As filed with the Securities and Exchange Commission on
March 6, 1997
File No. 333-2572
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
American Asset Advisers Trust, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland 6501 76-0410050
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classifica- Identification
formation) tion Code Number) Number)
Suite 824
8 Greenway Plaza
Houston, Texas 77046
(713) 850-1400
(Address, including zip code, and telephone number, including area
code of registrant's principal executive offices)
Suite 824 H. Kerr Taylor
8 Greenway Plaza Suite 824
Houston, Texas 77046 8 Greenway Plaza
(Address of registrant's Houston, TX 77046
intended principal place of (713) 850-1400
business) (Name, address,
including zip code
and telephone
number, of agent
for service)
Copies to:
Judith D. Fryer, Esq.
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel
153 East 53rd Street
New York, New York 10022
Approximate date of commencement of proposed sale to the public:
June 18, 1996
Sticker to SUPPLEMENT NO. 2
Supplement No. 2 dated February 28, 1997, which supersedes all prior
supplements, contains updated information to the Prospectus dated
June 18, 1996, consisting primarily of the following: (i) Updated
Prior Performance Information through December 31, 1996, including a
prior performance summary; (ii) Updated Prior Performance Tables through
December 31, 1996; (iii) Updated Suitability for Ohio residents;
(iv) Updated Selected Financial Data through December 31, 1996;
(v) Updated Management's Discussion and Analysis of Financial Condition
and Results of Operations through December 31, 1996; (vi) Updated Property
acquisition information through December 31, 1996; (vii) Updated Management
information; and (viii) Audited Financial Statements for the years ended
December 31, 1996, 1995 and 1994.
The Company commenced its offering of Shares of Common Stock on June 18,
1996. As of February 25, 1997, the Company had received contributions
aggregating $2,822,312 in Gross Proceeds (275,348 Shares). The Company
is in the process of registering shares of Common Stock for issuance upon
the exercise of the outstanding warrants. Such warrants are exercisable
at $9 per share between March 17, 1997 and March 16, 1998.
AMERICAN ASSET ADVISERS TRUST, INC.
A Real Estate Investment Trust Offering
2,853,658.5365 SHARES OF COMMON STOCK - $10.25 PER SHARE
2 SHARES ($20.50) MINIMUM PURCHASE
(Minimum Purchase May Be Higher In Certain States)
American Asset Advisers Trust, Inc. (the "Company") is a Maryland
corporation incorporated on August 17, 1993 which qualifies as a real estate
investment trust under federal tax laws. The Company presently owns interests in
five commercial properties in Georgia, Kansas, Missouri and Texas and has
contracted to purchase a sixth property in Arizona. This Prospectus describes
the Company's offering of additional shares of its common stock, $.01 par value
per share (hereinafter referred to as the "Shares" or "Securities").
The Company will use investor funds and, possibly, borrowed capital to
purchase real estate for commercial uses. Investor funds will also be used for
acquisition fees and expenses related to such acquisitions, offering expenses
and working capital. Properties purchased by the Company will be leased to
tenants having at least a $40 million net worth under long-term leases requiring
the tenant to pay all or a significant portion of the cost of maintenance,
insurance, and real estate taxes.
The Company issued 1,008,252 shares of its common stock and warrants to
purchase 504,126 shares of its common stock at $9 per share commencing March
1997 and expiring in March 1998, in connection with its initial public offering
which commenced on March 17, 1994 and terminated on March 15, 1996 (the "Initial
Public Offering"). American Asset Advisers Realty Corporation, a Texas
corporation ("AAA"), all of the capital stock of which is owned by H. Kerr
Taylor, the President and Chairman of the Board of Directors of the Company
("Taylor"), also purchased 20,001 shares of common stock prior to the Initial
Public Offering. Accordingly, as of the termination of the Initial Public
Offering, the total number of issued and outstanding shares of the Company's
common stock was 1,028,253 shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE MARYLAND SECURITIES COMMISSION NOR HAS THE MARYLAND
SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
THESE ARE SPECULATIVE SECURITIES. An investment in the Company
involves significant risks, including:
- Investors Will Not Have An Opportunity To Evaluate The
Additional Properties To Be Acquired By The Company With The
Proceeds Of This Offering;
- The Shares Being Offered Are Illiquid. They Are Not Presently
Listed And The Company Is Not Required To List The Shares.
Therefore, No Organized Trading Market Is Presently Expected
to Develop In The Foreseeable Future. Thus, Investors May Not
Be Able to Sell The Shares or May Only Be Able To Do So At A
Substantial Discount From The Offering Price;
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- There Is A Risk That The Value Of The Investment Will Be
Diluted By The Issuance of Additional Shares or Other Factors;
The Offering Price Was Determined By The Company Using, In
Part, Subjective Considerations; There Is No Assurance That
The Offering Price Reflects The Actual Current Value Of The
Company's Properties Or The Current Per Share Value;
- There Will Be Less Diversification Of Properties If The
Company Does Not Raise The Maximum Proceeds;
- Management Or Affiliates Of Management Will Receive
Significant Amounts Of Compensation, Regardless Of The
Company's Profitability, Before Any Dividends Are Paid To The
Shareholders Of The Company;
- The Company May Use Debt For Up To 50% Of The
Acquisition/Development Cost Of Its Properties, Thereby
Increasing The Company's Risk Of Loss;
- Distributions To Investors From Operations May Partially
Constitute "Return Of Capital" As Defined Under Generally
Accepted Accounting Principles.
- The Company Will Be Relying Upon The Advice Of An Affiliate Of
The Principal Officer Of The Company Concerning Property
Investments And The Board Of Directors Has Empowered The
Principal Officer Of The Company To Authorize And Approve
Company Investment Proposals Between Meetings Of The Board Of
Directors.
SEE THE "RISK FACTORS" SECTION OF THIS PROSPECTUS FOR A DETAILED
DISCUSSION OF THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMPANY.
<TABLE>
<CAPTION>
Price to Selling Proceeds to
Public Commissions(1) Company(2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Two Shares $ 20.50 $ 1.64 $ 18.86
- ---------------------------------------------------------------------------------------------------------
Total Maximum(3) $29,250,000 $2,340,000 $26,910,000
=========== ========== ===========
=========================================================================================================
</TABLE>
(1) The Shares are being offered by selected members of the National
Association of Securities Dealers, Inc. (the "Selected Dealers"). The
Selected Dealers will be paid commissions of up to 8% of the gross
proceeds from the sale of Securities pursuant to this offering plus up
to an additional .5% for reimbursement of actual due diligence
expenses. The Selected Dealers may also be entitled to a
non-accountable expense reimbursement of up to 2.0% of the gross
proceeds. In no event will the total compensation to Selected Dealers
exceed 10% of the gross proceeds plus .5% for due diligence expenses.
See "PLAN OF DISTRIBUTION."
(2) It is estimated that legal, accounting, printing and other reimbursable
offering expenses payable by the Company in connection with offering
the Shares will not exceed $438,750 if all 2,853,658.5365 Shares are
sold. See "Estimated Use of Proceeds."
(3) The Company has registered a total of 2,926,829.2682 Shares,
73,170.7317 of which will be available after the termination of the
offering for purchase under a dividend reinvestment plan which the
Company may have in effect. See "SUMMARY OF DIVIDEND REINVESTMENT
PLAN." The total maximum
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offering information does not include Shares to be issued pursuant to
any such dividend reinvestment plan and does not reflect any volume
discounts. See "PLAN OF DISTRIBUTION."
NEITHER THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR THE
BUREAU OF SECURITIES OF THE STATE OF NEW JERSEY HAS PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The offering will terminate on the earlier of the acceptance of
subscriptions for Shares with an aggregate offering price of $29,250,000, or the
date which is two years after the initial date of this Prospectus (subject to
extension thereafter under applicable federal law, and in states which permit
such an extension or a renewal of the offering period). Each subscription
payment will be deposited into an account of the Company at such time as the
subscription is accepted. No subscription payments for subscriptions which have
been accepted by the Company will be returned, regardless of the amount raised
by the Company in this offering. See "RISK FACTORS."
The date of this Prospectus is June 18, 1996.
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TABLE OF CONTENTS
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Page
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SUMMARY OF THE OFFERING............................................................................. -1-
Introduction............................................................................... -1-
Risk Factors............................................................................... -3-
Who May Invest............................................................................. -5-
Capitalization and Estimated Use of Proceeds............................................... -5-
Investment Objectives and Policies......................................................... -5-
Properties................................................................................. -7-
Construction............................................................................... -7-
Sale....................................................................................... -7-
Management................................................................................. -8-
Prior Performance.......................................................................... -8-
Compensation to Management and Affiliates.................................................. -8-
Conflicts of Interest...................................................................... -10-
Income Tax Aspects......................................................................... -11-
Dividend Reinvestment Plan................................................................. -11-
Organizational Relationships............................................................... -12-
RISK FACTORS........................................................................................ -12-
Risks Associated With This Offering........................................................ -12-
Other Real Estate Investment Risks......................................................... -17-
Other Risks to Shareholders................................................................ -21-
Tax Risks.................................................................................. -24-
SUITABILITY......................................................................................... -25-
CONFLICTS OF INTEREST............................................................................... -25-
Management and Affiliate Compensation...................................................... -26-
Non-Arm's-Length Agreements................................................................ -26-
Other Transactions with AAA................................................................ -27-
Competition With The Company By AAA Sponsored Affiliates In The Purchase, Sale,
Construction, Lease and Operation Of Properties................................... -27-
Competition For The Time And Services Affiliates........................................... -28-
Company Holdings of AAA and Directors...................................................... -28-
Common Counsel............................................................................. -29-
THE COMPANY......................................................................................... -29-
ESTIMATED USE OF PROCEEDS........................................................................... -32-
SELECTED FINANCIAL DATA............................................................................. -34-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. -34-
INVESTMENT OBJECTIVES AND POLICIES.................................................................. -37-
Principal Investment Objectives............................................................ -37-
Investment Objectives...................................................................... -37-
Company Investments........................................................................ -39-
Acquisition of Properties.................................................................. -39-
Development and Construction of Properties................................................. -41-
Dividends.................................................................................. -42-
Sale of Properties......................................................................... -42-
</TABLE>
(i)
<PAGE> 10
<TABLE>
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<S> <C>
Borrowing Policies -- Restriction on Leverage.............................................. -43-
Joint Venture Investments.................................................................. -43-
Reserves for Operating Expenses............................................................ -44-
Management of Properties................................................................... -44-
Changes in Investment Objectives and Policies.............................................. -45-
Certain Financial Activities Not Permitted................................................. -45-
PROPERTIES.......................................................................................... -45-
General.................................................................................... -45-
Blockbuster Music Store, Wichita, Kansas................................................... -46-
OneCare Health Industries, Houston, Texas.................................................. -47-
Blockbuster Music Store, Independence, Missouri............................................ -48-
AFC, Inc., Doing Business As America's Favorite Chicken Co., Smyrna, Georgia............... -48-
Tandy Corporation, Mesquite, Texas......................................................... -49-
Just For Feet, Inc., Tucson, Arizona....................................................... -50-
MANAGEMENT.......................................................................................... -51-
Board of Directors......................................................................... -51-
Directors and Executive Officers of the Company............................................ -52-
Management Decisions....................................................................... -53-
Background and Experience.................................................................. -53-
PRIOR PERFORMANCE................................................................................... -55-
MANAGEMENT AND AFFILIATE COMPENSATION............................................................... -56-
ERISA CONSIDERATIONS................................................................................ -59-
INCOME TAX ASPECTS.................................................................................. -62-
General.................................................................................... -62-
Requirements for Qualification and Taxation as a REIT...................................... -63-
Distribution Requirements.................................................................. -66-
Termination or Revocation of REIT Status................................................... -67-
Taxation of the Company.................................................................... -67-
Taxation of Domestic Shareholders.......................................................... -68-
Foreign Shareholders....................................................................... -70-
Dividend Reinvestment Plan................................................................. -70-
United States Report Requirements.......................................................... -71-
State and Local Taxes...................................................................... -71-
SUMMARY OF DIVIDEND REINVESTMENT PLAN............................................................... -71-
General.................................................................................... -71-
Investment of Distributions................................................................ -72-
Participant Accounts, Fees, and Allocation of Shares....................................... -72-
Reports to Participants.................................................................... -73-
Election to Participate or Terminate Participation......................................... -73-
Federal Income Tax Considerations.......................................................... -73-
Amendments and Termination................................................................. -74-
DESCRIPTION OF ORGANIZATIONAL
DOCUMENTS AND SECURITIES............................................................................ -74-
Description of Shares...................................................................... -74-
Transfer Agent............................................................................. -75-
Meetings and Special Voting Requirements................................................... -75-
Bylaws..................................................................................... -75-
Limitations on Holdings and Transfer....................................................... -75-
</TABLE>
(ii)
<PAGE> 11
<TABLE>
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REPORTS TO SHAREHOLDERS....................................................................... -76-
PLAN OF DISTRIBUTION.......................................................................... -76-
SALES MATERIALS............................................................................... -79-
LEGAL PROCEEDINGS............................................................................. -79-
EXPERTS....................................................................................... -79-
LEGAL OPINION................................................................................. -80-
FURTHER INFORMATION........................................................................... -80-
DEFINITIONS................................................................................... -80-
EXHIBITS:
Prior Performance Tables...................................................................... Exhibit A
Order Form.................................................................................... Exhibit B
Dividend Reinvestment Plan.................................................................... Exhibit C
</TABLE>
THE USE OF PROJECTIONS IN THIS OFFERING IS PROHIBITED. ANY
REPRESENTATIONS TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR
ORAL, AS TO THE AMOUNT OR CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT
OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN INVESTMENT IN THIS COMPANY IS A
VIOLATION OF THE LAW. HOWEVER, SUCH PROHIBITION SHOULD NOT BE CONSTRUED
TO PREVENT THE COMPANY FROM FILING SUPPLEMENTALLY ANY PRO FORMA FINANCIAL
STATEMENTS REQUIRED BY THE FEDERAL SECURITIES LAWS AND REGULATIONS THEREUNDER.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION IN ANY STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE OR JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. IF, HOWEVER, ANY MATERIAL
CHANGE IN THE COMPANY'S AFFAIRS OCCURS AT ANY TIME WHEN THIS PROSPECTUS IS
REQUIRED TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
APPROPRIATELY.
NEITHER THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR THE BUREAU
OF SECURITIES OF THE STATE OF NEW JERSEY HAS PASSED ON OR ENDORSED THE MERITS
OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
UNTIL JULY 28, 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
(iii)
<PAGE> 12
================================================================================
SUMMARY OF THE OFFERING
================================================================================
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. The information appearing in
the rest of the Prospectus follows in the same order as the topics appear in
this "SUMMARY OF THE OFFERING." See "DEFINITIONS" for a glossary of certain
terms used in this Summary and throughout the Prospectus.
Introduction
The Company is a Maryland corporation incorporated on August 17, 1993
which qualifies for federal income tax purposes as a real estate investment
trust ("REIT").
The Company is offering a total of 2,853,658.5365 Shares at $10.25 per
share, representing an aggregate offering price of $29,250,000 to qualified
investors. Each Share subscription payment will be deposited in an account of
the Company at such time as the Company accepts the subscription. No
subscription payments for Share subscriptions which have been accepted by the
Company will be returned, regardless of the amount raised by the Company in this
offering. See "RISK FACTORS."
The Shares are not presently listed on a national securities exchange
or on NASDAQ and the Company is not required to list the Shares. Although the
Directors may determine at a later date to list the Shares on a national
securities exchange or on NASDAQ, no such decision as to such listing has yet
been made to do so.
The Company's mission is to provide the highest quality corporate
commercial and retail locations for America's premier companies through net
leases, producing a steadily rising income stream for investors. It has
positioned itself to fulfill this mission by (1) targeting Properties for
acquisition which are located in the Continental United States within intensive
commercial zones near traffic generators, such as regional malls, business
developments and major thoroughfares; (2) purchasing only Properties that are
subject to leases with tenants who each have stated equity of at least $40
million, and (3) by limiting such leases to "net" leases (leases that require
the tenant to pay for all or a significant portion of the real estate taxes,
insurance, maintenance and repairs, but not capital expenses, thereby lowering
operating costs) that provide for periodic rent escalations over the original
terms and any renewal terms thereof. The Company's specific investment
objectives, policies and practices are further described below in this summary
and are discussed more fully elsewhere in this Prospectus.
In selecting additional Properties for acquisition, the Company will
continue to target freestanding Properties, each of which it is anticipated will
be leased to a single tenant. As is the case with the five Properties in which
the Company presently holds its interests and the sixth Property under contract
with the Company, these Properties are expected to continue to be located along
intensive commercial traffic corridors near traffic generators such as regional
malls, business developments and major thoroughfares. Management believes that
properties with these characteristics are desired by commercial tenants because
of their high visibility to passing traffic, ease of access, tenant control over
the sites' hours of operation and maintenance standards, and the ability to
create distinctive building designs which promote greater customer
identification. In addition, management believes that freestanding properties
permit tenants to open new facilities quickly, due to short development cycles
generally associated with such properties, and provide tenants with flexibility
to respond to changing commercial trends. As a result, management believes that
such properties are better situated to attract a wide array of established
retail and commercial tenants and to continue to afford the Company
opportunities for steady current return and potential long term capital
appreciation.
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<PAGE> 13
Management also believes that many commercial tenants interested in
occupying freestanding, single-tenant properties of the type targeted for
acquisition by the Company prefer to lease rather than to own the properties
which they operate because leasing enables them to allocate their capital to
their core businesses. The Company intends to benefit from this preference by
continuing to acquire additional Properties with the characteristics described
above, but which are already leased to tenants meeting certain minimum equity
criteria. In order to keep operating costs low, management intends to continue
to limit its acquisitions to Properties that are already leased to such tenants
pursuant to net leases. All five of the Properties in which the Company
currently holds interests are subject to net leases, as will be the sixth
Property which is under contract to the Company.
The Company used the foregoing investment profile to acquire the three
Properties which it presently holds and interests in two additional Properties
which it holds (through its majority ownership in two separate joint ventures).
The three Properties, located in Houston, Texas, Smyrna (a suburb of Atlanta),
Georgia and Mesquite (a suburb of Dallas), Texas, which are directly owned by
the Company have been leased on a "net" basis to One Care Health Industries,
Inc., AFC, Inc., doing business as America's Favorite Chicken Co. and Tandy
Corporation, respectively, for terms of ten, twenty and fifteen years,
respectively. The two Properties owned by joint ventures are located in Wichita,
Kansas and Independence (a suburb of Kansas City), Missouri and have been leased
on a "net" basis to Blockbuster Music Retail, Inc. for a term of ten years each.
Under each such lease, the tenant has successive renewal options. The Company
has contracted to purchase a sixth Property in Tucson, Arizona which it expects
to hold through a joint venture and to lease to the operator of a Just For Feet
retail shoe store for an initial term of 20 years. The leases on the five other
Properties have and it is expected that the lease on this Property will have
provisions for periodic rent escalations over the original and any renewal terms
thereof. See "PROPERTIES." The Company purchased Properties and joint venture
interests which it currently holds entirely with the proceeds which it received
from the Initial Public Offering. It intends to purchase the sixth Property with
such proceeds as well. See "Capitalization." The Company will hold all such
Properties that it acquires and eventually sell them, with the proceeds likely
to be reinvested in other Properties which meet the Company's investment
criteria. The Company has an infinite life in that it does not have any
predetermined date on which it is due to liquidate. See "INCOME TAX
ASPECTS--Taxation of the Company." In some situations, the Company may lease
Properties in other than net leases, but will attempt to enter into leases that
limit the amount of expenses to be paid by the Company. In some situations, the
Company may also acquire Properties on which improvements are required to be
constructed or completed or renovations are required to be made, but will take
appropriate measures to limit costs arising out of construction completion
delays, cost overruns and other problems incidental to construction projects.
See "Investment Objectives and Policies -- Development and Construction of
Properties."
Since the Company's formation, the Company's Board of Directors has
attempted to maximize the Company's cash flow to Shareholders by avoiding a
relatively fixed overhead cost structure and instead contracting to obtain
services from its Affiliate, AAA. AAA has provided administrative staff and
facilities to the Company at a cost less than the Company would incur if it was
providing itself with such personnel and administrative services because, if the
Company had to provide itself with such services, it would need to obtain
additional personnel to perform a variety of different functions and the Company
would not be able to fully utilize such personnel at the Company's present size.
The cost to the Company of maintaining underutilized employees would be greater
than is the cost to the Company of retaining AAA. At the Company's current asset
and revenue levels, the Company's Board of Directors continues to believe that
it is more economical to retain AAA to provide advisory and management services
than to incur the significant personnel and administrative overhead required to
support the Company's current and anticipated operations. Management believes,
however, that the efficiencies currently experienced by retaining AAA as the
adviser will diminish as the Company grows, and expects that at the point the
Company is incurring $2.5 million or more in combined annual general and
administrative expenses and advisory fees, it will become cost effective to be
self-administered. For conflicts of interest created by virtue of the Company's
retaining AAA in such a capacity, see "Conflicts of Interest."
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<PAGE> 14
Risk Factors
There are risks associated with the Company and with being a
Shareholder in it. The "RISK FACTORS" section of this Prospectus contains a
detailed discussion of the most important risks. The risk factors are organized
into Risks Associated with the Offering, Other Real Estate Investment Risks,
Other Risks Corporately, and Tax Risks, that is, risks arising from the REIT tax
laws as they apply to the Company. Please refer to the "RISK FACTORS" section of
this Prospectus for a discussion of these factors, including the following:
RISKS ASSOCIATED WITH THIS OFFERING.
- Investors will not have an opportunity to evaluate the
additional Properties to be purchased with the proceeds of
this offering. The Company has only recently acquired its
interests in its five existing Properties. Without knowledge
of the additional Properties to be acquired and because of the
limited period of time in which the Company has held interests
in its existing Properties, a prospective investor may have
little or no economic and/or other financial information
available to the investor to assist in evaluating the Company.
- The Shares being offered are illiquid. They are not presently
listed on any exchange and the Company is not required to list
the Shares. Therefore, no organized trading market is
presently expected to develop in the foreseeable future. Thus,
investors may not be able to sell the Shares in the future, or
may only be able to do so at a substantial discount from the
Offering Price.
- There is a risk that the value of the investments will be
diluted by the issuance of additional Shares or other factors.
The offering price ($10.25 per Share, hereinafter "Offering
Price") was determined by the Company using, in part,
subjective considerations. Thus, there is no assurance that
the Offering Price reflects the actual current value of the
Company's Properties or the current per Share value.
- There will be less diversification of Properties if the
Company does not raise the maximum proceeds pursuant to this
offering resulting in fewer additional Properties being
acquired. The Initial Public Offering and the past public
offerings by AAA-sponsored Affiliates have not raised their
maximum offering proceeds.
- Management or Affiliates of management will receive
significant amounts of compensation, regardless of the
Company's profitability, such compensation being payable
before any dividends are paid to the Shareholders of the
Company.
- The Company may use debt for up to 50% of the
acquisition/development cost of its properties thereby
increasing the Company's risk of loss; the increased risk of
loss arises from increased debt service requirements,
increased risk of foreclosure, balloon mortgage financing,
due-on-sale financing and other factors.
- Distributions to investors from operations may partially
constitute "Return of Capital" as defined under Generally
Accepted Accounting Principles.
- Investing in the same type of property or in multiple
Properties within relatively small geographical areas making
the Company more sensitive to the economic trends and
conditions that can affect such geographical areas.
- The Company was formed approximately three years ago and has a
limited operating history.
- There are conflicts of interest between the Company, the
Directors, and their Affiliates (persons or entities with a
significant ownership or control relationship with the party
with whom they are said to be affiliated) in connection with
the purchase and ownership of Properties.
-3-
<PAGE> 15
OTHER REAL ESTATE INVESTMENT RISKS.
- If the Company enters into additional joint ventures with
Affiliates of AAA (the Company has already entered into two
such joint ventures and expects to acquire through a third
joint venture a property under contract as of the date of this
Prospectus) or others, it is subject to the risks of being a
partner, which include issues concerning control, liability,
conflicts of interest and sharing of benefits.
- To the extent that the Company is permitted, after receiving
approval from a majority of the current Shareholders, and
desires to construct or complete improvements on Properties
that it acquires, the Company will be subject to risks
relating to the builder's ability to control construction
costs or to build in conformity with plans, specifications and
timetables.
- Because the Company will continue to lease to single tenants
who will be responsible for maintaining the Properties
acquired, the Company may be exposed to more financial risk
due to a tenant's failure to perform under its lease than if a
Property were leased to multiple tenants.
- Because the Company will continue to acquire Properties
subject to long-term net leases, it is subject to the risk of
early termination of such leases and the inability to re-lease
or sell on terms as favorable as those of the terminated
leases.
- The future value of real estate and, consequently, Company
profits, cannot be predicted and, thus, investors cannot be
sure that their capital will be returned to them.
- Because the Company may continue to acquire Properties built
for a special purpose and intended for a particular tenant,
such Properties may be hard to dispose of when their leases
terminate or in the event of tenant defaults.
- The Company may incur extraordinary expenses necessary to
comply with the Americans With Disabilities Act.
OTHER RISKS TO SHAREHOLDERS.
- The Company will be relying upon the advice of AAA, which is
an Affiliate of the principal officer of the Company, and on
the advice of such principal officer concerning Property
investments; and the Board of Directors has empowered the
principal officer of the Company to authorize and approve
Company investment proposals between meetings of the Board of
Directors. The Shareholders will not have the ability to
participate in management other than through the election of
directors.
- The Company may have insufficient working capital in the
future, which could result in the Company having to borrow
funds or receive additional capital through the sale of its
equity or debt securities.
- The Shareholders (record owners of the Company's Shares)
holding a majority of the Shares may exercise certain voting
rights, including the election of Directors, the amendment of
the Company's governing documents and a change in the
Company's material investment objectives, even if holders of
49% of the Shares object.
- The Directors are indemnified with respect to certain
liabilities.
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<PAGE> 16
TAX RISKS.
- The Company may not continue to qualify as a Real Estate
Investment Trust in which case the Company would be taxed as a
regular corporation and distributions to its Shareholders
would not be deductible by the Company in computing its
taxable income.
- The Company may incur tax liability and penalties for
non-compliance with certain REIT provisions, including those
relating to dividend payments and Prohibited Transactions.
- There may be in the future adverse changes in the tax laws
affecting the Company and, consequently, its Shareholders.
See the section later in the Prospectus entitled "RISK FACTORS" for details.
Who May Invest
This type of investment requires a long-term holding period, is
considered to be illiquid and may not be readily resold. The Company may elect
to list its Shares on an over-the-counter exchange, although there is no
obligation to do so and there is no assurance that such a listing will occur.
There are certain modest tax benefits claimed for this investment, but it is not
a tax shelter and will not benefit an investor's tax situation as to his other
income. See the section later in the Prospectus entitled "SUITABILITY" for
details.
Capitalization and Estimated Use of Proceeds
As of December 31, 1995, the Company had a total capitalization of
$7,141,923. A total of 827,876 shares of the Company's common stock, $.01 par
value per share, and 403,937 warrants to purchase shares of the Company's common
stock were outstanding as of that date. As of March 15, 1996, the termination
date of the Initial Public Offering, 1,028,253 shares of the Company's common
stock and 504,126 warrants were outstanding. In the event that the maximum
offering proceeds are raised from this offering, and assuming that the Company
utilizes borrowings ("Leverage") in acquiring its additional Properties equal to
20 percent of the total purchase price of the additional Properties, then the
Company's capitalization, as adjusted, would be approximately $44,702,301 with
3,881,911.5365 shares of the Company's common stock and 504,126 warrants to
purchase shares of the Company's common stock issued and outstanding. However,
based upon the Initial Public Offering and the prior offerings of Affiliates of
the Company, it is not expected that the maximum proceeds will be raised. In
addition, the Company has not previously used Leverage in connection with its
acquisition of Properties, nor does it currently expect to do so in connection
with its acquisition of its sixth Property.
If the maximum offering proceeds of $29,250,000 are raised from this
offering, the Company anticipates that it will have cash available for
investment of $25,740,000 after deduction of approximately $3,071,250 for
selling commissions and expenses and $438,750 for other organization and
offering costs. After deduction of $1,462,500 for Acquisition Fees, $292,500 for
other Acquisition Expenses and $292,500 for working capital reserve, the Company
anticipates that there would be $23,692,500 in cash available for the purchase
of Properties. See "ESTIMATED USE OF PROCEEDS" for details.
Investment Objectives and Policies
The Company has the following fundamental investment objectives:
- TO PROVIDE REGULAR DIVIDENDS TO SHAREHOLDERS. The Company has
paid quarterly dividends to Shareholders since July 1994 and
intends to continue paying quarterly dividends to
Shareholders.
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<PAGE> 17
Dividend payments may fluctuate during the life of the
Company. See "INVESTMENT OBJECTIVES AND POLICIES --
Dividends."
- TO PROVIDE DIVIDENDS THAT ARE PARTIALLY FREE FROM CURRENT
TAXATION. So long as the Company qualifies as a REIT, it will
generally not be taxed on taxable income to the extent it pays
dividends to the Shareholders. Company dividends will not be
currently taxable to Shareholders to the extent the dividends
exceed Company taxable income. The Company expects to incur
less taxable income (and thus greater cash flow) because of
its non-cash deductions for depreciation. However,
depreciation deductions decrease the Company's tax basis in
its properties and thus, will increase the Company's taxable
income when the Company sells these properties. Approximately
18.3% of the distributions paid with respect to the Company's
fiscal year ended December 31, 1995 constituted a return of
capital. However, there is no assurance that such amount will
not fluctuate from year to year. See "RISK FACTORS" and
"INCOME TAX ASPECTS". The return of capital on a GAAP basis is
calculated based on distributions to Shareholders in excess of
net income of the Company allocated to Shareholders. Non-cash
deductions such as depreciation and amortization generally
reduce net income of a REIT below distributions creating a
return of capital.
- TO PROVIDE SHAREHOLDERS WITH LONG-TERM APPRECIATION ON
THEIR
INVESTMENT. Management believes that the Company can realize
its objective of long-term appreciation of its Property
portfolio based on the fact that each of the leases on the
Properties in which the Company presently holds interests
contain, and the Company's expectation that the leases on the
additional Properties that it will acquire will contain,
periodic rent escalation provisions over the original and
renewal terms of such leases. Because the Company's Properties
are and are expected to continue to be valued on the basis of
their ability to produce income, the Company believes that
successive periodic rental income increases resulting from
such escalation provisions should increase the value of the
Company's Properties over the long term. There is of course no
assurance the Company will in fact realize portfolio
appreciation.
- TO PROVIDE INVESTORS WITH AN INFLATION HEDGE. During times of
inflation, it is management's experience that commodities such
as real estate experience price increases commensurate with
increases in inflation. However, inflation has become a less
significant factor in recent years as rates of inflation have
been low. Also, real property which is subject to long-term
leases requiring fixed rents over future years may not
experience an increase in price commensurate with inflation or
commensurate with similar properties which are not subject to
such leases.
- TO CONSERVE CAPITAL. The Company will attempt to conserve
capital by endeavoring to continue to invest in a diversified
portfolio of quality real estate under long-term leases to
creditworthy tenants. The amount of money raised in the
offering will affect the number of Properties the Company will
be able to purchase. The more Properties the Company acquires,
the more diversified it will be and the less it will be
affected by any single property that does not perform as
expected. For a description of the Properties which the
Company has already acquired, see "PROPERTIES".
There is no assurance that any of these objectives can be achieved.
In attempting to achieve these objectives, the Company will abide by
the following policies:
- Any Property acquired will be purchased for cash supplied by
the Company and indebtedness incurred by the Company or
otherwise encumbering the Property not to exceed half the
price of the Property acquired.
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<PAGE> 18
- The Properties, which will be used for commercial purposes,
will be leased to one or more tenants, each of whom has a
stated equity of at least $40 million based on its most
recently issued audited financial statements or other similar
evidence establishing net worth.
- Leases with a tenant will provide that it pays all or a
significant portion of the operating costs associated with the
Property, such as utilities, real estate taxes, insurance,
maintenance and so forth; or, in some cases, the leases will
provide an allowance in the rent structure to cover these
operational cost items with any such costs in excess of the
allowance to be paid for by the tenant. In some cases the
leases may provide that the Company is responsible for some
repairs to, or maintenance of, certain items of an improvement
on a Property. In those cases, however, management will
attempt to limit Company expenditures by obtaining sufficient
warranties and developer warranties or guarantees as to such
items. However, there is no assurance that it will be able to
do so.
- The leases will be for an extended period of time, typically
ten or more years, and will provide for increases in the rent
during the lease period based on various formulas.
There are also Company policies that impose conditions on possible
joint ventures, and there are numerous financial activities that are not
permitted. See "INVESTMENT OBJECTIVES AND POLICIES" for details.
Properties
The Company will attempt to continue to acquire only certain types of
properties. The Properties it intends to acquire will a) be commercial; b) be
leased or to be leased on a long-term basis to a single tenant; c) have certain
required terms in the lease; d) have a tenant that meets certain criteria; and
e) satisfy certain conditions as to prospects for appreciation. The Company may
not be able to satisfy all of these criteria for every Property. The Properties
the Company intends to acquire may be located anywhere in the United States. For
a description of the Properties which the Company has already acquired, see
"PROPERTIES".
Construction
The Company may on occasion purchase undeveloped Properties and
construct improvements thereon, provided that, at the time it acquires any
undeveloped Property, such Property will be subject to a net lease with a tenant
who meets the suitability criteria established by the Company with respect to
fully developed Properties. The Company may acquire undeveloped Properties and
require the tenant to assume responsibility for the improvements thereon, or
contract with third parties or affiliates to construct such improvements at
competitive rates. Upon the completion of development of a particular Property,
the Company may hold a Property for possible long term appreciation, or may sell
such Property if the Company believes that its gains would be greater from such
a sale than they would from holding the Property. See "INVESTMENT OBJECTIVES AND
POLICIES -- Development and Construction of Properties."
Sale
The Company may sell some or all of its Properties over time. The
determination of whether a particular Property should be sold or otherwise
disposed of will be made after consideration of performance of the Property and
market conditions and will depend, in part, on the economic benefits of
continued ownership. In deciding whether to sell Properties, the Directors will
consider factors such as potential capital appreciation, cash flow and federal
income tax consequences. Affiliates of one or more Directors may be selected to
perform various substantial real estate brokerage functions in connection with
the sale of Properties for the Company. The Company will not sell or lease any
Property to the Directors or their Affiliates. The Company may reinvest, at the
discretion of the Directors, the proceeds from any sale of a Property, but only
if it can do so without adversely affecting the Company's status as a REIT. See
"INVESTMENT OBJECTIVES AND POLICIES -- Sale of Properties."
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<PAGE> 19
Management
Under Maryland law, each Director of the Company must perform his or
her duties in good faith, in a manner he or she reasonably believes to be in the
best interests of the Company and with the care of an ordinarily prudent person
in a like position under similar circumstances. According to the Bylaws of the
Company, the Directors have a fiduciary duty to the Company and the Shareholders
and have a fiduciary duty to the Shareholders to supervise the relationship of
the Company with the Adviser. The Directors have agreed to limit the
idemnification they will seek from the Company in accordance with the
restrictions contianed in the Bylaws. The Bylaws of the Company generally
provide that a Director may be indemnified for any liability or loss suffered by
him or her if (i) the Directors determine, in good faith, that the course or
conduct which caused such loss or liability was in the best interests of the
Company, (ii) the Director requesting indemnification was acting on behalf of or
performing services for the Company, (iii) such liability or loss was not the
result of negligence or misconduct by the Director (or, in the case of an
Independent Director, gross negligence or willful misconduct) and (iv) such
indemnification is recoverable only out of the net assets of the Company.
AAA will serve as the property manager on behalf of the Company. AAA
will receive a fee and be reimbursed for its costs in doing so. AAA will receive
fees and cost reimbursements, up to a maximum percentage of the proceeds used,
for locating and acquiring suitable Properties on behalf of the Company. All of
the capital stock of AAA is owned by Taylor, the President and the Chairman of
the Board of Directors of the Company. Taylor resides in Houston, Texas. See
"MANAGEMENT" and "COMPENSATION OF MANAGEMENT AND AFFILIATES."
Prior Performance
AAA and its affiliates have sponsored a number of public and private
real estate limited partnerships. Seven partnerships raised $6,660,000 from 283
investors and purchased 14 properties with no debt and leased them to tenants
who were responsible for paying all or nearly all of the properties' operating
costs. In 1990, an AAA affiliated partnership was publicly registered, and in
1992, a second AAA affiliate partnership was publicly registered. Both publicly
registered partnerships have more restrictive investment objectives than those
of the Company. These public partnerships, which are no longer offering
securities, raised $16,844,110 from 1061 investors and purchased, either
individually or through Joint Ventures, ten properties. On October 27, 1994, a
third AAA affiliated partnership was publicly registered. As of December 31,
1995, this public partnership had raised $3,828,490 from 191 investors and had
purchased one property and an interest in one joint venture, which purchased a
separate property. As of the date of this Prospectus, all properties acquired by
these public and private partnerships are currently 100% leased and are leased
at the current market rate. Moreover, as of the date of this Prospectus, no such
AAA-sponsored limited partnership has ever failed to make a quarterly
distribution, and the amounts of the distributions of such AAA-sponsored public
limited partnerships and many such AAA-sponsored private limited partnerships
which acquire investments on an all-cash basis have increased as such programs
mature. See "PRIOR PERFORMANCE" for details.
Compensation to Management and Affiliates
AAA will manage the day-to-day business and affairs of the Company
under the direction of the Board of Directors. The Company will pay AAA fees for
these services and reimburse it for certain expenses. Outlined below are the
most significant items of compensation at each stage of the Company's operation:
See "COMPENSATION TO MANAGEMENT AND AFFILIATES" for details. Fees are paid
prior
to making distributions to the Shareholders.
Offering Stage
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<PAGE> 20
- The Company will pay Selected Dealers sales commissions of up
to 8% per share. Selected Dealers may also receive up to 2%
per Share for reimbursement of non-accountable expenses and up
to .5% of the offering proceeds as a reimbursement for actual
due diligence expenses.
Property Acquisitions
- The Company and/or the sellers of Properties will pay Total
Acquisition Fees and Expenses (inclusive of commissions or
similar compensation paid to all persons in connection with
the transaction) not to exceed the lesser of 6.0% of the
contract price of the Property or the competitive real estate
commission, unless the Directors of the Company otherwise
authorize, subject to certain restrictions.
Property Development
- The Company may buy undeveloped properties on which it will
construct or arrange to have constructed improvements by
utilizing the services of Affiliates, including AAA, or of
third parties. If the Company contracts with Affiliates to
construct or oversee construction of such improvements, such
Affiliates may receive competitive construction or development
fees and may receive reimbursement of their expenses.
Company Operations
- On August 22, 1995, the Directors approved a special
compensation payment for Taylor in the amount of $150,000.
Taylor has received no other compensation from the Company for
serving as its President. In connection with this special
compensation payment, the Company executed a demand promissory
note in such amount payable to Taylor on the earlier of July
15, 1996 or the date on which the Company receives $10,000,000
from its Initial Public Offering. Although entitled to do so,
Taylor has not yet demanded payment. The note shall be payable
in cash or Shares depending upon the availability of cash for
such payment. No compensation arrangements were considered by
the Directors prior to August 22, 1995 because, in their
judgment, the Company had not raised sufficient funds through
its Initial Public Offering to award such compensation. The
compensation to Taylor had not been accrued prior to August
22, 1995 because its payment was uncertain and the level of
compensation had not been determined until the August 1995
meeting of the Board of Directors. No decisions as yet have
been made with respect to any additional compensation for any
period after August 1995. However, the Directors have
commissioned an external study with respect to the amount and
type of compensation which could be paid in the future to
officers and/or directors, as well as the contingencies and
performance standards on which compensation will be
determined.
- AAA is entitled to be paid Property management fees varying
from 2.0% to 4.0% of rental income from the managed Property.
AAA will also be paid an as-yet undetermined amount for other
services related to the management of the Company and its
Properties, including leasing fees, mortgage brokerage fee
and maintenance fees.
- Directors of the Company receive a $500 fee for each meeting
of the Board of Directors attended in person (and will be
reimbursed for all expenses in connection with such meetings)
and will receive a fee of $500 for each meeting attended
telephonically.
Property Disposition
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<PAGE> 21
- AAA shall receive real estate brokerage commissions upon sale
of a Property not exceeding one-half of the brokerage
commission paid to all persons in connection with the
transaction, and in no event exceeding 3.0% of the sale or
disposition price.
Conflicts of Interest
Initially, there were no arm's length negotiations between the Company
and its principals or AAA in setting the fees and other compensation to be paid
by the Company to them or in determining the interests of such principals in the
Company. There may be competition with AAA-sponsored partnerships for suitable
Properties. The Company is a co-venturer with two different AAA-sponsored
partnerships in two separate joint ventures, each of which owns a Property.
Within certain guidelines, there may be additional joint ventures with
AAA-sponsored partnerships with respect to the ownership of Properties. Various
conflicts of interest may arise stemming from the relationships of the parties,
including the following. See "CONFLICTS OF INTEREST" and "INVESTMENT POLICIES
AND OBJECTIVES -- Joint Venture Investments" for details.
Management and Affiliate Compensation
- Transactions involving the purchase, development,
construction, financing, lease and/or sale of Property by the
Company may result in immediate realization by AAA of
substantial remuneration. Conflicts may arise between the
Directors and AAA with respect to AAA's recommendations
concerning these transactions.
- AAA and its Affiliates are actively engaged in other real
estate investment activities, some of which involve real
estate acquisition and management.
Non-Arm's Length Agreements
- Initially, there were no arm's length negotiations between the
Company and its principals or AAA in setting the fees and
other compensation to be paid by the Company to them or in
determining such principals' interest in the Company.
Competition Concerning Ownership Activities
- There may be competition with AAA-sponsored partnerships with
respect to the ownership of suitable Properties.
Transactions with AAA
- The Company may under specified circumstances acquire
Properties from AAA-sponsored entities and joint venture with
AAA-sponsored partnerships with respect to the ownership of
Properties.
Competition for Time and Services of Taylor and Affiliates
- The Company will depend on the Directors and AAA for its
operation and the acquisition and management of its
investments. Certain Directors and officers of the Company,
including Taylor, are also officers and directors of AAA which
also invests in and operates real estate.
Company Holdings of AAA and Directors
- AAA, Affiliates of Taylor and both Independent Directors have
previously acquired Shares which are not included in this
offering at the original offering price of $10 per Share.
However, neither
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<PAGE> 22
AAA nor its Affiliates received any warrants to purchase
Shares in connection with their Share purchases. Neither AAA,
nor the officers and Directors of the Company, nor the
Affiliates thereof and of the Company are restricted from
acquiring additional Shares. Shares owned by these persons can
be expected to be voted in the respective best interests of
these persons.
Income Tax Aspects
The complexity of the federal income tax laws causes there to be
potentially a variety of material tax issues associated with this investment.
The principal tax consequences involved with this investment are that as long as
the Company is treated as a real estate investment trust for income tax
purposes, investors may receive dividends that are partially sheltered from
federal income taxation. These reductions in the taxable income are generated as
a result of deductions from various operating expenses and from depreciation,
and such deductions could be challenged by the Internal Revenue Service. Also,
there could be changes in the federal tax laws which could either increase or
decrease the tax impact from income received from the Company.
A discussion of the federal income tax issues which may be important to
investors is set forth in the "INCOME TAX ASPECTS" section of this Prospectus.
This section includes a discussion of the many rules the Company must follow in
order to continue to qualify as a REIT and timely avoid paying federal income
taxes.
Dividend Reinvestment Plan
Investors may elect to automatically reinvest distributions in respect
of Shares purchased pursuant to this offering in additional Shares through the
Company's dividend reinvestment plan, if the Company adopts the same (the
"Dividend Reinvestment Plan"). Shareholders who elect to participate in the
Dividend Reinvestment Plan will be treated, for federal income tax purposes, as
having received their distributions and will be taxed on the amount that is
reinvested. See "SUMMARY OF DIVIDEND REINVESTMENT PLAN" and "INCOME TAX
CONSEQUENCES--Dividends Reinvestment Plan."
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<PAGE> 23
Organizational Relationships
- -----------------------------------------------------------
American Asset Advisers Trust, Inc.
===========================================================
Directors: H. Kerr Taylor
Robert S. Cartwright, Jr.
George A. McCanse, Jr.
Officers: H. Kerr Taylor, President,
Treasurer
Phil P. Moss, Executive
Vice President
Michelle Courry, Secretary ----------------------
(not an Executive Officer) The Investors
----------------------
- -----------------------------------------------------------
American Asset Advisers Realty Corp (AAA).
AAA owns $200,010 in common stock of
American Asset Advisers Trust, Inc. AAA
provides property acquisition, leasing,
administrative and management services for the
Company.
- -----------------------------------------------------------
- -----------------------------------------------------------
Common stock of AAA is wholly owned by H.
Kerr Taylor.
- -----------------------------------------------------------
===============================================================================
RISK FACTORS
===============================================================================
An investment in the Securities involves certain risks, some of which
are peculiar to the Company and others of which are inherent in all similar real
estate investments. In analyzing the offering, prospective investors should
consider carefully, among other factors, the effect, if any, of the following:
Risks Associated With This Offering
UNSPECIFIED PROPERTIES. The Company presently owns interests in five
Properties and has contracted to purchase a sixth Property. Although the Company
has established certain criteria for evaluating particular Properties to be
acquired by the Company, as well as the operators of such Properties, the
specific Properties in which the proceeds of this offering are to be invested
have not been identified as of the date of this Prospectus. Moreover,
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<PAGE> 24
the Company has owned its interests in existing Properties for little more than
one year. Therefore, a prospective investor may have no information as to the
identification or location of specific properties, financing terms or other
relevant economic and financial data affecting the Properties to be purchased by
the Company with the proceeds of this offering, and little information with
respect to the financial performance of the existing Properties, which
information, if possessed by the investor, would assist the investor in
evaluating the Company. However, this Prospectus will be amended or supplemented
at any time a reasonable probability exists that a specific property will be
acquired by the Company and may be amended periodically to reflect updated
financial information with respect to the performance of the existing
Properties. See "INVESTMENT OBJECTIVES AND POLICIES."
ILLIQUIDITY OF SHARES. The Shares being offered are illiquid. They are
not presently listed on any exchange and the Company is not required to list the
Shares. Therefore, no organized trading market is presently expected to develop
in the foreseeable future. Thus, investors may not be able to sell the Shares in
the future, or may only be able to do so at a substantial discount from the
Offering Price.
DILUTION. The value of an Investor's Securities can be diluted by
reason of poor future acquisitions by the Company, devaluation of existing
Properties of the Company, the subsequent issuance of more Shares in this and
subsequent offerings, the use of all or part of the proceeds from this offering
for operating expenses of existing Properties, and the Offering Price being
greater than the actual per Share value.
Because investors pay the same price per Share during the offering
whether they acquire Shares before or after the Company has made additional
investments, the value of Shares acquired by Shareholders could be diluted upon
the sale of additional Shares if investments previously acquired by the Company
have appreciated in value. Conversely, if investments previously acquired by the
Company have depreciated in value, the value of Shares purchased by the
Shareholder later in the offering will be diluted immediately upon the purchase
of the Shares. The Directors may authorize the issuance of Shares in addition to
Shares issued pursuant to this offering or may issue other types of securities,
thereby resulting in possible dilution of the equity of the Shareholders.
Moreover, the Company has issued warrants expiring March 1998 to purchase an
aggregate of 504,126 shares of the Common Stock at a purchase price of $9 per
share. The net proceeds to the Company from the exercise of such warrants will
be the full $9 per Share because no additional organizational and offering
expenses will be charged against such amount. The net proceeds from the sale of
Shares pursuant to the current offering, after deduction of the offering
expenses to be incurred by the Company in the offering, is $9.02 per Share. If
the net value per Share is greater than $9 at the time the warrants are
exercised, then the value of Shares purchased in this offering could be diluted.
To the extent that the actual value of the Shares is, in fact, less
than the per Share Offering Price (see "Determination of Offering Price" above),
an investor's investment in the Shares sold pursuant to this offering will be
immediately diluted.
There is no minimum number of Shares which the Company must sell to
consummate this offering. Accordingly, it is possible that the Company may sell
so few Shares in this offering that it would not be able to purchase additional
Properties, even by using leverage of up to 50 percent of the acquisition price
of the additional Properties. Under these circumstances, the Company would not
be prohibited from allocating all or a portion of the proceeds of this offering
for use to pay operating expenses of the Company or expenses of Properties
already purchased by the Company (to the extent that the Company is liable for
such expenses under the long-term net leases on such Properties). Because such
uses might not create additional value, investors in this offering might find
that the value of their investments would be effectively diluted. See
"INVESTMENT OBJECTIVES AND POLICIES" and "ESTIMATED USE OF PROCEEDS."
OFFERING PRICE. The Directors have determined the offering price for
the Securities based on a number of subjective and objective factors. The
offering price does not bear a direct relationship to any single objective
factor or group of objective factors, such as the financial condition of the
Company, or the cost, current value or potential
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<PAGE> 25
appreciation in value of the Properties of the Company or the per Share value.
Accordingly, there is no assurance that the Offering Price reflects the actual
current value of the Company's Properties or the per Share value.
PROCEEDS RAISED BY THE COMPANY AND AFFILIATES IN PRIOR
OFFERINGS.
During its recent two-year public offering, the Company raised approximately
$10,000,000 of the $20,000,000 being offered and three recent offerings by AAA
Affiliates raised (or have to date raised) less than the maximum amount of funds
for the securities offered. See "PRIOR PERFORMANCE." Similar results may occur
in this offering, increasing the likelihood of a lack of diversification of
Properties acquired with offering proceeds.
COMPENSATION OF MANAGEMENT AND AFFILIATES. Various types of
compensation are payable by the Company to the Company's management and to
persons affiliated with management. In general, this compensation is not
dependent on the success or profitability of the Company's investments, is not
subordinated to a specified return to the Shareholders, and is payable before
the payment of dividends to the Shareholders. Moreover, the amount of
compensation to be paid to management and the Affiliates is not the result of
arms-length negotiations. In the future, any additional compensation will be
determined in the sole discretion of the Board of Directors. See "MANAGEMENT"
and "MANAGEMENT AND AFFILIATE COMPENSATION".
RISKS ASSOCIATED WITH LEVERAGE. On an aggregate basis, the Company may
borrow up to 50% of the purchase price of its Properties. Following an
acquisition, the Company may also encumber a Property through financing the
construction of improvements thereon or otherwise, by borrowing up to 50% of the
value of the Property at that time. However, not more than 10% of the Company's
assets may be invested in Unimproved Real Property. Further, under state
securities laws, the Company may not at any given time incur additional
indebtedness, if after doing so, the Company's total indebtedness would exceed
three hundred percent (300%) of the Company's Net Assets. See "INVESTMENT
OBJECTIVES AND POLICIES - Borrowing Policies Restrictions on Leverage." The use
of borrowed funds in the purchase and development of Properties is referred to
as "Leverage." Although the Company has not yet borrowed funds, it may do so in
the future.
USE OF LEVERAGE, GENERALLY. The effects of utilizing Leverage
are to increase the number of Properties that may be purchased with the
Company's funds available for investment (thereby also increasing Acquisition
Fees payable to an Affiliate), to increase the potential for gain, to increase
the aggregate amount of depreciation available to the Company and to increase
the risk of loss. Also, while higher leverage should enable the Company to
acquire a greater number of investments, the Company would need to utilize
greater funds to make debt service payments resulting from such higher leverage,
which could result in less funds available for distributions to the
Shareholders. To the extent that the Company uses leverage or increased amounts
of leverage in the purchase of its Properties, the potential for gain and risk
of loss will be increased accordingly. If the Company defaults on secured
indebtedness, the lender may foreclose, and the Company could lose its
investment in the Property. Mortgage market conditions and the policies of the
Federal Reserve Board may make it difficult to obtain mortgages on acceptable
terms.
RISK OF ACCELERATION OF MORTGAGE FINANCING. In purchasing
Properties subject to financing, the Company may obtain financing with
"due-on-sale" and/or "due-on-encumbrance" clauses which, upon future refinancing
or sale of the Properties, may cause the maturity date of such mortgage loans to
be accelerated and such financing to become due. In such event, the Company may
be required to sell its Properties on an all-cash basis, to acquire new
financing in connection with the sale, or to provide seller financing. It is not
the intent of the Company to provide seller financing, although it may be
necessary or advisable in certain instances. It is unknown whether the holders
of mortgages encumbering the Company's investment Properties will require such
acceleration or whether other mortgage financing will be available. Such factors
will depend on the mortgage market and on financial and economic conditions
existing at the time of such sale or refinancing.
RISKS OF BALLOON PAYMENT OBLIGATIONS. The Company will seek to
acquire Properties which are subject to mortgage loans which have a term of not
less than five (5) years, which provide for the amortization of
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the entire loan principal, or a substantial portion thereof, prior to maturity,
or which do not require a balloon payment (i.e., a substantial lump sum
principal payment) to be paid within the anticipated holding period for the
Property. Nevertheless, the Company may incur borrowing not meeting the
foregoing standards if a majority of the disinterested Directors (including a
majority of the Independent Directors) deem it to be in the best interests of
the Company. Such mortgages involve greater risks than mortgages whose principal
amount is amortized over the term of the loan, since the ability of the Company
to repay the outstanding principal amount at maturity may be dependent upon the
Company's ability to obtain adequate refinancing or to sell the Property, which
will in turn be dependent upon economic conditions in general and the value of
the underlying Properties in particular. There is no assurance that the Company
will be able to refinance any such balloon payment mortgages at maturity.
Further, a significant shrinkage in the value of the underlying Property could
result in a loss of the Property by the Company through foreclosure.
The Company may finance acquisitions of Properties with
mortgages that do not provide for the repayment of the entire principal amount
of the mortgage loan or a substantial portion thereof during its term and
therefore require "balloon" payments at maturity. It is also possible that the
Company will finance Property acquisitions with balloon loans. Balloon payments
are payments of a significant portion of the amount originally borrowed when the
loan is due. The ability of the Company to repay at maturity the outstanding
principal amount of the balloon loan may be dependent on the Company's ability
to sell the Property or obtain adequate refinancing, which in turn will be
dependent upon economic conditions in general and the value of the Property in
particular at the time the loan is due. There is no assurance that the Company
will be able to refinance a balloon loan at maturity or that the terms of any
new loan will be as favorable as the prior loan.
If the Company is unable to refinance a balloon loan at
maturity, it may be forced to sell the Property securing repayment of the
balloon loan (or another Property), which sale would be affected by economic
conditions in general and possibly by the availability of financing to the
purchaser. There is no assurance that the proceeds of such sale would be
sufficient to repay fully the balloon loan. Any such refinancing or sale may
affect the rate of return to Shareholders and such sale may affect the projected
time of disposition of the Company's assets. To the extent that Properties are
subject to balloon mortgages, the Company's objective of increasing equity
through the reduction of mortgage debt on such Properties may be more difficult
to achieve. See "INVESTMENT OBJECTIVES AND POLICIES."
DIVIDENDS AS RETURN OF CAPITAL. If the Company generates cash from its
operations and thereafter distributes the cash to its shareholders in the form
of dividends, a portion of those dividends will be deemed to be a return of
capital to the extent the distribution exceeds net income as defined by
generally accepted accounting principles. The return of capital on a GAAP basis
is calculated based on distributions to shareholders in excess of net income of
the Company allocated to the shareholders. Non-cash deductions such as
depreciation and amortization generally reduce net income of a REIT below
distributions creating a return of capital. A return of capital will also have
the effect of reducing an investors's tax basis in the investor's Shares.
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LACK OF GEOGRAPHICAL DIVERSIFICATION. Although it is not limited to
investing in any particular area or region, the Company may invest in Properties
primarily located in the same state or general geographical area. If the
Company's concentration of investments are in a limited number of states or
general geographical areas, it will substantially increase the risks to the
Company in the event of any adverse change in the economic conditions and real
estate markets within such states or general geographical areas. Adverse trends
in these economic factors could adversely affect rental income and appreciation
in value of these Properties, which in turn would materially affect the
continued viability and profit potential of the Company.
As of the date of this Prospectus, the Company owns interests in five
properties located in four states in diverse geographic regions. See
"PROPERTIES." There is, however, no assurance that the Company's investments
will continue to be located in geographically diverse areas.
LACK OF OPERATING HISTORY. The Company was formed on August 17, 1993
and did not commence business until it broke escrow from its previous offering
on May 9, 1994. Its operating history is, therefore, limited. Executive officers
and the majority of the Directors of the Company and AAA have had experience in
acquiring, developing, leasing and managing properties, but have only
approximately 2 1/2 years experience in managing and operating a real estate
investment trust.
ACQUISITION OF PROPERTIES FROM AFFILIATES. Except for the requirement
that any transaction involving the acquisition by the Company of a Property from
a Director, officer or Affiliate must be (1) approved by a majority of the
Company's disinterested Directors, including its Independent Directors, as being
fair and reasonable and no less favorable to the Company than transactions
available from unaffiliated third parties, and (2) at a price to the Company no
greater than the cost to the Director, officer or affiliate of the Property,
unless a substantial justification exists for the price to be in excess of such
cost and such excess is reasonable, no other restrictions apply. Accordingly,
there is a risk that a majority of the Independent Directors could approve the
acquisition by the Company of an under-performing or marginally performing
property owned by a Director, officer or Affiliate of the Company which could
adversely affect the Company's investment results, while at the same time,
personally benefit the selling Director, officer or Affiliate. See "INVESTMENT
OBJECTIVES AND POLICES - Acquisition of Properties." The Company has not
acquired any of its existing Properties from Affiliates; however, there is no
assurance that it will not do so in the future.
CONFLICTS OF INTEREST. The Company is subject to potential conflicts of
interest resulting from current relationships among its President, who is also a
Director, AAA and AAA Affiliates. These conflicts of interest may arise in each
aspect of operations, including property acquisition, disposition and
management. Specifically, the Company will depend on the Directors and AAA for
its operation and the acquisition and management of its investments. The
President, who is also a Director, of the Company and certain other officers of
the Company are also officers and directors of AAA which also invests in and
operates real estate. Taylor, himself, is actively engaged in other real estate
investment activities, some of which involve real estate acquisition and
management. Accordingly, the Company may have to compete with AAA and other real
estate investment businesses of Taylor for the time and services of such
Directors and officers. Moreover, the Company may be in competition with AAA and
affiliates of Taylor for the acquisition and ownership of suitable investments.
Independent Directors (Directors having no separate relationship with
AAA or any of its Affiliates other than the Company) may disagree with AAA or
Taylor or both concerning AAA's recommendations for Properties to acquire, the
acquisition fees it intends to charge, the quality of the performance of its
management services, leasing services or brokerage services or other aspects of
AAA's advisory activities. The Independent Directors may disagree with Taylor as
to the size or duration of his proposed compensation arrangements as an officer
of the Company. See "CONFLICTS OF INTEREST."
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Other Real Estate Investment Risks
RISKS OF JOINT VENTURES. The Company may participate in additional
joint ventures. See "INVESTMENT OBJECTIVES AND POLICIES". It presently
participates in two such joint ventures in which it holds a 51% and 54.84%
interest, respectively and anticipates owning a 51.9% interest in the joint
venture which is due to close on the outstanding contract to purchase a sixth
property. See "INVESTMENT OBJECTIVES AND POLICIES-Joint Venture Investments" and
"PROPERTIES." Investments in joint ventures may involve risks which may not
otherwise be present where investments are made directly by the Company in real
property. These risks include those associated with the possibility that the
Company's partner might become bankrupt or otherwise unable to perform its
obligations, risks that the joint venture partner may from time to time have
economic or business interests or goals which are inconsistent with or adverse
to those of the Company and risks where the joint venture partner may take
actions contrary to the requests for instructions of the Company or contrary to
the Company's objectives or policies. For instance, actions by one joint
venturer may result in the Property being subjected to liabilities in excess of
those contemplated by the terms of the joint venture agreement, thereby exposing
the Company to liabilities of the joint venture in excess of its proportionate
share of such liabilities or may have other adverse consequences to the Company.
Moreover, there is the additional risk that the joint venturers may not be able
to agree on matters relating to the property they jointly own. Although each
joint owner will have a right of first refusal to purchase the other owner's
interest, in the event a sale is desired, the joint owner may not have
sufficient resources to exercise such right of first refusal.
The Company also may from time to time participate jointly with
publicly registered investment programs or other entities sponsored by AAA or
one of its Affiliates in investments as tenants-in-common or in some other joint
venture arrangement. The risks of such joint ownership may be similar to those
mentioned above for joint ventures and, in the case of a tenancy-in-common, each
co-tenant normally has the right, if an unresolvable dispute arises, to seek
partition of the Property, which partition might decrease the value of each
portion of the divided Property. The Company or AAA may also experience
difficulty in enforcing the rights of the Company in a joint venture with an
Affiliate due to the obligation of AAA or the Directors may owe to the other
partner in such joint venture.
RISKS ASSOCIATED WITH CONSTRUCTION ON PROPERTIES. The Company may
on
occasion acquire Properties and construct improvements thereon or acquire
Property under contract for development, under the circumstances described in
"INVESTMENT OBJECTIVES AND POLICIES - Development and Construction of
Properties." Investment in such Properties to be developed or constructed is
subject to more risks than are investments in fully developed and constructed
Properties with operating histories.
The Company may, in connection with the acquisition of such Properties,
advance on an unsecured basis, a portion of the purchase price, either in the
form of cash, a conditional letter of credit or promissory note, or some
combination thereof. In the case of any Property which is not yet completed at
the time of purchase, the Company will be dependent upon the seller or lessee to
fulfill its obligations, including the return of advances and the completion of
construction. Such party's ability to carry out its obligations may be affected
by financial and other conditions which are beyond the control of the Company.
If the Company acquires Properties on which improvements are to be
constructed or completed, the Company will be subject to risks in connection
with the ability of the general contractors and the subcontractors to control
the construction costs or to build in conformity with plans, specifications and
timetables. The failure of a contractor to perform may necessitate legal action
by the Company to rescind its construction contract or to compel performance or,
under certain circumstances, to rescind its purchase contract. There can be no
assurance that a rescission of the Company's purchase contract will be granted.
In the event it is granted, the Company may be compelled to sue for damages.
Such legal actions may result in increased costs to the Company. The failure of
a contractor to perform may also result in increased costs to the Company as a
result of foreclosure by the construction lender, if any, or due to the need for
the Company to complete the project. Performance may also be
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affected or delayed by conditions beyond the contractor's control, such as
building restrictions, clearances and environmental impact studies imposed or
caused by governmental bodies, labor strikes, adverse weather, unavailability of
materials or of skilled labor and by the financial insolvency of the general
contractor or any subcontractors prior to completion of construction. Such
factors can result in increased costs of a project and corresponding depletion
of the Company's working capital and reserves, and in loss of permanent mortgage
loan commitments relied upon as a primary source for repayment of construction
costs.
The Company may make periodic progress payments to the general
contractors of Properties prior to the completion of construction. By making
such payments, the Company may incur substantial additional risks, including the
possibility that the developer or contractor receiving such payments may not
fully perform the construction obligations in accordance with the terms of his
agreement with the Company and that the Company may be unable to enforce the
contract or to recover the progress payments. The Company may require a labor
and material bond, a completion bond or performance bond or more than one of the
foregoing in order to insure performance and reduce the risk of loss associated
with construction. While the Company intends to use such controls on its
disbursements to the builder as it deems necessary, there can be no assurance as
to whether the Company will be able to implement a particular control in any
given transaction and whether any control adopted will, in fact, limit risk.
Risks of Property Leased to a Single Tenant. In leases with single
tenants, the continued viability of the lease will depend directly on the
continued financial viability of one tenant. If the tenant fails and the lease
is terminated, the Company would incur a reduction in cash flow from the
Property and the value of the Property would be decreased. Also, where two or
more Properties have the same tenant, or related tenants, the continued
viability of each Property would depend directly on the financial viability of a
single tenant. To help mitigate these risks, the Company will continue to
consider the creditworthiness and financial strength of the tenants of its
Properties at the time they are acquired. See "INVESTMENT OBJECTIVES AND
POLICIES - Acquisition of Properties."
Risks of Net Leases. Net leases frequently provide the tenant greater
discretion in using the leased Property than ordinary property leases, such as
the right to freely sublease the Property, to make alterations in the leased
premises, and to early termination of the lease under specified circumstances.
The leases on the Company's existing Properties contain certain of these
provisions. Further, net leases are typically for longer lease terms and thus,
there is an increased risk that any rental increase clauses in future years will
fail to result in fair market rental rates during those years. The leases on the
Company's existing Properties are for terms ranging from 10 to 20 years.
In the event that a lease is terminated, there can be no assurance that
the Company will be able to lease the Property for the rent previously received
or would be able to sell the Property without incurring a loss. The Company
could also experience delays in enforcing its rights against defaulting tenants.
For example, in the event a defaulting tenant declared bankruptcy, the Company
would likely be unable to promptly recover the Property from the tenant under
the bankruptcy proceedings and there is no assurance that the Company would
receive rent in such proceedings sufficient to cover its expenses with respect
to the property. Moreover, the provisions applicable to real estate investment
trusts in the Internal Revenue Code may restrict the Company's ability to deal
with a new tenant after termination of the lease. In the event a tenant does not
pay rent, it is likely the Company would not only lose the net cash flow from
the Property but also might need to use cash flow generated by other Properties
to meet mortgage payments on the defaulted Property in order to prevent
foreclosure. Certain prior Programs of Affiliates of the Company have
experienced adverse business developments including the filing by tenants for
protection from creditors under Chapter 11 of the Bankruptcy Code and
involvement in litigation, as a result of which the Company has re-leased the
Properties formerly occupied by such tenants. See "PRIOR PERFORMANCE".
In evaluating a possible investment by the Company, the
creditworthiness, or financial strength, of a tenant generally will continue to
be a more significant factor than the value of the Property without a lease with
the tenant
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and the Appraised Value of a Property will probably reflect the value of the
tenant's ongoing lease of such Property. See "INVESTMENT OBJECTIVES AND
POLICIES."
Risks of Real Estate Investments. Equity real estate investments are
expected to be limited by the ability of the Company to vary its portfolio
promptly in response to changing economic, financial and investment conditions.
Such investments will be subject to risks such as adverse changes in general
economic conditions or local conditions (for example, excessive building
resulting in an oversupply of existing space or a decrease in employment,
reducing the demand for real estate in the area), as well as other factors
affecting real estate values (i.e., rent controls, increasing labor, materials
and energy costs, the attractiveness of the neighborhood, etc.). Equity
investments will also be subject to such risks as adverse changes in interest
rates, the availability of long-term mortgage funds and additional debt
financing, and the ability of the Company to provide for adequate maintenance of
its Properties. To the extent that the Company utilizes less Leverage to acquire
its Properties, the risks relating to interest rates and long-term financing
will be reduced. The Company's investments will be in single tenant net lease
commercial properties and, like all real estate equity investments, will be
subject to the risk of inability to attract or retain tenants and to the risk of
a decline in rental income as a result of adverse changes in the economic
conditions, local real estate markets and other factors. To the extent that the
Company's rental income is based on a percentage of gross receipts of retail
tenants, its cash flow is dependent on the retail success achieved by such
tenants. Also, certain expenditures associated with equity investments
(principally mortgage payments, real estate taxes, maintenance and utility
costs) are not necessarily decreased by events adversely affecting the Company's
income from such investments. Should such events occur, the Company's equity
investments could become a burden, and distributions to Shareholders may be
impaired. In the event that mortgage payments are not met with respect to a
Property, the Company could sustain a loss on its equity investment as a result
of a foreclosure of mortgages secured by such Property.
No Assurance of Property Appreciation, Company Profit or Dividends.
While the Company will attempt to buy leased, income-producing Properties at or
below the appraised value of such Properties, there is no assurance that any
Properties acquired by the Company will operate at a profit, will appreciate in
value or will ever be sold at a profit, or that dividends will be paid by the
Company. The marketability and value of any such Properties will be dependent
upon many factors beyond the control of the Company. There is no assurance that
there will be a ready market for the Company's Properties.
Risks of Investing in Special Purpose Properties. The Company may
acquire Properties which are specifically suited to the needs of particular
tenants, including office or retail facilities. For example, the Company already
owns interests in a medical clinic building, a Property on which a fast-food
restaurant is situated, and two Properties on each of which a music retail store
is situated. The Company has also contracted to purchase a Property in which it
expects that a large retail shoe store will be operated. The value of these
Properties could be adversely affected by the failure of the specific tenant for
which they are suited to renew or honor its lease. Such Properties would
typically require extensive renovations to adapt them for new uses by new
tenants. Also, it may be difficult for the Company to sell special purpose
Properties to persons other than the tenant.
Risks of Cost in Complying with the Americans With Disabilities Act.
Title III of the Americans with Disabilities Act of 1990 ("ADA"), 42 U.S.C.
Section 12101, et seq., prohibits discrimination in the private ownership and
operation of real estate. Title III addresses the design, construction, and use
of places of public accommodation and commercial facilities by private entities.
In general, Title III provides that private entities who own, operate, lease, or
lease to a place of public accommodation cannot discriminate against persons
with disabilities in the facility itself or the activities and operations
conducted within the facility. Title III mandates that persons with disabilities
be provided accommodations and access equal to, or similar to, that available to
the general public. In order to ensure that the Company's Properties comply with
ADA, the Company may incur costs necessary to remove "architectural barriers,"
that is, everything that prevents a person with a disability from enjoying full
and equal use of a facility. These costs may be prohibitive in certain
situations and thereby prevent the Company from acquiring
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a Property that would otherwise qualify for acquisition. In addition, the costs
of compliance with the ADA may have a significant adverse impact on the
Company's profits.
Risks of Environmental Liabilities. Under federal law, the landowner
has certain liabilities with respect to the presence of improperly disposed
hazardous substances on its real property. This liability is without regard to
fault or knowledge of such substances and may be imposed jointly or severally
upon all succeeding landowners from the date of the improper disposal. Moreover,
the requirements of state and local laws governing the Properties which the
Company acquires can be expected to differ from location to location. There can
be no assurance that hazardous substances or wastes, contaminants, pollutants or
sources thereof (as defined by present or future state or federal laws and
regulations) will not be discovered on Properties during the time they are owned
by the Company or after its sale of them to third parties. In the event
hazardous materials are discovered on a Company Property, the Company may be
required to remove these substances or sources and clean up the affected
Property. In doing so, the Company may incur liability to the full extent of its
assets for the entire cost or of any such removal and cleanup. The Company could
also be liable to tenants or other users of the affected Property, and it may
find it difficult or impossible to sell the affected Property prior to or
following any such removal or cleanup.
Risks of Providing Financing to Purchasers of Company Properties. The
Company may provide financing to purchasers of its Properties in order to effect
their sale. This financing would result in a delay of the Company's receipt of
the proceeds from the sale of the Property and in essence would result in the
Company's investing in a loan to such person. The Company may provide such
financing in circumstances where lenders are not willing to make loans secured
by commercial real estate or may find it desirable where a purchaser is willing
to pay a higher price for the Property than it would without such financing.
Risks of Leaseback Transactions. The Company, on occasion, may lease an
investment Property back to the seller for a certain period of time or until
stated rental income objectives are obtained. When the seller/lessee leases
space to tenants, the seller/lessee's ability to meet its mortgage payments and
its rental obligations to the Company would be subject to the risk that the
tenants may be unable to meet their lease payments to the seller/lessee. A
default by the seller/lessee or other premature termination of the leaseback
agreement could, depending on the size of the Property and the Company's ability
to manage and re-lease it successfully, have an adverse effect on the financial
position of the Company, since the Company may suffer a loss from operation of
such Property. In the event of such a default or termination, there is no
assurance that the Company would be able to find new tenants for the Property
without incurring a loss. Also, a seller, in negotiating the terms of an
acquisition which will require the seller to lease the Property back for some
period of time, may attempt to include in the acquisition price all or some
portion of the lease payments required to be made under the lease. If the seller
is successful in such attempt, the Company may pay an increased price upon
acquisition where a leaseback is involved. Further, leaseback revenues from
Properties leased back to sellers may be deemed to be a return of capital rather
than investment income.
Accounting for Net Lease Transactions. Certain accounting standards
require leases to be classified for financial reporting purposes as either
capital leases or operating leases. Capital leases are required to appear as
assets and liabilities on the lessee's balance sheet. Transactions in which the
Company acquires a deed to a Property may or may not be recognized as a sale for
financial reporting purposes due to the inclusion of certain provisions in the
lease of the Property. These accounting standards might make sale-leaseback
transactions less desirable for the seller-tenant that wants to treat the
sale-leaseback with the Company as an operating lease and, therefore, might
reduce the prospective number of Properties available for net lease investment.
Risks of Energy Shortages and Allocations. There may be shortages or
increased costs of fuel, natural gas, water, or electric power or allocations
thereof by suppliers or governmental regulatory bodies in the areas where the
Company purchases Properties, in which event the operation of Properties to be
acquired by the Company may be adversely affected. The Company will endeavor,
where feasible, to provide for the pass-through of any such increases to tenants
of the Properties through lease provisions to that effect.
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Competition for Investments. The results of Company operations will
continue to depend upon the availability of suitable opportunities for
investment, which in turn depends to a large extent on the type of investment
involved, the condition of the money market, the nature and geographical
location of the Property, competition and other factors, none of which can be
predicted with certainty. The Company continues to compete for acceptable
investments with other financial institutions, including insurance companies,
pension funds and other institutions, real estate investment trusts and limited
partnerships which have investment objectives similar to those of the Company.
Many of these competitors may have greater resources than the Company and have
greater experience than the Directors and AAA.
Risks of Uninsured Losses. The Company will continue to arrange or
obligate the lessee to arrange for comprehensive insurance, including fire,
liability and extended coverage on all investment Properties. However, there are
certain types of losses (generally of a catastrophic nature) which may be either
uninsurable or not economically insurable. These losses generally include those
resulting from war, earthquakes and floods, in addition to punitive damages. If
any such disaster occurs and is not covered by insurance, the Company might
suffer a loss of capital invested and any profits which might be anticipated
from the Property. The Company intends to obtain earthquake and flood insurance
for its Properties to the extent that it is economically available.
Investments in Non-Real Estate Assets. The Company will continue to
invest offering proceeds and working capital in Permitted Temporary Investments
pending investment of such proceeds in real estate assets. In general, the
return on Permitted Temporary Investments are sensitive to interest rates and
the value of such investments will generally decrease as market interest rates
increase. Accordingly, if the Company sells such an investment when interest
rates are higher than at the time when the investments was initially made, the
Company could receive less in such a sale than the amount it initially paid.
Conversely, if market interest rates declined, these investments may be prepaid
and the Company might not be able to reinvest the proceeds in investments
bearing comparable rates of return due to lower prevailing interest rates.
Adjacent Properties. Although it is not expected to occur, if AAA or
its Affiliates acquire Properties that are adjacent to Company's Properties, the
value of such Properties acquired by AAA or its Affiliates may be enhanced by
the interests of the Company. It is also possible that such Properties would be
in competition with the Company's Properties for prospective tenants.
Other Risks to Shareholders
Reliance on Management. The Shareholders do not have any active
participation in the management of the Company or in the investment of the
proceeds of this offering, and, therefore, must rely on the management,
acquisition expertise, and decisions regarding property investments provided by
the Directors and more particularly, AAA, the Company's property manager. None
of the Company's officers or Directors will be a full-time employee of the
Company. The principals of AAA and the Directors of the Company have substantial
collective experience in commercial real estate investment. The Board of
Directors has empowered Taylor to authorize and approve Company investment
proposals on its behalf between meetings of the Board. See "THE COMPANY,"
"MANAGEMENT," "PRIOR PERFORMANCE" and "SUMMARY OF ORGANIZATIONAL
DOCUMENTS AND
SECURITIES."
Risk of Insufficient Working Capital. Although the Company is not
presently experiencing any working capital deficiencies as of the date of this
Prospectus, there is no assurance that the Company will have sufficient working
capital in the future. A deficiency in working capital may be caused by a
decrease in revenues, by an increase in expenses, or by an uninsured casualty to
a property or by other unanticipated events. During times of insufficient
working capital, there is no assurance that the Company could borrow funds or
receive additional capital through the sale of its equity or debt securities.
Further, loan covenants and other restrictions included in any Company financing
agreements relating to its acquisition of Properties or otherwise, could
restrict the Company's ability to borrow for such purposes or its ability to
draw funds from working capital reserves.
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Shareholder Voting Rights. Under the organizational documents,
Shareholders voting specified percentages of the Shares may take certain
actions, including amending the Company's Charter and Bylaws and causing the
dissolution and liquidation of the Company. Certain provisions designed to
preserve the Company's status as a REIT cannot be amended without a "super
majority" vote of 66 2/3% of the votes entitled to be cast on the matter.
Certain of these provisions may discourage or make it more difficult for a
person to acquire control of the Company or to effect a change in the operation
of the Company. All actions approved by the requisite number of votes would be
binding on all of the Shareholders, whether or not they voted their Shares for
such action, including votes to sell all or substantially all of the Company's
assets, to dissolve and liquidate the Company, or to merge or reorganize the
Company. In certain mergers and reorganizations, dissenting Shareholders may not
have appraisal rights with respect to their Shares under applicable Maryland
law. Subject to certain conditions required under Maryland law, the Directors
have the power to cause the issuance of additional Shares without obtaining
Shareholder approval. See "SUMMARY OF ORGANIZATIONAL DOCUMENTS AND
SECURITIES."
Control Share Acquisitions. The MGCL provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror, by officers or by directors who are employees of the corporation.
"Control Shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more but
less than a majority, or (iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained shareholder approval. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an undertaking
to pay expenses), may compel the board of directors of the corporation to call a
special meeting of shareholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the statute, then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares (except those for which
voting rights have previously been approved) for fair value determined, without
regard to the absence of voting rights for the control shares, as of the date of
the last control share acquisition by the acquiror or of any meeting of
shareholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a shareholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other shareholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control
share acquisition.
The control share acquisition statute does not apply (a) to
shares acquired in a merger, consolidation or share exchange if the corporation
is a party to the transaction or (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation.
Limited Liability of Directors and Possible Inadequacy of Remedies. The
Directors are directors of a Maryland corporation and as such are required to
perform their duties in good faith, in a manner believed by the Directors to be
in the best interests of the Company and with the care of an ordinarily prudent
person in a like position under similar circumstances. A Director who performs
his duties in accordance with the foregoing standards shall not be liable to the
Company or any other person for failure to discharge his obligations as a
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director. Notwithstanding the additional responsibilities of Independent
Directors, an Independent Director will not have any greater liability than that
of a Director who is not independent.
The Company may in the future obtain insurance on behalf of any
director or officer in reasonable amounts against losses arising from tort
claims or other claims which may be made against a Director.
Under its Bylaws, the Company is required to, under specified
conditions, indemnify its Directors, officers and employees against all
liabilities to the full extent permitted under Maryland law.
Share Ownership of Directors and Affiliates. AAA, the Directors, and
Affiliates of Taylor presently own Shares and may purchase additional Shares.
Accordingly, following completion of the offering, management and its Affiliates
may own a substantial percentage of the total Shares outstanding. As
Shareholders, these persons can be expected to vote their Shares in a manner
intended to benefit themselves. Circumstances may arise where the interests of
these persons as Shareholders may be different from those of the other
Shareholders.
The Company's Bylaws provide that with respect to Shares owned by an
Adviser (as defined therein), which includes AAA, the Directors, or any
Affiliates, neither the Adviser nor the Directors nor any Affiliate may vote or
consent on matters submitted to the Shareholders regarding the removal of the
Adviser, Directors, or any Affiliate on any transaction between the Company and
any of them. In determining the requisite percentage in interest of Shares
necessary to approve a matter in which the Adviser, Director and any Affiliate
may not vote or consent, any Shares voted or as to which a consent is given by
any of them shall not be included.
Delay in Investment in Real Estate. Although AAA will be constantly
reviewing available Properties, there will be a delay between the time investors
purchase their Shares and the time the net proceeds of the offering are invested
in real estate interests. A delay in the Company's investment of offering
proceeds in real estate would delay the Company's receipt of rents from such
investment properties and would delay the time that earnings from these
Properties would otherwise be distributed to Shareholders.
Additional Financing and Potential Dilution. The Company is intended to
be an "open-end" REIT in that the Directors are authorized, from time to time,
without Shareholder approval, to borrow or raise capital through the issuance of
additional Shares, notes, debentures, or other obligations of the Company which
may be convertible into Shares or accompanied by warrants or rights to purchase
Shares. The issuance of debt securities or additional equity interests by the
Company will be made at such times and under such terms as the Directors
determine to be in the best interests of the Company. It is possible, however,
that any such issuance may result in dilution of the equity of the Shareholders.
The Company will not, however, issue any debt securities or additional mortgage
debt which would increase the Leverage of the Company above specified limits on
Company indebtedness, and in any event will not issue such securities unless the
historical or substantiated future cash flow of the Company, excluding
extraordinary items, is sufficient to cover the interest on the debt securities.
Derivative Securities. In its prior offering, the Company issued
warrants, exercisable between March 1997 and March 1998, to purchase an
aggregate of 504,126 shares of the Common Stock at $9.00 per share. While these
warrants are outstanding, the Company may find it more difficult to raise equity
capital. At any time when the holders of these derivative securities might be
expected to exercise their warrants, the Company may be able to obtain
additional equity capital on terms more favorable than those provided in such
warrants.
Fixed Expenses. Interest and required amortization payments on any
outstanding debt of the Company as well as certain of the Company's operating
expenses must be paid without regard to the Company's profitability. In the
event the Company does not operate profitably and exhausts its reserves, it may
be required to liquidate certain of its investments to pay its fixed expenses,
which could have an adverse effect on the Company's operation.
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Investment Company Act of 1940. The Directors intend to conduct the
operation of the Company so that it will not be subject to regulation under the
Investment Company Act of 1940. The Company may, therefore, have to forego
certain investments which could produce a more favorable return. Should the
Company fail to qualify for an exemption from registration under the Investment
Company Act of 1940, it would be subject to numerous restrictions under this
Act. A failure to qualify for an exemption under this Act could have a material
adverse affect on the Shareholders.
Tax Risks
Risks of Failure to Qualify as a REIT. The Company intends to continue
to operate so as to maintain its qualification for taxation as a REIT. As a
REIT, it will be allowed a deduction for dividends paid to its Shareholders in
computing its taxable income. Should the Company fail to qualify as a REIT for
any tax year, its previous election to be taxed as a REIT would terminate and it
would generally not be able to elect to be taxed as a REIT until the fifth year
after the beginning of the first year of such disqualification. Without REIT
qualification, the Company would be taxed as a regular corporation, and
distributions to its Shareholders would not be deductible by the Company in
computing its taxable income. See "TAX ASPECTS." The payment of any tax by the
Company resulting from its failure to qualify as a REIT would reduce the funds
available for distribution to Shareholders or for investment and, if Shareholder
distributions had been made in anticipation of the Company's qualifying for
taxation as a REIT, could force the Company to borrow additional funds or to
liquidate certain of its investments in order to pay the applicable tax. See
"INCOME TAX ASPECTS."
Risks of Excise Tax and/or Penalties. A violation of the REIT
Provisions, even where it does not cause failure to qualify as a REIT, may
result in the imposition on the Company of substantial excise taxes, such as
where the Company engages in a prohibited transaction or where the Company is
determined to be a dealer in real property. Because the question of whether such
a violation occurs may be a factual one and may depend on the facts and
circumstances underlying a given transaction, it is possible that such
violations could inadvertently occur. To reduce the possibility of an
inadvertent violation, the Directors intend to rely on the advice of legal
counsel in situations where they perceive the REIT Provisions to be inconclusive
or ambiguous. See "INCOME TAX ASPECTS."
Changes in Tax Laws. The discussions of the federal income tax
considerations of this offering are based on current law, including the Code,
the Regulations, certain administrative interpretations thereof and court
decisions. Future events, such as court decisions, administrative rulings and
interpretations and changes in the tax laws or Regulations, that change or
modify these provisions could result in treatment under the federal income tax
laws for the Company and/or the Shareholders that differs materially and
adversely from that described in this Prospectus, both for taxable years arising
after and before such event. There is no assurance that future legislation,
administrative interpretations or court decisions will not be retroactive in
effect.
Risks for IRAs and Investors Subject to ERISA. Fiduciaries of a
pension, profit sharing or other employee benefit plan subject to ERISA should
consider whether the investment in Securities of the Company satisfies the
diversification requirements of ERISA, whether the investment is prudent in
light of possible limitations on the marketability of the Securities, whether
the investment would be an improper delegation of control over or responsibility
for plan assets and whether such fiduciaries have authority to acquire such
Securities under the appropriate governing instrument and Title I of ERISA.
Also, fiduciaries of an Individual Retirement Account ("IRA") should consider
that an IRA may only make investments that are authorized by the appropriate
governing instrument. See "ERISA CONSIDERATIONS."
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================================================================================
SUITABILITY
================================================================================
It is important that investors recognize the possible illiquidity of
the Securities and the likelihood of a long-term holding period in order to
achieve the Company's investment objectives. Accordingly, the purchase of
Securities is not suitable for any prospective investor whose funds must remain
liquid or whose investment objectives for such funds do not include a long-term
holding period.
For the form of written representation required of persons investing in
Securities, see the Order Form attached as Exhibit B to this Prospectus. The
Company and each person selling Shares on behalf of the Company shall make every
reasonable effort to determine that Securities will only be sold to an investor
who represents in writing that, at the time the investor executes the Order
Form, the investor meets the applicable suitability requirements and is
purchasing the Securities for the investor's own account or the account of a
qualified retirement plan. In order to meet the suitability requirements for
this offering, each investor must, at a minimum, have (i) gross income, as
defined in the Code, of $45,000 and a $45,000 net worth (excluding home,
furnishings and automobiles) or (ii) a net worth of $150,000 (excluding home,
furnishings, and automobiles). The Company and the Selected Dealers will rely on
such representations by an investor in establishing the investor's suitability
pursuant to the foregoing conditions unless one or more of these parties has
reason to believe otherwise, in which case the investor's Order Form may be
rejected. The suitability standards are guidelines established by the Company
and various state securities regulators to assure that investors have the
financial means to assume the risks involved for an investment in the Company.
Executing the Order Form shall not constitute a completed transaction
until at least five (5) days after the date the investor receives a final
prospectus.
If an investor were to later assert that the investor was unsuitable to
acquire the Securities, the Company or the Selected Dealers, or both, may choose
to rely as a defense on the investor's representation that the investor is a
suitable purchaser, in light of the various considerations discussed herein and
in the Order Form.
Investors seeking to transfer their Securities after their initial
investment may be subject to the securities laws of the state in which the
transfer is to take place, including the imposition of "suitability standards"
of the type described above.
ATTENTION MICHIGAN AND PENNSYLVANIA RESIDENTS: By executing the
Order
Form you are representing to the Company that you are not and will not in the
future invest more than ten percent (10%) of your total net worth in the
Company's common stock.
ATTENTION PENNSYLVANIA RESIDENTS: Because there is no minimum offering
amount, you are cautioned to carefully evaluate the Company's ability to fully
accomplish its stated objectives and to inquire as to the current dollar volume
of Company subscriptions.
================================================================================
CONFLICTS OF INTEREST
================================================================================
The operation of the Company will involve various conflicts of
interest. The Independent Directors will determine how the Company will
participate in any transaction or situation in which such a conflict is
involved. The Directors have an obligation to act on behalf of the Shareholders
and have an obligation to determine the Company's course of action in all
situations in which a conflict of interest may rise. The conflicts of interest
include the following:
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Management and Affiliate Compensation
The Directors have attempted to avoid a relatively fixed overhead cost
structure, and thereby maximize cash flow to Shareholders, by retaining AAA to
advise the Company with respect to the purchase, financing, lease and sale of
Properties. At the Company's current asset and revenue levels, the cost to the
Company of engaging AAA to provide such advisory services is less than the
administrative and personnel costs the Company would incur if it was to provide
itself with such services. This is because the Company would need to obtain
personnel to perform a variety of different functions and the Company would not
be able to fully utilize such personnel at the Company's present size.
Transactions involving the purchase, financing, lease and sale of a Property by
the Company may result in immediate realization by AAA of substantial
commissions, fees, or other income. Conflicts may arise between the Directors
with respect to AAA recommendations regarding these transactions. For example,
recommending the acquisition of a Property with the use of leverage will
generally result in the payment of greater Acquisition Fees than would be paid
if a smaller Property was acquired with the same proceeds, but without the use
of leverage. Also, conflicts may arise where AAA has a choice of recommending
investments where its share of the Acquisition Fees or other compensation is
greater with respect to one investment than its share of the Acquisition Fees or
other compensation with respect to another investment. Similar conflicts may
arise in connection with recommending the sale of a Property to one prospective
purchaser over another. Conflicts may arise in recommending to the Directors the
sale of a Property, the refinancing of the Property, or the continued operation
of the Property where one course of action results in greater compensation to
AAA than another. Also, certain Directors and officers of the Company and AAA
and its Affiliates are actively engaged in other real estate investment
activities, including but not limited to, serving as general partners of limited
partnerships involved in real estate acquisition and management.
The Company may on occasion purchase undeveloped land and construct
improvements on such land. The Company may contract with Affiliates, tenants or
other third parties to perform the construction of improvements on the land.
Although the fees charged by Affiliates in connection with such construction
would be no more than would be charged by third party contractors performing
similar work, conflicts may arise in implementing controls to limit cost
overruns and to ensure building in conformity with plans, specifications and
timetables and in the event that legal action is required to be commenced to
rescind the construction contract or to compel performance thereof. The Company
may also enter into contracts to purchase Properties from Affiliates upon
completion of construction of the improvements on such Properties. Apart from
the same conflicts which may arise as when a fully developed Property is
purchased from an Affiliate, conflicts may arise from these "purchase upon
completion of construction" contracts which are similar to those arising out of
construction contracts with Affiliates.
Under the Bylaws, any such transactions involving AAA or its or the
Company's Affiliates must be approved by a majority of the Directors, including
a majority of the Independent Directors (except the Company may in no event sell
Property to AAA or its or the Company's Affiliates).
Non-Arm's-Length Agreements
In general, all initial agreements and arrangements, including those
relating to compensation between the Company and AAA were not the result of
arm's-length negotiations. However, the Bylaws contain certain provisions which
generally lessen potential conflicts which might otherwise have resulted or
result from such transactions. These provisions include requirements that the
compensation to AAA be approved by a majority of the Directors, including a
majority of the Company's Independent Directors and that the terms for such
transactions be no less favorable to the Company than the terms which would be
obtained from unaffiliated entities providing similar services in the same
geographical location. To date, all Independent Directors have been selected and
nominated for appointment by the Company's management, which is affiliated with
AAA. See "MANAGEMENT".
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Other Transactions with AAA
The Bylaws prohibit the Company from selling Properties to its
Affiliates (including real estate entities in which the Company's Directors,
officers and/or AAA serve as general partners or sponsors). The Company may,
under specified circumstances, acquire Properties from entities sponsored by
such Affiliates. Generally, any such transaction (other than through a joint
venture or partnership), must be approved by a majority of the Company's
Directors, including a majority of its Independent Directors, who must determine
that the transaction is fair and reasonable to the Company and no less favorable
to the Company than transactions available from unaffiliated third parties, and,
if the purchase price of the Property is in excess of the appraised value, as
determined by an independent appraiser selected by the Independent Directors,
that substantial justification for such excess exists and that such excess is
reasonable. Nevertheless, the acquisition of a Property from a Director, officer
or Affiliate is permitted in situations in which such person has acquired the
Property for the sole purpose of facilitating its acquisition by the Company,
the total consideration paid by the Company does not exceed the cost of the
Property to such person and no special benefit results to such person.
Also, the Company has co-ventured with AAA Affiliates in the ownership
of two Properties located in Wichita, Kansas and Independence, Missouri, which
Properties are currently leased to Blockbuster Music Retail, Inc. and intends to
co-venture one property which is under construction in Tucson, Arizona. The
Company may in the future enter into additional joint ventures with AAA
Affiliates with respect to additional Properties, so long as its interest in any
such joint venture is in excess of 50% of the interests in such joint venture.
See "PROPERTIES" and "INVESTMENT OBJECTIVES AND POLICIES -- Joint Venture
Investments." While the Company is prohibited from compensating Affiliates
through such existing and future co-ventures to a greater extent than it could
through a direct investment in the Properties, the Company may incur expenses in
connection with the management and administration of the Properties greater than
it would incur in connection with the management and administration of directly
owned Properties. Also, conflicts of interest may arise between the Company and
an AAA Affiliate in connection with the management of any such co-venture. The
terms and conditions of any such co-venture (including the amount of investment
and the allocation of profits and losses) must first be approved by a majority
of the Independent Directors.
Every transaction entered into between the Company, a Director or his
Affiliate, is subject to an inherent conflict of interest. The Directors may
face some conflicts of interest in enforcing the rights of the Company against
any Affiliate in the event of a default or disagreement or in invoking any
powers, rights or options under any agreement between the Company and such
person. The Bylaws require that every transaction between the Company and any
Director or Affiliate must be approved by a majority of the Directors not
interested in the transaction (including the Independent Directors) as being
fair and reasonable to the Company and on terms and conditions no less favorable
to the Company than those available from unaffiliated third-parties.
The Company presently has the following business relationships with
AAA: the rendering of real estate acquisition, brokerage, Property management,
leasing and certain administrative services. See "MANAGEMENT COMPENSATION",
"PROPERTIES", "CERTAIN TRANSACTIONS" and "MANAGEMENT."
Under the Bylaws, the Directors have a duty to supervise the
relationship between the Company and AAA. The relationship between Taylor and
AAA and the Company is illustrated by the Organizational Chart included under
"CONFLICTS OF INTEREST -- Organizational Relationships."
Competition With The Company By AAA Sponsored Affiliates In The Purchase, Sale,
Construction, Lease and Operation Of Properties
AAA Affiliates purchase, sell, construct, lease, manage, and operate
properties for their own benefit and for the benefit of others, including the
American Asset Adviser programs. Moreover, AAA Affiliates anticipate they will
continue these activities in the future. Various of the Directors and officers
of the Company also serve as officers and directors of AAA. Accordingly, AAA
Affiliates may be in competition with the Company from time to time in
connection with purchases, sales, leasing, management and operation of
properties in the same geographical area in which the Company owns Properties.
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AAA will use its best efforts to present to the Company suitable
investments consistent with the Company's investment objectives and policies.
AAA, however, is not restricted from advising or managing other entities, any of
which may have investment objectives similar to those of the Company. In
situations where AAA may recommend the same property to the Company and one or
more Affiliates of AAA, it will review the investment portfolio of each program
and will make decisions as to which program will acquire a particular property
on the basis of several factors, including each program's investment objectives,
each program's cash flow requirements, the effect of the acquisition on the
diversification of each program's real estate portfolio, the projected cash flow
and economic effects of the investment, the estimated tax consequences of the
acquisition on the respective programs, and the amount of each program's
available funds. If the Company and one or more of such programs have funds
available to purchase the specific property and, after evaluation of the factors
enumerated above, investment is deemed equally appropriate for each program, AAA
will offer the investment opportunity to the program which has had uncommitted
funds available for the longest period of time. In any event, it shall be the
duty of the Directors to determine independently that AAA is applying the
foregoing conditions and standards fairly with respect to the Company. In the
event the Company does not have funds available for the purchase of a property
presented to it, or if the Directors or AAA determine such property is not
suitable for investment by the Company, or if the investment opportunity is
within the investment guidelines of the Company and is first offered to the
Company and rejected by it, AAA or the Directors may invest for their own
account or otherwise deal with such property.
As discussed above, the Company has taken joint ownership (through
majority interests in two joint ventures) of two Properties and intends to enter
into a joint venture to acquire the Property presently subject to a contract to
purchase. See also "PROPERTIES" and "INVESTMENT OBJECTIVES AND POLICIES --
Joint
Venture Investments." Consideration will be given in the future to joint
ownership (including ownership by tenancy-in-common or joint venture) by two or
more investment entities of particular properties determined to be suitable in
order to achieve diversification of each entity's portfolio and efficient
completion of the entity's portfolio. In such joint ownership, the investment of
the investment entities will be on substantially the same terms and conditions,
compensation to the organizer of each investment entity will be similar and each
investment entity will have the right of first refusal to purchase the interest
of the other if a sale of that interest is contemplated; provided, however, that
the Company must hold the majority interest in any joint-ownership relationship
with an Affiliate. See "INVESTMENT OBJECTIVES AND POLICIES".
Competition For The Time And Services Affiliates
The Company will depend on the Directors and AAA for its operation and
the acquisition, operation and disposition of its investments. Certain Directors
and officers of the Company are also officers and directors of AAA which also
invests in and operates real estate. The Directors and officers of the Company
will devote such time to the affairs of the Company as they, within their sole
discretion exercised in good faith, determine to be necessary for the benefit of
the Company and its Shareholders. See "MANAGEMENT". Neither Taylor nor any AAA
Affiliates are restricted in any manner as a result of their connection with the
Company and this offering from acting as general partner, underwriter, or
broker/dealer in public or private offerings of securities in other REITs, real
estate investment partnerships or other entities which may have objectives
similar to those of the Company and which may be sponsored by AAA Affiliates.
Also, the Independent Directors may serve in similar capacities on the Board of
Directors of other investment programs affiliated with AAA.
Company Holdings of AAA and Directors
AAA, Affiliates of Taylor, Robert S. Cartwright, Jr. and George A.
McCanse, Jr. have acquired Shares which are not included in this offering for
the original offering price in the Initial Public Offering of $10 per Share or
an aggregate purchase price of $200,010, $4,000, $12,500 and $5,000,
respectively. Neither AAA nor its Affiliates have acquired any warrants to
purchase Shares in connection with such Share acquisitions. AAA as well as the
Directors and affiliates of AAA, the Directors or the Company, are not
restricted from acquiring Shares and
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may acquire an unlimited number of Shares in the future, subject to the
REIT-protective provisions set forth in the Charter of the Company. Shares owned
by these persons can be expected to be voted in the respective best interests of
these persons in matters requiring the approval of the holders of a majority of
the Company's Shares and in any other matter submitted to a vote of the
Shareholders.
The Adviser and Directors have each agreed and the Company's Bylaws
provide that with respect to Shares owned by the Adviser, the Directors, or any
Affiliates, neither the Adviser nor the Directors nor any Affiliate may vote or
consent on matters submitted to the Shareholders regarding the removal of the
Adviser, Directors, or any Affiliate on any transaction between the Company and
any of them. In determining the requisite percentage in interest of Shares
necessary to approve a matter in which the Adviser, Director and any Affiliate
may not vote or consent, any Shares owned by any of them shall not be included
unless required to be included under law.
Common Counsel
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, counsel for the
Company in connection with the offering, also serves as counsel to AAA and
certain of its Affiliates, including certain of the American Asset Adviser
programs. In the event any legal controversy arises in which the interests of
the Company appear to be in conflict with those of AAA or its Affiliates, other
counsel will be retained for one or more parties. See "MANAGEMENT".
================================================================================
THE COMPANY
================================================================================
The Company was organized on August 17, 1993 as a Maryland business
corporation and operates as a REIT under federal tax laws. Certain aspects of
the business and affairs of the Company, including the selection, acquisition
and supervision of the operation of Properties, will be managed by AAA, an
affiliate of Taylor, the President and Chairman of the Board of the Company.
The principal office of the Company is Suite 824, 8 Greenway Plaza,
Houston, Texas 77046. Its telephone number is (713) 850-1400.
The Company's mission is to provide the highest quality corporate
commercial and retail locations for America's premier companies through net
leases, producing a steadily rising income stream for investors. It has
positioned itself to fulfill this mission by (1) targeting Properties for
acquisition which are located in the Continental United States within intensive
commercial zones near traffic generators, such as regional malls, business
developments and major thoroughfares; (2) purchasing only Properties that are
subject to leases with tenants who each have stated equity of at least $40
million, and (3) by limiting such leases to "net" leases (leases that require
the tenant to pay for all or a significant portion of the real estate taxes,
insurance, maintenance and repairs, but not capital expenses, thereby lowering
operating costs) that provide for periodic rent escalations over the original
terms and any renewal terms thereof. The Company's specific investment
objectives, policies and practices are further described below in this summary
and are discussed more fully elsewhere in this Prospectus.
In selecting additional Properties for acquisition, the Company will
continue to target freestanding Properties, each of which it is anticipated will
be leased to a single tenant. As is the case with the five Properties in which
the Company presently holds its interests and the sixth Property under contract
with the Company, these Properties are expected to continue to be located along
intensive commercial traffic corridors near traffic generators such as regional
malls, business developments and major thoroughfares. Management believes that
properties with these characteristics are desired by commercial tenants because
of their high visibility to passing traffic, ease of access, tenant control over
the sites' hours of operation and maintenance standards, and the ability to
create
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distinctive building designs which promote greater customer identification. In
addition, management believes that freestanding properties permit tenants to
open new facilities quickly, due to short development cycles generally
associated with such properties, and provide tenants with flexibility to respond
to changing commercial trends. As a result, management believes that such
properties are better situated to attract a wide array of established retail and
commercial tenants and to continue to afford the Company opportunities for
steady current return and potential long term capital appreciation.
Management also believes that many commercial tenants interested in
occupying freestanding, single-tenant properties of the type targeted for
acquisition by the Company prefer to lease rather than to own the properties
which they operate because leasing enables them to allocate their capital to
their core businesses. The Company intends to benefit from this preference by
continuing to acquire additional Properties with the characteristics described
above, but which are already leased to tenants meeting certain minimum equity
criteria. In order to keep operating costs low, management intends to continue
to limit its acquisitions to Properties that are already leased to such tenants
pursuant to net leases. All five of the Properties in which the Company
currently holds interests are subject to net leases, as will be the sixth
Property which is under contract to the Company.
The Company has used the foregoing investment profile to acquire,
directly and through joint ventures, five Properties and to contract to purchase
a sixth Property. The Company will acquire and, possibly, develop additional
Properties located in the continental United States. The Properties to be
acquired will be acquired either subject to existing leases or on the condition
that they will be leased to tenants pursuant to "net" leases (leases that
require the tenant to pay for all or a significant portion of the real estate
taxes, insurance, maintenance and repairs but not capital expenses). The Company
will hold all such Properties and eventually sell them. In some situations, the
Company may lease Properties on other than net leases but will attempt to enter
into leases that limit the amount of expenses to be paid by the Company.
Of the five Properties in which the Company holds an interest to date,
two of them are held through joint ventures, in which the Company holds the
majority interests, with AAA Affiliates and the remaining three are directly
owned by the Company. The Properties are located in Wichita, Kansas (a joint
venture Property), Houston, Texas, Independence (a suburb of Kansas City),
Missouri (a joint-venture Property), Smyrna (a suburb of Atlanta), and Mesquite
(a suburb of Dallas), Texas and all of the Properties meet the investment
guidelines established by the Company. A brief description of the Properties is
set forth below:
- The Blockbuster Music Store Property, a 14,047 square foot
free standing one story masonry building located on a tract of
land containing approximately 1.24 acres in Wichita, Kansas. A
joint venture between the Company and an American Asset
Advisers program entity purchased the Property on September
12, 1995 for $1,700,000, all of which was paid in cash. The
Company holds a 51 percent interest in such joint venture.
This Property is leased to Blockbuster Music Retail, Inc., a
subsidiary of Viacom, Inc. ("Blockbuster Music"), pursuant to
a ten-year net lease, the initial term of which will expire on
December 31, 2004, with three successive optional renewal
terms of five years each. Pursuant to such lease, base annual
rental increases are scheduled at the end of fifth year of the
initial term and for each renewal term. Under the provisions
of such lease, the joint venture which owns this Property is
responsible for certain structural and exterior maintenance
and repairs. The lease is guaranteed by Viacom, Inc., the
successor in interest by merger to Blockbuster Entertainment
Corporation. As of December 31, 1993, Viacom, Inc.'s assets
exceeded its total liabilities by $2.7 billion.
- The OneCare Health Industries Property, a 14,000 square foot
free standing one story medical building, located on a tract
of land containing approximately 1.4216 acres in Houston,
Texas. The Company entered into a contract to purchase the
Property on March 31, 1995 for $1,680,000, all of which was
paid in cash. This Property is leased to OneCare Health
Industries, Inc., a Texas non-profit corporation ("OneCare"),
pursuant to a ten-year net lease with two successive optional
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<PAGE> 42
renewal terms of five years each. Under the provisions of such
lease, base annual minimum rental increases are scheduled
after the end of the third year and sixth year of the initial
term.
- The Blockbuster Music Store Property, a 15,158 square foot
free standing one story masonry building located on a tract of
land containing approximately 1.374 acres in Independence (a
suburb of Kansas City), Missouri. A joint venture between the
Company and an American Asset Advisers program entity
purchased the Property on November 14, 1994 for $1,550,000,
all of which was paid in cash. The Company holds a 54.84
percent interest in such joint venture. This Property is
leased to Blockbuster Music pursuant to a ten-year net lease,
the initial term of which will expire on April 30, 2004, with
three successive optional renewal terms of five years each.
Under the provisions of the lease, base annual rental
increases are scheduled at the end of the fifth year of the
initial term and for each renewal term. This lease is also
guaranteed by Viacom, Inc.
- The AFC, Inc. (Church's Chicken Facility) Property, a 2,200
square foot one story building located on a tract of land
containing approximately .782 acres in Smyrna (a suburb of
Atlanta), Georgia. The Company purchased the property on July
22, 1994 for $789,532, all of which was paid in cash. This
Property is leased to AFC, Inc., doing business as America's
Favorite Chicken Co., a Minnesota corporation ("AFC"),
pursuant to a twenty-year net lease, the initial term of which
will expire on July 21, 2014, with four successive optional
renewal terms of five years each. Under the provisions of such
lease, base annual rental increases are scheduled at the end
of each successive five-year period of the initial term.
- The Tandy Corporation (Radio Shack) Property, a 5,200 square
foot masonry building located on a tract of land containing
approximately 33,760 square feet in Mesquite (a suburb of
Dallas), Texas. The Company purchased the Property on June 15,
1994 for $1,062,439, all of which was paid in cash. This
Property is leased to Tandy Corporation, a Delaware
corporation ("Tandy"), pursuant to a fifteen-year net lease,
the initial term of which will expire on July 21, 2014, with
four successive optional renewal terms of five years each.
Under the provisions of such lease, the base monthly minimum
rent remains the same during the initial term but increases
for each of the two renewal terms. Tandy was, at the time of
acquisition, America's largest retailer of consumer
electronics and personal computers, with annual sales in
excess of $4.7 billion and a net worth in excess of $1.8
billion.
In addition, on January 19, 1996, the Company entered into a contract
with Tucson Oracle Limited Partnership, an Arizona limited partnership
("Oracle"), to purchase fee simple title to a 2.936 acre Property located in
Tucson, Arizona. The cost of the Property will be $3,271,136. Assuming that all
contingencies are met, including, but not limited to, the completion of
construction of a 19,400 square foot masonry building thereon, the closing of
the purchase of the Property will take place on or before September 1, 1996. The
Property will be acquired subject to a twenty-year net lease with two successive
optional renewal terms of five years each. Under the provisions of such lease,
base annual rental increases are scheduled at the end of each successive
five-year period of the initial term. The tenant under the lease will be Just
For Feet, Inc., an Alabama corporation, which will operate a retail store on the
Property which sells athletic footwear and apparel and related accessories. The
Property will be acquired with two AAA Affiliates through a joint venture in
which the Company intends to hold a 51.9% interest.
For a more detailed description of the Company's Properties, see the
section of this Prospectus entitled "PROPERTIES."
Other than as described above, as of the date hereof, the Company does
not own any Property and has not identified any commercial Property that it
intends to purchase with the proceeds of the Offering. This Prospectus will be
supplemented whenever a reasonable probability arises during the course of the
offering that the Company will invest in a particular Property. The Company may
not generally acquire, without the approval of a majority
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<PAGE> 43
of the Independent Directors, any property in which the Directors or their
Affiliates, other than an affiliated partnership that has investment objectives
and management compensation substantially identical to the Company, have any
direct or indirect interest.
================================================================================
ESTIMATED USE OF PROCEEDS
================================================================================
The table below sets forth information concerning the estimated use of
proceeds from the sale of the Shares in this offering, assuming that the maximum
of 2,853,658.5365 Shares ($29,250,000) are sold pursuant to this offering.
Certain of the figures set forth on the following table cannot be precisely
calculated at the present time and could vary materially from the amounts shown.
If the maximum proceeds are raised in the offering, a minimum of 88% of
the offering proceeds will be available for investment, from which Acquisition
Fees and Acquisition Expenses totaling up to an aggregate of 6% of the Contract
Price for a Property will be paid, including Acquisition Fees and Acquisition
Expenses which may be paid to Affiliates or third parties.
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<PAGE> 44
<TABLE>
<CAPTION>
Maximum Securities(1)
Dollars Percent
------- -------
<S> <C> <C>
GROSS OFFERING PROCEEDS $29,250,000 100.0%
Less Organization and Offering Costs:
Selling Commissions and Expenses 3,071,250 10.5%
Other Organizational and Offering Costs(2) 438,750 1.5%
Amount Available for Investment $25,740,000 88.0%
Acquisition Fees(3) 1,462,500 5.0%
Other Acquisition Expenses 292,500 1.0%
Working Capital Reserve 292,500 1.0%
CASH AVAILABLE FOR PURCHASE OF $23,692,500 81.0%
PROPERTIES
</TABLE>
- ---------------
(1) The Maximum Securities information does not reflect proceeds from the
Shares which may be issued pursuant to a dividend reinvestment plan
which the Company may adopt and does not reflect any volume discounts.
The Selected Dealers will be paid selling commissions and expense
allowances aggregating up to 10.5% of the gross proceeds from the
offering. The 10.5% includes a sales commission of up to 8% of the
gross proceeds, a non-accountable expense reimbursement of up to 2% of
the gross proceeds, and up to .5% of the gross proceeds as an expense
reimbursement allowance payable by the Company for bona fide
accountable due diligence expenses.
(2) Includes up to 1.5% of the gross offering proceeds to cover payments
for the federal and state securities registration fees, fees of
counsel, accountant's fees, printing expenses, and other out-of-pocket
expenses paid by the Company to non-Affiliates as well as expenses of
Affiliates, at cost, in arranging for the sale of Securities. In any
event, no more than 15% of the gross offering proceeds will be used to
pay aggregate selling commissions and organization and offering costs
incurred by the Company. Any excess selling expenses will be paid from
the existing funds of the Company subject to the requirement that AAA
will pay such expenses in excess of the percentages set forth in column
1 below (relating to the incremental offering size set forth in column
2 below):
<TABLE>
<CAPTION>
Column 1 Column 2
-------- --------
Percent of Gross Proceeds Incremental Offering Size
------------------------- -------------------------
<S> <C>
20 $3 million or less
19 Over $3 million up to $6 million
16 Over $6 million up to $9 million
15 Over $9 million
</TABLE>
In determining any expenses to be paid by AAA, the percentage of
organization and offering expenses from the original public offering is
permitted to be factored into the calculation.
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<PAGE> 45
(3) The total of all Acquisition Fees and Acquisition Expenses paid by the
Company to all persons or entities will not exceed six percent (6%) of
the Contract Price for the Property, unless a majority of the Directors
(including the Independent Directors) not otherwise interested in the
transaction approve fees in excess of these limits upon a determination
that the transaction is commercially competitive, fair and reasonable.
In any event, cash from gross offering proceeds available for purchase
of Properties, together with a working capital reserve, will not be
reduced, as a result of all Offering Expenses and Acquisition Fees and
Expenses, to less than 80% of the gross offering proceeds.
The net proceeds of the offering will be held in trust by the Company
for the benefit of the purchasers of Securities to be used only for the purposes
set forth above.
<TABLE>
<CAPTION>
=======================================================================================
SELECTED FINANCIAL DATA
=======================================================================================
1995 1994 1993(1)
---------- ---------- ----------
<S> <C> <C> <C>
Year Ending December 31:
Operating Revenues $ 495,137 $ 121,642 $ 0
Net income (loss) $ 163,446 $ 79,545 $ (1,325)
Per share data:
Net income (loss) $ 0.24 $ 0.32 $ (0.07)
Income before depreciation,
amortization and special
compensation(2) $ 0.66 $ 0.51 $ 0.05
Distributions $ 0.64 $ 0.35 $ 0.05
Total assets $8,970,623 $5,109,739 $ 197,615
Long-term obligations $ 0 $ 0 $ 0
</TABLE>
(1) Represents the period from August 17, 1993 (inception) to December 31,
1993
(2) This per share amount reflects the Company's operating profit before
deductions for depreciation, amortization and special compensation. In
addition, the special compensation of Taylor (See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "MANAGEMENT AND AFFILIATE COMPENSATION") was not
paid
in 1995.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
The Company was organized on August 17, 1993 to acquire either directly
or through joint venture arrangements, undeveloped, newly constructed and
existing net lease real estate that is located primarily on corner or out-parcel
locations in strong
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<PAGE> 46
commercial corridors, to lease to tenants having a minimum net worth of $40
million on a net lease basis, to hold the properties with the expectation of
equity appreciation producing a steadily rising income stream for its
Shareholders.
Liquidity and Capital Resources
On March 17, 1994, the Company commenced an offering of 2,000,000
Shares of Common Stock together with 1,000,000 warrants (collectively
"Securities"). Until the completion of the offering, the Securities offered were
to be purchased together on the basis of two (2) Shares of Common Stock and one
(1) warrant for a total purchase price of $20.00. The Shares and warrants are
separately transferable by an investor. Each warrant entitles the holder to
purchase one Share for $9.00 during the period which is between March 17, 1997
and March 16, 1998. The offering period terminated on March 15, 1996 with
1,028,253 shares issued and warrants having been issued to purchase 504,126
Shares.
The Company has an investment strategy of acquiring Properties and
leasing them under net leases to corporations having a minimum net worth of $40
million, which strategy MINIMIZES the Company's operating expenses. The Company
believes that the leases will continue to generate cash flow in excess of
operating expenses. Due to low operating expenses and ongoing cash flow, the
Company does not believe that large working capital reserves are necessary at
this time. In addition, because all leases of the Company's Properties are and
are intended to continue to be on a net lease basis, it is not anticipated that
a large reserve for maintenance and repairs will be necessary. The Company
intends to distribute a significant portion of its funds from operations unless
it becomes necessary to maintain additional reserves.
On August 22, 1995, the Board of Directors approved a special
compensation payment to Taylor in the amount of $150,000. Taylor has received no
other compensation from the Company for serving as its President. In connection
with the special compensation payment, the Company executed a demand note in the
amount of $150,000 payable on the earlier of July 15, 1996 or the date that the
Company receives $10,000,000 of proceeds from the Company's Initial Public
Offering. The note shall be payable in cash or Shares depending on the
availability of cash for such payment. No compensation arrangements were
considered by the Directors prior to August 22, 1995 because, in their judgment,
the Company had not raised sufficient funds to award such compensation. The
compensation had not been accrued prior to August 22, 1995 because its payment
was uncertain and the level of compensation had not been determined until the
August 1995 meeting of the Board of Directors. As of the termination of the
initial public offering, the Company had sold in excess of $10,000,000. Although
Mr. Taylor can demand payment on the note, such demand has not been made. Should
the note be paid in cash, such payment would reduce the funds from operations
available for distribution and, therefore, would decrease the distributions to
shareholders.
No decisions as yet have been made with respect to any additional
compensation for any period after August 1995. The Directors have commissioned
an external study with respect to the amount and type of compensation which
could be paid in the future to officers and/or directors, as well as the
contingencies and performance standards on which compensation will be
determined. Accordingly, the financial statements do not include any accruals
for compensation subsequent to August 1995.
At December 31, 1995, the Company had acquired three Properties
directly and two Properties through joint ventures with affiliated partnerships
and had invested $5,563,930, including certain acquisition expenses related to
the Company's investment in these Properties. These expenditures resulted in a
corresponding decrease in the Company's liquidity. On January 19, 1996, the
Company entered into an agreement with Tucson Oracle Limited Partnership for the
purchase of a property to be constructed in Tucson, Arizona. The property will
be acquired subject to a lease with Just For Feet, Inc. On April 5, 1996, the
Company entered into a joint venture with two affiliated partnerships for the
purpose of acquiring this property. The Company's interest in the joint venture
is 51.9% and the Company's share of the acquisition costs for the property will
approximate $1,714,697 plus $84,886 in acquisition fees to Affiliates. The
property is under construction with an estimated completion date of September
1996. See "PROPERTIES"
Until Properties are acquired by the Company, proceeds are held in
short-term, highly liquid investments which the Company believes to have
appropriate safety of principal. This investment strategy has allowed, and
continues to allow, high liquidity to facilitate the Company's use of these
funds to acquire properties at such time as Properties suitable for acquisition
are located. At December 31, 1995, the Company's cash and cash equivalents
totalled $1,564,961.
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<PAGE> 47
Results of Operations
Years Ended December 31, 1995 and 1994:
During 1995, the Company acquired its fourth and fifth Properties at an
aggregate price of $2,699,820 and also received $3,022,733 in net proceeds from
the Initial Public Offering. Both of these factors contributed to an increase in
total revenues to $623,084 in 1995 from $159,206 in 1994. $373,495 of this
increase came from rental activities and the remaining $90,383 came from
interest income. Income from rental activities included income from the two new
acquisitions in 1995 and also included a full year of income from three
Properties which were acquired throughout the last seven months of 1994. Each of
the three Properties acquired in 1994 contributed more than 15% of the Company's
total rental income in 1995. Interest income included $41,040 of interest
received on a short-term construction loan in addition to the income earned on
the Company's short-term money market investments.
Corresponding to the increase in revenues, expenses also increased in
1995 by $295,966. This is attributable to an overall increase in the
administrative expenses of the Company as 1995 was the first full year of
operation. In addition, the $150,000 of compensation discussed in preceding
paragraphs is reflected in 1995 operating results.
Years Ended December 31, 1994 and 1993:
During 1994, the Company acquired its first three Properties and also
received $4,223,904 in net proceeds from its Initial Public Offering. These
factors both contributed to an increase in total revenues to $159,206 in 1994
from $1,606 in 1993. Approximately $121,640 of this increase came from rental
activities and the remaining portion from interest income. Each of the three
Properties contributed more than 15% of the Company's total rental income.
Operations did not commence until the Company received MINIMUM offering
proceeds of $1,200,000 from the Initial Public Offering in May 1994.
Consequently, there were no significant revenues or expenses for 1993.
The Company made cash distributions to the Shareholders during each
quarter of 1995 and during the last three quarters of 1994, distributing a total
of $419,085 and $126,235, respectively, for each such fiscal year to the
investors. The Adviser waived the minimal property management fees to which it
was entitled during this period.
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to inflation as
well as increases in the Consumer Price Index may contribute to capital
appreciation of the Company's Properties. These factors, however, also may have
an adverse impact on the operating margins of the tenants of the Properties.
Current Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121 ("SFAS No. 121")
entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 establishes accounting standards for the
recognition and measurement of the impairment of long-lived assets, which
include the Company's real estate investments. The provisions of this statement
require that long lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review of recoverability, the
provisions of SFAS No. 121 require the estimation of the expected future cash
flows (undiscounted and without interest charges) to result from the use of the
asset and its eventual disposition, with an impairment loss recognized if the
sum of such cash flows is less than the carrying value of the asset. The
statement requires that long-lived assets and certain identifiable intangibles
to be disposed of be reflected at the lower of carrying amount or fair value
less costs to sell. SFAS No. 121 is effective for fiscal years beginning after
December 15, 1995. Management of the Company does not believe such adoption will
have a material effect on the Company's financial position or results of
operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
which is effective for the Company on January 1, 1996. SFAS No. 123 requires
expanded disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to
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<PAGE> 48
be measured based on the fair value of the equity instrument awarded. Companies
are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instruments awarded. Should a stock compensation program be adopted, the Company
intends to apply APB No. 25 to its stock-based compensation awards to employees
and/or directors and will disclose the required pro forma effect on net income
and earnings per share.
================================================================================
INVESTMENT OBJECTIVES AND POLICIES
================================================================================
Principal Investment Objectives
The Company intends to continue to acquire freestanding Properties that
are located in intensive commercial corridors near traffic generators, such as
regional malls, business developments and major thoroughfares. Management
believes that these Properties will attract a wide array of established
commercial tenants and, therefore, that such Properties offer opportunities for
stable current return and potential capital appreciation. In addition,
management believes that the location and design of the Properties in this niche
provide flexibility in use and tenant selection which could increase the
likelihood of advantageous re-leasing of such Properties.
The Company intends to continue to acquire existing, newly-developed,
development stage or undeveloped commercial Properties and to lease such
Properties to operating tenants pursuant to long-term leases (typically ten or
more years) leases generally having provisions covering all operating costs
(meaning the tenant pays all non-capital costs associated with operating the
leased premises which is frequently referred to as a net lease). The Company
expects that most Properties will be leased by single entities rather than
multiple tenants and will be acquired in sale-leaseback transactions. The
Company may acquire Properties anywhere in the continental United States. For a
description of the five Properties in which the Company presently holds
interests, see "PROPERTIES."
If the maximum $29,250,000 of Shares are sold, the Company anticipates
that it will acquire up to 20 additional Properties. Except as set forth herein,
the Company does not have a policy, and there is no limitation, as to the amount
or percentage of its assets that may be invested in any one property.
The Company intends to purchase or develop only Properties that are
either currently leased or are to be leased upon completion of development to a
national or regional corporation. No leases will be entered into with a sole
proprietor or franchisee who may operate the business on the Property.
Furthermore, each lessee of a Property acquired by the Company will be required
to have a net worth of not less than $40,000,000, based on the lessee's most
recent audited financial statement or other similar evidence establishing net
worth. The Company believes that such acquisitions should produce long-term
capital appreciation benefits for its Shareholders.
In order to achieve its stated objectives, it may be necessary of the
Company to acquire to-be-built or partially constructed Properties. Although
there are less risks involved in acquiring existing properties, the intense
competition for such properties has lowered the yields therefrom and made it
more difficult to quickly acquire choice existing properties. Therefore, after
obtaining approval from holders of a majority of the shares of the Company's
common stock, the Company may invest a portion of the net proceeds of this
offering in to-be-built or partially constructed Properties. See "Development
and Construction of Properties" below.
Investment Objectives
The Company's principal investment objectives are:
- To provide regular dividends to Shareholders. The Company
intends to continue to pay quarterly dividends to
Shareholders. Dividend payments may fluctuate during the life
of the Company. If the total amount received by
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<PAGE> 49
the Company from the sale of its Properties is less than the
total amount invested in the Company, a portion of the
dividends paid by the Company will represent a return of money
originally invested in the Company and not a return on
investment. See "Dividends" below.
- To provide dividends that are partially free from current
taxation. So long as the Company qualifies as a REIT, it will
generally not be taxed on taxable income to the extent it pays
dividends to the Shareholders. Company dividends will
generally not be currently taxable to taxable Shareholders to
the extent the dividends exceed Company taxable income. The
Company expects to incur less taxable income (and thus greater
cash flow) because of its non-cash deductions for
depreciation. However, depreciation deductions decrease the
Company's tax basis in its properties and thus, will increase
the Company's taxable income when the Company sells these
properties. Approximately 18.3% of the distributions paid with
respect to the Company's fiscal year ended December 31, 1995
constituted a return of capital. However, there is no
assurance that such amount will not fluctuate from year to
year. See "RISK FACTORS" and "INCOME TAX ASPECTS". The return
of capital on a GAAP basis is calculated based on
distributions to Shareholders in excess of net income of the
Company allocated to Shareholders. Non-cash deductions such as
depreciation and amortization generally reduce net income of a
REIT below distributions creating a return of capital.
- To provide Shareholders with long-term appreciation on their
investment. Management believes that the Company can realize
its objective of long-term appreciation of its Property
portfolio, based on the fact that each of the leases on the
Properties in which the Company presently holds interests
contain, and the Company's expectation that the leases on the
additional Properties that it will acquire will contain,
periodic rent escalation provisions over the original and
renewal terms of such leases. Because the Company's Properties
are and are expected to continue to be valued on the basis of
their ability to produce income, the Company believes that
successive periodic rental income increases resulting from
such escalation provisions should increase the value of the
Company's Properties over the long term. There is, of course,
no assurance the Company will in fact realize portfolio
appreciation.
- To provide investors with an inflation hedge. During times of
inflation, that is, during times in which the supply of money
available to purchase goods exceeds the goods available, it is
management's experience that commodities such as real estate
experience price increases commensurate with increases in
inflation. However, inflation has become a less significant
factor in recent years as rates of inflation have been low.
Also, real property which is subject to long-term leases
requiring fixed rents over future years may not experience an
increase in price commensurate with inflation or commensurate
with similar properties which are not subject to such leases.
- To conserve Shareholders' capital. The Company will attempt to
conserve Shareholder capital by endeavoring to continue to
invest in a diversified portfolio of quality real estate under
long-term lease. The amount of money raised in this offering
will affect the number of additional Properties the Company
will be able to purchase. The more Properties the Company
acquires, the more diversified it will be and the less it will
be affected by any single Property that does not perform as
expected.
There can be no assurance that any or all of the foregoing objectives
will be achieved as each, to some extent, is dependent upon factors and
conditions which are beyond the control of the Company. Management will endeavor
to purchase Properties under terms which will provide it with positive cash
return after construction is completed and management will endeavor to acquire
quality Properties in areas of projected growth. However, the Company's
realization of cash flow and appreciation of value from its Properties will
depend on a number of factors, including short-term and long-term economic
trends, federal income tax laws, governmental regulations, local real estate and
financial market conditions and Property operating expenses. Moreover, the
preservation of Shareholders' capital will largely depend upon management's
ability to invest in a diversified portfolio of real estate, which will in turn
depend upon the amount of proceeds realized from the offering.
The Company competes for both investment opportunities and the
operation of its Properties with other real estate investors (both domestic and
foreign), including other real estate investment trusts and limited partnerships
which have investment objectives similar to those of the Company and which are
likely to have resources greater than those of the Company. Management
continually
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<PAGE> 50
monitors the real estate market in order to identify potential desirable
property acquisitions and advantageous disposition opportunities for its
properties. See "RISK FACTORS".
Company Investments
The Company's investments must be made in accordance with the
applicable REIT provisions in order for the Company to qualify as a REIT. Such
provisions include the 75% asset and the 75% gross income test which are more
fully described in the "INCOME TAX ASPECTS" section of this Prospectus.
The specific investment policies of the Company are:
(1) the acquisition of income-producing, undeveloped, development
stage and improved real estate Properties using borrowed
capital only where prudent as determined by the Company's
directors and in any event where borrowed funds will not
constitute more than 50 percent of the total acquisition cost
of the Property;
(2) to purchase Properties subject to long-term, net leases with
lessees who are not sole proprietors or franchisees and who
have a stated net worth of at least $40 million as expressed
in their most recently issued audited financial statement or
other similar evidence establishing net worth.
There can be no assurance that such objectives can be attained. It is
not an objective of the Company to shelter taxable income of investors that is
derived from sources other than the Company.
Acquisition of Properties
The Company intends to use the net proceeds (after payment of selling
commissions and offering costs), which will be approximately $25,740,000 if the
maximum $29,250,000 of Shares are sold, for the purchase of income-producing
real estate that is subject to net leases. The Company may commit to purchase
Properties prior to, during or upon their physical completion at agreed prices
or pursuant to pricing formulas but only if subject to executed qualifying
leases. To the extent possible, the Company intends to diversify the type and
location of its commercial Properties. The ability to diversify will be limited
by the number of Properties that can be acquired with the available proceeds.
Because investments will be made generally in net leased Properties, the Company
does not presently anticipate establishing a large reserve for working capital.
The Company will purchase Properties using not more than 50 percent
borrowed capital. It will not subsequently mortgage Properties acquired unless
it is determined by the Directors to be in the best interests of the Company to
obtain funds necessary to maintain the financial viability of the Company or any
of its Properties and in any event such borrowings will not exceed 50 percent of
the then-appraised fair market value of the Properties encumbered. The amount
that may be borrowed will be determined by a number of factors, including the
use of the proceeds, the lender's restrictions, the likelihood that the loan can
be readily serviced from rents at the Property where the proceeds are applied
and similar considerations.
The Company's procedures with respect to environmental due diligence
are to require, prior to the purchase of a Property, that all conditions imposed
by a lender loaning funds towards the acquisition of the Property, if
applicable, have been satisfied and that all conditions imposed by the title
insurer which exclude coverage due to environmental conditions are either
removed, waived or found acceptable by a majority of the Company's Directors.
Where neither lender nor title insurer conditions raise issues regarding
environmental due diligence, the Company may nevertheless require certain
protective representations from the seller of a Property, including a
satisfactory level one environmental study of the Property site.
The Directors will not borrow funds in order to distribute the proceeds
to the Shareholders and thereby offset under-performance by the properties,
unless required to do so for REIT qualification purposes. The Bylaws
specifically prohibit such borrowings.
The Company presently owns interests in five Properties in four
different states and has contracted to purchase a sixth Property in a fifth
state (Arizona). See "PROPERTIES." The Company has not identified any additional
Properties which it intends
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<PAGE> 51
to purchase with the proceeds from this offering. Although there can be no
assurance as to when the proceeds from the offering will be fully invested, the
Directors do not anticipate that there will be an extended period required to
locate and evaluate Properties and complete their acquisition by the Company.
The Directors have delegated to AAA the responsibility of locating suitable
Properties for the Company to acquire and of assisting in other respects in
connection with Property acquisition. See "PRIOR PERFORMANCE" and "MANAGEMENT -
Background and Experience" for a discussion of AAA's and Taylor's qualifications
and experience in this regard.
In determining whether a property is a suitable acquisition for the
Company, the Directors will consider the following factors, among others:
(a) the safety of the investment;
(b) the location, condition, use and design of the property and
its suitability for a long-term net lease or a lease that
otherwise limits the amount of expenses to be incurred by the
Company;
(c) the terms of the proposed lease (including, specifically,
provisions relating to rent increases or percentage rent and
provisions relating to passing on operating expenses to
tenants);
(d) the credit worthiness of the lessee (who must have a net worth
of at least $40,000,000 based on the lessee's most recent
audited financial statement or other similar evidence
establishing net worth) and the cash flow expected to be
generated by the property;
(e) the prospects for long-term appreciation of the property;
(f) the prospects for long-range liquidity of the investment; and
(g) the stability and potential growth of the community.
With respect to the credit of a prospective tenant, the Company will
evaluate the party's creditworthiness in terms of its most recent audited
financial statements, its general credit history, any trends exhibited by its
credit rating, appropriate references, if available, the type of business in
which it engages, the size and scope of its business, the length of its
operating history, the background and experience of its management and similar
types of factors. In keeping with the Company's philosophy as to the safety of
the investment, the Company is willing to receive a somewhat lower rent in
exchange for having a higher credit standard in the tenant.
Another set of important factors in assessing properties for
acquisition and the terms of prospective leases are the property's prospects for
long-term appreciation and the prospects for long-range liquidity of the
investment. If the Company is successful in its efforts relating to safety of
the investment and creditworthiness of the lessee, then to a degree the
Properties' prospects for long-term appreciation and liquidity will be enhanced.
Other considerations of the Company affecting appreciation of the Properties and
liquidity of the investment include: inclusion of lease clauses providing for
increased rents based on a tenant's increased revenues, lease clauses providing
for periodic inflation adjustments to the base rent, minimizing deferred
maintenance by prompt attention to repair and replacement needs at the
Properties and by including common area maintenance clauses in the leases, and
locating Properties in areas where the financial institutions are less inclined
to make speculative real estate loans (to potential competitors) than was the
case in the past.
Prospective investors should recognize that the Directors may in good
faith select Properties that do not satisfy one or more of standards applicable
to the aforementioned factors. There is no assurance that even if a Property
satisfies, by the Directors' standards, every one of the aforementioned factors,
such a Property will perform profitably for the Company.
Any transaction with a Director, officer or Affiliate that involves the
acquisition of a Property from such person must be approved by a majority of the
Independent Directors as being fair, competitive and commercially reasonable and
no less favorable
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to the Company than transactions involving similar properties with similar
circumstances. NO OTHER RESTRICTIONS APPLY WITH RESPECT TO THE
COMPANY'S ACQUISITION OF PROPERTIES FROM A DIRECTOR, OFFICER OR AFFILIATE.
The Company shall not sell or lease Property to an officer, Director or
Affiliate.
Prior private programs and three public programs sponsored by Taylor
and AAA have acquired properties that were leased to retail companies,
restaurant companies, financial institutions, automobile repair and service
companies, medical companies and similar tenants. The Company will pursue the
possible acquisition of similar properties but may also negotiate the
acquisition by the Company of other types of properties.
The purchase price of each Property will be supported by an independent
Appraisal of the fair market value of the Property. Nevertheless, the Directors
will rely on their own analyses and not solely on Appraisals in determining
whether to acquire a particular property, as Appraisals should not be relied
upon exclusively as measures of true worth or realizable value. Copies of such
Appraisals will be retained at the offices of the Company for at least five
years and will be available for inspection and duplication by any Shareholder at
the Shareholder's cost.
Prior to the acquisition of any Property, the Company will be provided
with evidence satisfactory to the Directors that it will acquire marketable
title to such Property, subject only to such liens and encumbrances as are
acceptable to the Directors. Such evidence may include a policy of title
insurance, an opinion of counsel or such other evidence as is customary in the
locality in which the Property is situated.
During the offering period and at such time as the Directors believe a
reasonable probability exists that an additional Property will be acquired by
the Company, this Prospectus will be supplemented to disclose the pending
acquisition. Based upon the experience and acquisition methods of the Directors,
this will normally occur on the signing of a legally binding purchase agreement,
but may occur before or after such signing, depending on the particular
circumstances surrounding each potential acquisition. A supplement to this
Prospectus will describe in detail the proposed terms of purchase, the Property
to be acquired, the financial results of the prior operation, if any, of the
Property, and other information considered appropriate for an understanding of
the transaction. In addition, AAA may, under the foregoing circumstances,
include an "acquisition report" with respect to such Property in any regular
correspondence that it may send to Shareholders. Upon termination of this
offering, no further supplements to this Prospectus will be distributed, but
Shareholders will receive reports containing substantially equivalent
information about acquisitions.
IT SHOULD BE UNDERSTOOD THAT THE INITIAL DISCLOSURE OF ANY
PROPOSED ACQUISITION CANNOT BE RELIED UPON AS AN ASSURANCE THAT THE COMPANY
WILL ULTIMATELY CONSUMMATE SUCH PROPOSED ACQUISITION OR THAT THE
INFORMATION PROVIDED CONCERNING THE PROPOSED ACQUISITION WILL NOT CHANGE
BETWEEN THE DATE OF SUCH SUPPLEMENT AND THE ACTUAL PURCHASE.
Development and Construction of Properties
The Company may on occasion purchase Properties on which improvements
must be constructed or completed after acquisition. Under the Company's Bylaws
not more than 10% of the total assets of the Company may be invested in
Unimproved Real Property and the Company does not intend to seek shareholder
approval to exceed such percentage. Depending upon the circumstances,
improvements will be constructed or completed either by third party development
companies from whom the Company purchases the Properties, by the tenants to whom
such Properties are leased or by development companies other than the sellers of
the Properties which may be AAA Affiliates. The Company may borrow money in
order to finance the construction or completion of improvements on particular
Properties. However, the total amount of funds which the Company may borrow for
the construction or completion of improvements on a particular Property,
together will all other funds borrowed by the Company in connection the
acquisition of such Property, may not exceed 50% of the value of the Property at
that time.
To the extent the Company acquires Property on which improvements are
to be constructed or completed, the Company is subject to risk in connection
with the builder's ability to control construction costs or to build in
conformity with plans, specifications and timetables and to make the Property
available to the lessee within the time projected. The Company will endeavor to
purchase construction projects only if a construction loan and permanent loan
commitment has been secured (but only to the extent that such
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loans are necessary in order to complete the projects). Performance may be
affected or delayed by conditions beyond the builder's control such as building
restrictions, clearances and environmental impact studies imposed or caused by
governmental bodies, labor strikes, adverse weather, unavailability of materials
or of skilled labor and by the financial insolvency of the builder or any
subcontractors prior to completion of construction. Such factors can result in
increased costs of a project, corresponding depletion of the Company's offering
proceeds, working capital reserves and/or cash from operations and could
possibly result in the loss of permanent mortgage loan commitments relied upon
as a primary source for repayment of construction loans.
The Company may use the following techniques to reduce the risk of any
non-performance by the builder and to assure compliance with approved plans and
specifications: (1) a labor and material bond, a completion bond or a
performance bond, or more than one of the foregoing, may be required; (2) if in
the opinion of the Directors the financial position of the builder so warrants,
a personal guaranty or pledge of other assets may be accepted in lieu of, or
required in addition to, a bond; (3) before deciding not to require either (1)
or (2), the Directors will make an appropriate investigation and obtain
sufficient information to satisfy themselves that the builder has substantial
assets in relation to the project under construction and/or a good record of
completion; (4) in some cases, the builder of the Property will be required to
leaseback the Property from the Company until construction is completed with
lease payments designed to return to the Company a portion of its funds paid to
the builder during construction and to require the builder to bear the risk of
construction; (5) where possible, the Company will purchase Property subject to
the construction loan and the Directors will endeavor not to have the Company be
liable on such loan; and (6) depending on the financial condition of the
builder, the contract may provide that portions of the purchase price payments
to the former owners will be withheld until a notice of completion of
construction is obtained.
Dividends
The Company intends to distribute as dividends earnings from operations
to the Shareholders within 30 days after the close of each fiscal quarter.
During the offering and acquisition phase of the Company's operations, the
Directors intend to distribute interest income earned on proceeds that are
temporarily invested. The ultimate amount of such distributions will depend upon
the profitable operation and cash flow needs of the Company. In order to
preserve the Company's qualification as a REIT, the Company is required to
distribute at least 95% of its distributable REIT Taxable Income. Because of the
possible receipt of such income without corresponding distributable cash it is
possible that the Company may make such required distributions from borrowed
funds or working capital reserves. There can be no assurance that funds for
required distributions will be available from any such sources. See "INCOME TAX
ASPECTS - DISTRIBUTION REQUIREMENTS." Distributions may be reinvested in Shares
of the Company under the Dividend Reinvestment Plan. See "SUMMARY OF DIVIDEND
REINVESTMENT PLAN." The Company has paid dividends to Shareholders for each of
its fiscal quarters since July 1994.
Sale of Properties
The Company may sell some or all of its Properties over time. The
determination of whether a particular Property should be sold or otherwise
disposed of will be made after consideration of performance of the Property and
market conditions and will depend, in part, on the economic benefits of
continued ownership. In deciding whether to sell Properties, the Directors will
consider factors such as potential capital appreciation, cash flow and federal
income tax consequences. Affiliates of one or more Directors may be selected to
perform various substantial real estate brokerage functions in connection with
the sale of Properties by the Company. The Company will not sell or lease any
Property to the Directors or their Affiliates.
Any net proceeds from the sale of any Property may, at the election of
the Directors based upon their then current evaluation of the real estate market
conditions, either be distributed to the Shareholders or be reinvested in other
Properties. A reinvestment in other Properties would be feasible only if it can
be accomplished on such a basis that the status of the Company as a REIT will
not be adversely affected by such reinvestment. Any Properties in which net
proceeds from a sale are reinvested will be subject to the same acquisition
guidelines as Properties initially acquired by the Company. See "Properties."
In connection with the sale of a Property owned by the Company,
purchase money obligations secured by mortgages may be taken as partial payment.
The terms of payment to the Company will be affected by custom in the area in
which the Property being sold is located and the then prevailing economic
conditions. To the extent the Company receives notes and property other than
cash on sales, such proceeds will not be included in net proceeds of sale until
and to the extent the notes or other property are actually
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collected, sold, refinanced or otherwise liquidated. Therefore, dividends to
Shareholders of the proceeds of a sale may be delayed until the notes or other
property are collected at maturity, sold, refinanced or otherwise converted to
cash. The Company may receive payments (cash and other property) in the year of
sale in an amount less than the full sales price and subsequent payments may be
spread over several years. The entire balance of the principal may be a balloon
payment due at maturity. For federal income tax purposes, unless the Company
elects otherwise it will report the gain on such sale ratably as principal
payments are received under the installment method of accounting.
Borrowing Policies -- Restriction on Leverage
In the exercise of their duties the Directors may elect to borrow funds
on behalf of the Company in order to take advantage of particular acquisition
opportunities, cover the cost of improving a Property, cover costs not met by
insurance or cover operating costs. In any event, the Directors will not
encumber any Property in excess of 50 percent of its fair market value at the
time the borrowing is entered into. See "INVESTMENT OBJECTIVES AND
POLICIES--Acquisition of Properties" for a more detailed discussion.
Furthermore, the Directors will not borrow funds in order to use the proceeds
from the borrowing to pay dividends to the Company's Shareholders, unless such
borrowings are necessary for REIT qualification purposes. See "INCOME TAX
ASPECTS."
The Company may not borrow from a Sponsor, an Adviser, which includes
AAA, a Director, or any Affiliate thereof, unless a majority of Directors,
including a majority of Independent Directors, not otherwise interested in such
transaction approve the transaction as being fair, competitive, and commercially
reasonable and no less favorable to the Company than loans between unaffiliated
parties under the same circumstances.
The Company will not issue any senior securities nor will it invest net
proceeds of this offering in junior mortgages, junior deeds of trust or similar
obligations.
Joint Venture Investments
The Company, through the Directors, may elect to enter into joint
ventures with unaffiliated third parties. The Company may also invest in a
Property jointly with another publicly-registered entity sponsored by an
Affiliate that has investment objectives and management compensation provisions
substantially identical to those of the Company, subject to certain terms and
conditions contained in the Bylaws, which are summarized below. The Company's
ability to enter into such a joint venture with another entity sponsored an
Affiliate may be important if the Company wishes to acquire an interest in a
specified Property but does not have sufficient funds (or, at the time it enters
into a commitment to acquire a specified property, cannot determine whether it
will have sufficient funds) to make the full equity investment required to
acquire such Property. The Company has previously invested in two Properties
through joint ventures with Affiliates. See "Properties" for more details.
The Bylaws require that, in the event of any such joint venture with
another entity sponsored by the Adviser or an Affiliate, the following
conditions must be satisfied. First, the Company will invest only in a joint
venture having investment objectives comparable to the Company and the
investment by each party to the joint venture must be on substantially the same
terms and conditions; provided, however, the Company shall own more than fifty
percent (50%) of any joint venture between it and its Sponsor or Affiliate.
Second, in making any such joint venture investment, the Company may not pay
more than once, directly or indirectly, for the same services and may not act
indirectly through any such joint venture if the Company would be prohibited
from doing so directly because of restrictions contained in the Bylaws. Third,
in the event of a proposed sale of the Property initiated by the other joint
venture partner, the Company must have a right of first refusal to purchase the
other party's interest.
The Company may not have absolute control in a joint venture context.
There is a potential risk of impasse on joint venture decisions and a potential
risk that, even though the Company will have the right of first refusal to
purchase the other party's interest in the joint venture, the Company may not
have the resources to exercise such right. Disputes may arise under a joint
venture agreement which could raise a conflict of interest for certain Directors
of the Company. See "CONFLICTS OF INTEREST -- Transactions with AAA."
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Reserves for Operating Expenses
The Company expects that approximately 1% of the gross proceeds of the
offering will be reserved initially to meet costs and expenses of the Company's
Properties, capital expenditures and cash distributions. To the extent that such
reserve and any income of the Company are insufficient to defray such costs and
other obligations and liabilities, it will be necessary to attempt to finance or
refinance properties or, in the event financing or refinancing is not available
on acceptable terms, to liquidate the Company's investment in certain of its
Properties on possibly unfavorable terms. During the holding period of a
Property, the Company may increase reserves from rental income to meet
anticipated costs and expenses and other economic contingencies. If, in any
fiscal quarter, the Directors determine that reserves are in excess of the
amount necessary for Company operations, such excess may be included in and
distributed as dividends.
The Total Operating Expenses of the Company, including, but not limited
to certain administration items such as personnel salaries and the salary of
Taylor, shall (in the absence of a satisfactory showing to the contrary) be
deemed to be excessive if they exceed in any fiscal year the greater of 2.0% of
its Average Invested Assets or 25% of its net income for such year. The
Independent Directors shall have the responsibility of limiting such expenses to
amounts that do not exceed such limitations unless such Independent Directors
shall have made a finding that, based on such unusual and non-recurring factors
which they deem sufficient, a higher level of expenses is justified for such
year. Any such finding and the reasons in support thereof shall be reflected in
the minutes of the meeting of the Board of Directors.
Management of Properties
Each existing Property is presently managed and all new Properties are
expected to be managed by AAA. Such management will include providing leasing
services in connection with identifying and qualifying prospective tenants,
assisting in the negotiation of the leases, providing monthly statements as to
the income and expense applicable to each Property, receiving and depositing
monthly lease payments, periodic verification of tenant payment of real estate
taxes and insurance coverage, and periodic inspection of Properties and tenants'
sales records where applicable. AAA will be compensated for such management for
a fee of between 2% and 4% of rental income depending on the Property but in no
event to exceed what is reasonable in the marketplace, which includes an
allocable portion of its overhead expenses. See "COMPENSATION TO MANAGEMENT AND
AFFILIATES." The property management fees paid to AAA will be included in the
calculation of "Total Operating Expenses" as discussed above under "Reserves for
Operating Expenses." The tenants will be responsible, at their expense, for
day-to-day oversight and maintenance of the Properties.
AAA is presently owned by Taylor. Since its inception, AAA has engaged
in the business of providing real estate management services to real estate
investment programs sponsored by Taylor and his Affiliates. It has managed over
$40,000,000 of commercial real estate, including the Properties owned by the
Company. AAA also provides property management services to non-affiliated
persons.
The property management contract with AAA is for a term of twelve (12)
months. It will be renewed automatically for additional 12-month periods unless
terminated on sixty (60) days' prior written notice by either party. Under this
contract, AAA is charged with the responsibility of collecting all amounts due
the Company in connection with the managed Properties, including rentals, rental
adjustments and reimbursements, if any. AAA is also empowered to enforce, on
behalf of the Company, the tenant's responsibilities under the lease. AAA is
authorized to hire attorneys, accountants, administrative personnel and other
professionals or contractors as it deems necessary or appropriate to effect its
duties under the agreement. AAA also has authority to hire such persons as may
be necessary to fulfill the Company's responsibility as owner and lessor of the
Property, including contractors, subcontractors, materialmen, laborers,
surveyors, architects and engineers. The contract provides that AAA will be
reimbursed for its costs and expenses in fulfilling its duties.
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Changes in Investment Objectives and Policies
Shareholders have voting rights with respect to the establishment,
implementation or alteration of the investment objectives and policies of the
Company. The Directors will not make any material changes in the investment
objectives and policies described above without first obtaining the approval of
Shareholders owning in the aggregate more than 50% of the then outstanding
Shares.
Certain Financial Activities Not Permitted
It is the policy of the Company not to engage in the following
financial or investment activities, among other activities, except to the extent
indicated:
a) issue senior securities;
b) make loans to other persons, including, but not limited to, a
Sponsor, an Adviser, which includes AAA, or any Affiliate
thereof except as permitted in Section 3.13(c) of the
Company's Bylaws to wholly owned subsidiaries of the Company
and, except construction loans for the construction of
improvements on Properties acquired by the Company that are
already leased to qualifying tenants and those loans insured
or guaranteed by a government or government agency;
c) invest in the securities of other issuers for the purpose of
exercising control;
d) underwrite the securities of other issuers;
e) engage in the purchase and sale of investments, other than the
Properties which satisfy the Company's investment objectives
or for the purpose of investing on a short-term basis Company
reserves and funds available for the purchase of Properties;
f) investment in real estate mortgages, other than purchase money
mortgages acquired by the Company in connection with the sale
of one or more of its Properties;
g) invest in the securities of or interests in persons primarily
engaged in real estate activities, except as otherwise
permitted in connection with possible joint venture
investments with another entity; and
h) invest in equity securities of any non-governmental issue,
including other real estate investment trusts or limited
partnerships for a period in excess of eighteen months, unless
a majority of Directors, including a majority of Independent
Directors, approves the transaction.
Material changes in investment policies must be approved by a majority
in interest of the Shareholders.
================================================================================
PROPERTIES
================================================================================
General
Following is information concerning each of the Properties
owned by the Company as of the date of the Prospectus. The information describes
each Property, the acquisition of the Property and the terms of the lease to
which the Property is subject. Unless otherwise stated, the Company owns one
hundred percent (100%) of each Property in fee simple and acquired each Property
from an unrelated third party. All such Properties, or interests therein, were
acquired by the Company for cash.
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The Properties are unencumbered. The Company, in general,
recovers the cost of its Properties for federal income tax purposes by using the
straight-line method of depreciation over 39 years.
Unless otherwise stated, each Property is subject to a net
lease whereby the tenant bears substantially all costs of maintenance, insurance
and property taxes with respect to the Property and the lease on each property
is in full force and effect and lease payments are current. Unless otherwise
indicated, the total net rentable square feet of each property is presently
under lease.
In the opinion of the Company's management, each of the
Properties is adequately covered by the standard type of property and casualty
insurance policies held by persons engaged primarily in the business in which
the Property is presently operated.
The Table set forth below summarizes current annual rental
information concerning each of the Company's properties.
<TABLE>
<CAPTION>
Purchase Total Actual
Name of Property Price of Leasable Annual Percent
and Location Property(1) Sq. Ft. Rent(2) Vacant Cap Rate(4)
---------------- ---------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Blockbusters Music Property $ 867,000 14,047 $ 95,864 0% 11.00%
Wichita, Kansas(3)
OneCare Health Industries Property 1,680,000 14,000 180,600 0% 10.75%
Houston, Texas
AFC, Inc. (Church's Chicken 789,532 2,200 90,796 0% 11.50%
Facility) Property
Smyrna (suburb of Atlanta),
Georgia
Blockbusters Music Property 850,020 15,158 93,516 0% 11.00%
Independence (suburb of Kansas
City), Missouri(3)
Radio Shack Property 1,062,439 5,200 108,903 0% 10.25%
Mesquite (suburb of Dallas), Texas
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TOTALS
(1) Purchase price represents the pro rata sale price of the Properties and
does not include other Acquisition Fees and Acquisition Expenses.
(2) The figures set forth in this column represent current actual rent on
the Properties (or, in those cases in which the Company holds interests
in the Properties through joint ventures, the Company's share, as a
joint venture partner, of current actual rent on such Properties).
Actual rent is subject to successive increases over the original and
renewal terms of the leases on the Properties.
(3) The Company owns an interest in this Property through a joint-venture
with an Affiliate.
(4) Capitalization rate is determined by dividing annual rent by the
purchase price of the Property.
Blockbuster Music Store, Wichita, Kansas
Description. On September 12, 1995, the Company acting in joint venture
("the Joint Venture") with AAA Net Realty Fund XI, Ltd. acquired fee simple
title to real estate and improvements located at 6909 E. Collage, Wichita,
Kansas. The Property is operated as a Blockbuster Music Store. The Property
consists of a free standing building located on a tract of land containing
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approximately 1.24 acres. The improvements consist of a free standing one story
masonry building containing approximately 14,047 square feet.
The Property was acquired subject to a lease with Blockbuster Music, a
subsidiary of Viacom, Inc., the successor-in-interest by merger to Blockbuster
Entertainment Corporation ("Viacom") which guaranteed the primary term of the
lease. With respect to Viacom at the time the property was acquired, as reported
by its management, consolidated revenues totaled $7.3 billion and $2 billion for
the years ended December 31, 1994 and 1993. Viacom recorded consolidated net
earnings of $89.6 million and $171 million, respectively, for the same periods.
Its current assets at December 31, 1994, exceeded current liabilities by $1.1
billion and total assets exceeded total liabilities by $11.8 billion. It was the
opinion of the management of the Company, following review of the consolidated
financial statements of Viacom and subsidiaries, that Viacom's financial
condition at the time of acquisition was sufficient to meet the investment
criteria of the Company.
Lease Information. The original term of the lease is 10 years. The
Lease began on December 7, 1994, and will expire December 31, 2004. The tenant
has the option to renew the Lease for three additional terms of five years each.
The base annual maximum rent during the first five years of the
original term of the Lease is $187,968.00 (based on the current base annual
rent, the initial capitalization rate is 11.0%). The base annual minimum rent
will be $206,835.00 during the second five years of the original term.
During the 3 renewal terms the base annual rent will be $227,532.00,
$250,201.00 and $275,264.00, respectively. In addition to the base rent, the
tenant pays all real estate taxes, hazard and liability insurance premiums and
costs of general maintenance on the Property. The landlord is required to
maintain and repair, if necessary, the foundation, exterior plumbing system,
exterior electrical system, the exterior utility lines and connections to the
Property, the sprinkler mains, if any, structural systems, including the roof,
roof membrane, roof covering and load bearing walls and floor slabs and masonry
walls. Management believes that the warranties and guaranties provided by the
contractor for this Property should adequately cover the Company for any such
maintenance or repairs that it may be required to provide during a for some
period beyond the initial term of the lease.
Terms of Acquisition. The Property was acquired by the Joint Venture
for $1,700,000. AAA Net Realty Fund XI, Ltd. owns a 49% interest in the Joint
Venture and the Company owns a 51% interest.
Competitive Conditions. There are no retail music stores in the
immediate vicinity of the Property. In the vicinity of the Property are
merchants such as a car dealership, a McDonald's, a Men's Wearhouse and a
Kinkos.
OneCare Health Industries, Houston, Texas
Description. On March 31, 1995, the Company entered into a contract to
acquire fee simple title to real estate and improvements located at 8925 Highway
6 North, Houston, Texas. The Property, with all improvements completed, consists
of a free standing one-story building containing approximately 14,000 square
feet. The Property is located on a tract of land containing approximately 1.4216
acres.
As part of the acquisition process, the Company made a construction
loan in the amount of $1,445,000.00. The construction loan was used to construct
the improvements on the Property. The loan accrued interest at the prime lending
rate plus one percent with interest being payable monthly. The loan was secured
by a first lien on the Property, plus an assignment of the Lease (as described
below). Further, the principals of Turner Adreac, L.C., guaranteed the payment
of the construction loan. The loan was paid in full at the time the Company
acquired the Property.
The Property was acquired subject to an existing lease ("OneCare
Lease") with OneCare, a Texas Non-Profit Corporation, as lessee, pursuant to a
long-term net lease. The performance of the OneCare Lease is guaranteed by
Hermann Hospital ("Hermann"), a Texas Testamentary Trust. Hermann provided its
financial statements to the Company and the Company determined that Hermann
meets all of the Company's established criteria with respect to the
credit-worthiness of prospective tenants. In compliance with specific requests,
these financial statements and related financial information provided to the
Company are being treated as confidential information.
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Lease Information. The primary term of the OneCare Lease began when
construction of the improvements was completed and expires 10 years later. The
tenant has the option to renew the lease for two additional terms of five years
each. The base annual minimum rent during the first three years of the primary
term of the lease is $180,600.00. The base annual minimum rent will be
$197,341.00 during the second three years of the primary term, $215,640.09
during the third three years of the primary term, and $235,636.00 during the
final year of the primary term. Rent during the renewal terms is subject to
negotiation between the landlord and the tenant. In addition to the base rent,
the tenant pays all real estate taxes on the Property. The tenant also pays for
all utilities charges. The landlord is required to maintain and repair the
exterior, the foundation, the structural walls and the roof of the building
located on the Property and to maintain the parking lot and landscaping on the
Property. However, the tenant is required to pay the landlord for such
maintenance.
Terms of Acquisition. The Company acquired its interest in the property
for $ 1,680,000.
Competitive Conditions. There are no similar medical buildings located
in the close proximity to the Property.
Blockbuster Music Store, Independence, Missouri
Description. On November 14, 1994, the Joint Venture (the "Joint
Venture") comprised of affiliate AAA Net Realty Fund X, Ltd., and the Company
acquired fee simple title to real estate and improvements located at 13907 East
Highway 40 (the intersection of Highway 40 and Nolan Road), Independence (a
suburb of Kansas City), Missouri. The Property consists of a free-standing
building located on a tract of land containing approximately 1.374 acres. The
improvements consist of a one-story masonry building containing approximately
15,158 square feet.
The Property is presently leased to Blockbuster Music, pursuant to a
long-term net lease ("Blockbuster Lease"). Blockbuster is a subsidiary of
Viacom, the successor-in-interest by merger to Blockbuster Entertainment
Corporation which guaranteed the original term of the Blockbuster Lease. Based
upon its review of the consolidated financial statements of Viacom and
subsidiaries, the Company was, at the time of the acquisition, of the opinion
that Viacom's financial condition is sufficient to meet its investment criteria.
Lease Information. The Blockbuster Lease, which began on April 18,
1994, is for an original term of ten years and will expire on April 30, 2004.
The tenant has the option to renew the lease for three additional terms of five
years each. The base annual minimum rent during the first five years of the
original term of the lease is $170,527.44. (Based upon the current base annual
rent, the initial capitalization rate is 11.0%). The base annual minimum will be
$187,656.04 during the second five years of the original term. During the three
renewal terms the base annual rent will be $206,300.38, $226,915.26 and
$249,652.26, respectively. In addition to the base rent, the tenant also pays
all real estate taxes on the property as well as utilities for and repairs to
the Property.
Terms of Acquisition. The Joint Venture acquired its interest in the
property for $1,550,000.00. The Company and AAA Net Realty Fund X, Ltd., own a
54.84% and 45.16% interest, respectively, in the Joint Venture.
Competitive Conditions. There are no retail music stores in the
immediate vicinity of the Property. In the vicinity of the Property are
merchants such as K-Mart, Builder's Square, Black-Eyed Pea Restaurant, Toys'R'Us
and Best Buy.
AFC, Inc., Doing Business As America's Favorite Chicken Co., Smyrna, Georgia
Description. On July 22, 1994, the Company acquired fee simple title to
real estate and improvements located at 5120 South Cobb Drive, Smyrna (a suburb
of Atlanta), Georgia. The Property consists of a free-standing building located
on a tract of land containing approximately .782 acres. The improvements consist
of a one-story building containing approximately 2,200 square feet.
The Property is presently leased to AFC, a Minnesota corporation,
pursuant to a long-term net lease (the "AFC Lease"). AFC operates a Church's
Chicken restaurant on the Property. AFC is a privately held corporation. AFC
provided its financial
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<PAGE> 60
statements to the Company and the Company determined that AFC meets all of the
Company's established criteria with respect to the credit-worthiness of
prospective tenants. AFC required that these financial statements and related
financial information provided to the Company be treated as confidential
information since otherwise AFC believes it would be adversely affected if this
information was obtained by its competition.
Lease Information. The AFC Lease is for an initial term of twenty years
and will expire on July 21, 2014. The tenant has the option to renew the AFC
Lease for four additional terms of five years each. The base annual minimum rent
during the first five years of the original term of the lease is $90,796. The
base annual minimum rent will be $99,875 during the second five years of the
original term, $109,862 during the third five years of the original term, and
$120,847 during the final five years of the original term. In addition to the
base rent, the tenant pays percentage rent equal to 5% times certain "break
points" specified in the lease. The tenant also pays all real estate taxes on
the Property as well as utilities for and repairs to the Property.
Terms of Acquisition. The Company acquired its interest in the Property
for an aggregate purchase price of $789,532. The Property was acquired from AFC.
Competitive Conditions. Fast-food and family-style restaurants located
in close proximity to the Property include a Subway, a Blimpie, a Taco Bell, a
Checkers, and an Arby's, in addition to several local restaurants.
Tandy Corporation, Mesquite, Texas
Description. On June 15, 1994, the Company acquired fee simple title to
real estate and improvements located at 1505 North Town East Boulevard, Mesquite
(a suburb of Dallas), Texas. The Property consists of a free-standing building
located on a tract of land of approximately 33,760 square feet. The improvements
consist of a rectangular brick masonry building containing approximately 5,200
square feet.
The Property is presently leased to Tandy Corporation, a Delaware
Corporation, pursuant to a long-term net lease (the "Tandy Lease"). The Tandy
Corporation, America's largest retailer of consumer electronics and personal
computers, operates a Radio Shack Store (i.,e., an electronics retail sales
store) on the Property. As reported by its management in its financial
statements which were reviewed prior to the acquisition, the Tandy Corporation's
sales revenues increased 12 percent for the year ended December 31, 1993 as
compared to the fiscal year ended June 30, 1992. (The Tandy Corporation changed
its fiscal year end from June 30 to December 31, effective December 31, 1992).
The Tandy Corporation reported net income for 1993 of approximately $97 million.
The Tandy Corporation's current assets on December 31, 1993 exceeded current
liabilities by $1.1 billion and its total assets exceeded total liabilities by $
1.95 billion. Persons interested in receiving a copy of the publicly issued
financial statements of Tandy Corporation for the 1995 fiscal year should
contact the company.
Lease Information. The Tandy Lease is for an initial term of 15 years
and there are approximately 10 1/2 years remaining on the original lease (the
original lease term will expire on November 30, 2006). The tenant has the option
to renew the Tandy Lease for two additional terms of five years each. The base
monthly minimum rent during the original term of the lease is $9,075. The base
monthly minimum rent during the renewal option terms will be $10,981.03 during
the first term and $12,062.48 during the second term. In addition to the base
rent, the tenant pays percentage rent equal to the amount by which two percent
(2%) of the tenant's gross sales exceed the tenant's yearly base minimum rent.
The tenant also pays all real estate taxes on the Property as well as utilities
for and repairs to the Property.
Terms of Acquisition. The Company acquired its interest in the Property
for an aggregate purchase price of $1,062,439.
As of the date of this Prospectus, other than as set forth above, the
Company owns no other properties and has identified no other properties that it
intends to acquire. The Company will evaluate various properties for acquisition
and will engage in discussions with sellers from time to time regarding the
purchase of additional Properties. Depending on the proceeds obtained, the
Company intends to diversify the type and location of commercial additional
Properties acquired. The Company is not limited as to the amount or percentage
of its assets that may be invested in any specific Property.
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<PAGE> 61
The Company has contracted to purchase an additional Property, but has
not yet consummated such purchase. A description of the Property, the lease
information with respect to the Property, the terms of the acquisition and the
competitive conditions in the locale of the Property are set forth below;
however, there is no assurance that the transaction will be consummated or, if
consummated, that it will close on the terms described below.
Just For Feet, Inc., Tucson, Arizona
Description. On January 19, 1996, the Company entered into a contract
to purchase fee simple title to real estate and improvements located at 4775
Oracle Road, Tucson, Arizona. Assuming that all contingencies are met,
including, without limitation, the completion of construction of a 19,400 square
foot, free standing, one story building on the Property, the closing of the
purchase of the Property will take place on or before September 1, 1996. The
Property is located on a tract of land consisting of 2.936 acres.
The Property will be acquired subject to a net lease with Just For
Feet, Inc., an Alabama corporation ("JFFI"), which will operate a retail store
on the Property which sells athletic footwear and apparel and related items.
With respect to JFFI, as reported by its management, revenues totalled
$56,363,000 and $23,678,600 for the years ended January 31, 1995 and January 31,
1994, respectively. JFFI recorded consolidated net earnings of $3,218,100 for
the year ended January 31, 1995 and consolidated net losses of $203,000 for the
year ended January 31, 1994. Current assets of JFFI at January 31, 1995,
exceeded current liabilities by $64,616,600, and total assets at such date
exceeded total liabilities by $72,983,400. It is the opinion of the management
of the Company, upon reviewing the financial statements of JFFI, that JFFI's
financial condition is sufficient to meet the investment criteria of the
Company.
Lease Information. The original term of the lease, which is anticipated
to begin on or about September 1, 1996, will be twenty years. The tenant has the
option to renew the lease for two additional terms of five years each.
The base annual minimum rent during the first five years of the
original term of the lease will be $354,008.00 (based upon the current base
annual rent, the initial capitalization rate is 10.80%). The base annual minimum
rent will be $389,424.00 during the second five years of the original term of
the lease, $428,366.00 during the third five years of the original term of the
lease, and $471,203.00 during the last five years of the original term of the
lease. During the two renewal terms of the lease, the base annual rent will be
$518,320.00 and $570,152.00, respectively. In addition to the base annual rent,
the tenant will pay all real estate taxes and utility charges on the Property
and will be required, at its sole expense, to keep and maintain the improvements
in good repair and appearance, except for ordinary wear and tear, and make all
structural and nonstructural repairs of every kind which may be required to keep
the improvements in good condition, repair and appearance.
Terms of Acquisition. The cost to acquire the Property will be
$3,271,136.00 and will be paid in cash. The Company will acquire a 51.9%
interest in a joint venture with AAA Affiliates.
Competitive Conditions. The Property is located within approximately
150 yards of the entrance of the Oracle Mall, a regional shopping mall in
Tucson, Arizona, and near a Home Depot. A substantial number of national
retailers, including Payless Shoes and Converse, fast food restaurants and
department stores operate stores in the Oracle Mall.
In the opinion of the management of the Company, when the Property is
acquired by the Company, as required under the terms of the lease, the Property
will be adequately covered by the standard type of property and casualty
insurance policies held by persons engaged primarily in the business in which
the Property will be operated.
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<PAGE> 62
================================================================================
MANAGEMENT
================================================================================
Board of Directors
The business and affairs of the Company are managed under the direction
of the Board of Directors, which has retained AAA to manage the day-to-day
affairs of the Company and its acquisition and disposition of investments. Under
Maryland law, each Director must perform his or her duties in good faith, in a
manner he or she reasonably believes to be in the best interests of the Company
and with the care of an ordinarily prudent person in a like position under
similar circumstances. According to the Bylaws of the Company, the Directors
have a fiduciary duty to the Company and the Shareholders and have a fiduciary
duty to the Shareholders to supervise the relationship of the Company with the
Advisor. The Directors have agreed to limit the idemnification they will seek
from the Company in accordance with the restrictions contained in the Bylaws.
The Bylaws of the Company generally provide that a Director may be indemnified
for any liability or loss suffered by him or her if (i) the Directors determine,
in good faith, that the course or conduct which caused such loss or liability
was in the best interests of the Company, (ii) the Director requesting
indemnification was acting on behalf of or performing services for the Company,
(iii) such liability or loss was not the result of negligence or misconduct by
the Director (or, in the case of an Independent Director, gross negligence or
willful misconduct) and (iv) such indemnification is recoverable only out of the
net assets of the Company.
In addition, the Directors have agreed to limit the indemnification
they will seek in connection with securities law violations in accordance with
the restrictions contained in the Bylaws. In the opinion of the SEC,
indemnification for liabilities arising under the Securities Act of 1933 is
against public policy and therefore unenforceable. In the event that a claim for
indemnification for liabilities arising under the Act (other than the payment by
the Company of expenses incurred or paid by the Directors in the successful
defense of any such action, suit or proceeding) is asserted by the Directors in
connection with the securities being registered, the Company will submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
In general, decisions made by the Directors respecting Company
operations must be made by a majority of Directors present at a meeting which
has been duly called and at which a quorum is present. The Bylaws require that
an "Inside Transaction" (as defined therein) be approved by a majority of the
Board of Directors, including a majority of the Independent Directors who are
not parties to and have no financial interest in the Inside Transaction. A
majority of the Directors must consist of Independent Directors. An Independent
Director may not be employed by or receive any compensation (other than
Director's fees and reimbursed expenses) from, or otherwise be affiliated with,
the Company or an affiliate, or have general present business or a professional
relationship with, or serve as an officer or director of an Affiliate. See
"DEFINITIONS." An Independent Director may not perform material services for the
Company, except as a Director.
Although the Company believes it unlikely, it is possible that the
disinterested Directors (if there is an even number) would deadlock on a
particular matter because one or more Directors cannot vote due to an interest
they have in a particular proposed transaction involving the Company. The
Company's Bylaws provide that in that event, the Company is prohibited from
entering into or continuing in a transaction that benefits or would benefit the
interested Director(s).
The Company presently has three Directors, two of whom are unaffiliated
with any entity that provides or would provide goods or services to the Company.
The Bylaws provide for a minimum of three and a maximum of nine Directors, with
the exact number, which is currently three, to be set from time to time by the
Directors. The Bylaw provision providing for the number of Directors may be
amended from time to time by a majority of the votes of the Shareholders
entitled to be cast thereon. Although the number of Directors may be increased
or decreased, a decrease will not have the effect of shortening the term of any
incumbent Director. Each of the Directors were recommended for appointment or
election by Taylor.
Each Director will hold office until the next annual meeting of
Shareholders and until his successor is duly elected and qualified. Directors
may be re-elected by Shareholders. A Director may resign at any time and may be
removed with or without cause by the Shareholders upon the affirmative vote of
at least a majority of all the outstanding votes entitled to be cast for the
election of directors. A vacancy created by a change in the authorized number of
Directors or the death, resignation, removal, adjudicated incompetence, or other
incapacity of a Director may be filled by the remaining Directors, and a vacancy
created by an increase in
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<PAGE> 63
the number of Directors may be filled by action of a majority of the entire
Board of Directors; provided, however, that the Independent Directors shall
nominate replacements for vacancies among Independent Directors.
Directors are not required to devote all of their time to the affairs
of the Company. The Directors will continue to meet quarterly, or more
frequently as necessary. The Directors do not devote a substantial portion of
their time to the discharge of their duties as Directors and each Director's
principal occupation and principal source of income is unrelated to the Company.
As a consequence, the Directors, in exercising their responsibilities, rely
heavily on Mr. Taylor. The Directors are empowered to fix the compensation of
the Company's officers and may pay the Directors such compensation for special
services as they deem reasonable. Presently, the Company pays each Director a
fee of $500.00 for each meeting attended in person and $500.00 for each meeting
attended by telephonic means, and reimburses each such Director for their actual
costs and expenses in attending Director meetings.
The Bylaws provide that the Directors, and the Company's officers, may
engage in business activities of types conducted by the Company and that they
are generally not required to present to the Company any investment
opportunities which become available to them, regardless of whether the
opportunities are within the Company's investment policies. It is the policy of
the Company that each Director is required to disclose any interest he or she
has in AAA or its Affiliates. See "RISK FACTORS" and "CONFLICTS OF INTEREST."
In exercising their discretion in managing the affairs of the Company,
the Directors must follow the investment objectives and the general investment
and borrowing policies of the Company set forth in this Prospectus. The
Directors may establish, from time to time, further written policies on
investments and borrowings and will monitor the administrative procedures,
investment operations and performance of the Company to assure that these
policies are effected and are in the best interest of the Shareholders. Until
modified by the Directors, the Company will continue to follow the policies on
investments and borrowing set forth in this Prospectus. No material investment
objectives of the Company may be changed by the Directors without the approval
of a majority vote of the Shareholders.
The Directors also review the fees and expenses of the Company no less
often than annually and with sufficient frequency to determine that the expenses
incurred are in the best interest of the Shareholders. Any transactions between
the Company and any Affiliate must be approved by a majority of the Directors
not otherwise interested in the transaction (including a majority of the
Independent Directors). The Directors are also responsible for reviewing the
performance of the Company's officers, particularly Taylor, and determining that
the compensation paid to the officers is reasonable in relation to the nature
and quality of services performed by them for the Company and under the
provisions of their employment contract(s). In reviewing these matters, the
Directors consider factors such as the size of the fees paid to the officers in
relation to the size, composition and performance of the Company's investments,
the success of the officers in generating appropriate investment opportunities,
rates charged other REITs and other investors by advisors performing similar
services, additional revenues realized by the officers and any Affiliate through
their relationship with the Company, whether paid by the Company or others with
whom the Company does business, the quality and extent of service and advice
furnished by the officers, the performance of the investment portfolio of the
Company, and the quality of the Company's investment portfolio relative to the
investments generated by the officers for their own accounts.
The Company's Bylaws do not specify qualifications for officers with
whom the Company may contract for services. In selecting an officer, the
Directors will consider a number of factors, including his or her experience and
management abilities, the performance history in investing or advising in the
investment in real estate acquisition, operation and disposition, and the
identity and location of other employers.
Directors and Executive Officers of the Company
The Directors and executive officers of the Company are as follows:
Name Position
H. Kerr Taylor Chairman of the Board, President, Chief
Executive Officer, Treasurer, Director
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<PAGE> 64
Phil P. Moss Executive Vice President
Robert S. Cartwright, Jr. Director*
George A. McCanse, Jr. Director*
- -------------------------
* Denotes Independent Director
These Directors and executive officers have held these positions since
the Company first offered its securities to the public in March 1994.
Management Decisions
The day-to-day activities of the officers, including activities
relating to the services provided to the Company, are the primary responsibility
of AAA. AAA is primarily responsible for the selection of Company investments
and the negotiation of their acquisition and disposition. The Board of Directors
has empowered Taylor to authorize and approve Company investment proposals on
behalf of the Company between meetings of the Directors. However, the Board of
Directors retains ultimate authority to authorize and approve Company
investments.
AAA will provide the off-site (and to the extent needed, any on-site)
property management services to the Company. Such services are expected to
include, without limitation, leasing, releasing, tenant accounting and
monitoring and the periodic preparation of property operating statements. The
amounts paid by the Company to AAA for its Property management service fees will
be that which is reasonable and competitive and amounts necessary to reimburse
it for its actual expenses incurred in connection with providing these services.
Any fees or reimbursement amounts paid by the Company will not exceed an amount
that would be charged by unaffiliated entities rendering comparable services in
the same geographic location.
Fees for acquisition services and acquisition expenses may be paid by
the Company to AAA or third party brokers or both, within certain limitations.
See "INVESTMENT OBJECTIVES AND POLICIES -- Acquisition of Properties." Amounts
paid for Property management services will be for a fee and to reimburse actual
expenses in providing such services within certain limitations. Administrative
services, if provided by AAA, will be furnished at a price which does not exceed
the lesser of the actual cost for such services or the competitive price which
would be charged by non-affiliated persons rendering similar services in the
same or comparable geographic areas.
Background and Experience
H. KERR TAYLOR. H. Kerr Taylor, age 45, will serve as the President,
Treasurer and Chairman of the Board of Directors of the Company. Taylor has been
an attorney since 1979, has earned an M.B.A. at Southern Methodist University,
is a real estate broker and has over twenty years of experience as a specialist
in acquiring and operating income-producing real properties. He has been
involved in the development, analysis, marketing and management of private
investment programs investing in properties since 1975. Taylor's principal
activity for more than the last five years is to serve as the president, sole
director and sole shareholder of AAA, a company he founded under a predecessor
name in 1983 to own and operate the net lease properties formerly owned and
operated by Taylor and Taylor Affiliates.
From 1995 Taylor served, first, as a director, and, then, as a
non-voting advisory director, of Park National Bank of Houston until February
1996, at which time Park National Bank of Houston was purchased by Frost Bank.
Taylor also has served on the board of directors of a charitable institution.
Taylor is currently a general partner or principal of a general partner of each
of the limited partnerships set forth under "Prior Performance". Taylor is a
member of the Texas Association of Realtors and the Texas Bar Association and a
former member of the American Bar Association. Taylor holds the Series 7, 22,
24, 39, and 63 securities licenses and he is a registered principal in
Securities America, Inc., a NASD member broker-dealer, and a Selected Dealer for
the Company. Taylor is the author of numerous published articles and is a
speaker and leader of seminars for attorneys, CPAs and enrolled agents across
the state of Texas for which continuing education credits have been granted.
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<PAGE> 65
ROBERT S. CARTWRIGHT, JR. Robert S. Cartwright, Jr., is currently a
Professor of Computer Science at Rice University. Professor Cartwright earned a
bachelor's degree magna cum laude in Applied Mathematics from Harvard College in
1971 and a doctoral degree in Computer Science from Stanford University in 1977.
From September 1976 until June 1980, he served as Assistant Professor of
Computer Science at Cornell University. In July 1980, he joined the faculty of
Rice University as Associate Professor of Computer Science. He was promoted to
the rank of Professor in July 1986. During his fifteen years as a faculty member
at Rice University, he has twice served as Chairman of the Computer Science
Department during 1985-1986 and 1989-1990.
Professor Cartwright has compiled an extensive record of professional
service. He was a charter member of the editorial boards of LISP and Symbolic
Computation: An International Journal and ACM Letters on Programming Languages
and Systems. He has served as Program Chair of the ACM Conference on LISP and
Functional Programming and ACM Symposium on Principles of Programming Languages
and as General Chair for the SIGPLAN Conference on Programming Language Design
and Implementation. He is currently a member of the ACM Turing Award Committee,
which selects the annual recipient of the most prestigious international prize
for computer science research. He is also a member of the Board of Directors of
the Computing Research Association and a former member of the Computer Science
Advanced Placement Committee for the Educational Testing Service.
Professor Cartwright is an active private investor in equities, bonds,
mutual funds, and real estate. He has also served for two terms on the Rice
University Committee on Fringe Benefits, which advises the University President
on retirement plans.
GEORGE A. MCCANSE, JR. George A. McCanse, Jr., is President of Value
OnLine, Inc., an online computer communications and data access service for the
commercial real estate valuation industry.
Mr. McCanse is a member of the Appraisal Institute (MAI designation),
the Pension Real Estate Association, and the International Council of Shopping
Centers. He is also a participating member of the Valuation Committee of the
National Council of Real Estate Investment Fiduciaries.
Mr. McCanse is 42 years old and resides in New Canaan, Connecticut. He
holds a BBA degree from the University of Texas and has pursued graduate level
study in real estate, architecture and finance. He has also been involved in
real estate investing and development, including the acquisition and sale of
over $150,000,000 of real estate during the 1970s and 1980s.
PHIL P. MOSS. Phil P. Moss is the Executive Vice President of AAA. Moss
has been involved as a real estate investor in owning, operating and managing
shopping centers, office buildings, apartment projects, retail outlets and
various other properties for the past 25 years. Specifically in his capacity
with AAA, Moss has been involved in leasing and property acquisitions for
various companies since 1988. He received his B.B.A. degree from and did
graduate work at the University of Texas. He is a retired Major in the United
States Air Force.
The Property acquisition and management affairs of the Company will be
delegated to a group of people supervised by Taylor. These other individuals who
are specialists in their respective fields are engaged by AAA, which utilizes
their respective services on an as-needed basis to perform services on behalf of
the eleven Taylor sponsored public and private real estate limited partnerships.
These individuals will not be employees of the Company nor are they employees of
the Taylor-sponsored partnerships, although they do perform various services and
activities for those partnerships.
Jane Costello is a certified public accountant and is responsible for
the financial and tax accounting relating to the AAA-sponsored partnerships and
their properties. She has over 15 years experience as an accountant, including
over 4 years with a national public accounting firm. She has been engaged in her
own accounting practice for the past 6 years. Costello received a B.B.A. degree
in accounting from the University of Texas.
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<PAGE> 66
================================================================================
PRIOR PERFORMANCE
================================================================================
The information presented in this section summarizes the historical
experience of real estate programs previously sponsored by AAA and its
Affiliates. INVESTORS IN THE COMPANY SHOULD NOT ASSUME THAT THEY WILL
EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN
THESE PRIOR PARTNERSHIPS.
AAA and its Affiliates have sponsored a total of seven non-public
programs and three public programs in the last 10 years. As of December 31,
1995, a total of approximately $27,332,600 had been raised from over 1,492
investors through all such programs. The properties acquired in the prior
programs are located throughout the United States, including Tennessee,
Minnesota, Oklahoma, Kansas, Georgia, Texas, Arizona and Missouri.
Nearly $19,677,790 has been expended through December 31, 1995, on a
total of 24 properties which include 24 commercial buildings. Commercial
properties are leased to restaurants, medical facilities, automotive and other
retail stores, a financial institution and an office building. All of the
properties were existing when acquired. None of the other properties have been
sold. Each of the 10 programs previously sponsored, had investment objectives
similar to those of the Company.
As of the date of this Prospectus, no AAA sponsored real estate program
established since 1985 has failed to make a quarterly distribution, and all
AAA-sponsored public real estate partnerships and many AAA-sponsored private
real estate partnerships whose investments are required to be made on a cash
only basis have increased the amount of their distributions as the programs
mature.
The following table sets forth summary information as of December 31,
1995, regarding property acquisitions during the three preceding years by two
limited partnerships that, either individually or through a Joint Venture
arrangement, acquired properties which have investment objectives similar to
those of the Company. The general investment objectives of each partnership of
acquiring net leased properties with the potential for long-term appreciation
and providing periodic cash distributions to investors that are partially
tax-sheltered have been met. Whether the objectives of acquiring properties that
will conserve the investors' capital and provide an inflation hedge have been
met can only be determined after the partnerships' properties have been sold,
which has not yet occurred.
<TABLE>
<CAPTION>
Name of Partnership Type of Property Type of Program Method of
Financing
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AAA Net Realty Fund 1 restaurant Public All-Cash
X, Ltd. 2 retail stores*
1 automotive store
1 medical facility
- ------------------------------------------------------------------------------------------------------------------
AAA Net Realty Fund 2 retail stores** Public All-Cash
XI, Ltd.
</TABLE>
* One property was acquired with a combination of proceeds from AAA Net
Realty Fund X, Ltd. and the Company.
** One property was acquired with a combination of proceeds from AAA Net
Realty Fund XI, Ltd. and the Company.
The Company may joint venture with unaffiliated third parties or an
Affiliate that has objectives and management compensation provisions
substantially identical to those of the Company, subject to the terms and
conditions contained in the Company's Bylaws. See "INVESTMENT OBJECTIVES AND
POLICIES--JOINT VENTURE INVESTMENTS".
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<PAGE> 67
AAA Net Realty Fund X, Ltd. ("Fund X") whose general partner is H. Kerr
Taylor, has disclosed that its prospectus was not supplemented on a timely basis
with updated audited financial statements, information about its property
acquisitions and other material information as required under the Securities Act
of 1933, as amended. Fund X did, however, publicly disclose such information in
its Form 8-K, 10-Q and 10-K filings with the SEC. The Company has procedures in
place to assure that its prospectus will be updated as required.
A more detailed description of property acquisitions made by the
partnerships with investment objectives similar to those of the Company is
contained in Part II of the registration statement filed with the SEC with
respect to the securities offered by this Prospectus and is available from the
Company without fee upon request.
Further information about the operations of the four most recent
partnerships with similar investment objectives is contained in the prior
performance tables included in Exhibit A to this Prospectus. Cash generated from
operations by affiliate partnerships (as reflected in Table III of the attached
Prior Performance Tables) is higher than net income reported on a GAAP basis by
the amount of depreciation and amortization. When such cash is distributed by
these partnerships, investors receive a return of a portion of their invested
capital to the extent of the depreciation and amortization.
================================================================================
MANAGEMENT AND AFFILIATE COMPENSATION
================================================================================
The table on the next page sets forth the type, and to the extent
practicable, estimates of the amounts of all compensation, income, distributions
and other payments that management and its Affiliates will or may receive in
connection with this offering and the operation of the Company.
The Affiliates may receive compensation, subject to certain
restrictions, in connection with various transactions in which the Company may
engage, including the acquisition, development, operation, financing and sale of
Properties. In recommending one transaction over another to the Company,
conflicts of interest may arise within the management where the compensation to
Affiliates resulting from one transaction is greater than that from the other.
See "CONFLICTS OF INTEREST". Any compensation payable to Affiliates in an
isolated transaction or generally in a series of similar transactions must be
determined to be fair and reasonable, and be approved by a majority of the
Directors not otherwise interested in the transaction (including a majority of
the Independent Directors). Except as described, the Company will pay
compensation to management and Affiliates before it pays dividends to the
Shareholders.
<TABLE>
<CAPTION>
Person Receiving Form and Method
Compensation of Compensation Estimated Amount
------------ --------------- ----------------
PROPERTY ACQUISITIONS, CONSTRUCTION AND DEVELOPMENT
<S> <C> <C>
AAA Acquisition Fees and Acquisition Expenses Not determinable at this time.
payable by the Company and/or the sellers of
Properties. Total Acquisition Fees and
Expenses paid to all persons in connection
with property acquisitions and Construction
Fees and Development Fees paid to
Affiliates, may not exceed 6.0% of the
Contract Price for the Property. (1)(2)(3)(4)(5)
COMPANY OPERATIONS
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
Person Receiving Form and Method
Compensation of Compensation Estimated Amount
------------ --------------- ----------------
<S> <C> <C>
H. Kerr Taylor President and Chairman of the Board of Not determinable at this time.(6)
Directors
AAA Property management fees will generally be Not determinable at this time.
from 2.0% to 4.0% of rental income from
the Property under management and may not
exceed the fair, reasonable and competitive
compensation paid to others rendering similar
services as an ongoing public activity in the
same geographical location.
Directors Directors receive a fee of $500.00 for each Not determinable at this time.
meeting attended in person and a fee of $500.00
for each meeting attended telephonically. All
Directors are reimbursed for their costs of
attending meetings. Directors may receive options
and/or warrants to purchase the company's common
stock.
AAA Compensation for other services related to Not determinable at this time.
the management and operation of the
Company and its Properties, including leasing
fees, mortgage brokerage fees and
maintenance fees; provided, however, that
any such compensation must be found by the
Directors not interested in the transaction
(including a majority of the Independent
Directors) to be fair and reasonable and not
to exceed rates charged for similar services
by others in the same geographical location.
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
Person Receiving Form and Method
Compensation of Compensation Estimated Amount
------------ --------------- ----------------
PROPERTY DISPOSITIONS
<S> <C> <C>
AAA Real estate brokerage commissions for Not determinable at this time.
substantial services actually performed in
connection with the sale or disposition of a
Company Property; provided that this
compensation may not exceed one-half of the
brokerage commissions paid to all persons in
connection with the transaction, and may in
no event exceed 3.0% of the sale or
disposition price.
Also, the total of all real estate commissions
paid to all persons in connection with the
transaction may not exceed the lesser of (a) a
Competitive Real Estate Commission, or (b) 6.0% of
the contracted for sale or disposition price. The
payment of this compensation to an Adviser of the
Company (which includes AAA) or its Affiliate is
subordinated to the receipt by the Company of a
profit from the sale of the property, net of real
estate commissions.(2)(7)
Incentive fees may be paid in the form of an
interest in the gain from the sale of Company
assets for which full consideration is not paid in
cash or property of equivalent value.(8)
</TABLE>
(1) The total of (i) all Acquisition Fees paid by all persons, and (ii)
Acquisition Expenses paid by the Company in connection with the
acquisition of a Property must be reasonable and may not exceed an
amount equal to 6% of the Contract Price for the Property unless a
majority of the Directors not otherwise interested in the transaction
(including a majority of the Independent Directors) approves the
transaction as being commercially competitive and fair and reasonable
to the Company.
(2) Either the Company or the seller of the Property may pay Acquisition
Fees in connection with the Company's acquisition of Properties. To the
extent the seller pays such compensation, the seller can be expected to
have increased the price of the Property and, therefore, the price may
be greater to the Company than it would be if such compensation were
not paid and, to that extent, the Company can be considered as paying,
indirectly, such compensation.
(3) The Company has in the past, and may in the future, subject to certain
conditions, reinvest the proceeds from the refinancing, sale or
disposition of a Property in additional Properties, or in the
maintenance, repair or remodeling of existing properties. Affiliates
may receive compensation as described above in connection with any
reinvestment of such proceeds. See note (1) above. See "INVESTMENT
OBJECTIVES AND POLICIES."
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(4) The Company may contract to purchase Properties from Affiliates,
including Properties which are undeveloped at the time of execution of
the contract, but which will be developed at the time of the closing of
the contract. The purchase price of any such Properties from Affiliates
may be in excess of the costs to the Affiliate of acquiring,
constructing and developing such Properties, including allocated
overhead, only if substantial justification exists for such excess and
such excess is reasonable. As is the case in the acquisition by the
Company of any Property from an Affiliate, the terms of the sale
contract with the Affiliate must be approved by a majority of the
Independent Directors as being fair and reasonable and no less
favorable to the Company than terms available from unaffiliated third
parties.
(5) Construction Fees and Development Fees payable to Affiliates are
included within the definition of Acquisition Fees and the total of all
such fees when added to the Acquisition Fees and the Acquisition
Expenses may not exceed 6% of the Contract Price for the Property,
unless a majority of the disinterested Directors (including a majority
of the Independent Directors) approves the transaction as being
commercially competitive, fair and reasonable to the Company.
(6) The Company has commissioned an external study with respect to the
amount and type of compensation which could be paid in the future to
officers and/or directors, as well as the contingencies and performance
standards on which compensation will be determined. On August 22, 1995,
the Directors approved a special compensation payment to Taylor in the
amount of $150,000. Taylor has received no other compensation from the
Company for serving as its President. In connection therewith, the
Company issued to Taylor a demand promissory note in the amount of
$150,000 payable on the earlier of July 15, 1996 or the date on which
the Company receives $10,000,000 of proceeds from its Initial Public
Offering. Taylor is presently entitled to, but has not demanded, such
payment. The note is payable in cash or in Shares, depending on the
availability of cash for such payment.
(7) Any portion of a subordinated brokerage commission which is not
allowable under the specified subordination provisions will be deferred
and payable when first allowable under such provisions.
(8) An interest in the gain from the sale of assets of the Company, for
which full consideration is not paid in cash or property of equivalent
value, shall be allowed provided the amount of percentage of such
interest is reasonable. Such an interest in gain from the sale of
Company assets shall be considered presumptively reasonable if it does
not exceed 15% of the balance of such net proceeds remaining after
payment to Shareholders, in the aggregate, of an amount equal to 100%
of the original issue price of Company shares, plus an amount equal to
6% of the original issue price of the Company shares per annum
cumulative. For purposes of this Section, the original issue price of
the Company may be reduced by prior cash distributions to Shareholders
of net proceeds from the sale of Company assets. In the case of
multiple Advisers, Advisers and any Affiliate shall be allowed
incentive fees provided such fees are distributed by a proportional
method reasonably designed to reflect the value added to Company assets
by each respective Adviser or any Affiliate.
================================================================================
ERISA CONSIDERATIONS
================================================================================
The following is a summary of certain non-tax considerations associated
with an investment in the Company by a qualified employee benefit plan, KEOGH
Plan, or IRA ("Benefit Plans"). This summary is based on the provisions of ERISA
and the Code, as amended, through the date of this Prospectus and relevant
regulations and opinions issued by the Service and the Department of Labor. It
is possible that future legislative or administrative changes or court decisions
may significantly modify the statements set forth herein. It is also possible
that said changes may apply to transactions entered into prior to the date of
their enactment.
The Employee Retirement Income Security Act of 1974 ("ERISA") in
general requires that employee benefit plans subject to ERISA must have all of
their assets held in trust and that a trustee or duly authorized investment
manager has exclusive authority and discretion to manage and control their
assets. In addition, the Code provides similar rules for employee benefit plans
which are not subject to ERISA, including individual retirement accounts and
KEOGH plans that cover only self-employed persons. This
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requirement is satisfied with respect to the investment if the indicia of
ownership of the securities are held in trust on behalf of the plan. Counsel is
of the opinion that the Company's method of identifying owners of the Securities
will satisfy the ERISA "holding in trust" requirement.
FIDUCIARIES. In general, a person will be a Benefit Plan fiduciary
under ERISA if among other things, that person has discretionary authority or
control with respect to Plan assets or provides investment advice for a fee with
respect to such assets. Accordingly, whether or not a person is a Benefit Plan
fiduciary will depend on the facts and circumstances underlying that person's
relationship with the Plan and each person should consult his own advisor or
that of the Benefit Plan regarding questions of fiduciary status.
Benefit Plan fiduciaries are required under ERISA to determine whether
an investment in the Securities will satisfy the prudent man, adequate
diversification and other fiduciary standards set forth in ERISA. A fiduciary's
decision to cause a plan to invest in the Securities should include, among other
things, an analysis of whether (i) the investment is in accordance with the
governing instruments of the plan and its needs and objectives; (ii) the
investment satisfies the diversification requirement of ERISA Section
404(a)(I)(C); (iii) the purchase is prudent considering the nature of the
investment, the Company's compensation structure, the lack of a ready market for
the Securities and the other risks discussed in this Prospectus; and (iv) the
investment is made solely in the interest of the plan participants. The
Department of Labor has ruled that for diversification purposes, plan
fiduciaries are entitled to look to the underlying assets of the Company. The
other ERISA requirements must be satisfied on an individual facts and
circumstances basis.
PROHIBITED TRANSACTIONS. A fiduciary of a Benefit Plan is prohibited
from engaging in self-dealing, acting for a person who has an interest adverse
to that of the Plan, or receiving any consideration for its own account from a
party dealing with the Plan in a transaction regarding the Plan's assets.
Benefit Plan fiduciaries may incur substantial taxes and penalties in the event
they enter into transactions involving Benefit Plan assets which constitute a
prohibited transaction under ERISA. A "prohibited transaction" under ERISA
should not be confused with a Prohibited Transaction under the REIT provisions
discussed under the "INCOME TAX ASPECTS" section of this Prospectus.
In general, a prohibited transaction for ERISA purposes is a
transaction involving the assets of the Benefit Plan and any "party in interest"
or "disqualified person" with respect to that Benefit Plan. ERISA prohibits
these transactions regardless of how beneficial they may be to the Benefit Plan.
Prohibited transactions include the sale, exchange, or leasing of property, the
lending of money or the extension of credit between a Benefit Plan and a party
in interest or disqualified person.
A prohibited transaction could occur if the Company, any Selected
Dealer, or their respective Affiliates, is a fiduciary (within the meaning of
ERISA) with respect to the purchase of Securities by a Benefit Plan. This will
be true even if the Company assets underlying the Securities do not constitute
Plan assets as discussed below. Thus, unless an administrative or statutory
exemption applies, Securities should not be purchased by any Benefit Plan for
which either the Company, a Selected Dealer, or their respective Affiliates, is
a fiduciary with respect to such Securities purchase.
In the case of a prohibited transaction, the Code imposes an excise tax
equal to 5% of the amount involved and authorizes the IRS to impose an
additional 100% excise tax if the prohibited transaction is not corrected. These
taxes would be imposed on any disqualified person who participates in the
prohibited transaction. In addition, AAA and possibly other fiduciaries of
Benefit Plan Shareholders subject to ERISA who permitted a prohibited
transaction to occur or otherwise breach their fiduciary responsibilities would
be required to restore to the Plan any profits realized by them as a result of
the transaction or breach, and to make good to the Plan any losses it incurred
as a result of the transaction or breach. Where an IRA invests in the Company,
the occurrence of a prohibited transaction involving the individual who
established the IRA, or his or her beneficiary, would cause the IRA to lose its
tax-exempt status under the Code.
ANNUAL VALUATION. ERISA requires that assets of a plan be valued to
reflect market value as of the close of each plan year. ERISA requires a
fiduciary of a Benefit Plan to determine annually the fair market value of each
asset of the plan as of the end of the Plan's fiscal year and to file an annual
report reflecting that value. Where no fair market value of a particular asset
is available, the fiduciary is required to make a good faith determination of
the asset's "fair market value" assuming an orderly liquidation at the
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time the determination is made. A trustee or custodian of an IRA must, in
addition, provide the IRA participants with a statement of the value of the IRA
each year. There presently exists no regular secondary market for the Securities
and it is not anticipated that one will develop in the immediate future.
Further, the Directors have no present policy of reporting a fair market value
for the Securities to Plan fiduciaries on an annual basis, although they may in
the future do so. Accordingly, it may be difficult for Plan fiduciaries to
adequately value the Securities from year-to-year and it may not be practical to
take into account appreciation in the value of the Company's properties until
such time as the Company sells or otherwise disposes of its properties.
UNRELATED BUSINESS INCOME. A Benefit Plan investing in Securities will
not be subject to tax on distributions from the Company so long as the Company
qualifies as a REIT. The Service has ruled that dividends and other
distributions from a REIT are not taxable to Section 501(a) organizations as
"unrelated business income". This result stands even if the REIT utilizes debt
financing to purchase its real property assets. A private foundation, however,
may be subject to the excise taxes imposed by Sections 4940 and 4943 of the Code
(relating to investment income and excess business holdings). Additionally, the
laws and regulations applicable to Section 501(a) organizations set forth other
requirements respecting investments by such organizations. These additional
requirements may not be addressed in this Prospectus and prospective
Shareholders which are Section 501(a) organizations must consult their own tax
advisors in this regard.
PLAN ASSETS. In the event a Benefit Plan purchases Securities and the
Company's assets represented by those Securities, rather than the Securities
themselves, were considered the Plan's assets under ERISA, the prudent man
standards and other provisions of Title I of ERISA applicable to investments
made by the Company and certain transactions into which the Company might seek
to enter could constitute an improper delegation of a fiduciary responsibility
to AAA and expose the fiduciary of the Plan to co-fiduciary liability under
ERISA for any breach by AAA of its ERISA fiduciary duties. In such event,
investment by an IRA in the Securities might result in an impermissible
commingling of Plan assets with other property.
Accordingly, fiduciaries who hold or acquire Company Securities on
behalf of plans or IRAs subject to ERISA, must evaluate the risk that unintended
ERISA or Code prohibited transaction questions and fiduciary duty delegation
questions may arise if the underlying assets of the plan are treated under ERISA
as "plan assets" of such plans or IRAs.
On November 13, 1986, the United States Department of Labor (the "DOL")
promulgated Regulation Section 2510.3-101 (the "DOL Regulation") defining the
term of "plan assets" for purpose of the fiduciary requirements of ERISA and the
prohibited transaction provisions of ERISA and the Code. Under the DOL
Regulation, when a plan makes an equity investment in another entity, the
underlying assets of that entity generally will not be considered plan assets if
(i) the equity interest is a "publicly-offered security" or a security issued by
an investment company registered under the Investment Company Act of 1940, (ii)
the entity is an "operating company," including a "real estate operating
company," or (iii) equity participation to benefit plan investors is "not
significant." The Company believes that the Shares being sold in the Offering
will be "publicly offered" securities within the meaning of the DOL Regulation.
The DOL Regulation states that the term "equity interest" means any
interest in an entity other than an instrument that is treated as indebtedness
under applicable local law and which has no substantial equity features. The
Company believes that the Shares constitute equity interests as so defined.
The DOL Regulation provides that a "publicly-offered security" is a
security that is (i) either (A) part of a class of securities registered under
Section 12(b) or 12(g) of the Exchange Act, or (B) sold to the plan as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and the class of securities of which such
security is a part is registered under the Exchange Act within 120 days (or such
later time as may be allowed by the SEC) after the end of the fiscal year of the
issuer during which the offering of such securities to the public occurred, (ii)
part of a class of securities that is owned by 100 or more investors who are
independent of the issuer and of one another ("widely held"), and (iii) freely
transferable. The Shares will be registered in 1996 under Section 12(g) of the
Exchange Act within the time permitted by the Securities and Exchange
Commission. Therefore, the Shares sold in the Offering meet the first
requirement. Shares of Common Stock are already widely held within the meaning
of the DOL Regulation and thus meet the second requirement.
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With respect to the third requirement, the DOL Regulation provides that
a determination as to whether a security is freely transferable is inherently
factual in nature and must be made on the basis of all relevant facts and
circumstances. The preamble to the DOL Regulations (which is not considered
primary legal authority) indicates that this requirement reflects the DOL
concern that a plan investor have a reasonable opportunity to liquidate its
investment. The DOL Regulation also provides that if a security is part of an
offering in which the minimum investment is $10,000 or less (as is the case with
the Shares being sold in the offering), certain enumerated restrictions on
transfer and assignment ordinarily will not, alone or in combination, affect a
finding that such securities are freely transferable. The preamble to the DOL
Regulation (which is not considered primary legal authority) goes one step
further, providing that if the minimum investment requirement is satisfied and
there are no transfer restrictions other than those enumerated, the security in
effect will be presumed to be freely transferable. A security that is not
entitled to the presumption may still qualify as freely transferable if the
facts and circumstances so indicate. As to the Shares sold in the Offering, no
restrictions on transferability of the Shares exist other than those set forth
in the Company's Charter. The Company believes that such restrictions are of the
type enumerated in the DOL Regulation which ordinarily do not affect a finding
of free transferability.
Accordingly, the Company believes that the Shares should qualify as
"freely transferable" under the DOL Regulation, and that, assuming the Shares
are "widely held," as described above, such shares will be "Publicly-offered
securities" and the underlying assets of the Company will not be considered to
be plan assets of any Benefit Plan investing in Shares.
================================================================================
INCOME TAX ASPECTS
================================================================================
General
The following discussion, which has been prepared by the law firm of
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, counsel to the Company
("Counsel"), summarizes the material provisions of the federal income tax
treatment applicable to the Company and to the shareholders in connection with
their ownership of Securities of the Company. The discussion relates only to the
federal income tax treatment of the Company and its Shareholders and is
generally directed to the federal income tax treatment of an individual who is a
United States resident and subject to regular federal income tax. It will not
otherwise discuss the possible application of the federal income tax law to
individual Shareholders. SINCE THE DISCUSSION MAY NOT ADDRESS IN DEPTH ALL
OF THE MATERIAL INCOME TAX CONSIDERATIONS FOR EACH SHAREHOLDER'S
PERSONAL TAX SITUATION, DOES NOT DISCUSS STATE AND LOCAL INCOME TAX
CONSIDERATIONS, AND IS NOT TO BE INTERPRETED AS TAX ADVICE TO PROSPECTIVE
SHAREHOLDERS, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS
REGARDING THEIR PERSONAL TAX SITUATION.
The Company intends to conduct its operations in a manner that will permit it to
qualify and elect to be treated as a REIT for Federal income tax purposes for no
later than its first taxable year in which the Company receives the proceeds
from this offering and for each taxable year thereafter. The Company has not
requested a ruling from the IRS as to the qualification of the Company as a
REIT. The Company, however, has obtained an opinion from Counsel that, for
Federal income tax purposes, based on current law or interpretations thereof,
(i) the Company will qualify as a REIT provided the Company is operated in the
manner described in this Prospectus and in accordance with the representations
set forth in this Prospectus and satisfies the Share ownership tests described
below, and (ii) based on Revenue Ruling 66-109, 1966-1 C.B. 151, distributions
will not constitute unrelated business taxable income ("UBTI") to a shareholder
that is a tax-exempt entity (such as a pension plan, IRA or charitable
organization) that is required to account for UBTI even if the Company owns debt
financed property as that term is defined in the Code, provided that (i) such
shareholder does not incur any "acquisition indebtedness" with respect to its
Shares and (ii) the Company is not a pension-held REIT as defined by the Code.
See "Income Tax Aspects -- Taxation of Tax-Exempt Entities."
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Counsel has rendered no opinion on the other issues discussed under
"Income Tax Aspects" because of the prospective or hypothetical nature of the
facts and circumstances associated with such an opinion as, for example, the tax
treatment of distributions to specific shareholders or the tax treatment of
certain real estate transactions. Counsel's opinion represents only its best
legal judgment and has no binding effect on the Service or the courts. There is,
therefore, no assurance that the conclusions expressed below would be sustained
by a court if contested, or that future legislative or administrative changes or
court decisions may not significantly modify the statements and opinions
expressed herein. Any such future changes could be retroactive with respect to
any transactions effected prior to the time they are made.
In preparing and filing its income tax returns, the Company will make
decisions on several tax matters, including the expending or capitalizing of
particular expenditures, the allocation of property acquisition costs between
land, improvements and personal property and similar items. In making these
determinations, the Company will seek advice of its independent accountants,
however, in general, such decisions will not be reviewed by Counsel. There is no
assurance that some of these determinations will not be challenged by the
Service.
The Code provides tax treatment for organizations that principally
invest in real estate or real estates assets (including mortgages secured by
real property) which meet certain conditions imposed by Code Sections 856-860
and elect to be taxed as a real estate investment trust ("REIT"). In general, a
REIT will not be taxed at the corporate level on its net income which is
currently distributed to its shareholders. Thus, taxation as a REIT will
substantially eliminate the "double taxation" (tax at both the corporate and
Shareholder levels) typically associated with corporations. If the Company fails
to continue to qualify as a "REIT" in any year, it would likely be taxed as a
domestic corporation and would not receive a deduction for dividends paid to the
shareholders. In such event, the shareholders would be taxed in the same manner
as shareholders of ordinary domestic corporations, and the Company may be
subject to significant tax liabilities, which would reduce the amount of cash
available for dividends to the shareholders.
Requirements for Qualification and Taxation as a REIT
The Company presently qualifies as, and has elected to be taxed as, a
REIT. In the opinion of Counsel, assuming that the Company operates in
accordance with the method of operation described herein, including the
representations of the Directors that they intend to continue to comply with the
requirements of Code Sections 856-860, as amended, the Company will continue to
qualify for taxation as a REIT. However, no opinion can be given that the
Company will actually satisfy the REIT requirements in the future since that
they will depend substantially on future events. Further, the Company has not,
and does not intend to, request a ruling from the Service as to its tax status.
To continue to qualify as a REIT, the Company must, among others, meet
each of the requirements discussed below.
OWNERSHIP OF SHARES. The Company's Shares must be held by a minimum of
100 persons for at least 335 days in each of its 12 month taxable years. At all
times during the last half of each of its taxable years, no more than 50% in
value of the Shares may be owned, directly or indirectly, actually or
constructively, by five or fewer individuals. To aid in meeting these
requirements, the Company is given the power in its Bylaws to prohibit a
transfer of Shares which would produce a violation of these requirements. In
determining Share ownership, the attribution rules provided in the Code will, in
general, apply. In applying the attribution rules to determine indirect
ownership of the Company's Shares, attribution to an individual of Shares owned
by or for the individual's partner is ignored.
NATURE OF ASSETS; DIVERSIFICATION. The Company must meet two tests
designed to insure that its investments are primarily in real estate assets
(including mortgages secured by real estate), cash, or government securities and
that its other assets are diversified. In general, at the end of each fiscal
quarter, at least 75% of the value of the Company's total assets must be real
estate assets, cash and cash items (including receivables), and government
securities. The Company generally may not own securities of any one
non-governmental issuer which, in the aggregate, exceed 5% of the value of the
Company's total assets. Also, the Company may not own more than 10% of the
outstanding voting securities of any one issuer. For the purposes of so
evaluating the Company's assets, any Company investments in a partnership or
joint venture will be deemed to be a proportionate investment in the assets of
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such partnership or joint venture. Stock or debt instruments purchased with the
new equity capital are treated as real estate assets for the purposes of the 75%
Assets test. See the discussion under "New Equity Capital" below.
SOURCES OF INCOME. To qualify as a REIT, the Company must meet the
three separate income tests described below. These tests are designed to ensure
that the Company's income is derived principally from passive real estate
investments. In evaluating the Company's income, if the Company invests in a
partnership or joint venture, the Company will be treated as receiving its
proportionate share of the income earned by such partnership or joint venture
and, in the Company's hands, any such income will retain the character that it
would have in the hands of the partnership or joint venture.
THE 75% SOURCE OF INCOME TEST. Under this requirement, at
least 75% of the Company's income must be derived from the following sources:
- Interest on monetary obligations secured by real
property, including any income derived from a shared appreciation provision
which is treated as gain recognized on the sale of the secured property. A
"shared appreciation provision" is any interest that is in connection with an
obligation that is held by the REIT and secured by an interest in real property,
which provision entitles the REIT to receive a specified portion of any gain
realized on the sale or exchange of such property (or any gain that would be
realized if the property were sold on a specified date). For the purpose of
meeting the income requirements, the REIT will be treated as holding the secured
property for the period during which it held the shared appreciation provision
(or, if shorter, the period during which secured property was held by the person
holding such property). The Company does not intend to make substantial
investments in such mortgages.
- Rents from real property, except for (a) rent based
on the income or profits derived from the property, (b) rent paid by a person or
corporation in which the Company owns a 10% or greater interest, and (c) amounts
received with respect to real or personal property if the Company furnishes
services to tenants, or manages or operates the property, other than through an
"independent contractor" from whom the Company does not derive any income. The
Company anticipates that most of its income will continue to derive from such
rents.
- Gain from the sale or other disposition of real
property (including interests in mortgages) which is not property described in
Code Section 1221(1). Section 1221(1) property ("dealer property") is stock in
trade, inventory, and property held primarily for sale to customers in the
ordinary course of the Company's trade or business. In general, income from the
sale of dealer property does not qualify under this source of income test
because it is active income. The Company does not expect to have significant
amounts of such gain.
- Dividends or other distributions on shares in other
REITs (except a qualified REIT subsidiary), as well as gain from the sale of
such shares. The Company does not expect to invest in any other REIT.
- Abatements and refunds of real property taxes.
- Income and gain derived from "foreclosure
property." "Foreclosure property" includes real property and related personal
property that the Company elects to treat as foreclosure property under a
prescribed procedure. See "DEFINITIONS." Under this category, a REIT may
receive, for a limited period, income from a property that it acquired
involuntarily that otherwise would not qualify because it is active income.
- Commitment fees received in consideration for the
REIT's agreement to make secured loans or purchase or lease real property.
For the purposes of the foregoing, an "independent contractor" is any
person who does not own, directly or indirectly, 35% of the REITs Shares, and,
in general, which is not 35% or more owned, directly or indirectly, by any
person or persons owning 35% or more of the REIT's Shares. Attribution rules
apply for such determination so that the Shares of two or more persons may be
aggregated in making the determination. The contractor must be adequately
compensated for any services performed for the Company. Compensation determined
by reference to an unadjusted percentage of gross rents will generally be
considered to be
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adequate where the percentage is reasonable, taking into account the going rate
of compensation for managing similar property in the same locality, the services
rendered and other relevant factors. An independent contractor may not be an
employee of the Company (i.e., the manner in which the contractor carries out
its duties as independent contractor must not be subject to the control of the
Company).
To the extent that services (other than those customarily furnished or
rendered in connection with the rental of real property) are rendered to the
tenants of the property, they must, in general, be provided by an independent
contractor and the cost of the services must be borne by the independent
contractor or a separate charge on the tenants must be made for such services.
The amount of the separate charge must be received and retained by the
independent contractor and the independent contractor must be adequately
compensated for its services. However, REITs may perform for themselves those
services that would not result in the receipt of "unrelated business income" if
performed by certain tax exempted entities, without using an independent
contractor. The Company does not presently contemplate that it will perform for
itself such services.
A REIT receiving new capital and investing it in stock or bonds, may
treat interest, dividends or gains from the sale of such investments as income
for the purpose of the 75% source of income test. "New capital" is any amount
received by a REIT in exchange for its stock (other than pursuant to a dividend
reinvestment plan) or in a public offering of debt obligations of the REIT with
maturities of at least five years. However, this provision is applicable only to
income received for the one year period beginning on the date that the REIT
received such capital. In addition, during that period, stock or bonds bought
with new capital will be treated as "real estate assets" for the purposes of the
75% test (as explained, the 75% test requires that 75% or more of the value of a
REIT's total assets must be real estate assets, cash, cash items and government
securities).
THE 95% SOURCE OF INCOME TEST. Under this requirement, the
Company must derive at least 95% of its gross income from the sources listed
under the 75% source of income test and from dividends from companies other than
REITs, interest on obligations that are not secured by real property or gains
from the sale or disposition of stock or securities (other than interest in
qualified REITs), which is not Code Section 1221(1) property ("dealer
property").
For the purposes of determining whether the Company complies with the
75% and 95% source of income tests detailed above, "gross income" does not
include gross income from prohibited transactions. See "DEFINITIONS" and the
discussion of prohibited transactions below.
The Code provides certain relief from this requirement when a REIT has
certain types of income that are not accompanied by the receipt of cash.
However, the REIT must pay tax on the amounts not distributed (Code Sections
857(a) and (e)).
Should the Company fail to satisfy either of the 75% or the 95% source
of income tests for any taxable year, it will be subject to a 100% excise tax on
the greater of the amount by which it fails either test notwithstanding whether
the Company qualifies under the relief provision described below. However, it
may still qualify as a REIT if (i) its failure to comply was due to reasonable
cause and not to willful neglect; (ii) the Company reports the name and amount
of each item of its income included in the tests on a schedule attached to its
tax return; and (iii) any incorrect information is not due to fraud with intent
to evade tax.
THE 30% SOURCE OF INCOME TEST. Under this requirement, the
Company must derive less than 30% of its gross income from the sale or other
disposition of (i) real property held less than four years, other than
foreclosure property or property involuntarily or compulsorily converted within
the meaning of Code Section 1033, (ii) stock or securities held less than one
year, and (iii) property sold in a prohibited transaction.
PROHIBITED TRANSACTIONS. A "prohibited transaction" is one involving a
sale of dealer property, other than foreclosure property. See "DEFINITIONS." The
Code provides a safe harbor whereby the sale of a property is not a prohibited
transaction if: (i) the Company held the property for not less than four years;
(ii) the Company made no more than seven property sales (other than "foreclosure
property") during such taxable year, or the adjusted basis of all such sales is
not more than 10% of the adjusted basis of all of the REIT's assets as of the
beginning of such year; (iii) the aggregate expenditures made by the Company (or
any partner or joint venturer of the Company) during the four-year period
preceding the date of the sale which are includable in the basis of the property
do not exceed 30% of the net selling price of such property; and (iv) in the
case of land or improvements not acquired
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through foreclosure or lease termination, the Company held the property for at
least four years for the production of rental income. Losses from prohibited
transactions may not be taken into account in determining the amount of net
income from prohibited transactions. However, any net loss from prohibited
transactions may be taken into account in computing REIT taxable income.
In the event the Service were successful in characterizing the Company
as a dealer in connection with any sale of a property, the Company could be
subject to the 100% Excise Tax. In addition, capital gain treatment and any
otherwise applicable capital gain tax rate with respect to the sale of the
property could be unavailable. Under such circumstances, the Company could be
unable to satisfy the 75% and 95% source of income tests. Likewise, there is no
assurance that improvements made by the Company to any property will not exceed
30% of the net selling price of such properties or that the Company will not
make more than seven sales of properties in any one year.
The Company does not intend to hold any property primarily for sale to
customers in the ordinary course of its trade or business ("dealer property").
However, the determination of whether properties are held by the Company as
"dealer property" depends on the facts and circumstances relating to the
particular property at the time of sale. Also, the Company's purposes for
holding property may change during the course of its investments. Accordingly,
there can be no assurance that the Company will avoid "dealer status" with
respect to each of its properties.
ADDITIONAL REQUIREMENTS. In addition to the foregoing, the Company
must:
- Except for the application of Code Section 856-860, be taxable
as a "domestic corporation";
- Use the calendar year as its annual accounting period for
federal income tax purposes; and
- Conduct its affairs, with certain limitations, and manage and
dispose of its properties under the continuing exclusive authority and
management of its Directors.
DISTRIBUTION REQUIREMENTS
DISTRIBUTIONS DURING THE TAXABLE YEAR. In addition to satisfying the
requirements discussed above, in order to qualify for taxation as a REIT the
Company must distribute to the shareholders in each taxable year an amount at
least equal to the sum of:
- 95% of its REIT Taxable Income (as defined below), before the
deduction for dividends paid and excluding any net capital gain; and
- 95% of the net income from foreclosure property minus the tax
imposed on that income; minus
- Excess non-cash income.
"REIT Taxable Income" is defined under Code and Regulations as the
Company's taxable income computed as if the Company were an ordinary corporation
with certain adjustments. See "DEFINITIONS" for a detailed definition of REIT
Taxable Income.
In some situations, the Company may produce taxable income in excess of
the cash available for distribution by the Company. As a result, from time to
time, the Company might have to attempt to borrow, use cash reserves or sell
properties to meet the 95% distribution test.
DISTRIBUTIONS AFTER THE TAXABLE YEAR. Under certain circumstances, the
Company can rectify its failure to meet the 95% distribution test by paying
dividends after the close of the taxable year.
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DIVIDENDS PAID IN THE FOLLOWING YEAR. For purposes of the 95%
distribution test, the Company is permitted to treat as distributed in a
particular taxable year, certain dividends that it pays to the shareholders in
the following taxable year. To qualify for this treatment, the dividends must be
declared before the date on which the Company's tax return filings are due
(including extension periods), and the dividend must be paid within twelve
months of the end of the taxable year and no later than the next regular
dividend payment after the declaration.
DEFICIENCY DIVIDENDS. Although the Company may meet the 95%
distribution test based upon the figures reflected in its tax returns, the
Service might successfully dispute those figures. If an adjustment is made that
causes the dividends paid by the Company to be insufficient to have met the 95%
distribution test, it may pay a deficiency dividend, that will be permitted as a
deduction in the taxable year to which the adjustment is made, so that the
Company will retroactively be deemed in compliance with the 95% distribution
test. To qualify as a deficiency dividend, the Company must make this dividend
within a specified period. No deficiency dividend deduction is allowed if the
deficiency is due and there exists fraud with intent to evade tax or willful
failure to file a timely tax return.
Termination or Revocation of REIT Status
The Company's election to be treated as a REIT will be terminated
automatically if it fails to meet one of the various requirements described
above. The Company may voluntarily revoke its election within the first 90 days
of any taxable year after the first taxable year for which such election is
effective in the manner prescribed in the Treasury Regulations. If a termination
or revocation occurs, the Company (and its successor) will not be eligible to
elect REIT status for any taxable year prior to the fifth taxable year that
begins after the taxable year for which the termination or revocation is first
effective. However, this five year ineligibility rule will not apply in the case
of terminations by failure to satisfy the qualification requirements if: (i) the
Company does not willfully fail to timely file an income tax return for the
taxable year of the termination, (ii) any incorrect information in such return
is not due to fraud with intent to evade tax, and (iii) the Company's failure to
qualify as a REIT is due to reasonable cause and not due to willful neglect.
Taxation of the Company
IF QUALIFIED REIT. The following discussion generally describes the
various tax rules applicable to the Company for years in which it qualifies as a
REIT.
LOSS CARRY FORWARD. The Company generally cannot carry its net
operating or net capital losses back to prior years, but it may carry forward
net operating loss for 15 years and net capital loss for 5 years.
INCOME TAXABLE IF NOT DISTRIBUTED. The Company is taxed on its
REIT taxable income which is not timely distributed to the Shareholders and on
its undistributed capital gain, as if it were an ordinary domestic corporation.
As explained above, this income is essentially the Company's undistributed net
income and, in certain circumstances, dividends paid after the end of each
taxable year may also be deducted in determining the income subject to tax.
However, to discourage a REIT from delaying distributions until the year after
the income earned, the Code imposes a nondeductible excise tax on undistributed
income of 4% of the amount by which the required distribution exceeds the amount
distributed in the taxable year. The required distribution is the sum of 85% of
the REIT's ordinary income, plus 95% of its capital gain net income, plus the
excess, if any, of the "grossed up required distribution" for the preceding
calendar year over the distributed amount for such year. The "grossed up
required distribution" for the proceeding calendar year is the sum of the REIT's
taxable income for that year (without regard to deductions for REIT
distributions) and amounts from earlier years that are not treated as having
been distributed.
If the Company has undistributed net capital gain for a taxable year,
it must pay tax on such amounts. Currently, corporate long-term capital gains
are taxed as ordinary income, but will be subject to a maximum rate of 35%. The
alternative tax rate for corporate net capital gains does not apply.
INCOME TAXABLE WHETHER OR NOT DISTRIBUTED. The following forms
of income are subject to taxation at the Company level, whether or not they are
distributed to the shareholders:
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- INCOME VIOLATING THE 75% OR 95% SOURCE OF INCOME
TESTS. If the Company fails to meet either the 75% or 95% source of income tests
described above, but still qualifies for taxation as a REIT under the reasonable
cause exception to those tests, a 100% tax is imposed on an amount equal to the
result obtained by multiplying (i) the greater of (A) the amount by which the
Company failed to meet the 75% test or (B) the amount by which it failed to meet
the 95% test, by (ii) a fraction, the numerator of which is the Company's
taxable income (with certain adjustments) and the denominator of which is the
Company's gross income (with certain adjustments).
- NET INCOME FROM FORECLOSURE PROPERTY. The Company's
net income from foreclosure property would be taxed at the highest corporate
rate, which is presently 35%.
- INCOME FROM PROHIBITED TRANSACTIONS. The Company's
net income from prohibited transactions will be taxed at a rate of 100% whether
or not such income is distributed to the Shareholders.
- MINIMUM TAX ON ITEMS OF TAX PREFERENCE. The Company
may be subject to the corporate alternative minimum tax ("AMT"), which is
similar to the individual AMT. The corporate AMT rate is 20% with a $40,000
exemption amount (phased out at the rate of $.25 on each dollar for AMT income
in excess of $150,000) on items of tax preference allocable to it.
LIKE KIND DISTRIBUTIONS. The Company's Bylaws do not permit it
to make any in-kind distributions to the Shareholders.
QUALIFIED REIT SUBSIDIARIES. A REIT owning a "qualified REIT
subsidiary", may treat all of the assets, liabilities and items of income,
deduction, and credit of the subsidiary as though they were those of the REIT.
To be a qualified REIT subsidiary, 100% of the subsidiary must be owned by the
REIT during the entire period the subsidiary is in existence.
IF NOT QUALIFIED REIT. For any taxable year in which the Company fails
to qualify as a REIT, it will be taxed at the maximum corporate rate (currently
35%) on its taxable income, whether or not the income is distributed to the
Shareholders. In any taxable year for which the Company qualifies as a REIT, it
will be taxed as an ordinary corporation only on its undistributed income,
except that certain types of income will be taxable at the corporate level
whether or not they are distributed to the Shareholders.
Taxation of Domestic Shareholders
For any taxable year in which the Company fails to qualify as a REIT,
distributions to the Shareholders would be taxed as ordinary dividends to the
extent of the Company's current and accumulated earnings and profits. Such
dividends would be eligible for the dividend exclusion for individuals or the
70% dividends received deduction for corporations.
TAXATION OF DISTRIBUTIONS. For any taxable year in which the Company
qualifies as a REIT, the amounts it distributes to the Shareholders will be
taxed as follows:
DISTRIBUTIONS FROM ACCUMULATED EARNINGS AND PROFITS.
Distributions from the Company will be taxable to Shareholders who are not
tax-exempt entities as ordinary income to the extent of the earnings and profits
of the Company. Any dividend declared by the Company in October, November, or
December of any year payable to Shareholders of record on a specified date in
such a month shall be deemed to have been received by each Shareholder on
December 31 of such year and to have been paid by the Company on December 31 of
such year, provided such dividend actually is paid by January 31, of the
following year. Consequently, any such dividend will be taxable to a Shareholder
in such Shareholder's taxable year including December 31. (It is possible that
any portion of a dividend made to a Shareholder after December 31 not from
current or accumulated earnings and profits would be treated as a distribution
by the Company in the year it is actually made. Accordingly, if the Company has
sufficient earnings and profits in the year in which such dividend actually is
paid, no portion of such dividend would be a return of capital distribution.)
Dividends paid to such Shareholders will not constitute passive activity income
(such income, therefor, will not be subject to reduction by losses from passive
activities of a Shareholder who is subject to the passive activity loss rules).
Such distributions, however, will be considered investment income, which may be
offset by investment deductions.
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CAPITAL GAIN DISTRIBUTIONS. Company dividends that are
designated as capital gains dividends by the Company will be taxed as long-term
capital gain to taxable shareholders to the extent that they do not exceed the
Company's actual net capital gain for the taxable year. A Shareholder that is a
corporation may be required to treat up to 20% of any such capital gains
dividend as ordinary income. Such distributions, whether characterized as
ordinary income or as capital gains, are not eligible for the 70% dividends
received deduction for corporations. Shareholders are not permitted to deduct
any net losses of the Company. For tax years beginning after 1992, the maximum
Federal income tax rate applicable to net capital gains (the excess of net
long-term capital gains over net short-term capital losses) recognized by an
individual is 28% as compared to a maximum rate of 39.6% for ordinary income.
RETURN OF CAPITAL. To the extent any distributions made by the
Company to the Shareholders exceed the current and accumulated earnings and
profits of the Company, such distributions will constitute a non-taxable return
of capital to the Shareholder to the extent of the Shareholder's adjusted tax
basis in his or her Shares. A Shareholder's adjusted tax basis in his or her
Shares will be reduced (but not below zero) by the amount of such excess. The
proportion of the distributions that exceed such adjusted tax basis will be
taxable to the Shareholder as gain from the sale or exchange of his or her
Shares.
NOTIFICATION. The Company will promptly, as required, notify
Shareholders of the amount of any items of tax preference and the portion of
distributions made during each taxable year that constitute return of invested
capital.
BACK-UP WITHHOLDING. The Company will be required to withhold tax from
dividends paid to a Shareholder under certain circumstances as specified in the
"back-up" withholding provisions. These provisions only apply to a Shareholder
who (i) fails to furnish his or her taxpayer identification number ("TIN") to
the Company as required; (ii) who has, according to the Service, furnished an
incorrect TIN to the Company; (iii) who has, according to the Service,
under-reported interest, dividends or patronage dividend income in the past; or
(iv) who has failed to satisfy the payee's certification requirements of Code
Section 3406. With respect to such a Shareholder, the Company will impose
back-up withholding on dividends paid by the fund at the required rate of 31%.
Foreign investors are subject to different withholding rules.
ALTERNATIVE MINIMUM TAX. Individual and other non-corporate
Shareholders may, as a result of their investment in the Company, be subject to
the Alternative Minimum Tax ("AMT"), but only to the extent it exceeds their
regular tax liability. Effective beginning in 1993, a two-tiered, graduated rate
schedule for AMT is applicable. The lower tier consists of a 26% rate,
applicable to the first $175,000 of a taxpayer's alternative minimum taxable
income (AMTI) in excess of the exemption amount. The upper tier consists of a
28% rate, applicable to AMTI that is greater than $175,000 above the exemption
amount. For married individuals filing separately, the 28% rate applies to AMTI
that is greater than $87,500 above the exemption amount. The exemption amounts
are $45,000 for married individuals filing joint returns, $33,750 for unmarried
individuals, and $22,500 for married individuals filing separately, estates and
trusts.
AMTI is calculated by adding the taxpayer's items of tax preference to
his or her adjusted gross income (computed without regard to any deduction for
net operating loss carryovers) and subtracting certain itemized deductions (to
the extent they do not create a net operating loss, which can be carried to
another year for purposes of the regular tax), the taxpayer's AMT on net
operating loss carryovers and the applicable exemption amount. Under the 1986
Act, REITs are subject to AMT to the extent items of tax preference and other
items are treated differently for regular tax and AMT purposes. Code Section
59(d) authorizes the Service to issue regulations concerning the apportionment
of differently treated items between a REIT and its shareholders. These
regulations, when issued, could result in shareholders being allocated such
differently treated item for inclusion in their own tax returns.
STATEMENT OF SHARE OWNERSHIP. Each year the Company must demand from
the record holders of designated percentages of its Shares written statements
disclosing the actual owners of the Shares. The Company must also maintain
permanent records showing the information it has received from the shareholders
on this subject, and a list of those persons failing or refusing to comply with
the Company's request for that information.
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TAXATION OF TAX-EXEMPT ENTITIES. In general, a shareholder that is a
tax-exempt entity not subject to tax on its investment income will not be
subject to tax on distributions from the Company. The IRS has ruled that
regardless of whether the Company incurs indebtedness in connection with the
acquisition of properties, distributions paid by the Company to a shareholder
that is a tax-exempt entity will not be treated as UBTI, provided that (i) the
tax-exempt entity has not financed the acquisition of its Shares with
"acquisition indebtedness" within the meaning of the Code and the Shares
otherwise are not used in an unrelated trade or business of the tax-exempt
entity and (ii) the Company is not a pension-held REIT. This opinion applies to
a shareholder that is an organization that qualifies under Code Section 401(a),
an IRA or any other tax-exempt organization that would compute UBTI, if any, in
accordance with Code Section 512(a)(1). However, pursuant to changes that are
part of the 1993 Tax Act, if the Company is a pension-held REIT and a tax-exempt
shareholder owns more than 10 percent of the Company, such shareholder will be
required to recognize as UBTI that percentage of the dividends that it receives
from the Company as is equal to the percentage of the Company's gross income
that would be UBTI to the Company if the Company were a tax-exempt entity
required to recognize UBTI. A REIT is a pension-held REIT if at least one
qualified trust holds more than 25 percent of the value of the REIT's shares or
one or more qualified trusts, each of whom own more than 10 percent of the
REIT's shares, hold more than 50 percent of the value of the REIT's shares.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
Federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and
(c)(20), respectively, income from an investment in the Company will constitute
UBTI unless the organization is able to deduct amounts set aside or placed in
reserve for certain purposes so as to offset the UBTI generated by its
investment in the Company. Such prospective shareholders should consult their
own tax advisors concerning these "set aside" and reserve requirements.
Foreign Shareholders
Non-resident alien individuals, foreign corporations, foreign
partnerships and other foreign Shareholders are subject to United States federal
income tax under rules which are complex and the application of which will vary
depending on the individual foreign Shareholder's circumstances. Accordingly, no
attempt is made to summarize these rules and prospective foreign Shareholders
should consult their own tax advisors concerning those provisions of the Code
which deal with the taxation of foreign taxpayers.
Dividend Reinvestment Plan
Shareholders who elect to participate in the Dividend Reinvestment
Plan, if the same is adopted by the Company, will be deemed to have received the
gross amount of dividends distributed on their behalf to the Reinvestment Agent
as agent for the participants in such Plan. Such deemed dividends will be
treated as actual dividends to such Shareholders by the Company and will retain
their character and have the tax effects described above. Participants that are
subject to federal income tax will thus be taxed as if they received such
dividends despite the fact that their distributions have been reinvested and, as
a result, they will not receive any cash with which to pay the resulting tax
liability. The IRS has ruled that a maximum 5% discount (i.e., dividends
reinvested in newly issued Shares at a price equal to 95% of the Shares' fair
market value on the distribution date) representing the underwriting and other
costs that a REIT otherwise would expect to incur to issue new stock is
permitted without causing the REIT to lose its dividends paid deduction. The IRS
might assert that Shares issued for a fixed price under the Dividend
Reinvestment Plan would violate the 5% discount cap if the Company's assets have
appreciated. However, based on the availability of updated appraisals, the
Company will adjust the Plan's Share purchase price to take into account asset
value changes between distribution dates to strive to preserve its dividends
paid deduction. Shares received pursuant to the Dividend Reinvestment Plan, if
the same is adopted by the Company, will have a holding period which begins on
the day after purchase by the Reinvestment Agent. The tax basis of the Shares
acquired through the Dividend Reinvestment Plan will generally be the gross
amount of the deemed dividends invested in such Shares.
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United States Report Requirements
Subject to regulations, the IRS may impose annual reporting
requirements of certain United States and foreign persons directly holding
United States Real Property Interests ("USRPIs"). The required reports are in
addition to any necessary income tax returns. Furthermore, because Shares in a
domestically controlled REIT do not constitute USRPIs, such reporting
requirements will not apply to a foreign Shareholder in the Company (assuming
that the Company will be domestically controlled) if such Shareholder does not
otherwise own USRPIs. However, the Company is required to file an information
return with the IRS setting forth the name, address and taxpayer identification
number of the payee of dividends from the Company, whether the payee is a
nominee or is the actual beneficial owner of the Shares.
State and Local Taxes
Treatment of the Company and the Shareholders under state and local tax
laws may differ substantially from the federal income tax treatment described
above. CONSEQUENTLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR WITH REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN
INVESTMENT IN THE COMPANY.
================================================================================
SUMMARY OF DIVIDEND REINVESTMENT PLAN
================================================================================
The Company may adopt the Dividend Reinvestment Plan pursuant to which
Shareholders who purchase Shares in the Offering may elect to have the full
amount of their cash distributions from the Company reinvested in additional
Shares of the Company. Certain Selected Dealers may not offer their clients the
opportunity to participate in the Dividend Reinvestment Plan, when the same is
adopted by the Company. Each prospective investor who wishes to participate in
the Dividend Reinvestment Plan, if the same is adopted by the Company, should
consult with the investor's Selected Dealer as to the Selected Dealer's position
regarding participation in the Dividend Reinvestment Plan. The following
discussion summarizes the principal terms of the proposed Dividend Reinvestment
Plan. A copy of the proposed Dividend Reinvestment Plan is attached hereto as
Exhibit C.
General
If the Company adopts the Dividend Reinvestment Plan, the Company may,
but is not obligated to, retain an agent (the "Reinvestment Agent") to act on
behalf of the participants in the Dividend Reinvestment Plan (the
"Participants"). If the Company retains a Reinvestment Agent, the Reinvestment
Agent will be independent (i.e., not an Affiliate) of the Company and will be
paid competitive fees by the Company for the Reinvestment Agent's services.
Prior to the time that the offering terminates, if the Dividend Reinvestment
Plan is so adopted, the Company or the Reinvestment Agent, as the case may be,
will invest all cash distributions attributable to Shares owned by Participants
in Shares at the Offering Price per Share, or $10.25 per Share. Until the
Offering has terminated, Participants will be charged Selling Commissions on
Shares purchased for their accounts on the same basis as other investors
purchasing in the offering. See "The Offering -- Plan of Distribution."
Accordingly, the Company will pay the Selected Dealers, which may include
Affiliates, Selling Commissions of up to 8.0% (subject to reduction under the
circumstances provided under "PLAN OF DISTRIBUTION") and a diligence fee of
0.5%. The Company may also pay such Selected Dealers a non-accountable expense
allowance of up to 2.0%. No additional fees will be charged with respect to
Shares purchased under the Dividend Reinvestment Plan other than those paid
with respect to a purchase of Shares in the offering, except that there will be
an administrative charge equal to 5% of the amount of each reinvestment by a
Participant, but not less than $.10 or more than $2.50 for each reinvestment
transaction. Each Participant will pay to the Company at the end of each fiscal
quarter of the Company the aggregate of administrative charges incurred by the
Participant during such quarter.
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After the offering has terminated, the Company or the Reinvestment
Agent, as the case may be, will invest all distributions attributable to Shares
owned by Participants in Shares at a price per Share equal to the then "fair
market value" of a Share. For this purpose, "fair market value" shall be as
determined by the Directors, in good faith on an ongoing basis, and is expected
to be based, initially, upon the amount of increase or decrease, if any, in the
pro forma net income of the Company's real estate investments. Commencing no
later than three full fiscal years following the termination of the offering,
such Share valuation will be based upon an estimate of the amount Shareholders
would receive if the Company's real estate investments were then sold for their
estimated value and if such proceeds, together with the other assets of the
Company, were distributed in a liquidation of the Company as described in this
Prospectus. Such Share valuations are anticipated to be performed by the
Directors or Affiliates thereof, and no independent valuation will be obtained
unless the Directors elect to obtain an independent valuation. There can be no
assurance that the estimated value per Share would actually be realized by the
Company or the Shareholders upon the liquidation of the Company, or that the
Shareholders could realize the estimated net asset value of their Shares if they
were to attempt to sell their Shares.
During the offering Shares shall be available for purchase pursuant to
the Dividend Reinvestment Plan, if the same is adopted by the Company, (i) out
of the additional $750,000 (73,170.7317 Shares) registered with the Securities
and Exchange Commission or (ii) to the extent not sold pursuant to the offering,
out of the Shares offered pursuant to the offering. After the termination of the
offering, Shares shall be available for purchase pursuant to the Dividend
Reinvestment Plan, if the same is adopted by the Company, only out of the
additional 73,170.7317 Shares registered with the Securities and Exchange
Commission. If it adopts it, the Company may register additional Shares for the
Dividend Reinvestment Plan in the future if it determines that it would be
appropriate, but there is no assurance that it will do so. After the
termination, Shares issued pursuant to the Dividend Reinvestment Plan, if it is
adopted by the Company, may only be purchased pursuant to an "evergreen"
prospectus.
Investment of Distributions
Distributions will be used by the Company or the Reinvestment Agent, as
the case may be, promptly following the payment date with respect to such
distributions, to purchase Shares on behalf of the Participants from the Company
to the extent such Shares are available. If sufficient Shares are not available,
the distributions will be held in one or more interest-bearing accounts until
Shares are available to purchase. Any such funds that have not been invested in
Shares within 30 days after receipt by the Reinvestment Agent and, in any event,
by the end of the fiscal quarter in which they are received, will be paid to the
Participants. The interest earned on such accounts will be paid to the Company
to the extent necessary to pay for any administrative expenses relating to the
costs of the Dividend Reinvestment Plan and any excess remaining thereafter
shall be distributed, in its entirety, to the Participants.
At this time, Participants will not have the option to make voluntary
contributions to the Dividend Reinvestment Plan, if the same is adopted by the
Company, to purchase Shares in excess of the amount of Shares that can be
purchased with their cash distributions. At any time after it adopts the
Dividend Reinvestment Plan, if ever, the Company reserves the right, however, to
amend the Dividend Reinvestment Plan in the future to permit voluntary
contributions to the Dividend Reinvestment Plan by Participants.
All proceeds received by the Company from Shares purchased by
Participants pursuant to the Dividend Reinvestment Plan, if it is adopted by the
Company, after the termination of the offering, less any portion thereof which
the Directors deem necessary to be allocated for working capital reserves, and
less payments for Acquisition Fees and Acquisition Expenses (see "MANAGEMENT AND
AFFILIATE COMPENSATION"), will be used by the Company to acquire additional
Properties or to make improvements to existing Properties of the Company in
accordance with the investment objectives and policies of the Company then in
effect. See "INVESTMENT OBJECTIVES AND POLICIES."
Participant Accounts, Fees, and Allocation of Shares
If the Company adopts the Dividend Reinvestment Plan, for each
Participant, the Company or the Reinvestment Agent, as the case may be, will
maintain an account which shall reflect for each fiscal quarter the
distributions received by the Reinvestment Agent on behalf of such Participant.
A Participant's account shall be reduced as purchases of Shares are made on
behalf of such Participant. At the end of each fiscal quarter, the Company or
the Reinvestment Agent, as the case may be, shall disburse to each Participant
an amount equal to the balance in such Participant's account. The Company shall
be responsible for all administrative charges and expenses charged by the
Reinvestment Agent. Any interest earned on such accounts will be paid to the
Company to
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defray certain costs relating to the Dividend Reinvestment Plan and any excess
will be distributed to the Participants. The administrative charge to each
Participant for reinvestment transaction shall be equal to 5% of the
reinvestment amount, but not less than $.75 or more than $2.50 for each
reinvestment transaction. The Participant shall pay to the Company at the end of
each quarter all such administrative charges incurred by the Participant during
such quarter.
Each Participant during a fiscal quarter will acquire and own a pro
rata portion of each Share acquired pursuant to the Dividend Reinvestment Plan
during such quarter, based on the amount in the Participant's account at the
time the Share is acquired. The ownership of the Shares shall be reflected on
the books of the Company. Shares acquired pursuant to the Dividend Reinvestment
Plan will entitle the Participant to the same rights and be treated in the same
manner as those purchased by the Participants in the Offering.
The allocation of Shares among Participants may result in the ownership
of fractional Shares, computed to four decimal places.
Reports to Participants
If the Dividend Reinvestment Plan is adopted, within 60 days after the
end of each fiscal quarter, the Company or the Reinvestment Agent, as the case
may be, will mail to each Participant a statement of account describing, as to
such Participant, the distributions received during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge to each Participant (see "Participant
Accounts, Fees, and Allocation of Shares" above), and the total Shares purchased
on behalf of the Participant pursuant to the Dividend Reinvestment Plan.
Election to Participate or Terminate Participation
Shareholders may become Participants in the Dividend Reinvestment Plan,
if and when the same is adopted by the Company, by making a written election to
participate on their Subscription Agreements at the time they subscribe for
Shares. Any Shareholder who has not previously elected to participate in the
Dividend Reinvestment Plan may so elect at any time by written notice to the
Company of such Shareholder's desire to participate in the Dividend Reinvestment
Plan. Participation in the Dividend Reinvestment Plan, if and when the same is
adopted by the Company, will commence with the next distribution payable under
the adopted Dividend Reinvestment Plan after receipt of the Participant's
notice, provided it is received at least fifteen days prior to the last day of
the fiscal quarter to which such distribution relates. Subject to the preceding
sentence, the election to participate in the Dividend Reinvestment Plan, whether
made upon subscription or subsequently, will apply to all distributions
attributable to the fiscal quarters thereafter, assuming that the Dividend
Reinvestment Plan has been adopted by the Company at such time. Participants
will be able to terminate their participation in the Dividend Reinvestment Plan
at any time without penalty by delivering written notice to the Company.
Termination shall apply to the then next distribution which would otherwise have
been payable under the Dividend Reinvestment Plan, provided that the
Participant's notice of termination was received within fifteen days prior to
the end of the fiscal quarter of the Company as to which such distribution
relates.
The Company reserves the right to prohibit qualified Benefit Plans from
participating in the Dividend Reinvestment Plan if such participation would
cause the underlying assets of the Company to constitute "plan assets" of
Benefit Plans. See "ERISA CONTRIBUTIONS."
Federal Income Tax Considerations
Taxable Shareholders who elect to participate in the Dividend
Reinvestment Plan, if the same is adopted by the Company, may incur a tax
liability for Company income and gain allocated to them even though they have
elected not to receive their distributions in cash but rather to have their
distributions held pursuant to the Dividend Reinvestment Plan. For a discussion
of the federal income tax consequences of participation in the Dividend
Reinvestment Plan, see "Income Tax Aspects -- Dividend Reinvestment Plan."
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<PAGE> 85
Amendments and Termination
At any time after the Dividend Reinvestment Plan is adopted by the
Company, if ever, the Company has the right to amend any aspect of the Dividend
Reinvestment Plan, provided that notice of the amendment is sent to Participants
at least 30 days prior to the effective date thereof. The Company also reserves
the right to terminate the Dividend Reinvestment Plan for any reason at any time
after the same is adopted by the Company, if ever, by ten days' prior written
notice of termination to all Participants.
================================================================================
DESCRIPTION OF ORGANIZATIONAL
DOCUMENTS AND SECURITIES
================================================================================
The following description of the Company's organizational documents and
Shares does not purport to be complete but contains a summary of portions of the
Company's Charter and Bylaws, and is qualified in its entirety by reference to
those documents, copies of which are available upon request.
Description of Shares
The Company is authorized to issue up to 2,853,658.5365 shares of
common stock pursuant to this offering. The Shares have a $.01 par value. As of
the completion of the initial public offering on March 15, 1996, there were
1,028,253 Shares issued and outstanding. An additional 71,170.7317 shares have
been authorized and registered for issuance pursuant to the Dividend
Reinvestment Plan following the termination of the initial offering under this
Prospectus. In addition, 504,126 shares of common stock are reserved for
issuance upon the exercise of warrants which are issued and outstanding.
Each Share is entitled to participate equally in dividends when and if
declared by the Directors and in the distribution of assets of the Company upon
liquidation. Each Share is entitled to one vote and will be fully paid and
nonassessable by the Company when the Share is issued and paid for. The Shares
are not subject to redemption of the Company, except in limited circumstances in
order to preserve the Company's REIT status under the REIT Provisions. See the
discussion below. The Shares have no preemptive rights (which are intended to
ensure that a Shareholder maintains the same ownership interest (on a percentage
basis) before and after the issuance of additional Shares by the Company). The
Shares do not have cumulative voting under Maryland law for the election of
Directors. Other than shares of the Company's common stock and warrants to
purchase shares of common stock which are already issued and outstanding, and
the shares of common stock issuable upon the exercise of such warrants, the
Company currently does not intend to issue any securities other than the Shares
("PLAN OF DISTRIBUTION"), although it may do so from time to time in either
public or private distributions.
The Directors may authorize the listing, issuance and sale of Shares on
a national security exchange or on NASDAQ. The Directors may determine at a
later date to list the Shares on a national securities exchange or on NASDAQ,
but no such decision as to such listing has yet been made to do so. Maryland law
permits a Maryland corporation, if such power is provided for in its charter, to
classify or to reclassify any unissued stock by setting or changing the
preferences conversion or other rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of the redemption of
such stock, all as determined by the Directors. The Company is not so authorized
and may do so only upon amendment of its Charter.
Actual issuance of a certificate evidencing the Shares is optional,
except in those states where state laws or regulations require the Company to
issue certificates evidencing ownership of Shares. The Company may not issue
Share certificates unless it receives a request in writing to do so together
with a payment of $5.00 administrative charge to the extent such fee may legally
be charged. Shareholders who do not elect to receive Share certificates will own
such Shares in "uncertificated" or "book entry" form and will be treated in a
like manner as those who do receive a certificate. Owning Shares in
uncertificated or book entry form will (a) eliminate the physical handling and
safekeeping responsibilities inherent in owning transferrable certificates, and
(b) eliminate the need to return a duly executed Share certificate to the
Transfer Agent to effect the transfer. Transfers can be effected simply by
mailing
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<PAGE> 86
a duly executed stock power to the Transfer Agent subject to transfer
restrictions necessary to maintain the Company's qualification as a REIT. See
"Limitations on Holdings and Transfer" under this Section -- "DESCRIPTION OF
ORGANIZATIONAL DOCUMENTS AND SECURITIES."
Transfer Agent
The current Transfer Agent for the Shares is Service Data Corporation.
The Directors are currently in discussions as to whether or not to change the
Transfer Agent and may do so during the term of or after the termination of the
offering.
Meetings and Special Voting Requirements
The next Annual Meeting of Shareholders will be held on such date as
shall be fixed by the Board of Directors, but in any event no fewer than 30 days
nor more than 61 days after delivery of the annual report of the Company.
Special meetings of Shareholders may be called only upon the request of a
majority of the Directors, a majority of the Independent Directors, the
President, or upon the written request of Shareholders entitled to cast at least
10% of all of the votes entitled to be cast at such meeting. In general, the
presence in person or by proxy of Stockholders entitled to cast a majority of
votes shall constitute a quorum at any Shareholders' meeting. The organizational
documents may generally be amended by a majority vote of the Shareholders.
However, an amendment of any provision which requires, pursuant to the terms of
the Charter or Bylaws of the Company, a greater than majority vote must be
approved by a vote of the Shareholders holding shares representing at least
66-2/3% of the votes entitled to be cast thereon.
Other matters on which the Shareholders are entitled to vote include:
(i) the election and removal of Directors; (ii) a voluntary change in the
Company's status as a REIT; and/or (iii) the dissolution of the Company.
A majority of the Directors (including a majority of the Independent
Directors) may, in their discretion from time to time, amend certain portions of
the Bylaws. However, the Shareholders may amend the Bylaws upon a vote of a
majority of the votes entitled to be cast thereon.
Any action pertaining to a transaction involving the Company in which
any Adviser (including AAA), any Director or officer of the Company, or any
Affiliate of any of the foregoing persons has an interest ("Inside Transaction")
shall specifically be approved with respect to any isolated transactions or
generally be approved with respect to any series of similar transactions, by a
majority of the members of the Board of Directors, including a majority of the
Independent Directors who are not parties to and have no financial interest in
such Inside Transaction and who are not Affiliates of such interested party,
even if such Directors constitute less than a quorum. Any deadlock in voting by
the Independent Directors shall result in disapproval of the Inside Transaction
with respect to which the voting was conducted.
Bylaws
The Bylaws have been adopted by the Directors (including a majority of
the Independent Directors).
Limitations on Holdings and Transfer
For the Company to qualify as a "REIT" under the Code, not more than 50
percent of its outstanding Shares may be owned by five or fewer individuals
during the last half of each year and outstanding Shares must be 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 except with respect to the first
taxable year for which an election to be treated as an REIT is made. The
Company's Charter restricts the accumulation or transfer of Shares if any
accumulation or transfer could result in any person beneficially owning, in
accordance with the Code, in excess of 9.8% of the then outstanding Shares, or
could result in the Company being disqualified as a "REIT" under the Code. Such
restrictions authorize the Board of Directors of the Company to refuse to give
effect to such transfer on the books of the Company as to Shares accumulated in
excess of the 9.8% ownership limit. Although the intent of these restrictions is
to preclude transfers which would violate the ownership limit or protect the
Company's status as a REIT under the Code, there can be no assurance that such
restrictions will achieve their intent.
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<PAGE> 87
A transferee who acquires Shares in a restricted transfer is required
to indemnify, defend, and hold the Company and all other Shareholders harmless
from and against all damages, losses, costs, and expenses, including, without
limitation, reasonable attorneys' fees, incurred or suffered by the Company or
such Shareholders by virtue of the Company's loss of its qualification as a REIT
if such loss is a result of the transferee's acquisition. See "INCOME TAX
ASPECTS".
================================================================================
REPORTS TO SHAREHOLDERS
================================================================================
The Company will provide periodic reports to the Shareholders regarding
the operations of the Company over the course of the year. Financial information
contained in all reports to Shareholders will be prepared on an accrual basis of
accounting in accordance with generally accepted accounting principles. Tax
information will be mailed to Shareholders within 30 days following the close of
each fiscal year. The Company's annual report, which will include financial
statements audited and reported upon by independent public accountants, will be
furnished within 120 days following the close of each fiscal year. The annual
financial statements will contain or be accompanied by a complete statement of
any transactions with any Affiliates, and of compensation and fees paid or
payable by the Company to the management and its Affiliates. The information
required by Form 10-Q will be made available to Shareholders within 45 days of
the close of each of the first 3 fiscal quarters of each year.
The Directors will provide the Shareholders that are qualified
retirement plans with an annual statement of value in order to permit them to
comply with ERISA annual reporting requirements. The statement will report the
net asset value of Securities based upon the amount Shareholders would receive
if Properties were sold at their appraised values as of the close of the Company
fiscal year and if such proceeds, together with the other funds of the Company,
were distributed in liquidation of the Company. Until 1999, the Company is
permitted to value all Properties at cost, although it is not required to do so;
however, during the offering period, it is anticipated that the net asset value
of each Share will be deemed to be the net offering price of $9.02. Thereafter,
whenever the Company is not offering shares of its common stock, the Company
will perform a valuation update based on capitalization of income for each
property unless the Company previously obtained an appraisal for such Property
dated within nine months prior to the end of the relevant fiscal year. After the
first three annual reports, the Directors may elect to deliver such reports to
all Shareholders. Shareholders will not be forwarded copies of appraisals or
updates. In providing such reports to the Shareholders, neither the Company nor
its Affiliates thereby make any warranty, guarantee or representation that (1)
the Shareholders or the Company, upon liquidation, will actually realize the
estimated value per Share, or (2) the Shareholders will realize the estimated
net asset value if they attempt to sell their Shares.
Shareholders have the right under applicable federal and Maryland law
to obtain certain information about the Company and, at their expense, may
obtain a list of names and addresses of the Shareholders. Shareholders have the
right to inspect and duplicate the Company's Appraisal records. In the event
that the SEC promulgates rules and/or in the event that applicable State
securities laws or the North American Securities Administrators Association
("NASAA") Guidelines are amended so that, taking such changes into account, the
Company's reporting requirements are reduced, the Company may cease preparing
and filing certain of the aforementioned reports if the Directors determine
such action to be in the best interests of the Company and if such cessation is
in compliance with the rules and regulations of the SEC and applicable State
and NASAA Guidelines, one or more of which may then be amended.
================================================================================
PLAN OF DISTRIBUTION
================================================================================
The Company is offering a total of 2,853,658.5365 Shares of its common
stock. The minimum investment required of each investor is $20.50 (2 Shares). No
minimum number of Shares must be sold in this offering within the initial
offering period which is two years after the date of this prospectus. The
offering period is subject to extension thereafter federally and in states which
permit such extension (but such extension will not be permitted in Minnesota).
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<PAGE> 88
The Company has registered with the SEC a total of 2,926,829.2682
Shares, including Shares available for the Dividend Reinvestment Plan.
Each investor purchasing Securities will be required to complete and
execute an Order Form (also referred to sometimes as a "subscription agreement")
which includes certain representations (Exhibit B). At the time the prospective
investor submits such subscription agreement, he must tender a check to the
Company in the amount of $10.25 for each Share being purchased except for
fractional shares acquired after an investor purchases the 2 Share minimum.
Checks should be made payable to American Asset Advisers Trust, Inc. Shares will
only be sold to an investor who represents in writing that, at the time he
executes the subscription agreement, he meets the applicable suitability
requirements. See "SUITABILITY."
All funds received from subscribers whose subscriptions have been
accepted will be deposited directly into an account of the Company. A subscriber
is not entitled to the return of his funds, unless the Company rejects his
subscription.
The Company has complete discretion to reject any subscription
agreement executed by any investor within thirty days of its submission. It is
anticipated that subscriptions would be rejected for an investor's failure to
meet the suitability requirements, an over-subscription of the offering, or for
other reasons determined to be in the best interest of the Company. If any
investor's subscription is rejected, such investor's funds submitted with the
subscription will be promptly returned to the investor. The Company may not
complete a sale to an investor until at least 5 business days after the date the
investor receives a final Prospectus. The Company or its designee shall send
each investor a confirmation of his/her or its purchase.
The Securities are being offered by selected broker-dealers that are
members of the National Association of Securities Dealers, Inc. and who enter
into Selected Dealer Agreements. All Selected Dealers in the offering will offer
and sell Securities in the Company on the same terms and conditions. The
Selected Dealers will receive commissions of up to 8% of the gross proceeds from
the sale of the Securities and may receive up to an additional .5% of the gross
proceeds to cover actual due diligence expenses relating to the offering. Up to
2% per Share may be paid by the Company as a non-accountable expense
reimbursement to certain Selected Dealers. In no event, will the total
compensation to Selected Dealers including commissions, nonaccountable
continuing marketing assistance fees and nonaccountable expense reimbursements
exceed 10% of gross proceeds plus .5% for actual due diligence expense
reimbursements.
Until the termination of the offering period, Shareholders who elect to
participate in the Dividend Reinvestment Plan also will be charged selling
commissions on Shares purchased for their accounts on the same basis as they
were charged for the Shares they purchased pursuant to the offering. After
termination, no selling commissions will be paid for shares purchased pursuant
to the Dividend Reinvestment Plan.
The reallowed portion of the commission on sales will be discounted by
varying amounts in connection with sales of $250,000 or more of Shares to a
single purchaser, thereby reducing the aggregate selling commissions. The net
proceeds per Share to the Company, however, will remain the same. The total
amount of the discount is calculated by applying the applicable selling
commission percentage set forth on the schedule below to each level of Shares
purchased affected by an investor's qualifying purchases. For example, an
investor purchasing $390,240 of Shares will have an 8% commission applicable to
249,999.99 of Shares, a 7.4% commission applicable to the next $50,000 of Shares
and a 7% commission applicable to the last $90,240.01 of Shares. The amount of
the purchase price savings resulting from a volume purchase will be refunded to
the purchaser upon acceptance of the subscription, in the discretion of the
Company, either in the form of a cash refund or additional shares valued at the
Offering Price. The discount for volume purchasers is granted in accordance with
the following schedule:
<TABLE>
<CAPTION>
Purchase Selling
Amount of Shares Price Per Commission % of Share Net Savings
Purchased Share Per Share Price Per Share(1)
---------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Less than $250,000 $10.25 $.82 8.0% $0.00
$250,000 - $299,999 10.25 .76 7.4% 0.06
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
Purchase Selling
Amount of Shares Price Per Commission % of Share Net Savings
Purchased Share Per Share Price Per Share(1)
---------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
$300,000 - $399,999 10.25 .72 7.0% 0.10
$400,000 - $499,999 10.25 .65 6.3% 0.17
$500,000 - $599,999 10.25 .60 5.9% 0.22
$600,000 - $699,999 10.25 .54 5.3% 0.28
$700,000 - $799,999 10.25 .50 4.9% 0.32
$800,000 - $899,999 10.25 .44 4.3% 0.38
$900,000 or more 10.25 .39 3.8% 0.43
</TABLE>
- -----------------
(1) Reflects the amount per Share which, in the discretion of the Company,
will be refunded to the Investor or applied to the purchase of
additional Shares for the account of the Investor.
The Company expects to permit the sale of certain Shares without any
selling commission such as in the case of acquisitions by Persons who purchase
an aggregate number of Shares totalling $1,000,000 or more of total purchase
price or by Persons who are registered investment advisers, trust companies or
bank trust departments. On a case by case basis, in lieu of the commission, the
Company will either rebate the commission or issue additional shares valued at
the offering price. The Company also reserves the right to sell its shares to
its officers, Directors and employees net of the maximum commission and other
sales compensation aggregating up to 10.5% that could otherwise be paid to a
Selected Dealer by the Company.
Investors, who, in connection with their purchase of Shares, have
engaged the services of a registered investment advisor with whom the investor
has agreed to pay a fee for investment advisory services in lieu of normal
commissions based on the volume of securities sold may agree with the Company to
reduce the amount of selling commissions payable with respect to such sale to
zero. In lieu of refunding the purchase price savings, the Company shall have
the discretion to pay the amount of such savings to the investor in the form of
Shares valued at the offering price.
For purposes of determining the selling commissions payable with
respect to subscriptions made by a single purchaser, certain subscriptions may
be combined and the selling commissions apportioned pro rata among the
subscriptions. Separate subscriptions by an individual, his or her spouse, their
minor children, trusts established on behalf of any of them, and a corporation,
partnership, association or similar organized group in which any of the
foregoing hold a controlling interest (provided such entity has been in
existence for at least six months at the time of subscription and was not formed
for the purpose of subscribing) will be treated as submitted by a single
purchaser. Moreover, any purchaser (whether an individual, a corporation,
partnership, trust or other entity) that subscribes for additional interests
subsequent to an initial purchase of Securities may combine all such prior and
subsequent subscriptions for the purpose of computing total selling commissions.
Shares purchased pursuant to the Dividend Reinvestment Plan will not be combined
with other subscriptions for Shares by the investor in determining the discount
to which such investor may be entitled. See "SUMMARY OF DIVIDEND REINVESTMENT
PLAN."
The following purchasers will be permitted to aggregate their
subscriptions as described below for purposes of the reduced selling commissions
for volume purchases: (1) all profit-sharing pension and other retirements
trusts (other than any self-employed retirement plan or IRA) and all funds and
foundations maintained by a single corporation, partnership or other entity;
(ii) all profit-sharing, pension and other retirement trusts and all funds or
foundations over which a single bank or entity (except an individual, or an
investment adviser registered under the Investment Advisers Act of 1940)
exercises discretionary authority with respect to an investment in the Company;
and (iii) all clients of an investment advisor registered under the Investment
Advisers Act of 1940 who have been advised by such advisor on an ongoing basis
regarding investments other than in the Company, who have
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<PAGE> 90
been advised by such advisor regarding an investment in the Company, and who are
not being charged by such advisor or its affiliates, through the payment of
commissions or otherwise, for the advice rendered by such advisor in connection
with the purchase of interests. No purchaser may simultaneously combine
subscriptions with purchasers in more than one of categories (i), (ii) and
(iii).
On or after acceptance of his subscription agreement by the Company, an
investor will have no right to withdraw any funds submitted during the offering
period. Securities will be evidenced on the books and records of the Company,
which will include a list of Shareholders' names, addresses and number of Shares
owned. Investors will receive Share certificates only if they request a
certificate in writing together with the remittance to the Company of a $5.00
administrative fee.
The Selected Dealers and their controlling persons, will be indemnified
by the Company against certain liabilities, including liabilities under the
Securities Act of 1933.
================================================================================
SALES MATERIALS
================================================================================
Sales material prepared by the Company may be used in connection with
this offering. Such material may be used only when accompanied or preceded by
the delivery of this Prospectus. The offering is made only by means of this
Prospectus and shall be identified with the Company name and logo on the cover
page. Such sales material does not purport to be complete and should not be
considered part of this Prospectus or as forming the basis of the offering of
the Shares.
================================================================================
LEGAL PROCEEDINGS
================================================================================
Neither the Company nor the officers or Directors are parties to any
pending legal proceedings that are material to the Company.
================================================================================
EXPERTS
================================================================================
The consolidated balance sheets of American Asset Advisers Trust, Inc.
as of December 31, 1995 and 1994 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1995 and 1994 and for the period from August 17, 1993 (incorporation) to
December 31, 1993 included in this Prospectus have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The statements concerning federal taxes under the headings "Income Tax
Aspects" and "Risks Factors" have been reviewed by Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, counsel for the Company, and have been included herein,
to the extent they constitute matters of law, in reliance upon the authority of
said firm as experts thereon.
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<PAGE> 91
================================================================================
LEGAL OPINION
================================================================================
The legality of the Shares being offered hereby have been passed upon
for the Company by its counsel, Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel (which currently represents the Company, AAA and other Affiliates of
both), which firm will rely in this regard as to certain matters of Maryland law
on the opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
================================================================================
FURTHER INFORMATION
================================================================================
This Prospectus does not contain all of the information set forth in
the Registration Statement and the Exhibits relating thereto which the Company
has filed with the SEC, Washington, D.C., under the Securities Act of 1933, as
amended, and to which reference is hereby made. Copies of the Exhibits are on
file at the offices of the SEC in Washington, D.C. and may be obtained upon
payment of the fee prescribed by the Commission, or may be examined without
charge at the offices of the SEC or may be obtained through the Commission's
Internet address at http://www.sec.gov.
All summaries contained herein of documents which are filed as Exhibits
to the Registration Statement are qualified in their entirety by this reference
to those Exhibits. The Company has not knowingly made any untrue statement of a
material fact or admitted to any fact required to be stated in the Registration
Statement, including this Prospectus, or necessary to make the statement therein
not misleading.
================================================================================
DEFINITIONS
================================================================================
"AAA" means American Asset Advisers Realty Corporation, a Texas
corporation whose sole shareholder is Taylor, the President and Chairman of the
Board of the Company.
"Act" means the Securities Act of 1933, as amended from time to time.
"Acquisition Expenses" means those expenses, including but not limited
to legal fees and expenses, travel and communications expenses, costs of
appraisals, non-refundable option payments on property not acquired, accounting
fees and expenses, title insurance, and miscellaneous expenses related to
selection and acquisition of properties, whether or not acquired. Acquisition
Expenses shall not include Acquisition Fees.
"Acquisition Fees" means the total of all fees and commissions paid by
any party to any party in connection with making or investing in mortgage loans
or the purchase, development or construction of property by the Company.
Included in the computation of such fees or commissions shall be any real estate
commission, selection fee, Development Fee, Construction Fee, nonrecurring
management fee, loan fees or points or any fee of similar nature, however
designated. Excluded shall be Development Fees and Construction Fees paid to
Persons not affiliated with the Sponsor in connection with the actual
development and construction of the project.
"Adviser" shall mean the Person responsible for directing or performing
the day-to-day business affairs of the Company, including a Person to which an
Adviser subcontracts substantially all such functions.
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<PAGE> 92
"Affiliate" means as to any person, any other person who (i) owns
beneficially, directly or indirectly, 10% or more of the outstanding capital
stock, shares or equity interests of such person; or (ii) is an officer, retired
officer, director, trustee, or general partner of such person; or (iii)
controls, is controlled by or is under common control with, such person; or (iv)
if such other person is an officer, director, trustee, or general partner of
another entity, then the entity for which that person acts in any capacity.
"American Asset Adviser Programs" means AAA Net Realty Fund IX, Ltd.,
AAA Net Realty Fund X, Ltd., AAA Net Realty Fund XI, Ltd., and any other real
estate limited partnerships or REITs sponsored by American Asset Advisers Realty
Corporation or its Affiliates with investment objectives substantially similar
to the Company.
"Appraisal" means the valuation of real property (which value may take
into consideration the existing state of the property or a state to be created)
by an independent, qualified appraiser who is a member in good standing of the
American Institute of Real Estate Appraisers (MAI) or is a disinterested person
who, in the judgment of the Directors, is qualified to make such a
determination. Each Appraisal shall be maintained in the Company's records for
at least five years and shall be available for inspection and duplication by any
Shareholder. The independent qualified appraiser shall be selected by a majority
of the Directors (including a majority of the Independent Directors).
"Appraised Value" means the value of a particular property as stated in
the Appraisal.
"Average Invested Assets" means for any period the average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves
computed by taking the average of such values at the end of each month during
such period.
"Beneficial Ownership, Beneficially Own or Beneficial Owner of Shares"
means the ownership of such Shares for purposes of part II, subchapter M of the
Code, including the attribution of ownership provisions of Section 542 and 544
of the Code, or if, under Rule 13d-3 of the Exchange Act, such Person would be
deemed to have beneficial ownership of such Shares.
"Benefit Plan" means an IRA, Keogh or employee benefit plan subject to
Title I of ERISA or Section 4975 of the Code.
"Board of Directors, or Directors" means the persons holding such
office, as of any particular time, under the Charter, whether they be the
Directors named therein or additional or successor Directors.
"Bylaws" means the Bylaws of the Company.
"Charter" means the Charter of the Company filed with the State
Department of Assessments and Taxation of Maryland, as may be amended from time
to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means American Asset Advisers Trust, Inc., a Maryland
corporation.
"Competitive Real Estate Commission" means real estate or brokerage
commission paid for the purchase or sale of a property which is reasonable,
customary and competitive in light of the size, type and location of such
property.
"Construction Fee" means a fee or other remuneration for acting as
general contractor and/or construction manager to construct improvements,
supervise and coordinate projects or to provide Major Repairs or Rehabilitation
on a Company project.
"Contract Price for the Property" means the amount actually paid or
allocated to the purchase, development, construction or improvement of a
property exclusive of Acquisition Fees and Acquisition Expenses.
"Development Fee" means a fee for the packaging of the Company's
property, including negotiating and approving plans, and undertaking to assist
in obtaining zoning and necessary variances and necessary financing for the
specific property, either initially or at a later date.
-81-
<PAGE> 93
"Director(s)" means, as of any particular time, the members of the
Board of Directors of the Company.
"Distributable REIT Taxable Income" means an amount equal to or greater
than (i) the sum of 95% of: (a) the REIT Taxable Income for the taxable year
(determined without regard to the deduction for dividends paid and by excluding
any net capital gain), and (b) the excess of the net income from foreclosure
property, as defined in Section 856 of the Code, over the tax imposed on such
income less (ii) any excess noncash income, as defined in Section 857 of the
Code.
"Dividend Reinvestment Plan" or "Plan" shall mean the Dividend
Reinvestment Plan, in substantially the form attached hereto as Exhibit D, as
amended from time to time.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"Exchange Act" means The Securities Exchange Act of 1934, as amended.
"Independent Directors" means the Director(s) of the Company who are
not associated and have not been associated within the last two years, directly
or indirectly, with the Sponsor or an Adviser (including AAA) of the Company.
(a) A Director shall be deemed to be associated with the Sponsor or
Adviser if he or she:
i. owns an interest in the Sponsor, Adviser, or any of their
Affiliates; or
ii. is employed by the Sponsor, Adviser, or any of their
Affiliates; or
iii. is an officer or director of Sponsor, Adviser, or any of
their Affiliates; or
iv. performs services, other than as a Director, for the
Company; or
v. is a Director for more than three Companies organized by the
Sponsor or advised the Adviser; or
vi. has any material business or professional relationship with
the Sponsor, Adviser, or any of their Affiliates.
(b) For purposes of determining whether or not the business or
professional relationship is material, the gross revenue derived by
the prospective Independent Director from the Sponsor and Adviser
and Affiliates shall be deemed material per se if it exceeds 5% of
the prospective Independent Director:
i. annual gross revenue, derived from all sources, during
either of the last two years; or
ii. net worth, on a fair market value basis.
(c) An indirect relationship shall include circumstances in which a
Director's spouse, parents, children, siblings, mothers- or
fathers-in-law, sons- or daughters-in-law, or brothers- or
sisters-in-law is or has been associated with the Sponsor, Adviser,
any of their Affiliates, or the Company.
"Independent Expert" means a Person with no material current or prior
business or personal relationship with an Adviser (including AAA) or Director
who is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"Initial Public Offering" means the first public offering of up to
2,000,000 shares of the common stock of the Company and Warrants to purchase
1,000,000 shares, which public offering terminated on March 15, 1996.
"IRA" means an Individual Retirement Account described in Section
408(a) of the Code or an individual retirement annuity described in Section
408(b) of the Code.
"KEOGH" means a retirement benefit plan covering a person with net
earnings from self-employment, also known as an H.R.10 plan.
"Leverage" means the aggregate amount of indebtedness of the Company
for money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
-82-
<PAGE> 94
"Majority Vote" means the affirmative vote of at least a majority of
the Shares then outstanding represented and voting at a duly held meeting at
which a quorum is present or by written consent of the Shareholders.
"NASD" means The National Association of Securities Dealers, Inc.
"Net Assets" means the total assets (other than intangible) at cost
before deducting depreciation or other non-cash reserves less total liabilities,
calculated at least quarterly on a basis consistently applied.
"Organization and Offering Expenses" means those expenses payable by
the Company in connection with the formation, qualification and registration of
the Company and in marketing and distributing Shares, including, but not limited
to, (i) the preparing, printing, filing and delivery of the Registration
Statement and the Prospectus (including any amendments thereof or supplements
thereto) and the preparing and printing of contractual agreements between the
Company and the Selected Dealers (including copies thereof), (ii) the preparing
and printing of the Charter and Bylaws, solicitation material and related
documents and the filing and/or recording of such documents necessary to comply
with the laws of the State of Maryland for the formation of a Company and
thereafter for the continued good standing of a Company, (iii) the qualification
or registration of the Shares under state securities or "Blue Sky" laws, (iv)
any escrow arrangements, including any compensation to an escrow agent, (v) the
filing fees payable to the SEC and to the NASD, (vi) reimbursement for the
reasonable and identifiable out-of-pocket expenses of the Selected Dealers,
including the cost of their counsel, (vii) the fees of the Company's counsel and
independent public accountants, (viii) all advertising expenses incurred in
connection with the offering, including the cost of all sales literature and the
costs related to investor and broker-dealer sales and information meetings and
marketing incentive programs, and (ix) selling commissions, marketing fees,
incentive fees, investment banking fees and wholesaling fees and expenses
incurred in connection with the sale of the Shares.
"Participants" means those Limited Partners who elect to participate in
the Dividend Reinvestment Plan.
"Permitted Temporary Investments" means United States government
securities, certificates of deposit or other time or demand deposits of
commercial banks, savings banks, savings and loan associations or similar
institutions which have a net worth of at least $100,000,000 or in which such
certificates or deposits are fully insured by any Federal or state government
agency, United States dollar deposits in foreign branches of banks which have a
net worth of at least $100,000,000, bank repurchase agreements covering
securities of the United States government or governmental agencies, commercial
paper, bankers acceptances, public money market funds or other similar
short-term highly liquid investments.
"Person(s)" means individuals, corporations, limited partnerships,
general partnerships, joint stock companies or associations, joint venturers,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts and any other entities, government agencies and political subdivisions
thereof.
"Prohibited Transaction" under the REIT Provisions means sale of assets
held by the Company primarily for sale to customers in the ordinary course of
business other than (i) foreclosure property and (ii) certain dispositions of
real estate assets which satisfy Section 857(b)(6)(C) of the Code.
"Prospectus" means this prospectus pursuant to which the Company is
offering up to 2,853,658.5365 Shares, as the same may at any time and from time
to time be amended or supplemented.
"Regulations" means the federal income tax regulations which are the
official United States Treasury Department interpretations of the Code.
"Reinvestment Agent" means the independent agent for Participants in
the Dividend Reinvestment Plan.
"REIT" or "Real Estate Investment Trust" means a real estate investment
trust as defined under Sections 856-860 of the Code.
"REIT Provisions of the Code" or "REIT Provisions" means Parts II and
III of Subchapter M of Chapter 1 of the Code or successor statutes, and
regulations and rulings promulgated thereunder.
-83-
<PAGE> 95
"REIT Taxable Income" means the taxable income of a REIT, adjusted as
follows: (i) the deduction for dividends received allowable to trusts under
Sections 241 through 247, 249 and 250 of the Code is not allowed; (ii) the
deduction for dividends paid under Section 561 of the Code is allowed, but is
computed without regard to that portion of such deduction attributable to net
income from foreclosure property; (iii) taxable income is computed without
regard to Section 443(b) of the Code relating to the computation of tax upon the
change of an annual accounting period; (iv) net income from Foreclosure Property
that is not qualified REIT income without regard to the foreclosure property
provisions of the Code is excluded; (v) the tax imposed for failing the 75%
Income Test and/or the 95% Income Test is deducted; and (vi) income derived from
Prohibited Transactions is excluded.
"Roll-Up" means a transaction involving the acquisition, merger,
conversion, or consolidation either directly or indirectly of the Company and
the issuance of securities of a Roll-Up Entity. Such term does not include:
(a) a transaction involving securities of the Company that have been
for at least 12 months listed on a national securities exchange or
traded through the National Association of Securities Dealers
Automated Quotation National Market System; or
(b) a transaction involving the conversion to corporate, trust, or
association form of only the Company if, as a consequence of the
transaction there will be no significant adverse change in any of
the following:
i. Shareholders' voting rights;
ii. the term of existence of the Company;
iii. Sponsor or Adviser compensation;
iv. the Company's investment objectives.
"Roll-Up Entity" means a partnership, real estate investment trust,
corporation, trust, or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up transaction.
"Sales Commissions" means the fee payable to the Selected Dealers in
any amount of up to 8.0% of the offering price of the Shares sold pursuant to
the offering, plus up to an additional .5% of the offering price of the Shares
sold pursuant to the offering to cover actual due diligence expenses relating to
the offering.
"SEC" means the Securities and Exchange Commission.
"Selected Dealers" means broker-dealers who are members of the NASD and
who have executed a Selected Dealer Agreement with the Company.
"Service" or "IRS" means The Internal Revenue Service.
"Shareholders" means those Persons who at any particular time are shown
as holders of record of Shares on the books and records of the Company.
"Shares" means the Shares of the Company's common stock, $.01 par value
per share, offered pursuant to this Prospectus.
"Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any Person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the Company
is as that of an independent property manager of Company assets, and whose only
compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. A Person may also be deemed a Sponsor of the
Company by:
(a) taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either alone
or in conjunction with one or more other persons;
(b) receiving a material participation in the Company in connection
with the founding or organizing of the business of the Company, in
consideration of services or property, or both services and
property;
(c) having a substantial number of relationships and contacts with the
Company;
-84-
<PAGE> 96
(d) possessing significant rights to control Company properties;
(e) receiving fees for providing services to Company which are paid on
a basis that is not customary in the industry; or
(f) providing goods or services to the Company on a basis which was not
negotiated at arms length with the Company.
"Total Operating Expenses" means the aggregate expenses of every
character paid or incurred by the Company as determined under generally accepted
accounting principles, but excluding:
(a) The expense of raising capital such as Organization and Offering
Expenses, legal, audit, accounting, underwriting, brokerage,
listing registration and other fees, printing and other such
expenses, and tax incurred in connection with the issuance,
distribution, transfer, registration, and stock exchange listing of
the Company's Shares;
(b) interest payments;
(c) taxes;
(d) non-cash expenditures such as depreciation, amortization, and bad
debt reserves;
(e) incentive fees;
(f) Acquisition Fees and Acquisition Expenses, real estate commissions
on resale of property and other expenses connected with the
acquisition, disposition, construction, development and ownership
of real estate interests, mortgage loans, and other property (such
as the costs of foreclosure, insurance premiums, legal services,
maintenance, repair, and improvement of property).
"UBTI" means unrelated business taxable income as defined in Section
512 of the Code.
"Unimproved Real Property" means the real property of the Company which
has the following three characteristics:
(a) an equity interest in real property which as not acquired for the
purpose of producing rental or other operating income;
(b) has no development or construction in process on such land; and
(c) no development or construction on such land is planned in good
faith to commence on such land within one year.
-85-
<PAGE> 97
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994
AND FOR THE PERIOD AUGUST 17, 1993 (INCORPORATION) TO DECEMBER 31,
1993
F-1
<PAGE> 98
AMERICAN ASSET ADVISERS TRUST, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
FINANCIAL STATEMENTS: ----
<S> <C>
Independent Auditors' Report F-3
Consolidated Balance Sheets, December 31, 1995 and 1994 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 and for the Period
August 17, 1993 (Incorporation) to December 31, 1993 F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1995 and 1994 and for
the Period August 17, 1993 (Incorporation) to December 31, 1993 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 and for the Period
August 17, 1993 (Incorporation) to December 31, 1993 F-7 to F-8
Notes to Consolidated Financial Statements for Years Ended
December 31, 1995 and 1994 and for the Period
August 17, 1993 (Incorporation) to December 31, 1993 F-9 to F-14
</TABLE>
F-2
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American Asset Advisers Trust, Inc.
We have audited the accompanying consolidated balance sheets of American Asset
Advisers Trust, Inc. (the "Company") as of December 31, 1995 and 1994 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1995 and 1994 and for the period from
August 17, 1993 (Incorporation) to December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1995
and 1994 and the results of their operations and their cash flows for the years
ended December 31, 1995 and 1994 and for the period from August 17, 1993
(Incorporation) to December 31, 1993 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 12, 1996
F-3
<PAGE> 100
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ------ --------------- --------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1 ,564,961 $ 1,285,587
ACCOUNTS RECEIVABLE -- 69
PROPERTY:
Land 2,152,103 1,074,690
Buildings 4,436,074 1,923,113
--------------- --------------
6,588,177 2,997,803
Accumulated depreciation (81,512) (14,546)
--------------- --------------
TOTAL PROPERTY 6,506,665 2,983,257
--------------- --------------
NET INVESTMENT IN DIRECT FINANCING LEASE 582,753 584,396
OTHER ASSETS:
Acquisition costs 77,761 677
Accrued rental income 23,845 --
Organization costs, net of accumulated amortization
of $99,130 and $37,660, respectively 214,638 255,753
--------------- --------------
TOTAL OTHER ASSETS 316,244 256,430
--------------- --------------
TOTAL ASSETS $ 8,970,623 $ 5,109,739
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Accounts payable $ 67,481 $ 1,423
Compensation payable 150,000 --
Security deposit 15,050 --
--------------- --------------
TOTAL LIABILITIES 232,531 1,423
--------------- --------------
MINORITY INTEREST 1,596,169 733,487
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares
authorized, 827,876 and 490,921 shares issued and
outstanding, respectively 8,279 4,909
Additional paid-in capital 7,438,368 4,419,005
Accumulated distributions in excess of earnings (304,724) (49,085)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY 7,141,923 4,374,829
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,970,623 $ 5,109,739
=============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 101
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
FOR THE PERIOD AUGUST 17, 1993 (INCORPORATION) TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
Aug. 17, 1993
to
1995 1994 Dec. 31, 1993
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES
RENTAL INCOME FROM OPERATING LEASES $ 434,563 $ 93,552 $ -
EARNED INCOME FROM DIRECT FINANCING LEASES 60,574 28,090 -
INTEREST INCOME 127,947 37,564 1,606
------------ ------------ -------------
TOTAL REVENUES 623,084 159,206 1,606
------------ ------------ -------------
EXPENSES
AMORTIZATION 61,470 35,265 2,395
COMPENSATION 150,000 - -
DEPRECIATION 66,966 14,546 -
DIRECTORS' FEES 16,500 10,500 -
LEGAL AND PROFESSIONAL FEES 49,863 5,531 -
PRINTING 7,835 - -
OTHER 14,626 5,452 536
------------ ------------ -------------
TOTAL EXPENSES 367,260 71,294 2,931
------------ ------------ -------------
INCOME (LOSS) BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 255,824 87,912 (1,325)
MINORITY INTEREST IN NET INCOME
OF CONSOLIDATED JOINT VENTURES (92,378) (8,367) -
------------ ------------ -------------
NET INCOME (LOSS) $ 163,446 $ 79,545 $ (1,325)
============ ============ =============
NET INCOME (LOSS) PER SHARE $ .24 $ .32 $ (.07)
============ ============ =============
WEIGHTED AVERAGE COMMON &
COMMON EQUIVALENT SHARES 672,794 251,768 20,001
============ ============ =============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 102
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
FOR THE PERIOD AUGUST 17, 1993 (INCORPORATION) TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
Accumulated
Distributions
Common Additional In Excess of
Stock Paid-In-Capital Earnings Total
------------ ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
BALANCE AT AUGUST 15, 1993 $ - $ - $ - $ -
Issuance of common stock 200 199,810 - 200,010
Distributions - - (1,070) (1,070)
Net loss - - (1,325) (1,325)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1993 200 199,810 (2,395) 197,615
Issuance of common stock 4,709 4,704,495 - 4,709,204
Issuance costs - (485,300) - (485,300)
Distributions - - (126,235) (126,235)
Net income - - 79,545 79,545
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1994 4,909 4,419,005 (49,085) 4,374,829
Issuance of common stock 3,370 3,366,175 - 3,369,545
Issuance costs - (346,812) - (346,812)
Distributions - - (419,085) (419,085)
Net income - - 163,446 163,446
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 $ 8,279 $ 7,438,368 $ (304,724) $ 7,141,923
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 103
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
FOR THE PERIOD AUGUST 17, 1993 (INCORPORATION) TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
AUG.17,1993
TO
1995 1994 DEC.31,1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 163,446 $ 79,545 $ (1,325)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities
Amortization 61,470 35,265 2,395
Depreciation 66,966 14,546 -
Minority interest 92,378 8,367 -
Decrease (increase) in accounts receivable 69 (69) -
Increase in accounts payable 66,058 1,423 -
Increase in compensation payable 150,000 - -
Increase in security deposits 15,050 - -
Cash receipts from direct financing lease in excess of
income recognized 2,980 100 -
Increase in accrued rental income (23,845) - -
Increase in organization costs (20,355) (234,595) (58,818)
------------ ------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 574,217 (95,418) (57,748)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of real estate:
Accounted for under the operating method (2,715,431) (2,262,667) -
Accounted for under the direct financing method (1,337) (584,496) -
Acquisition costs (77,084) (677) -
------------ ------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (2,793,852) (2,847,840) -
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of issuance costs 3,022,733 4,223,904 200,010
Distributions paid to shareholders (419,085) (126,235) (1,070)
Distributions to minority interest partners (104,639) (10,016) -
------------ ------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 2,499,009 4,087,653 198,940
------------ ------------ ------------
NET INCREASE IN CASH & CASH EQUIVALENTS 279,374 1,144,395 141,192
CASH & CASH EQUIVALENTS, beginning of period 1,285,587 141,192 -
------------ ------------ ------------
CASH & CASH EQUIVALENTS, end of period $ 1,564,961 $ 1,285,587 $ 141,192
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE> 104
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
FOR THE PERIOD AUGUST 17, 1993 (INCORPORATION) TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
Aug. 17, 1993
to
1995 1994 Dec. 31, 1993
------------ ------------ -------------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Real estate contributed by partners
of the consolidated joint ventures $ 874,943 $ 735,136 $ -
============ ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE> 105
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND FOR THE PERIOD AUGUST 17, 1993 (INCORPORATION) TO DECEMBER 31,
1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
American Asset Advisers Trust, Inc. ("the Company") was incorporated on August
17, 1993 as a Maryland corporation. The initial issuance of 20,001 shares of
stock for $200,010 was to American Asset Advisers Realty Corporation ("AAA").
Commencing March 17, 1994 the Company offered up to 2,000,000 additional shares
of common stock together with 1,000,000 warrants. The warrants are exercisable
at $9 per share between March 1997 and March 1998. As of December 31, 1995 a
total of 807,875 additional shares had been issued bringing the total shares
issued and outstanding to 827,876. As of December 31, 1995 and 1994, 403,937 and
235,460 warrants were outstanding, respectively.
The Company was formed to acquire commercial and industrial real estate
properties using invested and borrowed funds. The selection, acquisition and
supervision of the operation of the properties is managed by AAA, a related
party.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of American Asset
Advisers Trust, Inc. and its majority interest in two real estate joint ventures
with related parties.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
reflected when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds.
REAL ESTATE
Real estate is leased to others on a net lease basis whereby all operating
expenses related to the properties including property taxes, insurance and
common area maintenance are the responsibility of the tenant. The leases are
accounted for under the operating method or the direct financing method.
Under the operating method, the properties are recorded at the lower of cost or
net realizable value. Rental income is recognized ratably over the life of the
lease and depreciation is charged as incurred. Under the direct financing
method, properties are recorded at their net investment (see Note 3). Unearned
income is deferred and amortized to income over the life of the lease so as to
produce a constant periodic rate of return.
The financial statements of the Company do not include any income from
contingent rentals for 1995, 1994 or 1993.
The Company obtains an appraisal on each property prior to a property's
acquisition and also performs an annual valuation update to evaluate potential
impairment for each property for which an appraisal is older than nine months.
This valuation is based on capitalization of income for each property, a review
of current market conditions and any significant events or factors which would
be considered as an impairment to a property's value.
F-9
<PAGE> 106
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years.
ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are amortized on a
straight-line basis over five years.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
No cash was paid for income taxes or interest during 1995, 1994 or 1993.
FEDERAL INCOME TAXES
The Company is qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, and is, therefore, not subject to Federal income
taxes provided it meets all conditions specified by the Internal Revenue Code
for retaining its REIT status, including the requirement that at least 95% of
its real estate investment trust taxable income is distributed by March 15 of
the following year.
EARNINGS PER SHARE
The number of shares used in earnings per share calculations for 1995, 1994 and
1993 are based on the weighted average number of shares of common stock
outstanding and, if dilutive, common stock equivalents (stock warrants) of the
Company using the treasury stock method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying value of financial instruments consisting of
cash and cash equivalents approximates their fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial statements to
conform to those classifications used in 1995.
2. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals, under
noncancellable operating leases is as follows:
<TABLE>
<S> <C>
1996 $ 675,233
1997 $ 675,233
1998 $ 679,651
1999 $ 706,318
2000 $ 730,696
2001-2014 $ 3,564,242
</TABLE>
F-10
<PAGE> 107
3. NET INVESTMENT IN DIRECT FINANCING LEASE
The Company's net investment in its direct financing lease at December 31, 1995
and 1994 included:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Minimum lease payments receivable $ 1,383,086 $ 1,446,640
Less: Unearned income 800,333 862,244
------------ ------------
$ 582,753 $ 584,396
============ ============
</TABLE>
A summary of minimum future rentals, exclusive of any renewals, under the
noncancellable direct financing lease is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 63,554
1997 $ 63,554
1998 $ 63,554
1999 $ 66,490
2000 $ 69,915
2001-2014 $ 1,056,019
</TABLE>
4. MINORITY INTEREST
On October 27, 1994 the Company formed a joint venture, AAA Joint Venture 94-1,
with AAA Net Realty Fund X, Ltd., an affiliated partnership for the purpose of
acquiring a property in Independence, Missouri on lease to Blockbuster Music
Retail, Inc. The Company's interest in the joint venture is 54.84%. The minority
interest is 45.16%.
On September 12, 1995, the Company formed a joint venture, AAA Joint Venture
95-2, with AAA Net Realty Fund XI, Ltd., an affiliated partnership for the
purpose of acquiring a property in Wichita, Kansas on lease to Blockbuster Music
Retail, Inc. The Company's interest in the joint venture is 51%. The minority
interest is 49%.
5. MAJOR TENANTS
The Company's operations are all related to the acquisition and leasing of
commercial real estate properties. The following schedule summarizes rental
income by lessee for 1995 and 1994 under both operating and direct financing
methods of accounting:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Tandy Corporation (Mesquite, Texas) $ 108,903 $ 59,290
America's Favorite Chicken Company (Smyrna, Georgia) $ 94,118 $ 40,173
Blockbuster Music Retail, Inc. (Independence, Missouri and Wichita, Kansas) $ 238,906 $ 22,179
OneCare Health Industries, Inc. (Houston, Texas) $ 53,210 $ -
</TABLE>
6. FEDERAL INCOME TAXES
The differences between net income for financial reporting purposes and taxable
income before distribution deductions relate primarily to temporary differences
and to certain organization costs which are amortized for financial reporting
purposes only.
F-11
<PAGE> 108
For income tax purposes, distributions paid to shareholders consist of ordinary
income, capital gains and return of capital as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Ordinary Income $ 342,210 $ 105,456 $ 1,325
Capital gains - - -
Return of capital 76,875 20,779 -
------------ ------------ ------------
$ 419,085 $ 126,235 $ 1,325
============ ============ ============
</TABLE>
7. RELATED PARTY TRANSACTIONS
20,001 Shares of the Company's stock are owned by American Asset Advisers Realty
Corporation. The common stock of AAA is wholly owned by H. Kerr Taylor,
President and Director of the Company. In addition, the Company has entered into
an Omnibus Services Agreement with AAA whereby AAA provides property
acquisition, leasing, administrative and management services for the Company.
$2,954 was paid to AAA during 1994 for such services. No payments were made to
AAA in 1995 or 1993 for such services although additional costs were incurred by
AAA for each year. The Company has no future obligations related to these costs.
Certain costs have been incurred by AAA in connection with the organization and
syndication of the Company. Reimbursement of these costs become obligations of
the Company in accordance with the terms of the offering. The costs to organize
the Company have been capitalized as Organization Costs. At December 31, 1994,
$58,110 in reimbursements had been paid to AAA. No reimbursements were received
in 1993 or 1995. In addition, $64,848 of costs were incurred by AAA in 1995 in
connection with the issuance and marketing of the Company's stock. These costs
are reflected as syndication costs. $9,256 of these costs were owed to AAA at
December 31, 1995. No reimbursements were paid in 1994 or 1993 for Syndication
Costs.
In accordance with the terms of the offering, AAA is entitled to receive
property management fees ranging from 2% to 4% of rental income from each of the
Company's properties. No payments have been made to AAA in 1995, 1994 or 1993
for property management fees and the Company has no future obligations related
to these costs.
Acquisition fees, including real estate commissions, finders fees, consulting
fees and any other non-recurring fees incurred in connection with locating,
evaluating and selecting properties and structuring and negotiating the
acquisition of properties are included in the basis of the properties. $232,378
and $131,077 of acquisition fees were incurred and paid to AAA during 1995 and
1994, respectively. No acquisition fees were paid in 1993.
On August 22, 1995, the Board of Directors approved a special compensation
payment for Mr. H. Kerr Taylor in the amount of $150,000. In connection
therewith, the Company executed a demand note payable at the earlier of July 15,
1996 or the receipt of $10,000,000 from the Company's stock offering. The note
shall be payable in cash or stock depending on the availability of cash for such
payment. No compensation arrangements were considered by the Board prior to this
time because the Company had not raised sufficient funds through its stock
offering, as determined by the judgment of the Board, considered necessary for
any compensation to be granted. The compensation had not been accrued prior to
August 22, 1995 because its payment was uncertain and the level of compensation
had not been determined until the August 1995 Board meeting.
No decisions as yet have been made with respect to any additional compensation
for any period after August 1995. The Board of Directors has commissioned an
external study with respect to the amount and type of compensation which could
be paid in the future to officers and/or directors, as well as the contingencies
and performance standards on which compensation will be determined. Accordingly,
the financial statements do not include any accruals for compensation subsequent
to August 1995.
F-12
<PAGE> 109
On October 27, 1994 the Company entered into a joint venture agreement with AAA
Net Realty Fund X, Ltd., an affiliated partnership for the purchase of a
property. The Company's interest in the joint venture is 54.84%. On September
12, 1995, the Company entered a joint venture agreement with AAA Net Realty Fund
XI, Ltd., an affiliated partnership for the purchase of a property. The
Company's interest in the joint venture is 51%.
8. CURRENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS No. 121) entitled "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 establishes accounting standards for the recognition and
measurement of the impairment of long-lived assets, which include the Company's
real estate investments. The provisions of this statement require that
long-lived assets to be held and used be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In performing the review of recoverability, the provisions
of SFAS No. 121 require the estimation of the expected future cash flows
(undiscounted and without interest charges) to result from the use of the asset
and its eventual disposition, with an impairment loss recognized if the sum of
such cash flows is less than the carrying value of the asset. The statement
requires that long-lived assets and certain identifiable intangibles to be
disposed of be reflected at the lower of carrying amount or fair value less
costs to sell. SFAS No. 121 is effective for fiscal years beginning after
December 15, 1995. Management of the Company does not believe such adoption will
have a material effect on the Company's financial position or results of
operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation", which is effective for the Company on January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instruments awarded. Should a stock compensation program be adopted, the Company
intends to apply APB No. 25 to its stock based compensation awards to employees
and/or directors and will disclose the required proforma effect on net income
and earnings per share.
9. PROPERTY ACQUISITIONS
On September 26, 1995, the Company acquired a newly constructed property on
lease to OneCare Health Industries, Inc. for a total price of $1,780,800. The
lease agreement extends for ten years with provisions for an escalation in the
rent after the third, sixth and ninth years of the lease. The Company recorded
$53,210 of rental income from OneCare for 1995.
On September 12, 1995, the Company acquired a 51% interest in a property on
lease to Blockbuster Music Retail, Inc. through a joint venture with a related
party for the purchase price of $919,020. The property was acquired subject to
an existing ten year lease which began in December 1994, upon the completion of
building, and continues to December 2004. The lease provides for an escalation
in the rent after five years. Rental income for 1995 totaled $58,956 from this
property.
Rental income, net income and net income per share for a full year of operations
under both operating and direct financing leases would have been $634,408,
$222,842 and $.33, respectively.
F-13
<PAGE> 110
10. SUBSEQUENT EVENT
On January 19, 1996, the Company entered into an agreement with Tucson Oracle
Limited Partnership for the purchase of a property to be constructed in Tucson,
Arizona. The property will be acquired subject to a lease with Just For Feet,
Inc. The purchase price for the property totals $3,271,136 and will be paid with
funds raised from the Initial Public Offering and, if necessary, through a joint
venture with a related party.
F-14
<PAGE> 111
AMERICAN ASSET ADVISERS
INDEX TO UNAUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Unaudited Consolidated Balance Sheets for the Period Ended F-16
March 31, 1996
Unaudited Statements of Operations for the Period Ended F-17
March 31, 1996
Unaudited Consolidated Statements of Shareholders' Equity F-18
for the Period Ended March 31, 1996
Unaudited Consolidated Statements of Cash Flows for F-19
the Period Ended March 31, 1996
Unaudited Notes to Consolidated Financial Statements for F-20 to F-23
the Period Ended March 31, 1996
</TABLE>
All other financial statement schedules are omitted as the required information
is either inapplicable or is included in the financial statements or related
notes.
F-15
<PAGE> 112
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED)
------------ -----------
<S> <C> <C>
ASSETS
CASH & CASH EQUIVALENTS $ 2,960,403 $ 1,564,961
ACCOUNTS RECEIVABLE 107,483 0
PROPERTY:
Escrow deposits 100,000 0
Land 2,152,103 2,152,103
Buildings 4,436,074 4,436,074
------------ -----------
6,688,177 6,588,177
Accumulated depreciation (109,958) (81,512)
------------ -----------
TOTAL PROPERTY 6,578,219 6,506,665
------------ -----------
NET INVESTMENT IN DIRECT FINANCING LEASE 582,024 582,753
OTHER ASSETS:
Acquisition costs 151,767 77,761
Accrued rental income 35,147 23,845
Organizational costs, net of accumulated
amortization of $114,577 and $99,130,
respectively 290,530 214,638
------------ -----------
TOTAL OTHER ASSETS 477,444 316,244
------------ -----------
TOTAL ASSETS 10,705,573 8,970,623
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable 51,386 67,481
Compensation payable 150,000 150,000
Security deposit 15,050 15,050
------------ -----------
TOTAL LIABILITIES 216,436 232,531
MINORITY INTEREST 1,591,232 1,596,169
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000
shares authorized, 1,028,253 and 827,876
shares issued and outstanding, respectively 10,283 8,279
Additional paid-in capital 9,237,634 7,438,368
Accumulated distributions in excess of earnings (350,012) (304,724)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 8,897,905 7,141,923
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,705,573 $ 8,970,623
============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-16
<PAGE> 113
AMERICAN ASSET ADVISERS TRUST, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
REVENUES
Rental income from operating leases $ 181,331 $ 77,888
Earned income from direct financing leases 13,938 14,022
Interest income 32,303 29,572
--------- ---------
TOTAL REVENUES 227,572 121,482
--------- ---------
EXPENSES
Administrative 8,544 0
Amortization 15,447 15,129
Depreciation 28,446 12,334
Directors' fees 4,500 6,000
Filing fees 250 250
Legal & Professional fees 10,912 8,954
Printing 2,322 1,176
Travel 885 467
Other 1,489 1,168
--------- ---------
TOTAL EXPENSES 72,795 45,478
--------- ---------
INCOME BEFORE MINORITY INTEREST IN
NET INCOME OF CONSOLIDATED JOINT VENTURE 154,777 76,004
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURE (37,341) (15,953)
--------- ---------
NET INCOME $ 117,436 $ 60,051
========= =========
NET INCOME PER SHARE $ 0.12 $ 0.11
========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 976,309 558,271
========= =========
</TABLE>
F-17
<PAGE> 114
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Distributions
Common Paid in in Excess of
Stock Capital Earnings Total
--------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 8,279 $ 7,438,368 $ (304,724) $7,141,923
Issuance of common stock 2,004 2,001,764 2,003,768
Issuance costs (202,498) (202,498)
Distributions (162,724) (162,724)
Net income 117,436 117,436
--------- ----------- ----------- ----------
Balance at March 31, 1996 $ 10,283 $ 9,237,634 $ (350,012) $8,897,905
========= =========== =========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-18
<PAGE> 115
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 117,436 $ 60,051
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization 15,447 15,129
Depreciation 28,446 12,334
Increase in accounts receivable (107,483) (5,000)
Increase (decrease) in accounts payable (16,095) 3,155
Cash receipts from direct financing lease
in excess of income recognized 729 645
Increase in escrow deposits (100,000) (75,000)
Increase in accrued rental income (11,302) 0
Increase in organization costs (91,339) (15,530)
Increase in minority interest 37,341 15,953
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (126,820) 11,737
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate:
Accounted for under the operating method 0 (1,064)
Acquisition costs (74,006) (122,419)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (74,006) (123,483)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock, net of
issuance costs 1,801,270 838,074
Increase in short-term notes receivable 0 (506,363)
Distributions paid to shareholders (162,724) (84,500)
Distributions to minority interest partners (42,278) (19,252)
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 1,596,268 227,959
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,395,442 116,213
CASH and CASH EQUIVALENTS at beginning
of period 1,564,961 1,285,587
----------- -----------
CASH and CASH EQUIVALENTS at end
of period $ 2,960,403 $ 1,401,800
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-19
<PAGE> 116
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Asset Advisers Trust, Inc. ("the Company") was incorporated on August
17, 1993 as a Maryland corporation. The initial issuance of 20,001 shares of
stock for $200,010 was to American Asset Advisers Realty Corporation. Commencing
March 17, 1994, the Company offered up to 2,000,000 additional shares of common
stock together with 1,000,000 warrants. The warrants are exercisable at $9 per
share between April 1997 and April 1998. The offering period terminated on March
15, 1996 with subscriptions having been received for 1,028,253 shares.
The Company was formed with the intention to qualify and to operate as a real
estate investment trust under federal tax laws. The Company will acquire
commercial and industrial properties using invested and borrowed funds. The
selection, acquisition and supervision of the operation of properties is managed
by American Asset Advisers Realty Corporation, ("AAA'), a related party.
The consolidated financial statements include the accounts of American Asset
Advisers Trust, Inc. and its majority interest in two joint ventures.
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
reflected when incurred. Rental income is recorded ratably over the life of the
lease.
For purposes of the statement of cash flows the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. There has been no cash paid for income taxes or interest
during 1996 or 1995.
Real estate is leased to others on a net lease basis whereby all operating
expenses related to the properties including property taxes, insurance and
common area maintenance are the responsibility of the tenant. The leases are
accounted for under the operating method or the direct financing method.
Under the operating method, the properties are recorded at cost. Rental income
is recognized ratably over the life of the lease and depreciation is charged as
incurred.
Under the direct financing method, properties are recorded at their net
investment. Unearned income is deferred and amortized to income over the life of
the lease so as to produce a constant periodic rate of return.
F-20
<PAGE> 117
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years.
Organization costs incurred in the formation of the Company are amortized on a
straight-line basis over five years.
Syndication costs incurred in the raising of capital through the sale of common
stock is treated as a reduction of stockholders' equity.
The Company is qualified as a real estate investment trust ("REIT') under the
Internal Revenue Code of 1986, and is, therefore, not subject to Federal income
taxes provided it meets all conditions specified by the Internal Revenue Code
for retaining its REIT status, including the requirement that at least 95% of
its real estate investment trust taxable income is distributed by March 15 of
the following year.
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the disclosures
required by generally accepted accounting principles. The financial statements
reflect all normal and recurring adjustments which are, in the opinion of
management, necessary to present a fair statement of results for the three month
periods ended March 31, 1996 and March 31, 1995.
The financial statements of American Asset Advisers Trust, Inc. contained herein
should be read in conjunction with the financial statements included in the
Partnership's annual report on Form 10-K for the year ended December 31, 1995.
2. RELATED PARTY TRANSACTIONS
20,001 shares of the Company's stock are owned by American Asset Advisers Realty
Corporation ("AAA"). The common stock of AAA is wholly owned by H. Kerr Taylor,
President and Director of the Company. In addition, the Company has entered into
an Omnibus Services Agreement with AAA whereby AAA provides acquisition,
leasing, administrative and management services for the Company. For the three
months ended March 31, 1996, $8,544 was paid to AAA for administrative services.
No fees were paid to AAA during the three months ended March 31, 1995 for
administrative services.
Certain costs have been incurred by AAA in connection with the organization and
syndication of the Company. Reimbursement of these costs become obligations of
the Company in accordance with the terms of the offering. $51,541 of costs were
incurred by AAA during the first three months of 1996 in connection with the
issuance and marketing of the Company's stock. These costs are reflected as
syndication costs. No reimbursements were paid during the first three months of
1995 for syndication costs.
Acquisition fees, including real estate commissions, finders fees, consulting
fees and any other non-recurring fees incurred in connection with locating,
evaluating and selecting properties and structuring and negotiating the
acquisition of properties are included in the basis of the properties. $74,006
of acquisition fees were incurred and paid to AAA for the three months
F-21
<PAGE> 118
ended March 31, 1996. $122,419 of acquisition fees were incurred and paid to AAA
for the three months ended March 31, 1995.
On August 22, 1995, the Board of Directors approved a special compensation
payment plan for H. Kerr Taylor in the amount of $150,000 for services provided
from August 1993 through August 1995. In connection therewith, the Company
executed a demand note payable at the earlier of July 15, 1996 or the receipt of
subscriptions of $10,000,000 from the Company's stock offering. The note shall
be payable without any interest in cash or stock depending on the availability
of cash for such payment. No compensation arrangements were considered by the
Board prior to this time because the Company had not raised sufficient funds
through its stock offering, as determined by the judgment of the Board,
considered necessary for any compensation to be granted. The compensation had
not been accrued prior to August 22, 1995 because its payment was uncertain and
the level of compensation had not been determined until the August 22, 1995
Board meeting. As of the termination of the initial public offering, the Company
had sold in excess of $10,000,000. Although Mr. Taylor can demand payment on the
note, such demand has not been made. The decision regarding the nature of the
payment, whether in stock or cash, will be made by the Board of Directors at the
time Taylor demands payment.
No decisions as yet have been made with respect to any additional compensation
for any period after August 1995. The Board of Directors has commissioned an
external study with respect to the amount and type of compensation which could
be paid in the future to officers and/or directors, as well as the contingencies
and performance standards on which compensation will be determined. Accordingly,
the financial statements do not include any accruals for compensation subsequent
to August 1995.
On April 5, 1996, the Company entered into a joint venture with AAA Net Realty
Fund XI, Ltd. and AAA Net Realty Fund X, Ltd., affiliated partnerships, for the
purchase of a property. The Company's interest in the joint venture is 51.9%.
This property is now under construction and there will be no income produced
until construction is completed and the joint venture purchases the property. On
September 12, 1995, the Company entered into a joint venture agreement with AAA
Net Realty Fund XI, Ltd. for the purchase of a property. The Company's interest
in the joint venture is 51%.
3. MAJOR TENANTS
<TABLE>
<CAPTION>
The following schedule summarizes total rental in 1996 1995
March 31, 1996 and 1995: ------- -------
<S> <C> <C>
Tandy Corporation $27,225 $27,225
America's Favorite Chicken Co. $23,060 $22,054
Blockbuster Music Retail, Inc. $94,575 $42,631
One Care Health Industries, Inc. $50,409 $0
</TABLE>
F-22
<PAGE> 119
4. EARNINGS PER SHARE
The number of shares used in earnings per share calculations for the three month
periods ended March 31, 1996 and March 31, 1995 are based on the weighted
average number of shares of common stock outstanding and, if dilutive, common
stock equivalents (stock warrants) of the Company using the modified treasury
stock method.
5. SUBSEQUENT EVENT
The Company has recently filed a registration statement with the Securities and
Exchange Commission for the sale of additional securities. Such offering has not
commenced.
F-23
<PAGE> 120
EXHIBIT A
PRIOR PERFORMANCE TABLES
The information in this section shows certain relevant summary information
concerning prior partnerships sponsored by Affiliates (the "Prior Programs")
which had investment objectives similar to the Company.
The investment objectives of these prior programs, which are substantially the
same as those of the Company, generally include preservation of capital, the
potential for increased income and protection against information, potential for
capital appreciation and partially tax-sheltered cash distributions.
INVESTORS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS
IMPLYING, IN ANY MANNER, THAT THE COMPANY WILL HAVE RESULTS COMPARABLE TO
THOSE REFLECTED IN SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX
DEDUCTIONS OR OTHER FACTORS COULD BE SUBSTANTIALLY DIFFERENT. INVESTORS
SHOULD NOTE THAT, BY ACQUIRING SHARES OF THE COMPANY, THEY WILL NOT BE
ACQUIRING ANY INTEREST IN ANY PRIOR PROGRAMS.
DESCRIPTION OF TABLES
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table VI - Acquisitions of Properties by Programs
All information contained in Tables I, II, III, and VI is as of December 31,
1995. The following is a brief description of the Tables.
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents information on a percentage basis showing the experience of the
Sponsor and Affiliates in raising and investing funds for the Prior Programs,
the offerings of which closed in the three year period ended December 31, 1995.
Also included is information on one program which has not closed.
The Table sets forth information on the offering expenses incurred and amounts
available for investment expressed as a percentage of dollars raised. The Table
also shows the date the offering commenced and the time required to raise funds
for investment.
A-1
<PAGE> 121
TABLE II - COMPENSATION TO SPONSOR
Table II provides information on a total dollar basis regarding amounts and
types of compensation paid to the Sponsor or Affiliates of the Prior Programs.
The Table indicates the total offering proceeds and the portion of such offering
proceeds paid to the Sponsor and Affiliates in connection with the Prior
Programs, the offerings of which closed in the three year period ended December
31, 1995 and one program which ash not been closed. The Table also shows the
amounts paid to the Sponsor and Affiliates from cash generated from operations
on a cumulative basis commencing with inception and ending December 31, 1995.
TABLE III - OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of operating results of the Prior Programs, the
offerings of which closed in the five year period ended December 31, 1995 and
one current program which has not closed.
TABLE IV - RESULTS OF COMPLETED PROGRAMS
Table IV is omitted from this section because neither the Sponsor nor any
Affiliates have been involved in completed programs which had investment
objectives similar to those of the Company.
TABLE V - SALES OR DISPOSALS OF PROPERTIES
Table V is omitted from this section because there have been no property sales
or disposals from any of the Prior Programs.
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS
Table VI provides certain information pertaining to properties acquired during
the past three years by the Prior Programs.
PRIOR PROGRAMS
Information in this section pertains to the following programs:
AAA Net Realty Fund Goodyear, Ltd. "AAA Goodyear"
AAA Net Realty Fund IX, Ltd. "AAA Net Realty IX"
AAA Net Realty Fund X, Ltd. "AAA Net Realty X"
AAA Net Realty Fund IX, Ltd. "AAA Net Realty XI"
A-2
<PAGE> 122
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(UNAUDITED)
<TABLE>
<CAPTION>
AAA NET AAA NET
REALTY REALTY
FUND X FUND XI (3)
-------------- --------------
<S> <C> <C>
Dollar Amount Offered $ 20,000,000 $ 20,000,000
Dollar Amount Raised $ 11,453,610 $ 3,828,490
Less Offering Expenses:
Selling Commissions
and Discounts 8.0% 8.0%
Organizational Expenses (1) 2.6% 4.5%
Marketing Support & Due Diligence 2.5% 2.5%
Reserve for Operations 1.0% 1.0%
Percent Available for
Investment 88.4% 84.0%
Acquisition Costs
Cash Down Payment 77.4% 41.6%
Acquisition Fees (2) 3.8% 1.8%
Other 0.0% 0.0%
Total Acquisition Costs 81.2% 43.4%
Percent Leveraged 0.0% 0.0%
Date Offering Began 9-17-92 10-27-94
Length of Offering (in months) 24 N/A
Months to Invest 90% of
Amount Available for
Investment (Measured from
Beginning of Offering) 28 N/A
</TABLE>
- -----------------------------------
(1) Organizational expenses include legal, accounting, printing, escrow,
filing, recording and other related expenses associated with the
formation and original organization of the Partnership and also
included fees paid to affiliates.
(2) Acquisition fees include fees paid to the general partner.
(3) The offering period for AAA Net Realty Fund XI, Ltd, is for two years
and will terminate on October 26, 1996.
A-3
<PAGE> 123
TABLE II
COMPENSATION TO SPONSOR
(UNAUDITED)
<TABLE>
<CAPTION>
FEES PAID
WITHIN LAST 3
AAA NET AAA NET YEARS FOR
REALTY REALTY ALL OTHER
FUND X FUND XI (1) PROGRAMS (2)
-------------- -------------- --------------
<S> <C> <C> <C>
Date Offering Commenced 9-17-92 10-27-94 1980-1990
Dollar Amount Raised $ 11,453,610 $ 3,828,490 $ 12,241,730
Amount paid to sponsor from proceeds of offering:
Underwriting fees $ 0 $ 0 $ 0
Acquisition fees $ 436,046 $ 70,098 $ 0
Real estate commissions $ 0 $ 0 $ 0
Advisory Fees $ 0 $ 0 $ 0
Reimbursement for
organizational expense $ 300,000 $ 106,321 $ 0
Other $ 0 $ 0 $ 0
Dollar amount of cash
generated from operations
before deducting payments
to sponsor $ 1,800,390 $ 124,038 $ 3,294,800
Amount paid to sponsor from
operations:
Property management fee $ 0 $ 0 $ 0
Reimbursements $ 90,419 $ 0 $ 145,616
Leasing Commissions $ 0 $ 0 $ 0
Other (General Partner
Distributions) $ 6,750 $ 0 $ 29,325
Dollar amount of property sales
and refinancing before deducting
payments to sponsor
- cash N/A N/A N/A
- notes N/A N/A N/A
Amount paid to sponsor from
property sales and
refinancing:
Real Estate Commissions N/A N/A N/A
Incentive fees N/A N/A N/A
Other (identify & quantify) N/A N/A N/A
</TABLE>
(1) The offering period for AAA Net Realty Fund XI, Ltd. is for two years
and will terminate on October 26, 1996.
(2) Represents information for ten private programs sponsored between 1980
and 1990
A-4
<PAGE> 124
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY GOODYEAR (1)(2)
(UNAUDITED)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
-------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues $ 2,586 $ 85,490 $ 107,333 $ 107,376 $ 107,443 $ 107,438
Profit on sale of properties $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Less: Operating expenses (4) $ 59 $ 12,933 $ 5,945 $ 6,016 $ 4,942 $ 3,994
Interest expense $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Depreciation and amortization $ 1,572 $ 27,918 $ 36,372 $ 36,372 $ 36,372 $ 34,801
Net Income - GAAP Basis $ 955 $ 44,639 $ 65,016 $ 64,988 $ 66,129 $ 68,643
Taxable Income
- -from operations $ 955 $ 44,639 $ 65,016 $ 64,988 $ 66,129 $ 68,643
- -from gain on sale $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated from operations (5) $ 1,767 $ 65,762 $ 86,959(8) $ 101,278 $ 102,480 $ 118,026
Cash generated from sales $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated from refinancing $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated from operations,
sales and refinancing $ 1,767 $ 65,762 $ 86,959 $ 101,278 $ 102,480 $ 118,026
Less: Cash distributions to investors (3)
- - from operating cash flow $ 0 $ 59,180 $ 101,388 $ 100,392 $ 100,392 $ 100,392
- - from cash flow from prior period $ 0 $ 0 $ 589 $ 0 $ 0 $ 0
- - from sales and refinancing $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
- - from return of capital $ 0 $ 105,910(7) $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after
cash distributions to investors $ 1,767 ($ 99,328) ($15,018)(8) $ 886 $ 2,088 $ 17,634
Less: Cash distributions to
general partner $ 0 $ 452 $ 960 $ 880 $ 960 $ 960
Cash generated (deficiency) after
cash distributions $ 1,767 ($ 99,780) ($15,978) $ 6 $ 1,128 $ 16,674
Special items (not including
sales and refinancing): $ 0
Limited partners' capital contributions $385,000 $ 950,000 $ 0 $ 0 $ 0 $ 0
General partner's capital contributions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Organization costs ($26,950) ($ 40,550) $ 0 $ 0 $ 0 $ 0
Syndication costs ($30,800) ($ 76,000) $ 0 $ 0 $ 0 $ 0
Property acquisitions ($ 9,000) $ 1,020,260) $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after cash
distributions and special items $320,017 $ (286,590) ($15,978) $ 6 $ 1,128 $ 16,674
</TABLE>
A-5
<PAGE> 125
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY GOODYEAR (1)(2)
(UNAUDITED)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED (7)
Federal Income Tax Results (6)
Ordinary income (loss)
- - from operations $2.48 $33.43 $52.90 $52.87 $53.80 $55.85
- - from recapture $0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Capital gain (loss) $0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Cash distributions to Investors (6)
Source (on GAAP Basis)
- - Investment income from current period $0.00 $33.43 $52.90(8) $52.87 $53.80 $55.85
- - Investment income from prior period $0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
- - Return of capital (10) $0.00 $90.23(7) $30.07 $28.81 $27.88 $25.83
Source (on Cash Basis)
- - Sales $0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
- - Refinancing $0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
- - Operations $0.00 $44.33 $82.50(8) $81.68 $81.68 $81.68
- - Cash flow from prior period $0.00 $ 0.00 $ 0.47 $ 0.00 $ 0.00 $ 0.00
- - Return of capital $0.00 $79.33(7) $ 0.00 $ 0.00 $ 0.00 $ 0.00
Amount (in percentage terms)
remaining invested in program
properties at the end of the last
year reported in the Table
(original total acquisition cost
of properties retained divided
by original total acquisition
cost of all properties in
program) N/A 100% 100% 100% 100% 100%
</TABLE>
SEE NOTES TO TABLES
A-6
<PAGE> 126
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND IX (1)(2)
(UNAUDITED)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Gross Revenues $ 141,719 $ 373,681 $ 491,922 $ 496,362 $ 500,716
Profit on sale of properties $ 0 $ 0 $ 0 $ 0 $ 0
Less: Operating expenses (4) $ 50,197 $ 53,020 $ 37,189 $ 37,597 $ 39,746
Interest expense $ 0 $ 0 $ 0 $ 0 $ 0
Depreciation and amortization $ 85,112 $ 213,492 $ 254,899 $ 255,250 $ 255,250
Net Income - GAAP Basis $ 6,410 $ 107,169 $ 199,834 $ 203,515 $ 205,720
Taxable Income
- -from operations $ 54,461 $ 212,675 $ 313,034 $ 316,715 $ 318,920
- -from gain on sale $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated from operations (5) $ 91,760 $ 325,702 $ 436,033 $ 487,354 $ 465,241
Cash generated from sales $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated from refinancing $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated from operations,
sales and refinancing $ 91,760 $ 325,702 $ 436,033 $ 487,354 $ 465,241
Less: Cash distributions to investors (3)
- - from operating cash flow $ 80,614 $ 318,949 $ 436,033 $ 452,802 $ 458,193
- - from cash flow from prior period $ 0 $ 0 $ 11,378 $ 0 $ 0
- - from sales and refinancing $ 0 $ 0 $ 0 $ 0 $ 0
- - from return of capital $ 0 $ 0 $ 0 $ 0 $ 0
Cash generated (deficiency) after
cash distributions to investors $ 11,146 $ 6,753 ($ 11,378) $ 34,552 $ 7,048
Less: Cash distributions to
general partner $ 814 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Cash generated (deficiency) after
cash distributions $ 10,332 $ 3,753 ($ 14,378) $ 31,552 $ 4,048
Special items (not including
sales and refinancing):
Limited partners' capital contributions $ 3,661,500 $ 1,729,000 $ 0 $ 0 $ 0
General partner's capital contributions $ 1,000 $ 0 $ 0 $ 0 $ 0
Organization costs ($ 164,768) ($ 77,807) $ 0 $ 0 $ 0
Syndication costs ($ 384,457) ($ 181,547) $ 0 $ 0 $ 0
Property acquisitions ($2,710,544) ($1,601,769) ($ 124,556) $ 0 $ 0
Cash generated (deficiency) after cash
distributions and special items $ 413,063 ($ 128,370) ($ 138,934) $ 31,552 $ 4,048
</TABLE>
A-7
<PAGE> 127
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND IX (1)(2)
(UNAUDITED)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
Federal Income Tax Results (6)
Ordinary income (loss)
- from operations $ 14.87 $ 39.45 $ 58.07 $ 58.75 $ 59.16
- from recapture $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Capital gain (loss) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Cash distributions to Investors (6)
Source (on GAAP Basis)
- Investment income from current period $ 14.87 $ 39.45 $ 58.07 $ 58.75 $ 59.16
- Investment income from prior period $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
- Return of capital (10) $ 7.15 $ 19.72 $ 24.93 $ 25.25 $ 25.84
Source (on Cash Basis)
- Sales $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
- Refinancing $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
- Operations $ 22.02 $ 59.17 $ 83.00 $ 84.00 $ 85.00
- Cash flow from prior period $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
- Return of capital $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Amount (in percentage terms)
remaining invested in program
properties at the end of the last
year reported in the Table
(original total acquisition cost 100% 100% 100% 100% 100%
of properties retained divided
by original total acquisition
cost of all properties in
program)
</TABLE>
SEE NOTES TO TABLES
A-8
<PAGE> 128
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND X (1)(2)(11)
(UNAUDITED)
<TABLE>
<CAPTION>
1993 1994 1995
=========== ========== ==========
<S> <C> <C> <C>
Gross Revenues $ 182,358 $ 666,798 $1,043,148
Profit on sale of properties $ 0 $ 0 $ 0
Less: Operating expenses (4) $ 13,430 $ 48,868 $ 94,818
Interest expense $ 0 $ 0 $ 0
Depreciation and amortization $ 59,563 $ 145,271 $ 216,557
Net Income - GAAP Basis $ 109,365 $ 472,659 $ 731,773
Taxable Income
-from operations $ 109,365 $ 460,870 $ 681,850
-from gain on sale $ 0 $ 0 $ 0
Cash generated from operations (5) $ 199,482 $ 537,731 $ 972,758
Cash generated from sales $ 0 $ 0 $ 0
Cash generated from refinancing $ 0 $ 0 $ 0
Cash generated from operations,
sales and refinancing $ 199,482 $ 537,731 $ 972,758
Less: Cash distributions to investors (3)
- from operating cash flow $ 116,054 $ 515,254 $ 879,065
- from cash flow from prior period $ 0 $ 0 $ 0
- from sales and refinancing $ 0 $ 0 $ 0
- from return of capital $ 0 $ 0 $ 0
Cash generated (deficiency) after
cash distributions to investors $ 83,428 $ 22,477 $ 93,693
Less: Cash distributions to
general partner $ 0 $ 2,650 $ 4,100
Cash generated (deficiency) after
cash distributions $ 83,428 $ 19,827 $ 89,593
Special items (not including
sales and refinancing):
Limited partners' capital contributions $ 6,468,550 $4,985,060 $ 0
General partner's capital contributions $ 944 (9) $ 0 $ 0
Organization costs $ 291,085) $ 8,915) $ 0
Syndication costs $ 679,198) $ 523,431) $ 0
Property acquisitions $ 3,113,096) $4,781,519) $1,425,353)
Cash generated (deficiency) after cash
distributions and special items $ 2,469,543 $ 308,978) $1,335,760)
</TABLE>
A-9
<PAGE> 129
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND X (1)(2)(11)
(UNAUDITED)
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
<TABLE>
<S> <C> <C> <C>
Federal Income Tax Results (6)
Ordinary income (loss)
- from operations $16.91 $40.24 $59.53
- from recapture $ 0.00 $ 0.00 $ 0.00
Capital gain (loss) $ 0.00 $ 0.00 $ 0.00
Cash distributions to Investors (6)
Source (on GAAP Basis)
- Investment income from current period $16.91 $40.24 $59.53
- Investment income from prior period $ 0.00 $ 0.00 $ 0.00
- Return of capital (10) $ 1.03 $ 4.75 $17.22
Source (on Cash Basis)
- Sales $ 0.00 $ 0.00 $ 0.00
- Refinancing $ 0.00 $ 0.00 $ 0.00
- Operations $17.94 $44.99 $76.75
- Cash flow from prior period $ 0.00 $ 0.00 $ 0.00
- Return of capital $ 0.00 $ 0.00 $ 0.00
Amount (in percentage terms)
remaining invested in program
properties at the end of the last
year reported in the Table N/A N/A N/A
(original total acquisition cost
of properties retained divided
by original total acquisition
cost of all properties in
program)
</TABLE>
SEE NOTES TO TABLES
A-10
<PAGE> 130
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND XI (1)(2)
(UNAUDITED)
<TABLE>
<CAPTION>
1995
==========
<S> <C>
Gross Revenues $ 124,158
Profit on sale of properties $ 0
Less: Operating expenses (4) $ 20,790
Interest expense $ 0
Depreciation and amortization $ 26,058
Net Income - GAAP Basis $ 77,310
Taxable Income
-from operations $ 76,054
-from gain on sale $ 0
Cash generated from operations (5) $ 124,038
Cash generated from sales $ 0
Cash generated from refinancing $ 0
Cash generated from operations,
sales and refinancing $ 124,038
Less: Cash distributions to investors (3)
- from operating cash flow $ 61,863
- from cash flow from prior period $ 0
- from sales and refinancing $ 0
- from return of capital $ 0
Cash generated (deficiency) after
cash distributions to investors $ 62,175
Less: Cash distributions to
general partner $ 0
Cash generated (deficiency) after
cash distributions $ 62,175
Special items (not including
sales and refinancing):
Limited partners' capital contributions $3,828,490
General partner's capital contributions $ 1,000
Organization costs ($ 172,533)
Syndication costs ($ 402,096)
Property acquisitions ($1,674,307)
Cash generated (deficiency) after cash
distributions and special items $1,642,729
</TABLE>
A-11
<PAGE> 131
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND XI (1)(2)
(UNAUDITED)
<TABLE>
<CAPTION>
1995
========
<S> <C>
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
Federal Income Tax Results (6)
Ordinary income (loss)
- from operations $19.86
- from recapture $ 0.00
Capital gain (loss) $ 0.00
Cash distributions to Investors (6)
Source (on GAAP Basis)
- Investment income from current period $16.16
- Investment income from prior period $ 0.00
- Return of capital (10) $ 0.00
Source (on Cash Basis)
- Sales $ 0.00
- Refinancing $ 0.00
- Operations $16.16
- Cash flow from prior period $ 0.00
- Return of capital $ 0.00
</TABLE>
Amount (in percentage terms)
remaining invested in program
properties at the end of the last
year reported in the Table
(original total acquisition cost
of properties retained divided N/A
by original total acquisition
cost of all properties in
program)
SEE NOTES TO TABLES
A-12
<PAGE> 132
NOTES TO TABLE III
(1) Taxable income is reflected on the cash basis for AAA Goodyear and on the
accrual basis for AAA Net Realty Funds IX, X and XI. There are no significant
differences between income as reflected on the cash basis for AAA Goodyear and
income as would be reflected on a GAAP basis.
(2) Amortization of organizational costs is computed over a period of 60 months.
Depreciation of commercial real property is determined on the straight-line
method over estimated useful lives ranging from 31.5 to 39 years.
(3) Cash distributions/dividends to investors represents the amount actually
disbursed in each year to the limited partners or shareholders.
(4) Operating expenses include management fees paid to affiliates for such
services as accounting, property supervision, etc.
(5) Cash generated from operations includes net income plus depreciation and
amortization plus any decreases in accounts receivable and accrued rental income
or increases in accounts payable and minus any increases in accounts receivable
and accrued rental income or decreases in accounts payable.
(6) Tax and distribution data per $1,000 invested was computed based on the
number of units subscribed at each year end. Contributions to the Goodyear
Program was $30,000 per unit and contributions to Programs IX, X and XI were
$1,000 per unit. AAA Goodyear had 12.833 units outstanding at December 31, 1990
and 44.5 units outstanding for each year thereafter. AAA Net Realty IX had 3,661
units outstanding at December 31, 1991 and 5,390.5 units outstanding thereafter.
AAA Net Realty X had 6,468.55 units outstanding at December 31, 1993 and
11,453.61 units thereafter. AAA Net Realty XI had 3,828.49 units outstanding at
December 31, 1995.
(7) After the final property was acquired by AAA Net Realty Goodyear, funds
remained in excess of the required working capital reserve. $105,910, 7.9% of
the original funds raised, was returned to the investors in the fall of 1991.
Tax and Distribution Data per $1,000 invested has been computed based upon a net
investment of $1,229,090 after this return of capital.
(8) In December 1992, a property tax payment was made from the working capital
reserve for which reimbursement was received in January 1993. The source of
distributions for both years is reflected as operations.
(9) The General Partners' contribution consists of $1,000 from 1992 reduced by
bank charges incurred before the Partnership was formed.
(10) The amount of cash distributions paid to investors is primarily determined
by the operating profit before depreciation and amortization deductions. The
sources of distributions from investment income in the Table is net income after
all deductions. Investment income from the current period represents net income
from earlier years. The distributions shown as a return of capital are
generally the portion attributable to depreciation and amortization.
(11) AAA Net Realty X, Ltd. has been advised that it has a contingent liability
to investors who acquired units after December 31, 1993 as a result of not
maintaining current information in the prospectus and supplement. The maximum
possible amount of this contingent liability is approximately $5.5 million. For
more information, please refer to the Prospectus under section "Prior
Performance".
A-13
<PAGE> 133
EXHIBIT B
AMERICAN ASSET ADVISERS TRUST, INC.
ORDER FORM
The undersigned desires to become a shareholder of AMERICAN ASSET ADVISERS
TRUST, INC. (The "Company") and to purchase the number of shares (the "Shares")
appearing at the beginning of this Order Form in accordance with the terms and
conditions of the Prospectus and supplements, if any, thereto. In connection
therewith, the undersigned hereby represents, warrants and agrees as follows:
1. SUBSCRIPTION The undersigned agrees to purchase the number of
Shares set forth above his signature at the end of
this subscription, and hereby tenders the amount
required to purchase such Shares ($10.25 per Share; -
2 Share minimum subscription, see the Prospectus).
2. REPRESENTATIONS (a) The undersigned is subscribing for Shares
(Each investor must solely for his own account or for the account
initial each repre- indicated herein and not for the benefit or the
sentation on the account of any other person or entity. _______
line provided after (initial)
each such
representation.) (b) The undersigned is aware that this subscription
may be rejected in whole or in part by the Company in
its sole discretion. ________(initial)
(c) The undersigned has received a copy of the
Prospectus. ________(initial)
(d) The undersigned meets the minimum income and net
worth standards established by the Company, which are
generally as follows: (1) gross income of $45,000 and
a net worth of $45,000 (excluding home, furnishings
and automobiles), or (2) a net worth of $150,000
(excluding home, furnishings and automobiles).
________(initial)
(e) The undersigned acknowledges that the Shares are
not liquid. ________(initial)
B-1
<PAGE> 134
NOTHING HEREIN SHALL BE DEEMED A WAIVER OF ANY RIGHTS OF ACTION
WHICH THE UNDERSIGNED MAY HAVE UNDER ANY FEDERAL OR STATE SECURITIES LAW.
EXECUTING THE ORDER FORM SHALL NOT CONSTITUTE A COMPLETED
TRANSACTION UNTIL AT LEAST FIVE (5) DAYS AFTER THE DATE THE INVESTOR
RECEIVES A FINAL PROSPECTUS. AN INVESTOR MAY RECONSIDER THE INVESTMENT
DURING SUCH FIVE (5) DAY PERIOD AND ANY INVESTOR WHO FIRST RECEIVES A
FINAL PROSPECTUS ONLY AT THE TIME OF SUBSCRIPTION MAY REQUEST A REFUND
DURING SUCH FIVE (5) DAY PERIOD.
REGISTRATION REQUIREMENTS FOR
AMERICAN ASSET ADVISERS TRUST, INC.
The following requirements have been established for the various forms of
registration. Accordingly, complete subscription agreements and such supporting
material as may be necessary, must be provided.
TYPE OF OWNERSHIP:
1. INDIVIDUAL - One signature required.
2. JOINT TENANTS WITH RIGHT OF SURVIVORSHIP. Both parties must sign.
3. TENANTS IN COMMON - Both parties must sign.
4. COMMUNITY PROPERTY - Only one investor signature required.
5. CUSTODIAN - The custodian signs the Subscription Agreement.
6. TRUST - The trustee signs the Subscription Agreement. Provide a copy of
the Trust Agreement, the name of the trustee and the name of the
beneficiary.
7. PARTNERSHIP - Identify the entity as to whether it is a general or
limited partnership. The general partners must be identified and their
signatures obtained on the order. In the case of an investment by a
general partnership, all partners must sign (unless a "managing
partner" has been designated for the partnership, in which case he may
sign on behalf of the partnership if a certified copy of the document
granting him authority to invest on behalf of the partnership is
submitted).
8. CORPORATION - The Subscription Agreement must be accompanied by (i) a
certified copy of the resolution of the Board of Directors designating
the
B-2
<PAGE> 135
officer(s) of the corporation authorized to sign on behalf of the
corporation and (ii) a certified copy of the board's resolution
authorizing the investment.
9. IRA - Requires signature of authorized signer (e.g., an officer) of the
bank, trust company or other fiduciary. The address of the trustee must
be provided in order for them to receive checks and other pertinent
information regarding the investment.
10. KEOGH (HR 10) - Same rules as those applicable to IRAs.
11. UNIFORM GIFT TO MINORS ACT (UGMA) - The required signature is that of
the custodian, not of the parent (unless the parent has been designated
as the custodian). Only one child is permitted in each investment under
the Uniform Gift to Minors Act. In addition, designate state under
which UGMA is being made and the child's Social Security number.
American Asset Advisers Trust, Inc.
8 Greenway Plaza, Suite 824, Houston, TX 77046
ATTN: Investor Services
ORDER FORM
AMERICAN ASSET ADVISERS TRUST, INC.
MAKE CHECK PAYABLE TO: AMERICAN ASSET ADVISERS TRUST, INC.
IMPORTANT: Please fill out application completely.
Type or use ballpoint pen. Press hard.
<TABLE>
<S> <C>
=======================================================================================================
1. INVESTMENT _______________ _____________ / / NEW _____________________________________
NUMBER OF PURCHASER DATE OF PREVIOUS PURCHASE
SHARES OR
$______________________________ / / ADDITION TO _____________________________________
AMOUNT OF INVESTMENT PREVIOUS PREV. AAA ACCT. #
($10.25 TIMES NUMBER OF SHARES) PURCHASE
=======================================================================================================
2. OWNERSHIP A. / / Individual F. / / Trust K. / / Uniform Gift to Minors Act
Check One: B. / / Joint Tenants with G. / / Partnership of the State of
Rights of Survivorship H. / / Corporation L. / / Other (explain)___________
C. / / Tenants in Common I. / / IRA ____________________
D. / / Community Property J. / / Keogh (HR 10) ____________________
E. / / Custodian
=======================================================================================================
</TABLE>
B-3
<PAGE> 136
3. REGISTERED OWNER: Name___________________ Soc. Sec. No. _________
NAME OF INVESTOR. (Use name of
trust and address of the Name___________________ Soc. Sec. No. _________
trustee or custodian or
administrator where Address _______________________________________
applicable.) Please type or
print here the exact name City __________ State __ Zip _____ Phone ______
(registration) investor
desires on account.
================================================================================
4. DIVIDEND PAYMENT Name___________________________________________
ADDRESS:
Where is the dividend to be C/O____________________________________________
sent? (Insert "same" if it is
to be sent to address of the Address________________________________________
registered owner. Insert name,
address and account number if City __________ State __ Zip _____ Phone ______
check is to be sent to a
financial institution.) Account Number ________________________________
B-4
<PAGE> 137
5. DIVIDEND If the Company adopts a Dividend Reinvestment Plan, check
REINVESTMENT here if you elect to have all distributions reinvested in
PLAN additional Shares at the then current price per Share (which
will continue to be $10.25 during the initial offering
period under the Prospectus), until you revoke this election
pursuant to the rules adopted by the Company with respect to
revocation of such elections.
================================================================================
6. CORRESPONDENCE: All reports and financial statements will be sent to the
registered owner at the address above. All correspondence,
reports, and financial statements are normally sent to the
registered owner at the address shown above. On IRA and
Uniform Gift to Minors Act accounts, please complete this
block to insure that the investor will receive this
information at his or her mailing address. Also, if
additional correspondence, reports and financial statements
are required by another person, please complete.
Name________________________________________________________
Address_____________________________________________________
City__________________ State____ Zip_________ Phone_________
================================================================================
7. SIGNATURES: Executed this __________ day of _____, 199__ at _______, _______
X____________________________ X_______________________________
Signature (Investor, Trustee, Signature (Investor, Trustee,
Custodian, Administrator) Custodian, Administrator)
BY EXECUTING THIS AGREEMENT THE INVESTOR IS NOT WAIVING ANY
RIGHTS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934.
================================================================================
8. BROKER/DEALER We recognize our obligation under the NASD Manual, Rules of
REGISTERED Fair Practice (i) to determine the suitability of investors
REPRESENTATIVE and maintain documentation on which the determination was
based, and (ii) to inform investors of the liquidity and
marketability of the Shares.
Broker/Dealer NASD Firm Name________________________________
Home/Main Office Address____________________________________
City___________ State_____ Zip___________ Phone_____________
Broker/Dealer Authorized Signature X________________________
Registered Representative Name______________________________
Branch Office Address & Dealer Code Number__________________
City___________ State_____ Zip___________ Phone_____________
Registered Representative Signature X_______________________
================================================================================
9. COPY DISTRIBUTION: YELLOW - To American Asset Advisers Trust, Inc.
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================================================================================
10. MAIL TO: Mailing Instructions: Please remove yellow copy and mail along
with check to:
AMERICAN ASSET ADVISERS TRUST, INC.
8 Greenway Plaza, Suite 824
Houston, Texas 77046
Telephone: (713) 850-1400
================================================================================
11. (OFFICE USE ONLY) Accepted: Date________ (must be at least 5 business days
after the date Investor receives a final
Prospectus)
<TABLE>
<S> <C>
American Asset Advisers Trust, Inc.________________
Date Received_________________________ By ___________________ Date Checked By______________
Investor Check Date__________ Investor Check Amount $__________ Investor Check #___________
Entered by________________________________________ Date Entered____________________________
Confirmation of Purchase Section____________________
</TABLE>
================================================================================
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EXHIBIT C
AMERICAN ASSET ADVISERS TRUST, INC.
DIVIDEND REINVESTMENT PLAN
On June 14, 1996, American Asset Advisers Trust, Inc., a
Maryland corporation (the "Company"), adopted a Dividend Reinvestment Plan (the
"Reinvestment Plan"), the terms and conditions of which are set forth below.
Reference is made to the prospectus included as part of the Company's
registration statement on Form S-11 dated June 18, 1996, as may be
amended from time to time (the "Prospectus"), pursuant to which the Company is
offering to sell a total of 2,926,829.2682 shares of its Common Stock (including
shares specifically designated for issuance pursuant to the Reinvestment Plan).
Any term used herein which is defined in the Prospectus will have the same
meaning herein as therein, unless otherwise defined or unless the context
otherwise indicates.
The Company may retain an agent for the Reinvestment Plan (the "Agent")
who will act as independent agent for participants (the "Participants") in the
Reinvestment Plan. In the event the company retains an Agent for the
Reinvestment Plan, such Agent shall be independent (i.e., not an Affiliate) of
the Company.
1. A Participant may invest only the entire amount of the Participant's
distributions in respect of Shares of the Company held by the Participant and in
respect of any Shares acquired under the Reinvestment Plan ("Distributions").
Commencing on the effective date of the offering of Shares pursuant to the
Prospectus (the "Effective Date") and continuing thereafter until the
Reinvestment Plan is terminated, the Company, or the Agent, as the case may be,
will receive the full amount of all Distributions which would otherwise be paid
to each Participant (unless such Participant terminates his, her or its
participation in the Reinvestment Plan as provided in Paragraph 8 hereof). If
the Company retains an agent, the Company will notify Participants of the
identity of the Agent as soon as reasonably practicable after such retention.
The Company, or the Agent, as the case may be, will promptly apply such funds,
after deducting applicable service charges specified below, as follows:
Commencing with the first Distribution after the Effective Date, and
continuing throughout the period that the offering of Shares pursuant to the
Prospectus (the "Offering") takes place, all Distributions to Participants will
(i) be applied to purchase additional Shares of the Company, or (ii) if the
Company retains an Agent, be paid over to the Agent, which will
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purchase additional Shares of the Company, in either case for the Participants'
accounts. Shares will be acquired directly from the Company at a price of $10.25
per Share sold on or before the date of termination of the Offering (the
"Offering Termination Date"). After the Offering Termination Date, the sales
prices per Share shall be equal to the then fair market value of a Share
(determined as hereinafter provided). For this purpose, "fair market value"
shall be as determined by the Directors, in good faith on an ongoing basis, and
is expected to be based, initially, upon the amount of increase or decrease, if
any, in the pro forma net income of the Company's real estate investments.
Commencing no later than three full fiscal years following the termination of
the offering, such Share valuation will be based upon an estimate of the amount
Shareholders would receive if the Company's real estate investments were then
sold for their estimated value and if such proceeds, together with the other
assets of the Company, were distributed in a liquidation of the Company as
described in the Prospectus. Such Share valuations are anticipated to be
performed by the Directors or Affiliates thereof, and no independent valuation
will be obtained unless the Directors elect to obtain an independent valuation.
2. Shareholders may become Participants in the Reinvestment Plan at any
time by completing, or authorizing their account executive to complete, the
appropriate authorization form available from the Company or the Agent (if
applicable). Participation in the Reinvestment Plan will commence with the next
Distribution payable after receipt of a Participant's authorization form,
provided that the election is made no later than 15 days before the end of the
fiscal quarter as to which such Distribution relates.
3. For each Participant, the Agent will maintain an account which shall
reflect for each fiscal quarter the distributions received by the Agent on
behalf of such Participant. A Participant's account shall be reduced as
purchases of Shares are made on behalf of such Participant. At the end of each
fiscal quarter, the Agent shall disburse to each Participant an amount equal to
the balance in such Participant's account. The Company shall be responsible for
all administrative charges and expenses charged by the Agent. Any interest
earned on such accounts will be paid to the Company to defray certain costs
relating to the Reinvestment Plan and any excess will be distributed to the
Participants. The administrative charge to each Participant for a reinvestment
transaction shall be equal to 5% of the reinvestment amount, but not less than
$.10 or more than $2.50 for each reinvestment transaction. The Participant shall
pay to the Company at the end of each quarter all such administrative charges
incurred by the Participant during such quarter.
Each Participant during a fiscal quarter will acquire and own a pro
rata portion of each Share acquired pursuant to the
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Reinvestment Plan during such quarter, based on the amount in the Participant's
account at the time the Share is acquired. The ownership of the Shares shall be
reflected on the books of the Company. Shares acquired pursuant to the
Reinvestment Plan will entitle the Participant to the same rights and be treated
in the same manner as those purchased by the Participants in the Offering.
In making purchases for the Participant's accounts, the Company, or the
Agent, as the case may be, may commingle the funds of any Participant with those
of other Participants. The price at which Shares shall be deemed to have been
acquired for a Participant's account shall be the price at which they were
acquired from the Company. Distributions shall be invested by the Company, or
the Agent, as the case may be, promptly following the payment date with respect
thereto, and in no event later than 30 days from such receipt. However, under
certain circumstances, observance of the rules and regulations of the Securities
and Exchange Commission may require temporary suspension of such purchases or
may require that purchases be spread over a period of more than 30 days, in
which event such purchases will be made or resumed as or when permitted by such
rules and regulations. The Company, or the Agent, as the case may be, may rely
and act upon an opinion of counsel in this respect, and in such event will not
be accountable for such inability to make all purchases prior to the end of such
30-day period. In the absence of such rules and regulations, any such funds that
have not been invested in Shares within 30 days after receipt by the Agent and,
in any event, by the end of the fiscal quarter in which they are received, will
be paid to the Participants. The interest earned on such accounts will be paid
to the Company to the extent necessary to pay for any administrative expenses
relating to the costs of the Reinvestment Plan and any excess remaining
thereafter shall be distributed, in its entirety, to the Participants. If a
Participant's Distribution is not large enough to buy a full share, the
Participant will be credited with fractional Shares, computed to four decimal
places.
Neither the Company nor the Agent shall have any responsibility or
liability as to the value of the Company's Shares or any change in value of the
Shares acquired for the Participant's account.
4. Pending investment, funds shall be held in one or more interest
bearing accounts maintained by the Company, or the Agent, as the case may be, in
a bank or banks having capital and surplus of not less than $100,000,000. The
bank account(s) shall be specifically designated as being for the benefit of the
Reinvestment Plan and disbursements shall be permitted from such account(s) only
for (a) purchases of Shares, (b) payment of administrative expenses in
accordance with the Reinvestment Plan, and (c) distributions to Participants in
accordance with the Reinvestment Plan.
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5. The Company, or the Agent, as the case may be, will mail to each
Participant, within 60 days after the end of each fiscal quarter (and also as
soon as practicable after the termination of the Participant's account in
accordance with Paragraph 8 hereof), a statement of account describing, as to
such Participant, the distributions received during the quarter, the number of
Shares purchased during the quarter, the per Share purchase price for such
Shares, the total administrative charge to each Participant, and the total
Shares purchased on behalf of the Participant pursuant to the Reinvestment Plan.
No certificates representing Shares will be issued for Shares credited to an
account unless the Participant requests otherwise. Such requests must be made in
writing. A service charge of $5.00 will be charged by the Company to the
Participant in connection with each such issuance. No certificates will be
issued for fractional Shares.
6. No Participant shall have any right to draw checks or drafts against
the Participant's account or to give instructions to the Company or the Agent,
as the case may be, except as expressly provided herein.
7. It is understood that the reinvestment of Distributions does not
relieve a Participant of any income tax which may be payable on such
Distributions.
8. A Participant may terminate the Participant's account and
participation in the Reinvestment Plan at any time without penalty by written
notice to the Company at 8 Greenway Plaza, Suite 824, Houston, Texas 77046,
Attn: Reinvestment Plan/American Asset Advisers Trust, Inc., or such other
address as may be specified in writing to Participants by the Company. To be
effective for any Distribution, such notice must be received no later than
fifteen days prior to the end of the fiscal quarter of the Company as to which
such Distribution relates. A service charge of $2.50 will be charged by the
Company, or the Agent, as the case may be, for a termination. The Company
reserves the right to amend any aspect of the Reinvestment Plan effective with
respect to any Distributions paid subsequent to the notice, provided that the
notice is sent to Participants in the Reinvestment Plan at least 10 days before
the end of the fiscal quarter as to which such Distribution relates, mailed to a
Participant, or to all Participants, as the case may be, at the address or
addresses shown on their respective accounts or at any more recent address or
addresses which a Participant or Participants may furnish to the Company, or to
the Agent, as the case may be, in writing. The Company also reserves the right
to terminate the Reinvestment Plan or to retain or change any agent as Agent for
the Reinvestment Plan, for any reason at any time, by sending written notice of
termination or change to all Participants.
9. Neither the Company, nor the Agent, as the case may be, shall be
liable for any act done in good faith, or for any good
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faith omission to act, including, without limitation, any claims of liability
(a) arising out of failure to terminate a Participant's account upon such
Participant's death prior to receipt of notice in writing of such death, and (b)
with respect to the time and the prices at which Shares are purchased or sold
for a Participant's account.
10. Each Participant agrees to notify the Company, or the Agent, as the
case may be, promptly in writing of any change of address. Notices to the
Participant may be given by letter addressed to the Participant at the
Participant's last address of record with the Company, or with the Agent, as the
case may be.
11. The Company may, at any time, amend or supplement the terms of the
Reinvestment Plan for any reason and to effectuate any purpose contemplated by
the Company, including, but not limited to, for the purpose of adding a
voluntary cash contribution feature or substituting a new Agent to act as agent
for the Participants, by mailing an appropriate notice at least 10 days prior to
the effective date of such amendment or supplement to each Participant at the
Participant's last address of record. Such amendment or supplement shall be
deemed conclusively accepted by each Participant, except those Participants from
whom the Company, or the Agent, as the case may be, receives written notice of
termination prior to the effective date of the amendment or supplement.
12. The Reinvestment Plan and a Participant's election to participate
in the Reinvestment Plan shall be governed by the laws of the State of Maryland.
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SUPPLEMENT NO. 2
AMERICAN ASSET ADVISERS TRUST, INC.
SUPPLEMENT NO. 2 DATED FEBRUARY 28, 1997
TO PROSPECTUS DATED JUNE 18, 1996
THIS SUPPLEMENT SUPERSEDES SUPPLEMENT NO. 1
ATTENTION PROSPECTIVE INVESTORS
The following information should be read carefully and considered
in connection with your review of the Prospectus, the receipt of
which must precede or accompany this Supplement.
STATUS OF THE OFFERING
The Company commenced its offering of Shares of Common Stock on
June 18, 1996. As of February 25, 1997, the Company had received
contributions aggregating $2,822,312 in Gross Proceeds (275,348
Shares). The Company is in the process of registering shares of
Common Stock for issuance upon the exercise of the outstanding
warrants. Such warrants are exercisable at $9 per share between
March 17, 1997 and March 16, 1998.
1. SUMMARY OF OFFERING
Prior Performance
American Asset Advisers Realty Corporation ("AAA") and its
affiliates have sponsored a number of public and private real
estate limited partnerships. Seven private partnerships raised
$6,660,000 from 283 investors between 1985 and 1990. These
partnerships purchased 14 properties with no debt, either
directly or through joint ventures, and leased them to tenants
who were responsible for paying all or nearly all of the
properties' operating costs. Three publicly registered
partnerships raised $23,905,319 between 1990 and 1996 from 1,350
investors and purchased 15 properties, either directly or through
joint ventures. The properties were acquired on the same basic
terms as those acquired by the private partnerships (i.e. no debt
and tenant is responsible for operating costs). The publicly
registered partnerships have more restrictive investment
objectives than those of the Company. As of the date of this
Prospectus, all properties acquired by these public and private
partnerships are currently 100% leased and are leased at the
current market rate. Moreover, as of the date of this
Prospectus, no such AAA-sponsored limited partnership has ever
failed to make a quarterly distribution, and the amounts of the
distributions of such AAA-sponsored public limited partnerships
and many such AAA-sponsored private limited partnerships which
acquire investments on an all-cash basis have increased as such
programs mature. See "PRIOR PERFORMANCE TABLES" for details.
2. SUITABILITY
ATTENTION OHIO RESIDENTS: By executing the Order Form you are
representing to the Company that you are not and will not in the
future invest more than ten percent (10%) of your total net worth
in the Company's common stock.
3. SELECTED FINANCIAL DATA
1996 1995 1994 1993(1)
Operating revenue $ 924,788 $ 495,137 $ 121,642 $ -
Net income (loss) $ 542,807 $ 163,446 $ 79,545 $ (1,325)
Per share data:
Net income (loss) $ .50 $ .24 $ .32 $ (.07)
Income before
depreciation,
amortization and
special
compensation (2) $ .64 $ .66 $ .51 $ .005
Distributions $ .71 $ .64 $ .35 $ .005
Total assets $14,126,834 $8,970,623 $ 5,109,739 $197,615
Long-term
obligations $ 0 $ 0 $ 0 $ 0
2
(1) Represents the period from August 17, 1993, to December
31, 1993.
(2) This per share amount reflects the Company's operating
profit before deductions for depreciation, amortization
and special compensation. The special compensation
authorized in 1995 for the president (See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations") has not yet been paid.
Although the special compensation is now payable, the
president has not requested payment. At the time of
such request, payment will be made in cash or shares,
depending upon the availability of cash for such
payment, at the discretion of the Board of Directors.
4. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company was organized on August 17, 1993 to acquire, either
directly or through joint venture arrangements, undeveloped,
newly constructed and existing net-lease real estate that is
located primarily on corner or out-parcel locations in strong
commercial corridors, to lease on a net-lease basis to tenants
having a minimum net worth of $40 million and to hold the
properties with the expectation of equity appreciation producing
a steadily rising income stream for its Shareholders.
Liquidity and Capital Resources
The initial issuance of 20,001 shares of stock for $200,010 was
to AAA. On March 17, 1994, the Company commenced an offering of
2,000,000 Shares of Common Stock, together with 1,000,000
Warrants (collectively "Securities"). Until the completion of the
offering in March 1996, the Securities were offered on the basis
of two (2) Shares of Common Stock and one (1) Warrant for a total
purchase price of $20.00. The Shares and Warrants are separately
transferable by an investor. The Company is in the process of
registering shares of Common Stock for issuance upon the exercise
of the outstanding warrants. Each Warrant entitles the holder to
purchase one Share for $9.00 during the period which is between
March 17, 1997 and March 16, 1998. As of December 31, 1996,
504,126 warrants were outstanding. The offering period for the
initial public offering terminated on March 15, 1996 with gross
proceeds totaling $10,082,520 (1,008,252 shares). On June 18,
1996, the Company offered up to $29,250,000 (2,853,659 shares) of
additional shares of its common stock. The offering will
terminate June 17, 1998, unless terminated earlier. As of
December 31, 1996, gross proceeds had been received for
$1,810,886 (176,672 shares) in this second offering bringing the
total gross proceeds to $12,093,416 (1,204,925 shares).
The Company has an investment strategy of acquiring properties
and leasing them under net-leases to corporations having a
minimum net worth of $40 million, which strategy minimizes the
Company's operating expenses. The Company believes that the
leases will continue to generate cash flow in excess of operating
3
expenses. Due to low operating expenses and ongoing cash flow,
the Company does not believe that large working capital reserves
are necessary at this time. In addition, because all leases of
the Company's Properties are and are intended to continue to be
on a net-lease basis, it is not anticipated that a large reserve
for maintenance and repairs will be necessary. The Company
intends to distribute a significant portion of its funds from
operations unless it becomes necessary to maintain additional
reserves.
On August 22, 1995, the Board of Directors approved a special
compensation payment for the president in the amount of $150,000
for services provided from August 1993 through August 1995. The
president has received no other compensation from the Company for
serving as its president. In connection with the special
compensation payment, the Company executed a demand note in the
amount of $150,000, the payment of which could not be demanded
prior to the earlier of July 15, 1996 or the receipt of
$10,000,000 from the Company's initial public offering. The note
is payable in cash or shares depending on the availability of
cash for such payment. No compensation arrangements were
considered by the directors prior to August 22, 1995, because in
their judgement, the Company had not raised sufficient funds to
award such compensation. The compensation had not been accrued
prior to August 22, 1995 because its payment was uncertain and
the level of compensation had not been determined until the
August 1995 meeting of the Board of Directors. As of the
termination of the initial public offering in March 1996, the
Company had raised in excess of $10,000,000. Although the
president can demand payment on the note, such demand has not
been made. The decision regarding the nature of the payment,
whether in stock or cash, will be made by the Board of Directors
at the time the president demands payment. In consideration that
no payment has been demanded by the president for the special
compensation payment, the Board of Directors approved at its
August 1, 1996 meeting the payment of interest to the president
on the outstanding note at an annual rate of 8%. This interest
payment will be paid in cash or in stock. As of December 31, 1996,
$5,000 of interest has been accrued related to this note. Should the
note and interest be paid in cash, such payment would reduce the funds
from operations available for distribution and, therefore, would
decrease the distributions to shareholders.
No decisions as yet have been made with respect to any additional
compensation for any period after August 1995. The Board of
Directors commissioned an external study with respect to the
amount and type of compensation which could be paid in the future
to officers and/or directors, as well as the contingencies and
performance standards on which compensation will be determined.
The compensation portion of the study has been completed and will
be considered at such time as the Board determines in the future
to consider a new compensation arrangement. Accordingly, the
financial statements do not include any accruals for compensation
subsequent to August 1995.
As of December 31, 1996, the Company had acquired four Properties
directly and four Properties through joint ventures with related
parties and had invested $8,602,293, including certain
acquisition expenses related to the Company's investment in these
properties. These expenditures resulted in a corresponding
decrease in the Company's liquidity. On December 11, 1996, the
Company entered into an agreement for the purchase of a property
to be constructed in Baton Rouge, Louisiana. The purchase price
4
for the property totals approximately $2,670,000 and will be paid
with funds raised from the public offering and through a joint
venture with a related party. The Company's interest in the
joint venture is 51%.
Until Properties are acquired by the Company, proceeds are held
in short-term, highly liquid investments which the Company
believes to have appropriate safety of principal. This investment
strategy has allowed, and continues to allow, high liquidity to
facilitate the Company's use of these funds to acquire properties
at such time as properties suitable for acquisition are located.
At December 31, 1996, the Company's cash and cash equivalents
totaled $1,616,311.
The Company made cash distributions to the Shareholders during
each quarter of 1996 and 1995 and during the last three quarters
of 1994, distributing a total of $737,277, $419,085, and
$126,235, respectively, for each such fiscal year to the
investors.
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to
inflation as well as increases in the Consumer Price Index
(C.P.I.), may contribute to capital appreciation of the Company
Properties. These factors, however, also may have an adverse
impact on the operating margins of the tenants of the Properties.
Results of Operations
Years Ended December 31, 1996 and 1995:
During 1996, the Company acquired three Properties at an
aggregate price of $3,037,951 and also received $3,346,249 in net
proceeds from the public offering. Both of these factors
contributed to an increase in total revenues to $1,062,316 in
1996 from $623,084 in 1995. $429,651 of this increase came from
rental activities and the remaining $9,581 came from interest
income. Income from rental activities included income from the
three new acquisitions in 1996 and also included a full year of
income from two Properties which were acquired in the third
quarter of 1995. Interest income resulted from earnings on the
Company's short-term money market investments.
The Company's operating expenses decreased from $367,260 in 1995
to $302,857 in 1996 primarily from a decrease in executive
compensation of $150,000 discussed above partially offset by an
increase in administrative expenses and depreciation which
resulted from the overall increase in the activity of the
Company.
Years Ended December 31, 1995 and 1994:
During 1995, the Company acquired its fourth and fifth Properties
at an aggregate price of $2,716,768 and also received $3,022,733
in net proceeds from the initial public offering. Both of these
factors contributed to an increase in total revenues to $623,084
in 1995 from $159,206 in 1994. $373,495 of this increase came
5
from rental activities and the remaining $90,383 came from
interest income. Income from rental activities included income
from the two new acquisitions in 1995 and also included a full
year of income from three Properties which were acquired
throughout the last seven months of 1994. Each of the three
Properties acquired in 1994 contributed more than 15% of the
Company's total rental income in 1995. Interest income included
$41,040 of interest received on a short-term construction loan in
addition to the income earned on the Company's short-term money
market investments.
Corresponding to the increase in revenues, expenses also
increased in 1995 by $295,966. This is attributable to an
overall increase in the administrative expenses of the Company as
1995 was the first full year of operation. In addition, the
$150,000 of compensation discussed in preceding paragraphs is
reflected in 1995 operating results.
5. PROPERTIES
The Company has completed the purchase of three additional
properties which are summarized as follows:
Total Actual
Name of Property Purchase Price Leasable Annual Percent
and Location of Property(1) Sq. Ft. Rent(2) Vacant
Just for Feet (3)
Tucson, Arizona $1,809,612 19,550 $197,719 0%
Bank United (3)
The Woodlands,
Texas 255,000 3,685 27,569 0%
Bank United
Houston, Texas 827,580 3,685 88,965 0%
(1) Purchase price represents the pro rata purchase price of the
Properties and does not include other Acquisition Fees and
Acquisition Expenses.
(2) The figures set forth in this column represent current
actual rent on the Properties (or, in those cases in which
the Company holds interests in the Properties through joint
ventures, the Company's share, as a joint venture partner,
of current actual rent on such Properties). Actual rent is
subject to successive increases over the original and
renewal terms of the leases on the Properties.
(3) The Company owns an interest in this Property through a
joint-venture with Affiliates.
6
Just for Feet, Inc., Tucson, Arizona
Final terms of the acquisition of the Just for Feet property
after completion of the property are as follows:
Description. On January 19, 1996, the Company entered into a
contract to purchase fee simple title to real estate and
improvements located at 4775 Oracle Road, Tucson, Arizona. The
closing of the purchase of the Property was completed on
September 11, 1996 by the Joint Venture (the "Joint Venture")
comprised of affiliates AAA Net Realty Fund XI, Ltd. and AAA Net
Realty Fund X, Ltd. and the Company. The Property is located on
a tract of land consisting of 2.936 acres. The improvements
consist of a free-standing masonry building containing
approximately 15,349 square feet on the first floor and
approximately 4,200 square feet on the mezzanine level.
The Property was acquired subject to a net lease with Just For
Feet, Inc., an Alabama corporation ("JFFI"), which will operate a
retail store on the Property which sells athletic footwear and
apparel and related items. With respect to JFFI, as reported by
its management, consolidated revenues totaled $119,819,000 and
$56,363,000 for the years ended January 31, 1996 and January 31,
1995, respectively. JFFI recorded consolidated net earnings of
$9,722,000 and $3,218,100 for the years ended January 31, 1996
and January 31, 1995, respectively. Current assets of JFFI at
January 31, 1996 exceeded current liabilities by $108,303,500,
and total assets at such date exceeded total liabilities by
$149,269,800.
Lease Information. The original term of the lease, which began
on September 11, 1996, is for twenty years. The tenant has the
option to renew the lease for two additional terms of five years
each.
The Company's share of the base annual minimum rent during the
first five years of the original term of the lease is $197,719.
The Company's share of the base annual minimum rent is $217,475
during the second five years of the original term of the lease,
$239,223 during the third five years of the original term of the
lease, and $263,200 during the last five years of the original
term of the lease. During the two renewal terms of the lease,
the Company's share of the base annual rent will be $289,489 and
$318,486, respectively. In addition to the base annual rent, the
tenant pays all real estate taxes and utility charges on the
Property and is required, at its sole expense, to keep and
maintain the improvements in good repair and appearance, except
for ordinary wear and tear, and make all structural and
nonstructural repairs of every kind which may be required to keep
the improvements in good condition, repair and appearance.
Terms of Acquisition. The Joint Venture acquired the Property
for $3,486,728 which was paid in cash. The Company owns a 51.9%
interest in the Joint Venture, AAA Net Realty Fund XI, Ltd. owns
a 29.85% interest and AAA Net Realty Fund X, Ltd. owns an 18.25%
interest.
Competitive Conditions. The Property is located within
7
approximately 150 yards of the entrance of the Oracle Mall, a
regional shopping mall in Tucson, Arizona, and near a Home Depot.
A substantial number of national retailers, including Payless
Shoes and Converse, fast food restaurants and department stores
operate stores in the Oracle Mall.
Bank United, The Woodlands, Texas
Description. On September 23, 1996 the Joint Venture (the "Joint
Venture") comprised of affiliate AAA Net Realty Fund XI, Ltd. and
the Company acquired fee simple title to real estate located at
Grogan's Mill Road and Buckthorne Place, The Woodlands, Texas.
The Property consists of undeveloped land of approximately 1.7223
acres on which the tenant will construct a branch bank containing
approximately 3,685 square feet.
The Property was acquired subject to a ground lease with Bank
United, a Federal Savings Bank. With respect to Bank United, as
reported by its management, consolidated net income totaled
$134.2 million and $62.7 million for the years ended September
30, 1996 and 1995, respectively. Bank United reported
consolidated total assets of $11 billion and consolidated
stockholders' equity of $794 million as of September 30, 1996 and
$12 billion of assets and $795 million of stockholders' equity as
of September 30, 1995.
Lease Information. The primary term of the lease is fifteen
years. The lease began on September 23, 1996 and expires on
September 30, 2011. The tenant has the option to renew the lease
for one additional term of five years. The Company's share of
the base annual rent during the first five years of the original
term of the lease is $27,569, during the second five years is
$30,326 and during the final five year term is $33,358. The
Company's share of the rent during the renewal term is $36,694.
In addition to the base rent, the tenant pays all real estate
taxes and utilities on the Property. The tenant is also
required, at its sole expense, to keep and maintain the
improvements in good repair and appearance, except for ordinary
wear and tear and make all structural and nonstructural repairs
of every kind which may be required to keep the improvements in
good condition, repair and appearance.
Terms of Acquisition. The Joint Venture acquired the Property
for a price of $500,000 which was paid in cash. The Company owns
a 51% interest in the Joint Venture and AAA Net Realty Fund XI,
Ltd. owns a 49% interest.
Competitive Conditions. There are no branch banks in the
immediate vicinity of the Property.
Bank United, Houston, Texas
Description. On December 11, 1996, the Company purchased fee
simple title to real estate located at Westheimer and Rogerdale,
Houston, Texas. The Property is a tract of undeveloped land
containing approximately 42,440 square feet on which the tenant
8
will construct a branch bank containing approximately 3,685
square feet.
The Property was acquired subject to a ground lease with Bank
United, a Federal Savings Bank. Financial information with
respect to Bank United is discussed with the preceding Property.
Lease Information. The primary term of the lease is fifteen
years. The lease began on December 11, 1996 and expires on
December 30, 2011. The tenant has the option to renew the lease
for one additional term of five years. The base annual rent
during the first five years of the original term of the lease is
$88,965, during the second five years is $97,861 and during the
final five year term is $107,647. The rent during the renewal
term is $118,412. In addition to the base rent, the tenant pays
all real estate taxes and utilities on the Property. The tenant
is also required, at its sole expense, to keep and maintain the
improvements in good repair and appearance, except for ordinary
wear and tear and make all structural and nonstructural repairs
of every kind which may be required to keep the improvements in
good condition, repair and appearance.
Terms of Acquisition. The Company acquired its interest in the
Property for $827,580 which was paid in cash.
Competitive Conditions. There are no branch banks in the
immediate vicinity of the Property.
Just For Feet, Baton Rouge, Louisiana
Description. On December 11, 1996, the Company entered into a
contract to purchase fee simple title to real estate and
improvements located at the intersection of Promenade Avenue and
Cortana Place, Baton Rouge, Louisiana. On February 11, 1997, the
Company entered into a Joint Venture (the "Joint Venture") with
an affiliate, AAA Net Realty Fund XI, Ltd. The Property is
located on a tract of land consisting of 1.735 acres on which
there is being constructed a Just For Feet Shoe Store. When
construction is completed, the improvements will consist of a
free-standing masonry building containing approximately 15,675
square feet on the first floor and approximately 4,900 square
feet on the mezzanine level.
The Property will be acquired subject to a lease with Just For
Feet, Inc., an Alabama corporation ("JFFI"), which will operate a
retail store on the Property which sells athletic footwear and
apparel and related items. With respect to JFFI, as reported by
its management, consolidated revenues totaled $119,819,000 and
$56,363,000 for the years ended January 31, 1996 and January 31,
1995, respectively. JFFI recorded consolidated net earnings of
$9,722,000 and $3,218,100 for the years ended January 31, 1996
and January 31, 1995, respectively. Current assets of JFFI at
January 31, 1996 exceeded current liabilities by $108,303,500,
and total assets at such date exceeded total liabilities by
$149,269,800.
Lease Information. The original term of the lease, which will
begin on approximately May 15, 1997, is for fifteen years. The
tenant has the option to renew the lease for two additional terms
of five years each.
9
The Company's share of the base annual minimum rent during the
first five years of the original term of the lease is
approximately $145,841. The actual rent cannot be established
until the improvements are completed and the square footage on
the first floor of the building is calculated. The base annual
minimum rent will be increased at the beginning of the sixth and
eleventh lease years by three times the percentage increase in
the Consumer Price Index for all Urban Consumers, U.S. City
Average, during the previous five years, limited to ten percent
each time. During the two renewal terms of the lease, the rent
will be increased using the same formula used in the sixth and
eleventh years of the lease. In addition to the base annual
rent, the tenant pays all real estate taxes and utility charges
on the Property. The Company is required to maintain and repair
the foundation, structural systems (including roof structure,
roof covering, load bearing walls and floor slabs), building
exterior and masonry walls. The Company is also required to
repair any latent defects which are discovered during a one year
period following the time the improvements are turned over to the
tenant. The tenant is required to maintain and repair everything
that the Company is not.
Terms of Acquisition. The Joint Venture intends to acquired the
Property for approximately $2,670,000. The Company owns a 51%
interest in the Joint Venture and AAA Net Realty Fund XI, Ltd.
owns a 49% interest.
Competitive Conditions. There are no retail athletic shoe stores
in the immediate vicinity of the Property.
PRO-FORMA FINANCIAL INFORMATION
The following table presents unaudited pro-forma consolidated
balance sheet for the Company giving effect to the acquisition of
the Just For Feet, Baton Rouge, Louisiana property as of December
31, 1996. Pro-forma consolidated results of operations are not
included as of December 31, 1996 as the building has not been
completed.
10
PRO-FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(Unaudited)
Historical Pro-Forma
Costs Adjustments (1) Total
Cash $ 1,616,311 $ (1,375,317) (2) $ 240,994
Property and
Net Investment
In Direct
Financing
Leases 12,102,195 2,830,200 (2) 14,932,395
Other Assets 408,328 (68,085) (2) 340,243
Total Assets 14,126,834 1,386,798 15,513,632
Liabilities 201,285 -- 201,285
Minority
Interest 3,631,847 1,386,798 (2) 5,018,645
Shareholders'
Equity 10,293,702 -- 10,293,702
Total
Liabilities
and
Shareholders'
Equity $ 14,126,834 $ 1,386,798 $ 15,513,632
(1) Adjustments are reflected as if the Just For Feet property
discussed in (2) below was completed on December 31, 1996.
(2) Includes total property acquisition costs of $2,830,200, the
minority partner's share of $1,386,798, acquisition costs
paid to affiliates of $68,085 and the Company's portion of
acquisition costs of $1,375,317.
6. MANAGEMENT
Directors and Executive Officers of the Company
The Company has appointed a new officer, L. Larry Mangum as of
September 19, 1996. Mr. Mangum assumes the offices of Vice
President and Treasurer. The Treasurer position was previously
held by the president.
Background and Experience
11
L. Larry Mangum. L. Larry Mangum, 31, will serve as Vice
President and Treasurer of the Company. Mr. Mangum is the Vice
President of Finance of AAA. Mr. Mangum is responsible for the
financial accounting and reporting relating to the AAA-sponsored
partnerships and their properties. He previously worked for
American General Corporation, a national insurance company, from
1991-1996 as part of a team responsible for supervising their
reporting activities. Mr. Mangum received a B.B.A. degree in
accounting from Stephen F. Austin State University and
subsequently earned the CPA designation.
7. PRIOR PERFORMANCE TABLES
The Prior Performance Tables showing updated information as of
December 31, 1996 concerning prior partnerships sponsored by
affiliates follow.
12
PRIOR PERFORMANCE TABLES
The information in this section shows certain relevant summary
information concerning prior partnerships sponsored by Affiliates
(the "Prior Programs") which had investment objectives similar to
the Company.
The investment objectives of these prior programs, which are
substantially the same as those of the Company, generally include
preservation of capital, the potential for increased income and
protection against inflation, potential for capital appreciation
and partially tax-sheltered cash distributions.
INVESTORS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES
AS IMPLYING, IN ANY MANNER, THAT THE COMPANY WILL HAVE RESULTS
COMPARABLE TO THOSE REFLECTED IN SUCH TABLES. DISTRIBUTABLE CASH
FLOW, FEDERAL INCOME TAX DEDUCTIONS OR OTHER FACTORS COULD BE
SUBSTANTIALLY DIFFERENT. INVESTORS SHOULD NOTE THAT, BY
ACQUIRING SHARES IN THE COMPANY, THEY WILL NOT BE ACQUIRING ANY
INTEREST IN ANY PRIOR PROGRAMS.
DESCRIPTION OF TABLES
The following Tables are included herein:
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table VI - Acquisitions of Properties by Programs
All information contained in Tables I, II, III and VI is as of
December 31, 1996. The following is a brief description of the
Tables:
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents information on a percentage basis showing the
experience of the General Partners and Affiliates in raising and
investing funds for the Prior Programs, the offerings of which
closed in the three year period ended December 31, 1996.
The Table sets forth information on the offering expenses
incurred and amounts available for investment expressed as a
percentage of dollars raised. The Table also shows the date the
offering commenced and the time required to raise funds for
investment.
P-1
TABLE II - COMPENSATION TO SPONSOR
Table II provides information, on a total dollar basis, regarding
amounts and types of compensation paid to the General Partners or
Affiliates of the Prior Programs.
The Table indicates the total offering proceeds and the portion
of such offering proceeds paid to the General Partners and
Affiliates in connection with the Prior Programs, the offerings
of which closed in the three year period ended December 31, 1996.
The Table also shows the amounts paid to the General Partners and
Affiliates from cash generated from operations on a cumulative
basis commencing with inception and ending December 31, 1996.
TABLE III - OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of operating results of the Prior
Programs, the offerings of which closed in the five year period
ended December 31, 1996.
TABLE IV - RESULTS OF COMPLETED PROGRAMS
Table IV is omitted from this section because none of the General
Partners or Affiliates have been involved in completed programs
which had investment objectives similar to those of the Company.
TABLE V - SALES OR DISPOSALS OF PROPERTIES
Table V is omitted from this section because there have been no
property sales or disposals from any of the Prior Programs.
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS
Table VI, which is included in Part II to this Post-Effective Amendment,
provides certain information pertaining to properties acquired during the
past three years by the Prior Programs.
PRIOR PROGRAMS
Information in this section pertains to the following programs:
AAA Net Realty Fund Goodyear, Ltd. - "AAA Goodyear"
AAA Net Realty Fund IX, Ltd. - "AAA Net Realty IX"
AAA Net Realty Fund X, Ltd. - "AAA Net Realty X"
AAA Net Realty Fund XI, Ltd. - "AAA Net Realty XI"
P-2
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(Unaudited)
AAA NET AAA NET
REALTY REALTY
FUND X FUND XI
Dollar Amount Offered $20,000,000 $20,000,000
Dollar Amount Raised $11,453,610 $7,061,200
Less Offering Expenses:
Selling Commissions
and Discounts 8.0% 8.0%
Organizational Expenses (1) 2.6% 4.2%
Marketing Support & Due Diligence 2.5% 2.5%
Reserve for Operations 1.0% 1.0%
Percent Available for
Investment 88.4% 84.3%
Acquisition Costs
Cash Down Payment 77.4% 40.9%
Acquisition Fees (2) 3.8% 2.0%
Other 0.0% 0.0%
Total Acquisition Costs 81.2% 42.9%
Percent Leveraged 0.0% 0.0%
Date Offering Began 9-17-92 10-27-94
Length of Offering (in months) 24 24
Months to Invest 90% of
Amount Available for
Investment (Measured from
Beginning of Offering) 28 N/A
(1) Organizational expenses include legal, accounting, printing, escrow,
filing, recording and other related expenses associated with the
formation and original organization of the Partnership and also
included fees paid to affiliates.
(2) Acquisition fees include fees paid to the general partner.
P-3
TABLE II
COMPENSATION TO SPONSOR
(Unaudited)
FEES PAID
WITHIN LAST 3
AAA NET AAA NET YEARS FOR
REALTY REALTY ALL OTHER
FUND X FUND XI PROGRAMS (1)
Date Offering Commenced 9-17-92 10-27-94 1985-1990
Dollar Amount Raised $11,453,610 $7,061,200 $12,150,500
Amount paid to sponsor from
proceeds of offering:
Underwriting fees $0 $0 $0
Acquisition fees $436,046 $141,321 $0
Real estate commissions $0 $0 $0
Advisory Fees $0 $0 $0
Reimbursement for
organizational expense $54,602 $190,545 $0
Other $0 $0 $0
Dollar amount of cash
generated from operations
before deducting payments
to sponsor $2,574,522 $417,858 $3,298,276
Amount paid to sponsor from
operations:
Property management fee $0 $0 $0
Reimbursements $150,179 $17,832 $144,900
Leasing Commissions $0 $0 $0
Other (General Partner
Distributions) $10,350 $2,040 $29,456
Dollar amount of property sales
and refinancing before
deducting payments to sponsor
-cash N/A N/A N/A
-notes N/A N/A N/A
Amount paid to sponsor from
property sales and
refinancing:
Real Estate Commissions N/A N/A N/A
Incentive fees N/A N/A N/A
Other (identify & quantify) N/A N/A N/A
(1) Represents information for eight private programs sponsored between 1985
and 1990.
P-4
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY GOODYEAR (1) (2)
(Unaudited)
<CAPTION>
1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Revenues $2,586 $85,490 $107,333 $107,376 $107,443 $107,438 $107,347
Profit on sale of properties $0 $0 $0 $0 $0 $0 $0
Less: Operating expenses (4) $59 $12,933 $5,945 $6,016 $4,942 $3,994 $4,840
Interest expense $0 $0 $0 $0 $0 $0 $0
Depreciation and $1,572 $27,918 $36,372 $36,372 $36,372 $34,801 $22,872
amortization
Net Income - GAAP Basis $955 $44,639 $65,016 $64,988 $66,129 $68,643 $79,635
Taxable Income
-from operations $955 $44,639 $65,016 $64,988 $66,129 $68,643 $79,635
-from gain on sale $0 $0 $0 $0 $0 $0 $0
Cash generated $1,767 $65,762 $86,959 (8) $101,278 $102,480 $118,026 $91,054 (8)
-from operations (5)
Cash generated from sales $0 $0 $0 $0 $0 $0 $0
Cash generated from refinancing $0 $0 $0 $0 $0 $0 $0
Cash generated from operations,
sales and refinancing $1,767 $65,762 $86,959 $101,278 $102,480 $118,026 $91,054
Less: Cash distributions to
investors (3)
-from operating cash flow $0 $59,180 $101,388 $100,392 $100,392 $100,392 $100,392
-from cash flow from prior
period $0 $0 $589 $0 $0 $0 $0
-from sales and refinancing $0 $0 $0 $0 $0 $0 $0
-from return of capital $0 $105,910 (7) $0 $0 $0 $0 $0
Cash generated (deficiency) after
cash distributions to investors $1,767 ($99,328) ($15,018)(8) $886 $2,088 $17,634 ($9,338)(8)
Less: Cash distributions to
general partner $0 $452 $960 $880 $960 $960 $960
Cash generated (deficiency) after
cash distributions $1,767 ($99,780) ($15,978) $6 $1,128 $16,674 ($10,298)
Special items (not including
sales and refinancing):
Limited partners'
capital contributions $385,000 $950,000 $0 $0 $0 $0 $0
General partner's
capital contributions $0 $0 $0 $0 $0 $0 $0
Organization and syndication
costs ($57,750) ($116,550) $0 $0 $0 $0 $0
Property acquisitions ($9,000) ($1,020,260) $0 $0 $0 $0 $0
Cash generated (deficiency)
after cash distributions and
special items $320,017 ($286,590) ($15,978) $6 $1,128 $16,674 ($10,298)
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED (7)
Federal Income Tax Results (6)
Ordinary income (loss)
-from operations $2.48 $33.43 $52.90 $52.87 $53.80 $55.85 $64.80
-from recapture $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Capital gain (loss) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Cash distributions to
Investors (6)
Source (on GAAP Basis)
-Investment income from
current period $0.00 $33.43 $52.90 (8) $52.87 $53.80 $55.85 $64.80 (8)
-Investment income from prior
period $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
-Return of capital (10) $0.00 $90.23 (7) $30.07 $28.81 $27.88 $25.83 $16.88
Source (on Cash Basis)
-Sales $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
-Refinancing $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
-Operations $0.00 $44.33 $82.50 (8) $81.68 $81.68 $81.68 $81.68 (8)
-Cash flow from prior period $0.00 $0.00 $0.47 $0.00 $0.00 $0.00 $0.00
-Return of capital $0.00 $79.33 (7) $0.00 $0.00 $0.00 $0.00 $0.00
Amount (in percentage terms)
remaining invested in program
properties at the end of the
last year reported in the Table
(original total acquisition cost
of properties retained divided
by original total acquisition
cost of all properties in N/A 100% 100% 100% 100% 100% 100%
program)
SEE NOTES TO TABLES
P-5
</TABLE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND IX (1) (2)
(Unaudited)
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues $141,719 $373,681 $491,922 $496,362 $500,716 $499,602
Profit on sale of properties $0 $0 $0 $0 $0 $0
Less: Operating expenses (4) $50,197 $53,020 $37,189 $37,597 $39,746 $31,822
Interest expense $0 $0 $0 $0 $0 $0
Depreciation and
amortization $85,112 $213,492 $254,899 $255,250 $255,250 $197,605
Net Income - GAAP Basis $6,410 $107,169 $199,834 $203,515 $205,720 $270,175
Taxable Income
-from operations $54,461 $212,675 $313,034 $316,715 $318,920 $343,020
-from gain on sale $0 $0 $0 $0 $0 $0
Cash generated from operations (5) $91,760 $325,702 $436,033 $487,354 $465,241 $460,245
Cash generated from sales $0 $0 $0 $0 $0 $0
Cash generated from refinancing $0 $0 $0 $0 $0 $0
Cash generated from operations,
sales and refinancing $91,760 $325,702 $436,033 $487,354 $465,241 $460,245
Less: Cash distributions to
investors (3)
-from operating cash flow $80,614 $318,949 $436,033 $452,802 $458,193 $458,462
-from cash flow from prior period $0 $0 $11,378 $0 $0 $0
-from sales and refinancing $0 $0 $0 $0 $0 $0
-from return of capital $0 $0 $0 $0 $0 $0
Cash generated (deficiency) after
cash distributions to investors $11,146 $6,753 ($11,378) $34,552 $7,048 $1,783
Less: Cash distributions to
general partner $814 $3,000 $3,000 $3,000 $3,000 $3,000
Cash generated (deficiency) after
cash distributions $10,332 $3,753 ($14,378) $31,552 $4,048 ($1,217)
Special items (not including
sales and refinancing):
Limited partners' capital
contribution $3,661,500 $1,729,000 $0 $0 $0 $0
General partner's capital
contribution $1,000 $0 $0 $0 $0 $0
Organization and syndication
costs ($549,225) ($259,354) $0 $0 $0 $0
Property acquisitions ($2,710,544) ($1,601,769) ($124,556) $0 $0 $0
Cash generated (deficiency)
after cash distributions and
special items $413,063 ($128,370) ($138,934) $31,552 $4,048 ($1,217)
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
Federal Income Tax Results: (6)
Ordinary income (loss)
-from operations $14.87 $39.45 $58.07 $58.75 $59.16 $63.63
-from recapture $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Capital gain (lo $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Cash distributions to
Investors (6)
Source (on GAAP Basis)
-Investment income from current
period $14.87 $39.45 $58.07 $58.75 $59.16 $63.63
-Investment income from prior
period $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
-Return of capital (10) $7.15 $19.72 $24.93 $25.25 $25.84 $21.42
Source (on Cash Basis)
-Sales $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
-Refinancing $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
-Operations $22.02 $59.17 $83.00 $84.00 $85.00 $85.05
-Cash flow from prior period $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
-Return of capital $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Amount (in percentage terms)
remaining invested in program
properties at the end of the
last year reported in the Table
(original total acquisition cost 100% 100% 100 % 100% 100% 100%
of properties retained divided
by original total acquisition
cost of all properties in
program)
SEE NOTES TO TABLES
P-6
</TABLE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND X (1) (2) (11)
(Unaudited)
<CAPTION>
1993 1994 1995 1996
<S> <C> <C> <C> <C>
Gross Revenues $182,358 $666,798 $1,043,148 $1,050,106
Profit on sale of properties $0 $0 $0 $0
Less: Operating expenses (4) $13,430 $48,868 $94,818 $95,233
Interest expense $0 $0 $0 $0
Depreciation and
amortization $59,563 $145,271 $216,557 $217,661
Net Income - GAAP Basis $109,365 $472,659 $731,773 $737,212
Taxable Income
-from operations $109,365 $460,870 $681,850 $683,504
-from gain on sale $0 $0 $0 $0
Cash generated from operations (5) $199,482 $537,731 $972,758 $913,854
Cash generated from sales $0 $0 $0 $0
Cash generated from refinancing $0 $0 $0 $0
Cash generated from operations,
sales and refinancing $199,482 $537,731 $972,758 $913,854
Less: Cash distributions to
investors (3)
-from operating cash flow $116,054 $515,254 $879,065 $913,854
-from cash flow from prior
period $0 $0 $0 $3,007
-from sales and refinancing $0 $0 $0 $0
-from return of capital $0 $0 $0 $0
Cash generated (deficiency) after
cash distributions to investors $83,428 $22,477 $93,693 $3,007
Less: Cash distributions to
general partner $0 $2,650 $4,100 $3,600
Cash generated (deficiency) after
cash distributions $83,428 $19,827 $89,593 $6,607
Special items (not including
sales and refinancing):
Limited partners' capital
contributions $6,468,550 $4,985,060 $0 $0
General partner's capital
contributions $944 (9) $0 $0 $0
Organization and syndication
costs ($970,283) ($532,346) $0 $0
Property acquisitions ($3,113,096) ($4,781,519) ($1,425,353) ($624,732)
Cash generated (deficiency)
after cash distributions and
special items $2,469,543 ($308,978) ($1,335,760) ($631,339)
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
Federal Income Tax Results (6)
Ordinary income (loss)
-from operations $16.91 $40.24 $59.53 $59.68
-from recapture $0.00 $0.00 $0.00 $0.00
Capital gain (loss) $0.00 $0.00 $0.00 $0.00
Cash distributions to
Investors (6)
Source (on GAAP Basis)
-Investment income from current
period $16.91 $40.24 $59.53 $59.68
-Investment income from prior
period $0.00 $0.00 $0.00 $0.00
-Return of capital (10) $1.03 $4.75 $17.22 $20.37
Source (on Cash Basis)
-Sales $0.00 $0.00 $0.00 $0.00
-Refinancing $0.00 $0.00 $0.00 $0.00
-Operations $17.94 $44.99 $76.75 $80.05
-Cash flow from prior period $0.00 $0.00 $0.00 $0.00
-Return of capital $0.00 $0.00 $0.00 $0.00
Amount (in percentage terms)
remaining invested in program
properties at the end of the
last year reported in the Table N/A N/A N/A 100%
(original total acquisition cost
of properties retained divided
by original total acquisition
cost of all properties in
program)
SEE NOTES TO TABLES
P-7
</TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
AAA NET REALTY FUND XI, LTD. (1) (2)
(Unaudited)
1995 1996
Gross Revenues $124,158 $341,383
Profit on sale of properties $0 $0
Less: Operating expenses (4) $20,790 $46,964
Interest expense $0 $0
Depreciation and amortization $26,058 $62,400
Net Income - GAAP Basis $77,310 $232,019
Taxable Income
-from operations $76,054 $212,043
-from gain on sale $0 $0
Cash generated from operations (5) $124,038 $275,988
Cash generated from sales $0 $0
Cash generated from refinancing $0 $0
Cash generated from operations,
sales and refinancing $124,038 $275,988
Less: Cash dividends to investors
-from operating cash flow $61,863 $275,433
-from cash flow from prior period $0 $0
-from sales and refinancing $0 $0
-from return of capital $0 $0
Cash generated (deficiency) after
cash dividends to investors $62,175 $555
Less: Cash distributions to
general partner $0 $2,040
Cash generated (deficiency) after
cash distributions $62,175 ($1,485)
Special items (not including
sales and refinancing):
Limited partners' capital contributions $3,828,490 $3,232,719
General partner's capital contributions $1,000 $0
Organization and syndication costs ($574,629) ($466,425)
Property acquisitions ($1,674,307) ($1,391,663)
Cash generated (deficiency) after cash
distributions and special items $1,642,729 $1,373,146
TAX AND DISTRIBUTION DATA PER $1,000 INVESTED
Federal Income Tax Results (6)
Ordinary income (loss)
-from operations $19.86 $30.02
-from recapture $0.00 $0.00
Capital gain (loss) $0.00 $0.00
Cash distributions to Investors (6)
Source (on GAAP Basis)
-Investment income from current period $16.16 $30.02
-Investment income from prior period $0.00 $0.00
-Return of capital (10) $0.00 $8.98
Source (on Cash Basis)
-Sales $0.00 $0.00
-Refinancing $0.00 $0.00
-Operations $16.16 $39.00
-Cash flow from prior period $0.00 $0.00
-Return of capital $0.00 $0.00
Amount (in percentage terms)
remaining invested in program
properties at the end of the last
year reported in the Table
(original total acquisition cost
of properties retained divided N/A N/A
by original total acquisition
cost of all properties in
program)
SEE NOTES TO TABLES
P-8
NOTES TO TABLE III
( 1) Taxable income is reflected on the cash basis for AAA
Goodyear and on the accrual basis for AAA Net Realty
Funds IX, X and XI. There are no significant
differences between income as reflected on the cash
basis for AAA Goodyear and income as would be
reflected on a GAAP basis.
( 2) Amortization of organizational costs is computed over a
period of 60 months. Depreciation of commercial real
property is determined on the straight-line method over
estimated useful lives ranging from 31.5 to 39 years.
( 3) Cash distributions to investors represents the amount
actually disbursed in each year to the limited
partners.
( 4) Operating expenses include management fees paid to
affiliates for such services as accounting, property
supervision, etc.
( 5) Cash generated from operations includes net income plus
depreciation and amortization plus any decreases in
accounts receivable and accrued rental income or
increases in accounts payable and minus any increases
in accounts receivable and accrued rental income or
decreases in accounts payable.
( 6) Tax and distribution data per $1,000 invested was
computed based on the number of units subscribed at
each year-end except for AAA Goodyear which is
discussed in Note (7) below. Contributions to
Programs IX, X and XI were $1,000 per unit. AAA Net
Realty IX had 3,661 units outstanding at December 31,
1991 and 5,390.5 units outstanding thereafter. AAA Net
Realty X had 6,468.55 units outstanding at December 31,
1993 and 11,453.61 units thereafter. AAA Net Realty XI
had 3,828.49 units outstanding at December 31, 1995 and
7,061.21 units thereafter.
( 7) After the final property was acquired by AAA Net Realty
Goodyear, funds remained in excess of the required
working capital reserve. $105,910, 7.9% of the
original funds raised, was returned to the
investors in the fall of 1991. Tax and Distribution
Data per $1,000 invested has been computed based upon a
net investment of $1,229,090 after this return of
capital.
( 8) In December 1992, a property tax payment was made from
the working capital reserve for which reimbursement was
received in January 1993. The source of distributions
for both years is reflected as operations. In December
1996, a similar property tax payment was made which was
reimbursed in January 1997. The source of
distributions for 1996 is also reflected as being
completely from operations.
( 9) The general partners' contribution consists of $1,000
from 1992 reduced by bank charges incurred before the
Partnership was formed.
(10) The amount of cash distributions paid to investors is
primarily determined by the operating profit before
depreciation and amortization deductions. The sources
of distributions from investment income in the Table is
net income after all deductions. Investment income
from the current period represents net income for the
year after all deductions. Investment income
from a prior period represents previously undistributed
net income from earlier years. The distributions shown
as a return of capital are generally the portion
attributable to depreciation and amortization.
(11) AAA Net Realty Fund X, Ltd. has been advised that it
has a contingent liability to investors who acquired
units after December 31, 1993 as a result of not
maintaining current information in the prospectus and
supplement. The maximum possible amount of this
contingent liability is approximately $5.5 million.
P-9
8. EXPERTS
The consolidated balance sheets of American Asset Advisers Trust,
Inc. 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 included in this Supplement have been audited
by Deloitte & Touche, LLP, independent auditors, as stated in
their report appearing herein, and have been so included in
reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
9. FINANCIAL STATEMENTS
The financial statements for the Company as of December 31, 1996
follow.
13
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994
AMERICAN ASSET ADVISERS TRUST, INC.
F-1
AMERICAN ASSET ADVISERS TRUST, INC.
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS:
Independent Auditors' Report F-3
Consolidated Balance Sheets, December 31, 1996 F-4
and 1995
Consolidated Statements of Operations for the Years F-5
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity F-6
for the Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows for the Years F-7 to F-8
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements for the F-9 to F-14
Years Ended December 31, 1996, 1995 and 1994
F-2
INDEPENDENT AUDITORS' REPORT
American Asset Advisers Trust, Inc.
We have audited the accompanying consolidated balance sheets of
American Asset Advisers Trust, Inc. (the "Company") 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.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 14, 1997
F-3
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
CASH AND CASH EQUIVALENTS $ 1,616,311 $ 1,564,961
ACCOUNTS RECEIVABLE 5,119 -
PROPERTY:
Escrow deposits 75,000 -
Land 4,634,941 2,152,103
Buildings 4,435,713 4,436,074
9,145,654 6,588,177
Accumulated depreciation (195,256) ( 81,512)
TOTAL PROPERTY 8,950,398 6,506,665
NET INVESTMENT IN DIRECT
FINANCING LEASES 3,151,797 582,753
OTHER ASSETS:
Prepaid acquisition costs 74,336 77,761
Prepaid issuance costs 101,399 -
Accrued rental income 74,625 23,845
Organization costs, net of
accumulated amortization
of $160,919 and $99,130,
respectively 152,849 214,638
TOTAL OTHER ASSETS 403,209 316,244
TOTAL ASSETS $ 14,126,834 $ 8,970,623
LIABILITIES AND
SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 36,235 $ 67,481
Compensation payable 150,000 150,000
Security deposit 15,050 15,050
TOTAL LIABILITIES 201,285 232,531
MINORITY INTEREST 3,631,847 1,596,169
SHAREHOLDERS' EQUITY
Common stock, $.01 par
value, 25,000,000 shares
authorized, 1,204,925 and
827,876 shares issued and
outstanding, respectively 12,049 8,279
Additional paid-in capital 10,780,847 7,438,368
Accumulated distributions
in excess of earnings (499,194) (304,724)
TOTAL SHAREHOLDERS' EQUITY 10,293,702 7,141,923
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 14,126,834 $ 8,970,623
See Notes to Consolidated Financial Statements
F-4
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
REVENUES
RENTAL INCOME FROM
OPERATING LEASES $ 780,768 $ 434,563 $ 93,552
EARNED INCOME FROM
DIRECT FINANCING LEASES 144,020 60,574 28,090
INTEREST INCOME 137,528 127,947 37,564
TOTAL REVENUES 1,062,316 623,084 159,206
EXPENSES
ADMINISTRATIVE 37,910 - 2,954
AMORTIZATION 61,789 61,470 35,265
COMPENSATION - 150,000 -
DEPRECIATION 113,744 66,966 14,546
DIRECTORS' FEES 15,000 16,500 10,500
INTEREST 5,000 - -
LEGAL AND PROFESSIONAL
FEES 41,060 49,863 5,531
PRINTING 4,089 7,835 -
OTHER 24,265 14,626 2,498
TOTAL EXPENSES 302,857 367,260 71,294
INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 759,459 255,824 87,912
MINORITY INTEREST IN NET
INCOME OF CONSOLIDATED
JOINT VENTURES (216,652) (92,378) (8,367)
NET INCOME $ 542,807 $ 163,446 $ 79,545
NET INCOME PER SHARE:
PRIMARY $ .51 $ .24 $ .32
FULLY DILUTED $ .50
WEIGHTED AVERAGE COMMON
& COMMON EQUIVALENT
SHARES:
PRIMARY 1,066,353 672,794 251,768
FULLY DILUTED 1,329,494
See Notes to Consolidated Financial Statements
F-5
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Accumulated
Additional Distributions
Common Paid-In In Excess of
Stock -Capital Earnings Total
Balance at
December 31,1993 $ 200 $ 199,810 $ (2,395) $ 197,615
Issuance of
common stock 4,709 4,704,495 - 4,709,204
Issuance costs - (485,300) - (485,300)
Distributions
($.35 per share) - - (126,235) (126,235)
Net income - - 79,545 79,545
Balance at
December 31, 1994 4,909 4,419,005 (49,085) 4,374,829
Issuance of
common stock 3,370 3,366,175 - 3,369,545
Issuance costs - (346,812) - (346,812)
Distributions
($.64 per share) - - (419,085) (419,085)
Net income - - 163,446 163,446
Balance at
December 31, 1995 8,279 7,438,368 (304,724) 7,141,923
Issuance of
common stock 3,770 3,810,883 - 3,814,653
Issuance costs - (468,404) - (468,404)
Distributions
($.71 per share) - - (737,277) (737,277)
Net income - - 542,807 542,807
Balance at
December 31,1996 $12,049 $10,780,847 $(499,194) $10,293,702
See Notes to Consolidated Financial Statements
F-6
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 542,807 $ 163,446 $ 79,545
Adjustments to reconcile
net income to net cash
flows from operating
activities:
Amortization 61,789 61,470 35,265
Depreciation 113,744 66,966 14,546
Increase in minority
interest 216,652 92,378 8,367
Decrease (increase)
in accounts receivable (5,119) 69 (69)
Increase (decrease)
in accounts payable (31,246) 66,058 1,423
Increase in compensation
payable - 150,000 -
Increase in security
deposits - 15,050 -
Cash receipts from direct
financing lease in excess
of income recognized 1,017 2,980 100
Increase in escrow
deposits (38,250) - -
Increase in accrued
rental income (50,780) (23,845) -
Increase in
organization costs - (20,355) (234,595)
NET CASH FLOWS PROVIDED
BY (USED IN) OPERATING
ACTIVITIES 810,614 574,217 (95,418)
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisitions of real
estate:
Accounted for under the
operating lease method (1,695,146) (2,715,431) (2,262,667)
Accounted for under the
direct financing lease
method (1,342,805) (1,337) (584,496)
Change in prepaid
acquisition costs 3,425 (77,084) (677)
NET CASH FLOWS USED
IN INVESTING
ACTIVITIES (3,034,526) (2,793,852) (2,847,840)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock, net 3,346,249 3,022,733 4,223,904
Prepaid issuance costs (101,399) - -
Distributions paid to
shareholders (737,277) (419,085) (126,235)
Distributions to
minority interest
partners (232,311) (104,639) (10,016)
NET CASH FLOWS PROVIDED
BY FINANCING ACTIVITIES 2,275,262 2,499,009 4,087,653
NET INCREASE IN CASH
& CASH EQUIVALENTS 51,350 279,374 1,144,395
CASH & CASH EQUIVALENTS,
beginning of period 1,564,961 1,285,587 141,192
CASH & CASH EQUIVALENTS,
end of period $1,616,311 $1,564,961 $1,285,587
See Notes to Consolidated Financial Statements
F-7
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
SUPPLEMENTAL SCHEDULE
OF NON-CASH FINANCING
ACTIVITIES:
Escrow deposit
contributed by partner
of the consolidated
joint ventures $ 36,750 $ - $ -
Minority owners share
of real estate
acquired:
Accounted for under
the operating lease
method $ 787,331 $ 874,943 $ 735,136
Accounted for under
the direct financing
lease method 1,227,256 - -
Total minority owners
share of real estate
acquired $2,014,587 $ 874,943 $ 735,136
See notes to Consolidated Financial Statements.
F-8
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
American Asset Advisers Trust, Inc. ("the Company") was
incorporated on August 17, 1993 as a Maryland corporation. The
initial issuance of 20,001 shares of stock for $200,010 was to
American Asset Advisers Realty Corporation ("AAA"). Commencing
March 17, 1994, the Company offered up to 2,000,000 additional
shares of common stock together with 1,000,000 warrants. The
Company is in the process of registering shares of common stock
for issuance upon the exercise of the outstanding warrants. The
warrants are exercisable at $9 per share between March 17, 1997
and March 16, 1998. As of December 31, 1996, 504,126 warrants
were outstanding. The offering period of the initial public
offering terminated on March 15, 1996 with 1,008,252 shares being
issued. On June 18, 1996, the Company offered up to 2,853,659
additional shares of its common stock. The offering will
terminate June 17, 1998, unless terminated earlier. As of
December 31, 1996, 176,672 shares in this second offering were
issued, bringing the total shares issued and outstanding to
1,204,925 shares.
The Company was formed to acquire commercial and industrial real
estate properties using invested and borrowed funds. The
selection, acquisition and supervision of the operation of the
properties is managed by AAA, a related party.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
American Asset Advisers Trust, Inc. and its four controlled joint
ventures with related parties.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the
accrual basis of accounting whereby revenues are recognized when
earned and expenses are recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds.
REAL ESTATE
Real estate is leased to others on a net lease basis whereby all
operating expenses related to the properties, including property
taxes, insurance and common area maintenance are the
responsibility of the tenant. The leases are accounted for under
the operating lease method or the direct financing lease method.
Under the operating lease method, the properties are recorded at
cost. Rental income is recognized ratably over the life of the
lease and depreciation is charged based upon the estimated useful
life of the property. Under the direct financing lease method,
properties are recorded at their net investment (see Note 3).
Unearned income is deferred and amortized to income over the life
of the lease so as to produce a constant periodic rate of return.
F-9
The Company's lease agreements do not provide for contingent
rentals.
The Company obtains an appraisal on each property prior to a
property's acquisition and also performs an annual valuation
update to evaluate potential impairment for each property for
which an appraisal is older than twelve months. This valuation
is based on capitalization of income for each property, a review
of current market conditions and any significant events or
factors which would indicate a potential impairment to the value
of a property.
DEPRECIATION
Buildings are depreciated using the straight-line method over an
estimated useful life of 39 years.
ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are
amortized on a straight-line basis over five years.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
No cash was paid for interest during 1996, 1995 or 1994.
FEDERAL INCOME TAXES
The Company is qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, and is,
therefore, not subject to Federal income taxes provided it meets
all conditions specified by the Internal Revenue Code for
retaining its REIT status, including the requirement that at
least 95% of its real estate investment trust taxable income is
distributed by March 15 of the following year.
NET INCOME PER SHARE
The number of shares used in primary net income per share
calculations are based on the weighted average number of shares
of common stock outstanding. The number of shares used in the
fully diluted net income per share calculations are based on the
weighted average number of shares of common stock outstanding and
the assumption that the warrants were exercised using the
treasury stock method.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying value of financial instruments
consisting of cash, cash equivalents, accounts receivable and
liabilities approximates their fair value.
F-10
2. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals,
under noncancellable operating leases in existence at December
31, 1996 is as follows:
1997 $ 932,543
1998 $ 936,961
1999 $ 963,178
2000 $ 988,006
2001 $ 997,043
2002-2016 $ 6,469,568
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at
December 31, 1996 and 1995 included:
1996 1995
Minimum lease payments
receivable $ 7,441,043 $ 1,383,086
Unguaranteed residual value 1,557,904 289,209
Less: Unearned income 5,847,150 1,089,542
$ 3,151,797 $ 582,753
A summary of minimum future rentals, exclusive of any renewals,
under the noncancellable direct financing leases are summarized
as follows:
1997 $ 330,229
1998 $ 330,229
1999 $ 333,165
2000 $ 336,590
2001 $ 343,251
2002-2016 $ 5,767,559
4. MINORITY INTEREST
On September 23, 1996, the Company formed a joint venture, AAA
Joint Venture 96-2, with AAA Net Realty Fund XI, Ltd., an
affiliated partnership. The joint venture was formed for the
purpose of acquiring a parcel of land in The Woodlands, Texas
upon which the tenant, Bank United, will construct a branch bank
building at its cost. At the termination of the lease the
improvements will be owned by the joint venture. The Company's
interest in the joint venture is 51%. The minority interest is
49%.
On April 5, 1996, the Company formed a joint venture, AAA Joint
Venture 96-1, with AAA Net Realty Fund XI, Ltd. and AAA Net
Realty Fund X, Ltd., affiliated partnerships, for the purpose of
acquiring a property which is being operated as a Just For Feet
retail store in Tucson, Arizona. The property was purchased on
September 11, 1996 after construction was completed. The
Company's interest in the joint venture is 51.9%. The minority
interest is 48.1%.
On September 12, 1995, the Company formed a joint venture, AAA
Joint Venture 95-2, with AAA Net Realty Fund XI, Ltd., an
affiliated partnership, for the purpose of acquiring a property
in Wichita, Kansas on lease to Blockbuster Music Retail, Inc.
The Company's interest in the joint venture is 51%. The minority
interest is 49%.
F-11
On October 27, 1994, the Company formed a joint venture, AAA
Joint Venture 94-1, with AAA Net Realty Fund X, Ltd., an
affiliated partnership, for the purpose of acquiring a property
in Independence, Missouri on lease to Blockbuster Music Retail,
Inc. The Company's interest in the joint venture is 54.84%. The
minority interest is 45.16%.
5. MAJOR TENANTS
The Company's operations are all related to the acquisition and
leasing of commercial real estate properties. The following
schedule summarizes rental income by lessee for 1996, 1995 and
1994 under both operating lease and direct financing lease
methods of accounting:
1996 1995 1994
Tandy Corporation
(Mesquite, Texas) $ 108,900 $ 108,903 $ 59,290
America's Favorite
Chicken Company
(Smyrna, Georgia) $ 91,875* $ 94,118 $ 40,173
Blockbuster Music
Retail, Inc.
(Independence, Missouri
and Wichita, Kansas) $ 377,901 $ 238,906 $ 22,179
OneCare Health
Industries, Inc.
(Houston, Texas) $ 201,638 $ 53,210 $ -
Just For Feet, Inc.
(Tucson, Arizona) $ 123,244 $ - $ -
Bank United
(The Woodlands, Texas
and Houston, Texas) $ 21,230 $ - $ -
Total $ 924,788 $ 495,137 $ 121,642
*Decrease resulted from recognition of earned income under the
direct financing lease method of accounting. Rental payments
received remained unchanged from 1995.
6. FEDERAL INCOME TAXES
The differences between net income for financial reporting
purposes and taxable income before distribution deductions relate
primarily to temporary differences and to certain organization
costs which are amortized for financial reporting purposes only.
For income tax purposes, distributions paid to shareholders
consist of ordinary income, capital gains and return of capital
as follows:
1996 1995 1994
Ordinary Income $ 545,967 $ 342,210 $ 105,456
Capital gains - - -
Return of capital 191,310 76,875 20,779
$ 737,277 $ 419,085 $ 126,235
7. RELATED PARTY TRANSACTIONS
20,001 Shares of the Company's stock are owned by AAA. The
common stock of AAA is wholly owned by the president and director
of the Company. In addition, the Company has entered into an
Omnibus Services Agreement with AAA whereby AAA provides property
acquisition, leasing, administrative and management services for
the Company. $37,910 and $2,954 were incurred and paid to AAA
during 1996 and 1994, respectively, for such services.
F-12
Certain costs have been incurred by AAA in connection with the
organization and syndication of the Company. Reimbursement of
these costs become obligations of the Company in accordance with
the terms of the offering. The costs to organize the Company
have been capitalized as Organization Costs. For the year ended
December 31, 1994, $58,110 in reimbursements had been incurred
and paid to AAA. In addition, $98,494 and $64,848 of costs were
incurred by AAA in 1996 and 1995, respectively, in connection
with the issuance and marketing of the Company's stock. These
costs are reflected as issuance costs. $9,256 of these costs were
owed to AAA at December 31, 1995.
Acquisition fees, including real estate commissions, finders
fees, consulting fees and any other non-recurring fees incurred
in connection with locating, evaluating and selecting properties
and structuring and negotiating the acquisition of properties are
included in the basis of the properties. Acquisition fees of
$222,785, $232,378 and $131,077 were incurred and paid to AAA
during 1996, 1995 and 1994, respectively.
On August 22, 1995, the Board of Directors approved a special
compensation payment for the president in the amount of $150,000
for services provided from August 1993 through August 1995. In
connection therewith, the Company executed a demand note payable
at the earlier of July 15, 1996 or the receipt of $10,000,000
from the Company's stock offering. The note shall be payable in
cash or stock depending on the availability of cash for such
payment. No compensation arrangements were considered by the
Board prior to this time because the Company had not raised
sufficient funds through its stock offering, as determined by the
judgment of the Board, considered necessary for any compensation
to be granted. The compensation had not been accrued prior to
August 22, 1995 because its payment was uncertain and the level
of compensation had not been determined until the August 1995
Board meeting. As of the termination of the initial public
offering in March 1996, the Company had sold in excess of
$10,000,000. Although the president can demand payment on the
note, such demand has not been made. The decision regarding the
nature of the payment, whether in stock or cash, will be made by
the Board of Directors at the time the president demands payment.
In consideration that no payment has been demanded by the
president for the special compensation payment, the Board of
Directors approved at its August 1, 1996 meeting the payment of
interest to the president at an annual rate of 8%. This interest
payment will be paid in cash or in stock. As of December 31,
1996, $5,000 of interest has been accrued related to this note.
No decisions as yet have been made with respect to any additional
compensation for any period after August 1995. The Board of
Directors commissioned an external study with respect to the
amount and type of compensation which could be paid in the future
to officers and/or directors, as well as the contingencies and
performance standards on which compensation will be determined.
The compensation portion of the study has been completed and will
be considered at such time as the Board determines in the future
to consider a new compensation arrangement. Accordingly, the
financial statements do not include any accruals for compensation
subsequent to August 1995.
In accordance with the terms of the Company's public offering, up
to 15% of the gross offering proceeds will be used to pay
aggregate selling commissions and other issuance costs incurred
by the Company. Any excess costs incurred by the Company are the
obligation of AAA. At December 31, 1996, $101,399 of such costs
had been incurred by the Company in excess of the amount allowed
from the offering proceeds. AAA's obligation to fund such costs
is dependent upon future proceeds from the public offering.
See Note 4 for joint venture agreements with related parties.
F-13
8. PROPERTY ACQUISITIONS IN 1996
On December 11, 1996, the Company purchased real estate located
in Houston, Texas for $849,462. The property is a tract of
undeveloped land on which the tenant, Bank United, intends to
construct a branch bank. The lease agreement is for fifteen
years, however the tenant has the option to renew the lease for
one additional term of five years. The lease has provisions for
an escalation in the rent after the fifth and tenth years of the
lease. The Company recorded $5,119 of rental income from Bank
United for 1996.
On December 11, 1996, the Company entered into an agreement with
SCC Baton Rouge JFF, Ltd. for the purchase of a property to be
constructed in Baton Rouge, Louisiana. The property will be
acquired subject to a lease with Just For Feet, Inc. The
purchase price for the property will total approximately
$2,670,000 and will be paid with funds raised from the Company's
stock offering (See Note 1) and through a joint venture with a
related party.
On September 23, 1996, the Company purchased a 51% interest in
real estate located in The Woodlands, Texas through a joint
venture with a related party for the purchase price of $270,300.
The property is a tract of undeveloped land on which the tenant,
Bank United, will construct a branch bank. The lease agreement
extends for fifteen years, however the tenant has the option to
renew the lease for one additional term of five years. The lease
has provisions for an escalation in the rent after the fifth and
tenth years of the lease. The Company recorded $16,111 of rental
income from Bank United for 1996.
On September 11, 1996, the Company acquired a 51.9% interest in
a newly constructed property on lease to Just For Feet, Inc.
through a joint venture with two related parties for the purchase
price of $1,918,189. The lease agreement extends for twenty
years, however the tenant has the option to renew the lease for
two additional terms of five years each. The lease has
provisions for an escalation in the rent after the fifth, tenth,
and fifteenth years of the lease. The Company recorded $123,244
of income from Just For Feet for 1996.
As no buildings had previously been constructed on any of the
properties acquired by the Company during 1996, the rental income
received by the Company from these properties represents the
initial results of operations. Consequently, no pro-forma
information is presented.
F-14
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 35 Financial Statements and Exhibits
(a) Financial Statements
Included in Supplement No. 2:
Audited Financial Statements and related Notes thereto of
Registrant, American Asset Advisers Trust, Inc., as of and for
the years ended December 31, 1996, 1995 and 1994.
All other statements and schedules are omitted as
inapplicable.
(b) Exhibits
Exhibit No. Description
23 Consent of Deloitte & Touche LLP,
Independent Public Accountants
II-1
<TABLE>
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
Summarized as follows is certain information pertaining to the properties
acquired within the three years ended December 31, 1996 by prior programs
with investment objectives similar to those of the Company.
<CAPTION>
GROSS MORTGAGE PRICE
TYPE LEASABLE DATE FINANCING CASH &
PROPERTY/ OF SPACE OF AT DOWN ACQ. OTHER TOTAL
PROGRAM LOCATION* PROPERTY (Approx.)** PURCHASE PURCHASE PAYMENT FEE EXPENSES PRICE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AAA Net TGI Friday's/
Realty Fund Texas Restaurant 9,200 Sq Ft 12/93 $0 $1,548,657 $1,548,657 $0 $1,548,657
X, Ltd.
Goodyear Tire
& Rubber Co/ Automotive
Texas Store 5,200 Sq Ft 3/94 $0 $538,945 $538,945 $0 $538,945
America's
Favorite
Chicken Co/
Georgia Restaurant 2,588 Sq Ft 7/94 $0 $881,334 $881,334 $0 $881,334
Computer City
Super Center/ Retail
Minnesota Outlet 15,000 Sq Ft 8/94 $0 $2,528,214 $2,528,214 $0 $2,528,214
Blockbuster
Music Store/ Retail
Missouri Store 15,158 Sq Ft 11/94 $0 $735,136 $735,136 $0 $735,136
OneCare Health
Industries/ Medical
Texas Facility 14,760 Sq Ft 1/95 $0 $1,477,838 $1,477,838 $0 $1,477,838
Just For Feet/ Retail
Arizona Store 19,400 Sq Ft 9/96 $0 $662,216 $662,216 $0 $662,216
AAA Net Blockbuster
Realty Fund Music Store/ Retail
XI, Ltd. Kansas Outlet 14,047 Sq Ft 9/95 $0 $874,943 $874,943 $0 $874,943
Blockbuster
Video Store/ Retail
Oklahoma Outlet 6,500 Sq Ft 12/95 $0 $789,871 $789,871 $0 $789,871
Just For Feet/ Retail
Arizona Store 19,400 Sq Ft. 9/96 $0 $1,090,912 $1,090,912 $0 $1,090,912
Bank United/ Financial
Texas Institution 3,685 Sq Ft 9/96 $0 $261,393 $261,393 $0 $261,393
<FN>
* All properties are under lease to parent companies.
** Certain of these properties have been acquired by a joint venture
of two or three programs. Gross leasable space includes the full
approximate square footage of each property while the total price
reflects only each program's share of acquisition costs.
</FN>
II-2
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds
to believe that it meets all the requirement for filing a Form S-11
and has duly caused this Post-Effective Amendment No. 2 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Houston,
State of Texas, on the 5th day of March, 1997.
American Asset Advisers Trust, Inc.
/s/ H. Kerr Taylor
H. Kerr Taylor, President
/s/ H. Kerr Taylor
H. Kerr Taylor, Chief Financial Officer
/s/ L. Larry Mangum
L. Larry Mangum, Vice President and
Treasurer (Principal Accounting Officer)
Date: March 6, 1997
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the
following people on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ H. Kerr Taylor March 6, 1997
H. KERR TAYLOR Date
President, Chairman of the Board
(Chief Executive Officer and Chief
Financial Officer) and Director
/s/ Robert S. Cartwright, Jr. March 6, 1997
ROBERT S. CARTWRIGHT, JR., Director Date
/s/ George A. McCanse, Jr. March 6, 1997
GEORGE A. McCANSE, JR., Director Date
II-3
Exhibit No. 23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to
Registration Statement No. 333-2572 of American Asset Advisers
Trust, Inc. on Form S-11 of our report dated February 14, 1997
appearing in Supplement No. 2 to the Prospectus, which is a part
of such Registration Statement, and to the reference to us under
the heading "Experts" in such Supplement.
DELOITTE & TOUCHE LLP
Houston, Texas
March 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,616,311
<SECURITIES> 0
<RECEIVABLES> 5,119
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,621,430
<PP&E> 9,145,654
<DEPRECIATION> 195,256
<TOTAL-ASSETS> 14,126,834
<CURRENT-LIABILITIES> 186,235
<BONDS> 0
0
0
<COMMON> 12,049
<OTHER-SE> 10,281,653
<TOTAL-LIABILITY-AND-EQUITY> 14,126,834
<SALES> 924,788
<TOTAL-REVENUES> 1,062,316
<CGS> 0
<TOTAL-COSTS> 302,857
<OTHER-EXPENSES> 216,652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 542,807
<INCOME-TAX> 0
<INCOME-CONTINUING> 542,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 542,807
<EPS-PRIMARY> .51
<EPS-DILUTED> .50
