April 8, 1998 via EDGAR and Overnight Delivery
U.S. SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street N.W.
Washington, DC 20549
Re: American Asset Advisers Trust, Inc.
Section 14A Preliminary Proxy Material
Filed January 22, 1998
File No. 0-28378
Attention: Rufus Decker, Esq.
Robert Plesnarski
Mail Stop 4-9
Gentlemen:
This letter is in further response to your comments
regarding the amended Preliminary Proxy Material filed with the
Commission on March 27, 1998 by American Asset Advisers Trust,
Inc. ("Registrant" and the "Company"). The amended Preliminary
Proxy Material was filed in response to the Staff's February 26,
1998 letter regarding the above-referenced Preliminary Proxy
Material filed with the Commission on January 22, 1998. The
following paragraphs are numbered to correspond to the comment
number of the Commissions's February 26, 1998 letter to which
they respond.
23. We enclose supplementally, a copy of the proposed form
of Deloitte & Touche's federal income tax opinion to be issued as
of the closing date of the Adviser Acquisition. The Company has
not currently received the referenced federal income tax opinion
from Deloitte & Touche. The references to Deloitte & Touche in
the preliminary Proxy Statement under the caption "Federal Income
Tax Consequences" represents the Company's understanding of the
expected form of such opinion. The Company expects to receive a
federal income tax opinion from Deloitte & Touche affirming the
referenced matters prior to the mailing of the Proxy Statement to
shareholders. If the factors discussed under the "Federal Income
Tax Consequence" caption or the expected form of the Deloitte &
Touche federal income tax opinion change prior to the mailing of
the Proxy, the Company will revise the references accordingly.
25. We enclose supplementally, with the material referenced
in our response to Item 28 below, copies of all materials
furnished to Bishop-Crown by management and the Adviser. In
addition to this material, Bishop-Crown held conferences with the
Independent Directors, management and staff members and, on those
-1-
occasions, also reviewed and made copies of additional
information regarding the Company and the Adviser as it deemed
necessary. Management is not aware of whether any of this
material was in addition to that being supplementary delivered
hereby.
While it reviewed this material, Bishop-Crown, as a basis
for its analysis, created its own financial forecasts and
projections regarding the future performance of the Registrant
and the Adviser, both as separate entities and as a combined
entity.
Bishop-Crown has advised us, and the Preliminary Proxy
Statement states, that the forecasts and projections provided by
management constitute only some of the information Bishop-Crown
reviewed and relied upon in connection with its opinion.
28. We enclose supplementally, copies of all of the
material provided or distributed by management to the Board of
Directors regarding the Adviser and the proposed terms of the
Adviser Acquisition. Included with copies of this material is a
manifest designating each package of materials by number and a
schedule of distribution indicating which of the materials were
distributed to the Independent Directors, Houlihan and Bishop-Crown.
36. We enclose supplementally, with the material referenced
in our response to Item 28 above, copies of all materials
furnished to Houlihan by management and the Adviser. In addition
to this material, Houlihan held conferences with the Independent
Directors, management and staff members and on those occasions,
also reviewed and made copies of additional information regarding
the Company and the Adviser as it deemed necessary. Management
is not aware of whether any of this material was in addition to
that being supplementary delivered hereby.
Houlihan has advised us, and the Preliminary Proxy Statement
states, that the forecasts and projections provided by management
constitute only part of the information Houlihan reviewed and
relied upon in connection with its opinion. While Houlihan
reviewed this material as part of its analysis, it created its
own financial forecasts and projections regarding the future
performance of Registrant and the Adviser, both as separate
entities and as a combined entity.
37. The materials provided to the Board of Directors in
support or in non-support of the valuation of the Adviser are
included in the materials referenced in Response 28 above.
42. Included with this letter are the revised Pro forma
Statements. The pro forma statements now include a separate
presentation of each component of shareholders' equity and
present pro forma adjustments to each component. The pro forma
statements also disclose the number of shares authorized, issued
and outstanding on both a historical and pro forma basis.
-2-
43. Note 3 to the pro forma balance sheet now discloses the
number of additional shares of the Company that are contingently
payable pursuant to the Adviser Acquisition, the terms of
issuance and how the additional issuances of such shares will be
accounted for.
44. Note 3 to the pro forma balance sheet now discloses the
dollar amount of the initial purchase price and that it will be
expensed in the year in which the Acquisition is consummated. We
request that the Staff supplementally review the proposed
revisions and advise Registrant as to their adequacy prior to
filing as part of the definitive Proxy Statement.
51. The Staff's comments is duly noted.
52. Registrant's Form 10-KSB Report for the year ended
December 31, 1997 (the "1997 10-KSB") includes the requested
information under Items 1 and 2. If otherwise deemed necessary,
Registrant is prepared to amend Items 1 and 2 of the Form 10-K
for Registrant's year ended December 31, 1996 (the "1996 10-K")
as follows:
- Significant lease terms will be included for a fourth
property, the Just for Feet Store in Item 1.
- To address the issue of occupancy rate, the
"Properties" section of Item 1 and the first paragraph
of Item 2 will specify that each property is a single
tenant property.
- To address the issue of occupancy rate as a percentage
over the last five years, the first paragraph of Item 2
will be expanded to state that each of the properties
have been occupied and leased for the entire time owned
by the Company. This information is already included
in Item 1.
53. If otherwise deemed necessary, Registrant is prepared
to amend the "Selected Financial Data" section of the 1996 10-K
to remove the income before depreciation, amortization and
special compensation.
54. If otherwise deemed necessary, Registrant is prepared
to amend the "Management's Discussion and Analysis" of the 1996
10-K to include the disclosures requested by this comment.
55. The 1997 10-KSB includes the requested disclosure. If
otherwise deemed necessary, Registrant is prepared to amend the
"Management's Discussion and Analysis" section of the 1996 10-K
to disclose the composition of "administrative expenses" in 1996.
Please see our response to Item 57, below.
-3-
56. The shares underlying the Company's $9.00 warrants are
being issued pursuant to a Registration Statement on Form S-3,
declared effective by the Commission on May 29, 1997.
57. There have been no fees of any type forgiven or waived
by Registrant's Adviser or its Affiliates during any period.
Property management fees are discussed in detail in the following
paragraphs. Administrative and overhead expenses, both to the
Adviser and to third parties for each of the three years are
summarized as follows.
1994 1995 1996
Adviser Reimbursements $ 2,954 $ 0 $37,910
Legal & Professional Fees:
Transfer Agent 1,537 5,672 5,161
Accounting 1,450 11,670 4,850
Other (Audit,
Legal, etc.) 2,544 32,521 31,049
TOTAL $ 8,485 $49,863 $78,970
In addition, the administrative expenses listed above as a
percentage of total revenues were 5.33% in 1994, 8.00% in 1995
and 7.43% in 1996.
Accounting and Shareholder Administrative Costs. In 1994,
Registrant's year of inception, the Adviser provided administrative
services in connection with setting up records and administrative
systems and procedures for Registrant. Accounting services were
performed by an independent party and directly paid for. Registrant
also utilized the services of an independent transfer agent in 1995,
as Registrant's shareholders increased. Registrant continued to outsource
ministerial investor functions, such as communication mailings, payments
of distributions, Form 1099 reporting and other ministerial administrative
functions to its transfer agent. Thus, in 1995, both accounting and
administrative functions were outsourced and, as shown in the
above table, Adviser reimbursements were zero but direct transfer
agent and accounting expenses increased disproportionately from
the prior year. In 1996, the Adviser employed a full-time
financial officer and provided accounting services to the
Company, including property management record-keeping services.
As a result, general non-audit accounting services rendered by
any outside parties decreased significantly. Ministerial
shareholder communication and related functions were still
performed and directly paid for by Registrant's transfer agent.
Property Management Costs. Under Registrant's Omnibus
Services Agreement with its Adviser, the Adviser has the right to
charge property management fees and to collect reimbursements for
property management costs only to the extent it provides services
-4-
and incurs such costs. Accordingly, property management fees
were not charged until September 1997 because management services
were not necessary until that time. The Registrant did reimburse
the Adviser for its out-of-pocket management expenses in 1994,
1995 and 1996.
It has been management's experience, both with Registrant
and with affiliated partnerships, that property management
expenses are minimal during the initial twelve months of property
ownership. Because the properties acquired by Registrant in 1994
and 1995 were newly constructed and subject to newly effective
net leases, property management functions were minimal, at least
during the initial twelve months of ownership. Moreover,
essentially all property management setup functions, including
lease review, payment administration procedures and property
status are performed by the Adviser upon acquisition of the
property as part of its acquisition fee and acquisition expense
reimbursements. Registrant did not hold a substantial number of
properties for twelve months or more until 1996, when it held
five such properties for the entire year. Management believes
overall expenses were slightly lower in 1996 as a percentage of
revenues because revenues for 1996 nearly doubled and for most of
the year a majority of its 8 properties were owned for less than
12 months.
Registrant believes that its costs are in line with other
REITs which typically incur administrative and property
management costs in the 3% range and general administrative
expenses in the 6% to 10% range. In general, the larger a REIT's
asset base, its costs for these functions represent a smaller
percentage of total revenues.
Restatement Not Required. As discussed above, Registrant
did not pay property management or advisory fees in 1994, 1995 or
1996 and such fees were not waived, but instead no services
giving rise for such fees were provided. Payments to the Adviser
and its affiliates during this period were for reimbursement of
the Adviser's out-of-pocket expenses in connection with the
Registrant's property management and administrative functions.
The Proxy Statement has been amended to remove any confusion as
to the payment of advisory fees vs. expense reimbursements. The
discussion regarding the Adviser's rights under the Omnibus
Services Agreement has been revised to state that the right to
payment for fees or reimbursement of expenses is limited to the
extent such services are provided or expenses are incurred.
Based on the foregoing, the Company does not believe fees were
forgiven or waived by the Adviser or affiliates. Accordingly,
Registrant believes that all costs are currently properly
reported in its financial statements.
58. The "Real Estate" section of Note 1 to the Financial
Statements of the 1996 10-K does state on page F-10 that an
annual valuation update is performed on each property for which
an appraisal is older than twelve months.
-5-
59. The 1997 10-KSB includes the requested disclosure.
Included herewith is a copy of the form of Joint Venture
Agreement utilized by Registrant in the subject joint ventures.
Included for the Staff's supplemental review is a copy of the
form of Joint Venture Agreement used in each of Registrant's six
consolidated joint ventures. Section 4.2 expressly incorporates
the provisions to the Texas Revised Partnership Act (the "TRPA").
Based on representations of Texas counsel under the TRPA,
management decisions, such as the sale or disposition of the
property, would be controlled by the majority owner, which in
each case is Registrant. Under the TRPA, Registrant as the
majority owner of the property may make operating decisions and
sell the property without the consent of the minority joint
venture interests.
It should also be noted that based on the foregoing,
Registrant has accounted for its joint venture interest on a
consolidated basis. The minority joint venture holders account
for their joint venture interest on the equity basis consistent
with Registrant's method of reporting. Of Registrant's present
joint ventures, two are with AAA Net Realty Fund X, Ltd. (a
Reporting Company).
60. The 1997 10-KSB includes the requested disclosure in
Item 1 with respect to Just-For-Feet, the only tenant leasing 20%
or more of Registrant's Properties at December 31, 1997.
Registrant does not believe that it is necessary to disclose
financial information regarding Viacom Inc. as guarantor of the
subject Blockbuster leases because each Blockbuster location is
independent of the other and no Blockbuster property exceeds 20%
of the Company's total assets on a consolidated basis. For 1997,
the Blockbuster stores, individually and in the aggregate, are
less than 20% of Registrant's consolidated total assets.
61. The 1997 10-KSB includes the requested disclosure. If
otherwise deemed necessary, Registrant is prepared to amend the
Schedule III to include the additional disclosures requested.
We thank you in advance for your expeditious review of this
filing. Please contact the undersigned, legal counsel to the
Company in this matter, with any questions or comments you have.
Very truly yours,
/s/ Bruce J. Rushall
BRUCE J. RUSHALL
BJR:cjd
Encl.
INDEX TO FINANCIAL INFORMATION
Pro Forma Financial Statements:
Unaudited Pro Forma Financial Information F-2
Unaudited Pro Forma Balance Sheet as of December 31, 1997 F-3
Notes to Pro Forma Balance Sheet F-4
Unaudited Pro Forma Statement of Operations for the Year
Ended December 31, 1997 F-5
Notes to Pro Forma Statement of Operations F-6
F-1
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma financial information for
American Asset Advisers Trust, Inc. (the "Company") gives effect
to the merger and is based on estimates and assumptions set forth
in the notes to the financial statements which include pro forma
adjustments. This unaudited pro forma financial information has
been prepared from the historical financial statements of the Company
and of American Asset Advisers Realty Corp. (the "Adviser"). The
pro forma balance sheet assumes that the merger occurred on December 31,
1997. The pro forma statement of operations assumes that the merger
occurred on January 1, 1997. The pro forma adjustments do not reflect the
final amounts which will be determined at closing. Management does not
anticipate that final amounts will be materially different.
The unaudited pro forma financial information does not purport to
be indicative of the results which actually would have been
obtained if the merger had been effected on the dates indicated
or of the results which may be obtained in the future and should
be read in conjunction with the annual financial statements of
the Company.
F-2
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Historical Pro Forma Pro Forma
Company Adjustments (1) Total
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,401,740 $ - $ 1,401,740
Accounts receivable 124,600 - 124,600
Property, net 21,827,866 68,439 (2) 21,896,305
Net investment in direct financing leases 3,161,196 - 3,161,196
Other assets 630,961 - 630,961
Total assets $ 27,146,363 $ 68,439 $ 27,214,802
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable $ 6,131,489 $ - $ 6,131,489
Estimated obligation to shareholder - 200,000 (3) 200,000
Accounts payable 108,823 117,110 (3) 225,933
Capital lease payable - 6,854 (4) 6,854
Security deposit 15,050 - 15,050
Total liabilities 6,255,362 323,964 6,579,326
MINORITY INTEREST 5,260,795 - 5,260,795
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 100,000,000
shares authorized, 1,868,213 and
2,081,473 shares issued and outstanding
on historical and pro-forma basis,
respectively 18,682 2,133 (3) 20,815
Capital in excess of par value 16,665,300 2,183,782 (3) 18,910,667
68,439 (2)
(6,854) (4)
Accumulated distributions in excess of
earnings (1,053,776) (2,503,025) (3) (3,556,801)
Total shareholders' equity 15,630,206 (255,525) 15,374,681
Total liabilities and shareholders' equity $ 27,146,363 $ 68,439 $ 27,214,802
</TABLE>
See Notes to Pro Forma Balance Sheet
F-3
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(1) Adjustments are reflected as if the acquisition of the
Adviser was completed on December 31, 1997.
(2) Represents the addition of office furniture and equipment.
(3) Represents the issuance of 213,260 shares of Common Stock in
consideration for the acquisition of the Adviser at a price of
$10.25 per share, the selling price under the Company's current
offering, plus an estimated obligation to the shareholder of
the Adviser in the amount of $200,000 plus estimated
transaction costs of $400,000. This amount has been accounted
for as costs incurred in acquiring the Adviser from a related
party because the Adviser has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No.16,
"Business Combinations". This adjustment does not include any
shares potentially issuable in accordance with the Agreement
and Plan of Merger described in this Proxy Statement since the
Pro Forma Balance Sheet was prepared as if the merger occurred on
December 31, 1997 and the issuance of any additional shares is
dependent upon the achievement of events subsequent to the closing
of the merger. As of December 31, 1997, $282,890 of transaction
costs had been incurred and charged to expense.
Consideration for the Adviser $ 2,385,915
Additional transaction costs incurred in 1998 117,110
Additional costs incurred to acquire Adviser $ 2,503,025
(to be expensed upon consummation of transaction)
Common Stock issued $ 2,133
Capital in excess of par value 2,183,782
Retained earnings (2,503,025)
Net decrease in equity $ 317,110
The $200,000 estimated obligation to the shareholder of the
Adviser represents the estimated excess current liabilities
over the current assets of the Adviser at the closing date
("Current Liability Excess"). This amount is payable at the
election of the Company in either cash or common stock valued
at a price of $10.25 per share. The remaining share balance
will be reduced by the number of shares equal to the Current
Liability Excess divided by $10.25.
In addition, up to 686,740 shares of stock are contingently
issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of
each calendar quarter, shares will be issued up to the level where the
shareholder of the Adviser's total stock ownership does not
exceed 9.8% of the Company's total shares issued and
outstanding. The issuance of these additional shares will be
expensed as they are issued.
(4) Represents a capital lease obligation related to office equipment.
F-4
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Historical Pro Forma Pro Forma
Company Adviser Adjustments (1) Total
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating leases $ 1,217,187 $ - $ - $ 1,217,187
Earned income from direct financing leases 339,628 - - 339,628
Service fee income - 1,380,461 (1,213,026) (2) 167,435
Commission income, net - 141,813 - 141,813
Dividend income - 14,429 (14,429) (2) -
Interest income 153,895 12,539 - 166,434
TOTAL REVENUES 1,710,710 1,549,242 (1,227,455) 2,032,497
EXPENSES
General operating and administrative 218,968 1,409,133 (1,332,220) (2) 295,881
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 - 161,446
Interest 6,000 18,202 - 24,202
Potential acquisition costs 282,890 - - 282,890
Taxes - 21,626 (21,626) (2) -
TOTAL EXPENSES 716,627 1,464,424 (1,353,846) (3) 827,205
PRO FORMA INCOME BEFORE MINORITY INTEREST IN
NET INCOME OF CONSOLIDATED JOINT VENTURES 994,083 84,818 126,391 1,205,292
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - - (455,226)
PRO FORMA NET INCOME $ 538,857 $ 84,818 $ 126,391 $ 750,066
PRO FORMA EARNINGS PER SHARE:
Basis $ 0.34 $ 0.42
Diluted $ 0.33 $ 0.41
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 1,563,048 1,776,308
Diluted 1,624,217 1,837,477
</TABLE>
See Notes to Pro Forma Statement Of Operations
F-5
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1) Adjustments are reflected as if the acquisition of the
Adviser was effective as of January 1, 1997.
(2) Includes pro forma adjustments as follows:
* Elimination of service fee income recorded by the
Adviser for administrative, acquisition and management
services provided to the Company. Administrative service
fees were previously expensed by the Company and the
remaining fees were previously capitalized.
* Elimination of dividend income earned from the Adviser's
stock ownership in the Company prior to the merger.
* Elimination of general and administrative expenses of the
Adviser which have been allocated to the Company or have
been capitalized in connection with the acquisition and
development of properties acquired during the period.
* Elimination of income tax provision recorded by the
Adviser as the Company is qualified as a real estate
investment trust and is not a tax paying entity.
(3) To the extent that the consideration paid for the Adviser
exceeds the fair market value of the net tangible assets received,
an expense will be recorded as an operating expense on the Company's
Statement of Operations. Because the purpose of the pro forma
statement of operations is to reflect the expected continuing
impact of the merger on the Company, this adjustment has not been
included. At the closing of the merger, this expense will be
recorded as an operating expense. For the year ended December
31, 1997, this pro forma expense would have been $2,124,330 based
on the issuance of 213,260 shares at closing on January 1, 1997
in accordance with the partial satisfaction of the share balance
issuance criteria described in the Agreement and Plan of Merger.
In addition, up to 686,740 shares of stock are contingently
issuable for a period of up to 24 calendar quarters following the
closing of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where the
shareholder of the Adviser's total stock ownership does not
exceed 9.8% of the Company's total shares issued and outstanding.
The issuance of these additional shares will be expensed as they
are issued.
F-6
