or former Trust Manager or officer of the
Trust; (ii) any person who while serving in any of the capacities referred to in
clause (i) hereof served at the Trust's request as a trust manager, director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another REIT or foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan or other
enterprise; and (iii) any person nominated or designated by (or pursuant to
authority granted by) the Trust Managers or any committee thereof to serve in
any of the capacities referred to in clauses (i) or (ii) hereof.
The substantive provisions of proposed Article Sixteen of the Amended
Declaration of Trust do not materially differ from the indemnification
provisions contained in the Current Declaration of Trust, which provisions also
provide for indemnification to the fullest extent lawful. The Trust Managers
believe that proposed Article Sixteen better enumerates the persons to whom the
Trust's indemnification provisions apply, as well as the terms and conditions of
such indemnification within the scope of the Texas REIT Act.
RESCISSION OF MAJORITY INDEPENDENT TRUST MANAGER PROVISION. The Current
Declaration of Trust contains certain provisions that require a majority of the
Trust Managers to be "Independent Trust Managers," which means a Trust Manager
who: (i) does not perform any services for the Trust (except in the capacity as
a Trust Manager) whether as an agent, advisor, consultant, employee, property
manager, or in any other capacity whatsoever (other than as Trust Manager); and
(ii) is not an Affiliate of any person or entity that performs any services for
the Trust (other than as a Trust Manager). For purposes of the Current
Declaration of Trust, "Affiliate" means any individual, corporation,
partnership, trust, unincorporated organization, association or other entity
that, directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with any person or entity that
performs any services for the Trust (other than as a Trust Manager).
On October 22, 1993, the holders of over 80% of the Common Shares of the
Trust voted to adopt the Current Declaration of Trust and perpetuate the Trust's
existence beyond its original finite life. The Trust is no longer affiliated
with the organizer of the Trust and, as a result, the Trust Managers do not
believe the provision of the Current Declaration of Trust requiring that a
majority of the Trust Managers be Independent Trust Managers serves the purpose
for which it was originally intended (i.e., to maintain a governing body of the
Trust that is independent of the organizer of the Trust). The Trust Managers
also believe that because all Trust Managers must be elected by a majority of
the outstanding Common Shares, the shareholders themselves are able to determine
whether any particular person nominated to serve as a Trust Manager, regardless
of whether such person would qualify as an Independent Trust Manager or not,
should serve in that capacity. Although the NYSE requires the Trust to have two
independent Trust Managers, to the knowledge of management of the Trust, a
provision requiring a majority of independent Trust Managers contained in the
declaration of trust or articles of incorporation is not common in the REIT
industry.
NUMBER AND TERM OF TRUST MANAGERS. Consistent with the Texas REIT Act,
Article Eighteen of the proposed Amended Declaration of Trust provides that the
number of Trust Managers shall be fixed by the Board as provided in the Bylaws
of the Trust. Proposed Article Eighteen also states, in conformity with the
Texas REIT Act, that each Trust Manager serves until his or her successor is
elected and qualified or until his or her death, retirement, resignation or
removal. If a Trust Manager is serving to fill a position on the Board created
by an increase in the number of Trust Managers, or if a Trust Manager is serving
at a time when the authorized number of Trust Managers is decreased, then he or
she will continue to serve until his or her death, retirement, resignation or
removal. The substantive provisions of proposed Article Eighteen are compelled
by the Texas REIT Act and the provision allowing the Board to fix the number of
Trust Managers is identical to the comparable Bylaw provision that is presently
operative and which was adopted in accordance with the Texas REIT Act.
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REMOVAL OF TRUST MANAGERS AND VACANCIES ON THE BOARD OF TRUST MANAGERS.
Consistent with the Texas REIT Act, Article Eighteen of the proposed Amended
Declaration of Trust also provides that any Trust Manager may be removed from
office at any time, but only by the affirmative vote of the holders of two-
thirds of the then-outstanding shares entitled to vote generally in the election
of Trust Managers, voting together as a single class. Under the Trust's
Bylaws, vacancies resulting from death, resignation, retirement, or removal may
be filled by the affirmative vote of a majority of the Trust Managers or by the
affirmative vote of the holders of at least a majority of the outstanding Common
Shares at an annual or special meeting. The Bylaws also provide that Trust
Managers selected by the Board to fill vacancies serve until the next annual
meeting of shareholders and until their successors are elected and qualified.
The general effect of the proposed provision is to allow for the removal of
Trust Managers by shareholders of the Trust, as well as to enumerate the
provisions governing the period during which Trust Managers are deemed to serve
under the Texas REIT Act.
RESCISSION OF SPECIFIED INDEPENDENT TRUST MANAGER DUTIES. Consistent with
the elimination of the requirement for Independent Trust Managers, as discussed
above, the proposed Amended Declaration of Trust eliminates the enumeration of
specific duties to Independent Trust Managers. As a matter of law, all of the
Trust Managers, not only Independent Trust Managers, are accountable to the
Trust as fiduciaries and must exercise good faith and integrity in handling its
affairs. The duties enumerated in the Current Declaration of Trust include
duties to annually review the Trust's investment policies to ensure they are
followed in the best interests of the shareholders, to ensure that an annual
report is prepared, to oversee the termination and compensation of advisors and
property managers, to approve aggregate borrowings of the Trust to exceed an
amount equal to 300% of the Trust's net assets, and determinations as to whether
independent appraisers should be utilized when acquiring a property and whether
investments in junior mortgage loans are sufficiently secured. As with the
Independent Trust Manager provision discussed above, these provisions were
originally adopted to ensure that certain decisions of the Trust were made by a
governing body that was independent of the organizer of the Trust. Because the
Trust is no longer affiliated with its organizer and all of the Trust Managers
owe fiduciary obligations with respect to all of the decisions they make and
actions they take, the enumeration of specific duties of Independent Trust
Managers is unnecessarily limited. As a result, the Trust Managers recommend
that such provisions be eliminated.
LIMITATION ON OWNERSHIP. For the Trust to qualify as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), among other things, not
more than 50% in value of its outstanding shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year, and such shares must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a shorter taxable
year.
Because the Board believes it is essential for the Trust to continue to
qualify as a REIT, the Amended Declaration of Trust, subject to certain
exceptions, provides that no holder may own, or be deemed to own by virtue of
the attribution provisions of the Code, more than 9.8% (the "Percentage Limit")
of the aggregate value of any class of shares or 9.8% of the total number of
outstanding shares of any class of shares. Any transfer of shares or change in
capital structure (such as a redemption of shares by the Trust) that would (i)
create a direct or indirect ownership of shares in excess of the Percentage
Limit, (ii) result in the shares being owned by fewer than 100 persons, (iii)
result in the Trust being "closely held" within the meaning of Section 856(h) of
the Code, (iv) result in the Trust constructively owning 10% or more of the
ownership interests in any tenant or subtenant of the Trust's real property
within the meaning of the relevant provisions of the Code, or (v) result in the
disqualification of the Trust as a REIT, shall be null and void, and the
intended transferee will acquire no rights to such shares. The Percentage Limit
does not apply to: (i) acquisitions of Securities (defined to include all
shares and any Trust securities that are convertible into shares) by a person
who has made a tender offer for all outstanding Securities in conformity with
federal securities laws; (ii) acquisitions of Securities by an underwriter in
connection with the distribution of such Securities; (iii) acquisitions of
Securities pursuant to the exercise of employee share options; or (iv)
acquisitions of Securities made pursuant to an exception granted by the Board.
The proposed Amended Declaration of Trust provides that shares owned, or
deemed to be owned, or transferred to a shareholder in excess of the Percentage
Limit will automatically be deemed to be "Excess Securities" and as such will be
transferred, by operation of law, to the Trust as trustee of a trust for the
exclusive benefit of the transferee(s) to whom such shares may be ultimately
transferred without violating the Percentage Limit. While the Excess Securities
are held in trust, the holder will not be entitled to vote such Excess
Securities, nor will such Excess Securities be considered for purposes of any
shareholder vote or the determination of a quorum for such vote, and no
dividends or
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other distributions will be paid to the holder. Any dividend or distribution
paid to a proposed transferee of Excess Securities prior to the discovery by the
Trust that shares have been transferred in violation of the provisions of the
Trust's Amended Declaration of Trust must be repaid to the Trust upon demand.
The Excess Securities are not treasury shares. The original transferee-
shareholder may, at any time the Excess Securities are held by the Trust in
trust, transfer the interest in the trust representing the Excess Securities to
any individual whose ownership of the shares that have been deemed to be Excess
Securities would be permitted under the Percentage Limit, at a price not in
excess of the price paid by the original transferee-shareholder for the shares
that were exchanged into Excess Securities. Immediately upon the transfer to the
permitted transferee, the transferee will automatically be entitled to exercise
all of the rights of shares of the class underlying such Excess Securities. If
the foregoing transfer restrictions are determined to be void or invalid by
virtue of any legal decision, statute, rule or regulation, then the intended
transferee-shareholder of any Excess Securities may be deemed, at the option of
the Trust, to have acted as an agent on behalf of the Trust in acquiring the
Excess Securities and to hold the Excess Securities on behalf of the Trust.
In addition to the foregoing transfer restrictions, the Trust will have the
right, for a period of 90 days during the time any Excess Securities are held by
the Trust in trust, to purchase all or any portion of the Excess Securities from
the original transferee-shareholder at the lesser of the price paid for the
shares by the original transferee-shareholder and the market price (as
determined in the manner set forth in the Amended Declaration of Trust) of the
shares on the date the Trust exercises its option to purchase. The 90-day
period begins on the later of the date of the violative transfer or the date the
Board determines that a violative transfer has been made.
Each shareholder shall upon demand be required to disclose to the Trust in
writing any information with respect to the direct, indirect, and constructive
ownership of beneficial interests as the Board deems necessary to comply with
the provisions of the Code applicable to REITs, to comply with the requirements
of any taxing authority or governmental agency or to determine any such
compliance.
The Percentage Limit may have the effect of precluding acquisition of
control of the Trust unless the Board and the shareholders determine that
maintenance of REIT status is no longer in the best interests of the Trust.
The Trust has historically operated as a REIT and maintained its
qualification as a REIT under the Code. Although management of the Trust
believes that the Trust will continue to be organized and will operate in such a
manner, no assurance can be given that the Trust will remain qualified as a
REIT. Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters
and circumstances not entirely within the Trust's control may affect the Trust's
ability to qualify as a REIT. If in any taxable year the Trust were to fail to
qualify as a REIT, it would be taxed as a corporation and distributions to
shareholders would not be deductible by the Trust in computing its taxable
income. Failure to qualify for even one taxable year will disqualify it from
taxation as a REIT for the next four taxable years. In addition, dividends
would no longer be required to be paid. As a result, the funds available for
distribution to the Trust's shareholders would be reduced for each of the years
involved. The Excess Securities provision of proposed Article Nineteen of the
Amended Declaration of Trust are designed to avoid the adverse consequences of a
failure to qualify as a REIT under the Code.
USAA REALCO presently beneficially owns 31.82% of the Trust's outstanding
Common Shares. For purposes of determining whether the Trust is closely held
within the meaning of Section 856(h) of the Code, the rules of attribution set
forth in Section 544 of the Code must be applied (subject to certain limited
exceptions under Section 856(h) of the Code). Such rules of attribution
generally result in stock owned by a corporation being attributed to its
shareholders (and with regard to shareholders that are corporations, such
ownership once again being attributed to their respective shareholders). Prior
to USAA REALCO acquiring its Common Shares, Liddell, Sapp, Zivley, Hill &
LaBoon, L.L.P., counsel to the Trust, orally advised the Board that based upon
such Code provisions (and the Treasury Regulations thereunder) neither USAA
REALCO nor its parent, United Services Automobile Association ("USAA") would be
treated as an individual holder under the relevant attribution rules of the Code
and, as a result, USAA REALCO's ownership of Common Shares would not threaten
the Trust's qualification as a REIT under the Code. Accordingly, the Board voted
to waive provisions in the currently operative Bylaws that are equivalent to the
proposed Excess Securities provisions as they relate to USAA REALCO. For the
same reasons, the proposed Excess Securities provisions will be waived as to
USAA REALCO if the Recapitalization Plan is approved by the shareholders of the
Trust. However, if USAA REALCO or USAA were treated as an individual holder
under the relevant attribution provisions of the Code, and such attribution
resulted in the Trust being "closely held" within the meaning of Section
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856(h) of the Code, it would lose REIT status which would result in the Trust
being subject to federal income taxation on its taxable income at regular
corporate rates (without a deduction for dividends paid to shareholders).
Further, unless it were entitled to relief under certain statutory provisions,
the Trust would also be disqualified from treatment as a REIT for the four
taxable years following the year in which the Trust lost its qualification as a
REIT.
PROTECTION OF REIT STATUS. Article Twenty of the proposed Amended
Declaration of Trust provides that the Board is to use its best efforts and take
such actions as it may deem desirable to preserve the Trust's status as a REIT
under the Code. While proposed Article Nineteen of the Amended Declaration of
Trust is believed to adequately protect the Trust's status as a REIT under the
Code, in the event that such provisions prove insufficient, proposed Article
Twenty affords the Board the discretion that may be necessary to ensure that the
Trust and its shareholders continue to receive the federal income tax benefits
that arise from the Trust's continued qualification as a REIT under the Code.
SPECIAL SHAREHOLDER MEETINGS. Article Twenty-One of the proposed Amended
Declaration of Trust allows for the holders of 5% of the Trust's voting shares
to call a special meeting. The provisions of proposed Article Twenty-One were
specifically adopted in light of the Trust's Excess Securities provisions, as
discussed above and set forth in proposed Article Nineteen of the Amended
Declaration of Trust, which generally limit the ownership of Trust shares by
persons to 9.8% of the Trust's outstanding shares. The Texas REIT Act provides
that holders of 10% of the shares entitled to vote may call a special meeting of
a REIT formed under the Texas REIT Act unless the declaration of trust for such
REIT provides for a number of shares greater than or less than 10% of the shares
entitled to vote. Without the adoption of proposed Article Twenty-One, the
Texas REIT Act might prevent special meetings from ever being called by
shareholders of the Trust in light of the Excess Securities provision, which
itself is necessary to protect the Trust's continued qualification as a REIT.
AMENDMENTS TO THE AMENDED DECLARATION OF TRUST. Article Twenty-Two of the
proposed Amended Declaration of Trust provides, in accordance with the Texas
REIT Act, that the affirmative vote of the holders of at least two-thirds of the
Trust's outstanding voting shares is required in order to amend the Amended
Declaration of Trust; provided, however, that any amendment to the provisions in
the Amended Declaration of Trust relating to (i) the prohibition against
engaging in non-real estate investment trust businesses, (ii) the restrictions
on certain Business Combinations discussed above, (iii) restrictions on certain
share ownership and transfers and (iv) the amendment of the provisions in the
Amended Declaration of Trust regarding amendments thereto shall each require the
affirmative vote of the holders of at least 80% of the outstanding voting
shares. The provisions of proposed Article Twenty-Two ensure that the various
provisions of the Amended Declaration of Trust that require a vote in excess of
a simple majority of shares entitled to vote and represented at a shareholder
meeting are not amended except by a vote at least equal to the voting
requirement of such provisions.
SEVERABILITY. Article Twenty-Three of the proposed Amended Declaration of
Trust was adopted to allow for the severance of any provisions or application of
such provisions of the Amended Declaration of Trust that are deemed to be
invalid by any federal or state court having jurisdiction over such issues. As
a result, the remaining provisions or application of such provisions of the
Amended Declaration of Trust would continue in effect even in the event that
other provisions or the application of such other provisions may be deemed to be
invalid.
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding Common
Shares (6,666,667 Common Shares) is required to approve the Amended Declaration
of Trust. Abstentions and broker non-votes will have the same effect as a vote
against the proposal. The Trust Managers have unanimously approved the
proposal, subject to shareholder approval. USAA REALCO and management of the
Trust who collectively own 32.99% of the outstanding Common Shares have advised
the Trust that they intend to vote in favor of this proposal.
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL TWO.
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PROPOSAL THREE
AUTHORIZATION OF PREFERRED SHARES
DESCRIPTION OF PREFERRED SHARES
GENERAL. If this proposal is approved, under the Amended Declaration of
Trust, the Trust will be authorized to issue 50,000,000 Preferred Shares. The
Trust Managers have no present intention to issue Preferred Shares.
Under the Amended Declaration of Trust, the Board of Trust Managers, could,
without further shareholder approval, from time to time establish and issue
Preferred Shares in one or more series with such designations, powers,
preferences or rights of the shares of such series and the qualifications,
limitations or restrictions thereon.
It is anticipated that the Preferred Shares shall have the dividend,
liquidation, redemption and voting rights described below unless otherwise
provided with respect to a particular series of the Preferred Shares including:
(i) the amount of liquidation preference per share; (ii) the dividend rate (or
method of calculation), the dates on which dividends shall be payable and the
dates from which dividends shall commence to cumulate, if any; (iii) any
redemption or sinking fund provisions; (iv) any conversion right; and (v) any
additional voting, dividend, liquidation, redemption, sinking fund and other
rights, preferences, privileges, limitations and restrictions not in conflict
with the Amended Declaration of Trust or the Texas REIT Act. The Preferred
Shares will, when issued for lawful consideration therefor, be fully paid and
nonassessable and will have no preemptive rights.
RANK. Unless otherwise specified with respect to a particular series, the
Preferred Shares will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Trust, rank (i) senior to all
classes or series of Common Shares and to all equity securities ranking junior
to such Preferred Shares; (ii) on a parity with all equity securities issued by
the Trust, the terms of which specifically provide that such equity securities
rank on a parity with the Preferred Shares; and (iii) junior to all equity
securities issued by the Trust the terms of which specifically provide that such
equity securities rank senior to the Preferred Shares. The rights of the
holders of each series of the Preferred Shares will be subordinate to those of
the Trust's general creditors.
DIVIDENDS. Holders of each series of Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Trust Managers, out of assets
of the Trust legally available for payment, cash or share dividends. Such rates
may be fixed or variable or both. Each such dividend shall be payable to
holders of record as they appear on the share transfer books of the Trust on
such record dates as shall be fixed by the Board of Trust Managers.
Dividends on any series of the Preferred Shares may be cumulative or non-
cumulative. If the Board of Trust Managers of the Trust fails to declare a
dividend payable on a dividend payment date on any series of the Preferred
Shares for which dividends are noncumulative, then the holders of such series of
the Preferred Shares will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Trust will have no
obligation to pay the dividend accrued for such period, whether or not dividends
on such series are declared payable on any future dividend payment date.
Dividends on shares of each series of Preferred Shares for which dividends are
cumulative will accrue from the date on which the Trust initially issues shares
of such series.
So long as any series of the Preferred Shares shall be outstanding, unless
(i) full dividends (including if such dividends are cumulative, dividends for
prior dividend periods) shall have been paid or declared and set apart for
payment on all outstanding Preferred Shares of such series and all other classes
and series of Preferred Shares of the Trust (other than Junior Shares, as
defined below); and (ii) the repurchase or other mandatory retirement of, or
with respect to any sinking or other analogous fund for, any shares of Preferred
Shares of such series or any other Preferred Shares of the Trust of any class or
series (other than Junior Shares), the Trust may not declare any dividends on
any Common Shares of the Trust or any other shares of the Trust ranking as to
dividends or distributions of assets junior to such series of Preferred Shares
(the Common Shares and any such other shares being herein referred to as "Junior
Shares"), or make any payment on account of, or set apart money for, the
purchase, redemption or other retirement of, or for a sinking or other analogous
fund for, any Junior Shares or make any distribution in respect thereof, whether
in cash or property or in obligations or shares of the Trust, other than Junior
Shares which are neither convertible into, nor exchangeable or exercisable for,
any securities of the Trust other than Junior Shares.
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Any dividend payment made on a series of Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable. No interest, or sum of money in
lieu of interest, shall be payable in respect to any dividend payment or
payments on Preferred Shares of such series which may be in arrears.
REDEMPTION. A series of Preferred Shares may be redeemable, in whole or
from time to time in part, at the option of the Trust, and may be subject to
mandatory redemption pursuant to a sinking fund or otherwise, in each case upon
terms, at the times and at the redemption prices set forth in the instrument
creating the series of Preferred Shares. Shares of the Preferred Shares redeemed
by the Trust will be restored to the status of authorized but unissued Preferred
Shares of the Trust.
The instrument creating the series of Preferred Shares that is subject to
mandatory redemption will specify the number of shares of such Preferred Shares
that shall be redeemed by the Trust in each year commencing after a date to be
specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid dividends thereon (which shall not, if
such Preferred Shares do not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash or other
property. If the redemption price for Preferred Shares of any series is payable
only from the net proceeds of the issuance of shares of beneficial interest of
the Trust, the terms of such Preferred Shares may provide that, if no such
shares shall have been issued or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred Shares shall automatically and mandatorily be converted into
shares of the applicable shares of beneficial interest of the Trust pursuant to
specified conversion provisions.
So long as any dividends on shares of any series of the Preferred Shares or
any other series of Preferred Shares of the Trust ranking on a parity as to
dividends and distribution of assets with such series of the Preferred Shares
are in arrears, no shares of any such series of the Preferred Shares or such
other series of Preferred Shares of the Trust will be redeemed (whether by
mandatory or optional redemption) unless all such shares are simultaneously
redeemed, and the Trust will not purchase or otherwise acquire any such shares;
provided, however, that the foregoing will not prevent the purchase or
acquisition of such shares to preserve the REIT status of the Company or
pursuant to a purchase or exchange offer made on the same terms to holders of
all such shares outstanding.
In the event that fewer than all of the outstanding shares of a series of
the Preferred Shares are to be redeemed, whether by mandatory or optional
redemption, the number of shares to be redeemed will be determined by lot or pro
rata (subject to rounding to avoid fractional shares) as may be determined by
the Trust or by any other method as may be determined by the Trust in its sole
discretion to be equitable. From and after the redemption date (unless default
shall be made by the Trust in providing for the payment of the redemption price
plus accumulated and unpaid dividends, if any), dividends shall cease to
accumulate on the Preferred Shares called for redemption and all rights of the
holders thereof (except the right to receive the redemption price plus
accumulated and unpaid dividends, if any) shall cease.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Trust then, before any
distribution or payment shall be made to the holders of any Junior Shares, the
holders of each series of Preferred Shares shall be entitled to receive out of
assets of the Trust legally available for distribution to shareholders,
liquidating distributions in the amount of the liquidation preference per share,
plus an amount equal to all dividends accrued and unpaid thereon (which shall
not include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Shares do not have a cumulative dividend). After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Preferred Shares will have no right or claim to any of
the remaining assets of the Trust. In the event that, upon any such voluntary
or involuntary liquidation, dissolution or winding up, the available assets of
the Trust are insufficient to pay the amount of the liquidating distributions on
all outstanding Preferred Shares and the corresponding amounts payable on all
shares of other classes or series of shares of beneficial interest of the
Company ranking on a parity with the Preferred Shares in the distribution of
assets, then the holders of the Preferred Shares and all other such classes or
series of shares of beneficial interest shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
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If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of the Trust shall be distributed among
the holders of Junior Shares, according to their respective rights and
preferences and in each case according to their respective number of shares.
For such purposes, the consolidation or merger of the Trust with or into any
other corporation, or the sale, lease or conveyance of all or substantially all
of the property or business of the Trust, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Trust.
VOTING RIGHTS. Except as indicated below in the instrument establishing
the series of Preferred Shares, or except as required by applicable law, holders
of the Preferred Shares will not be entitled to vote for any purpose.
So long as any series of Preferred Shares remain outstanding, the consent
or the affirmative vote of the holders of at least two-thirds of the votes
entitled to be cast with respect to the then outstanding shares of such series
of the Preferred Shares together with any Other Preferred Shares (as defined
below), voting as one class, either expressed in writing or at a meeting called
for that purpose, will be necessary (i) to permit, effect or validate the
authorization, or any increase in the authorized amount, of any class or series
of shares of the Trust ranking prior to the Preferred Shares of such series as
to dividends, voting or upon distribution of assets; and (ii) to repeal, amend
or otherwise change any of the provisions applicable to the Preferred Shares of
such series in any manner which adversely affects the powers, preferences,
voting power or other rights or privileges of such series of the Preferred
Shares. In case any series of the Preferred Shares would be so affected by any
such action referred to in clause (ii) above in a different manner than one or
more series of the Other Preferred Shares which will be similarly affected, the
holders of the Preferred Shares of such series, together with any series of the
Other Preferred Shares which will be similarly affected, will be entitled to
vote as a class, and the Trust will not take such action without the consent or
affirmative vote, as above provided, of at least two-thirds of the total number
of votes entitled to be cast with respect to each such series of the Preferred
Shares and the Other Preferred Shares, then outstanding, in lieu of the consent
or affirmative vote hereinabove otherwise required.
CONVERSION RIGHTS. The terms and conditions, if any, upon which shares of
any series of Preferred Shares are convertible into Common Shares will be set
forth in the applicable instrument establishing the series of Preferred Shares.
Such terms will include the number of shares of Common Shares into which the
Preferred Shares are convertible, the conversion price (or manner of calculation
thereof), the conversion period, provisions as to whether conversion will be at
the option of the holders of the Preferred Shares or the Trust, the events
requiring an adjustment of the conversion price and provisions affecting
conversion.
DETRIMENTS
The issuance of Preferred Shares by action of the Board of Trust Managers
could adversely affect the voting power, dividend rights and other rights of
holders of the Common Shares. Issuance of additional series of Preferred Shares
also could, depending on the terms of such series, either impede or facilitate
the completion of a merger, tender offer or other takeover attempt. Although
the Board of Trust Managers is required to make a determination as to the best
interests of the shareholders of the Trust when issuing Preferred Shares, the
Board of Trust Managers could act in a manner that would discourage an
acquisition attempt or other transaction that some or a majority of the
shareholders might believe to be in the best interest of the Trust or in which
shareholders might receive a premium for their shares over the then prevailing
market price. Although there are currently no plans to issue additional
Preferred Shares or rights to purchase such shares, management believes that the
availability of the Preferred Shares will provide the Trust with increased
flexibility in structuring possible future financing and acquisitions and in
meeting other needs that might arise. The approval of proposal two will result
in Preferred Shares being available for issuance without further action by the
Trust's shareholders, unless such action is required by applicable law or the
rules of any stock exchanges on which the Common Shares may then be listed.
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding Common
Shares (6,666,667 Common Shares) is required to authorize 50,000,000 Preferred
Shares, $0.10 par value per share. Abstentions and broker non-votes will have
the same effect as a vote against the proposal. The Trust Managers have
unanimously approved the proposal, subject to shareholder approval. USAA REALCO
and management of the Trust who collectively own 32.99% of the outstanding
Common Shares have advised the Trust that they intend to vote in favor of this
proposal.
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RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL THREE.
PROPOSAL FOUR
ELIMINATION OF CUMULATIVE VOTING
GENERAL
Management has proposed that the right to cumulate votes in the election of
Trust Managers be eliminated.
Article Twelve of the proposed Amended Declaration of Trust denies
cumulative voting, whereas the Current Declaration of Trust provides for
cumulative voting in any election of Trust Managers on or after the date on
which the Trust becomes aware that a 30% Shareholder (as defined below) has
become a 30% Shareholder. For purposes of the Current Declaration of Trust,
"30% Shareholder" means any person who or which is the beneficial owner,
directly or indirectly, of 30% or more of the outstanding Common Shares. This
provision was designed to enable a 30% shareholder to assure itself a
representative as a Trust Manager. USAA REALCO is the only such shareholder and
currently owns 31.82% of the Trust's issued and outstanding Common Shares. The
proposed amendment will reconcile any inconsistencies between the voting
requirements to elect Trust Managers enumerated in the Trust's Bylaws consistent
with the Texas REIT Act (i.e., vote of holders of a majority of outstanding
voting shares to elect Trust Managers) and cumulative voting (i.e., generally
determined by the vote of the holders of a plurality of voting shares voted in
the election of Trust Managers). The elimination of cumulative voting will have
the effect of allowing the holders of a majority of the outstanding Common
Shares to elect all of the Trust Managers then standing for election.
Based on USAA REALCO's ownership of Common Shares, under the Current
Declaration of Trust, the Trust's shareholders have the right to cumulate their
votes in the election of Trust Managers. See "PROPOSAL NINE: ELECTION OF TRUST
MANAGERS -- VOTING PROCEDURES."
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding Common
Shares (6,666,667 Common Shares) is required to approve the proposal to
eliminate cumulative voting. Abstentions and broker non-votes will have the
same effect as a vote against the proposal. The Trust Managers have unanimously
approved the proposal, subject to shareholder approval. USAA REALCO and
management of the Trust who collectively own 32.99% of the outstanding Common
Shares have advised the Trust that they intend to vote in favor of this
proposal.
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL FOUR.
PROPOSAL FIVE
CONVERSION OF USAA REALCO DEBT INTO COMMON SHARES
BACKGROUND
On May 22, 1996, the Trust and certain of its affiliates entered into a
settlement agreement (the "MLI Agreement") to repay the Trust's 8.8% unsecured
notes (the "MLI Notes") to The Manufacturers Life Insurance Company and The
Manufacturers Life Insurance Company (U.S.A.) (collectively referred to as
"MLI") at a substantial discount in connection with the settlement of the
Trust's litigation with MLI and Fidelity Management and Research Company and
certain of its affiliates.
Pursuant to the MLI Agreement, the Trust was granted the option to repay
the approximately $45,239,000 principal amount of the MLI Notes for $36,800,000
(the "Option Price"). In order to achieve this discount, the Trust
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was required to pay at least $25,000,000 to MLI by November 23, 1996, such
amount to be applied pro rata to the outstanding principal balance of the MLI
Notes and dollar-for-dollar to the Option Price. This amount was funded on
November 19, 1996 with the proceeds of a $26,452,500 loan from Life Investors
Insurance Company of America, an affiliate of AEGON USA Realty Advisors, Inc.,
which was secured by first liens on nine of the Trust's properties, and the sale
of two of the Trust's properties. In order to achieve the remaining discount,
the Trust would have been required to pay $5,449,618 (the remaining amount of
the Option Price) by March 31, 1997 (or June 30, 1997, subject to the payment of
an additional principal payment in the amount of $150,000, which would be
applied pro rata to the outstanding principal balance of the MLI Notes, but not
the Option Price).
TRANSACTION WITH USAA REALCO
On December 19, 1996, USAA REALCO purchased from the Trust the
remaining 924,600 unissued shares of the Trust. In connection with the
settlement of the litigation involving the Trust, Pure World, Inc. and Robert
Strougo, USAA REALCO purchased on December 20, 1996, (i) 907,000 Common Shares
of the Trust from Pure World, Inc.; (ii) 352,506 Common Shares of the Trust from
Jonathan Tratt, Stanley D.L. Horwitz, David Bradley, Keith Sexton and C.J.
Scott; and (iii) 998,100 Common Shares of the Trust previously owned by Black
Bear Realty, Ltd. and Turkey Vulture Fund XIII, Ltd., affiliates of Richard
Osborne. These purchases resulted in USAA REALCO owning 31.82% of the Common
Shares of the Trust. Prior to such purchase, on December 18, 1996, the Trust
executed a letter agreement with USAA REALCO wherein, among other things, USAA
REALCO agreed to commence negotiations to purchase or repay the MLI Notes. The
Trust believed that the purchase of the MLI Notes by USAA REALCO would remove
the risks and uncertainties of the Trust's ability to perform under the MLI
Agreement in connection with the payment of the remaining portion of the Option
Price. See "BACKGROUND" and "--REASONS FOR THE USAA REALCO TRANSACTION" below.
As a result of these negotiations, USAA REALCO acquired the MLI Notes for
$5,481,151.52 and, pursuant to the Renewal, Extension, Modification and
Amendment Agreement dated as of February 26, 1997, by and between the Trust and
USAA REALCO (the "Renewal Agreement"), the MLI Notes have been modified to
incorporate various amendments described below (the "Modified Notes"). The
aggregate principal balance of the MLI Notes of approximately $9,419,213 was
amended, resulting in an aggregate principal balance of the Modified Notes of
$7,040,721. The maturity date of the MLI Notes has been extended from March 31,
1997 to December 31, 2000 and the existing security for the MLI Notes has been
released. The Trust also made a $1,591,103 principal payment on the Modified
Notes, resulting in a current principal balance on the Modified Notes of
approximately $5,449,618.
The provisions of the Renewal Agreement were the result of negotiations
between USAA REALCO and the non-USAA REALCO Trust Managers, including the right
of USAA REALCO to convert the Modified Notes into Common Shares for $2.00 before
December 31, 1997, and $2.25 after December 31, 1997 (but before December 31,
2000) as described below.
If this proposal is approved by the shareholders by June 30, 1997, the
Modified Notes will continue to accrue interest at a non-default rate of 8.8%
per annum, with accrued interest payable monthly in arrears. If this proposal
is not approved by the shareholders by June 30, 1997, the interest rate
applicable to the Modified Notes will increase to 18% (but in no event will
exceed the highest lawful rate), and the Trust will be required to pay the
outstanding principal balance of the Modified Notes, plus accrued and unpaid
interest, by October 31, 1997. The Modified Notes do not contain the discounted
prepayments contemplated by the Settlement Agreement and, except for the payment
of $1,591,103 made by the Trust at the time USAA REALCO acquired the MLI Notes,
the Modified Notes are not prepayable.
If the shareholders approve this proposal, the Modified Notes will be
convertible (in whole or in part) at USAA REALCO's option, at any time, into a
number of Common Shares determined as follows:
P / C = S
For this purpose: (i) "P" equals the aggregate principal balance of the Modified
Notes at the date of conversion; and (ii) "S" equals such number of converted
Common Shares. If the conversion of the Modified Notes occurs on or before
December 31, 1997, the conversion price "C" per share will be $2.00. If the
conversion of the Modified Notes occurs after December 31, 1997, but on or
before December 31, 2000, the conversion price "C" per share will be $2.25. The
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$2.00 conversion price is equal to the closing price of the Trust's Common
Shares on December 18, 1996, the date of the letter agreement between the Trust
and USAA REALCO.
If the shareholders approve this proposal, and USAA REALCO converts the
Modified Notes into Common Shares prior to December 31, 1997 at $2.00 per Common
Share (assuming a principal balance of $5,449,618), USAA REALCO will receive
approximately 2,724,809 Common Shares upon conversion. Upon such an event, USAA
REALCO will own 46.42% of the outstanding Common Shares (assuming no other
issuances of Common Shares).
If USAA REALCO converted the Modified Notes into Common Shares on April 1,
1997, and the aggregate principal balance of the Modified Notes was $5,449,618,
it would have received 2,724,809 Common Shares upon conversion, representing a
$0.625 per share discount ($1,703,006 aggregate discount) from the closing price
of the Common Shares on March 31, 1997.
The Modified Notes provide that the Trust may not pay dividends until the
debt is paid in full; however, the Modified Notes allow dividends to be paid in
the event the shareholders approve this proposal, or if USAA REALCO, in its sole
discretion, permits dividends to be paid prior to the Modified Notes being fully
paid.
Upon conversion of the Modified Notes into Common Shares, the Trust is
required to enter into a registration rights agreement with USAA REALCO granting
USAA REALCO the right to demand that the Trust register the converted Common
Shares or, if the Trust is registering Common Shares for its own account, that
the Trust also register the converted Common Shares.
USAA REALCO has advised the Trust that if the shareholders do not approve
proposal one, it is highly doubtful that it would convert the Modified Notes
into Common Shares.
REASONS FOR THE USAA REALCO TRANSACTION
In order for the Trust to perform under the MLI Agreement, as described
above, the Trust was required to pay $5,449,618 (the remaining portion of the
Option Price) by March 31 1997 (or June 30, 1997, if the Trust paid an
additional extension fee of $150,000). Failure to perform would not only cause
the Trust to lose the remaining discount available on the MLI Notes, but would
also have resulted in a default under the MLI Agreement. Such a default would
require the Trust to immediately be required to pay the outstanding principal
balance on the MLI Notes of $9,419,213 plus 8.8% interest thereon (net of any
interest payments paid on the Option Price as described above). Management
believes that the value of the remaining unencumbered properties of the Trust
was insufficient to support conventional financing to allow the Trust to finance
this payment to MLI. Accordingly, in order to achieve the funds necessary to
make this payment, the Trust would have been forced to liquidate these
properties prior to June 30, 1997. There was no assurance that these properties
could be liquidated at the prices necessary to achieve the payment of the
remaining Option Price, or that such sales would occur prior to June 30, 1997.
Accordingly, the Trust Managers entered into the USAA REALCO transaction for the
following reasons:
(i) USAA REALCO's purchase of the MLI Notes removed the risk of the
Trust's inability to pay the remaining Option Price, the failure of
which would have resulted in the loss of the remaining discount and
caused the Trust to be in default under the MLI Agreement;
(ii) USAA REALCO's purchase of the MLI Notes removed the necessity for
the Trust to liquidate certain of its properties to pay the
remaining Option Price and the risk that the Trust would not achieve
sufficient proceeds from the sale of such properties prior to June
30, 1997;
(iii) USAA REALCO's purchase of the MLI Notes allowed the Trust to get a
release of its collateral under the MLI Notes resulting in the
Modified Notes being an unsecured obligation of the Trust;
(iv) USAA REALCO's purchase of the MLI Notes eliminated the necessity for
the Trust to pay an additional extension fee of $150,000 to extend
the time period to pay the remaining Option Price from March 31,
1997 until June 30, 1997;
(v) USAA REALCO's purchase of the MLI Notes allowed the Trust to
recognize an extraordinary gain of approximately $2,643,000 or $0.26
per share in the first quarter of 1997; and
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(vi) USAA REALCO's purchase of the MLI Notes allowed for the possibility
of the conversion of the Modified Notes into Common Shares (in the
event this proposal is approved by the shareholders), thus enhancing
the Trust's financial structure and affording the Trust additional
flexibility to (a) finance additional growth by taking advantage of
the lower prevailing interest rates in today's financial markets or
by raising additional equity in the capital markets due to the
Trust's improved capital structure and (b) exchange the payment of
interest by the Trust to a creditor for the possible payment of
dividends on the Common Shares issued upon conversion of the
Modified Notes.
The Trust Managers also considered the following negative factors in
connection with the USAA REALCO transaction:
(i) $1,591,103 of the total discount available to the Trust ($9,806,000)
was ultimately not realized by the Trust;
(ii) The conversion price of $2.00 per share was at a discount to the
closing price per share of $2.375 on the date of execution of the
Renewal Agreement (February 26, 1997); and
(iii) Failure by the Trust to perform under the Renewal Agreement as
described above would cause the interest rate on the Modified Notes
to adjust up to 18% per annum.
After considering the negative factors described above, the Trust Managers
decided that the risk of default under the MLI Agreement and the possibility of
having to liquidate the Trust's remaining unencumbered properties by June 30,
1997 for prices possibly less than the Option Price, outweighed the negative
factors and decided to proceed with the transaction with USAA REALCO.
Management believes the approval of this proposal will allow the Trust to
reduce its outstanding debt if USAA REALCO converts its debt. If there is no
conversion, the debt will continue to accrue interest at the favorable rate of
8.8% per annum. If this proposal is not approved, the debt will bear interest
at the rate of 18% per annum (or the maximum rate allowed by law) and the debt
will be due and payable on October 31, 1997. There can be no assurance that the
Trust would be able to obtain financing or liquidate unencumbered properties in
an amount sufficient to retire the debt to USAA REALCO. For this reason,
management recommends that shareholders vote in favor of this proposal.
By voting in favor of this proposal, you will also be voting to increase
the number of authorized Common Shares to enable the conversion to occur. If
proposal one is approved, the additional shares will not be needed to permit
conversion of the Modified Notes, therefore, no additional Common Shares will be
authorized other than those described in proposal one.
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SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding Common
Shares (6,666,667 Common Shares) is required to approve the conversion of the
Trust's debt to USAA REALCO into Common Shares and, if proposal one is not
approved, the authorization of additional Common Shares necessary to enable the
conversion of such debt. Abstentions and broker non-votes will have the same
effect as a vote against the proposal. The Trust Managers have unanimously
approved the proposal, subject to shareholder approval. USAA REALCO and
management of the Trust who collectively own 32.99% of the outstanding Common
Shares have advised the Trust that they intend to vote in favor of this
proposal.
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL FIVE.
PROPOSAL SIX
CONVERSION OF ADDITIONAL DEBT INTO COMMON SHARES
BACKGROUND
On March 12, 1997, the Trust received a term sheet from the Purchasers
regarding a proposed investment in the Trust by the Purchasers. After an arm's
length negotiation between MSAM and management of the Trust, the Trust and the
Purchasers entered into an agreement setting forth the terms of the Purchasers'
investment in the Trust. The obligation of the Purchasers to invest in the
Trust is subject to certain contingencies discussed below.
TRANSACTION WITH MSAM
On May 1, 1997, the Trust and the Purchasers entered into an agreement that
sets forth the principal terms of the Purchasers' commitment to invest in the
Trust (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Trust
will issue an aggregate of the lesser of $20,000,000 of senior convertible debt
or a principal amount of the debt that when converted, would result in the
Purchasers not owning in excess of 37.8% of the Trust's Common Shares (the
"Purchase Limit") (such amount being issued shall be referred to herein as the
"Purchaser Debt") to the Purchasers. The Trust will use the net proceeds from
the issuance of the Purchaser Debt for the acquisition of certain real estate
properties that the Trust will identify and disclose to the Purchasers prior to
the Purchaser Debt being acquired. Each property acquisition must be approved by
MSAM, if such acquisition occurs prior to the Annual Meeting, or by the
Investment Committee of the Board of Trust Managers thereafter. If MSAM or the
Investment Committee (composed of one independent Trust Manager, one Trust
Manager designated by USAA REALCO and one Trust Manager designated by MSAM), as
the case may be, approves the purchase of a property, the Purchasers must
acquire the Purchaser Debt in an amount necessary to enable the Trust to
purchase such property, up to the aggregate committed amount.
The Purchaser Debt is non-interest bearing, unless the shareholders do not
approve this proposal. If the shareholders do not approve this proposal, the
Purchaser Debt will (i) commence bearing interest at a rate per annum of 10%,
which interest shall be payable in kind quarterly in arrears, and (ii) mature
and be fully payable by the Trust two years from the date of execution of
definitive agreements that further document the agreement with the Purchasers.
If the shareholders approve this proposal, the Purchaser Debt will
automatically convert into a number of Common Shares determined by dividing the
amount of Purchaser Debt by $2.45. Accordingly, the Purchaser Debt may be
converted into 8,163,265 Common Shares (based upon the Purchaser Debt having a
principal amount of $20,000,000) or such lesser amount to the extent the
Purchase Limit would be exceeded.
The convertibility of the Purchaser Debt into Common Shares is expressly
conditioned on the assurance from the Purchasers that upon issuance of the
Purchaser Debt, and at all times thereafter, the ownership of the Purchasers is
such that neither the Purchaser Debt nor the Common Shares into which the
Purchaser Debt is to be converted will result in any person actually or
constructively owning directly or indirectly more than 9.8% of the number or
value of the Common Shares of the Trust after applying the applicable
attribution provisions of the Code.
As a condition to the transaction, the Trust is required to enter into a
registration rights agreement with the Purchasers granting them the right to
demand that the Trust register the converted Common Shares or, if the Trust is
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registering Common Shares for its own account or for the account of any of its
security holders, that the Trust also register the converted Common Shares.
If the Trust issues additional Common Shares (specifically excluding any
conversion by USAA REALCO of the Modified Notes, any issuances to USAA REALCO or
its affiliates in connection with a contribution of real property to the Trust
and any issuance under the proposed Employee and Trust Manager Share Incentive
Plan) after the issuance of the Purchaser Debt, the Purchaser shall have the
right to purchase a proportionate share (on a fully-diluted basis) of any share
issues (the "Preemptive Rights"). However, with respect to each Common Share
offering by the Company in the amount of $10,000,000 or more, the Purchasers'
Preemptive Rights shall be limited in that they shall have the right to exercise
such Preemptive Rights to purchase up to a number of Common Shares which will
result in the Purchasers' percentage ownership of the Company declining by 5%
(on a fully-diluted basis). The Preemptive Rights will immediately terminate
once the Trust achieves a Minimum Equity Capitalization. For purposes of the
Purchase Agreement, "Minimum Equity Capitalization" means $150,000,000 as
calculated using the average closing price of the Common Shares for the most
recent ten trading days multiplied by the current number of issued and
outstanding Common Shares and Common Share equivalents.
The Purchase Agreement provides that the Trust may not issue any additional
debt securities prior to achieving a Minimum Equity Capitalization without the
consent of the Purchasers, unless the proceeds of such debt or senior equity
securities will be used to acquire real estate. Additionally, effective upon the
earlier of (i) the initial funding of the Purchaser Debt or (ii) shareholder
approval of this proposal, the Trust shall increase the number of Trust Managers
from five to seven and shall appoint two designees of MSAM to fill the vacancies
created by the increase in the number of Trust Managers. At such time as the
Trust achieves a Minimum Equity Capitalization, one of each of MSAM's and USAA
REALCO's designees shall commit not to seek re-election at the next annual
meeting of the Trust. However, if USAA REALCO or its affiliates purchases an
additional $20 million of equity securities from the Trust for cash or real
property, USAA REALCO may retain its two board seats. At such time as the Trust
achieves a $250 million Minimum Equity Capitalization, MSAM's remaining designee
shall resign from the Board. If the shareholders fail to elect MSAM's designees,
MSAM shall have full board observation rights, including the right to notice of
and to attend all meetings of the Trust Managers and committee meetings.
The obligations of the Purchasers to purchase the Purchaser Debt is subject
to the following conditions being satisfied prior to each closing of the
transaction: (i) since December 31, 1996, there shall have been no material
adverse change or any development involving a material adverse change in the
condition (financial or otherwise) of the Trust and its subsidiaries, taken as a
whole, or in the earnings, business, prospects or operations of the Trust and
its subsidiaries, taken as whole; (ii) MSAM shall have completed its due
diligence investigation of the Trust and its subsidiaries, which investigation
shall be in scope, and with results reasonably satisfactory to MSAM, and MSAM
shall have been given access to the management, records, books of account,
contracts and properties of the Trust and its subsidiaries and shall have
received such financial, business and other information regarding the Trust and
its subsidiaries as it shall have reasonably requested; and (iii) Purchasers and
the Trust shall have received at each closing customary closing certificates,
schedules, opinions and other closing documents in form and substance
satisfactory to MSAM and the Trust and certain other conditions to be agreed
upon by the parties. If the conditions described above are not satisfied, the
Purchasers shall be under no obligation to purchase the Purchaser Debt.
Accordingly, there can be no assurance that the Purchaser Debt will be issued by
the Trust. The Trust and the Purchasers will enter into definitive agreements
that will embody in detail the terms contained in the Purchase Agreement and
certain other matters.
REASONS FOR THE TRANSACTION AND DETRIMENTS
The Trust Managers entered into the Purchase Agreement in order to obtain
funds to finance additional growth through property acquisitions. The
conversion of the Purchaser Debt into Common Shares (in the event this proposal
is approved by the shareholders) enhances the Trust's financial structure and
affords the Trust additional flexibility to (i) finance additional growth by
taking advantage of the lower prevailing interest rates in today's financial
markets or by raising additional equity capital in the capital markets due to
the Trust's improved capital structure and (ii) exchange the payment of interest
by the Trust to a creditor for the possible payment of dividends on the Common
Shares issued upon conversion of the Purchaser Debt.
The Trust Managers also considered the negative factors associated with the
transaction. First, the conversion price of $2.45 per share was at a discount
to the closing price per share of $2.____ on the date of execution of the
Purchase Agreement (May 1, 1997). Second, conversion of the Purchaser Debt
would cause the percentage ownership of the existing shareholders of the Trust
to decline. Third, failure by the shareholders to approve this proposal would
cause the Purchaser Debt to commence bearing interest at a rate per annum of
10%. Finally, the Trust may not issue any additional debt or senior equity
securities prior to achieving a Minimum Equity Capitalization (as defined above)
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<PAGE>
without the consent of the Purchasers, unless the proceeds of such debt or
senior equity securities will be used to acquire real estate.
After weighing the aforementioned factors, the Trust Managers determined
that the additional growth the Trust may achieve through the transaction
outweighed the negative factors and would provide the shareholders with the best
opportunity for the long-term growth of their investment in the Trust.
By voting in favor of this proposal, you may also be voting to increase the
number of authorized Common Shares to enable the conversion to occur (8,163,265
Common Shares). If proposal one is approved, the additional shares will not be
needed to permit conversion of the Purchaser Debt, therefore, no additional
Common Shares will be authorized other than those described in proposal one.
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding Common
Shares (6,666,667 Common Shares) is required to approve the conversion of the
Trust's debt to the Purchasers into Common Shares and, if proposal one is not
approved, the authorization of additional Common Shares necessary to enable the
conversion of such debt (8,163,265 Common Shares). Abstentions and broker non-
votes will have the same effect as a vote against the proposal. The Trust
Managers have unanimously approved the proposal, subject to shareholder
approval. USAA REALCO and management of the Trust, who collectively own 32.99%
of the outstanding Common Shares, have advised the Trust that they intend to
vote in favor of this proposal.
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL SIX.
PROPOSAL SEVEN
ISSUANCE OF ADDITIONAL SENIOR CONVERTIBLE DEBT
ADDITIONAL PRIVATE PLACEMENT
The Purchase Agreement provides that prior to the earlier of (i) June 15,
1997 or (ii) the execution of definitive agreements to further document the
transaction between the Trust and the Purchasers, the Trust may privately place
senior convertible debt on terms no more favorable than the terms of the
Purchaser Debt. The Trust Managers are currently negotiating with several
institutional investors regarding their potential investment in the Trust.
Although no agreements between the Trust and any institutional investors have
been executed as of May 1, 1997, the Trust Managers expect that the Trust will
enter into an agreement (the "Investment Agreement") with one or more
institutional investors (collectively, the "Investor") relating to the private
placement of $15,000,000 of senior convertible debt (the "Convertible Debt")
prior to the Annual Meeting, although there can be no assurance that such an
investment will occur.
The Investment Agreement and the Convertible Debt will contain terms
similar to, but no less favorable to the Trust than, the terms of the Purchase
Agreement and the Purchaser Debt. In connection with the Investment Agreement,
the Trust Managers contemplate that the Trust will issue up to an aggregate of
$15,000,000 of Convertible Debt to the Investor. The Trust will use the net
proceeds from the issuance of the Convertible Debt for the acquisition of
certain real estate properties. The Convertible Debt likely will be a zero
coupon security (which requires no payment of current interest), although the
Convertible Debt may bear a stated interest rate equal to or below the market
rate. If the shareholders do not approve this proposal, however, the
Convertible Debt will likely commence bearing interest at a rate above the
market rate and will mature and be fully payable within two years.
If the shareholders approve this proposal, the Convertible Debt will be
convertible into Common Shares at a conversion price of no less than $2.45 per
share. The Trust Managers expect that the Investment Agreement will require the
Trust to enter into a registration rights agreement with the Investor granting
the Investor the right to demand that the Trust register the converted Common
Shares or, if the Trust is registering Common Shares for its own account or
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<PAGE>
for the account of any of its security holders, that the Trust also register the
converted Common Shares. The Investment Agreement also may grant the Investor
certain preemptive rights and contain other terms similar to those contained in
the Purchase Agreement. For example, the Investment Agreement may require the
Trust to increase the number of Trust Managers and appoint a designee of the
Investor to the Board of Trust Managers. In any event, however, the terms of the
Investment Agreement will be no more favorable than the terms of the Purchase
Agreement. SEE "PROPOSAL SIX--CONVERSION OF ADDITIONAL DEBT INTO COMMON SHARES."
Management will ensure that the convertibility of the Convertible Debt into
Common Shares is expressly conditioned on the assurance from the Investor that
upon issuance of the Convertible Debt, and at all times thereafter, the
ownership of the Investor is such that neither the Convertible Debt nor the
Common Shares into which the Convertible Debt may be converted will result in
any individual or entity actually or constructively owning directly or
indirectly more than 9.8% of the number or value of the Common Shares of the
Trust after applying the applicable attribution provisions of the Code.
REASONS FOR THE INVESTMENT AGREEMENT
The Trust Managers will enter into the Investment Agreement in order to
obtain funds to finance additional growth through property acquisitions. The
Conversion of the Convertible Debt into Common Shares (in the event this
proposal is approved by the shareholders) enhances the Trust's financial
structure and affords the Trust additional flexibility to (i) finance additional
growth by taking advantage of the lower prevailing interest rates in today's
financial markets or by raising additional equity capital in the capital markets
due to the Trust's improved capital structure and (ii) exchange the payment of
interest by the Trust to a creditor for the possible payment of dividends on the
Common Shares issued upon conversion of the Convertible Debt.
Many of the negative factors discussed with regard to the Purchaser Debt
will also apply to the Convertible Debt. First, the conversion price of the
Convertible Debt may be at a discount to the closing price per share of the
Common Stock on the date the Investment Agreement is executed. Second,
conversion of the Convertible Debt will cause the percentage ownership of the
existing shareholders of the Trust to decline. Third, failure by the
shareholders to approve this proposal likely will cause the Convertible Debt to
commence bearing interest at a rate above the market rate.
The Trust Managers believe that the aforementioned benefits of the
Investment Agreement outweigh any negative factors and that the Investment
Agreement will be in the best interests of the Trust and its shareholders. The
Trust Managers believe the additional growth that the Trust may achieve through
the Investment Agreement will provide the shareholders with the best opportunity
for long-term growth of their investment in the Trust.
By voting in favor of this proposal, you will also be voting to increase
the number of authorized Common Shares to enable the conversion to occur. If
proposal one is approved, the additional shares will not be needed to permit
conversion of the Convertible Debt, therefore, no additional Common Shares will
be authorized other than those described in proposal one.
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding Common
Shares (6,666,667 Common Shares) is required to approve the conversion of the
Convertible Debt into Common Shares and, if proposal one is not approved, the
authorization of additional Common Shares necessary to enable the conversion of
such debt. Abstentions and broker non-votes will have the same effect as a vote
against the proposal. The Trust Managers have unanimously approved the
proposal, subject to shareholder approval. USAA REALCO and management of the
Trust, who collectively own 32.99% of the outstanding Common Shares, have
advised the Trust that they intend to vote in favor of this proposal.
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL SEVEN.
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<PAGE>
PROPOSAL EIGHT
EMPLOYEE AND TRUST MANAGER INCENTIVE SHARE PLAN
The Trust seeks to adopt an Employee and Trust Manager Incentive Share Plan
(the "Plan") to assist the Trust in recruiting, retaining and rewarding
employees, officers and Trust Managers ("Eligible Participants") with ability
and initiative by enabling such Eligible Participants to participate in its
future success and to associate their interests with those of the Trust and its
shareholders. The summary of the Plan set forth below is qualified in its
entirety by reference to the text of the Plan, a copy of which is attached
hereto as Appendix B.
----------
The Board unanimously approved and adopted the Plan as of January 27, 1997,
subject to approval by the Trust's shareholders. A total of 800,000 Common
Shares have been reserved for issuance under the Plan pursuant to the exercise
of incentive and non-qualified share options (collectively, "Options") and the
grant of restricted share awards.
ADMINISTRATION AND ELIGIBILITY. The Plan will be administered by a
committee of Trust Managers who are not employees of the Trust ("Non-Employee
Trust Managers") appointed by the Board (the "Committee"). The Committee will
have complete authority to interpret all provisions of the Plan, to prescribe
the form of agreements, to adopt, amend and rescind rules and regulations
pertaining to the administration of the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan. The
Plan may be amended or terminated by the Board, provided, however, that the
Board may choose to require that the Trust's shareholders approve any amendment
to this Plan in order to satisfy the requirements of Section 422 of the Code,
provisions and rules under the Exchange Act or for any other reason. No
amendment to the Plan may, without a participant's consent, adversely affect any
rights of such participant under any outstanding award of Common Shares of the
Trust subject to forfeiture and limitations on transferability ("Restricted
Shares") or under any Option, Share Appreciation Right ("SAR") or dividend
equivalent rights ("Dividend Equivalent Rights") outstanding at the time such
amendment is made.
Under the terms of the Plan, any person who is a full-time employee or a
Trust Manager of the Trust or of an Affiliate (as defined in the Plan) of the
Trust or a person designated by the Committee as eligible because such person
performs bona fide consulting or advisory services for the Trust or an Affiliate
of the Trust (other than services in connection with the offer or sale of
securities in a capital-raising transaction) and has a direct and significant
effect on the financial development of the Trust or an Affiliate of the Trust,
shall be eligible to receive awards under the Plan. As of April 1, 1997,
approximately 10 persons were eligible to receive benefits under the Plan.
OPTIONS. The exercise price of Common Shares covered by Options granted
under the Plan will be determined by the Committee, but Options must have an
exercise price equal to not less than 100% of the fair market value of a Common
Share on the date of the grant. In some instances, the exercise price for
Options granted to persons who directly or indirectly own 10% or more of the
outstanding shares of the Trust may be required to be 110% of the fair market
value of a Common Share on the date of the grant. Options will not be
transferable without the consent of the Committee or other than by will or the
laws of descent and distribution or pursuant to qualified domestic relations
orders, and are exercisable only by the optionee, Committee-approved assignees,
or his or her guardian, legal representative or similar party, or executors,
administrators or beneficiaries of the optionee.
The Committee selects the employees (and any consultants or advisors) to
whom options will be granted, the number of shares subject to each option and
the other terms and conditions of options, but in all cases consistent with the
Plan. Each option is evidenced by an option agreement. The option agreement
specifies whether the option is intended to be an Incentive Share Option (as
defined in the Plan) or Non-Qualified Share Option (as defined in the Plan). The
Committee may provide that options will be exercisable from time to time, in
installments or otherwise, of and for such periods (up to ten years from the
date of the grant) as the Committee may determine in its discretion. The
exercise price of options will be payable in cash or, if the Committee permits,
by issuance of a full recourse promissory note by the optionee (other than
officers and Trust Managers) or the surrender of Common Shares owned by the
optionee.
SHARE APPRECIATION RIGHTS. The Committee may also grant awards of SARs to
employees, consultants and advisors. A SAR entitles the holder to receive from
the Trust, in cash or (if the Committee so permits) Common Shares, at the time
of exercise, the excess of the fair market value at the date of exercise of a
Common Share over a specified price fixed by the Committee in the award,
multiplied by the number of Common Shares as to which holder of the right is
exercising the right.
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<PAGE>
RESTRICTED SHARES. The Committee may also grant awards of Restricted
Shares to employees, consultants and advisors. Each award of Restricted Shares
will specify the number of Common Shares to be issued to the recipient, the date
of issuance, any consideration for such Common Shares and the restrictions
imposed on the Common Shares (including the conditions of release or lapse of
such restrictions). Restricted Shares generally may not be sold, assigned,
transferred or pledged until the restrictions have lapsed and the rights to the
Common Shares have vested.
AWARDS TO NON-EMPLOYEE TRUST MANAGERS. Upon approval of the Plan by the
shareholders, the Trust will automatically grant to each Non-Employee Trust
Manager an option to purchase 10,000 Common Shares at the fair market value of
the Common Shares on the date of the Annual Meeting. On an annual basis
beginning in 1997, each Non-Employee Trust Manager shall receive a Non-Qualified
Share Option to purchase 5,000 Common Shares. Except as described in the
preceding sentence, the exercise price of these options is the fair market value
of the Common Shares covered by the options on the date of the grant. Each of
these Non-Employee Trust Manager options is fully exercisable upon the date of
the grant and generally terminates (unless sooner terminated under the terms of
the Plan) ten years after the date of the grant. If a Non-Employee Trust Manager
ceases to be a member of the Board for any reason other than death or
disability, these options will terminate on the first anniversary of the date
the Non-Employee Trust Manager ceases to be a member of the Board. If a Non-
Employee Trust Manager dies or becomes disabled while a member of the Board,
these options will terminate on the second anniversary of the date the Non-
Employee Trust Manager dies or becomes disabled.
DIVIDEND EQUIVALENT RIGHTS. The Committee may grant Dividend Equivalent
Rights under the Plan. Each right may, but need not, be related to a specific
option granted under the Plan and may be granted simultaneously with or
subsequent to the grant of the option. A right will entitle the recipient to
receive a cash payment from the Trust equal to the dividend declared and paid on
a Common Share for a period to be determined by the Committee at the time of
grant. The payment may, if the Committee so provides, be made in Common Shares
in lieu of cash. If the right relates to an option, the payment period shall
not extend beyond the date of exercise of the option.
With respect to Dividend Equivalent Rights which do not relate to a
specific option, there are not limits on the number of such rights which may be
granted under the Plan or on the total amount of cash payments which may be made
with respect to such rights. The cash payment may be made as dividends on
Common Shares are paid or delayed until the occurrence of a date or event
specified by the Committee.
TERMS AND CONDITIONS TO WHICH ALL AWARDS ARE SUBJECT. If there is a share
dividend, share split, reverse share split or reclassification of Common Shares
or outstanding Common Shares are converted into or exchanged for other
securities as a result of a merger, consolidation or sale of substantially all
of the Trust's assets, appropriate adjustments will be made in: (i) the number
and class of Common Shares subject to the Plan, each outstanding award and the
entitlements of Non-Employee Trust Managers; and (ii) the exercise price of each
outstanding award. Each such adjustment will be determined by the Committee in
its sole discretion. Further, new awards may be substituted for awards
previously granted, or the Trust's obligations respecting outstanding awards may
be assumed by an employer entity other than the Trust. In connection with any
merger, consolidation or sale of substantial assets in which the Trust is
involved (other than a merger, consolidation or sale in which the Trust is the
continuing entity and which does not result in any reclassification of the
Trust's then-outstanding shares), the Committee may decide to pay cash to plan
participants other than Non-Employee Trust Managers and other persons then
subject to Section 16(b) who hold awards that have not been outstanding for at
least six months. Any such cash award shall be in an amount which, in the sole
discretion of the Committee, is an amount by which the fair market value (at the
effective time of the transaction) of the consideration the plan participant
would have received if the award had been exercised before the effective time of
the merger or other transaction exceeds the exercise price of the award.
Further, upon the occurrence of such a transaction, the Committee may provide
that the vesting of any award shall be automatically accelerated to a date prior
to the consummation of such transaction.
If a participant's employment with the Trust is terminated, generally the
participant will forfeit any award that has not vested on or before the date of
termination. The Committee will establish the effect of employment termination
on vested awards when awards are granted.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN. The grant of an option will
not be a taxable event for the optionee or the Trust. An optionee will not
recognize taxable income upon exercise of an ISO, and any gain realized
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<PAGE>
upon a disposition of shares received pursuant to the exercise of an ISO will be
taxed as long-term capital gain if the optionee holds the shares for at least
two years after the date of the grant and for one year after the date of
exercise. However, the excess of the fair market value of shares subject to an
ISO on the exercise date over the option exercise price will be included in the
optionee's alternative minimum taxable income in the year of exercise (except
that, if the optionee is subject to certain securities law restrictions,
determination of the amount included in alternative minimum taxable income will
be deferred, unless the optionee elects within 30 days following exercise to
have income determined without regard to such restrictions) for purposes of the
alternative minimum tax. An optionee may be entitled to a credit against regular
tax liability in future years for alternative minimum taxes paid with respect to
the exercise of ISOs. The Trust will not be entitled to any business expense
deduction with respect to the exercise of an ISO, except as discussed below.
For the exercise of an option to qualify for the foregoing tax treatment,
the optionee generally must be an employee of the Trust or a subsidiary of the
Trust from the date the option is granted through the date that is three months
prior to the date of exercise of the option. In the case of an optionee who is
disabled, the three-month period for exercise following termination of
employment is extended to one year. In the case of an employee who dies, both
the time for exercising ISOs after termination of employment and the holding
period for shares received pursuant to the exercise of the option are waived.
If the special holding period rules mentioned above are not met, the
optionee will recognize ordinary income upon the disposition of the shares in an
amount generally equal to the excess of the fair market value of the shares at
the time the option was exercised over the option exercise price (but not in
excess of the gain realized on the sale). The Trust will be allowed a business
expense deduction to the extent the optionee recognizes ordinary income.
If an optionee exercises an ISO by tendering Common Shares with a fair
market value equal to part or all of the option exercise price, the exchange of
shares will be treated as a nontaxable exchange (except that this treatment
would not apply if the optionee had acquired the shares being transferred
pursuant to the exercise of an ISO and had not satisfied the special holding
period requirements summarized above). If the exercise is treated as a tax-free
exchange, the optionee would have no taxable income from the exchange and
exercise (other than minimum taxable income as discussed above) and the tax
basis for the shares received shall be equal to the fair market value of the
Common Shares tendered by the optionee. If the optionee used shares received
pursuant to the exercise of an ISO (or another statutory option) as to which the
optionee had not satisfied the applicable holding period requirement, the
exchange would be treated as a taxable disqualifying disposition of the
exchanged shares.
Upon exercising a nonstatutory option or SAR, a Participant will recognize
ordinary income in an amount equal to the difference between the exercise price
and the fair market value of the shares or cash received on the date of exercise
(except that, if the Participant is subject to certain restrictions imposed by
the securities laws, the measurement date will be deferred, unless the
Participant makes a special tax election within 30 days after exercise to have
income determined without regard to the restrictions). If the Trust complies
with applicable reporting requirements, it will be entitled to a business
expense deduction in the same amount and at the same time as the Participant
recognizes ordinary income. Upon a subsequent sale or exchange of shares
acquired pursuant to the exercise of a nonstatutory option, the optionee will
have taxable gain or loss, measured by the difference between the amount
realized on the disposition and the tax basis of the shares (generally, the
amount paid for the shares plus the amount treated as ordinary income at the
time the option was exercised).
If the optionee surrenders shares of Common Shares in payment of part or
all of the exercise price for nonstatutory options, no gain or loss will be
recognized with respect to the shares surrendered and the optionee will be
treated as receiving an equivalent number of shares pursuant to the exercise of
the option in a nontaxable exchange. The basis of the shares surrendered will be
treated as the substituted tax basis for an equivalent number of option shares
received and such shares will be treated as having been held for the same
holding period as had expired with respect to the transferred shares. The
difference between the aggregate option exercise price and the aggregate fair
market value of the shares received pursuant to the exercise of the option will
be taxed as ordinary income. The optionee's basis in the additional shares will
be equal to the amount included in the optionee's income and the optionee's
holding period will begin upon the optionee's acquisition of such Notes.
An award of Restricted Shares will create no immediate tax consequences for
the employee or the Trust, unless the employee makes an election pursuant to
Section 83(b) of the Code. The employee will, however, realize ordinary
26
<PAGE>
income when Restricted Shares become vested, in an amount equal to the fair
market value of the underlying shares of Common Shares on the date of vesting
less any consideration paid by the employee for such shares. If the employee
makes an election pursuant to Section 83(b) of the Code with respect to a grant
of Restricted Shares, the employee will recognize income at the time the
Restricted Shares are awarded (based upon the value of such shares at the time
of award), rather than when the Restricted Shares become vested. The Trust will
be allowed a business expense deduction for the amount of any taxable income
recognized by the employee at the time such income is recognized (assuming the
Trust complies with applicable reporting requirements).
The employee will recognize taxable income for the amount of cash received
under a Dividend Equivalent Right for the year such amounts are paid. The Trust
is permitted a compensation deduction equal to such amount.
The foregoing provides only a general description of the federal income tax
consequences of transactions contemplated by the Plan. Participants should
consult a tax advisor as to their individual circumstances.
SHAREHOLDER VOTE
The affirmative vote of the holders of a majority of the Common Shares
present in person or represented by proxy, and entitled to vote at the Annual
Meeting is required to adopt the Plan. The Trust Managers have unanimously
approved the proposal, subject to shareholder approval. USAA REALCO and
management of the Trust who collectively own 32.99% of the outstanding Common
Shares have advised the Trust that they intend to vote in favor of the proposal.
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL EIGHT.
PROPOSAL NINE
ELECTION OF TRUST MANAGERS
The shareholders are asked to elect five Trust Managers at the Annual
Meeting. Each shareholder is entitled to cast one vote for each share held on
the record date unless a shareholder elects to exercise his or her right to
cumulate votes. The Current Declaration of Trust provides that once the Trust
is aware that any person beneficially owns 30% or more of the Trust's
outstanding Common Shares, shareholders shall have the right to cumulate their
votes in the election of Trust Managers. Because USAA REALCO beneficially owns,
as of the record date, 31.82% of the outstanding Common Shares, shareholders may
cumulate their votes in this election of Trust Managers. Cumulative voting
entitles a shareholder to cast as many votes for one nominee as is equal to the
number of Trust Managers to be elected, multiplied by the number of Common
Shares owned by such shareholder, or to distribute such shareholder's total
votes on the same principle between two or more nominees. As a general rule,
cumulative voting enhances the ability of minority shareholders to obtain
representation on a board. Because election as a Trust Manager requires the
affirmative vote of a majority of the outstanding Common Shares, the ability of
the minority to elect a Trust Manager is not as greatly enhanced as with a
company that elects directors by a plurality of votes. Common Shares
represented by proxies will be voted equally for all nominee Trust Managers.
Any current Trust Manager not receiving the affirmative vote of a majority of
the outstanding Common Shares shall nevertheless remain a Trust Manager unless
another proper nominee receives the requisite vote.
Any shareholder desiring to cumulate votes must give written notice of his
or her intention to cumulate votes to the Board of Trust Managers at the Trust's
principal executive office on or before 5:00 p.m. Dallas time on Sunday, June
29, 1997. Faxed notices to (972) 550-6037 will be accepted.
The Trust increased the number of Trust Managers on the Board of Trust
Managers to five, with the additional two Trust Managers being Independent Trust
Managers, as defined in the Current Declaration of Trust. The Trust Managers
unanimously voted to appoint Edward B. Kelley and T. Patrick Duncan to fill the
vacancies created by the increase in the number of Trust Managers pursuant to
the terms of the Share Purchase Agreement dated December 13, 1996 (the "Share
Purchase Agreement"), by and between the Trust and USAA REALCO. Pursuant to the
terms of the Purchase Agreement, at such time as the Company achieves Minimum
Equity Capitalization, unless USAA REALCO or its affiliates has purchased or
commits to purchase from the Company an additional $20,000,000 of equity
securities for cash or real
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property, one of USAA REALCO's designees as a Trust Manager must commit not to
seek re-election at the next annual meeting of the Company.
Each nominee is presently a Trust Manager and was appointed from time to
time as indicated below. The following information as of April 1, 1997, is
submitted concerning the following nominees named for election as Trust
Managers to fill the presently existing five Trust Manager positions:
<TABLE>
<CAPTION>
NAME AGE TRUST MANAGER SINCE
------------------ --- -------------------
<S> <C> <C>
William H. Bricker 65 September 1985
T. Patrick Duncan 48 December 1996
Robert E. Giles 49 March 1996
Edward B. Kelley 56 December 1996
Charles W. Wolcott 44 August 1993
</TABLE>
The following information with respect to the principal occupation or
employment, other affiliations and business experience of each nominee during
the last five years has been furnished to the Trust by each such nominee:
William H. Bricker has served as a Trust Manager of the Trust since
September 1985. Mr. Bricker has served as President of DS Energy Services
Incorporated and has consulted in the energy field and on international trade
since 1987. In May 1987, Mr. Bricker retired as the Chairman and Chief
Executive Officer of Diamond Shamrock Corporation where he held various
management positions from 1969 through May 1987. Mr. Bricker is a director of
the LTV Corporation, the Eltech Systems Corporation and the National Paralysis
Foundation. He received his Bachelor of Science and Master of Science degrees
from Michigan State University.
T. Patrick Duncan has served as a Trust Manager since December 1996, when
he was appointed as an independent Trust Manager at the request of USAA REALCO
pursuant to the Share Purchase Agreement. Mr. Duncan joined USAA REALCO in
November 1986 as Chief Financial Officer. With over 24 years of experience, Mr.
Duncan serves as Senior Vice President of Real Estate Operations with
responsibilities which include the direction of all acquisitions, sales,
management and leasing of real estate for USAA-affiliated companies. Mr. Duncan
received degrees from the University of Arizona in Accounting and Finance. He
is a Certified Public Accountant, Certified Commodities Investment Manager, and
holds a Texas Real Estate Broker's License. He currently holds memberships in
the Texas and Arizona State Boards of Accounting, the Texas and Arizona State
Societies of Certified Public Accountants, the International Council of Shopping
Centers, the Urban Land Institute, the National Association of Real Estate
Investment Trusts and the Pension Real Estate Association, and he is currently
Vice-Chairman of the Board of the Daughters of Charity, and a member of the
Board of Directors for the North San Antonio Chamber of Commerce. Mr. Duncan is
also a member of the Board of Directors of Meridian Industrial Trust, and a
member of the Board of Directors of the general partner of USA Investment Income
I and II, and USAA Real Estate Partnership III and IV and a member of the Board
of Directors of USAA Equities Advisor, Inc.
Robert E. Giles has served as a Trust Manager since March 15, 1996. Mr.
Giles is currently the owner and President of Robert E. Giles Interests, Inc., a
real estate consulting and development firm based in Houston, Texas. Mr. Giles
also serves as President of Title Network, Ltd., a national title insurance
agency. Mr. Giles was a Vice President with the J.E. Roberts Companies, Inc.
from 1994 to 1995. From 1990 to 1994, Mr. Giles was President and a Director of
National Loan Bank, a publicly-held company created through the merger of
Chemical Bank and Texas Commerce Bank. Mr. Giles received his Bachelor of Arts
degree from University of Texas - Austin in 1970 and received a Master of Arts
degree from University of Texas - Arlington in 1973.
Edward B. Kelley has served as a Trust Manager since December 1996, when he
was appointed as an independent Trust Manager at the request of USAA REALCO
pursuant to the terms of the Share Purchase Agreement. Mr. Kelley is President
of USAA REALCO. He joined USAA REALCO in April 1989 as executive vice president
and chief operating officer before assuming his new title in August 1989. Mr.
Kelley received his Bachelor of Business Administration degree from St. Mary's
University in 1964 and a Masters in Business Administration from Southern
Methodist University in 1967, and is a Member of the Appraisal Institute (MAI).
He is past Chairman of the North San Antonio Chamber of Commerce and past board
member of the Baptist Memorial Hospital System, La Quinta Motor
28
<PAGE>
Inns, and the National Association of Industrial and Office Parks. Mr. Kelley is
also a member of the board of directors and executive committee of the Alamo
Area Council of Boy Scouts of America and a member of the Board of Trustees of
St. Mary's University, where he has served as past Chairman of the Board. Mr.
Kelley is also a member of the Board of Trustees of the Baptist Children's Home
in San Antonio and he is a member of the Rotary Club of Downtown San Antonio and
the Wednesday Civil Breakfast Club of San Antonio. He was the 1992 chairman of
the Greater San Antonio Chamber of Commerce and is on the board of directors of
the San Antonio Economic Development Foundation. Mr. Kelley is also a member of
the Board of Directors of the general partner of USAA Investment Income I and II
and USAA Real Estate Partnership III and IV, and a member of the Board of
Directors of USAA Equities Advisor, Inc.
Charles W. Wolcott has served as a Trust Manager since August 1993 and as
President and Chief Executive Officer of the Trust since May 1993. Mr. Wolcott
was President and Chief Executive Officer of Trammell Crow Asset Services, a
real estate asset and portfolio management affiliate of Trammell Crow Company,
from 1990 to 1992. He served as Vice President and Chief Financial and
Operating Officer of the Trust from 1988 to 1991. From 1988 to 1990, Mr.
Wolcott was a partner in Trammell Crow Ventures Operating Partnership. Prior to
joining the Trammell Crow Company in 1984, Mr. Wolcott was President of Wolcott
Corporation, a firm engaged in the development and management of commercial real
estate properties. Mr. Wolcott graduated from the University of Texas at Austin
in 1975 with a Bachelor of Science degree and received a Master of Business
Administration degree from Harvard University in 1977.
The Trust Managers have no reason to believe that any of the nominees will
not serve if elected, but if any of them should become unavailable to serve as a
Trust Manager, and if the Trust Managers designate a substitute nominee, the
persons named in the accompanying Proxy will vote for the substitute nominee
designated by the Trust Managers, unless a contrary instruction is given in the
Proxy. The Trust Managers did not appoint a nominating committee to nominate
Trust Managers for election.
No family relationship exists among any of the Trust Managers or executive
officers of the Trust. The Share Purchase Agreement is the only arrangement or
understanding that exists between any Trust Manager or executive officer or any
other person pursuant to which any Trust Manager or executive officer was
selected as a Trust Manager or executive officer of the Trust.
Fourteen regularly scheduled or special Trust Manager meetings were held
during the fiscal year ended December 31, 1995 (the "1995 Fiscal Year").
Messrs. Bricker and Wolcott attended 100% of all 1995 Fiscal Year Trust Manager
and Trust Manager committee meetings. Twelve regularly or special Trust Manager
meetings were held during the fiscal year ended December 31, 1996 (the "1996
Fiscal Year"). All Trust Managers attended 100% of all 1996 Fiscal Year Trust
Manager and Trust Manager committee meetings held during his 1996 term as a
Trust Manager.
PROPOSAL TEN
RATIFICATION OF INDEPENDENT AUDITORS
The shareholders are asked to ratify the appointment by the Trust Managers
of Ernst & Young LLP as the Trust's independent auditors for the 1996 Fiscal
Year. The selection was based upon the recommendation of the Audit Committee.
Effective May 24, 1994, the Trust dismissed its prior independent auditors,
Kenneth Leventhal & Company and retained as its new independent auditors, Ernst
& Young LLP. Kenneth Leventhal & Company's Independent Auditors' Report on the
Trust's financial statements for fiscal year ended December 31, 1993 ("1993
Fiscal Year") did not contain an adverse opinion or a disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change independent auditors was recommended by the
Audit Committee of the Trust Managers and approved by the Trust Managers on May
24, 1994. During the 1993 Fiscal Year and through May 24, 1994, there were no
disagreements between the Trust and Kenneth Leventhal & Company on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Kenneth Leventhal & Company, would have caused it to make reference to the
subject matter of the disagreements in connection with the report. In June
1995, Kenneth Leventhal & Company merged with Ernst & Young LLP.
29
<PAGE>
During the 1993 Fiscal Year and through May 24, 1994, the Trust did not
consult Ernst & Young LLP regarding the application of accounting principles to
a specified transaction or any audit opinion.
Representatives of Ernst & Young LLP will be present at the Annual Meeting
to respond to appropriate questions from shareholders and to make a statement if
they desire.
SHAREHOLDER VOTE
Adoption of this proposal requires approval by the holders of a majority of
the Common Shares present in person or represented by proxy, and entitled to
vote at the Annual Meeting. The Trust Managers have unanimously approved the
proposal, subject to shareholder approval. USAA REALCO and management of the
Trust who collectively own 32.99% of the outstanding Common Shares have advised
the Trust that they intend to vote in favor of the proposal.
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR PROPOSAL
TEN.
MANAGEMENT
EXECUTIVE OFFICERS
Set forth below is information regarding the names and ages of the
executive officers of the Trust, all positions held with the Trust by each
individual, and a description of the business experience of each individual for
at least the past five years.
<TABLE>
<CAPTION>
NAME AGE TITLE
- -------------------- --- ----------------------------------
<S> <C> <C>
Charles W. Wolcott 44 Trust Manager, President and Chief
Executive Officer
Marc A. Simpson 42 Vice President and Chief Financial
Officer, Secretary and Treasurer
David B. Warner 38 Vice President and Chief Operating
Officer
</TABLE>
Information regarding the business experience of Mr. Wolcott is provided
under "Proposal Three -- Election of Trust Managers."
Marc A. Simpson has served as Vice President and Chief Financial Officer,
Secretary and Treasurer of the Trust since March 1994. From November 1989
through March 1994, Mr. Simpson was a Manager in the Financial Advisory Services
Group of Coopers & Lybrand. Prior to that time, he served as Controller of
Pacific Realty Corp., a real estate development company. Mr. Simpson graduated
with a Bachelor of Business Administration from Midwestern State University in
1978, and received a Master of Business Administration from Southern Methodist
University in 1990.
David B. Warner has served as Vice President and Chief Operating Officer of
the Trust since May 1993. From 1989 through the date he accepted a position
with the Trust, Mr. Warner was a Director of the Equity Investment Group for the
Prudential Realty Group. From 1985 to 1989, he served in the Real Estate
Banking Group of NCNB Texas National Bank. Mr. Warner graduated from the
University of Texas at Austin in 1981 with a Bachelor of Business Administration
and received a Master of Business Administration from the same institution in
1984.
COMMITTEES OF THE TRUST MANAGERS
AUDIT COMMITTEE. The Audit Committee of the Trust Managers met once during
the 1995 Fiscal Year and once during the 1996 Fiscal Year. The Audit Committee
reviews and approves the scope and results of any outside audit of the Trust,
and the fees therefor, and makes recommendations to the Trust Managers or
management concerning auditing and accounting matters and the efficacy of the
Trust's internal control systems. The Audit Committee selects
30
<PAGE>
the Trust's independent auditors. Mr. Bricker was the sole member of the Audit
Committee during the 1995 Fiscal Year. During the 1996 Fiscal Year, Messrs.
Bricker and Giles served on the Compensation Committee. Current members of the
Audit Committee are Messrs. Bricker, Giles and Kelley.
COMPENSATION COMMITTEE. The Compensation Committee met three times during
the 1995 Fiscal Year and two times during the 1996 Fiscal Year. The
Compensation Committee establishes guidelines for compensation and benefits of
the executive officers of the Trust based upon achievement of objectives and
other factors. The Compensation Committee is also responsible for acting upon
all matters concerning, and exercising such authority as is delegated to it
under the provisions of, any benefit, retirement or pension plan. Mr. Bricker
was the sole member of the Compensation Committee during the 1995 Fiscal Year.
During the 1996 Fiscal Year, Messrs. Bricker and Giles served on the Audit
Committee. Current members of the Compensation Committee are Messrs. Bricker,
Duncan and Giles.
ELECTION OF TRUST MANAGERS AND EXECUTIVE OFFICERS
Trust Managers are elected at each annual meeting of the shareholders of
the Trust and remain in office until their successors have been duly elected and
qualified, or until their earlier death, resignation or removal. Executive
officers serve at the discretion of the Trust Managers.
EXECUTIVE AND TRUST MANAGER COMPENSATION
The following table summarizes the compensation paid by the Trust to the
executive officers of the Trust for the three years ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------
NAME AND ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
- ---------------------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles W. Wolcott 1996 $195,000 $100,000 (1) $8,039 (4)
President and CEO 1995 189,000 72,000 (2) 7,040 (5)
1994 180,000 62,100 (3) 7,222 (6)
Marc A. Simpson 1996 110,000 55,000 (1) 8,039 (4)
Vice President and 1995 105,000 40,000 (2) 6,838 (5)
CFO, Secretary and 1994 81,859 (7) 34,500 (3) 4,095 (6)
Treasurer
David B. Warner 1996 110,000 55,000 (1) 8,039 (4)
Vice President 1995 100,000 43,000 (2) 6,312 (5)
and COO 1994 92,000 34,500 (3) 4,429 (6)
- ----------------------------
</TABLE>
(1) Represents bonus payments for 1996 paid in January 1997.
(2) Represents bonus payments for 1995 paid in January 1996.
(3) Represents bonus payments for 1994 paid in February 1995.
(4) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1997.
(5) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1996.
(6) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan paid in February 1995.
(7) Mr. Simpson's annualized salary for 1994 was $100,000.
In 1995, the Trust paid its Non-Employee Trust Managers an annual fee of
$20,000 plus $1,000 for each Trust Manager or committee meeting attended in
person. In addition, the Trust Managers are reimbursed for their expenses
incurred in connection with their duties as Trust Managers. In addition to the
annual fee, Mr. Bricker received $17,000
31
<PAGE>
in 1995 for attendance at Trust Manager and committee meetings. Mr. Wolcott did
not receive any compensation for his services as a Trust Manager. In March 1996,
the Trust increased the annual fee paid its Non-Employee Trust Managers to
$40,000 plus $1,000 for each Trust Manager or committee meeting attended in
person. In addition to the annual fee, Mr. Bricker received $16,000 and Mr.
Giles received $11,000 in 1996 for attendance at Trust Manager and Committee
meetings.
The Board of Trust Managers has voted to reduce their compensation effective
July 1, 1997 to an annual retainer of $25,000 plus $1,000 for each Trust Manager
meeting attended in person, $500 for each Trust Manager meeting attended via
teleconference, $500 for each committee meeting attended in person and $250 for
each committee meeting attended via teleconference. If proposal four is
approved by the shareholders, each non-employee Trust Manager will have the
right to receive his annual retainer in cash and/or Shares.
BYLAWS AMENDMENTS LIMITING TRUST MANAGER COMPENSATION
Pursuant to the terms of the Settlement Agreement, Section 3.9 of the Bylaws
of the Trust has been amended by the Trust Managers to limit the increase in
cash compensation paid to the Trust Managers to 20% over the prior year without
the approval of the holders of a majority of the shares cast at the annual
meeting of shareholders.
EMPLOYMENT AGREEMENTS
On March 13, 1996, the Trust entered into Bonus and Severance Agreements with
each of Messrs. Wolcott, Simpson and Warner. These agreements formalized the
Trust's policy of providing an annual incentive bonus of up to 50% of the
employee's base salary upon the achievement of certain objectives established by
the Compensation Committee. In addition, the agreements generally provide that
if the employee is terminated within one year after a Change in Control (as
defined), the employee will be entitled to receive an amount equal to one times
the employee's annual base salary, continuation of health and welfare benefits
for up to one year and the prorated amount of any annual incentive bonus earned
through the date of termination. The agreements are effective through March 13,
1999.
401(K) PLAN
The Trust has adopted a Retirement and Profit Sharing Plan (the "Profit
Sharing Plan") for the benefit of employees of the Trust. Employees who were
employed by the Trust on November 1, 1993, and who have attained the age of 21
are immediately eligible to participate in the Profit Sharing Plan. All other
employees of the Trust are eligible to participate in the Plan after they have
completed six months of service with the Trust and attained the age of 21.
Each participant may make contributions to the Profit Sharing Plan by means of
a pre-tax salary deferral which may not be more than 15% of the employee's
compensation. The Trust may make annual discretionary contributions to the
Profit Sharing Plan and may be required to contribute, on behalf of each non-
highly compensated employee and non-key employee who is actively employed on the
last day of each plan year, a special discretionary contribution equal to a
percentage of such employee's compensation, which will be determined each year
by the Trust. The Code limits the annual amount of salary deferrals that may be
made by any employee.
An employee's salary deferral contribution will always be 100% vested and
nonforfeitable, although such contributions will be affected by any investment
gains or losses to the Profit Sharing Plan. In general, in the event of
retirement, death or disability, 100% of a participating employee's account
would be available for distribution to either the employee or such employee's
beneficiary, as applicable. The Trust Managers may amend the Profit Sharing
Plan at any time. In no event, however, may any amendment (i) authorize or
permit any part of the Profit Sharing Plan assets to be used for purposes other
than the exclusive benefit of participating employees or their beneficiaries, or
(ii) cause any reduction in the amount credited to each participating employee's
account. Likewise, the Trust Managers have the right to terminate the Profit
Sharing Plan at any time. In the event of such termination, all amounts
credited to each employee's account will continue to be 100% vested.
32
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Compensation for the executive officers of the Trust is administered under
the direction of the Compensation Committee of the Trust Managers. The
following is the Compensation Committee's report, in its role as reviewer of the
Trust's pay programs, on 1995 and 1996 compensation practices for the executive
officers of the Trust. The report and the performance graph that appears
immediately after such report shall not be deemed to be soliciting material or
to be filed with the Securities and Exchange Commission under the Securities Act
of 1933 or the Securities Exchange Act of 1934 or incorporated by reference in
any document so filed.
BASE SALARY. The Compensation Committee determines base salaries for
executive officers by evaluating the responsibilities of the position held and
the experience of the individual, and by reference to the competitive
marketplace for executive talent, including a comparison to base salaries for
comparable positions at other real estate investment trusts, to historical
levels of salary paid by the Trust, and to recommendations of independent
compensation consultants to the Trust. Salary adjustments are based on a
periodic evaluation of the performance of the Trust and of each executive
officer, and also take into account new responsibilities as well as changes in
the competitive marketplace. Mr. Wolcott, who has served as President and Chief
Executive Officer of the Trust since the commencement of his employment with the
Trust in May received a base salary of $189,000 for the 1995 Fiscal Year and
$195,000 for the 1996 Fiscal Year. Mr. Warner, who has served as the Vice
President and Chief Operating Officer of the Trust since May 1993 received a
base salary of $100,000 for the 1995 Fiscal Year and $110,000 for the 1996
Fiscal Year. Mr. Simpson, who has served as Secretary, Treasurer and Chief
Financial Officer of the Trust since March 1994, received a base salary of
$105,000 for the 1995 Fiscal Year and $110,000 for the 1996 Fiscal Year. The
Compensation Committee was advised by a compensation consultant from Kenneth
Leventhal & Company (now part of Ernst & Young LLP) that base compensation
levels for the Trust for the 1995 Fiscal Year and for the 1996 Fiscal Year were
below the REIT industry as a whole, which was consistent with the Trust's desire
to bring its operating performance up to the standards of the REIT industry and
to focus on the incentive portion of compensation during a period of
repositioning the Trust's operations.
PERFORMANCE-BASED BONUS PLAN. Each year, in order to encourage the
accomplishment of the short-term goals of the Trust, the Compensation Committee
reviews and approves a performance-based bonus plan for executive officers based
in part on increases in Funds From Operations ("FFO") per Share as defined by
the National Association of Real Estate Investment Trusts ("NAREIT") and
adjusted by the Compensation Committee as described below. The NAREIT
definition of FFO is net income (loss) computed in accordance with generally
accepted accounting principles, excluding gains or losses from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Additionally, extraordinary items or significant non-recurring items
that distort comparability are not considered in determining FFO. The
Compensation Committee also believes FFO, when used as a performance
measurement, should be adjusted to exclude certain nonrecurring costs such as
litigation and contested proxy costs, as well as effects from other transactions
which distort comparability between periods such as property sales and
acquisitions. The Compensation Committee noted that other REITs do not adjust
the NAREIT definition of FFO as adjusted by the Compensation Committee.
However, the Compensation Committee believes that in light of the large amount
of expenses incurred by the Trust due to litigation and proxy contests, an
adjustment to FFO was appropriate when determining bonuses. Each executive
officer was eligible in 1995 to receive a bonus of up to 20% of his base salary
based on an increase of $0.05 per share in adjusted FFO over 1994. In addition
to the FFO-related bonus, each executive officer was eligible to receive a bonus
of up to 20% of his base salary for achievement of specific goals established by
the Compensation Committee. Such goals established for Mr. Wolcott included
acquisition of outstanding debt at a discount which would yield a $0.04 per
share increase in full-year FFO, maintenance of recurring administrative and
overhead expenses of the trust below $1,500,000 and realization of an
extraordinary gain on extinguishment of debt in excess of $1.00 per Share. Also
during 1995, each executive officer of the Trust was eligible to receive a merit
bonus of up to 10% of his or her base salary at the discretion of the
Compensation Committee, based strictly on individual performance. With respect
to the 1995 Fiscal Year, the Compensation Committee awarded a $72,000 bonus to
Mr. Wolcott, a $43,000 bonus to Mr. Warner and a $40,000 bonus to Mr. Simpson.
During 1996, each executive officer was eligible to receive a bonus of 40% of
base salary based on realization of the first stage of principal discount
provided for under the Settlement Agreement executed with MLI. In addition, each
executive officer was eligible to receive a bonus of 10% of base salary based on
achievement of $0.11 per share in adjusted FFO. With respect to the 1996 Fiscal
Year, the Compensation Committee awarded a $100,000 bonus to Mr. Wolcott, a
$55,000 bonus to Mr. Warner and a $55,000 bonus to Mr. Simpson.
33
<PAGE>
OTHER COMPENSATION. Other compensation payable to the executives of the
Trust includes contributions to the Employee Retirement and Profit Sharing Plan
of the Trust and insurance premiums paid by the Trust under the Trust's medical,
dental, life and long-term disability plans. See "Management -- 401(k) Plan."
1995 Compensation Committee,
William H. Bricker
1996 Compensation Committee,
William H. Bricker
Robert E. Giles
NOTICE OF INDEMNIFICATION
Pursuant to the Texas REIT Act, the Trust hereby reports to its
shareholders that the Trust indemnified Messrs. Bricker and Wolcott in
connection with certain litigation involving Pure World, Inc., a former
shareholder of the Trust, and Robert Strougo, a shareholder of the Trust (the
"Shareholder Litigation"). The Trust previously acquired director and officer
liability insurance for its Trust Managers, which policy reimbursed the Trust
for sums in excess of $200,000 paid by the Trust to indemnify Trust Managers for
expenses incurred in connection with actions such as the Shareholder Litigation.
In connection with the Shareholder Litigation, the Trust paid the $200,000
retention under the director and officer liability insurance policy.
34
<PAGE>
PERFORMANCE GRAPH
The rules and regulations of the Securities and Exchange Commission require
the presentation of a line graph comparing, over a period of five years, the
cumulative total shareholder return to a performance indicator of a broad equity
market index and either a nationally recognized industry index or a peer group
index constructed by the Trust. The chart below compares the performance of the
Common Shares with the performance of the Standard & Poors 500 Index and the
NAREIT Equity REIT Index. The comparison assumes $100 was invested on December
31, 1990 in the Common Shares and in each of the foregoing indices and assumes
reinvestment of dividends.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
DECEMBER
---------------------------------------------------
1990 1992 1993 1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S & P INDEX 100 107.67 118.43 119.97 164.88 202.74
EQUITY REIT INDEX 100 120.66 143.23 147.52 164.48 229.82
AIR REIT 100 117.66 141.68 86.58 128.31 147.43
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Shares by (i) each Trust Manager and each nominee for Trust
Manager, (ii) the Trust's Chief Executive Officer and each executive officer of
the Trust, and (iii) all Trust Managers and executive officers of the Trust as a
group, and, to the Trust's knowledge, by any person owning beneficially more
than 5% of the outstanding shares of such class, in each case at April 1, 1997.
Each person named in the table has sole voting and investment power with respect
to all Common Shares shown as beneficially owned by such person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- ---------------- ----------------------- ----------
<S> <C> <C>
William H. Bricker.......................... 2,000 *
T. Patrick Duncan........................... 3,000 *
Robert E. Giles............................. 3,750 *
Edward B. Kelley............................ 5,000 *
Charles W. Wolcott.......................... 83,000 *
Marc A. Simpson............................. 14,500 *
David B. Warner............................. 6,000 *
USAA Real Estate Company
8000 Robert F. McDermott Freeway
IH-10 West, Suite 600
San Antonio, Texas 78230-3884.............. 3,182,206 31.82%(1)
All Trust Managers and executive officers
as a group (seven persons)................ 117,250 1.17%
</TABLE>
______________
* Ownership is less than 1% of outstanding Common Shares.
(1) This information was obtained from the Schedule 13D filed by USAA REALCO
with the Securities and Exchange Commission on December 19, 1996.
35
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4 and 5 (and any amendments thereto)
furnished to the Trust with respect to the 1995 Fiscal Year and 1996 Fiscal Year
or written representations from certain reporting persons that no forms were
required, no person failed to disclose on a timely basis, as disclosed in such
forms, reports required by Section 16(a) of the Securities Exchange Act of 1934,
as amended.
PROPOSALS BY SHAREHOLDERS
A proper proposal submitted by a shareholder for presentation at the
Trust's 1997 Annual Meeting and received at the Trust's principal executive
office no later than January 12, 1998 will be included in the Proxy Statement
and Proxy related to the 1997 Annual Meeting.
OTHER MATTERS
The Trust Managers are aware of no other matter that will be presented for
action at the Annual Meeting. IF SUCH PROPOSALS OR ANY OTHER MATTERS REQUIRING A
VOTE OF THE SHAREHOLDERS PROPERLY COMES BEFORE THE ANNUAL MEETING, THE PERSONS
AUTHORIZED UNDER THE PROXIES WILL VOTE AND ACT ACCORDING TO THEIR BEST JUDGMENT.
EXPENSES
The expense of preparing, printing and mailing proxy materials to the
Trust's shareholders will be borne by the Trust. The Trust has engaged The
Herman Group, Inc. to assist in the solicitation of proxies from shareholders.
Proxies may also be solicited personally or by telephone by officers and
employees of the Trust, none of whom will receive additional compensation
therefor. In addition to mailing this material to Trust shareholders, the
Trust has asked banks and brokers to forward copies to persons for whom they
hold shares of the Trust and to request authority for execution of the proxies.
The Trust will reimburse the banks and brokers for their reasonable out-of-
pocket expenses in doing so. The expense of preparing, printing and mailing the
Proxy Statement and all supplemental materials, as well as the cost of the
solicitors and attorneys, anticipated to be approximately $275,000, will be
borne by the Trust. Of these expenses, the estimated fees for The Herman Group,
Inc. are $20,000. The Herman Group, Inc. will be reimbursed for reasonable out-
of-pocket expenses. To date, the Trust has not spent any amount of the
anticipated expenses.
ANNUAL REPORT TO SHAREHOLDERS
The Trust's 1996 Annual Report (which does not form a part of the proxy
solicitation material) was mailed on or about March 13, 1997 to all shareholders
of record as of March 10, 1997. The Trust's 1995 Annual Report (which does not
form a part of the proxy solicitation material) was mailed on or about August 5,
1996 to all shareholders of record as of August 1, 1996. A copy of the Trust's
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, will be furnished to shareholders, without exhibits and without
charge, upon written request to: Investor Relations, American Industrial
Properties REIT, 6220 N. Beltline Road, Suite 205, Irving, Texas 75063.
36
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Trust and its
subsidiaries for each of the five years in the period ended December 31, 1996.
This information should be read in conjunction with the discussion set forth
below under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Trust
and accompanying Notes included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- ----------
(in thousands except share and per share data)
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Total revenues......................... $11,478 $11,779 $11,226 $10,641 $ 15,139
Loss from real estate operations (a).. (4,732) (4,338) (4,311) (5,121) (18,719)
Net income (loss) (a)................. 1,255 (4,584) (4,655) (7,867) (17,593)
Per share:
Loss from real estate operations (a). $ (0.52) $ (0.48) $ (0.47) $ (0.57) $ (2.06)
Net income (loss) (a)................. 0.14 (0.51) (0.51) (0.87) (1.94)
Distributions paid..................... 0.04 0.04 - 0.16 0.20
BALANCE SHEET DATA:
Total assets........................... $78,936 $89,382 $92,550 $88,297 $110,446
Total debt............................. 53,216 62,815 65,613 57,078 68,578
Shareholders' equity................... 22,683 19,248 24,196 28,851 38,171
</TABLE>
______________
(a) Loss from real estate operations and net loss for 1995, 1994 and 1992
include provisions for possible losses on real estate of $600,000, $650,000
and $14,094,000, respectively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for discussion of
extraordinary gains and losses of $5,810, ($55), ($344), ($2,530) and $1,910
in 1996, 1995, 1994, 1993 and 1992, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Trust and accompanying Notes included elsewhere in
this Proxy Statement. 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 of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may differ
materially from those included in the forward-looking statements. These forward-
looking statements involve risks and uncertainties including, but not limited
to, changes in general economic conditions in the markets that could impact
demand for the Trust's properties and changes in financial markets and interest
rates impacting the Trust's ability to meet its financing needs and obligations.
RESULTS OF OPERATIONS
Comparison of 1996 to 1995
The sale of two properties in late 1996 and the purchase of a property in
August 1995 resulted in a net decrease in 1996 property revenue and net
operating income of $67,000 and $51,000, respectively, when compared to 1995.
On a same property basis, property revenues decreased from $10,209,000 in 1995
to $10,186,000 in 1996, a decrease of 0.2%, comprised of a 2.9% increase in
revenue related to industrial properties and a 6.2% decrease in revenue at the
Trust's retail property. The decrease in revenue at the Trust's retail property
stemmed principally from lower percentage rents ($115,000) and slower leasing of
vacancies and is partially attributable to the opening of a new regional mall in
Denver during the third quarter of 1996. Overall leased occupancy of the
Trust's portfolio was 94.2% at December 31, 1996 compared to 93.7% at December
31, 1995.
37
<PAGE>
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, Trust administration and
overhead expenses or provision for possible losses on real estate) decreased
from $6,704,000 in 1995 to $6,494,000 in 1996, a decrease of 3.1%. This overall
decrease is comprised of a 0.5% increase related to industrial properties and a
10.7% decrease related to the Trust's retail property. The decrease in the
Trust's retail property is a result of the decrease in revenue explained above.
Same property operating expenses increased by 5.3%, an increase in repairs and
maintenance expenses and tenant refit costs of $98,000 in 1996. On the same
property basis, loss from operations increased from $4,964,000 in 1995 to
$5,351,000 in 1996 (see following explanation).
Loss from operations increased from $4,338,000 in 1995 to $4,732,000 in
1996 as a result of the decrease in net operating income explained above, a
decrease in total interest expense of $584,000 (due to the larger accrual of
default rate interest on the MLI Notes in 1995), the provision of $600,000 for
possible losses on real estate in 1995, an increase in litigation, refinancing
and proxy costs of $568,000 (due to the shareholder litigation in 1996), an
increase in Trust administration and overhead expenses of $406,000 (due to the
accrual of $240,000 in incentive compensation, higher legal fees and increased
Trust Manager compensation in 1996) and a decrease in interest income (due to
higher invested balances in 1995 from the nonpayment of interest to the Trust's
unsecured lender).
During 1996, the Trust sold two industrial properties and recognized a gain
on sale of $177,000, compared to the sale of one property in 1995 resulting in a
loss on sale of $191,000. In 1996, the Trust recognized an extraordinary gain
on extinguishment of debt of $5,810,000, or $0.64 per share, pursuant to
settlement of litigation with MLI.
Comparison of 1995 to 1994
Property revenues increased from $11,080,000 in 1994 to $11,410,000 in
1995, resulting from the stabilization in occupancy of the Trust's portfolio and
improving rental rates in selected markets. Property operating expenses
decreased from $3,952,000 in 1994 to $3,851,000 in 1995, primarily due to the
net effect of a sale of a property in February 1995 and the purchase of a
property in August 1995. Property net operating income increased from
$7,128,000 in 1994 to $7,559,000 in 1995, an increase of 6.0%. On a same
property basis, net operating income increased from $6,927,000 in 1994 to
$7,474,000 in 1995, an increase of 7.9%. Overall leased occupancy of the
portfolio was 93.7% at December 31, 1995 compared to 93.2% at December 31, 1994.
Loss from operations increased from $4,311,000 in 1994 to $4,338,000 in
1995 as a result of the increase in net operating income and an increase in
interest income of $223,000 (due to higher invested balances resulting from the
non-payment of interest to the Trust's unsecured lender), a decrease in total
administrative expenses of $128,000 (as a result of two proxy contests in 1994
versus one in 1995), a net increase in interest expense of $1,215,000 (due to
the November 1994 refinancing transaction and the default rate interest accrued
by the Trust in 1995 of $724,000), a decrease in depreciation and amortization
of $356,000 (due to the Trust's property transactions in 1995), and a decrease
in provision for possible losses on real estate of $50,000 (due to the timing of
writedowns related to properties held for sale).
During 1995, the Trust recognized a loss of $191,000 on the sale of its
Quadrant property and an extraordinary loss of $55,000 related to the prepayment
of an outstanding mortgage loan. In 1994, the Trust recognized an extraordinary
loss of $344,000 on the partial in-substance defeasance of Zero Coupon Notes due
1997.
During 1995, the Trust incurred approximately $980,000 in expenses related
to litigation, a proxy contest in connection with issues before the shareholders
at the Trust's annual meeting and attempted recapitalization costs, compared to
approximately $1,027,000 in 1994. During 1994, the Trust had no litigation
expenses but incurred costs related to two proxy contests.
38
<PAGE>
The Trust recorded a provision for possible loss on real estate related to
its Patapsco property at December 31, 1995 of $600,000. This provision follows
a $650,000 provision made at December 31, 1994. The Trust began marketing this
property in early 1995.
Analysis of Cash Flows
Cash flow used in operating activities in 1996 was $1,965,000. This
deficit reflects the results of property operations, interest expense and
administrative expenses. Interest expense reflects several items of non-
recurring nature, including the accrual of $369,000 of default rate interest
which was ultimately forgiven and approximately $535,000 related to principal
which was forgiven in November 1996 and February 1997. In addition,
administrative expenses includes $1,548,000 of litigation, refinancing and proxy
costs which relate to special situations and should not be considered to be
recurring expenses. Management believes that, in the future, cash flow provided
by operations will increase due to the elimination of the non-recurring items
described above and the Trust's plans to attract capital and pursue a growth
strategy.
Cash flow provided by investing activities in 1996 was $5,173,000,
representing proceeds from the sale of two properties and amounts expended on
capitalized improvements and leasing commissions. The sale of the two
properties was necessary to raise capital with which to make payments under the
Trust's option to retire certain indebtedness at a discount.
Cash flow used in financing activities in 1996 was $6,185,000. This amount
reflects proceeds from the mortgage financing on nine properties, the payment of
amounts on the option to retire certain indebtedness at a discount, the sale of
Shares to USAA REALCO, and the first quarter distribution to shareholders.
Funds from Operations
In March 1995, NAREIT issued its White Paper on FFO which clarified the
treatment of certain items in determining FFO and recommended additional
supplemental disclosures. The Trust has adopted the recommendations of NAREIT
and restated its FFO calculation for prior years. The changes promulgated by
NAREIT eliminate the add back of depreciation and amortization of non-real
estate items, including the amortization of deferred financing costs, in
determining FFO. The revised definition of FFO is net income (loss) computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In addition, NAREIT recommends that
extraordinary items or significant non-recurring items that distort
comparability should not be considered in arriving at FFO. Accordingly, the
Trust does not include the default rate interest accrued on its $45.2 million in
unsecured notes payable in the determination of FFO. Funds Available for
Distribution ("FAD") is also presented as it more accurately portrays the
ability of the Trust to make distributions because it reflects capital
expenditures. The Trust believes FFO and FAD are appropriate measures of
performance relative to other REITs. FFO provides investors with an
understanding of the ability of the Trust to incur and service debt and make
capital expenditures. There can be no assurance that FFO and FAD presented by
the Trust is comparable to similarly titled measures of other REITs. While
other REITs may not always use a similar definition, this information does add
comparability to those which have adopted the NAREIT definitions.
FFO and FAD should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of the Trust's operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital improvements or
principal payments on indebtedness.
39
<PAGE>
FFO and FAD are calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(in thousands)
NET INCOME (LOSS).................................... $ 1,255 $ (4,584) $ (4,655)
Exclude effects of:
Extraordinary (gain) loss on extinguishment of
debt........................................... (5,810) 55 -
(Gain) loss on sales of real estate.................. (177) 191 -
Provision for possible losses on real estate......... - 600 650
Real estate depreciation and amortization............ 2,890 2,771 3,102
Default rate interest................................ 369 724 -
Extraordinary loss on partial in-substance
defeasance of Zero Coupon Notes..................... - - 344
-------- -------- --------
FUNDS FROM OPERATIONS................................ $ (1,473) $ (243) $ (559)
======== ======== ========
Funds from Operations................................ $ (1,473) $ (243) $ (559)
Capitalized improvements and leasing commissions (a). (1,372) (1,023) (1,476)
Non-cash effect of straight-line rents on FFO........ 193 161 156
-------- -------- --------
FUNDS AVAILABLE FOR DISTRIBUTION..................... $ (2,652) $ (1,105) $ (1,879)
======== ======== ========
Weighted average Shares outstanding.................. 9,108.2 9,075.4 9,075.4
- --------------------------------------
</TABLE>
(a) The breakdown of capitalized improvements and leasing commissions is as
follows for each of the two years ending December 31, 1996:
<TABLE>
<CAPTION>
FYE 12/31/96 FYE 12/31/95
--------------- -------------
Amount PSF Amount PSF
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tenant improvements - new tenants $ 287 $3.32 $ 343 $2.58
Tenant improvements - renewing tenants 282 1.93 184 1.30
Leasing costs - new tenants 245 1.71 168 1.16
Leasing costs - renewing tenants 144 0.58 107 0.55
Expansions and major renovations 414 0.26 221 0.13
------ ------
Total $1,372 $1,023
====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Trust's liquidity requirements are
funds generated from operations of the Trust's real estate assets and
unrestricted cash reserves. As of December 31, 1996, the Trust had $4,010,000
in unrestricted cash on hand. The Trust presently anticipates that these cash
reserves will provide sufficient funds for all currently known liabilities and
commitments relating to the Trust's operations during 1997.
40
<PAGE>
The Trust settled its MLI litigation in May 1996 and paid $5,200,000 in
settlement of all past due interest on the MLI Notes, thereby allowing the Trust
to record an extraordinary gain of $1,367,000. The Trust was also granted an
option to repay the approximate $45,239,000 in principal amount outstanding on
the MLI Notes for $36,800,000 (the "Option Price"). In November 1996, the Trust
completed a mortgage financing on nine properties in the amount of $26,453,000.
Net proceeds of $24,805,000 were applied to the Option Price. In addition, the
Trust sold two properties during the fourth quarter of 1996, generating net
proceeds of $6,545,000 which were also applied to the Option Price. In
accordance with the MLI Agreement, $4,220,000 in debt was forgiven, allowing the
Trust to record an extraordinary gain of $4,443,000 (including accrued interest
forgiven). These notes were purchased by USAA REALCO in February 1997. As
discussed under "PROPOSAL THREE -- CONVERSION OF USAA REALCO DEBT INTO COMMON
SHARES," USAA REALCO has the option to convert the principal amount of these
notes into Common Shares at the conversion rate of $2.00 per share (if converted
prior to December 31, 1997) or $2.25 per share (if converted between December
31, 1997 and December 31, 2000), assuming shareholder approval of this
conversion right and approval of an increase in the number of authorized Common
Shares of the Trust. If conversion of this debt were to occur in 1997, USAA
REALCO would own approximately 46.4% of the outstanding Common Shares of the
Trust.
The Trust declared a distribution of $0.04 per Common Share in February 1996.
The MLI Agreement related to the MLI litigation, signed in May 1996, prohibited
the payment of distributions while the agreement is in effect. The Modified
Notes owned by USAA REALCO provide that the Trust may not pay distributions
until the debt is paid in full; however, this restriction terminates in the
event the shareholders approve USAA REALCO's conversion right and approve an
increase in the authorized Common Shares of the Trust or if USAA REALCO, in its
sole discretion, permits distributions to be paid prior to the Modified Notes
being fully paid. Should the notes be converted to equity as described above,
this restriction will be removed. To the extent allowable, the Trust intends to
evaluate future distributions on a quarterly basis.
The Trust currently has borrowings secured by mortgages on the Trust's
properties totaling $43,797,000. Of this amount, approximately $1,927,000
represents variable rate financing with a weighted average interest rate of
10.25% and $41,870,000 represents fixed rate financing with a weighted average
interest rate of 8.61%. The overall weighted average interest rate on the
Trust's mortgage debt is 8.68%. Annual debt service on these borrowings amounts
to $4,452,000 and principal maturity during 1997 will approximate $675,000.
The nature of the Trust's operating properties, which generally provide for
leases with a term of between three and five years, results in an approximate
turnover rate of 20% to 25% of the Trust's tenants and related revenue annually.
Such turnover requires capital outlays related to tenant improvements and
leasing commissions in order to maintain or improve the Trust's occupancy
levels. These costs amounted to $1,372,000 in the year ended December 31, 1996
and $1,023,000 in the year ended December 31, 1995. These costs have
historically been funded out of the Trust's operating cash flow and cash
reserves. The Trust has made no commitments for additional capital expenditures
beyond those related to normal leasing and releasing activity and related
escrows. No capital improvements or renovations of significance are anticipated
in the near future for any of the Trust's properties, with the possible
exception of a large retail lease at the Trust's retail property. Such a lease,
if agreed to, could result in expenditures for tenant improvements in excess of
$500,000.
41
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
----
Report of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
Schedule III - Consolidated Real Estate and Accumulated Depreciation F-14
Notes to Schedule III F-15
All other financial statements and schedules not listed have been omitted
because the required information is either included in the Financial
Statements and the Notes thereto as included herein or is not applicable or
required.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Trust Managers and Shareholders
American Industrial Properties REIT:
We have audited the accompanying consolidated balance sheets of American
Industrial Properties REIT (the "Trust") as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Trust as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related 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.
Dallas, Texas
February 13, 1997
except for Note 14, as to
which the date is February 26, 1997
F-2
<PAGE>
American Industrial Properties REIT
Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Rents $ 8,592 $ 8,676 $ 8,397
Tenant reimbursements 2,728 2,734 2,683
Interest income 158 369 146
----------- ----------- -----------
11,478 11,779 11,226
----------- ----------- -----------
EXPENSES
Property operating expenses:
Property taxes 1,421 1,397 1,421
Property management fees 430 428 442
Utilities 476 478 501
General operating 849 795 705
Repairs and maintenance 529 431 656
Other property operating expenses 317 322 227
Depreciation and amortization 2,909 2,777 3,133
Interest on 8.8% notes payable 4,003 4,707 4,001
Interest on mortgages payable 1,898 1,778 850
Amortization of original issue discount on Zero
Coupon Notes due 1997 - - 419
Administrative expenses:
Trust administration and overhead 1,830 1,424 1,505
Litigation, refinancing and proxy costs 1,548 980 1,027
Provision for possible losses on real estate - 600 650
----------- ----------- -----------
16,210 16,117 15,537
----------- ----------- -----------
Loss from operations (4,732) (4,338) (4,311)
Gain (loss) on sales of real estate 177 (191) -
Extraordinary gain (loss) on extinguishment of debt 5,810 (55) -
Extraordinary loss on partial in-substance
defeasance of Zero Coupon Notes due 1997 - - (344)
----------- ----------- -----------
NET INCOME (LOSS) $ 1,255 $ (4,584) $ (4,655)
=========== =========== ===========
PER SHARE DATA
Loss from operations $ (0.52) $ (0.48) $ (0.47)
Gain (loss) on sales of real estate 0.02 (0.02) -
Extraordinary gain (loss) on extinguishment of debt 0.64 (0.01) -
Extraordinary loss on partial in-substance
defeasance of Zero Coupon Notes due 1997 - - (0.04)
----------- ----------- -----------
Net Income (Loss) $ 0.14 $ (0.51) $ (0.51)
=========== =========== ===========
Distributions Paid $ 0.04 $ 0.04 $ 0.00
=========== =========== ===========
Weighted average shares outstanding 9,108,241 9,075,400 9,075,400
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
American Industrial Properties REIT
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Real estate:
Held for investment $ 84,693 $ 97,091
Held for sale 9,779 4,806
------------ ------------
Total real estate 94,472 101,897
Accumulated depreciation (23,973) (23,441)
------------ ------------
Net real estate 70,499 78,456
Cash and cash equivalents:
Unrestricted 4,010 7,694
Restricted 1,366 659
------------ ------------
Total cash and cash equivalents 5,376 8,353
Other assets, net 3,061 2,573
------------ ------------
Total Assets $ 78,936 $ 89,382
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 43,797 $ 17,576
8.8% notes payable 9,419 45,239
Accrued interest 602 5,178
Accounts payable, accrued expenses and other liabilities 1,964 1,620
Tenant security deposits 471 521
------------ ------------
Total Liabilities 56,253 70,134
------------ ------------
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value;
authorized 10,000,000 Shares; issued and
outstanding 10,000,000 Shares at 1996 and
9,075,400 Shares at 1995 1,000 908
Additional paid-in capital 127,056 124,605
Retained earnings (deficit) (105,373) (106,265)
------------ ------------
Total Shareholders' Equity 22,683 19,248
------------ ------------
Total Liabilities and Shareholders' Equity $ 78,936 $ 89,382
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
American Industrial Properties REIT
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Shares of Beneficial
Interest Additional Retained
--------------------- Paid-In Earnings
Number Amount Capital (Deficit) Total
---------- ------ -------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 9,075,400 $ 908 $124,605 ($96,662) $28,851
Net loss - - - (4,655) (4,655)
---------- ------ -------- -------- -------
Balance at December 31, 1994 9,075,400 908 124,605 (101,317) 24,196
Net loss - - - (4,584) (4,584)
Distributions to shareholders - - - (364) (364)
---------- ------ -------- -------- -------
Balance at December 31, 1995 9,075,400 908 124,605 (106,265) 19,248
Issuance of additional shares 924,600 92 2,451 - 2,543
Net income 1,255 1,255
Distributions to shareholders - - - (363) (363)
---------- ------ -------- --------- -------
Balance at December 31, 1996 10,000,000 $1,000 $127,056 ($105,373) $22,683
========== ====== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
American Industrial Properties REIT
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,255 $ (4,584) $ (4,655)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Extraordinary (gains) losses (5,810) 55 344
(Gains) losses on real estate (177) 791 650
Depreciation 2,577 2,479 2,622
Amortization of deferred financing costs 70 70 -
Other amortization 332 298 511
Amortization of original issue discount - - 419
Changes in operating assets and liabilities:
(Increase) decrease in other assets (563) 183 (256)
Increase (decrease) in accounts payable, other
liabilities and tenant security deposits 351 (61) 373
-------- -------- --------
Net Cash (Used In) Provided By Operating Activities (1,965) (769) 8
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales of real estate 6,545 2,476 -
Capitalized improvements and leasing commissions (1,372) (1,023) (1,476)
Acquisition of real estate - (1,309) -
-------- -------- --------
Net Cash Provided By (Used In) Investing Activities 5,173 144 (1,476)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable (31,832) (2,798) (1,283)
Proceeds from mortgage financing 26,453 - 14,500
Proceeds from sale of common shares 2,543 - -
(Decrease) increase in accrued interest (2,986) 4,674 -
Distributions to shareholders (363) (364) -
Prepayment penalty on extinguishment of debt - (55) -
Partial in-substance defeasance of Zero Coupon Notes - - (3,106)
Partial repurchase of Zero Coupon Notes - - (2,241)
-------- -------- --------
Net Cash (Used In) Provided By Financing Activities (6,185) 1,457 7,870
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (2,977) 832 6,402
Cash and Cash Equivalents at Beginning of Year 8,353 7,521 1,119
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 5,376 $ 8,353 $ 7,521
======== ======== ========
Cash Paid for Interest $ 8,817 $ 1,741 $ 4,718
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
General.
American Industrial Properties REIT (the "Trust") is a self-administered
Texas real estate investment trust which, as of December 31, 1996, owns and
operates thirteen commercial real estate properties consisting of twelve
industrial properties and one retail property. The Trust was formed September
26, 1985 and commenced operations on November 27, 1985. Pursuant to the Trust's
1993 Annual Meeting of Shareholders, amendments to the Trust's Declaration of
Trust and Bylaws were approved which, among other things, changed the name of
the Trust to American Industrial Properties REIT and converted the Trust from a
finite life entity to a perpetual life entity.
Principles of Consolidation.
The consolidated financial statements of the Trust include the accounts of
American Industrial Properties REIT and its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated in
consolidation.
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 amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly from such estimates
and assumptions.
Real Estate.
The Trust carries its real estate at lower of depreciated cost or net
realizable value. In accordance with Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, issued in March 1995, the Trust records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the related carrying
amounts. In addition, the Trust records impairment losses on assets held for
sale when the estimated sales proceeds, after estimated selling costs, are less
than the carrying value of the related asset (see Note 2).
Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital improvements is
computed using the straight-line method over forty years. Depreciation of tenant
improvements is computed using the straight-line method over ten years.
Cash and Cash Equivalents.
Cash equivalents include demand deposits and all highly liquid instruments
purchased with an original maturity of three months or less. Restricted amounts
reflect escrow deposits held by third parties for the payment of taxes and
insurance and reserves held by third parties for property repairs or tenant
improvements.
F-7
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Assets.
Other assets primarily consists of deferred rent receivable, prepaid
commissions and loan fees. Leasing commissions are capitalized and amortized on
a straight line basis over the life of the lease. Loan fees are capitalized and
amortized to interest expense on a level yield basis over the term of the
related loan.
Rents and Tenant Reimbursements.
Rental income, including contractual rent increases or delayed rent starts,
is recognized on a straight-line basis over the lease term. The Trust has
recorded deferred rent receivable (representing the excess of rental revenue
recognized on a straight line basis over actual rents received under the
applicable lease provisions) of $599,000 and $810,000 at December 31, 1996 and
1995, respectively.
Several tenants in the Trust's retail property are also required to pay as
rent a percentage of their gross sales volume, to the extent such percentage
rent exceeds their base rents. Such percentage rents amounted to $154,000,
$269,000 and $245,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. In addition to paying base and percentage rents, most tenants
are required to reimburse the Trust for operating expenses in excess of a
negotiated base amount.
Tamarac Square, the Trust's only retail property, has rental revenues in
excess of 10% of the total revenues of the Trust. Rental revenues and tenant
reimbursements from Tamarac totaled $3,308,000, $3,525,000, and $3,441,000 in
1996, 1995, and 1994, respectively.
Income Tax Matters.
The Trust operates as a real estate investment trust ("REIT") for federal
income tax purposes. Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a deduction for dividends
paid during the year. The Trust had a taxable loss in each of the years ending
December 31, 1996, 1995, and 1994. Accordingly, no provision for income taxes
has been reflected in the financial statements.
The Trust has a net operating loss carryforward from 1996 and prior years
of approximately $34,800,000. Subject to certain restrictions, the losses may
be carried forward for up to 15 years. The present losses will expire
beginning in the year 2004. Management intends to operate the Trust in such a
manner as to continue to qualify as a REIT and to continue to distribute cash
flow in excess of taxable income.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from that reported for financial reporting purposes
due primarily to differences in the basis of the assets and the estimated useful
lives used to compute depreciation.
Concentrations.
The Trust owns industrial properties in Baltimore, Dallas, Houston, Los
Angeles, Milwaukee, and Minneapolis, and one retail property in Denver. The
principal competitive factors in these markets are price, location, quality of
space, and amenities. In each case, the Trust owns a small portion of the total
similar space in the market and competes with owners of other space for tenants.
Each of these markets is highly competitive, and other owners of property may
have competitive advantages not available to the Trust. The Trust's retail
property, Tamarac Square, represents approximately 29% of the rent and tenant
reimbursement revenues for the year ended December 31, 1996, and approximately
41% of net real estate at December 31, 1996.
F-8
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassification.
Certain amounts in prior years financial statements have been reclassified
to conform with the current year presentation.
NOTE 2 -- REAL ESTATE AND PROVISIONS FOR POSSIBLE LOSSES ON REAL ESTATE:
At December 31, 1996 and 1995, real estate was comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Held for investment:
Land $15,149,000 $ 17,526,000
Buildings and improvements 69,544,000 79,565,000
----------- ------------
84,693,000 97,091,000
----------- ------------
Held for sale:
Land 1,728,000 897,000
Buildings and improvements 8,051,000 3,909,000
----------- ------------
9,779,000 4,806,000
----------- ------------
Total $94,472,000 $101,897,000
=========== ============
</TABLE>
During 1996, the Trust reclassified four properties from held for
investment to held for sale in anticipation of the need to raise capital to
complete the discounted purchase of certain indebtedness. Two of these
properties were sold in the fourth quarter of 1996 for net proceeds of
$6,545,000, resulting in a net gain of $177,000, and two remain classified as
held for sale at December 31, 1996. The net operating income of the properties
held for sale at December 31, 1996 was approximately $827,000 in 1996. During
1995, the Trust sold one industrial property for net proceeds of $2,476,000,
resulting in a net loss of $191,000, and acquired a 72,000 square foot
industrial distribution property in Arlington, Texas for total consideration of
approximately $1,309,000. One property was classified as held for sale at
December 31, 1995. This property, on which provisions for possible losses on
real estate were recorded of $600,000 and $650,000 in 1995 and 1994,
respectively, was reclassified to held for investment in 1996.
If unforeseen factors should cause a reclassification of the Trust's real
estate from held for investment to held for sale, significant adjustments to
reduce the depreciated cost of the real estate to net realizable value could be
required.
NOTE 3 -- MORTGAGES PAYABLE:
At December 31, 1996, the Trust's properties were subject to liens securing
mortgage notes payable totaling $43,797,000. Of this amount $1,927,000
represented a note with a variable interest rate of prime plus 2% (at December
31, 1996, the prime rate was 8.25%) and $41,870,000 represented notes with fixed
interest rates ranging from 8.40% to 11.0%.
Principal payments due during each of the next five years are as follows:
$675,000 in 1997, $2,632,000 in 1998, $1,973,000 in 1999, $818,000 in 2000,
$13,776,000 in 2001 and $23,923,000 thereafter.
The Bylaws of the Trust, the settlement agreement relating to the 8.8%
Notes Payable, and certain mortgages payable contain various borrowing
restrictions and operating performance covenants. The Trust is in compliance
with all such restrictions and covenants as of December 31, 1996.
F-9
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- 8.8% NOTES PAYABLE:
In February 1992, the Trust issued $53,234,000 of unsecured notes payable
due November 1997 (the "8.8% Notes Payable"), proceeds of which were used to
retire certain other indebtedness. In May 1995, the Trust initiated litigation
against the holder of these notes and elected not to make scheduled interest
payments thereafter. In June 1995, the noteholder declared the entire principal
amount and all accrued interest on the notes due and payable and, effective June
13, 1995, began accruing interest on the principal amount at the 11.7% default
rate provided for in the Note Purchase Agreement.
In May 1996, the Trust settled this litigation and, as a result, the notes
became secured by first or second liens on various properties and by pledges of
ownership interests in certain Trust entities owning properties. The Trust paid
$5,200,000 to satisfy all accrued interest payable through April 12, 1996,
allowing the Trust to recognize an extraordinary gain of $1,367,000 in the
second quarter of 1996.
As part of the settlement, the Trust obtained an option to pay the
remaining $45,239,000 in outstanding principal indebtedness for $36,800,000 (the
"Option Price"). As a result of a mortgage financing on nine properties and the
sale of two other properties in the fourth quarter of 1996, the Trust made
payments of $31,350,000 during 1996 on the Option Price, decreasing the
remaining required payment under the option to $5,450,000. The Trust paid
$250,000 to extend the date by which the Option Price must be paid to March 31,
1997. This amount reduced the principal amount outstanding on the 8.8% Notes
Payable but did not reduce the Option Price. The principal amount of
indebtedness outstanding on the 8.8% Notes Payable is $9,419,000. In connection
with the settlement of the litigation and the terms of the option, the Trust
recorded an extraordinary gain on extinguishment of debt of $1,367,000 in the
second quarter of 1996 and $4,443,000 in the fourth quarter of 1996.
In February 1997, the notes were sold to a major shareholder of the Trust
(see Note 14).
NOTE 5 -- ZERO COUPON NOTES:
As part of its original capitalization in 1985, the Trust issued
$179,698,000 (face amount at maturity) of Zero Coupon Notes due 1997 (the
"Notes"). These Notes, which were collateralized by first and second mortgage
liens on each of the Trust's real estate properties, accreted at 12%, compounded
semiannually. In 1991, the Trust began a program to retire the outstanding
Notes, resulting in a reduction of the outstanding Notes to $19,491,000 (face
amount at maturity) at December 31, 1993. On December 31, 1993, the Trust
effected a partial in-substance defeasance on $12,696,000 (face amount at
maturity) of the Notes and recorded an extraordinary loss of $2,530,000. In
November 1994, the Trust completed a partial in-substance defeasance on
$3,669,000 (face amount at maturity) of Notes and recorded an extraordinary loss
of $344,000. In December 1994, the Trust purchased the remaining non-defeased
Notes outstanding in the open market and submitted the Notes to the Trustee for
cancellation. The legal defeasance of the Notes resulted in the release of the
Zero Coupon Note mortgage liens which encumbered each of the Trust's properties.
The accreted value of the Notes defeased at December 31, 1996 and 1995 was
$14,725,000 and $13,104,000, respectively.
F-10
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- ENVIRONMENTAL MATTERS:
The Trust has been notified of the existence of limited underground
petroleum based contamination at a portion of Tamarac Square, the Trust's Denver
retail property. The source of the contamination is apparently related to
underground storage tanks ("USTs") located on adjacent property. The owner of
the adjacent property has agreed to remediate the property to comply with state
standards and has indemnified the Trust against costs related to its sampling
activity. The responsible party for the adjacent USTs has submitted a
corrective Action Plan to the Colorado Department of Public Health and
Environment. Implementation of the plan is ongoing. The responsible party is
negotiating to obtain access agreements from impacted landowners, including the
Trust.
With the exception of Tamarac Square, the Trust has not been notified, and
is not otherwise aware, of any material non-compliance, liability or claim
relating to hazardous or toxic substances in connection with any of its
properties.
NOTE 7 -- SHAREHOLDER TRANSACTIONS:
In January 1996, the Trust filed a lawsuit in federal court in Dallas,
Texas against a major shareholder of the Trust, alleging violations of federal
and state securities laws. The defendants filed a counterclaim against the
Trust and its Trust Managers and, in February 1996, another shareholder filed a
claim against the Trust and its Trust Managers. The litigation related to these
claims was consolidated in April 1996.
In December 1996, a settlement of this litigation was approved by the
Court. This settlement provided, among other things, that certain amendments to
the Trust's Bylaws be made and that the Trust pay the shareholders a total of
$955,000. Of this amount, $625,000 was paid by the Trust's directors and
officers liability insurance.
In connection with the settlement, USAA Real Estate Company ("USAA REALCO")
purchased the Shares held by several shareholders. Prior to these purchases,
the Trust had sold to USAA REALCO 924,600 authorized but unissued Shares for
$2,542,650. Upon completion of the purchases from the shareholders, USAA REALCO
owned a total of 3,182,206 Shares, representing 31.82% of the total Shares of
the Trust outstanding.
On December 18, 1996, the Trust executed an agreement with USAA REALCO
contemplating the purchase by USAA REALCO of certain outstanding indebtedness of
the Trust. On February 26, 1997, USAA REALCO purchased this debt (see Note 14).
NOTE 8 -- LITIGATION:
During 1996, the Trust concluded two significant litigation matters (see
Notes 4 and 7). Although the Trust is not currently involved in any significant
litigation, the Trust may, on occasion and in the normal course of business, be
involved in legal actions relating to the ownership and operations of its
properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a materially
adverse effect on the consolidated financial position of the Trust.
F-11
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- RETIREMENT AND PROFIT SHARING PLAN:
During 1993, the Trust adopted a retirement and profit sharing plan which
qualifies under section 401(k) of the Internal Revenue Code. All existing Trust
employees at adoption and subsequent employees who have completed six months of
service are eligible to participate in the plan. Subject to certain limitations,
employees may contribute up to 15% of their salary. The Trust may make annual
discretionary contributions to the plan. Contributions by the Trust related to
the years ended December 31, 1996, 1995 and 1994 were $30,000, $25,000 and
$20,000, respectively.
NOTE 10 -- OPERATING LEASES:
The Trust's properties are leased to others under operating leases
with expiration dates ranging from 1997 to 2011. Future minimum rentals on
noncancellable tenant leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1997 $ 7,592,000
1998 6,179,000
1999 4,328,000
2000 2,844,000
2001 2,091,000
Thereafter 2,217,000
-----------
$25,251,000
===========
</TABLE>
NOTE 11 -- DISTRIBUTIONS:
The Trust's distributions of $363,000 ($0.04 per share) in 1996 and
$364,000 ($0.04 per share) in 1995 represent a return of capital to shareholders
(to the extent of the shareholder's basis in the Shares.) The Trust did not pay
any distributions in 1994.
NOTE 12 -- PER SHARE DATA:
Per share data is based on a weighted average number of Shares outstanding
of 9,108,241 for the year ending December 31, 1996 and 9,075,400 or the years
ended December 31, 1995 and 1994.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
Accounts receivable, accounts payable and accrued expenses and other
liabilities are carried at amounts that reasonably approximate their fair
values. The fair values of the Trust's mortgage notes payable are estimated
using discounted cash flow analyses, based on the Trust's incremental borrowing
rates for similar types of borrowing arrangements. The carrying values of such
mortgage notes payable reasonably approximate their fair values.
NOTE 14 -- SUBSEQUENT EVENT:
On February 26, 1997, USAA REALCO, a shareholder owning 31.8% of the
outstanding Shares in the Trust, purchased outstanding indebtedness of the Trust
totaling $9,419,213 pursuant to an earlier agreement with the Trust. USAA REALCO
and the Trust then entered into an agreement modifying the terms of the
indebtedness. The amount of the outstanding debt was reduced from $9,419,213 to
$7,040,721, allowing the Trust to recognize an extraordinary gain on
extinguishment of debt (including accrued interest) of $2,643,000 in the first
quarter of 1997. The Trust made an immediate principal reduction on the
modified notes of $1,591,103, leaving an outstanding principal balance of
$5,449,618.
F-12
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The terms of the modified notes provide for monthly payments of interest at
8.8% and an extension in the maturity date from March 31, 1997 to December 31,
2000. In addition, USAA REALCO has the option to convert the principal amount
of the notes into Shares of the Trust at the conversion rate of $2.00 per share
(if converted prior to December 31, 1997) or $2.25 per share (if converted
between December 31, 1997 and December 31, 2000). In order for USAA REALCO to
convert its debt into Shares, the shareholders must approve an increase in the
authorized Shares of the Trust. An increase in the authorized Shares of the
Trust requires approval by holders of two-thirds of the outstanding Shares. In
addition, the shareholders must approve the right of USAA REALCO to convert its
debt into Shares. The notes provide that if shareholder approval of this
conversion right is not approved by June 30, 1997, interest on the debt will
increase to the lesser of 18% or the highest lawful rate effective July 1, 1997
and the full principal amount will become due and payable on October 31, 1997.
Management believes that the sale of one or more properties would be required to
satisfy this obligation in the event the notes become due and payable.
F-13
<PAGE>
SCHEDULE III
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
($000'S)
<TABLE>
<CAPTION>
INITIAL COST
ENCUM- -------------------- WRITEDOWNS
BRANCES BLDINGS & CAPITALIZED AND
DESCRIPTION AT 12/31/96 LAND IMPRVMNTS IMPRVMNTS RETIREMENTS ALLOWANCES
----------- ----------- ---- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS--
Beltline Business Ctr $ 2,775 $ 1,303 $ 5,213 $ 424 ($5) ($3,516)
Commerce Park 2,100 1,108 4,431 542 (2,014)
Gateway 5 & 6 2,850 935 3,741 693 (1,861)
Northgate II 5,175 2,153 8,612 758 (4,122)
Northview 2,194 658 2,631 38
Plaza Southwest 3,375 1,312 5,248 979
Westchase 1,327 697 2,787 322 (74) (1,158)
Meridian 1,163 262 1,047
CALIFORNIA--
Huntington Drive 4,575 1,559 6,237 731
MARYLAND--
Patapsco 3,112 1,147 4,588 371 (1,250)
MINNESOTA--
Burnsville 1,927 761 3,045 443 (18) (1,563)
WISCONSIN--
Northwest Business Pk 1,278 1,296 5,184 762 (131)
RETAIL PROPERTY:
COLORADO--
Tamarac Square 11,946 6,799 27,194 4,383 (241)
TRUST HOME OFFICE 31
------- ------- ------- ------- ----- -------
TOTAL $43,797 $19,990 $79,958 $10,477 ($469) ($15,484)
======= ======= ======= ======= ===== =======
<CAPTION>
GROSS AMT CARRIED
AT DECEMBER 31, 1996
--------------------------------------
BLDINGS & ACCUM. DATE OF DATE
LAND IMPRVMNTS TOTAL DEPREC. CONSTRUCTION ACQUIRED
---- --------- ----- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS--
Beltline Business Ctr $ 600 $ 2,819 $ 3,419 $ 1,320 1984 1985
Commerce Park 705 3,362 4,067 1,214 1984 1985
Gateway 5 & 6 563 2,945 3,508 1,208 1984-85 1985
Northgate II 1,329 6,072 7,401 2,365 1982-83 1985
Northview 658 2,669 3,327 215 1980 1993
Plaza Southwest 1,312 6,227 7,539 1,737 1970-74 1985
Westchase 465 2,109 2,574 773 1983 1985
Meridian 262 1,047 1,309 35 1981 1995
CALIFORNIA--
Huntington Drive 1,559 6,968 8,527 2,004 1984-85 1985
MARYLAND--
Patapsco 897 3,959 4,856 1,155 1980-84 1985
MINNESOTA--
Burnsville 432 2,236 2,668 941 1984 1986
WISCONSIN--
Northwest Business Pk 1,296 5,815 7,111 1,668 1983-86 1986
RETAIL PROPERTY:
COLORADO--
Tamarac Square 6,799 31,336 38,135 9,307 1976-79 1985
TRUST HOME OFFICE 31 31 31 N/A various
TOTAL ------- ------- ------- -------
$16,877 $77,595 $94,472 $23,973
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this schedule.
F-14
<PAGE>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO SCHEDULE III
DECEMBER 31, 1996
($000)
<TABLE>
<CAPTION>
RECONCILIATION OF REAL ESTATE:
- ------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................... $101,897 $103,843 $103,710
Additions during period:
Improvements................................ 982 752 1,024
Acquisitions................................ - 1,309 -
-------- -------- --------
102,879 105,904 104,734
Deductions during period:
Dispositions................................ 8,407 3,402 -
Writedowns.................................. - 600 650
Asset retirements........................... - 5 241
-------- -------- --------
Balance at end of year......................... $ 94,472 $101,897 $103,843
-------- -------- --------
RECONCILIATION OF ACCUMULATED DEPRECIATION:
- ------------------------------------------
1996 1995 1994
-------- -------- --------
Balance at beginning of year................... $ 23,441 $ 21,859 $ 19,315
Additions during period:
Depreciation expense for period............. 2,577 2,479 2,622
-------- -------- --------
26,018 24,338 21,937
Deductions during period:
Accumulated depreciation of real estate
sold....................................... 2,045 897 -
Asset retirements........................... - - 78
-------- -------- --------
Balance at end of year......................... $ 23,973 $ 23,441 $ 21,859
-------- -------- --------
</TABLE>
TAX BASIS:
- ----------
The income tax basis of real estate, net of accumulated tax depreciation, is
approximately $89,033 at December 31, 1996.
DEPRECIABLE LIFE:
- -----------------
Depreciation is provided by the straight-line method over the estimated useful
lives which are as follows:
Buildings and capital improvements.................. 40 years
Tenant improvements................................. 10 years
F-15
<PAGE>
APPENDIX A
----------
THIRD AMENDED AND RESTATED
DECLARATION OF TRUST
OF
AMERICAN INDUSTRIAL PROPERTIES REIT
The undersigned, acting as the Trust Managers of a real estate investment
trust under the Texas Real Estate Investment Trust Act (the "Texas REIT Act"),
hereby adopt the following Third Amended and Restated Declaration of Trust for
such trust, which replaces in its entirety the previously enacted Second Amended
and Restated Declaration of Trust, which Third Amended and Restated Declaration
of Trust was adopted by the Shareholders of the Trust on ________________, 1997
pursuant to the affirmative vote of the holders of at least two-thirds of the
outstanding Shares of the Trust.
ARTICLE ONE
The name of the trust (the "Trust") is "American Industrial Properties
REIT." An assumed name certificate setting forth such name has been filed in the
manner prescribed by law.
ARTICLE TWO
The Trust is formed pursuant to the Texas REIT Act and has the following as
its purpose:
To purchase, hold, lease, manage, sell, exchange, develop, subdivide
and improve real property and interests in real property, and in
general, to carry on any other business and do any other acts in
connection with the foregoing and to have and exercise all powers
conferred by the laws of the State of Texas upon real estate
investment trusts formed under the Texas REIT Act, and to do any or
all of the things hereinafter set forth to the same extent as natural
persons might or could do. The term "real property" and the term
"interests in real property" for the purposes stated herein shall not
include severed mineral, oil or gas royalty interests.
ARTICLE THREE
The address of the Trust's principal office and place of business is 6220
North Beltline, Suite 205, Irving, Texas 75063.
A-1
<PAGE>
ARTICLE FOUR
The street address of the Trust's registered office is 6220 North Beltline,
Suite 205, Irving, Texas 75063. The name of the Trust's registered agent at
that address is Marc A. Simpson.
ARTICLE FIVE
The names and business addresses of the Trust Managers approving and
adopting this Declaration of Trust are as follows:
<TABLE>
<CAPTION>
Name Mailing Address
<S> <C>
William H. Bricker 16475 Dallas Parkway, Suite 350
Dallas, Texas 75248
T. Patrick Duncan 8000 Robert F. McDermott Frwy., Suite 600
San Antonio, Texas 78230
Robert E. Giles 3040 Post Oak Blvd., Suite 315
Houston, Texas 77056
Edward B. Kelley 8000 Robert F. McDermott Frwy., Suite 600
San Antonio, Texas 78230
Charles W. Wolcott 6220 North Beltline, Suite 205
Irving, Texas 75063
</TABLE>
ARTICLE SIX
The period of the Trust's duration is perpetual. The Trust may be sooner
terminated by the vote of the holders of at least a majority of the outstanding
voting Shares.
ARTICLE SEVEN
The aggregate number of shares of beneficial interest which the Trust shall
have authority to issue is five hundred million common shares, par value $0.10
per share ("Common Shares"), and fifty million preferred shares, par value $0.10
per share ("Preferred Shares"). All of the Common Shares shall be equal in all
respects to every other such Common Share, and shall have no preference,
conversion, exchange or preemptive rights.
Unless otherwise specified, the term "Shares" in this Declaration of Trust
shall be deemed to refer to the Common Shares and, solely to the extent
specifically required by law or as specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, to the Preferred Shares. For purposes of
A-2
<PAGE>
Articles Ten and Nineteen (other than Article Nineteen (j)) of this Declaration
of Trust, the term Shares shall be deemed to refer to both the Common Shares and
the Preferred Shares and, for purposes of such Articles Ten and Nineteen (other
than Article Nineteen (j)), the number of outstanding Shares shall be deemed to
be equal to the value of the Trust's outstanding Shares as determined from time
to time by resolution of the Trust Managers, such determination to include an
allocation of relative value among the Common Shares and any outstanding series
of Preferred Shares.
The Trust may issue one or more series of Preferred Shares, each such
series to consist of such number of shares as shall be determined by resolution
of the Trust Managers creating such series. The Preferred Shares of each such
series shall have such designations, preferences, conversion, exchange or other
rights, participations, voting powers, options, restrictions, limitations,
special rights or relations, limitations as to dividends, qualifications or
terms, or conditions of redemption thereof, as shall be stated and expressed by
the Trust Managers in the resolution or resolutions providing for the issuance
of such series of Preferred Shares pursuant to the authority to do so which is
hereby expressly vested in the Trust Managers.
Except as otherwise specifically provided in any resolution or resolutions
of the Trust Managers providing for the issue of any particular series of
Preferred Shares, the number of shares of any such series so set forth in such
resolution or resolutions may be increased or decreased (but not below the
number of shares of such series then outstanding) by a resolution or resolutions
likewise adopted by the Trust Managers.
Except as otherwise specifically provided in any resolution or resolutions
of the Trust Managers providing for the issue of any particular series of
Preferred Shares, Preferred Shares redeemed or otherwise acquired by the Trust
shall assume the status of authorized but unissued Preferred Shares and shall be
unclassified as to series and may thereafter, subject to the provisions of this
Article Seven and to any restrictions contained in any resolution or resolutions
of the Trust Managers providing for the issuance of any such series of Preferred
Shares, be reissued in the same manner as other authorized but unissued
Preferred Shares.
Except as otherwise specifically provided in any resolution or resolutions
of the Trust Managers providing for the issue of any particular series of
Preferred Shares, holders of Preferred Shares shall have no preemptive rights.
Except as otherwise specifically required by law or this Declaration of
Trust or as specifically provided in any resolution or resolutions of the Trust
Managers providing for the issuance of any particular series of Preferred
Shares, the exclusive voting power of the Trust shall be vested in the Common
Shares of the Trust. Each Common Share entitles the holder thereof to one vote
at all meetings of the shareholders of the Trust.
ARTICLE EIGHT
The Trust shall issue Shares for consideration consisting of any tangible
or intangible benefit to the Trust, including cash, promissory notes, services
performed, contracts for services
A-3
<PAGE>
to be performed, or other securities of the Trust, such consideration to be
determined by the Trust Managers.
ARTICLE NINE
The Trust Managers shall manage all money and/or property received for the
issuance of Shares for the benefit of the shareholders of the Trust.
ARTICLE TEN
The Trust will not commence business until it has received for the issuance
of Shares consideration of at least $1,000 value.
ARTICLE ELEVEN
The Trust shall not engage in any activities beyond the scope of the
purpose of a real estate investment trust formed pursuant to the Texas REIT Act,
as such purpose is set forth in Article Two hereof.
ARTICLE TWELVE
Cumulative voting for the election of Trust Managers is prohibited.
ARTICLE THIRTEEN
(a) The affirmative vote of the holders of not less than 80% of the
outstanding Shares of the Trust, including the affirmative vote of the holders
of not less than 50% of the outstanding Shares not owned, directly or
indirectly, by any "Related Person" (as hereinafter defined), shall be required
for the approval or authorization of any "Business Combination" (as hereinafter
defined); provided, however, that the 50% voting requirement referred to above
shall not be applicable if the Business Combination is approved by the
affirmative vote of the holders of not less than 90% of the outstanding Shares;
provided further, that neither the 80% voting requirement nor the 50% voting
requirement referred to above shall be applicable if:
(i) The Trust Managers of the Trust by a vote of not less than 80%
of the Trust Managers then holding office (A) have expressly
approved in advance the acquisition of Shares of the Trust that
caused the Related Person to become a Related Person or (B) have
expressly approved the Business Combination prior to the date on
which the Related Person involved in the Business Combination
shall have become a Related Person; or
A-4
<PAGE>
(ii) The Business Combination is solely between the Trust and another
entity, 100% of the voting stock, shares or comparable interests
of which is owned directly or indirectly by the Trust; or
(iii) The Business Combination is proposed to be consummated within
one year of the consummation of a Fair Tender Offer (as
hereinafter defined) by the Related Person in which Business
Combination the cash or Fair Market Value (as hereinafter
defined) of the property, securities or other consideration to
be received per Share by all remaining holders of Shares of the
Trust in the Business Combination is not less than the price
offered in the Fair Tender Offer; or
(iv) All of conditions (A) through (D) of this subparagraph (iv)
shall have been met: (A) if and to the extent permitted by law,
the Business Combination is a merger or consolidation,
consummation of which is proposed to take place within one year
of the date of the transaction pursuant to which such person
became a Related Person and the cash or Fair Market Value of the
property, securities or other consideration to be received per
share by all remaining holders of Shares of the Trust in the
Business Combination is not less than the Fair Price (as
hereinafter defined); (B) the consideration to be received by
such holders is either cash or, if the Related Person shall have
acquired the majority of its holdings of the Trust's Shares for
a form of consideration other than cash, in the same form of
consideration with which the Related Person acquired such
majority; (C) after such person has become a Related Person and
prior to consummation of such Business Combination: (1) there
shall have been no reduction in the annual rate of dividends, if
any, paid per share on the Trust's Shares (adjusted as
appropriate for recapitalizations and for Share splits, reverse
Share splits and Share dividends) except any reduction in such
rate that is made proportionately with any decline in the
Trust's net income for the period for which such dividends are
declared and except as approved by a majority of the Continuing
Trust Managers (as hereinafter defined), and (2) such Related
Person shall not have received the benefit, directly or
indirectly (except proportionately as a shareholder), of any
loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided
by the Trust prior to the consummation of such Business
Combination (other than in connection with financing a Fair
Tender Offer); and (D) a proxy statement that conforms in all
respects with the provisions of the Securities Exchange Act of
1934 (the "Exchange Act") and the rules and regulations
thereunder (or any subsequent provisions replacing the Exchange
Act or the rules or regulations thereunder) shall be mailed to
holders of the Trust's Shares at least 45 days prior to the
consummation of the Business Combination for the purpose of
soliciting shareholder approval of the Business Combination; or
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(v) The "Rights" (as defined in paragraph (b) of this Article
Thirteen) shall have become exercisable.
(b) If a person has become a Related Person and within one year after the
date (the "Acquisition Date") of the transaction pursuant to which the Related
Person become a Related Person (x) a Business Combination meeting all of the
requirements of subparagraph (iv) of the proviso to paragraph (a) of this
Article Thirteen regarding the applicability of the 80% voting requirement shall
not have been consummated and (y) a Fair Tender Offer shall not have been
consummated and (z) the Trust shall not have been dissolved and liquidated,
then, in such event the beneficial owner of each Share (not including Shares
beneficially owned by the Related Person) (each such beneficial owner being
hereinafter referred to as a "Holder") shall have the right (individually a
"Right" and collectively the "Rights"), which may be exercised subject to the
provisions of paragraph (d) of this Article Thirteen, commencing at the opening
of business on the one-year anniversary date of the Acquisition Date and
continuing for a period of 90 days thereafter, subject to extensions as provided
in paragraph (d) of this Article Thirteen (the "Exercise Period"), to sell to
the Trust on the terms set forth herein one Share upon exercise of such Right.
Within five business days after the commencement of the Exercise Period the
Trust shall notify the Holders of the commencement of the Exercise Period,
specifying therein the terms and conditions for exercise of the Rights. During
the Exercise Period, each certificate representing Shares beneficially owned by
a Holder (a "Certificate") shall also represent the number of Rights equal to
the number of Shares represented thereby and the surrender for transfer of any
Certificate shall also constitute the transfer of the Rights represented by such
Shares. At 5:00 P.M., Dallas, Texas time, on the last day of the Exercise
Period, each Right not exercised shall become void, all rights in respect
thereof shall cease as of such time and the Certificates shall no longer
represent Rights.
(c) The purchase price for a Share upon exercise of an accompanying Right
shall be equal to the then-applicable Fair Price paid by the Related Person
(plus, as an allowance for interest, an amount equal to the prime rate of
interest as published in the Wall Street Journal and as in effect from time to
time from the Acquisition Date until the date of the payment for such Share but
less the amount of any cash and the Fair Market Value of any property or
securities distributed with respect to such Shares as dividends or otherwise
during such time period), pursuant to the exercise of the Right relating
thereto. In the event the Related Person shall have acquired any of its
holdings of the Trust's Shares for a form of consideration other than cash, the
value of such other consideration shall be the Fair Market Value thereof.
(d) Notwithstanding the foregoing in paragraph (b) of this Article
Thirteen, the Exercise Period will be deferred in the event (a "Deferral Event")
that the Trust is otherwise prohibited under applicable law from repurchasing
Shares pursuant to the Rights. In the event the Exercise Period is deferred, or
if at any time the Trust reasonably anticipates that a Deferral Event will
exist, the Trust will, as soon as practicable, notify the Holders. If at the
end of any fiscal quarter the Deferral Event ceases to exist, notice shall be
given to the Holders of the commencement of the deferred Exercise Period, which
Exercise Period shall commence no sooner than 15 days nor more than 45 days from
the date of such notice and which shall continue in effect for a period of time
equal in duration to the previously unexpired portion of the Exercise Period.
Notwithstanding any other provision of this Declaration of Trust to the
contrary, during the Exercise Period (including during the existence of any
Deferral Event),
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neither the Trust nor any subsidiary may declare or pay any dividend or make any
distribution on its shares or to its shareholders (other than dividends or
distributions payable in its Shares or, in the case of any subsidiary, dividends
payable to the Trust) or purchase, redeem or otherwise acquire or retire for
value, or permit any subsidiary to purchase or otherwise acquire for value, any
Shares of the Trust if, upon giving effect to such dividend, distribution,
purchase, redemption, or other acquisition or retirement, the aggregate amount
expended for all such purposes (the amount expended for such purposes, if other
than in cash, to be determined by a majority of the Continuing Trust Managers,
whose determination shall be conclusive) would prejudice the ability of the
Trust to satisfy its maximum obligation to purchase Shares upon exercise of the
Rights.
(e) Rights may be exercised upon surrender to the Trust's principal
transfer agent (the "Transfer Agent") at its principal office of the Certificate
or Certificates evidencing the Shares to be tendered for purchase by the Trust,
together with the form on the reverse thereof completed and duly signed in
accordance with the instructions thereon. In the event that a Holder shall
tender a Certificate which represents greater than the number of Shares which
the Holder elects to require the Trust to purchase upon exercise of the Rights,
the Holder shall designate on the reverse side of such Certificate the number of
Shares to be sold from such Certificate. The Transfer Agent shall thereupon
issue a new Certificate or Certificates for the balance of the number of Shares
not sold to the Trust, which new Certificate or Certificates shall also
represent Rights for an equivalent number of Shares.
(f) For the purposes of this Article:
(i) The term "Business Combination" shall mean (A) any merger or
consolidation, if and to the extent permitted by law, of the
Trust or a subsidiary, with or into a Related Person, (B) any
sale, lease, exchange, mortgage, pledge, transfer or other
disposition, of all or any Substantial Part (as hereinafter
defined) of the assets of the Trust and its subsidiaries (taken
as a whole) (including, without limitation, any voting
securities of a subsidiary) to or with a Related Person, (C)
the issuance or transfer by the Trust or a subsidiary (other
than by way of a pro rata distribution to all shareholders) of
any securities of the Trust or a subsidiary of the Trust to a
Related Person, (D) any reclassification of securities
(including any reverse Share split) or recapitalization by the
Trust, the effect of which would be to increase the voting
power (whether or not currently exercisable) of the Related
Person, (E) the adoption of any plan or proposal for the
liquidation or dissolution of the Trust proposed by or on
behalf of a Related Person which involves any transfer of
assets, or any other transaction, in which the Related Person
has any direct or indirect interest (except proportionately as
a shareholder), (F) any series or combination of transactions
having, directly or indirectly, the same or substantially the
same effect as any of the foregoing, and (G) any agreement,
contract or other arrangement providing, directly or
indirectly, for any of the foregoing.
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(ii) The term "Continuing Trust Manager' shall mean (x) any Trust
Manager of the Trust who is not affiliated with a Related
Person and who was a Trust Manager immediately prior to the
time that the Related Person became a Related Person, and (y)
any other Trust Manager who is not affiliated with the Related
Person and is recommended either by a majority of the persons
described in clause (x) of this subparagraph (ii) or by persons
described in this clause (y) who are then Trust Managers of the
Trust to succeed a person described in either the said clause
(x) or clause (y) as a Trust Manager of the Trust.
(iii) The term "Fair Market Value" shall mean: (A) in the case of
securities, the highest closing sale price during the 30-day
period immediately preceding the date in question of such
security on the Composite Tape for New York Stock Exchange-
Listed Stocks, or, if such security is not quoted on the
Composite Tape on the New York Stock Exchange, or, if such
security is not listed on such Exchange, on the principal
United States securities exchange registered under the Exchange
Act on which such security is listed, or, if such security is
not listed on any such exchange, the highest closing bid
quotation with respect to such security during the 30-day
period preceding the date in question on the National
Association of Securities Dealers, Inc. Automated Quotation
System or any system then in use, or if no such quotations are
available, the fair market value on the date in question of
such security as reasonably determined by an independent
appraiser selected by a majority of the Continuing Trust
Managers (or, if there are no Continuing Trust Managers, by the
investment banking firm most recently retained by the Trust) in
good faith; and (B) in the case of property other than cash or
stock, the fair market value of such property on the date in
question as reasonably determined by an independent appraiser
selected by a majority of the Continuing Trust Managers (or, if
there are no Continuing Trust Managers, by the investment
banking firm most recently retained by the Trust) in good
faith. In each case hereunder in which an independent appraiser
is to be selected to determine Fair Market Value, (1) in the
event (x) there are no Continuing Trust Managers, and (y) the
investment banking firm most recently retained by the Trust is
unable or elects not to serve as such appraiser, or (2) in the
event there are Continuing Trust Managers that do not select an
independent appraiser within 10 days of a request for such
appointment made by a Related Person, such independent
appraiser may be selected by such Related Person.
(iv) The term "Fair Price" shall mean the highest per-Share price
(which, to the extent not paid in cash, shall equal the Fair
Market Value of any other consideration paid), with appropriate
adjustments for recapitalizations and for Share splits, reverse
Share splits and Share dividends, paid by the Related Person in
acquiring any of its holdings of the Trust's Shares.
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(v) The term "Fair Tender Offer" shall mean a bona fide tender
offer for all of the Trust's Shares outstanding (and owned by
persons other than a Related Person if the tender offer is made
by the Related Person), whether or not such offer is
conditional upon any minimum number of Shares being tendered,
in which the aggregate amount of cash or the Fair Market Value
of any securities or other property to be received by all
holders who tender their Shares for each Share so tendered
shall be at least equal to the then applicable Fair Price paid
by a Related Person or paid by the person making the tender
offer if such person is not a Related Person. In the event that
at the time such tender offer is commenced the terms and
conduct thereof are not directly regulated by Section 14(d) or
13(e) of the Exchange Act and the general rules and regulations
promulgated thereunder, then the terms of such tender offer
regarding the time such offer is held open and regarding
withdrawal rights shall conform in all respects with such terms
applicable to tender offers regulated by either of such
Sections of the Exchange Act. A Fair Tender Offer shall not be
deemed to be "consummated" until Shares are purchased and
payment in full has been made for all duly tendered Shares.
(vi) The term "Related Person" shall mean and include any
individual, corporation, partnership or other "person" (as
defined in Section 13(d)(3) of the Exchange Act), and the
"Affiliates" and "Associates" (as defined in Rule 12b-2 of the
Exchange Act) of any such individual, corporation, partnership
or other person) which individually or together is the
"Beneficial Owner" (as defined in Rule 13d-3 of the Exchange
Act) in the aggregate of more than 50% of the outstanding
Shares of the Trust, other than the Trust or any employee
benefit plan(s) sponsored by the Trust, except that an
individual, corporation, partnership or other person which
individually or together Beneficially Owns or upon conversion
of debt securities (owned or with regard to which such
individual, corporation, partnership or other person is
committed to purchase as of the date of adoption of this
Declaration of Trust) would own in excess of 20% of the
outstanding Shares at the time this provision is adopted by
vote of the Trust's shareholders shall only be considered a
Related Person at such time as he, she, it or they acquire in
the aggregate Beneficial Ownership of more than 80% of the
outstanding Shares.
(vii) The term "Substantial Part" shall mean more than 35% of the
book value of the total assets of the Trust and its
subsidiaries (taken as a whole) as of the end of the fiscal
year ending prior to the time the determination is being made.
(viii) Any person (as such term is defined in subsection (vi) of this
paragraph (f)) that has the right to acquire any Shares of the
Trust pursuant to any agreement, or upon the exercise of
conversion rights, warrants or options, or otherwise, shall be
deemed a Beneficial Owner of such Shares for purposes of
determining whether such person, individually or together with
its Affiliates and Associates, is a Related Person.
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(ix) For purposes of subparagraph (iii) of paragraph (a) of this
Article Thirteen, the term "other consideration to be received"
shall include, without limitation, Shares of the Trust retained
by its existing public shareholders in the event of a Business
Combination in which the Trust is the surviving entity.
(g) The affirmative vote of the holders of not less than 80% of the
outstanding Shares of the Trust, including the affirmative vote of the holders
of not less than 50% of the outstanding Shares not owned, directly or
indirectly, by any Related Person (such 50% voting requirement shall not be
applicable if such amendment, alteration, change, repeal or rescission is
approved by the affirmative vote of not less than 90% of the outstanding Shares)
shall be required to amend, alter, change, repeal or rescind, or adopt any
provisions inconsistent with, this Article Thirteen.
(h) The provisions of this Article Thirteen shall be subject to all valid
and applicable laws, including, without limitation, the Texas REIT Act, and, in
the event this Article Thirteen or any of the provisions hereof are found to be
inconsistent with or contrary to any such valid laws, such laws shall be deemed
to control and this Article Thirteen shall be regarded as modified accordingly,
and, as so modified, to continue in full force and effect.
ARTICLE FOURTEEN
The Trust Managers may from time to time declare, and the Trust may pay,
dividends on its outstanding Shares in cash, in property or in its Shares,
except that no dividend shall be declared or paid when the Trust is unable to
pay its debts as they become due in the usual course of its business, or when
the payment of such dividend would result in the Trust being unable to pay its
debts as they become due in the usual course of business.
ARTICLE FIFTEEN
Upon resolution adopted by the Trust Managers, the Trust shall be entitled
to purchase or redeem, directly or indirectly, its own Shares, subject to any
limitations of the Texas REIT Act.
ARTICLE SIXTEEN
(a) In this Article:
(i) "Indemnitee" means (A) any present or former Trust Manager or
officer of the Trust, (B) any person who while serving in any
of the capacities referred to in clause (A) hereof served at
the Trust's request as a trust manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another real estate investment trust or
foreign or domestic corporation, partnership, joint venture,
sole
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proprietorship, trust, employee benefit plan or other
enterprise and (C) any person nominated or designated by (or
pursuant to authority granted by) the Trust Managers or any
committee thereof to serve in any of the capacities referred to
in clauses (A) or (B) hereof.
(ii) "Official Capacity" means (A) when used with respect to a Trust
Manager, the office of Trust Manager of the Trust and (B) when
used with respect to a person other than a Trust Manager, the
elective or appointive office of the Trust held by such person
or the employment or agency relationship undertaken by such
person on behalf of the Trust, but in each case does not
include service for any other real estate investment trust or
foreign or domestic corporation or any partnership, joint
venture, sole proprietorship, trust, employee benefit plan or
other enterprise.
(iii) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, any appeal in such an action,
suit or proceeding, and any inquiry or investigation that could
lead to such an action, suit or proceeding.
(b) The Trust shall indemnify every Indemnitee against all judgments,
penalties (including excise and similar taxes), fines, amounts paid in
settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he or she was, is or is threatened to be
named defendant or respondent, or in which he or she was or is a witness without
being named a defendant or respondent, by reason, in whole or in part, of his or
her serving or having served, or having been nominated or designated to serve,
in any of the capacities referred to in paragraph (a)(i) of this Article
Sixteen, to the fullest extent that indemnification is permitted by Texas law.
An Indemnitee shall be deemed to have been found liable in respect of any claim,
issue or matter only after the Indemnitee shall have been so adjudged by a court
of competent jurisdiction after exhaustion of all appeals therefrom. Reasonable
expenses shall include, without limitation, all court costs and all fees and
disbursements of attorneys for the Indemnitee.
(c) Without limitation of paragraph (b) of this Article Sixteen and in
addition to the indemnification provided for in paragraph (b) of this Article
Sixteen, the Trust shall indemnify every Indemnitee against reasonable expenses
incurred by such person in connection with any proceeding in which he or she is
a witness or a named defendant or respondent because he or she served in any of
the capacities referred to in paragraph (a)(i) of this Article Sixteen.
(d) Reasonable expenses (including court costs and attorneys' fees)
incurred by an Indemnitee who was or is a witness or was, is or is threatened to
be made a named defendant or respondent in a Proceeding shall be paid or
reimbursed by the Trust at reasonable intervals in advance of the final
disposition of such Proceeding after receipt by the Trust of a written
undertaking by or on behalf of such Indemnitee to repay the amount paid or
reimbursed by the Trust if it shall ultimately be determined that he or she is
not entitled to be indemnified by the Trust as authorized in this Article
Sixteen. Such written undertaking shall be an unlimited obligation of the
Indemnitee but need not be secured and it may be accepted without reference
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to financial ability to make repayment. Notwithstanding any other provision of
this Article Sixteen, the Trust may pay or reimburse expenses incurred by an
Indemnitee in connection with his or her appearance as a witness or other
participation in a Proceeding at a time when he or she is not named a defendant
or respondent in the Proceeding.
(e) The indemnification provided by this Article Sixteen shall (i) not be
deemed exclusive of, or to preclude, any other rights to which those seeking
indemnification may at any time be entitled under the Trust's Bylaws, any law,
agreement or vote of shareholders or disinterested Trust Managers, or otherwise,
or under any policy or policies of insurance purchased and maintained by the
Trust on behalf of any Indemnitee, both as to action in his or her Official
Capacity and as to action in any other capacity, (ii) continue as to a person
who has ceased to be in the capacity by reason of which he or she was an
Indemnitee with respect to matters arising during the period he or she was in
such capacity, and (iii) inure to the benefit of the heirs, executors and
administrators of such a person.
(f) The provisions of this Article Sixteen (i) are for the benefit of, and
may be enforced by, each Indemnitee of the Trust, the same as if set forth in
their entirety in a written instrument duly executed and delivered by the Trust
and such Indemnitee and (ii) constitute a continuing offer to all present and
future Indemnitees. The Trust, by its adoption of this Declaration of Trust,
(x) acknowledges and agrees that each Indemnitee of the Trust has relied upon
and will continue to rely upon the provisions of this Article Sixteen in
becoming, and serving in any of the capacities referred to in paragraph (a)(i)
of this Article Sixteen, (y) waives reliance upon, and all notice of acceptance
of, such provisions by such Indemnitees and (z) acknowledges and agrees that no
present or future Indemnitee shall be prejudiced in his or her right to enforce
the provisions of this Article Sixteen in accordance with their terms by any act
or failure to act on the part of the Trust.
(g) No amendment, modification or repeal of this Article Sixteen or any
provision of this Article Sixteen shall in any manner terminate, reduce or
impair the right of any past, present or future Indemnitees to be indemnified by
the Trust, nor the obligation of the Trust to indemnify any such Indemnitees,
under and in accordance with the provisions of this Article Sixteen as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may be
asserted.
(h) If the indemnification provided in this Article Sixteen is either (i)
insufficient to cover all costs and expenses incurred by any Indemnitee as a
result of such Indemnitee being made or threatened to be made a defendant or
respondent in a Proceeding by reason of his or her holding or having held a
position named in paragraph (a)(i) of this Article Sixteen or (ii) not permitted
by Texas law, the Trust shall indemnify, to the fullest extent that
indemnification is permitted by Texas law, every Indemnitee with respect to all
costs and expenses incurred by such Indemnitee as a result of such Indemnitee
being made or threatened to be made a defendant or respondent in a Proceeding by
reason of his or her holding or having held a position named in paragraph (a)(i)
of this Article Sixteen.
(i) The indemnification provided by this Article Sixteen shall be subject
to all valid and applicable laws, including, without limitation, the Texas REIT
Act, and, in the event this
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Article Sixteen or any of the provisions hereof or the indemnification
contemplated hereby are found to be inconsistent with or contrary to any such
valid laws, such laws shall be deemed to control and this Article Sixteen shall
be regarded as modified accordingly, and, as so modified, to continue in full
force and effect.
ARTICLE SEVENTEEN
No Trust Manager or officer of the Trust shall be liable to the Trust for
any act, omission, loss, damage, or expense arising from the performance of his
or her duties under the Trust save only for his or her own willful misfeasance
or malfeasance or negligence. In discharging their duties to the Trust, Trust
Managers and officers of the Trust shall be entitled to rely upon experts and
other matters as provided in the Texas REIT Act and the Trust's Bylaws.
ARTICLE EIGHTEEN
The number of Trust Managers may be increased from time to time by the
affirmative vote of the majority of the Trust Managers or decreased by the
unanimous vote of the Trust Managers. Each Trust Manager shall serve until his
or her successor is elected and qualified or until his or her death, retirement,
resignation or removal.
A Trust Manager may be removed by the vote of the holders of two-thirds of
the outstanding Shares at a special meeting of the shareholders called for such
purpose pursuant to the Trust's Bylaws.
ARTICLE NINETEEN
(a) No Person may own Shares of any class with an aggregate value in
excess of 9.8% of the aggregate value of all outstanding Shares of such class of
Shares or more than 9.8% of the number of outstanding Shares of any class of
Shares (the limitation on the ownership of outstanding Shares is referred to in
this Article Nineteen as the "Ownership Limit" and the 9.8% threshold is
referred to in this Article Nineteen as the "Percentage Limit"), and no
Securities (as hereinafter defined) shall be accepted, purchased, or in any
manner acquired by any Person if such issuance or transfer would result in that
Person's ownership of Shares exceeding the Percentage Limit. For purposes of
determining if the Ownership Limit is exceeded by a Person, Convertible
Securities (as hereinafter defined) owned by such Person shall be treated as if
the Convertible Securities owned by such Person had been converted into Shares
if the effect of such treatment would be to increase the ownership percentage of
such Person in the Trust. The Ownership Limit shall not apply (i) to
acquisitions of Securities by any Person that has made a tender offer for all
outstanding Shares of the Trust (including Convertible Securities) in conformity
with applicable federal securities laws, (ii) to the acquisition of Securities
of the Trust by an underwriter in a public offering of Securities of the Trust,
or in any transaction involving the issuance of Securities by the Trust, in
which a majority of the Trust Managers determines that the underwriter or other
Person or party initially acquiring such Securities will
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timely distribute such Securities to or among others so that, following such
distribution, none of such Securities will be Excess Securities (as hereinafter
defined), (iii) to the acquisition of Securities pursuant to the exercise of
employee share options, or (iv) to the acquisition of Securities pursuant to an
exception made pursuant to paragraph (h) hereof.
(b) Nothing in this Article Nineteen shall preclude the settlement of any
transaction in Securities entered into through the facilities of the New York
Stock Exchange. If any Securities are accepted, purchased, or in any manner
acquired by any Person resulting in a violation of paragraph (a) or (e) hereof,
such issuance or transfer shall be valid only with respect to such amount of
Securities issued or transferred as does not result in a violation of paragraph
(a) or (e) hereof, and such acceptance, purchase or acquisition shall be void ab
initio with respect to the amount of Securities that results in a violation of
paragraph (a) or (e) hereof (the "Excess Securities"), and the intended
transferee of such Excess Securities shall acquire no rights in such Excess
Securities except as set forth in subsection (d) below.
(c) Each shareholder shall, within ten days of demand by the Trust,
disclose to the Trust in writing such information with respect to his, her or
its ownership of shares as the Trust Managers in their discretion deem necessary
or appropriate in order that the Trust may fully comply with all provisions of
the Internal Revenue Code of 1986, as amended, and any successor statute (the
"Code") relating to REITs and all regulations, rulings and cases promulgated or
decided thereunder (the "REIT Provisions") and to comply with the requirements
of any taxing authority or governmental agency. All Persons who own Shares of
any class with an aggregate value in excess of 9.8% of the aggregate value of
such class of Shares or 9.8% of the number of outstanding Shares of any class
must disclose in writing such ownership information to the Trust no later than
January 31 of each year. Failure to provide such information, upon reasonable
request, shall result in the Securities so owned being treated as Excess
Securities pursuant to paragraph (b) hereof for so long as such failure
continues.
(d) The Excess Securities, and the owners thereof, shall have the
following characteristics, rights and powers:
(i) Upon any purported purchase, sale, exchange, acquisition,
disposition or other transfer or upon any change in the capital
structure of the Trust (including any redemption of Securities)
that results in Excess Securities pursuant to paragraphs (a) or
(e) of this Article Nineteen, such Excess Securities shall be
deemed to have been transferred to the Trust, as trustee of a
trust for the exclusive benefit of such beneficiary or
beneficiaries to whom an interest in such Excess Securities may
later be transferred pursuant to subparagraph (v) of this
subsection (d) ("Beneficial Trust"). Any such Excess Securities
so held in the Beneficial Trust shall be issued and outstanding
shares of the Trust. The purported transferee shall have no
rights in such Excess Securities except as provided in
subparagraph (v) of this subsection (d).
(ii) The holder of Excess Securities shall not be entitled to receive
any dividends, interest payments or other distributions. Any
dividend or
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distribution paid prior to the discovery by the Trust that the
Securities have become Excess Securities shall be repaid to the
Trust upon demand.
(iii) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of, or any distribution of the assets
of, the Trust, each holder of Excess Securities shall be entitled
to receive, ratably with each other holder of Securities and
Excess Securities, that portion of the assets of the Trust
available for distribution to its shareholders. The Trust as
holder of all Excess Securities in the Beneficial Trust or if the
Trust shall have been dissolved, any trustee of such Beneficial
Trust appointed by the Trust prior to its dissolution, shall
distribute ratably to the beneficiaries of such Beneficial Trust
any such assets received in respect of the Excess Securities in
any liquidation, dissolution or winding up of, or any
distribution of the assets of, the Trust.
(iv) The holders of shares of Excess Securities shall not be entitled
to vote on any matters (except as required by law).
(v) Except as otherwise provided in this Article Nineteen, Excess
Securities shall not be transferable. The purported transferee
may freely designate a beneficiary of an interest in the
Beneficial Trust (representing the number of shares of Excess
Securities that have not been acquired by the Trust pursuant to
subparagraph (vi) of this subsection (d) that are held by the
Beneficial Trust attributable to a purported transfer that
resulted in the Excess Securities), if (A) the shares of Excess
Securities held in the Beneficial Trust would not be Excess
Securities in the hands of such beneficiary and (B) the purported
transferee does not receive a price from such beneficiary that
reflects a price per share for such Excess Securities that
exceeds (x) the price per share such purported transferee paid
for the Securities in the purported transfer that resulted in the
Excess Securities, or (y) if the purported transferee did not
give value for such Excess Securities (through a gift, devise or
other transaction), a price per share equal to the Market Price
on the date of the purported transfer that resulted in the Excess
Securities. Upon such transfer of an interest in the Beneficial
Trust, the corresponding shares of Excess Securities in the
Beneficial Trust shall be automatically exchanged for an equal
number of shares of the applicable Securities and such Securities
shall be transferred of record to the transferee of the interest
in the Beneficial Trust if such Securities would not be Excess
Securities in the hands of such transferee. Prior to any transfer
of any interest in the Beneficial Trust, the purported transferee
must give advance notice to the Trust of the intended transfer
and the Trust must have waived in writing its purchase rights
under subparagraph (vi) of this subsection (d). Notwithstanding
the foregoing, if a purported transferee receives a price for
designating a beneficiary of an interest in the Beneficial Trust
that exceeds the amounts allowable under the foregoing provisions
of this subparagraph (v), such purported
A-15
<PAGE>
transferee shall pay, or cause such beneficiary to pay, such
excess to the Trust immediately upon demand.
(vi) Excess Securities shall be deemed to have been offered for sale
to the Trust, or its designee, at a price per share equal to
the lesser of (A) the price per share in the transaction that
created such Excess Securities (or, in the case of a devise or
gift, the Market Price at the time of such devise or gift) and
(B) the Market Price on the date the Trust, or its designee,
accepts such offer. The Trust shall have the right to accept
such offer for a period of 90 days after the later of (x) the
date of the transfer which resulted in such Excess Securities
and (y) the date the Trust Managers determine in good faith
that a transfer resulting in Excess Securities has occurred.
(e) Any sale, transfer, gift, assignment, devise or other disposition of
Shares (a "transfer") that, if effective, would result in (i) the Shares of the
Trust being owned by less than 100 persons (determined without reference to any
rules of attribution) shall be void ab initio as to the Shares which would
otherwise be beneficially owned by the transferee, (ii) the Trust being "closely
held" within the meaning of Section 856(h) of the Code, shall be void ab initio
as to the transfer of the Shares that would cause the Trust to be "closely held"
within the meaning of Section 856(h) of the Code, (iii) the Trust owning,
directly or indirectly, 10% or more of the ownership interest in any tenant or
subtenant of the Trust's real property within the meaning of Section
856(d)(2)(B) of the Code and the Treasury Regulations thereunder, shall be void
ab initio, or (iv) the disqualification of the Trust as a REIT shall be void ab
initio as to the transfer of the Shares that would cause the Trust to be
disqualified as a REIT, and, in the case of each of clauses (i), (ii), (iii) and
(iv) of this paragraph (e), the intended transferee shall acquire no rights in
such Shares except as set forth in subsection (d) above.
(f) For purposes of this Article Nineteen:
(i) The term "Convertible Securities" means any securities of the
Trust that are convertible into Shares.
(ii) The term "individual" shall mean any natural person as well as
those organizations treated as natural persons under Section
542(a) of the Code.
(iii) The term "Market Price" means the average of the last reported
sales price of Common Shares reported on the New York Stock
Exchange on the five trading days immediately preceding the
relevant date, or if the Common Shares are not then traded on
the New York Stock Exchange, the last reported sales price of
the Common Shares on the five trading days immediately
preceding the relevant date as reported on any exchange or
quotation system over which the Common Shares may be traded, or
if the Common Shares are not then traded over any exchange or
quotation system, then the market price of the Common Shares on
the relevant date as determined in good faith by the Trust
Managers.
A-16
<PAGE>
(iv) The term "ownership" (including "own" or "owns") of Shares
means beneficial ownership. Beneficial ownership, for this
purpose shall be defined to include actual ownership by a
Person as well as constructive ownership by such Person after
application of principles in accordance with or by reference to
Sections 856 or 544 of the Code.
(v) The term "Person" includes an individual, corporation,
partnership, association, joint stock company, limited
liability company, trust, unincorporated association or other
entity and also includes a "group" as that term is defined in
Section 13(d)(3) of the Exchange Act.
(vi) The term "REIT" means a "real estate investment trust" as
defined in Section 856 of the Code and applicable Treasury
Regulations.
(vii) The term "Securities" means Shares and Convertible Securities.
(g) If any of the restrictions on transfer set forth in this Article
Nineteen are determined to be void, invalid or unenforceable by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of any
Excess Securities may be deemed, at the option of the Trust, to have acted as an
agent on behalf of the Trust in acquiring the Excess Securities and to hold the
Excess Securities on behalf of the Trust.
(h) The Percentage Limit set forth in paragraph (a) hereof shall not apply
to Securities which the Trust Managers in their sole discretion may exempt from
the Percentage Limit while owned by a Person who has provided the Trust with
evidence and assurances acceptable to the Trust Managers that the qualification
of the Trust as a REIT would not be jeopardized thereby. The Trust Managers, in
their sole discretion, may at any time revoke any exception pursuant to this
paragraph (h) in the case of any Person, and upon such revocation, the
provisions of paragraph (a) hereof shall immediately become applicable to such
Person and all Securities which such Person may own. A decision to exempt or
refuse to exempt from the Percentage Limit the ownership of certain designated
Securities, or to revoke an exemption previously granted, shall be made by the
Trust Managers in their sole discretion, based on any reason whatsoever,
including, but not limited to, the preservation of the Trust's qualification as
a REIT.
(i) Subject to the provisions of the first sentence of paragraph (b)
hereof, nothing herein contained shall limit the ability of the Trust to impose
or to seek judicial or other imposition of additional restrictions if deemed
necessary or advisable to protect the Trust and the interests of its security
holders by preservation of the Trust's status as a qualified REIT under the
Code.
(j) All Persons who own 5% or more of the Trust's outstanding Shares
during any taxable year of the Trust shall file with the Trust an affidavit
setting forth the number of Shares during such taxable year (i) owned directly
(held of record by such Person or by a nominee or nominees of such Person) and
(ii) constructively owned (within the meaning of Section 544 of the Code or for
purposes of Rule 13(d) of the Exchange Act) by the Person filing the affidavit.
The affidavit to be filed with the Trust shall set forth all the information
required to be reported (i) in returns of shareholders under Section 1.857-9 of
the Treasury Regulations or similar
A-17
<PAGE>
provisions of any successor Treasury Regulations and (ii) in reports to be filed
under Section 13(d) of the Exchange Act. The affidavit or an amendment to a
previously filed affidavit shall be filed with the Trust annually within 60 days
after the close of the Trust's taxable year. A Person shall have satisfied the
requirements of this paragraph (j) if the person furnishes to the Trust the
information in such person's possession after such person has made a good faith
effort to determine the Shares it owns and to acquire the information required
by income tax regulation 1.857-9 or similar provisions of any successor
regulation.
ARTICLE TWENTY
The Board of Trust Managers shall use its best efforts to cause the Trust
and its shareholders to qualify for U.S. federal income tax treatment in
accordance with the provisions of the Code applicable to REITs. In furtherance
of the foregoing, the Board of Trust Managers shall use its best efforts to take
such actions as are necessary, and may take such actions as it deems desirable
(in its sole discretion) to preserve the status of the Trust as a REIT.
ARTICLE TWENTY-ONE
Special meetings of the shareholders for any purpose or purposes, unless
otherwise prescribed by law or by the Declaration of Trust, may be called by the
Trust Managers, any officer of the Trust or the holders of at least five percent
(5%) of all of the shares entitled to vote at such meeting.
ARTICLE TWENTY-TWO
This Declaration of Trust may be amended from time to time by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
Shares, except that (i) Article Eleven hereof (relating to the prohibition
against engaging in non-real estate investment trust businesses); (ii) Article
Thirteen hereof (relating to the approval of Business Combinations); (iii)
Article Eighteen hereof (relating to the number and removal of Trust Managers);
(iv) Article Nineteen hereof (relating to Share ownership requirements); and (v)
this Article Twenty-Two may not be amended or repealed, and provisions
inconsistent therewith and herewith may not be adopted, except by the
affirmative vote of the holders of at least 80% of the outstanding voting
Shares.
ARTICLE TWENTY-THREE
If any provision of this Declaration of Trust or any application of any
such provision is determined to be invalid by any federal or state court having
jurisdiction over the issue, the validity of the remaining provisions shall not
be affected and other applications of such provision shall be affected only to
the extent necessary to comply with the determination of such court. In lieu of
such illegal, invalid or unenforceable provision, there shall be added
automatically as a part of this Declaration of Trust, a legal, valid and
enforceable provision as similar in terms
A-18
<PAGE>
to such illegal, invalid or unenforceable provision as may be possible, and the
parties hereto request the court or any arbitrator to whom disputes relating to
this Declaration of Trust are submitted to reform the otherwise illegal, invalid
or unenforceable provision in accordance with this Article Twenty-Three.
IN WITNESS WHEREOF, the undersigned Trust Managers do hereby execute this
Third Amended and Restated Declaration of Trust as of the ___ day of
_______________, 1997.
----------------------------------
WILLIAM H. BRICKER
----------------------------------
T. PATRICK DUNCAN
----------------------------------
ROBERT E. GILES
----------------------------------
EDWARD B. KELLEY
----------------------------------
CHARLES W. WOLCOTT
A-19
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF __________ (S)
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared
William H. Bricker, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, in the presence of ____________
___________________________________________ and ________________________________
______________, the undersigned competent witnesses, that he executed the
foregoing instrument in the presence of the undersigned witnesses on behalf of
the said American Industrial Properties REIT, as his own free and voluntary act
and deed, for the uses, purposes and considerations therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together with
me, Notary, and the undersigned competent witnesses, at my office in the County
and State aforesaid, on the _____________ day of ____________________, 1997.
My commission expires:
----------------------------------
STATE OF TEXAS (S)
(S)
COUNTY OF __________ (S)
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared T.
Patrick Duncan, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, in the presence of ____________
____________________________________________ and _______________________________
_____________________________, the undersigned competent witnesses, that he
executed the foregoing instrument in the presence of the undersigned witnesses
on behalf of the said American Industrial Properties REIT, as his own free and
voluntary act and deed, for the uses, purposes and considerations therein
expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together with
me, Notary, and the undersigned competent witnesses, at my office in the County
and State aforesaid, on the _____________ day of _____________________, 1997.
My commission expires:
----------------------------------
A-20
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF __________ (S)
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared
Robert E. Giles, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, in the presence of ____________
_________________________________________________________ and __________________
___________________________________________, the undersigned competent
witnesses, that he executed the foregoing instrument in the presence of the
undersigned witnesses on behalf of the said American Industrial Properties REIT,
as his own free and voluntary act and deed, for the uses, purposes and
considerations therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together with
me, Notary, and the undersigned competent witnesses, at my office in the County
and State aforesaid, on the _____________ day of ________________________, 1997.
My commission expires:
----------------------------------
STATE OF TEXAS (S)
(S)
COUNTY OF __________ (S)
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared
Edward B. Kelley, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, in the presence of ____________
_________________________________________________________ and __________________
__________________________________________, the undersigned competent witnesses,
that he executed the foregoing instrument in the presence of the undersigned
witnesses on behalf of the said American Industrial Properties REIT, as his own
free and voluntary act and deed, for the uses, purposes and considerations
therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together with
me, Notary, and the undersigned competent witnesses, at my office in the County
and State aforesaid, on the _____________ day of ________________________, 1997.
My commission expires:
----------------------------------
A-21
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF ____________ (S)
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared
Charles W. Wolcott, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, in the presence of ____________
_________________________________________________________ and __________________
__________________________________________, the undersigned competent witnesses,
that he executed the foregoing instrument in the presence of the undersigned
witnesses on behalf of the said American Industrial Properties REIT, as his own
free and voluntary act and deed, for the uses, purposes and considerations
therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together with
me, Notary, and the undersigned competent witnesses, at my office in the County
and State aforesaid, on the _____________ day of ________________________, 1997.
My commission expires:
----------------------------------
A-22
<PAGE>
APPENDIX B
----------
EMPLOYEE AND TRUST MANAGER INCENTIVE
SHARE PLAN
OF
AMERICAN INDUSTRIAL PROPERTIES REIT
1. PURPOSE OF THE PLAN AND DEFINITIONS
-----------------------------------
1.1 Purpose. The purposes of this Employee and Trust Manager Incentive
-------
Share Plan (the "Plan") of American Industrial Properties REIT (the "Trust") are
to:
(a) furnish incentive to individuals chosen to receive share-based awards
because they are considered capable of responding by improving operations and
increasing profits;
(b) encourage selected persons to accept or continue employment with the
Trust; and
(c) increase the interest of Trust Managers in the Trust's welfare through
their participation in the growth in value of the Trust's Shares.
To accomplish these purposes, this Plan provides a means whereby Employees,
Trust Managers and other enumerated persons may receive Awards.
1.2 Definitions. For purposes of this Plan, the following terms have the
-----------
following meanings:
"Affiliate" means a parent or subsidiary entity, to be interpreted in
---------
accordance with the comparable terms "parent" and "subsidiary" corporation in
the applicable provisions (currently Section 424) of the Code at the time this
definition is being applied.
"Award" means any award under this Plan, including any grant of
-----
Options, Restricted Shares, Share Appreciation Rights, Dividend Equivalent
Rights or Trust Manager Shares.
"Award Agreement" means, with respect to each Award, the written
---------------
agreement executed by the Trust and the Participant or other written document
approved by the Committee setting forth the terms and conditions of the Award.
"Board" means the Board of Trust Managers of the Trust.
-----
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and any successor statute.
"Commission" means the Securities and Exchange Commission and any
----------
successor agency.
B-1
<PAGE>
"Committee" has the meaning given it in Section 4.1.
---------
"Common Shares" or "Shares" means common shares of beneficial interest
------------- ------
of the Trust, par value $0.10 per share.
"Declaration of Trust" means the then operative declaration of trust
--------------------
adopted by the shareholders of the Trust.
"Dividend Equivalent Right" means an Award of rights pursuant to
-------------------------
Section 9.
"Effective Date" has the meaning given it in Section 19.
--------------
"Employee" has the meaning ascribed to it for purposes of Section
--------
3401(c) of the Code and the Treasury Regulations adopted under that Section. It
includes an officer or a Trust Manager who is also an employee of the Trust.
"Employment Termination" means that a Participant has ceased, for any
----------------------
reason and with or without cause, to be an Employee or Trust Manager of, or a
consultant to, the Trust or any Affiliate of the Trust. However, the term
"Employment Termination" shall not include a Non-Employee Trust Manager ceasing
to be a Trust Manager or a transfer of a Participant from the Trust to an
Affiliate or vice versa, or from one Affiliate to another, or a leave of absence
duly authorized by the Trust unless the Committee has provided otherwise.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended form time to time, and any successor statute.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
------------
from time to time, and any successor statute.
"Exercise Notice" has the meaning given it in Section 6.1(h).
---------------
"Executive Officer" means an eligible person who, as of the earlier
-----------------
of: (i) the date an Award is vested, (ii) the date restrictions with respect to
an Award lapse or (iii) the date a payment is made pursuant to an Award
Agreement, is a "covered employee" as defined in Section 1.162-27(c)(2) of the
Treasury Regulations and any successor Treasury Regulation adopted under Section
162(m).
"Grant Date" has the meaning given it in Section 6.1(d).
----------
"Incentive Share Option" or "ISO" mean any Option intended to be and
---------------------- ---
designated as an "incentive stock option" within the meaning of Section 422 of
the Code or successor provision.
"Non-Employee Trust Manager" means a person who qualifies as a "Non-
--------------------------
Employee Director" as defined in Rule 16b-3 and an "outside director" as defined
in Treasury Regulation
B-2
<PAGE>
(S)1.162-27(e)(3) and any successor Treasury Regulation.
"Non-Qualified Share Option" or "NQO" mean any Option that is not an
-------------------------- ---
Incentive Share Option.
"Option" means an option granted under Section 5.
------
"Participant" means an eligible person who is granted an Award.
-----------
"Plan" means this Employee and Trust Manager Incentive Share Plan.
----
"Restricted Shares" means an Award granted under Section 7.
-----------------
"Retainer" has the meaning given it in Section 10.
--------
"Rule 16b-3" means Rule 16b-3 adopted under Section 16(b) of the
----------
Exchange Act or any successor rule, as it may be amended from time to time, and
references to paragraphs or clauses of Rules 16b-3 refer to the corresponding
paragraphs or clauses of Rule 16b-3 as it exists at the Effective Date or the
comparable paragraph or clause of Rule 16b-3 or successor rule, as that
paragraph or clause may thereafter be amended.
"Securities Act" means the Securities Act of 1933, as amended from
--------------
time to time, and any successor statute.
"Share Appreciation Right" means an Award granted under Section 8.
------------------------
"Ten Percent Shareholder" means any person who, at the time this
-----------------------
definition is being applied, owns, directly or indirectly (or is treated as
owning by reason of attribution rules currently set forth in Code Section 424 or
any successor statute), shares of the Trust constituting more than 10% of the
total combined voting power of all classes of outstanding shares of the Trust or
of any Affiliate of the Trust.
"Trust" has the meaning given it in Section 1.1.
-----
"Trust Manager" means a person elected or appointed and serving as a
-------------
trust manager of the Trust in accordance with the Declaration of Trust and the
Texas Real Estate Investment Trust Act.
"Trust Manager Option" has the meaning given it in Section 5.3.
--------------------
"Trust Manager Shares" means Shares issued to a Non-Employee Trust
--------------------
Manager under Section 10.
2. ELIGIBLE PERSONS
----------------
B-3
<PAGE>
Every person who, at or as of the Grant Date, is (a) a full-time Employee
of the Trust or an Affiliate of the Trust, (b) a Trust Manager of the Trust or
an Affiliate of the Trust, or (c) someone whom the Committee designates as
eligible for an Award (other than for Incentive Share Options) because the
person (i) performs bona fide consulting or advisory services for the Trust or
an Affiliate of the Trust (other than services in connection with the offer or
sale of securities in a capital-raising transaction) and (ii) has a direct and
significant effect on the financial development of the Trust or an Affiliate of
the Trust, shall be eligible to receive Awards hereunder. Trust Managers of the
Trust who are not full-time Employees are only eligible to receive Trust Manager
Options under Section 5.3 and Trust Manager Shares under Section 10.
3. SHARES SUBJECT TO THIS PLAN
---------------------------
The total number of Shares that may be issued under Awards, all or any part
of which may be issued to any Participant, is 800,000. Such Shares may consist,
in whole or in part, of authorized and unissued Common Shares or Shares
reacquired in private transactions or open market purchases, but all Shares
issued under the Plan, regardless of their source, shall be counted against the
800,000 Share limitation. Any Shares that are retained by the Trust upon
exercise or settlement of an Award in order to satisfy the exercise price in
whole or in part, or to pay withholding taxes due with respect to such exercise
or settlement, shall be treated as issued to the Participant and will thereafter
not be available under the Plan. The number of Shares reserved for issuance
under this Plan is subject to adjustment in accordance with the provisions for
adjustment in this Plan.
4. ADMINISTRATION
--------------
4.1 Committee. This Plan shall be administered by a committee (the
---------
"Committee") appointed by the Board. The Committee shall be constituted so that,
as long as Shares are registered under Section 12 of the Exchange Act, each
member of the Committee shall be a Non-Employee Trust Manager. The number of
persons that shall constitute the Committee shall be determined from time to
time by a majority of all the members of the Board; provided, however, the
Committee shall not consist of fewer than two persons.
4.2 Duration, Removal, Etc. The members of the Committee shall serve at
----------------------
the pleasure of the Board, which shall have the power, at any time and from time
to time, to remove members from or add members to the Committee. Removal from
the Committee may be with or without cause. Any individual serving as a member
of the Committee shall have the right to resign from the Committee by giving at
least three days' written notice to the Board. The Board, and not the remaining
members of the Committee, shall have the power and authority to fill vacancies
on the Committee, however caused. The Board shall promptly fill any vacancy
that causes the number of members of the Committee to be fewer than two or any
other minimum number that Rule 16b-3 may require from time to time (unless the
Board expressly determines not to have Awards under the Plan comply with Rule
16b-3).
4.3 Meetings and Actions of Committee. The Board shall designate which of
---------------------------------
the Committee members shall be the chairperson of the Committee. If the Board
fails to designate a
B-4
<PAGE>
chairperson for the Committee, the members of the Committee shall elect one of
the Committee members as chairperson, who shall act as chairperson until he or
she ceases to be a member of the Committee or until the Board elects a new
chairperson. The Committee shall hold its meetings at those times and places as
the chairperson of the Committee may determine. At all meetings of the
Committee, a quorum for the transaction of business shall be required and a
quorum shall be deemed present if at least a majority of the members of the
Committee is present. At any meeting of the Committee, each member shall have
one vote. All decisions and determinations of the Committee shall be made by the
majority vote of all of its members present at a meeting at which a quorum is
present and a unanimous vote of the members of the Committee shall be required
if the Committee is comprised of only two members; provided, however, that any
-------- -------
decision or determination reduced to writing and signed by all members of the
Committee shall be as fully effective as if it had been made at a meeting that
was duly called and held. The Committee may make any rules and regulations for
the conduct of its business that are not inconsistent with this Plan, the
Declaration of Trust or bylaws of the Trust or Rule 16b-3 (so long as it is
applicable).
4.4 Committee's Powers. Subject to the express provisions of this Plan
------------------
and Rule 16b-3 (so long as it is applicable), the Committee shall have the
authority, in its sole discretion: (a) to adopt, amend and rescind
administrative and interpretive rules and regulations relating to the Plan; (b)
to determine the eligible persons to whom, and the time or times at which,
Awards shall be granted; (c) to determine the number of Shares that shall be the
subject of each Award; (d) to determine the terms and provisions of each Award
Agreement (which need not be identical) and any amendments thereto, including
provisions defining or otherwise relating to (i) the period or periods and
extent of exercisability of any Option or Share Appreciation Right, (ii) the
extent to which the transferability of Shares issued or transferred pursuant to
any Award is restricted, (iii) the effect of Employment Termination on an Award,
and (iv) the effect of approved leaves of absence (consistent with any
applicable Treasury Regulations); (e) to accelerate the time of exercisability
of any Option, Dividend Equivalent Right or Share Appreciation Right; (f) to
construe the respective Award Agreements and the Plan; (g) to make
determinations of the fair market value of Shares; (h) to waive any provision,
condition or limitation set forth in an Award Agreement; (i) to delegate its
duties under the Plan to such agents as it may appoint from time to time,
provided, however, that the Committee may not delegate its duties with respect
- -------- -------
to making or exercising discretion with respect to Awards to eligible persons if
such delegation would cause Awards not to qualify for the exemptions provided by
Rule 16b-3 (unless the Board expressly determines not to have Awards under the
Plan comply with Rule 16b-3); and (j) to make all other determinations, perform
all other acts and exercise all other powers and authority necessary or
advisable for administering the Plan, including the delegation of those
ministerial acts and responsibilities as the Committee deems appropriate.
Subject to Rule 16b-3 (so long as it is applicable), the Committee may correct
any defect, supply any omission or reconcile any inconsistency in the Plan, in
any Award or in any Award Agreement in the manner and to the extent it deems
necessary or desirable to implement the Plan, and the Committee shall be the
sole and final judge of that necessity or desirability. The determinations of
the Committee on the matters referred to in this Section 4.4 shall be final and
conclusive. Notwithstanding any provision in this Plan to the contrary, Awards
will be made to Non-Employee Trust Managers only under Sections 5.3 and 10 of
this Plan. In addition, notwithstanding any provision of this Plan to the
contrary, the Committee may not in any manner exercise discretion under the Plan
with
B-5
<PAGE>
respect to any Awards made to Non-Employee Trust Managers.
4.5 Term of Plan. No Awards shall be granted under this Plan after 10
------------
years from the Effective Date of this Plan.
B-6
<PAGE>
5. GRANT OF OPTIONS
----------------
5.1 Written Agreement. Each Option shall be evidenced by an Award
-----------------
Agreement. The Award Agreement shall specify whether each Option it evidences
is a NQO or an ISO.
5.2 Annual $100,000 Limitation on ISOs. To the extent that the aggregate
----------------------------------
"fair market value" of Shares with respect to which ISOs first become
exercisable by a Participant in any calendar year exceeds $100,000, taking into
account ISOs granted under this Plan and any other plan of the Trust or any
Affiliate of the Trust, the Options covering such additional Shares becoming
exercisable in that year shall cease to be ISOs and thereafter be NQOs. For
this purpose, the "fair market value" of Shares subject to Options shall be
determined as of the date the Options were granted. In reducing the number of
Options treated as ISOs to meet this $100,000 limit, the most recently granted
Options shall be reduced first.
5.3 Annual Grants to Non-Employee Trust Managers. On the date of approval
--------------------------------------------
of this Plan by the Trust's shareholders, the non-employee Trust Managers shall
receive an option to purchase 10,000 Shares for the fair market value of such
Shares on the date of approval by shareholders. The options will vest upon the
date of shareholder approval. In addition to the foregoing, on the last day of
each calendar year beginning with the last day of 1997, each Non-Employee Trust
Manager who is then a member of the Board shall automatically be granted a NQO
to purchase 5,000 Shares. Each option referred to in the previous sentence is
referred to as a "Trust Manager Option." The exercise price of Trust Manager
Options shall be the fair market value of the Shares subject to the Option on
the date the Option is granted. Each Trust Manager Option shall be fully
exercisable upon the date of grant and continuing, unless sooner terminated as
provided in this Plan, for 10 years after the date it is granted. If, for any
reason other than death or permanent and total disability, a Non-Employee Trust
Manager ceases to be a member of the Board, each Trust Manager Option held by
that Non-Employee Trust Manager on the date that the Non-Employee Trust Manager
ceases to be a member of the Board may be exercised in whole or in part at any
time within one year after the date of such termination or until the expiration
of the Trust Manager Option, whichever is earlier. If a Non-Employee Trust
Manager dies or becomes permanently and totally disabled (within the meaning of
Section 422(c)(6) of the Code) while a member of the Board (or within the period
that the Trust Manager Options remain exercisable after the Non-Employee Trust
Manager ceases to be a member of the Board), each Trust Manager Option then held
by that Non-Employee Trust Manager may be exercised, in whole or in part, by the
Non-Employee Trust Manager, by the Non-Employee Trust Manager's personal
representative or by the person to whom the Non-Employee Trust Manager
transferred the Trust Manager Option by will or the laws of descent and
distribution, at any time within two years after the date of death or permanent
and total disability of the Non-Employee Trust Manager or until the expiration
date of the Trust Manager Option, whichever is earlier. Each Trust Manager
Option shall be evidenced by an Award Agreement.
6. CERTAIN TERMS AND CONDITIONS OF OPTIONS AND OTHER AWARDS
--------------------------------------------------------
B-7
<PAGE>
Each Option shall be designated as an ISO or a NQO and shall be subject to
the terms and conditions set forth in Section 6.1. Notwithstanding the
foregoing, the Committee may provide for different terms and conditions in any
Award Agreement or amendment thereto as provided in Section 4.4.
6.1 All Awards. All Options and other Awards shall be subject to the
----------
following terms and conditions:
(a) Changes in Capital Structure. If the number of outstanding Shares is
----------------------------
increased by means of a share dividend payable in Shares, a share split or other
subdivision or by a reclassification of Shares, then, from and after the record
date for such dividend, subdivision or reclassification, the number and class of
Shares subject to this Plan (including without limitation its Sections 3, 5.3
and 10) and each outstanding Award shall be increased in proportion to such
increase in outstanding Shares and the then-applicable exercise price of each
outstanding Award shall be correspondingly decreased. If the number of
outstanding Shares is decreased by means of a share split or other subdivision
or by a reclassification of Shares, then, from and after the record date for
such split, subdivision or reclassification, the number and class of Shares
subject to this Plan (including without limitation its Sections 3, 5.3 and 10)
and each outstanding Award shall be decreased in proportion to such decrease in
outstanding Shares and the then-applicable exercise price of each outstanding
Award shall be correspondingly increased.
(b) Certain Corporate Transactions. This Section 6.1(b) addresses the
------------------------------
impact of certain corporate transactions on outstanding Awards other than Awards
granted to Non-Employee Trust Managers (except to the extent provided in Section
6.1(c)) and other than transactions requiring adjustments in accordance with
Section 6.1(a). In the case of any reclassification or change of outstanding
Shares issuable upon exercise of an outstanding Award or in the case of any
consolidation or merger of the Trust with or into another entity (other than a
merger in which the Trust is the surviving entity and which does not result in
any reclassification or change in the then-outstanding Shares) or in the case of
any sale or conveyance to another entity of the property of the Trust as an
entirety or substantially as an entirety, then, as a condition of such
reclassification, change, consolidation, merger, sale or conveyance, the Trust
or such successor or purchasing entity, as the case may be, shall make lawful
and adequate provision whereby the holder of each outstanding Award shall
thereafter have the right, on exercise of such Award, to receive the kind and
amount of securities, property and/or cash receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Award immediately
before such reclassification, change, consolidation, merger, sale or conveyance.
Such provision shall include adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in Section 6.1(a).
Notwithstanding the foregoing, if such a transaction occurs, in lieu of causing
such rights to be substituted for outstanding Awards, the Committee may, upon 20
days' prior written notice to Participants in its sole discretion: (i) shorten
the period during which Awards are exercisable, provided they remain
exercisable, to the extent otherwise exercisable, for at least 20 days after the
date the notice is given, or (ii) cancel an Award upon payment to the
Participant in cash, with respect to each Award to the extent then exercisable,
of an amount which, in the sole discretion of the Committee, is determined to be
equivalent to the amount, if any, by which the fair market value (at the
effective
B-8
<PAGE>
time of the transaction) of the consideration that the Participant would have
received if the Award had been exercised before the effective time exceeds the
exercise price of the Award. The actions described in this Section 6.1(b) may be
taken without regard to any resulting tax consequences to the Participant. The
fourth sentence of this Section 6.1(b) shall not apply to any Award held by a
person then subject to Section 16(b) if such Award has not been outstanding for
at least six months.
(c) Special Rule For Non-Employee Trust Managers. In the case of any of
--------------------------------------------
the transactions described in the second sentence of Section 6.1(b), that second
sentence and the third sentence, but not the fourth sentence, of Section 6.1(b)
shall apply to any outstanding Options granted to Non-Employee Trust Managers
under Section 5.3.
(d) Grant Date. Each Award Agreement shall specify the date as of which it
----------
shall be effective (the "Grant Date").
(e) Fair Market Value. For purposes of this Plan, the fair market value of
-----------------
Shares shall be determined as follows:
(i) If the Shares are listed on any established stock exchange or
a national market system, including, without limitation, the National Market
System of the National Association of Securities Dealers Automated Quotation
System, its fair market value shall be the closing sales price for the Shares,
or the mean between the high bid and low asked prices if no sales were reported,
as quoted on such system or exchange (or, if the Shares are listed on more than
one exchange, then on the largest such exchange) for the date the value is to be
determined (or if there are no sales or bids for such date, then for the last
preceding business day on which there were sales or bids), as reported in The
Wall Street Journal or similar publication.
(ii) If the Shares are regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall be
determined in good faith by the Committee, with reference to the Trust's net
worth, prospective earning power, dividend-paying capacity and other relevant
factors, including the goodwill of the Trust, the economic outlook in the
Trust's industry, the Trust's position in the industry and its management, and
the values of stock of other corporations in the same or similar lines of
business.
(f) Time of Exercise; Vesting. Awards may, in the sole discretion of the
-------------------------
Committee, be exercisable or may vest, and restrictions may lapse, as the case
may be, at such times and in such amounts as may be specified by the Committee
in the grant of the Award.
(g) Nonassignability of Rights. No Award that is a derivative security (as
--------------------------
defined in Rule 16a-1(c) under the Exchange Act) shall be transferable other
than with the consent of the Committee (which consent will not be granted in the
case of ISOs unless the conditions for transfer of ISOs specified in the Code
have been satisfied) or by will or the laws of the descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of ERISA. Awards requiring exercise shall be exercisable only by the
Participant, assignees that were approved by the Committee, executors,
administrators or beneficiaries of the Participant
B-9
<PAGE>
(who are the permitted transferees hereunder), guardians or members of a
committee for an incompetent Participant, or similar persons duly authorized by
law to administer the estate or assets of a Participant.
(h) Notice and Payment. To the extent it is exercisable, an Award shall be
------------------
exercisable only by written or recorded electronic notice of exercise, in the
manner specified by the Committee from time to time, delivered to the Trust or
its designated agent during the term of the Award (the "Exercise Notice"). The
Exercise Notice shall: (a) state the number of Shares with respect to which the
Award is being exercised; (b) be signed by the holder of the Award or by the
person authorized to exercise the Award pursuant to Section 6.1(g); and (c)
include such other information, instruments and documents as may be required to
satisfy any other condition to exercise set forth in the Award Agreement. Except
as provided below, payment in full, in cash or check, shall be made for all
Shares purchased at the time notice of exercise of an Award is given to the
Trust. The proceeds of any payment shall constitute general funds of the Trust.
At the time an Award is granted or before it is exercised, the Committee, in the
exercise of its sole discretion, may authorize any one or more of the following
additional methods of payment:
(i) for all Participants other than officers and Trust Managers,
acceptance of such Participants' full recourse promissory note for some or all
of the exercise price of the Shares being acquired, payable on such terms and
bearing such interest rate as determined by the Committee, and secured in such
manner, if at all, as the Committee shall approve, including, without
limitation, by a security interest in the Shares which are the subject of the
Award or other securities;
(ii) for all Participants, delivery by such Participants of Shares
of the Trust already owned by such Participants for all or part of the exercise
price of the Award being exercised, provided that the fair market value of such
Shares are equal on the date of exercise to the exercise price of the Award
being exercised, or such portion thereof as the Participants are authorized to
pay and elects to pay by delivery of such Shares;
(iii) for all Participants, surrender by such Participants, or
withholding by the Trust from the Shares issuable upon exercise of the Award, of
a number of Shares subject to the Award being exercised with a fair market value
equal to some or all of the exercise price of the Shares being acquired,
together with such documentation as the Committee and the broker, if applicable,
shall require; or
(iv) for all Participants, to the extent permitted by applicable
law, payment may be made pursuant to arrangements with a brokerage firm under
which that brokerage firm, on behalf of such Participants, shall pay to the
Trust the exercise price of the Award being exercised (either as a loan to the
Participant or from the proceeds of the sale of Shares issued under that Award),
and the Trust shall promptly cause the Shares being purchased under the Award to
be delivered to the brokerage firm. Such transactions shall be effected in
accordance with the procedures that the Committee may establish from time to
time.
If the exercise price is satisfied in whole or in part by the delivery of Shares
pursuant to paragraph
B-10
<PAGE>
(ii) above, the Committee may issue the Participant an additional Option, with
terms identical to those set forth in the option agreement governing the
exercised Option, except for the exercise price which shall be the fair market
value used for such delivery and the number of Shares subject to such additional
Option shall be the number of Shares so delivered.
(i) Termination of Employment. Any Award or portion thereof which has not
-------------------------
vested on or before the date of a Participant's Employment Termination shall
expire on the date of Employment Termination. As to an Award or portion thereof
that has vested by the time of Employment Termination, the Committee shall
establish, in respect of each Award when granted, the effect of an Employment
Termination on the rights and benefits thereunder and in so doing may, but need
not, make distinctions based upon the cause of termination (such as retirement,
death, disability or other factors) or which party effected the termination (the
employer or the Employee). Notwithstanding any other provision in this Plan or
the Award Agreement, the Committee may decide in its discretion at the time of
any Employment Termination (or within a reasonable time thereafter) to extend
the exercise period of an Award (but not beyond the period specified in Section
6.2(b) or 6.3(b), as applicable) and not decrease the number of Shares covered
by the Award with respect to which the Award is exercisable or vested. A
transfer of a Participant from the Trust to an Affiliate or vice versa, or from
one Affiliate to another, or a leave of absence duly authorized by the Trust,
shall not be deemed an Employment Termination or a break in continuous
employment unless the Committee has provided otherwise.
(j) Death. Any Award or portion thereof which has not vested on or before
-----
the date of the Participant's death shall expire on the date of such
Participant's death. As to an Award or portion thereof that has vested by the
date of death of the Participant, such Awards or portions thereof must be
exercised within two years of the date of the Participant's death by a person
authorized under this Plan to exercise such Awards.
(k) Payment of Dividends Upon Exercise of Options. Upon exercise of an
---------------------------------------------
Option, the Participant shall be entitled to receive a cash payment from the
Trust equal to the amount of dividends that have been paid from the Grant Date
of the Option through the date of exercise of the Option on that number of
Common Shares that is equal to the number of Common Shares being purchased upon
exercise of such Option.
(l) Other Provisions. Each Award Agreement may contain such other terms,
----------------
provisions and conditions not inconsistent with this Plan, as may be determined
by the Committee, and each ISO granted under this Plan shall include such
provisions and conditions as are necessary to qualify such Option as an
"incentive stock option" within the meaning of Section 422 of the Code, unless
the Committee determines otherwise.
(m) Withholding and Employment Taxes. At the time of exercise of an Award,
--------------------------------
the lapse of restrictions on an Award or a disqualifying disposition of Shares
issued under an ISO (within the meaning of Section 6.3(c)), the Participant
shall remit to the Trust in cash all applicable federal and state withholding
and employment taxes. If and to the extent authorized and approved by the
Committee in its sole discretion, a Participant may elect, by means of a form of
election to be prescribed by the Committee, to have Shares which are acquired
upon exercise of an Award
B-11
<PAGE>
withheld by the Trust or tender other Shares owned by the Participant to the
Trust at the time the amount of such taxes is determined, in order to pay the
amount of such tax obligations, subject to such limitations as the Committee
determines are necessary or appropriate to comply with Rule 16b-3 in the case of
Participants who are subject to Section 16(b). For example, the Committee may
require that the election be irrevocable and that the election not be made
within six months of the acquisition of the securities to be tendered to satisfy
the tax withholding obligation (except that this limitation shall not apply in
the event that death or disability of the Participant occurs before the
expiration of the six-month period). Any Shares so withheld or tendered shall be
valued by the Trust as of the date they are withheld or tendered. If Shares are
tendered to satisfy such withholding tax obligation, the Committee may issue the
Participant an additional Option, with terms identical to those set forth in the
option agreement governing the Option exercised, except that the exercise price
shall be the fair market value used by the Trust in accepting the tender of
Shares for such purpose and the number of Shares subject to the additional
Option shall be the number of Shares tendered by the Participant.
6.2 Terms and Condition to Which Only NQOs Are Subject. Options granted
--------------------------------------------------
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:
(a) Exercise Price. The exercise price of a NQO shall be determined by the
--------------
Committee; provided, however, that the exercise price of a NQO shall not be less
-------- -------
than 100% of the fair market value of the Shares subject to the Option on the
Grant Date or, if required by applicable state securities laws in the case of a
NQO granted to any Ten Percent Shareholder, not less than 110% of such fair
market value.
(b) Option Term. Unless an earlier expiration date is specified by the
-----------
Committee at the Grant Date, each NQO shall expire 10 years after the Grant Date
or, if required by applicable state securities laws in the case of a NQO granted
to a Ten Percent Shareholder, five years after the Grant Date.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted
---------------------------------------------------
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:
(a) Exercise Price. The exercise price of an ISO shall be determined in
--------------
accordance with the applicable provisions of the Code and shall in no event be
less than 100% of the fair market value of the Shares covered by the ISO at the
Grant Date; provided, however, that the exercise price of an ISO granted to a
-------- -------
Ten Percent Shareholder shall not be less than 110% of such fair market value.
(b) Option Term. Unless an earlier expiration date is specified by the
-----------
Committee at the Grant Date, each ISO shall expire 10 years after the Grant
Date; provided, however, that an ISO granted to a Ten Percent Shareholder shall
-------- -------
expire no later than five years after the Grant Date.
(c) Disqualifying Dispositions. If Shares acquired by exercise of an ISO
--------------------------
are disposed of within two years after the Grant Date or within one year after
the transfer of the Shares to the optionee, the holder of the Shares immediately
before the disposition shall promptly notify the
B-12
<PAGE>
Trust in writing of the date and terms of the disposition, shall provide such
other information regarding the disposition as the Trust may reasonably require
and shall pay the Trust any withholding and employment taxes which the Trust in
its sole discretion deems applicable to the disposition.
(d) Termination of Employment. All vested ISOs must be exercised within
-------------------------
three months of the Employment Termination of the optionee unless such
Employment Termination is due to the employee being disabled (within the meaning
of Section 422 (c)(6) of the Code), in which case the ISO shall be exercised
within one year of the Employment Termination.
6.4 Surrender of Options. The Committee, acting in its sole discretion,
--------------------
may include a provision in an option agreement allowing the optionee to
surrender the Option covered by the agreement, in whole or in part in lieu of
exercise in whole or in part, on any date that the fair market value of the
Shares subject to the Option exceeds the exercise price and the Option is
exercisable (to the extent being surrendered). The surrender shall be effected
by the delivery of the option agreement, together with a signed statement which
specifies the number of shares as to which the optionee is surrendering the
Option, together with a request for such type of payment. Upon such surrender,
the optionee shall receive (subject to any limitations imposed by Rule 16b-3),
at the election of the Committee, payment in cash or Shares, or a combination of
the two, equal to (or equal in fair market value to) the excess of the fair
market value of the Shares covered by the portion of the Option being
surrendered on the date of surrender over the exercise price for such Shares.
The Committee, acting in its sole discretion, shall determine the form of
payment, taking into account such factors as it deems appropriate. To the extent
necessary to satisfy Rule 16b-3, the Committee may terminate an optionee's
rights to receive payments in cash for fractional Shares. Any option agreement
providing for such surrender privilege shall also incorporate such additional
restrictions on the exercise or surrender of Options as may be necessary to
satisfy the conditions of Rule 16b-3.
7. RESTRICTED SHARES.
-----------------
Restricted Shares shall be subject to the following terms and conditions:
7.1 Grant. The Committee may grant one or more Awards of Restricted
-----
Shares to any Participant other than Non-Employee Trust Managers. Each Award of
Restricted Shares shall specify the number of Shares to be issued to the
Participant, the date of issuance and the restrictions imposed on the Shares
including the conditions of release or lapse of such restrictions. Unless the
Committee provides otherwise, the restrictions shall not lapse earlier than six
months after the date of the Award. Pending the lapse of restrictions, Share
certificates evidencing Restricted Shares shall bear a legend referring to the
restrictions and shall be held by the Trust. Prior to the issuance of any
Restricted Shares, the Participant receiving such Restricted Shares shall pay to
the Trust an amount of cash equal to, at a minimum, the par value per Restricted
Share multiplied by the number of Restricted Shares to be issued. Upon the
issuance of Restricted Shares, the Participant may be required to furnish such
additional documentation or other assurances as the Committee may require to
enforce the restrictions.
B-13
<PAGE>
7.2 Restrictions. Except as specifically provided elsewhere in this Plan
------------
or the Award Agreement regarding Restricted Shares, Restricted Shares may not be
sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until the restrictions have lapsed and the
rights to the Shares have vested. The Committee may in its discretion provide
for the lapse of such restrictions in installments and may accelerate or waive
such restrictions, in whole or in part, based on service, performance or such
other factors or criteria as the Committee may determine.
7.3 Dividends. Unless otherwise determined by the Committee, cash
---------
dividends with respect to Restricted Shares shall be paid to the recipient of
the Award of Restricted Shares on the normal dividend payment dates, and
dividends payable in Shares shall be paid in the form of Restricted Shares
having the same terms as the Restricted Shares upon which such dividend is paid.
Each Award Agreement for Awards of Restricted Shares shall specify whether and,
if so, the extent to which the Participant shall be obligated to return to the
Trust any cash dividends paid with respect to any Restricted Shares which are
subsequently forfeited.
7.4 Forfeiture of Restricted Shares. Except to the extent otherwise
-------------------------------
provided in the governing Award Agreement, when a Participant's Employment
Termination occurs, the Participant shall forfeit all Restricted Shares still
subject to restriction.
8. SHARE APPRECIATION RIGHTS
-------------------------
The Committee may grant Share Appreciation Rights to eligible persons other
than Non-Employee Trust Managers. A Share Appreciation Right shall entitle its
holder to receive from the Trust, at the time of exercise of the right, an
amount in cash equal to (or, at the Committee's discretion, Shares equal in fair
market value to) the excess of the fair market value (at the date of exercise)
of a Share over a specified price fixed by the Committee in the governing Award
Agreement multiplied by the number of Shares as to which the holder is
exercising the Share Appreciation Right. The specified price fixed by the
Committee shall not be less than the fair market value of the Shares at the date
of grant of the Share Appreciation Right. Share Appreciation Rights may be
granted in tandem with any previously or contemporaneously granted Option or
independent of any Option. The specified price of a tandem Share Appreciation
Right shall be the exercise price of the related Option. Any Share Appreciation
Rights granted in connection with an ISO shall contain such terms as may be
required to comply with Section 422 of the Code.
9. DIVIDEND EQUIVALENT RIGHTS
--------------------------
9.1 General. The Committee shall have the authority to grant Dividend
-------
Equivalent Rights to Participants other than Non-Employee Trust Managers upon
such terms and conditions as it shall establish, subject in all events to the
following limitations and provisions of general application set forth in this
Plan. Each Dividend Equivalent Right shall entitle a holder to receive, for a
period of time to be determined by the Committee, a payment equal to the
quarterly dividend declared and paid by the Trust on one Common Share. If the
right relates to a specific Option, the period shall not extend beyond the
earliest of the date the Option is exercised, the date any
B-14
<PAGE>
Share Appreciation Right related to the Option is exercised, or the expiration
date set forth in the Option.
9.2 Rights and Options. Each right may relate to a specific Option
------------------
granted under this Plan and may be granted to the optionee either concurrently
with the grant of such Option or at such later time as determined by the
Committee, or each right may be granted independent of any Option.
9.3 Payments. The Committee shall determine at the time of grant whether
--------
payment pursuant to a right shall be immediate or deferred and if immediate, the
Trust shall make payments pursuant to each right concurrently with the payment
of the quarterly dividend to holders of Common Shares. If deferred, the
payments shall not be made until a date or the occurrence of an event specified
by the Committee and then shall be made within 30 days after the occurrence of
the specified date or event, unless the right is forfeited under the terms of
the Plan or applicable Award Agreement.
9.4 Termination of Employment. In the event of Employment Termination,
-------------------------
any Dividend Equivalent Right held by such Participant on the date of Employment
Termination shall be forfeited, unless otherwise expressly provided by the
Committee.
10. TRUST MANAGER SHARES
--------------------
10.1 Election. The Trust intends to pay each Non-Employee Trust Manager an
--------
annual fee in the amount set from time to time by the Board (the "Retainer").
Each Non-Employee Trust Manager shall be entitled to receive his or her Retainer
exclusively in cash, exclusively in unrestricted Shares ("Trust Manager Shares")
or any portion in cash and Trust Manager Shares. Following the approval of this
Plan by the shareholders of the Trust, each Non-Employee Trust Manager shall be
given the opportunity, during the month the Non-Employee Trust Manager first
becomes a Non-Employee Trust Manager and during each December thereafter, to
elect among these choices for the balance of the calendar year (in the case of
the election made during the month the Non-Employee Trust Manager first becomes
a Non-Employee Trust Manager) and for the ensuing year (in the case of a
subsequent election made during any December). If the Non-Employee Trust
Manager chooses to receive at least some of his or her Retainer in Trust Manager
Shares, the election shall also indicate the percentage of the Retainer to be
paid in Trust Manager Shares. If a Non-Employee Trust Manager makes no election
during his or her first opportunity to make an election, the Non-Employee Trust
Manager shall be assumed to have elected to receive his or her entire Retainer
in cash. If a Non-Employee Trust Manager makes no election during any
succeeding election month, the Non-Employee Trust Manager shall be assumed to
have remade the election then currently in effect for that Non-Employee Trust
Manager.
10.2 Issuance. The Trust shall make the first issuance of Trust Manager
--------
Shares on the first trading day following the last day of the full calendar
quarter following the approval of the Plan by the Trust's shareholders.
Subsequent issuances of Trust Manager Shares shall be made on the first trading
day of each subsequent calendar quarter and shall be made to all persons who are
Non-Employee Trust Managers on that trading day except any Non-Employee Trust
Manager
B-15
<PAGE>
whose Retainer is to be paid entirely in cash. The number of Shares issuable to
those Non-Employee Trust Managers on the relevant trading date indicated above
shall equal:
(% x R) / P
-
4
where:
- -----
% = the percentage of the Non-Employee Trust Manager's Retainer that
the Non-Employee Trust Manager elected or is deemed to have
elected to receive in the form of Trust Manager Shares, expressed
as a decimal;
R = the Non-Employee Trust Manager's Retainer for the year during
which the issuance occurs;
P = the fair market value of Shares determined in accordance with
Section 6.1(e).
Trust Manager Shares shall not include any fractional Shares. Fractions shall
be rounded to the nearest whole Share.
11. SECURITIES LAWS
---------------
Nothing in this Plan or in any Award or Award Agreement shall require the
Trust to issue any Shares with respect to any Award if, in the opinion of
counsel for the Trust, that issuance could constitute a violation of the
Securities Act, any other law or the rules of any applicable securities exchange
or securities association then in effect. As a condition to the grant or
exercise of any Award, the Trust may require the Participant (or, in the event
of the Participant's death, the Participant's legal representatives, heirs,
legatees or distributees) to provide written representations concerning the
Participant's (or such other person's) intentions with regard to the retention
or disposition of the Shares covered by the Award and written covenants as to
the manner of disposal of such Shares as may be necessary or useful to ensure
that the grant, exercise or disposition will not violate the Securities Act, any
other law or any rule of any applicable securities exchange or securities
association then in effect. The Trust shall not be required to register any
Shares under the Securities Act or register or qualify any Shares under any
state or other securities laws.
12. EMPLOYMENT OR OTHER RELATIONSHIP
--------------------------------
Nothing in this Plan or any Award shall in any way interfere with or limit
the right of the Trust or any of its Affiliates to terminate any Participant's
employment or status as a consultant or Trust Manager at any time, nor confer
upon any Participant any right to continue in the employ of, or as a Trust
Manager or consultant of, the Trust or any of its Affiliates.
B-16
<PAGE>
13. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN
---------------------------------------------
The Board may at any time amend, suspend or discontinue this Plan without
shareholder approval, except as required by applicable law; provided, however,
-------- -------
that no amendment, alteration, suspension or discontinuation shall be made which
would impair the rights of any Participant under any Award previously granted,
without the Participant's consent, except to conform this Plan and Awards
granted to the requirements of federal or other tax laws including without
limitation Section 422 of the Code and/or ERISA, or to the requirements of Rule
16b-3. The provisions of the Plan relating to Awards for Non-Employee Trust
Managers may not be amended more than once each six months. The Board may choose
to require that the Trust's shareholders approve any amendment to this Plan in
order to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or for
any other reason.
14. LIABILITY AND INDEMNIFICATION OF THE COMMITTEE
----------------------------------------------
No person constituting, or member of the group constituting, the Committee
shall be liable for any act or omission on such person's part, including but not
limited to the exercise of any power or discretion given to such member under
this Plan, except for those acts or omissions resulting from such member's gross
negligence or willful misconduct. The Trust shall indemnify each present and
future person constituting, or member of the group constituting, the Committee
against, and each person or member of the group constituting the Committee shall
be entitled without further act on his or her part to indemnity from the Trust
for, all expenses (including the amount of judgments and the amount of approved
settlements made with a view to the curtailment of costs of litigation)
reasonably incurred by such person in connection with or arising out of any
action, suit or proceeding to the fullest extent permitted by law and by the
Declaration of Trust and Bylaws of the Trust.
15. GRANTS TO PERSONS EXPECTED TO BECOME EMPLOYEES OR TRUST MANAGERS
----------------------------------------------------------------
As allowed by this Plan, the Committee may grant Awards (other than ISOs)
to persons who are expected to become Employees, Trust Managers (other than Non-
Employee Trust Managers) or consultants of the Trust. The grant shall be deemed
to have been made upon the date the grantee becomes an Employee, Trust Manager
or consultant of the Trust without further action or approval by the Committee.
16. CERTAIN TRUST MANAGERS AND OFFICERS
-----------------------------------
All Award Agreements for Participants who are subject to Section 16(b)
shall be deemed to include such additional limitations, terms and provisions as
Rule 16b-3 then requires unless the Committee determines that any such Award
should not comply with the requirements of Rule 16b-3. All Award Agreements
relating to ISOs shall be deemed to include such additional terms and provisions
as Section 422 of the Code or any successor provision thereto then requires
under the Committee expressly determines that such Award should not comply with
such requirements.
B-17
<PAGE>
17. SECURITIES LAW LEGENDS
----------------------
Certificates of Shares and Restricted Shares, when issued, may have the
following legend and statements of other applicable restrictions endorsed
thereon:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED,
TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES
EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE SOLE DISCRETION OF
THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION
WILL NOT VIOLATE ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS.
This legend shall not be required for any Shares issued pursuant to an effective
registration statement under the Securities Act.
18. SEVERABILITY
------------
If any provision of this Plan is held to be illegal or invalid for any
reason, that illegality or invalidity shall not affect the remaining portions of
the Plan, but such provision shall be fully severable and the Plan shall be
construed and enforced as if the illegal or invalid provision had never been
included in this Plan. Such an illegal or invalid provision shall be replaced
by a revised provision that most nearly comports to the substance of the illegal
or invalid provision. If any of the terms or provisions of this Plan or any
Award Agreement conflict with the requirements of Rule 16b-3 (as those terms or
provisions are applied to eligible persons who are subject to Section 16(b) or
Section 422 of the Code (with respect to ISOs)), those conflicting terms or
provisions shall be deemed inoperative to the extent they conflict with those
requirements. With respect to ISOs, if this Plan does not contain any provision
required to be included in a plan under Section 422 of the Code, that provision
shall be deemed to be incorporated into this Plan with the same force and effect
as if it had been expressly set out in this Plan; provided, however, that, to
-------- -------
the extent any Option that is intended to qualify as an ISO cannot so qualify,
that Option (to that extent) shall be deemed to be a NQO for all purposes of the
Plan.
19. EFFECTIVE DATE AND PROCEDURAL HISTORY
-------------------------------------
This Plan was originally approved by the Trust's Board on January 27, 1997.
It was approved in that form by the holders of the Trust's voting shares on
___________________________ (the "Effective Date").
B-18
<PAGE>
PROXY
AMERICAN INDUSTRIAL PROPERTIES REIT
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUST MANAGERS OF
AMERICAN INDUSTRIAL PROPERTIES REIT
ANNUAL MEETING TO BE HELD JUNE 30, 1997
The undersigned hereby appoints Charles W. Wolcott and Marc A. Simpson, and each
of them, jointly and severally, as Proxies, each with the full power of
substitution, to vote all of the undersigned's Common Shares of Beneficial
Interest in the Trust, held of record on May 12, 1997, at the Annual Meeting of
Shareholders or at any postponements or adjournments thereof, on the proposals
set forth on the reverse side, as directed.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTION MADE BELOW. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE THROUGH ELEVEN. THE PROXIES WILL VOTE WITH RESPECT TO THE TWELFTH
PROPOSAL ACCORDING TO THEIR BEST JUDGMENT. Please sign exactly as your name
appears on your Share certificate. When Shares are held in more than one name,
all parties should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by an authorized officer. If a partnership, please
sign in partnership name by an authorized person.
<PAGE>
1. Authorization of additional Common Shares.
For Against Abstain
[_] [_] [_]
2. Adoption of the Third Amended and Restated Declaration of Trust which
includes provisions limiting share ownership, dealing with business
combinations, allowing dividends to be paid in cash or shares and allowing
the Board to take any action necessary to preserve the Trust's REIT status.
For Against Abstain
[_] [_] [_]
3. Authorization of Preferred Shares.
For Against Abstain
[_] [_] [_]
4. Elimination of Cumulative Voting.
For Against Abstain
[_] [_] [_]
5. Conversion of debt to USAA REALCO into Common Shares and, if proposal one is
not approved, authorization of additional Common Shares to permit such
conversion.
For Against Abstain
[_] [_] [_]
6. Conversion of debt to Morgan Stanley Asset Management into Common Shares
and, if proposal one is not approved, authorization of additional Common
Shares to permit such conversion.
For Against Abstain
[_] [_] [_]
7. Issuance of up to $15 million of convertible debt securities and, if
proposal one is not approved, authorization of additional Common Shares to
permit such conversion.
For Against Abstain
[_] [_] [_]
8. Adoption of the Employee and Trust Manager Incentive Plan.
For Against Abstain
[_] [_] [_]
<PAGE>
9. Election of Trust Managers.
Nominees: William H. Bricker, T. Patrick Duncan, Robert E. Giles, Edward
-------- B. Kelley, Charles W. Wolcott
For Withhold
Authority
[_] [_]
(Instruction: To withhold authority to vote for any of the above nominees,
strike a line through that nominee's name in the list above.)
10. Ratification of selection of Ernst & Young LLP as independent auditors.
For Against Abstain
[_] [_] [_]
11. Postponement or adjournment of the Annual Meeting for the solicitation of
additional votes, if necessary.
For Against Abstain
[_] [_] [_]
12. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY POSTPONEMENTS OR
ADJOURNMENTS THEREOF.
By signing and returning this Proxy, the undersigned acknowledges receipt of the
Notice of Annual Meeting and Proxy statement delivered herewith.
_________________________________ ____________
Signature of Shareholder Date
_________________________________ ____________
Signature if Shares held Date
in more than one name
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
