<PAGE>
As filed with the Securities and Exchange Commission on September 2, 1999
Registration No. 333-81885
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
AmREIT, Inc.
(Exact Name of Registrant as specified in its Charter)
----------------
Maryland 6798 76-0410050
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification No.)
of incorporation or Classification Code
organization) Number)
8 Greenway Plaza, Suite 824
Houston, Texas 77046
(713) 850-1400
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
H. Kerr Taylor
Chief Executive Officer
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, Texas 77046
(713) 850-1400
(Name, Address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Bryan L. Goolsby
Kenneth L. Betts
Locke Liddell & Sapp LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201-8001
(214) 849-5500
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 2, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
AmREIT, INC.
If you are an AmREIT stockholder or a limited partner of any of the
following partnerships, your vote is very important:
<TABLE>
<S> <C>
Taylor Income Investors, Ltd. AAA Net Realty Fund VIII, Ltd.
Taylor Income Investors IV, Ltd. AAA Net Realty Fund Goodyear, Ltd.
Taylor Income Investors V, Ltd. AAA Net Realty Fund IX, Ltd.
Taylor Income Investors VI, Ltd. AAA Net Realty Fund X, Ltd.
AAA Net Realty Fund VII, Ltd. AAA Net Realty Fund XI, Ltd.
</TABLE>
AmREIT is seeking to merge with each of the 10 partnerships listed above.
AmREIT is a Maryland corporation that has elected to be taxed as a real estate
investment trust under the Internal Revenue Code . Like the partnerships, the
primary business of AmREIT is the ownership of properties leased to national
and regional tenants. AmREIT's independent directors and the general partners
of each of the partnerships seek your approval of the merger. In the merger,
AmREIT will issue shares of common stock or, under specified situations more
fully described in the accompanying proxy statement, cash and % callable
notes to the limited partners of the partnerships. At the completion of the
merger, the existing limited partners of partnerships approving the merger will
become stockholders (or noteholders as the case may be) of AmREIT and will no
longer be limited partners in their respective partnerships. As a condition
precedent to the merger the AmREIT shares will be listed for trading on the
Nasdaq Stock Market's National Market. The notes will not be listed on an
exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
No person has been authorized to give any information or to make any
representation other than those contained in or incorporated by reference into
this Joint Consent and Proxy Solicitation Statement/Prospectus in connection
with the solicitation of proxies or the offering of securities made hereby and,
if given or made, that information or representation must not be relied upon as
having been authorized by AmREIT or any of the partnerships. Neither the
delivery of this proxy statement nor any distribution of the AmREIT common
stock offered hereby shall under any circumstances create an implication that
there has been no change in the affairs of AmREIT or any of the partnerships
since the date hereof or that the information set forth or incorporated by
reference herein is correct as of any time subsequent to its date. This proxy
statement does not constitute an offer to sell, or a solicitation of an offer
to purchase, any securities or the solicitation of a proxy, in any jurisdiction
in which, or to any person to whom, it is unlawful to make such offer or
solicitation of an offer or proxy solicitation.
This proxy statement incorporates documents by reference which are not
presented herein or delivered herewith. These documents are available upon
request, without charge, to any person to whom this proxy statement is
delivered, upon written or oral request to Larry Mangum, AmREIT, Inc., 8
Greenway Plaza, Suite 824, Houston, Texas 77046 (telephone (713) 850-1400; fax
(713) 850-0498). In order to ensure timely delivery of the documents, any
request should be received by , 1999.
AVAILABLE INFORMATION
AmREIT is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission. Reports, proxy
statements and other information filed by AmREIT can be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven World
Trade Center, 13th Floor, New York, NY 10048 and CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60621-2511. Copies of this
material can be obtained by mail from the Public Reference Section of the SEC
at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such reports, proxy statements and other information may also be obtained from
the web site that the SEC maintains at http://www.sec.gov.
Reports, proxy statements and other information concerning AmREIT may also
be obtained electronically through a variety of databases, including, among
others, the SEC's Electronic Data Gathering and Retrieval ("EDGAR") program,
Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
AmREIT has filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933 with respect to the AmREIT common stock to be issued
pursuant to the merger. This proxy statement does not contain all of the
information set forth in that registration statement, parts of which have been
omitted in accordance with the rules and regulations of the SEC. For further
information, reference is hereby made to that registration statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to that registration statement or otherwise filed with the SEC are
not necessarily complete, and in each instance reference is made to the copy of
that document so filed. Each of those statements is qualified in its entirety
by this reference.
<PAGE>
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE REORGANIZATION........... 1
SUMMARY................................................................. 4
Proxy Statement....................................................... 4
Parties to the Merger................................................. 4
Material Factors That Make the Merger Speculative or Risky............ 5
The Merger............................................................ 5
The Merger Consideration.............................................. 6
Consideration Paid to the Partnerships................................ 8
Comparison of AmREIT Common Stock Ownership and the Cash/Notes
Option............................................................... 9
Reasons For The Merger and Recommendations............................ 10
Alternatives to the Merger............................................ 14
Comparative Compensation Paid to the General Partner.................. 16
Proposed Amendments to Partnership Agreements......................... 16
AmREIT's Reorganization as a Texas REIT............................... 16
Purpose of the Reorganization......................................... 17
Voting Procedures..................................................... 17
Record Date; Votes Required........................................... 17
Dissenters' Rights.................................................... 18
AmREIT Common Stock................................................... 18
Partnership Appraisals................................................ 18
Effective Time of the Merger.......................................... 18
Conditions to Consummation of the Merger.............................. 18
Termination Rights.................................................... 19
Anticipated Accounting Treatment...................................... 19
Conduct of Business Pending the Merger................................ 19
The Merger Expenses................................................... 19
Comparison of Rights of the Limited Partners and Stockholders of
AmREIT............................................................... 20
Right to Investor Lists and to Communicate with Other Investors....... 20
Federal Income Tax Consequences....................................... 20
RISK FACTORS............................................................ 22
Risk Associated With the Merger....................................... 22
Risks Associated with Fundamental Change in Nature of Investment...... 27
Risk Considerations Associated with the Cash/Notes Option............. 29
Risks Associated With an Investment in AmREIT......................... 30
Risks Associated with an Investment in Real Estate.................... 33
Risks Associated With Federal Income Taxation of AmREIT............... 37
THE MERGER.............................................................. 38
Background of the Merger.............................................. 38
The Independent Directors' Reasons and Recommendations for the
Merger............................................................... 40
The General Partners' Reasons and Recommendations for the
Merger............................................................... 43
Alternatives to the Merger............................................ 45
The Merger Consideration.............................................. 51
Fiduciary Responsibility.............................................. 55
Market Prices and Distributions of AmREIT Common Stock................ 56
Effective Time of the Merger.......................................... 57
Conditions to Consummation of the Merger.............................. 58
Conduct of Business Pending the Merger................................ 58
Acquisition Proposals................................................. 61
i
<PAGE>
<TABLE>
<S> <C>
Termination............................................................. 61
Effect of Termination and Abandonment................................... 62
Extension; Waiver....................................................... 63
Proposed Amendments to Partnership Agreements........................... 63
Proposed AmREIT Bylaw Amendment......................................... 64
Dissenting Partners and Stockholders.................................... 64
The Merger Expenses..................................................... 64
Anticipated Accounting Treatment........................................ 65
BENEFITS OF THE MERGER TO MR. TAYLOR AND HIS AFFILIATES................... 66
CONFLICTS OF INTEREST..................................................... 67
Affiliated General Partners............................................. 67
The Independent Directors............................................... 68
Continuing Conflicts of Interest........................................ 68
FAIRNESS OPINIONS......................................................... 69
Morgan Keegan Fairness Opinion.......................................... 69
Valuation of AmREIT..................................................... 71
The Houlihan Fairness Opinions.......................................... 73
APPRAISALS................................................................ 79
AmREIT PRO FORMA FINANCIAL INFORMATION.................................... 82
FEDERAL INCOME TAX CONSEQUENCES........................................... 83
General................................................................. 83
Certain Tax Differences between the Partnership Interests and Shares of
AmREIT Common Stock.................................................... 83
Tax Consequences of the Merger and the Reorganization................... 84
Consequences of Ownership of an Interest in a REIT...................... 88
REIT Qualification...................................................... 88
Taxation as a REIT...................................................... 93
Failure to Qualify as a REIT............................................ 93
Taxation of Taxable U.S. Stockholders................................... 94
Proposed Legislation.................................................... 95
Backup Withholding...................................................... 96
Taxation of Tax-Exempt Entities......................................... 96
Taxation of Foreign Investors........................................... 97
State and Local Taxes................................................... 98
AmREIT AND ITS BUSINESS................................................... 98
Description of AmREIT................................................... 98
AmREIT's Investment Objectives.......................................... 99
Employees............................................................... 99
Competition............................................................. 99
Properties.............................................................. 99
AmREIT Property Information............................................. 100
Debt and Credit Facilities.............................................. 101
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF AMREIT..................................................... 102
Liquidity and Capital Resources......................................... 102
Results of Operations................................................... 103
Funds From Operations................................................... 104
Year 2000 Compliance.................................................... 105
AmREIT'S POLICIES WITH RESPECT TO CERTAIN ACTIVITIES...................... 106
AmREIT's Stated Investment Policies..................................... 106
AmREIT's Operating Strategy............................................. 109
Dividend Reinvestment Plan.............................................. 113
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT.................................................................. 114
Executive Compensation.................................................... 115
Security Ownership of Certain Beneficial Owners and Management............ 116
Certain Relationships and Related Transactions............................ 116
Legal Proceedings......................................................... 116
Advisor Acquisition....................................................... 116
AmREIT CHARTER AND BYLAWS................................................... 120
Authorized Stock.......................................................... 120
Directors................................................................. 120
Stockholder Meetings and Special Voting Requirements...................... 120
Amendment of the Charter and Bylaws....................................... 121
Transactions With Interested Officers or Directors........................ 121
Rollup Transactions....................................................... 121
Limitations on Holdings and Transfer...................................... 121
Anti-takeover Effect of Authorized But Undesignated Preferred Stock....... 122
Liability for Monetary Damages............................................ 122
Indemnification And Advancement of Expenses............................... 122
DESCRIPTION OF AmREIT'S CAPITAL STOCK....................................... 124
General................................................................... 124
Common Stock.............................................................. 124
Preferred Stock........................................................... 124
REORGANIZATION OF AmREIT AS A TEXAS REAL ESTATE INVESTMENT TRUST............ 125
Background................................................................ 126
REIT Qualification........................................................ 126
Liability of Stockholders and Shareholders................................ 126
Inspection Rights......................................................... 127
Special Meetings of Stockholders.......................................... 127
Stockholder Action Without a Meeting...................................... 128
Preemptive Rights......................................................... 128
Vote for Reorganization................................................... 128
Authorized Capital Stock.................................................. 128
Stock Redemption and Retirement........................................... 129
Dividends................................................................. 129
Director/Trust Manager Number and Election................................ 130
Director/Trust Manager Removal and Vacancies.............................. 130
Limitations on Liability.................................................. 131
Indemnification........................................................... 132
Amendment of Charter...................................................... 133
Amendment of Bylaws....................................................... 134
Business Combinations..................................................... 135
Control Share Acquisitions................................................ 136
THE NOTES................................................................... 138
REPORTS TO STOCKHOLDERS..................................................... 143
THE PARTNERSHIPS............................................................ 143
General................................................................... 143
Partnership Organization and Capitalization............................... 144
Partnership Property Information.......................................... 144
Lease Information......................................................... 146
Partnership Distributions................................................. 148
Cumulative Cash Distributions Since Formation Through June 30, 1999....... 148
Management of the Properties ............................................. 149
Employees................................................................. 149
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
COMPARISON OF OWNERSHIP OF UNITS AND SHARES............................. 149
Properties And Diversification........................................ 150
Permitted Investments................................................. 151
Additional Equity..................................................... 151
Borrowing Policies.................................................... 151
Restrictions Upon Related Party Transactions.......................... 152
Management Control And Responsibility................................. 153
Management Liability And Indemnification.............................. 154
Anti-Takeover Provisions.............................................. 155
Voting Rights......................................................... 157
Limited Liability of Investors........................................ 157
Review of Investor Lists.............................................. 157
Taxation of Taxable Investors......................................... 158
Taxation of Tax-Exempt Investors...................................... 159
Distribution Policies................................................. 159
Comparative Compensation, Fees and Distributions...................... 160
COMPARISON OF PARTNERSHIP UNITS, AmREIT COMMON STOCK AND NOTES.......... 161
General............................................................... 161
Issuance of Additional Securities..................................... 162
Liquidity............................................................. 163
VOTING PROCEDURES....................................................... 164
AmREIT Special Stockholders Meeting................................... 164
Partnership Voting Procedures......................................... 165
EXPERTS................................................................. 168
LEGAL OPINIONS.......................................................... 168
WHERE YOU CAN FIND MORE INFORMATION..................................... 168
INDEX TO FINANCIAL INFORMATION ......................................... F-1
MORGAN KEEGAN FAIRNESS OPINION.......................................... ANNEX 1
DECLARATION OF TRUST.................................................... ANNEX 2
FORMS OF NOTE AND LOAN AGREEMENT........................................ ANNEX 3
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS TO THE LIMITED PARTNERS ABOUT THE MERGER
The following questions and answers are intended to provide brief answers
to frequently asked questions by limited partners concerning the proposed
mergers. These questions and answers do not, and are not intended to, address
all the questions that may be important to you. Limited partners should
carefully read the "Summary" section and the remainder of this proxy statement
as well as the annexes and the documents incorporated by reference in this
proxy statement for more information regarding the mergers. Stockholders of
AmREIT should read the "Summary" section for information which is specific to
them regarding the merger and the reorganization.
Q. What are the limited partners being asked to vote on?
A. The general partners of each partnership are soliciting the vote of the
limited partners in favor of the merger of their partnership with AmREIT.
In addition, limited partners are being asked to vote in favor of the
amendment of the partnership's agreement of limited partnership to permit
the merger to occur.
Q. What vote is required for approval of the merger?
A. For a partnership to be acquired by AmREIT, limited partners holding
partnership units constituting greater than 50% of the outstanding
partnership units of the partnership must approve the transaction. The
affirmative vote of greater than 50% of a partnership's limited partners
will bind all partners of that partnership.
Q. What is AmREIT?
A. AmREIT is a Maryland corporation based in Houston, Texas, that has elected
to be taxed as a real estate investment trust (REIT) under the Internal
Revenue Code. AmREIT is an affiliate of the general partners. AmREIT
acquires, develops, owns and manages a diversified portfolio of
freestanding and specialty retail properties leased to national and
regional retail tenants. If AmREIT acquires all of the partnerships in the
merger, AmREIT expects to have total assets of approximately $61 million
upon the effectiveness of the merger.
Q. What is a REIT?
A. A REIT is an entity which has elected to be taxed as a REIT under the
Internal Revenue Code and generally owns or provides financing for real
estate, offers the benefits of a diversified portfolio under professional
management and pays quarterly distributions to investors of at least 95% of
its taxable income. A REIT typically is not subject to federal income
taxation on its net income, provided that it meets specific income tax
requirements.
Q. What will I receive for my partnership units?
A. In the event your limited partnership approves the merger, those of you who
vote in favor of the merger will be entitled to receive shares of AmREIT
common stock in exchange for your partnership units. The number of shares
received in the exchange will be equal in value, based on the exchange
price, to your pro rata portion of your partnership's transaction value.
For a description of the transaction value of each partnership, please see
the information set forth under the caption "SUMMARY--Consideration Paid to
the Partnerships" in the proxy statement. Your pro rata portion will be
determined in accordance with the terms of your partnership's partnership
agreement.
Q. Will the transaction value change?
A. Yes. The transaction value of each partnership, which is the basis of the
consideration paid to each partner, consists of the negotiated prices of
the partnership's properties and the net cash of the partnership on the
effective date of the merger. The number of shares of AmREIT common stock
to be issued to each partnership is equal to the aggregate of the
negotiated prices of the partnership's properties plus the net cash divided
by the exchange price. Both the negotiated prices and the exchange price of
$9.34 per share of AmREIT common stock have been fixed and will not change
prior to closing. Each partner will also receive his or her pro rata
portion of the net cash of the partnership at closing in shares of AmREIT
common stock. The amount of net cash of each
1
<PAGE>
partnership will fluctuate between now and closing based on the
partnership's cash needs.
Q. What do partners who vote against the merger receive?
A. Limited partners who vote against the merger, but whose partnerships are
nevertheless merged into AmREIT, will receive shares of AmREIT common stock
as consideration in exchange for their units, unless they affirmatively
elect to receive a payment that consists of 10% in cash and 90% in %
callable notes due , 2006. The amount of cash and callable notes
issuable to a partner will be equal to that partner's pro rata portion of
90% of the transaction value of the electing limited partner's partnership.
Please note that limited partners may only receive cash and notes if they
vote against the merger and elect the cash/callable note option on their
consent form.
Q. How was the exchange price established?
A. The exchange price of $9.34 per share was determined through negotiations
between the general partners of the partnerships and the independent
directors of AmREIT and was based, in part, on the last public offering
price per share of AmREIT common stock of $10.25 which closed on May 22,
1998. AmREIT has not issued additional equity through public offerings
since May 1998 as it has funded additional acquisitions from its line of
credit. Because the common stock is not listed on an exchange, AmREIT is
not able to determine the prices at which its shares have been trading. In
the future it is possible that AmREIT common stock will trade at prices
substantially below the exchange price.
Q. What benefits will general partners receive as a result of the merger?
A. Mr. H. Kerr Taylor, the individual general partner of AAA Net Realty Fund
IX, Ltd., AAA Net Realty Fund X, Ltd. and AAA Net Realty Fund XI, Ltd. and
the chairman of the board and chief executive officer of AmREIT, will
receive up to 3,992 shares of AmREIT common stock in exchange for his
general partnership interests should these partnerships participate in the
merger. In addition, the corporate general partners will receive up to an
additional 6,784 shares as a result of disposition fees payable by Taylor
Income Investments, Ltd, Taylor Income Investments IV, Ltd., Taylor Income
Investments V, Ltd. and Taylor Income Investments VI, Ltd. The total value
of the consideration received by Mr. Taylor, as a general partner, is
estimated to be $100,650 based on the exchange price should all the
partnerships participate in the merger.
Q. Does the total consideration to be received by the limited partners of each
partnership exceed the appraised value of each respective partnership's
properties?
A. Yes. The value of the AmREIT common stock consideration, based on the
exchange price, and the value of cash and notes, if any, to be received by
each respective partnership will exceed that partnership's appraised value,
so long as less than 37% of the partners of the partnerships in the
aggregate specifically elect the cash/note option. For an analysis of the
specific percentage applicable to your partnership, please see the
applicable supplement. Appraisals setting out the market values of each of
the partnership's properties were obtained from Valuation Associates, an
independent, nationally recognized and fully diversified real estate
appraisal firm.
Q. Will limited partners receive future distributions with respect to the
AmREIT common stock received in the merger?
A. Yes. Historically, AmREIT has made quarterly distributions to its
stockholders and it expects to continue to do so in the future.
Q. Is the merger dependent on the number of participating partnerships?
A. Yes. If only one partnership approves the merger, AmREIT has the option,
but not the obligation, to proceed with the merger with the one
partnership. However, if more than one partnership approves the merger,
AmREIT must proceed with the merger of the participating partnerships if
all other conditions to the merger have been satisfied.
Q. Is the merger a taxable transaction to the limited partners of the
partnership participating in the merger?
A. Yes. The merger is a taxable transaction. All of the limited partners of
each partnership participating in the merger, except those that
2
<PAGE>
are tax-exempt entities, will realize a taxable gain or loss regardless of
whether they receive AmREIT common stock or elect to receive cash and notes.
Gain or loss will be determined by the difference between the value of the
merger consideration you receive and the tax basis of your partnership
unit(s). If you elect to receive cash and notes, determination of gain or
loss will be based upon your allocable share of gain which will be
recognized by your partnership. Your partnership's gain will generally be
equal to the excess, if any, of the value of the transaction value received
by your partnership over the tax basis of your partnership's net assets. We
urge you to consult with your tax advisor to assist you in evaluating the
taxes you will incur as a result of your partnership's participation in the
merger. To review the tax consequences to the partnerships in greater
detail, see pages through below and the accompanying supplement
discussing your partnership.
Q. Am I entitled to exercise any dissenters' rights in connection with the
merger or the reorganization?
A. No.
Q. May I vote my partnership units held in "street name?"
A. No. Only your broker may vote the partnership units held in "street name."
Your broker may not vote your partnership units without your instructions.
You should instruct your broker to vote your partnership units, following
the directions you provide to your broker. If you do not provide your broker
with instructions as to how to vote your partnership units, your broker will
not be permitted to vote your partnership units, and the effect will be a
vote against the merger.
Q. How do I change my vote?
A. Limited partners may change their vote by delivering a written notice of
revocation bearing a later date than the consent or a consent bearing a
later date than the consent relating to the same partnership units to
MAVRICC Management Systems, Inc. at 1845 Maxwell, Suite 101, Troy, Michigan
48084. Attention: AAA Partnership Consents, or by attending the special
meeting of limited partners and voting in person.
Q. When and where are the special meetings?
A. Each special meeting of limited partners will be held at a.m. on
, 1999.
Q. When do you expect the merger to be completed?
A. We hope to complete the merger by the end of the fourth quarter of 1999.
Q. What do I need to do now?
A. The limited partners should complete and mail the consent to MAVRICC
Management Systems, Inc., at 1845 Maxwell, Suite 101, Troy, Michigan 48084.
Attention: AAA Partnership Consents. Do not send in your partnership units
with your consent forms. AmREIT will send written notification to you
regarding the results of the vote and further instruction regarding the
exchange of partnership units in the event the merger is approved by your
partnership.
Q. Whom should I call with questions?
A. If you have any questions about the merger, limited partners should call
Larry Mangum, at (713) 850-1400, extension 30.
3
<PAGE>
SUMMARY
This summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. We have
included page references in parentheses to direct you to a more complete
description of the topics presented in this summary. To understand the merger
fully and for a more complete description of the legal terms of the merger,
you should read carefully this entire proxy statement and the documents to
which we have referred you. See "WHERE YOU CAN FIND MORE INFORMATION" on page
.
Proxy Statement
This proxy statement describes the proposed merger of AmREIT, Inc., a
Maryland corporation, and up to ten limited partnerships. Through this proxy
statement, AmREIT and the general partners of the partnerships are asking the
AmREIT stockholders and the limited partners, respectively, to approve the
merger. AmREIT is also soliciting the approval of the AmREIT stockholders to
change AmREIT's jurisdiction of organization from Maryland to Texas. This
change would be accomplished through the reorganization of AmREIT from a
Maryland corporation to a Texas real estate investment trust.
Parties to the Merger (pages 93 and 134)
AmREIT. AmREIT is a Maryland corporation that has elected to be taxed as a
real estate investment trust (REIT) under the Internal Revenue Code. AmREIT is
an affiliate of the general partners. AmREIT became internally managed upon
the merger of American Asset Advisers Realty Corporation, its then external
advisor, with and into AmREIT in June 1998. AmREIT acquires, develops, owns
and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. Since the
completion of AmREIT's public offering in May 1998, AmREIT's use of its credit
facility has been the principal sources of capital required to fund growth. As
of the date of this document, AmREIT owned directly, or through joint
ventures, interests in 16 properties. These properties are leased to a total
of nine different tenants and are located in eight states and contain an
aggregate of approximately 193,920 square feet of gross leaseable area.
AmREIT's principal executive offices are located at 8 Greenway Plaza, Suite
824, Houston, Texas 77046, and its telephone number is (713) 850-1400.
The General Partners. Mr. H. Kerr Taylor serves as the individual general
partner of AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd. and AAA
Net Realty Fund XI, Ltd. each of which also has a corporate general partner.
Mr. Taylor sponsored and organized each of the partnerships. Each of the other
partnerships has only a corporate general partner. A different corporation
serves as the corporate general partner of each partnership. Mr. Taylor is a
director, chief executive officer and the 45% or greater owner of each
corporate general partner. Mr. Taylor is also the chairman of the board, chief
executive officer and largest stockholder of AmREIT, currently holding
approximately 11% of the outstanding shares of AmREIT common stock.
The Partnerships. The partnerships were organized to acquire real
properties, under long-term net leases, and to hold the properties for capital
appreciation and sale after a 10 to 15 year period. The partnerships own an
aggregate of 15 retail properties directly and 16 retail properties through
joint ventures, leased to national and regional retail tenants comprising an
aggregate of approximately 179,000 square feet of gross leasable area. The
names of the partnerships being asked to participate in the merger are:
Taylor Income Investors, Ltd. (Fund III)
Taylor Income Investors IV, Ltd. (Fund IV)
Taylor Income Investors V, Ltd. (Fund V)
Taylor Income Investors VI, Ltd. (Fund VI)
AAA Net Realty Fund VII, Ltd. (Fund VII)
AAA Net Realty Fund VIII, Ltd. (Fund VIII)
AAA Net Realty Fund Goodyear, Ltd. (Goodyear)
AAA Net Realty Fund IX, Ltd. (Fund IX)
AAA Net Realty Fund X, Ltd. (Fund X)
AAA Net Realty Fund XI, Ltd. (Fund XI)
The properties of the partnerships are currently managed by AmREIT Realty
Investment Corporation, a subsidiary of AmREIT. The address
4
<PAGE>
of the principal executive offices of each of the partnerships and the general
partners of the partnerships is 8 Greenway Plaza, Suite 824, Houston, Texas
77046, telephone (713) 850-1400.
Material Factors that make the Merger Speculative or Risky
There are a number of risk factors that limited partners and stockholders
should consider in determining whether to vote in favor of the merger. The
following list summarizes the most significant of these factors:
. The trading price of the shares of AmREIT common stock may be significantly
less than the exchange price.
. There can be no assurance that the price paid by AmREIT properly reflects
the value of each partnership's assets; therefore, there is the risk that
AmREIT may have paid too much for the partnership interests.
. Mr. Taylor is the chairman of the board of directors, chief executive
officer and largest stockholder of AmREIT. Mr. Taylor also serves as, or
controls, the general partner of all of the partnerships. If all
partnerships approve the merger, the general partners will receive 10,776
shares of AmREIT common stock in exchange for his general partnership
interests. In addition, Mr. Taylor will also receive up to 349,995 shares of
AmREIT common stock, constituting consideration payable to Mr. Taylor as a
result of AmREIT's acquisition of its external advisor in June 1998, which
Mr. Taylor deferred at the time of the sale. Prior to its acquisition by
AmREIT, the external advisor was wholly owned by Mr. Taylor.
. The merger involves a fundamental change in the nature of each limited
partner's investment. If the merger is approved, limited partners will no
longer hold an interest in a finite life entity with special distributions
to be paid upon the liquidation of assets. Instead, following the merger,
the partners will be stockholders in AmREIT which intends to operate for an
indefinite period of time and has no specific plans for the sale of its
investments.
. The partnerships currently have no debt, but AmREIT has historically
incurred debt to acquire properties and anticipates using debt financing in
the future. As AmREIT's debt increases relative to its income, or as
interest rates rise, income available for distribution may be reduced.
. The merger is a taxable transaction to all limited partners, except those
which are tax-exempt entities. As a result, there is a risk that the limited
partners will be liable for taxes on any gain resulting from the merger. The
limited partners will not receive cash from the merger (other than cash
received in lieu of fractional shares or cash received as part of the
cash/notes option) to pay any taxes due on any taxable gain. Any gain or
loss will be recognized in the year the merger is consummated.
The Merger (page 34)
AmREIT will acquire those partnerships, through merger, whose limited
partners holding greater than 50% of the outstanding limited partnership units
vote in favor of the merger, providing all other conditions to the merger are
met. Each partner will be asked to vote on the merger of their partnership
with AmREIT. The merger agreements provide that if only one of the
partnerships approves the merger, AmREIT has the right but not the obligation
to consummate the merger with the partnership approving the merger. If more
than one partnership approves the merger, AmREIT must consummate the merger
with the approving partnerships if all other conditions to the merger have
been satisfied. As a result, the merger may involve between one and ten
partnerships depending on the number of partnerships approving the merger.
Even if a particular limited partner votes in favor of the merger, if less
than a majority of the partners of that partnership approve the merger, that
partnership will not participate in the merger. Accordingly, a vote in favor
of the merger does not mean you will receive shares of AmREIT common stock.
The partnership units of those limited partners who approve the merger,
abstain from voting or otherwise do not elect alternative compensation will be
converted into shares of AmREIT common stock. Limited partners of a
partnership that approves the merger who vote against the merger may elect to
5
<PAGE>
receive consideration consisting of 10% cash and 90% notes in lieu of shares.
The partnerships that approve the merger will cease to exist on the effective
date of the merger.
Each merger agreement is attached as an appendix to the respective
supplement. Limited partners are encouraged to read the applicable merger
agreement in its entirety as it is the legal document that governs the merger
of their partnership with AmREIT.
The Merger Consideration (page 47)
Limited partners of partnerships approving the merger will receive the
following consideration.
Shares of AmREIT Common Stock. Limited partners of partnerships that approve
the merger who vote in favor of or abstain from voting on the merger will
receive shares of AmREIT common stock in the merger. You should note that if
your partnership approves the merger and you vote against the merger and do not
specifically choose to receive cash and notes, you will receive shares of
AmREIT common stock. The shares of AmREIT common stock are being allocated to
each approving partnership in an amount equal to the partnership's transaction
value divided by the exchange price of $9.34 per share. The number of shares
that will be issued to each limited partner upon the consummation of the merger
will be allocated based on each limited partner's partnership units.
A partnership's transaction value equals the negotiated prices, as described
below, of its properties plus its net cash on the effective date of the merger.
The transaction value of each partnership is subject to adjustment for its
actual net cash as of the effective date; provided, however, that a
partnership's transaction value will not be decreased below the appraised value
of its properties. For a tabular presentation of the valuations of each
partnership, see discussion under the heading "SUMMARY--Alternatives to the
Merger". A partnership's net cash equals the excess, if any, of its cash and
accounts receivable over its debt.
The negotiated prices of each partnership's properties were negotiated and
agreed to by the general partners on behalf of the partnerships and the
independent directors on behalf of AmREIT. The negotiated prices were based on
agreed premiums for the particular partnership's assets over the appraised
value of those assets. Each of the partnership's properties was appraised by
Valuation Associates, an independent appraiser. The exchange price of $9.34 per
share of common stock was determined and agreed to by the general partners on
behalf of the partnerships and the independent directors on behalf of AmREIT
based on the last public offering price of AmREIT's common stock of $10.25 on
May 22, 1998.
Calculated as if the effective date of the merger were June 30, 1999, AmREIT
would issue up to 3,006,604 shares of common stock to the partnerships of which
up to 3,002,612 shares would be issued to the limited partners and up to 3,992
shares would be issued to the general partners. Assuming all the partnerships
participate in the merger, based on 5,747,500 shares outstanding upon
consummation of the merger, the limited partners would own approximately 52.2%
of the then outstanding common stock of AmREIT. If all partnerships participate
in the merger the general partners will receive 10,776 shares of AmREIT common
stock. This is the only consideration the general partners will receive in
exchange for their partnership interests. This stock, together with stock
issued as deferred consideration in connection with AmREIT's purchase of the
external advisor and stock purchased by Mr. Taylor with disposition fees
payable to the general partners pursuant to the partnership agreements of Fund
III, Fund IV, Fund V and Fund VI, will result in him owning approximately 10.8%
of AmREIT's outstanding shares of common stock.
Cash/Notes Option. Limited partners voting against the merger, but whose
partnerships nevertheless approve the merger, will receive shares of AmREIT
common stock unless they affirmatively elect to receive consideration in the
form of 10% cash and 90% notes. The amount of cash and notes issuable to a
partner will be equal to that partner's pro rata portion of 90% of the
transaction value of the electing limited partner's partnership. The discounted
transaction value is calculated based on a 10% discount from the transaction
value. This
6
<PAGE>
discount is equal to the aggregate of the discounts assumed to be applicable to
a liquidation, as determined by Valuation Associates. These assumptions were
based on the conditions under which a partnership would liquidate its
properties and the degree to which those conditions would reduce a property's
value below its appraised value. Please note, however, that AmREIT has applied
the discount to the transaction value, which represents a premium over the
appraised value. Valuation Associates assumed a 5% discount for a reduced
marketing period, a 3% discount for brokerage commission, and a 2% discount for
marketing and other related expenses in establishing its liquidation value. The
notes are part of a series of up to $10,000,000 in aggregate principal amount
which will bear interest at % per annum and will provide for quarterly
interest only payments until the maturity date of the notes. The interest rate
on the notes was determined based on 120% of the applicable federal rate of
on , 1999. All principal and unpaid interest on the notes
will be due at maturity. AmREIT may prepay the notes at any time upon 30 days'
prior written notice without premium or penalty. If the aggregate principal
amount of notes issuable to all limited partners electing the cash/notes option
exceeds $10,000,000, limited partners electing the cash/notes option will
receive their pro rata portion of the $10,000,000 aggregate note value, with
the remaining amount of their respective note consideration to be paid in
shares of AmREIT common stock valued at the exchange price.
7
<PAGE>
Consideration Paid to the Partnerships
The following table sets forth for each partnership the consideration, based
on the exchange price, that your partnership will receive in the merger. The
data in these tables assumes that none of the limited partners has elected to
receive consideration in the form of cash and notes. Specifically, the
following table sets forth:
. the aggregate amount of original limited partner investments in each
partnership less any return of capital paid to the limited partners of
that partnership;
. the original amount of limited partner investments in each partnership
less any return of capital per average $1,000 of original investment;
. the number of shares of AmREIT common stock to be paid to the limited
partners of that partnership;
. the estimated value of the shares of AmREIT common stock to be paid to
the limited partners of that partnership based on the exchange price; and
. the estimated value of shares of AmREIT common stock based on the
exchange price, limited partners will receive for each $1,000 of their
adjusted investment:
<TABLE>
<CAPTION>
Estimated
Original Value of
Limited Shares of
Partner Number of AmREIT
Investments Shares of Common
Original less any AmREIT Stock per
Limited Return of Common Transaction Average
Partner Capital per Stock Value $1,000
Investments Average Offered to Offered Adjusted
less any $1,000 the Payable to Limited
Return of Original Limited the Limited Partner
Limited Partnership Capital(1) Investment Partners(2) Partners(3)(4) Investment
------------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Taylor Income Investors,
Ltd.................... $ 776,814 $ 822 93,987 $ 877,841 $1,130
Taylor Income Investors
IV, Ltd................ 615,000 1,000 54,533 509,337 828
Taylor Income Investors
V, Ltd................. 460,389 959 48,552 453,473 985
Taylor Income Investors
VI, Ltd................ 294,733 982 37,045 346,000 1,174
AAA Net Realty Fund VII,
Ltd.................... 1,125,100 1,000 100,937 942,749 838
AAA Net Realty Fund
VIII, Ltd.............. 1,853,980 997 180,726 1,687,985 910
AAA Net Realty Fund
Goodyear, Ltd.......... 1,229,090 921 113,599 1,061,015 863
AAA Net Realty Fund IX,
Ltd.................... 5,390,500 1,000 572,249 5,344,801 992
AAA Net Realty Fund X,
Ltd.................... 11,453,610 1,000 1,123,662 10,495,000 916
AAA Net Realty Fund XI,
Ltd.................... 7,061,209 1,000 677,322 6,326,192 896
</TABLE>
- --------
(1) Represents the limited partners adjusted investment at June 30, 1999.
(2) The shares of AmREIT common stock payable to each partnership as set forth
in this chart will not change if fewer than all of the partnerships merge
into AmREIT. This number assumes that none of the limited partners of the
partnerships has made the cash/note election.
(3) Values are based on the exchange price of $9.34. Upon listing the shares of
AmREIT common stock on an exchange, the actual values at which the shares
of AmREIT will trade on the exchange may be at prices significantly below
the exchange price.
(4) The value of the cash and notes to be received by partners electing the
cash/note option will be equal to 90% of their pro rata portion of the
transaction value set forth in this column. If greater than $10,000,000 in
the aggregate of notes are elected to be received, the number of shares of
common stock issued to the electing partners will be equal to the
difference between the amount of cash and notes actually received by the
electing partners and 90% of the amounts set forth in this column.
8
<PAGE>
Comparison of AmREIT Common Stock Ownership and the Cash/Notes Option (page
152)
The advantages of owning shares of AmREIT common stock versus notes include:
. The market for the shares, which are expected be traded on the Nasdaq
Stock Market's National Market, likely will be more active than the
market for the notes, since the notes will not be listed on an exchange.
Although a market may develop for the callable notes, AmREIT believes
that this market will be limited and less active than the market for the
common stock. AmREIT expects that the more active market for the common
stock resulting from listing on an exchange will afford stockholders a
greater opportunity to liquidate all or any portion of their shares in a
more timely manner than the callable notes.
. The value of AmREIT common stock, however, is subject to market
fluctuations that may result in trading at prices below the exchange
price.
. AmREIT stockholders will be in a position to take advantage of growth
opportunities resulting from AmREIT's ability to raise additional funds
through equity or debt financing, which opportunities are not available
to the holder of notes.
. Stockholders will be entitled to participate in AmREIT's dividends and
distributions to the extent of their percentage ownership of AmREIT
stock. Stockholders' rights to receive dividends are not guaranteed.
Distributions to stockholders may be made only when funds are available
after the payment of AmREIT's debt obligations. Thus, as a stockholder
your rights to receive dividends and distributions are subordinated to
the interest payments payable with respect to all of AmREIT's debt
obligations.
. The anticipated initial dividends to be paid on the shares are expected
to be higher than the initial interest payments expected to be made on
the notes. For example, an AmREIT stockholder may be expected to receive
a dividend yield of 7.8%, based on the exchange price, whereas a holder
of notes would only receive % interest on the notes.
. AmREIT expects that the initial value of the shares of AmREIT common
stock to be distributed to a limited partner will be greater than the
value of the cash/notes option because the amount of cash and notes
issued to electing partners will be equal to 90% of the transaction value
being received by those partners voting in favor of the merger.
. Unlike a holder of notes, stockholders will be entitled to vote on
matters presented at stockholder meetings and will have the right to
access AmREIT's books and records.
The advantage of owning notes versus AmREIT common stock include:
. Although the amount of cash and notes to be issued to electing partners
is less than their pro rata portion of the transaction value, the holders
of the notes are guaranteed a return and can expect to receive the entire
amount of their principal at maturity.
. The market prices for the AmREIT common stock may fluctuate with changes
in market and economic conditions, the financial condition of AmREIT and
other factors that generally influence the market prices of securities,
including the market perception of REITs in general. These fluctuations
may significantly affect liquidity and market prices independent of the
financial performance of AmREIT.
. In the event AmREIT is liquidated or dissolved, the noteholders will have
superior rights to the distribution of AmREIT's assets. The funds from
liquidation will be applied to the payment of all the outstanding
principal and accrued interest on the notes before any distributions may
be made to AmREIT stockholders. As a result, after all required payments
are made to the note holders, there may be
9
<PAGE>
insufficient funds to make any distributions to stockholders.
. The notes are senior, unsecured indebtedness and represent fixed
obligations of AmREIT. Payments to noteholders will be superior to the
rights of stockholders to receive dividend distributions.
. Payments of principal and interest on the notes are not dependent upon
the profits derived from AmREIT's operations.
. Stockholders' percentage ownership interest in AmREIT may be diluted at
anytime through the issuance of additional securities, including
securities that have priority to cash flow generated from AmREIT's
operations and to liquidation proceeds derived from the sale of AmREIT's
assets.
Reasons For The Merger and Recommendations (page 35)
The independent directors of AmREIT and the general partners of the
partnerships believe that the merger will provide you the following benefits,
which the general partners believe generally apply to all partnerships and
will be realized by the merged entity regardless of the number of partnerships
participating in the merger, although to a smaller degree if fewer of all the
partnerships participate:
. Growth Potential. The general partners believe that there is greater
potential for increased distributions to you as an AmREIT stockholder and
for appreciation in the price of your AmREIT common stock than there
would be for you as a limited partner of your partnership in holding
units. This growth potential results from future acquisitions of
additional properties and financing growth through debt and equity
offerings. In addition, as a result of AmREIT's acquisition of the
external advisor, the value of AmREIT stock will likely be enhanced
because the general partners believe there is a market preference in
favor of internally-advised REITs. Substantial opportunities currently
exist to acquire additional properties at attractive prices. Your
partnership cannot take advantage of such opportunities because its
partnership agreement generally restricts it from borrowing or raising
additional capital, making additional acquisitions and the development of
additional properties unlikely.
. Risk Diversification. The combination of the properties owned by the
partnerships with AmREIT's existing properties, as well as future
property acquisitions made by AmREIT, will diversify your investment over
a larger number of properties, industries and a broader group of
commercial tenants. AmREIT and each of the partnerships electing to
participate in the merger, other than Fund XI, would experience greater
geographic diversification as a result of the merger. AmREIT, however,
will experience greater geographic concentration of its assets if only
Fund III, Fund IV, Fund V, Fund VI, Fund VII and Fund Goodyear elect to
merge. Your investment will also change from being an interest in a
static, finite-life entity to an investment in a growing operating
company. This diversification will reduce the dependence of your
investment upon the performance of, and the exposure to the risks
associated with, the particular group of commercial properties currently
owned by your partnership.
. Operational Economies of Scale. The combination of the partnerships with
AmREIT will result in administrative and operational economies of scale
and cost savings by allocating fixed costs over a broader property base
and by eliminating duplicative expenditures. AmREIT estimates the
potential annual savings to each partnership that will be achieved by the
merger will be approximately $5,000 to $10,000 per partnership for Fund
III, Fund IV, Fund V, Fund VI, Fund VII, Fund VIII and Fund Goodyear and
approximately $75,000 to $90,000 per partnership for Fund IX, Fund X and
Fund XI.
. Liquidity. The merger provides you with greater liquidity of your
investment, which
10
<PAGE>
means your AmREIT common stock would be freely-tradable, for two reasons.
First, the market for the units you own is very limited because the units
are not listed on an exchange and, therefore, a potential buyer has no
real basis upon which to value the units. Additionally, because your
partnership agreement contains limitations on the transfer of your units,
you may not be able to sell your units even if you were able to locate a
willing buyer. Second, as a holder of units that have transfer
restrictions, the pool of potential buyers for your units is limited and,
to the extent that there is a willing buyer, the buyer would likely
acquire your units at a discount. As a stockholder of AmREIT, you will
own AmREIT common stock, which is expected to be listed on the Nasdaq
Stock Market's National Market, and therefore publicly valued, and there
will be no contractual or exchange restrictions on your ability to sell
the AmREIT common stock you own.
Recommendations
The Partnerships. The general partners believe that the terms of the merger
agreements, including the transaction value to be received by the limited
partners, are fair to and in the best interests of the respective limited
partners. The general partners approved the merger agreements and recommend
that the limited partners vote "For" approval of their respective merger
agreement and amendment of their agreement of limited partnership. The
following are the principal reasons why and how the general partners made their
determinations as to which no relative weight was assigned:
. The general partners believe the terms of the merger are fair to the
limited partners for the following principal reasons:
(1) The general partners analyzed the benefits of the merger and believe
that the potential benefits of the merger to the limited partners
outweigh the risks and potential detriments of the merger described
below.
(2) The general partners reviewed the value of the consideration to be
received by limited partners if their respective partnerships are
acquired by AmREIT, and the general partners compared it to the
consideration that limited partners might have received under the
continuation of the partnership without change or the liquidation of
the partnership. The general partners concluded that the likely value
of the shares of AmREIT common stock and, as applicable, the value of
the notes and cash, would be higher than the value of the
consideration limited partners would have received if the general
partners had elected either of those other alternatives.
(3) The general partners considered that limited partners have the
opportunity to vote for or against the merger, and, if they vote
against it, they have the ability to elect to receive either shares
of AmREIT common stock or to elect the cash/notes option if their
respective partnership approves the merger.
. The fairness opinions issued by Houlihan Lokey Howard & Zukin Financial
Advisors Inc. dated June 23, 1999 concluded that the consideration to be
received by the limited partners of each partnership in connection with
its merger with AmREIT is fair to the limited partners from a financial
point of view. Houlihan Lokey did not base its evaluation on various
combinations of partnerships with AmREIT. Accordingly, the general
partners believe that the merger of any number of the partnerships with
AmREIT will be fair to the limited partners of the participating
partnerships. Limited partners should read the applicable fairness
opinion in its entirety with respect to the assumptions made, matters
construed and limits of the reviews undertaken in the opinion. A copy of
the Houlihan Lokey opinion is attached as an exhibit to the supplement.
11
<PAGE>
. The fact that the transaction value to be received by those partners who
approve the merger and the value of the notes and cash to be received by
those so electing exceed the appraised value of the partnerships, whether
in liquidation or as a going concern, as determined by Valuation
Associates, an independent real estate appraisal firm.
. The belief by the general partners that, as a result of the increased
asset base of the combined entity, there is a greater potential for
increased distributions to the limited partners as stockholders of AmREIT
and appreciation in the price of the AmREIT common stock than there would
be for limited partners from the alternatives of complete liquidation of
the partnerships or continuation of the partnerships. For a comparison of
the historical distributions made by AmREIT and your partnership, see
your partnership supplement.
. The determination that the transaction values of the partnerships
represent fair estimates of the value of the partnerships' assets and
provide a reasonable basis for allocating merger consideration among
participating partnerships.
In recommending the merger, the general partners also considered the
following negative aspects of the merger, among others:
. The exchange price is fixed and the occurrence of events unfavorable to
AmREIT prior to consummation of the merger could reduce the value of the
common stock to be received by the limited partners in the merger.
. AmREIT's plan to increase its borrowings in order to fund additional real
estate investments upon completion of the merger and the risks associated
with increased debt.
. All limited partners, except those which are tax-exempt entities, will
realize taxable gain or loss in the merger, but will not receive cash
from the merger (other than cash received in lieu of fractional shares or
cash received as part of the cash/notes option) to pay any taxes due on
any taxable gain. Any gain or loss will be recognized in the year the
merger is consummated.
. The differences in investment objectives and policies of AmREIT and the
partnerships.
. The possible differences in investment objectives of a limited partner
from those of a stockholder, for example, limited partners may be
expecting a return of their equity investment at the end of the life of
the partnership, while stockholders require a market for their stock in
order to liquidate their interest.
. The risk that the anticipated benefits of the merger may not be realized.
. The fact that under the terms of the merger agreements, the general
partners are prohibited from initiating, soliciting or encouraging any
inquiries or the making of any proposal that constitutes, or that may
reasonably be expected to lead to, a transaction which would compete with
the merger, except if the general partners determine in good faith after
consultation with outside legal counsel that they are required by their
fiduciary obligations to do so.
The general partners believe the negative factors considered were not
sufficient, either individually or collectively, to outweigh the possible
benefits considered by the general partners in their deliberations relating to
the merger.
If the merger is not consummated for any reason, the partnerships will
continue to pursue their business intent of maximizing the value of their
partnership interests through the management and disposition of their
properties and liquidating their properties at the expiration of their
respective finite lives, if not previously sold in accordance with their
respective investment intent. In addition, the partnerships may seek another
strategic combination or pursue other attractive alternatives which may become
available.
AmREIT. The independent directors of AmREIT have unanimously approved the
merger and believe that the terms of the merger agreements are fair to the
stockholders of AmREIT. The independent directors unanimously
12
<PAGE>
recommend the stockholders vote for approval of the merger agreements and the
issuance of the shares of common stock thereunder. The determinations of the
independent directors are directed only to the stockholders of AmREIT and not
to the limited partners. The following are the principal reasons why and how
the independent directors made their determinations as to which no relative
weight was assigned:
. The merger is expected to improve AmREIT's operating performance and
profit margins because the partnerships' properties are generally located
in AmREIT's existing markets.
. Following the merger, AmREIT is expecting to be able to list its shares
on the Nasdaq Stock Market's National Market so long as a minimum of two
partnerships participate. Listing of AmREIT's shares on a national
exchange will increase the opportunity for stockholder liquidity.
AmREIT's shares are not currently listed on an exchange. It should be
noted that, as a result of the merger and the issuance of shares to the
limited partners, there will be a greater number of AmREIT shares
outstanding. The listing of the AmREIT shares on the Nasdaq Stock
Market's National Market will be undertaken regardless of whether the
reorganization is approved and completed.
. The merger should help increase AmREIT's cash flow and net income. An
increase in cash flow from operations increases the likelihood that
distributions will be able to continue to be made to stockholders.
. The written fairness opinion dated June 23, 1999 of Morgan Keegan &
Company, Inc. concluding that the consideration to be paid by AmREIT
pursuant to the merger is fair to AmREIT from a financial point of view.
A copy of the Morgan Keegan fairness opinion is attached to this proxy
statement as Annex 1.
In recommending the merger, the independent directors also considered the
following negative aspects of the merger, among others:
. A fixed exchange price, which upon the occurrence of events favorable to
AmREIT prior to consummation of the merger could result in an increase in
the value of the common stock to be paid in the merger.
. The significant cost involved in connection with consummating the merger.
. The substantial time and effort required of AmREIT's management to
effectuate the merger, integrate the business of the partnerships into
AmREIT and manage the increased and more diversified property portfolio.
. The risk that the anticipated benefits of the merger might not be fully
realized.
. The risk of dilution to the current AmREIT stockholders in the event that
AmREIT overpaid for the partnership interests.
The independent directors believe that the benefits and advantages of the
merger far outweigh the negative factors and risks.
If the merger is not consummated for any reason, AmREIT will continue to
execute its strategic objective of acquiring, by development and/or purchase,
single and multiple tenant retail properties. AmREIT will also continue to
consider possible acquisitions of compatible properties in commercial and
frontage retail developments.
13
<PAGE>
Alternatives to the Merger (page 41)
In determining whether to accept and recommend the merger, the general
partners considered two principal alternatives to the merger that could have
been pursued by each partnership: (1) continuation of each partnership pursuant
to its existing partnership agreement and (2) liquidation of each partnership.
The table below sets forth the value of each partnership's transaction value,
going concern value and liquidation value.
<TABLE>
<CAPTION>
Going
Transaction Concern Liquidation
Value Value Value
----------- ----------- -----------
<S> <C> <C> <C>
Fund III.................................... $ 877,841 $ 793,000 $ 711,000
Fund IV..................................... 509,337 479,000 425,000
Fund V...................................... 453,473 426,000 380,000
Fund VI..................................... 346,000 333,000 299,000
Fund VII.................................... 952,272 886,000 794,000
Fund VIII................................... 1,705,035 1,580,000 1,413,000
Fund Goodyear............................... 1,071,732 1,017,000 916,000
Fund IX..................................... 5,344,801 5,047,000 4,561,000
Fund X...................................... 10,495,000 10,088,000 9,122,000
Fund XI..................................... 6,323,192 6,001,000 5,422,000
----------- ----------- -----------
$28,078,683 $26,650,000 $24,043,000
=========== =========== ===========
</TABLE>
Benefits and Disadvantages of Continuation Alternative. Continuing each
partnership without change would have the following effects:
. each partnership would not be subject to the risks associated with the
ongoing operations of AmREIT and instead would remain a separate entity,
with its own assets and liabilities, and would pursue its original
investment objectives consistent with the guidelines, restrictions and
safeguards contained in its partnership agreement;
. each partnership's performance would not be affected by the performance
of AmREIT and the other partnerships that AmREIT intends to acquire in
the merger;
. eventually, each partnership would liquidate its holdings and distribute
the proceeds received in liquidation in accordance with the terms of each
partnership's partnership agreement whereas the AmREIT common stock
represents an asset with the potential to have a perpetual life with no
expectation of a return of the partner's equity investment in the absence
of a market for the sale of AmREIT common stock;
. there would be no change in the nature of limited partners' voting rights
and no change in each partnership's operating policies;
. your partnership would not incur merger expenses, ranging from $2,600 to
$79,000, or approximately 0.75% of the transaction value to be issued to
your partnership. For a breakdown of the expenses with respect to your
partnership, see the applicable supplement accompanying this proxy
statement;
. income from each partnership may be offset by passive activity losses
generated from limited partners' other investments, whereas limited
partners will not have the ability to offset income from their investment
in AmREIT with such losses;
. limited partners would not be subject to any immediate federal income
taxation that will otherwise be incurred by limited partners as a
consequence of the merger; and
. liquidation would likely provide a partner with sufficient cash to
satisfy tax liabilities arising in connection with a taxable gain, if
any, on the partner's original investment.
However, the general partners believe that maintaining the partnerships as
separate entities would have the following disadvantages:
. since the majority of the partnerships' operating expenses are fixed, as
their properties are sold and revenues from the portfolio decrease, the
general partners do not expect that the partnerships will sustain their
current level of distributions;
. since the partnerships are not authorized to raise additional funds
either through equity issuances or by incurring indebtedness for
investment, the partnerships are unable to benefit from investing in
potential growth opportunities;
. each limited partner's investment would continue to be illiquid because
the partnership units are not freely transferable and there is no
established public trading market or public market valuation for
14
<PAGE>
partnership units, unlike the shares of AmREIT common stock which will
have a public trading market that former limited partners could access at
their discretion;
. each partnership's property portfolio would be less diversified and
therefore the loss of one tenant or an economic downturn in the region
where a property is located would likely have a greater impact on that
particular partnership's ability to make distributions than it would on
AmREIT; and
. each partnership cannot acquire, develop or finance properties or take
advantage of the other potential benefits of the merger, which are
described above.
Benefits and Disadvantages of Liquidation Alternative. As an alternative to
the merger, each partnership could dissolve and liquidate by selling its
properties and other assets, paying off its existing liabilities not assumed by
the buyer and distributing the net sales proceeds to the limited partners (as
well as to the general partners) in accordance with the distribution provisions
of its partnership agreement. The primary advantage of this alternative would
be to provide liquidity to the limited partners as properties are sold based
upon the net liquidation proceeds received from the sale of each partnership's
assets.
The general partners do not believe that liquidation would be as beneficial
to the limited partners as the merger, for the following reasons:
. the general partners believe the public market valuation of an investment
in an operating real estate company like AmREIT may exceed the
liquidation value of your partnership's properties; and
. the general partners believe that liquidation of the properties would be
less desirable and could result in various adverse consequences
including:
(1) the liquidation valuation provided by Valuation Associates shows that
the liquidation values of the partnerships are lower than the values
of the shares of AmREIT common stock, based on the exchange price, to
be paid to the partnerships in the merger;
(2) a short term sale of the entire portfolio of a partnership's
properties could result in significant discounts from appraised
values due to the lack of time to properly market the portfolio. This
adverse consequence would affect Fund VII, Fund VIII, Fund IX, Fund X
and Fund XI more than the other partnerships because of the larger
size of their property portfolios; and
(3) the gradual liquidation of properties likely would involve higher
administrative costs and greater uncertainty, either of which would
reduce the portion of net sales proceeds available for distribution
to limited partners. This adverse consequence would affect Fund III,
Fund IV, Fund V, Fund VI and Fund Goodyear more than the other
partnerships because of the smaller size of their property
portfolios, thereby reducing the asset base over which these costs
may be spread.
15
<PAGE>
Comparative Compensation Paid to the General Partner
The following table sets forth the compensation, fees and distributions paid
by the partnerships to the general partners and their affiliates during the
last three fiscal years and the six-month period ended June 30, 1999 and
compares those payments against the amount that would have been paid assuming
the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Six Months Ended
December 31, 1996 December 31, 1997 December 31, 1998 June 30, 1999
------------------ ------------------ ------------------ ------------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimbursements(1)...... $131,835 -- $143,800 -- $188,972 -- $105,996 --
Cash Distributions(2)... $ 15,480 -- $ 17,110 -- $ 26,270 -- $ 17,727 --
General Partners
Salary(3).............. -- $13,078 -- $13,078 -- $13,078 -- $7,847
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnerships to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor, chairman of the board
and chief executive officer of AmREIT and his affiliates resulting from
ownership of partnership interests. Mr. Taylor's employment agreement with
AmREIT provides for a fixed base salary of $25,000 until June 1999 and
$30,000 through June 2000, which amount will not increase as a result of
the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as chief executive officer and director of
AmREIT. For purposes of this table, a portion of his salary was allocated
to the partnerships based on the percentage ownership of AmREIT of the
limited partners following the merger, assuming all partnerships
participate. No other affiliate of the general partner of the partnership
will receive compensation from AmREIT upon completion of the merger.
Proposed Amendments to Partnership Agreements (page 61)
The general partners of the partnerships are proposing an amendment to each
partnership's agreement of limited partnership which will amend the respective
agreements to authorize: (a) the merger of the partnership with and into
AmREIT, whether or not AmREIT would be regarded as an affiliate of the general
partners; and (b) all other actions as may be necessary under or contemplated
by the merger agreements or this proxy statement, irrespective of any provision
in the partnership agreement which might otherwise prohibit such actions.
AmREIT's Reorganization as a Texas REIT (page 118)
AmREIT's board is proposing that AmREIT change its jurisdiction of
organization from Maryland to Texas through the reorganization of AmREIT from a
Maryland corporation to a Texas REIT as soon as practicable following the
merger. The reorganization, if approved, will be effected through a separate
merger of AmREIT into a newly-formed Texas REIT subsidiary of AmREIT. As a
result of the reorganization, AmREIT and the rights of its stockholders,
directors and officers will be governed by Texas law and the declaration of
trust and bylaws of the Texas REIT, rather than Maryland law and AmREIT's
existing charter and bylaws.
If the reorganization proposal is approved by the AmREIT stockholders,
AmREIT will be redomiciled in Texas and will become a Texas REIT. The
reorganization, if approved, will occur following the closing of the merger. If
the reorganization is completed, limited partners will receive common shares of
beneficial interest in the Texas REIT in substitution for the shares of AmREIT
common stock received in the merger. The securities of the Texas REIT will have
the same value as the shares of AmREIT common stock and will be traded on an
exchange. There are, however, differences between Maryland law and Texas law
and between AmREIT's charter and the Texas REIT's charter. We believe that none
of these differences is material. For a description of the reorganization and a
comparison of the rights of a stockholder of a Maryland corporation and a
holder
16
<PAGE>
of common shares of beneficial interest of a Texas REIT, see "REORGANIZATION OF
AmREIT AS A TEXAS REAL ESTATE INVESTMENT TRUST" beginning on page 118. In order
to simplify the discussion of the merger contained in this proxy statement, we
will refer to the consideration to be received by limited partners in the
merger as AmREIT common stock throughout this document.
Purpose of the Reorganization
Following the merger, assuming all partnerships participate, approximately
50% of AmREIT's properties will be located in Texas. As a result, AmREIT's
board determined it would be advisable to reorganize the company as a Texas
REIT so as to recognize the business advantages of that structure, including
the fact that Texas REITs are not subject to Texas franchise tax while
corporations, such as AmREIT prior to the reorganization, are subject to that
tax.
Voting Procedures (page 155)
AmREIT Special Stockholders Meeting. The special meeting of AmREIT's
stockholders will be held on , , 1999 at 10:00 a.m.,
Houston time at . The purpose of the AmREIT meeting is to
consider and vote upon the proposal to approve the merger agreements, the
amendment to AmREIT's bylaws authorizing the merger and the reorganization.
Stockholders may vote at the meeting by attending the meeting and voting in
person, by completing the enclosed proxy card and returning it in the enclosed
envelope or by faxing it to the transfer agent as directed below. Proxies will
be received, tabulated and certified as to time of receipt and vote by The Bank
of New York, AmREIT's transfer agent. Proxies returned to the transfer agent at
101 Barclay Street, New York, NY 10286, Attention: AmREIT Proxies, or faxed to
. Faxed proxies will be accepted until 5:00 p.m., New York time,
on , 1999.
If the stockholders have any questions regarding the merger or the
reorganization, they should call Chad Braun, at (713) 850-1400, extension 24.
The Partnerships' Special Limited Partners Meetings. The special meetings of
limited partners will be held on , , 1999 at 10:00
a.m. time at . The purpose of the meetings is to
consider and vote upon the proposal to approve the respective merger agreement
and the amendment to the partnership agreements authorizing the merger. Limited
partners may vote at the meeting by attending the meeting and voting in person,
by completing the enclosed consent and returning it in the enclosed envelope or
by faxing it to as directed below. Consents will be
received, tabulated and certified as to time of receipt and vote by MAVRICC
Management Systems, Inc. Consents must be returned to MAVRICC Management
Systems, Inc., 1845 Maxwell, Suite 101, Troy, Michigan 48084, Attention AAA
Partnership Consents, or faxed to . Faxed partnership consents
will be accepted until 5:00 p.m., time, on , 1999.
Record Date; Votes Required
AmREIT. Only holders of shares of record at the close of business on
, 1999, will be entitled to notice of and to vote at the AmREIT
meeting. The merger agreements and the reorganization will be approved if each
of those proposals receives the affirmative vote, in person or by proxy, of a
majority of the outstanding shares of common stock entitled to vote at the
AmREIT meeting. The bylaw amendment will be approved if the proposal receives
the affirmative vote, in person or by proxy, of a majority of the outstanding
shares of common stock entitled to vote at the AmREIT meeting. The holders of a
majority of the shares entitled to vote, present in person or by proxy, will
constitute a quorum for purposes of the AmREIT meeting. As of the record date
for the meeting, there were shares outstanding and entitled to vote.
The members of the board of directors and executive officers of AmREIT and
their affiliates beneficially owned, as of the record date, shares,
which represent approximately % of the outstanding shares. The directors and
members of management intend to vote their shares in favor of all proposals.
Abstentions and broker non-votes have the same effect as a vote against the
proposals.
17
<PAGE>
The Partnerships. Only limited partners of record at the close of business
on , 1999 will be entitled to notice of and to vote at the
partnership meetings. The affirmative vote of (a) the holders of a majority of
the outstanding partnership units of each partnership, in person or by consent,
and (b) the general partners are required to approve the merger and the
amendment to the applicable partnership agreement. The general partners intend
to vote in favor of the merger and the amendment to the applicable partnership
agreement. Abstentions and broker non-votes will, for the purposes of the
merger vote, have the same effect as a vote against the merger and the
partnership amendments.
Dissenters' Rights
AmREIT Stockholders. AmREIT stockholders will not have dissenters' appraisal
rights by reason of the merger or the reorganization. Any stockholder may
abstain from or vote against the merger or the reorganization.
Limited Partners. Limited partners will not have dissenters' appraisal
rights by reason of the merger. Limited partners who vote against the merger,
and whose partnerships nonetheless approve the merger, will receive shares of
AmREIT common stock for their units unless they affirmatively elect the
cash/notes option.
AmREIT Common Stock (page 117)
AmREIT is authorized to issue up to 100,000,000 shares of common stock, par
value $0.01 per share. As of the record date, AmREIT has outstanding a total of
5,747,500 shares of common stock. The shares issued in the merger will be
freely transferable by the holders thereof except for those shares held by
holders who may be deemed to be affiliates of AmREIT under applicable federal
securities laws. The shares are expected to be listed for trading on the Nasdaq
Stock Market's National Markets.
Partnership Appraisals (page 75)
The general partners have received appraisals of each partnership prepared
by Valuation Associates, an independent real estate appraisal firm. The general
partners used these valuations to establish the consideration to be paid to the
partners of each of the partnerships. Based on the fact that the transaction
value exceeds the appraised value of partnerships assets, the general partners
determined that the consideration payable to each partnership was reasonable.
For a tabular comparison of the transaction values and the appraised values
please see "SUMMARY--Alternatives to the Merger".
Limited partners will not have any right to have an independent appraisal
performed at the expense of AmREIT or any of the partnerships.
Effective Time of the Merger (page 54)
As soon as practicable after satisfaction of all conditions to consummation
of the merger, AmREIT will file articles of merger with the Maryland Department
of Assessments and Taxation and the partnerships will file articles of merger
with the Secretary of State of either the state of Nebraska or Texas, as
applicable, in order to effect the merger under the laws of those states. For
Nebraska and Texas state law purposes, the merger will become effective upon
the later of the filing of articles of merger described above, or at a later
time which AmREIT and the general partners shall have agreed upon and
designated in their filings in accordance with applicable law. AmREIT and each
of the partnerships have the right, acting unilaterally, so long as they have
not willfully and materially breached the merger agreement, to terminate the
merger agreement should the merger not be consummated by the close of business
on March 31, 2000.
Conditions to Consummation of the Merger (page 54)
The following conditions must be satisfied in order for the merger to be
consummated:
. the merger agreements shall have been approved by the stockholders of
AmREIT and the limited partners of the participating partnerships;
. all other approvals, including, by way of example, those required by
lease agreements, debt instruments, financing
18
<PAGE>
agreements, and the satisfaction of any other related contractual
obligations that may be necessary to carry out the transactions
contemplated by the merger agreements shall have been obtained;
. none of the parties shall be subject to an order or injunction
prohibiting the merger;
. all material actions by or in respect of or filings with any governmental
entity required for consummation of the merger shall have been obtained
or made; and
. the shares of AmREIT common stock shall have been listed on an exchange.
Consummation of the merger is also subject to the satisfaction or waiver of
these other conditions:
. the representations and warranties in the merger agreements of each of
the parties shall be true and correct as of the closing date;
. each party shall have performed its obligations contained in the
respective merger agreement;
. from and after the date of the respective merger agreement there shall
not have occurred any change in the financial condition, business or
operations of either party that would have or would be reasonably likely
to have a material adverse effect on the business, results of operations
or financial condition of such party;
. each party shall have received all necessary opinions of counsel; and
. each party shall have obtained all consents and waivers from third
parties necessary to consummate the merger.
If any material conditions to the merger are waived by the parties, the
parties shall resolicit proxies or consents from the waiving party's
stockholders or limited partners, as applicable.
The merger agreements provide that if only one of the partnerships approves
the merger, AmREIT has the right but not the obligation to consummate the
merger with the partnership approving the merger. If more than one partnership
approves the merger, AmREIT must consummate the merger with the approving
partnerships if all of the other conditions to the merger have been satisfied.
Termination Rights (page 58)
The merger agreements provide that they may be terminated prior to the
effective time for good reason. For a definition of good reason please see the
discussion under the caption "THE MERGER--Termination." In the event a party so
terminates its respective merger agreement, it may be required to pay the non-
terminating party liquidated damages in a specified amount. In the case of
AmREIT, the liquidated damages are equal to 120% of the partnerships'
proportionate share of the merger expenses. In the case of each of the
partnerships, the liquidated damages will consist of the partnership's
proportionate share of $500,000 which is the agreed upon break up fee as set
forth in the merger agreement.
Anticipated Accounting Treatment (page 63)
The merger will be accounted for by using the purchase method in accordance
with Accounting Principles Board Opinion No. 16 "Business Combinations."
Conduct of Business Pending the Merger (page 55)
Each of AmREIT and the partnerships has agreed in their respective merger
agreement to operate its business in the ordinary course and to refrain from
taking certain actions relating to the operation of its business pending
consummation of the merger without the prior approval of the other party,
except as otherwise permitted by the merger agreement.
The Merger Expenses (page 62)
AmREIT will bear all its costs incurred in connection with the merger and
will bear the proportionate merger costs of each partnership that approves the
merger. Those partnerships which reject the merger will bear their allocated
portion of the merger expenses. The merger expenses are
19
<PAGE>
allocated among the partnerships based on the transaction values established
for each partnership. Each partnership that rejects the merger will pay a
percentage of the allocated expenses equal to the number of votes cast "For"
the merger. The general partners of any rejecting partnership will pay the
percentage of that partnership's merger expenses equal to the percentage of
votes cast "Against" the merger and abstentions. For a breakdown of the
expense estimated to be paid by each partnership in the merger, please see the
applicable supplement attached to this proxy statement.
Comparison of Rights of the Limited Partners and Stockholders of AmREIT (page
140)
The rights of limited partners are currently governed by Nebraska or Texas
law depending on the state of organization of the partnership and the
partnership agreements. If the merger is approved, the rights of the limited
partners receiving shares of AmREIT common stock will be governed by Maryland
law, the AmREIT articles of incorporation and the AmREIT bylaws, all of which
differ from the partnership agreements. For a comparison of the rights of a
limited partner and the rights of a Maryland corporate stockholder, please see
the disclosure under the caption "COMPARISON OF OWNERSHIP OF UNITS AND
SHARES." If the reorganization is approved, limited partners who otherwise
would have received AmREIT common stock will receive common shares of
beneficial interest in the Texas REIT and will be governed by Texas law and
the Texas REIT's declaration of trust and bylaws. For a comparison of the
rights of a shareholder of a Maryland corporation and holders of common shares
of beneficial interest of a Texas REIT, please see the disclosure under the
caption "REORGANIZATION OF AmREIT AS A TEXAS REIT--Comparison of Maryland
Common Stock and Texas Common Shares of Beneficial Interest".
Right to Investor Lists and to Communicate with Other Investors
We are required, upon receipt of a written request from you, to provide you
with the following information:
. a statement of the approximate number of limited partners or stockholders
in your partnership or AmREIT, as the case may be, and
. the estimated cost of mailing a proxy statement, form of proxy or consent
or other similar communication to those limited partners or stockholders.
In addition, you have the right, at our option, either to:
. at your expense, have us mail copies of any proxy statement, proxy or
consent form or other soliciting material furnished by you to any of your
fellow limited partners or stockholders that you designate, or
. have the partnership or AmREIT, as applicable, deliver to you (at a cost
to you of $0.25 per page for mailing and duplication), within five
business days of when the partnership or AmREIT receives your request, a
reasonably current list of the names, addresses and number of shares or
partnership units held by the investors in your entity.
Federal Income Tax Consequences (page 78)
The merger involves numerous federal income tax consequences to you,
depending in part on whether you receive only AmREIT common stock or make the
cash/notes election. The material federal income tax consequences of the
merger generally include the following:
. All limited partners, except those which are tax-exempt entities, will
realize taxable gain or loss in the merger. The transaction will be
taxable with respect to all limited partners, whether they receive AmREIT
common stock or elect to receive cash and notes. The limited partners
will not receive cash from the merger to pay any taxes due on any taxable
gain (other than cash received in lieu of fractional shares or cash
received as part of the cash/notes option) to pay any taxes due on any
taxable gain. Gain or loss will be recognized in the year the merger is
consummated.
. The amount of gain or loss initially recognized by a limited partner will
be
20
<PAGE>
based upon its allocable share of gain or loss recognized by the
respective partnership upon the deemed sale of assets. The net gain or
loss recognized by a partner who receives only AmREIT common stock in the
merger will also be impacted to the extent the fair market value of the
consideration distributed to the limited partner exceeds or is less than
the limited partner's adjusted tax basis in his or her partnership units.
Tax matters are very complicated, and the tax consequences of the merger to
stockholders and limited partners will depend on the facts of each
individual's situation. We urge you to consult your tax advisor for a full
understanding of the merger's tax consequences to you.
21
<PAGE>
RISK FACTORS
Before you decide how to vote on the merger, you should be aware that there
are various risks involved in the merger. In addition to the other information
included in this proxy statement, you should carefully consider the following
risk factors in determining whether to vote in favor of the merger. The
following list summarizes all material risks related to the merger.
Risks Associated With the Merger
The value of the AmREIT common stock may be less than the exchange price.
The value of the AmREIT common stock may be less than the exchange price
after the merger for the following reasons:
. The exchange price was fixed at $9.34 per share several months before the
anticipated effective time of the merger. Therefore, the exchange price
may not reflect the actual value of the AmREIT common stock on the
effective date of the merger because of possible changes in AmREIT's
business, operations and prospects, market assessments of the merger,
general market and economic conditions and other factors. Because the
exchange price is fixed, AmREIT will not (i) pay additional shares to
participating limited partners if the value of the shares on the merger
effective date is lower than the exchange price or (ii) decrease the
number of shares to be received by participating limited partners if the
value of the shares is greater than the exchange price on the effective
date.
. The AmREIT common stock currently is not traded on an established market,
and therefore the exchange price is not based on a known market value for
the shares. Neither the independent directors nor the general partners
can predict whether the shares will trade at a price lower than the
exchange price after the merger.
. When an established secondary market for the AmREIT common stock is
established, there can be no assurance as to the trading volume or price
of the shares after the merger. Events outside the control of AmREIT may
adversely affect the market value of AmREIT's assets and the market value
of the shares. Sales of a substantial number of the shares by AmREIT
stockholders upon listing or by limited partners following the merger, or
the perception that those sales could occur, could adversely affect the
market price for the shares. AmREIT currently has 2,372,744 shares of
common stock outstanding. Following completion of the merger, assuming
all partnership participate, there will be 5,747,500 shares of AmREIT
common stock outstanding. If Funds IX, X and XI, which constitute about
80% of all of the partnerships' assets, participate in the merger, there
will be about 5,033,615 shares of AmREIT common stock outstanding.
The price paid for the partnership interests may not accurately reflect the
values of the underlying assets.
There can be no assurance that the Houlihan Lokey and Morgan Keegan fairness
opinions or the independent appraisals prepared by Valuation Associates
properly reflect the value of each partnership's assets or AmREIT's common
stock, as applicable. The partnerships in the aggregate, therefore, may not
have received sufficient consideration consistent with their actual asset
value. Alternatively, the negotiated property prices may exceed the actual
price at which AmREIT could purchase each property in a market transaction.
Mr. Taylor will receive benefits from the merger and will have conflicts of
interest in the merger.
Mr. Taylor has several material conflicts of interest in the merger and in
determining the merger terms as general partner on behalf of the partnerships.
(1) Mr. Taylor is the chief executive officer and director of AmREIT,
currently holds 262,061 shares or 11% of AmREIT common stock, is an individual
general partner of Funds IX, X and XI and is the sole director,
22
<PAGE>
chief executive officer and significant stockholder of each of the corporate
general partners of all of the partnerships. Although Mr. Taylor is a board
member and stockholder of AmREIT, Mr. Taylor has a different interest in the
completion of the merger, which may conflict with the interests of the AmREIT
stockholders and with his own position as a stockholder in AmREIT.
(2) Mr. Taylor is entitled to (a) receive 3,992 shares for his general
partner interests in Fund VII, Fund VIII and Fund Goodyear and (b) purchase
6,784 shares with the disposition fees that he will receive from Funds III, IV,
V and VI. The disposition fees are contractual obligations of those
partnerships contained in their partnership agreements which are payable upon
the sale of each of those partnership's properties. These fees are based on a
percentage of the sales price received for these properties. For information on
the number of shares of AmREIT common stock to be paid to him if your
partnership is merged, if any, please see the supplement relating to that
partnership accompanying this proxy statement.
(3) Mr. Taylor will receive up to an additional 349,995 shares upon
completion of the merger, assuming all partnerships participate, pursuant to
the terms of the acquisition agreement between AmREIT and American Asset
Advisers Realty Corporation (AAA), AmREIT's former external advisor entered
into on June 5, 1998 under which AmREIT acquired AAA. These additional shares
issuable to Mr. Taylor represent a portion of the deferred consideration
payable under the terms of the AAA acquisition agreement, the ultimate issuance
of which was contingent upon AmREIT increasing its outstanding equity.
(4) In the event that one or more partnerships are not acquired, Mr. Taylor,
as an individual general partner or significant stockholder of a corporate
general partner of all of the partnerships, may be required to pay a
substantial portion of the merger costs allocated to those partnerships to the
extent that you or other limited partners of your partnerships vote against the
merger. When you consider the recommendation of Mr. Taylor, as a general
partner of your partnership, keep in mind that his interests may differ from
your interests with respect to the merger.
Interests of limited partners and stockholders will be diluted.
Upon completion of the merger, the interest of each limited partner in a
partnership and each stockholder in AmREIT will be diluted significantly from
the interest that each limited partner and stockholder held previously due to
the increase in the amount of stockholders of AmREIT after the merger. Also,
shortly after the merger, AmREIT intends to engage in an underwritten public
offering of AmREIT common shares, if market conditions permit. This future sale
of AmREIT common shares could adversely affect the market price of the AmREIT
common shares.
Each partnership did not have independent representation.
The general partners and the independent directors negotiated and agreed to
the terms of the merger on behalf of the partnerships and AmREIT, respectively.
The general partners are Mr. Taylor and entities controlled by Mr. Taylor. Mr.
Taylor is a director, the chief executive officer and approximately 11%
stockholder of AmREIT. While the partnerships did receive fairness opinions and
appraisals prepared by Houlihan Lokey and Valuation Associates, respectively,
the partnerships were not individually or as a group represented by independent
parties during merger negotiations. Independent representation may have
resulted in more favorable merger terms to the limited partners and greater
attention to unique partnership valuation issues during the structuring of the
merger, thereby affecting allocations.
The acquisition of AmREIT securities is a speculative investment.
The shares of AmREIT common stock and notes are speculative investments
because AmREIT's ability to make distributions on its shares of common stock
and to make timely interest payments on its notes depends on AmREIT's future
business operations. While management believes AmREIT's ability to achieve
future operating results sufficient to be able to make these distributions and
payments is good, AmREIT may not be
23
<PAGE>
able to do so. AmREIT's future operating budgets are based on assumptions about
the general economy and AmREIT's business operations. In general, budgets
project inflation, interest rates and revenues, all of which depend
substantially on factors beyond AmREIT's control. Interest rates and levels of
economic activity have been particularly volatile in recent years, and any
significant increase in interest rates or downturn in the level of economic
activity, particularly in the real estate industry, would materially impair
AmREIT's ability to achieve budgeted levels of operating income.
Limited partners may receive smaller distributions after the merger.
Limited partners who become AmREIT stockholders may receive lesser cash
distributions than previously received from the partnerships. AmREIT, in order
to maintain its qualification as a REIT under the Internal Revenue Code, is
required to distribute each year's income to its stockholders in an aggregate
amount at least equal to:
. the sum of (A) 95% of its "REIT taxable income," computed without regard
to the dividends paid deduction and computed by excluding its net capital
gain, and (B) 95% of the net income, after tax, if any, from foreclosure
property, if any, minus (C) the sum of specified items of non-cash
income.
These distributions, which AmREIT pro rates and pays on a quarterly basis,
must be paid in the taxable year to which they relate, or in the following
taxable year if declared before AmREIT timely files its federal income tax
return for such year and if paid on or before the first regular distribution
payment date after such declaration. If AmREIT does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax on the undistributed
amounts at regular corporate tax rates. Furthermore, if AmREIT should fail to
distribute during each calendar year at least the sum of:
. 85% of its REIT ordinary income for such year,
. 95% of its REIT capital gain income for such year and
. any undistributed taxable income from prior periods,
it would be subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts actually distributed.
The partnerships do not have any distribution requirements similar to
AmREIT. The partnerships have allocated net profits or losses and distributable
cash among the limited and general partners according to the applicable
partnership agreements. The partnerships have distributed cash available for
distribution quarterly.
Although AmREIT intends to continue paying quarterly cash distributions at
current levels, it may not be able to do so. Also, the impact of the merger
upon the distributions to limited partners who receive shares in the merger is
uncertain.
The size of AmREIT after the merger is uncertain.
At the time that you and the other limited partners are asked to vote on the
merger, you will not be able to make a complete evaluation of the merger
because you will not know which partnerships, if any, will participate in it.
If less than all of the partnerships approve the merger:
. a smaller combined entity will have less capitalization than a larger
combined entity, which may adversely affect AmREIT's access to capital
markets and the liquidity of AmREIT shares to its stockholders;
. the economies of scale that a smaller combined entity can achieve in
operating, administering and allocating its resources to its various
properties may be less than those that a larger combined entity can
achieve;
24
<PAGE>
. a smaller combined entity may not have the diversification of industry
risks that a larger combined entity may have. For example, if only Funds
III, IV, V, VI, VII, VIII and Goodyear participate in the merger, (1) the
geographical concentration of AmREIT's properties in Texas will increase
from 50% to 70% and (2) AmREIT's average lease term will decrease,
thereby increasing AmREIT's operational risks; and
. The table below sets forth the capitalization of AmREIT when (i) 50% of
the partnership's participate in the merger, (ii) 75% of the partnerships
participate and (iii) 100% of the partnerships participate.
<TABLE>
<CAPTION>
Total
Shares Allocated
----------------
<S> <C>
50%
Fund III..................................................... 93,987
Fund VI...................................................... 37,045
Fund VIII.................................................... 182,552
Fund Goodyear................................................ 114,746
Fund X....................................................... 1,123,662
---------
Total Shares Issued........................................ 1,551,992
Total Outstanding Shares at 6/30/99........................ 2,384,117
Shares Purchased with Disposition Fees..................... 3,761
Shares Issued as Deferred Compensation..................... 175,000
---------
Total Capitalization....................................... 4,114,870
75%
Fund III..................................................... 93,987
Fund VII..................................................... 101,956
Fund VIII.................................................... 182,552
Fund Goodyear................................................ 114,746
Fund X....................................................... 1,123,662
Fund XI...................................................... 677,322
---------
Total Shares Issued........................................ 2,294,225
Total Outstanding Shares at 6/30/99........................ 2,384,177
Shares Purchased with Disposition Fees..................... 2,650
Shares Issued as Deferred Compensation..................... 262,500
---------
Total Capitalization....................................... 4,943,492
100%
Total Shares Issued........................................ 3,006,604
Total Outstanding Shares at 6/30/99........................ 2,384,117
Shares Purchased with Disposition Fees..................... 6,784
Shares Issued as Deferred Compensation..................... 349,995
---------
Total Capitalization....................................... 5,747,500
</TABLE>
AmREIT believes that REITs with greater market capitalization have
historically attracted greater investor interest because of the increased
liquidity resulting from a larger number of shares outstanding. Accordingly, if
fewer partnerships participate, the value of the AmREIT common stock may be
lower because of reduced demand for the securities.
The Merger is a Taxable Event.
The merger is a taxable transaction resulting in either taxable income or
loss for each limited partner. However, tax exempt partners should not
recognize gain or loss. The merger will be treated as a deemed sale of
25
<PAGE>
the partnership assets and will result in realization of gain or loss to the
partnership based on the difference between (1) the sum of the fair market
value of the consideration received by the partnership and the partnership
liabilities assumed by AmREIT, and (2) the partnership's adjusted asset tax
basis in its assets. The supplement for each partnership sets forth the
estimated taxable gain per average original $1,000 investment in your
partnership. Each taxable limited partner generally will recognize his/her
allocable share of any gain or loss based upon his/her respective partnership
interest. Additionally, each taxable limited partner who receives only AmREIT
common stock will recognize taxable gain (or taxable loss) to the extent that
the fair market value of the consideration received by that limited partner
exceeds (or is less than) that limited partner's adjusted tax basis in his/her
partnership units. Gain or loss recognized by the limited partners will be
treated as passive income or loss. Although limited partners should be treated
as having disposed of their entire interest in the partnership's activity for
purposes of "freeing up" suspended passive losses from such activity, such
results are uncertain.
Based on the general partners' representation that the partnerships do not
hold their properties for resale in the ordinary course of business, the merger
should not result in recognition of unrelated business taxable income by tax-
exempt limited partners that do not hold their partnership units as a "dealer"
or acquired such units with debt-financed proceeds. Not all tax-exempt
organizations qualify for this treatment.
The limited partners will receive no cash to pay taxes.
The merger will result in taxable income or loss to each limited partner
which is not a tax-exempt entity. Because the merger will result in an exchange
of partnership units for shares of common stock and limited partners have no
cash appraisal rights, limited partners generally will receive no cash, other
than cash received in lieu of fractional shares (or cash received as part of
the cash/notes option), in the merger to pay any taxes due on any taxable
income arising as a result of the merger. Thus, a limited partner may be
required to sell shares or liquidate other investments in order to pay the
taxes arising from the taxable income.
AmREIT may assume undisclosed partnership liabilities which may decrease its
profits and asset values.
At closing, AmREIT will assume each participating partnerships' liabilities
that are (1) undisclosed and (2) disclosed but contingent liabilities for which
the partnership failed to provide adequate reserves. Undisclosed and/or
contingent liabilities might include, among others, claims for cleanup or
remediation of unknown environmental conditions, tenant or vendor claims for
pre-merger activities, unpaid liabilities unintentionally omitted from the
closing balance sheets, claims for indemnification by the general partners and
other indemnified parties for pre- merger events, and claims for undisclosed
title defects. The existence of any of these liabilities could decrease
AmREIT's profits or decrease the value of the properties and therefore,
decrease the value of AmREIT's assets after the merger.
The partnerships may bear a portion of the merger expenses.
AmREIT will pay all transaction costs and expenses of any partnership
incurred in connection with the merger if that partnership approves the merger.
If a partnership does not approve the merger, that partnership
must pay its allocated share of the merger expenses, including the cost of the
fairness opinion provided by Houlihan Lokey, the accounting costs for the
partnerships, 50% of the costs of the appraisals of the partnership properties
and the costs of partner communications allocable to that partnership. The
merger expenses are allocated among the partnerships based on the transaction
values established for each partnership. Each partnership that rejects the
merger will pay a percentage of the allocated expenses equal to the number of
votes cast "For" the merger divided by the total number of votes cast on the
merger. The general partners of any rejecting partnership will pay the
percentage of these expenses equal to the number of votes cast "Against" the
merger and abstentions divided by the total number of votes cast on the merger.
The aggregate estimated amount of expenses that the partnerships can expect to
incur in connection with the merger is $212,000. For a breakdown of the
expenses that we estimate each partnership will incur, please see the
applicable supplement attached to this proxy statement.
26
<PAGE>
A majority vote of limited partners of a partnership binds all limited
partners.
Each participating partnership must approve the merger by a vote of the
holders of a majority of partnership units. If the merger is approved, limited
partners who abstain from voting or vote against the merger will nonetheless be
required to participate in the merger.
Participating limited partners will forego the alternatives to the merger.
If a partnership approves the merger, its limited partners will forego
alternatives to the merger, including continuing each partnership pursuant to
its existing partnership agreement and retaining its finite-life feature to
allow investors to liquidate and receive proceeds from the sale of the
partnerships' properties. A limited partner's share of these sale proceeds
could be higher than the amount realized from the consideration received in the
merger.
AmREIT or a partnership may be liable for liquidated damages if it terminates
the merger agreement.
A party to the merger agreement must pay the other party liquidated damages
if it terminates the merger agreement
. other than for good reason (for example,, the merger is not consummated
by March 31, 2000, the AmREIT stockholders or the limited partners do not
approve the merger or the breach of a party's representations, warranties
and covenants) or
. in the good faith exercise of its fiduciary duties and that party is
acquired by, or agrees to be acquired by, another entity within one year
after such termination. The liquidated damages that (1) a partnership
would owe is equal to its proportionate share of $500,000 and (2) AmREIT
would owe to any partnership is equal to 120% of that partnerships'
allocated share of the partnership's merger expenses. The obligation to
make the termination payment may adversely affect the ability of any of
the partnerships or AmREIT to engage in another transaction in the event
the merger is not consummated and may have an adverse impact on the
financial condition of AmREIT or the partnerships incurring that
obligation.
Risks Associated with Fundamental Change in Nature of Investment
Limited partners who receive shares in the merger will have fundamentally
changed the nature of their investment. These changes include the following:
AmREIT has a perpetual life while each partnership has a finite life.
Each partnership was formed as a finite-life investment, with limited
partners receiving regular cash distributions from the partnership's net
operating income and special distributions upon liquidation of the
partnership's real estate investments. AmREIT intends to operate indefinitely
and has no specific plans to sell its assets. Further, AmREIT does not intend
to make any special distributions of proceeds from future asset sales, unless
it is required to make a distribution to maintain its REIT status.
Additionally, amounts realized from the sale of shares of AmREIT common stock
may not equal the amount obtainable through the public sale
of AmREIT's assets. AmREIT stockholders are, therefore, subject to public
market risks, particularly where the value of their equity securities may
fluctuate from time to time depending upon general market conditions and
AmREIT's future performance.
AmREIT generally is not a pass-through entity.
Limited partners who become stockholders will have changed their investment
from a pass-through entity for federal income tax purposes to an investment in
a REIT, which is generally not a pass-through entity, with the possible
exception of certain undistributed long-term gains. Limited partners who become
stockholders of AmREIT will be unable to deduct any losses realized by AmREIT
on their individual federal income tax returns.
27
<PAGE>
AmREIT's business objectives differ from partnership business objectives.
AmREIT intends to acquire additional properties by raising additional
capital, borrowing and reinvesting sales proceeds. Raising additional capital
may dilute the existing stockholders' percentage interest in AmREIT and
borrowing involves risks such as the inability to repay loans and losing
secured properties by foreclosure. AmREIT plans to increase its leverage up to
approximately 50% of the value of the real property acquired in the merger and
to acquire new properties using those borrowed funds.
Operating changes may adversely affect AmREIT's financial condition.
AmREIT's investment and financing policies and its policies with respect to
all other activities, including its growth, debt, capitalization, distribution
and operating policies, may be amended or revised at any time and from time to
time at the discretion of AmREIT's board of directors. Any operating policy
changes could adversely affect AmREIT's financial condition, results of
operations or share market price.
Limited partners may lose rights after the merger.
The rights of limited partners in Fund IX and Fund X are currently governed
by Nebraska law, the rights of the limited partners in Fund III, Fund IV, Fund
V, Fund VI, Fund VII, Fund VIII, Fund XI and Fund Goodyear are governed by
Texas law and the rights of limited partners in each partnership also are
governed by the terms of the partnership agreement of that partnership. After
consummation of the merger, the rights of the holders of partnership units that
are converted into shares of AmREIT common stock will be governed by Maryland
law (or Texas law should the reorganization be approved) and AmREIT's charter
and bylaws. Existing limited partner rights may be reduced by the following
differences:
. the partnerships' agreements of limited partnership require the
distribution of net cash from operations, unlike the AmREIT governing
documents which subject distributions to the discretion of independent
directors and the distribution requirements of the Internal Revenue Code
relating to maintaining REIT status;
. unlike each partnership's agreement of limited partnership, which
requires that each partnership distribute net proceeds from the sale or
refinancing of properties, AmREIT's governing documents do not contain a
similar requirement and AmREIT currently does not intend to distribute
the net proceeds resulting from the sale or refinancing of properties,
but rather intends to use those proceeds to acquire additional properties
or for working capital purposes;
. while the partnerships are not authorized to issue equity securities
other than partnership units, AmREIT has substantial flexibility to issue
additional equity securities and its stockholders, unlike limited
partners, face the risk of dilution by such issuance; and
. effective as of the merger date, the partnerships will cease to exist and
AmREIT will acquire their properties. A subsidiary of AmREIT has
historically managed its properties, therefore, no significant changes to
the day to day operations of the Partnerships' properties are expected to
occur as a result of the merger.
AmREIT is subject to fewer restrictions on management.
Currently, each partnership agreement limits the fees and other compensation
which the partnership may pay to the general partners and their affiliates.
AmREIT may pay its management any amount deemed fair and reasonable and in the
best interests of AmREIT by its board of directors.
AmREIT's officers and directors have more limited liability than the general
partners.
As a stockholder of AmREIT, you will have different rights and remedies
against AmREIT, its officers and directors than you have against the general
partners of your partnership. The articles of incorporation and bylaws of
AmREIT provide that an officer's or director's liability to AmREIT, its
stockholders or third parties for monetary damages may be limited as permitted
under Maryland law. Under Maryland law and its articles of
28
<PAGE>
incorporation and bylaws, AmREIT generally is obligated to indemnify its
officers and directors for reasonable expenses that may be incurred in
connection with their service to AmREIT. This indemnification could limit the
legal remedies available to AmREIT, to you and to other stockholders of AmREIT
after the merger against any officers or directors of AmREIT.
Risk Considerations Associated with the Cash/Notes Option
Limited partners should consult their own advisors to review and evaluate
the economic, tax and other consequences of note ownership. Limited partners
should not construe this document as investment, legal, accounting or tax
advice. Before electing the cash/notes option, partners and their advisors
should carefully consider, among other things, the following risk
considerations:
AmREIT's ability to incur additional secured debt may reduce the value of the
notes held by former limited partners of the partnerships.
AmREIT's callable note obligations will be unsecured, and their payment
will not be guaranteed. Because the notes are unsecured obligations of AmREIT,
they will be subordinate to all secured debt of AmREIT. AmREIT expects to
incur additional secured debt in the future. Limited partners electing the
cash/notes option will be general creditors of AmREIT and, as such, their
claims against AmREIT's other assets would rank equally with AmREIT's other
general creditors. To illustrate what this means, if you assume that the
merger had been consummated on June 30, 1999 and that all of the partnerships
were acquired, then as of that date, AmREIT would have had aggregate
consolidated secured liabilities of approximately $999,379 which AmREIT would
have to repay before repaying the notes.
Noteholders may not participate in AmREIT's profits.
Participating limited partners who elect to receive notes will not hold an
equity interest in AmREIT and will not be able to participate in earnings or
benefit from increases in the equity value, if any.
Each noteholder is subject to majority vote of all noteholders.
Each noteholder must enter into the loan agreement, under which the
noteholders may take actions by majority vote. Accordingly, the persons
holding a simple majority of the notes may bind all of the noteholders, and
may waive certain defaults under the notes. The loan agreement has not been
registered under the Trust Indenture Act of 1939 and note holders will not
have the act's protections.
The notes may be relatively illiquid.
An active secondary market for the notes will not likely develop, making it
difficult for noteholders to sell their notes prior to maturity, or subjecting
them to the risk of selling the notes at substantial discounts to facilitate
their sale. Thus, a noteholder will likely not be able to liquidate his
investment in the event of an emergency, and the notes may not be readily
acceptable as loan collateral. Accordingly, the notes should be considered a
long-term, illiquid investment. Participating limited partners are likely to
receive the full face amount of their notes only if they hold the obligations
to maturity, which is approximately years after the closing date of the
merger.
The notes will not be subject to a sinking fund.
The notes will not be subject to a sinking fund. AmREIT will not be
required to set aside funds for the retirement of or to retire the notes at
any time prior to maturity.
Noteholders have limited recourse.
The noteholders have no right of personal recourse against the officers,
directors, stockholders, employees or agents of AmREIT for payment of
principal or interest, or for attorneys' fees and costs which they, as
prevailing parties, may be entitled to recover.
29
<PAGE>
AmREIT may have to raise cash on unattractive terms to satisfy note
obligations.
AmREIT believes that it can satisfy its cash payment obligations and note
service payment obligations to noteholders from available resources, including
cash reserves, operating revenues and borrowing under existing and/or proposed
credit facilities. However, if AmREIT lacks sufficient funds to satisfy these
obligations, it would need to find funds from other sources and may be required
to sell one or more of its properties on unattractive terms, which could impair
AmREIT's ability to achieve budgeted levels of operating income, further
impairing AmREIT's ability to satisfy its obligations to noteholders.
Risks Associated With an Investment in AmREIT
AmREIT's plan to grow through the acquisition and development of new
properties could be adversely affected by trends in the real estate and
financing businesses, may not generate income or may generate insufficient
income from operations.
AmREIT's growth strategy is substantially based on the acquisition and
development of additional properties, including those in the merger. We cannot
assure you that AmREIT will be able to do so successfully because AmREIT may
have difficulty finding new properties, negotiating with new or existing
tenants or securing acceptable financing. In addition, investing in additional
properties is subject to many risks. If AmREIT does not generate enough income
from future operations to pay distributions to stockholders, AmREIT may, as it
has in the past, make distributions to its stockholders in amounts exceeding
its net income.
If AmREIT cannot meet its REIT distribution requirements, it may have to
borrow funds or liquidate assets to maintain its REIT status.
REITs generally must distribute 95% of their taxable income annually. In the
event that AmREIT does not have sufficient available cash to make these
distributions, this requirement may limit AmREIT's ability to acquire
additional properties. Also, for the purposes of determining taxable income,
AmREIT may be required to include interest payments, rent and other items it
has not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, AmREIT could have taxable
income in excess of cash available for distribution. If this occurred, AmREIT
would have to borrow funds or liquidate some of its assets in order to make
sufficient distributions and maintain its status as a REIT.
Limitations on share ownership required to maintain AmREIT's REIT status may
deter attractive tender offers for AmREIT common shares.
For the purposes of protecting its REIT status, AmREIT's articles of
incorporation limit the ownership by any single stockholder of any class of
AmREIT capital stock, including common stock, to 9.8% of the issued and
outstanding equity securities, unless the AmREIT board determines otherwise.
These restrictions may discourage a change in control of AmREIT, deter any
attractive tender offers for AmREIT common shares or limit the opportunity for
you or other stockholders to receive a premium for your AmREIT common stock.
AmREIT may increase its leverage without stockholder approval.
Although AmREIT's bylaws limit AmREIT's ability to incur indebtedness in
excess of 300% of AmREIT's net assets on a consolidated basis, AmREIT can
increase its leverage up to this level without stockholder approval. This
additional debt could adversely affect AmREIT's ability to make stockholder
distributions and would result in an increased risk of default on its
obligations, including payment of the notes issued in the merger. AmREIT
intends to borrow future funds through secured and/or unsecured credit
facilities to finance property investments. These borrowings may require lump
sum payments of principal and interest at maturity. Because of the significant
cash requirements necessary to make those large payments, AmREIT's
30
<PAGE>
ability to make these payments may depend upon its ability to sell or refinance
properties for amounts sufficient to repay such loans. In addition, increased
debt service may adversely affect cash flow and share value.
At June 30, 1999, AmREIT had outstanding debt totaling $15.4 million, of
which $14.4 million was unsecured. This debt represented approximately 41% of
AmREIT's total assets. At June 30, 1999, none of the partnerships had any
outstanding debt.
On a post-merger pro forma basis, AmREIT would have outstanding up to
approximately $19.9 million of unsecured and/or secured debt which would equal
approximately 33% of AmREIT's total assets, assuming all of the partnerships
participate and 20% of all consideration paid in the merger consists of notes.
AmREIT's and the Texas REIT's charter will contain anti-takeover provisions.
AmREIT's charter contains, and the Texas REIT's charter will contain,
provisions which may make it more difficult to remove current management or
delay or discourage an unsolicited takeover, which could have the effect of
inhibiting a non-negotiated merger or other business combination involving
AmREIT. These provisions include:
. The power of the AmREIT board to issue 10,000,000 preferred shares, with
rights and preferences as determined by independent board members, thus
enabling the board to create a new class of preferred stock with voting
or other rights senior to any existing class of stock;
. The prohibition on any person owning, directly or indirectly, more than
9.8% of the outstanding shares of capital stock
The provisions authorizing the issuance of preferred shares on terms that
board members determine make it more difficult for an aggressor to obtain a
controlling number of shares. The provisions authorizing stop transfers prevent
stockholders from transferring their shares to an aggressor.
Provisions of Maryland law could restrict change in control.
Maryland law provides that "control shares" of a Maryland corporation
obtained in a "control share acquisition" have no voting rights, except to the
extent approved by two-thirds of the votes entitled to be cast on the matter.
Any shares of stock owned by the acquirer of "control shares," or by AmREIT's
officers or directors who are also its employees, may not be counted in the
two-thirds required for approval.
"Control shares" are voting shares of stock which, when added with all other
shares already owned or subject to the voting control of the acquirer, would
result in the acquirer having specified ranges of voting power in electing
AmREIT's board of directors. A "control share acquisition" means the
acquisition of control shares.
If voting rights for the control shares are properly approved by AmREIT's
stockholders, and the acquirer then controls the voting of a majority of the
shares entitled to vote, then all other stockholders may exercise appraisal
rights to receive the fair market value of their shares. None of the shares of
AmREIT common stock issuable in the merger will be subject to these
restrictions.
These provisions of Maryland law could delay or prevent a change in control
even if such a change were in the stockholders' best interest due to (1) the
potential for the absence of voting rights for control shares, and (2) the
potential cost of the exercise of appraisal rights if voting rights are
approved for control shares. However, this law does not apply to shares
acquired in a merger, consolidation or share exchange in which AmREIT is a
party.
The Texas Real Estate Investment Trust Act which will govern the Texas REIT
does not contain provisions similar to this Maryland provision.
31
<PAGE>
AmREIT's properties may lack geographical diversification after the merger.
As of June 30, 1999, AmREIT and the partnerships owned properties located in
12 southwest states. Below is a table which sets forth the geographic
concentration of AmREIT in these twelve states based on revenue.
<TABLE>
<CAPTION>
AmREIT and:
---------------------------------------------------------------
Funds III,
IV, V, VI,
AmREIT All VII, VIII
Only Partnerships and Goodyear Fund IX Fund X Fund XI
---------- ------------ ------------ ------------ ------------ -----------
# % # % # % # % # % # %
--- ------ ------------ ----- ------ ----- ------ ----- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona................. 1 7.6% 1 7.1% 1.00 6.2% 1.00 6.3% 1.00 7.3% 1.00 9.6%
Colorado................ -- 0.0% 1 2.4% 0.00 0.0% 0.00 0.0% 0.00 0.0% 1.00 3.9%
Delaware................ 1 10.1% 1 4.9% 1.00 8.3% 1.00 8.4% 1.00 7.2% 1.00 8.2%
Georgia................. 2 6.3% 3 4.9% 2.00 5.2% 2.00 5.3% 3.00 7.1% 2.00 5.1%
Kansas.................. 1 3.7% 1 3.5% 1.00 3.0% 1.00 3.0% 1.00 2.6% 1.00 5.8%
Louisiana............... 2 9.7% 2 8.1% 2.00 8.0% 2.00 8.1% 2.00 6.9% 2.00 13.4%
Minnesota............... -- 0.0% 1 4.6% 0.00 0.0% 0.00 0.0% 1.00 6.7% 0.00 0.0%
Missouri................ 1 3.6% 1 3.2% 1.00 2.9% 1.00 3.0% 1.00 4.6% 1.00 2.9%
Mississippi............. 1 5.3% 1 2.6% 1.00 4.4% 1.00 4.4% 1.00 3.8% 1.00 4.3%
Oklahoma................ -- 0.0% 1 1.5% 0.00 0.0% 0.00 0.0% 0.00 0.0% 1.00 2.5%
Tennessee............... -- 0.0% 1 3.5% 0.00 0.0% 1.00 6.0% 0.00 0.0% 0.00 0.0%
Texas................... 7 53.8% 27 53.9% 19.00 61.9% 11.00 55.6% 11.00 53.7% 7.00 44.3%
--- ------ ---- ------- ----- ------ ----- ------ ----- ------ ---- ------
Total................. 16 100.0% 41 100.0% 28 100.0% 21 100.0% 22 100.0% 18 100.0%
</TABLE>
AmREIT intends to make future investments in other geographical areas but it
may not be able to do so. AmREIT's concentration of investments in a limited
geographical area subjects AmREIT to substantial risks of adverse changes in
regional economic conditions and real estate markets.
AmREIT depends on a few major tenants.
Just For Feet, Inc. and OfficeMax, Inc. accounted for 33.1% and 11.7%,
respectively, of AmREIT's total revenues for the six months ended June 30,
1999.
Just For Feet, Inc. (JFFI) operates a Just For Feet discount shoe store on
its leased properties as part of its national chain of retail stores which sell
athletic footwear, athletic apparel and related items. JFFI reported
consolidated revenues in excess of $774 million and $478 million for the years
ended January 31, 1999 and 1998, respectively. JFFI had consolidated net
earnings of $26.6 million and $21.4 million, respectively, for these periods.
JFFI's current assets exceeded its current liabilities at January 31, 1999 by
$316 million and its total assets exceeded its total liabilities on such date
by more than $325 million.
OfficeMax, Inc. operates an OfficeMax discount office supply store on each
of its leased properties as part of its nationwide network of OfficeMax stores.
OfficeMax, Inc. had total consolidated revenues of more than
$4.3 billion and $3.7 billion for the years ended January 24, 1999 and 1998,
respectively. OfficeMax, Inc. had consolidated net earnings of in excess of $48
million and $89 million for the years ended January 24, 1999 and 1998,
respectively. OfficeMax, Inc.'s current assets exceed its current liabilities
at January 24, 1999 by more than $501 million and total assets on that date
exceeded total liabilities by more than $1.1 billion.
Distribution payments are subordinate to payments on debt.
AmREIT has paid regular quarterly distributions since its organization.
Distributions to stockholders of AmREIT will be subordinate to the prior
payment of AmREIT's current debts and obligations, including payments on the
callable notes, if any. If AmREIT has insufficient funds to pay its debts and
obligations, future distributions to stockholders will be suspended pending the
payment of such debts and obligations.
32
<PAGE>
Debt obligations restrict payment of dividends.
AmREIT's credit agreement with Wells Fargo contain provisions that restrict
(1) payment of dividends if AmREIT fails to pay the bank any principal,
interest or fees and (2) payment of dividends other than dividends only as
necessary to maintain qualified as a real estate investment trust under the
Internal Revenue Code if AmREIT fails to observe or perform other covenants
under the credit agreement.
Property acquisitions may fail to perform in accordance with expectations and
estimates of the costs of improvements to bring an acquired property up to
standard may prove inaccurate.
AmREIT anticipates that its new developments and acquisitions will be
financed under lines of credit or other interim forms of secured or unsecured
financing. Permanent financing for this newly developed or acquired projects
may not be available or may be available only on disadvantageous terms. In
addition, AmREIT's distribution requirements limit its ability to rely upon
income from operations or cash flow from operations to finance new developments
or acquisitions. As a result, if permanent financing is not available on
acceptable terms, further development activities or acquisitions might be
curtailed. In the case of an unsuccessful development or acquisition, AmREIT's
loss could exceed its project investment.
Risks Associated with an Investment in Real Estate
AmREIT may be unable to renew lease or relet spaces.
AmREIT's property leases might not be renewed, the space might not be relet
or the terms of renewal or reletting may be less favorable than current lease
terms. AmREIT's cash flow and ability to make expected distributions to its
stockholders may be adversely affected if: (1) it is unable to promptly relet
or renew the leases, (2) the rental rate upon renewal or reletting is
significantly lower than expected or (3) its reserves proved inadequate.
Real estate investments are relatively illiquid.
Real estate investments are relatively illiquid. Illiquidity limits the
owner's ability to vary its portfolio promptly in response to changes in
economic or other conditions. In addition, federal income tax provisions
applicable to REITs may limit AmREIT's ability to sell properties at a time
which would be in the best interest of its stockholders.
Properties are subject to general real estate operating risks.
Like your investment in the partnerships, if you become a stockholder of
AmREIT, your investment will be subject to the risks of investing in real
property. In general, a downturn in the national or local economy, changes in
zoning or tax laws or the availability of financing could adversely affect
occupancy or rental rates. In addition, increases in operating costs due to
inflation and other factors may not be offset by increased rents.
If operating expenses increase, the local rental market for properties similar
to AmREIT's may limit the extent to which rents may be increased to meet
increased expenses without decreasing occupancy rates. If any of the above
occur, AmREIT's ability to make distributions to stockholders could be
adversely affected.
AmREIT's properties face competing properties.
All of AmREIT's properties are located in areas that include competing
properties. The number of competitive properties could have a material adverse
effect on both AmREIT's ability to lease space and the rents charged. AmREIT
may be competing with other property owners that have greater resources. There
is no dominant competitor in any of AmREIT's markets.
AmREIT may construct improvements, the cost of which may not be recoverable.
AmREIT may on occasion acquire properties and construct improvements or
acquire properties under contract for development. Investment in properties to
be developed or constructed is more risky than
33
<PAGE>
investment in fully developed and constructed properties with operating
histories. In connection with the acquisition of these properties, AmREIT may
advance, on an unsecured basis, a portion of the purchase price, either in the
form of cash, a conditional letter of credit and/or promissory note. AmREIT
will be dependent upon the seller or lessee of the property under construction
to fulfill its obligations, including the return of advances and the completion
of construction. This party's ability to carry out its obligations may be
affected by financial and other conditions which are beyond the control of
AmREIT.
If AmREIT acquires construction properties, the general contractors and the
subcontractors may not be able to control the construction costs or build in
conformity with plans, specifications and timetables. The failure of a
contractor to perform may necessitate legal action by AmREIT to rescind its
construction contract, to compel performance or to rescind its purchase
contract. These legal actions may result in increased costs to AmREIT.
Performance may also be 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 skilled labor and by
financial insolvency of the general contractor or any subcontractors prior to
completion of construction. These factors can result in increased project costs
project and corresponding depletion of AmREIT's working capital and reserves,
and in loss of permanent mortgage loan commitments relied upon as a primary
source for repayment of construction costs.
AmREIT may make periodic progress payments to the general contractors of
properties prior to construction completion. By making these payments, AmREIT
may incur substantial additional risks, including the possibility that the
developer or contractor receiving these payments may not fully perform the
construction obligations in accordance with the terms of his agreement with
AmREIT and that AmREIT may be unable to enforce the contract or to recover the
progress payments.
AmREIT leases to single tenants who can fail.
Single tenant leases accounted for 100% of AmREIT's total revenue for the
six month period ended June 30, 1999. In single tenant leases, 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,
AmREIT 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, AmREIT will continue to consider the creditworthiness and
financial strength of the tenants of its properties at the time they are
acquired.
The inability of a tenant to make lease and mortgage payments could have an
adverse effect on AmREIT.
AmREIT's business depends on the tenants' ability to pay their obligations
to AmREIT with respect to AmREIT's real estate leases. AmREIT typically does
not require that a third party guarantee the obligations of the tenant. The
ability of the tenants to pay their obligations to AmREIT in a timely manner
will depend on a number of factors, including the successful operation of their
businesses. Various factors, many of which are beyond the control of any
business, may adversely affect the economic viability of AmREIT's tenants,
including but not limited to:
(1) national, regional and local economic conditions (which may be adversely
affected by industry slowdowns, employer relocations, prevailing employment
conditions and other factors), which may reduce consumer demand for the
products offered by AmREIT's customers;
(2) local real estate conditions;
(3) changes or weaknesses in specific industry segments;
(4) perceptions by prospective customers of the safety, convenience,
services and attractiveness of AmREIT's customers;
34
<PAGE>
(5) changes in demographics, consumer tastes and traffic patterns;
(6) the ability to obtain and retain capable management;
(7) changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties;
(8) the inability of a particular property's computer system, or that of its
suppliers or vendors, to adequately address Year 2000 issues;
(9) increases in operating expenses; and
(10) increases in minimum wages, taxes (including income, service, real
estate and other taxes) or mandatory employee benefits.
Net leases may not result in fair market lease rates over time.
Net leases accounted for 100% of AmREIT's total revenue for the six month
period ended June 30, 1999. 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.
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 original leases on
AmREIT's existing properties are for original terms ranging from 10 to 20
years.
In the event a lease is terminated, AmREIT may not be able to lease the
property for the previous rent and may not be able to sell the property without
incurring a loss. AmREIT could also experience delays in enforcing its rights
against defaulting tenants. Moreover, tax laws may restrict AmREIT's ability to
deal with a new tenant after termination of the lease. If a tenant does not pay
rent, AmREIT may not only lose the net cash flow from the property but may also
need to use cash flow generated by other properties to meet mortgage payments
on the defaulted property.
AmREIT invests in joint ventures, which adds another layer of risk to its
business.
AmREIT is currently involved in six joint ventures with certain of the
partnerships in which it holds between 51% and 74.58% interest. Investments in
joint ventures may involve risks which may not otherwise be present where
investments are made directly by AmREIT in real property such as:
. the potential ability in AmREIT's joint venture partner to perform;
. the joint venture partner may have economic or business interests or
goals which are inconsistent with or adverse to those of AmREIT;
. the joint venture partner may take actions contrary to the requests or
instructions of AmREIT or contrary to AmREIT's objectives or policies;
and
. 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.
AmREIT also may participate with other investors, including, possibly
investment programs or other entities affiliated with management, 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.
35
<PAGE>
AmREIT's properties may not be profitable, may not result in distributions
and/or may depreciate.
While AmREIT will attempt to buy leased, income-producing properties at a
price at or below the appraised value of such properties, properties acquired
by AmREIT
(1) may not operate at a profit,
(2) may not perform to investor's expectations,
(3) may not appreciate in value,
(4) may depreciate in value,
(5) may not ever be sold at a profit,
(6) may result in the loss of a portion of your investment and
(7) may not result in dividends. The marketability and value of any
properties will depend upon many factors beyond AmREIT's control. A ready
market for AmREIT's properties may not exist or develop.
AmREIT has properties specifically suited to few tenants.
AmREIT may acquire properties specifically suited to particular tenant
needs, including retail or commercial facilities. The value of these properties
would be adversely affected by the specific tenant's failure to renew or honor
its lease. These properties would typically require extensive renovations to
adapt them for new uses by new tenants. Also, AmREIT may experience difficulty
selling special purpose properties to persons other than the tenant.
AmREIT may provide financing to purchasers of REIT properties.
AmREIT may provide purchaser financing which would delay receipt of the
proceeds from the property sale, AmREIT may provide this financing 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 this financing.
AmREIT will be subject to risks inherent in the business of lending, such as
the risk of default of the borrower or bankruptcy of the borrower. Upon a
default by a borrower, AmREIT may not be able to sell the property securing a
mortgage loan at a price that would enable it to recover the balance of a
defaulted mortgage loan. In addition, the mortgage loans could be subject to
regulation by federal, state and local authorities which could interfere with
AmREIT's administration of the mortgage loans and any collections upon a
borrower's default. AmREIT will also be subject to interest rate risk that is
associated with the business of making mortgage loans. Since AmREIT's primary
source of financing its mortgage loans is expected to be through variable rate
loans, any increase in interest rates will also increase AmREIT's borrowing
costs. In addition, any interest rate increases after a loan's origination
could also adversely affect the value of the loans when securitized.
AmREIT may engage in sale-leaseback transactions.
AmREIT, on occasion, may lease an investment property back to the seller.
When the seller/lessee leases space to tenants, the seller/lessee's may be
unable to meet its rental obligations to AmREIT if 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 have an adverse
effect on AmREIT's financial position. In the event of a default or
termination, AmREIT may not be able to find new tenants without incurring a
loss.
Also, a seller may attempt to include in the acquisition price all or some
portion of the lease payments. If the seller is successful, AmREIT may pay a
premium 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.
36
<PAGE>
AmREIT must compete for acceptable investments.
AmREIT's operating results will depend upon the availability of suitable
investment opportunities, which in turn depends 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. AmREIT will continue 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 AmREIT. Many
of these competitors may have greater resources than AmREIT.
Risks Associated With Federal Income Taxation of AmREIT
AmREIT's failure to qualify as a REIT for tax purposes would result in
AmREIT's taxation as a corporation and the reduction of funds available for
stockholder distribution.
Although AmREIT's management believes that it is organized and is operating
so as to qualify as a REIT, AmREIT may not be able to continue to remain so
qualified. In addition REIT qualification tax laws may change. AmREIT is not
aware, however, of any currently pending tax legislation that would adversely
affect its ability to continue to qualify as a REIT.
For any taxable year that AmREIT fails to qualify as a REIT, it will be
subject to federal income tax on its taxable income at corporate rates. In
addition, unless entitled to relief under certain statutory provisions,
AmREIT also will be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification is lost. This treatment
would reduce the net earnings available for investment or distribution to
stockholders because of the additional tax liability to AmREIT for the year or
years involved. In addition, distributions no longer would qualify for the
dividends paid deduction nor would there by any requirement that such
distributions be made. To the extent that distributions to stockholders would
have been made in anticipation of AmREIT qualifying as a REIT, AmREIT might be
required to borrow funds or to liquidate certain of its investments to pay the
applicable tax.
AmREIT may be liable for prohibited transaction 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 AmREIT of substantial taxes,
such as the 100% tax that applies to net income from a prohibited transaction
if AmREIT is determined to be a dealer in real property. Because the question
of whether that type of violation occurs may depend on the facts and
circumstances underlying a given transaction, these 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 REIT provisions to be inconclusive or ambiguous.
Changes in the tax law may adversely affect AmREIT's REIT status.
The discussions of the federal income tax considerations of the merger are
based on current tax laws. Changes in the tax laws could result in tax
treatment that differs materially and adversely from that described in this
proxy statement.
Investment in AmREIT may not be suitable under ERISA and IRA requirements.
Fiduciaries of a pension, profit sharing or other employee benefit plan
subject to ERISA should consider whether the investment in AmREIT securities
satisfies the ERISA diversification requirements of ERISA, whether the
investment is prudent in light of possible limitations on the marketability,
whether the investment would be an improper delegation of 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 should consider that an
IRA may only make investments that are authorized by the appropriate governing
instrument.
37
<PAGE>
THE MERGER
The following discussion describes the material aspects of the merger and
the terms of the merger agreements. Please note, however, that even though the
following information describes all material provisions, the description
provided below is a summary and does not set forth all the provisions of the
agreements. For a complete description of the merger, you are encouraged to
read the terms of your respective merger agreement which is attached as an
appendix to the respective prospectus supplement. By this reference, we are
incorporating each of the merger agreements into this proxy statement.
Background of the Merger
In late 1996, the general partners began to consider alternative ways to
maximize the value of the partnership units of each of the partnerships. The
general partners evaluated three possible strategic alternatives: (1)
continuation of the partnerships, (2) liquidation of the partnerships, and (3)
the combination of one or more of the partnerships with AmREIT. The general
partners believed a combination of the partnerships with AmREIT would, if
structured in an equitable and efficient manner, be most beneficial to the
limited partners by providing them both an opportunity to invest in a larger
and more diversified portfolio and an opportunity for liquidity. The general
partners believed such a combination would also benefit AmREIT's stockholders
by allowing an incremental expansion opportunity to acquire unleveraged assets
for its equity and debt securities and to further increase its investment
portfolio by leveraging those assets.
In early 1997, the general partners began informal discussions regarding
AmREIT's possible acquisition of one or more of the partnerships with the
independent directors of AmREIT. While the independent directors generally felt
such a transaction would be mutually favorable, they agreed that Mr. Taylor's
position as the controlling person of both the partnerships and American Asset
Advisors Realty Corp., AmREIT's then existing external adviser, created a
number of conflicts in structuring such a transaction. The independent
directors were particularly concerned about the general partners' service
contracts with the partnerships which would, as a practical matter, continue
after their acquisition by AmREIT. The independent directors believed it to be
in the best interests of the AmREIT stockholders to negotiate the acquisition
of the partnerships only if AmREIT were internally managed. The independent
directors informed the general partners that for this and other considerations
they would entertain a proposal to acquire the external adviser. In response,
the general partners informed the independent directors that AmREIT's
acquisition of the external adviser would need to be independent of and in no
manner conditioned upon any transactions between AmREIT and the partnerships.
Negotiations for the acquisition of the adviser commenced in July 1997 and
continued through December 31, 1997, when the independent directors approved
the final terms of the acquisition of the adviser which was consummated on June
5, 1998 following the approval of the acquisition by the stockholders of
AmREIT.
During January and February 1998, the general partners began structuring an
offer to the independent directors regarding the proposed merger of the
partnerships with and into AmREIT. On February 10, 1998, the general partners
engaged Houlihan Lokey on behalf of the limited partners to render to each
partnership an opinion as to the fairness, from a financial point of view, of
the consideration to be received by the limited partners in connection with the
merger, if and when approved by the parties. In late February, in anticipation
of the general partners' offer, the independent directors engaged counsel and
Bishop-Crown, as financial advisors.
During March and early April of 1998, the independent directors and the
general partners held numerous discussions regarding the terms of the proposed
merger and the advantages and disadvantages associated with a possible merger.
On April 10, 1998, the general partners presented the merger proposal to the
independent directors. The merger proposal presented in April 1998 involved a
structure substantially similar to the one presented to the limited partners by
this proxy statement. The independent directors reviewed the proposal with
AmREIT management (other than Mr. Taylor), their financial adviser, Bishop-
Crown, and counsel.
In early April, the independent directors made a counter proposal to the
general partners. After further negotiations, the parties agreed in principal
to the merger terms, but delayed final agreement as to price until they
reviewed, among other things, the 1997 year end financial statements of the
partnerships and AmREIT.
38
<PAGE>
During the remainder of April and continuing through May 1998, the
independent directors received and reviewed financial information regarding the
partnerships and advice from Bishop-Crown regarding likely value of the
partnerships to AmREIT in a controlled acquisition structure. The independent
directors and the general partners considered pro forma financial data based on
a different number of partnerships participating in the merger. During meetings
on May 21, 22 and 23, 1998, the independent directors and the general partners
reached agreement on the price and terms of the merger. At meetings held on May
23, 1998, the independent directors, acting as a majority of the board of
directors of AmREIT, and the general partners of the partnerships approved the
respective merger agreement between AmREIT and the partnerships. Following the
approvals of the independent directors and the general partners, AmREIT and the
partnerships entered into the merger agreement.
Counsel for AmREIT began the preparation of the documentation required for
presenting the merger proposal to the limited partners and the AmREIT
stockholders. Initially, it was determined that it would be advisable to issue
the AmREIT common stock to be delivered to the limited partners as the merger
consideration through an exemption from registration of the shares under the
federal securities laws. This exemption required AmREIT to seek a review of the
merits of the transaction from a state regulatory agency. AmREIT selected the
California Department of Corporations as the reviewing body. Following
protracted negotiations between AmREIT and representatives of the California
Department of Corporations, AmREIT decided in March 1999 to withdraw its
application from the State of California and to register the AmREIT common
stock to be issued in the merger under the federal securities laws. The
decision to withdraw from California was based in principal part on AmREIT's
concern as to whether a favorable response would have been received from the
State of California in a timely manner so as to enable AmREIT to consummate the
merger within a reasonable time frame. During the second half of 1998 and early
1999, Bishop-Crown became more actively involved in assisting AmREIT in the
valuation of prospective property acquisitions, other than those to be acquired
pursuant to the proposed merger. As a result, Bishop-Crown and the independent
directors became concerned as to the effect of possible conflicts of interest
impairing Bishop-Crown's ability to render an independent fairness opinion with
respect to the merger. As a result, Bishop-Crown ceased to act as financial
advisor in April 1999. As a result, AmREIT retained Morgan Keegan to act as its
financial advisor and to render a fairness opinion with respect to the merger
consideration. AmREIT and the partnerships also retained Valuation Associates
an independent real estate appraisal firm to assist both parties in valuing the
properties.
As a result of the length of time from the signing of the original merger
agreement and the decision to withdraw the California application, additional
negotiations commenced between the independent directors and the general
partners of the partnerships in June 1999. During their negotiations, the
independent directors and general partners reviewed the 1998 financial
information for AmREIT and the partnerships and discussed possible changes to
the terms of the merger based on that information. In addition, the independent
directors and general partners reviewed the appraisals performed by Valuation
Associates and held discussions with their respective financial advisors.
A special meeting of the independent directors was held on June 9, 1999 to
consider the proposed merger as negotiated and documented. At this meeting,
senior management and the financial and legal advisors of AmREIT made detailed
presentations concerning all material aspects of the proposed transaction.
Following this meeting, AmREIT made a revised acquisition proposal to the
general partners. Following additional negotiations between the parties, on
June 17, 1999, the independent directors and the general partners met and
eventually agreed upon the consideration to be paid for the partnership units
by AmREIT, subject to agreement on the documentation reflecting the proposal
and to further refinement by and approval of the financial advisers to AmREIT
and the partnerships. The merger proposal presented to the AmREIT board and the
general partners on June 17 is identical to the terms of the merger described
on this proxy statement except for immaterial adjustments in the transaction
values.
On June 25, 1999, a special meeting of the independent directors was held to
consider the terms of the proposed merger agreement and to evaluate the final
financial terms of the merger. At this meeting, senior management and the legal
advisers of AmREIT made detailed presentations concerning the terms of the
merger
39
<PAGE>
agreement, this proxy statement and the financial terms of the proposed merger.
At this meeting, the independent directors approved the merger. Following the
meeting, the general partners, on behalf of the partnerships, and AmREIT
executed and delivered the merger agreements. Each merger agreement is attached
to the respective prospectus supplement as Appendix B.
If the partnerships approve the merger AmREIT will pay all costs related to
the appraisals. If a partnership rejects the merger, that partnership will bear
its allocated portion of the appraisal expenses which is equal to the
transaction value assigned to that partnership divided by the aggregate
transaction values for all partnerships.
In May 1999, Fund III sold a Taco Bell located in Houston, Texas which was
originally purchased in 1983. Fund III was notified that Taco Bell desired to
terminate their lease. The property was listed for sale with an independent
third party real estate broker. In May 1999, the property sold for
approximately $172,500. Additionally, in April 1999, Fund III received an offer
to purchase the Bank of America property located in Houston, Texas. The offer
made was for approximately $574,000. Upon discussion and further analysis, the
offer was rejected. No other offers have been made on this property.
The Independent Directors' Reasons and Recommendations for the Merger
The independent directors, each of whom is unaffiliated with the general
partners and the partnerships, believe that the terms of the merger agreements
are fair from a financial point of view to the stockholders and in the best
interests of AmREIT and its stockholders. The independent directors also
unanimously believe that the merger is fair to the stockholders of AmREIT who
are not affiliated with Mr. Taylor or AmREIT management. Accordingly, the
independent directors have unanimously approved the merger agreements and such
issuance of shares of common stock thereunder, and recommend that the
stockholders vote for approval of the merger agreements and the issuance of
shares of common stock. As the independent directors determined that it would
be in the best interests of the stockholders to acquire all or any one of the
partnerships, the independent directors did not condition the consummation of
each of the mergers on the consummation of any other merger. Nevertheless, the
merger agreements give AmREIT the option of not consummating the merger if only
one of the partnerships approves the merger.
In negotiating and agreeing to the terms and conditions of the merger and
the negotiated prices of the properties, the independent directors have acted
solely on behalf of AmREIT. The independent directors are not affiliated with
the general partners or the partnerships and therefore owe no fiduciary duty to
the limited partners in connection with those negotiations. In conducting their
negotiations in connection with the merger, the independent directors owe a
fiduciary duty only to the stockholders of AmREIT, whose interests in
connection with the merger conflict with those of the limited partners.
The independent directors' determinations as to the fairness of the merger
are directed only to the AmREIT stockholders and not to the limited partners.
In reaching their decision, the independent directors considered several
factors, and consulted with AmREIT's management and Morgan Keegan. Set forth
below are the principal reasons, to which relative weights were not assigned,
of why and how the independent directors made those determinations.
. The independent directors have concluded that the merger will increase
AmREIT's funds from operations (FFO) and cash flow based on their
analysis of the pro forma historical financial statements included in
this proxy statement, forecasts and projections based on various
assumptions and their analysis of the operating history and potential of
AmREIT and the partnerships. Based on their analysis, the independent
directors believe the merger will be accretive to AmREIT's FFO and cash
flow primarily because of three operational advantages AmREIT has over
each of the partnerships.
FFO is a widely accepted measure of an equity REIT's operating
performance. An increase in cash flow and FFO per share as a result of
the merger or any other reason may result in a greater likelihood that
distributions will be made to stockholders. FFO is calculated as net
income, excluding gains or losses from sales of property, depreciation
and amortization of real estate assets and nonrecurring
40
<PAGE>
items of income or expense. The independent directors consider FFO an
appropriate measure of performance of an equity REIT because it is
predicated on cash flow analysis. However, FFO is not an alternative to
measurements under GAAP and may not be comparable to similar titled
items recorded by other REITs.
(1) Because of AmREIT's internally managed structure, its costs for
operating and administering the properties will be less than those
incurred historically by the partnerships. Moreover, the independent
directors believe AmREIT's administrative and management costs, as a
percentage of total assets, should decrease in the future because of
efficiencies of scale realized as its investment portfolio increases
in size.
(2) AmREIT's current rate of distributions (approximately $0.73 per
share per annum or approximately $71.22 per $1,000 original
investment) is less than the annual rate of distributions paid by
the partnerships (other than Fund IV) to the limited partners on
their investment which annual distributions vary from $62.00 to
$96.53 per $1,000 original investment. Thus, AmREIT's cost of equity
capital is generally less than that of the partnerships.
(3) Unlike the partnerships, which may not leverage their investments,
AmREIT will be able to take advantage of positive leverage by the
borrowing of additional funds and investing of those funds in
additional properties.
The independent directors noted that AmREIT's borrowing costs on
current and proposed credit facilities are currently 7.2% per annum
and that, based on recently closed and contractually committed
property acquisitions, the return currently available to AmREIT from
property investments is 9.5% or more. Thus, in current financial and
real estate markets, the revenues from available property investments
exceeds the costs of acquisition financing, resulting in positive
leverage. The independent directors also noted that the amount of
accretion to AmREIT's cash flow resulting from the merger will depend,
upon, among other things, current borrowing rates, the returns
available to AmREIT from the purchase of additional properties and
AmREIT's ability to maintain general administrative costs at prudent
levels. The independent directors noted that the merger is expected to
be accretive to AmREIT's FFO and AmREIT's ability to pay distributions
to stockholders, even after dilution by reason of the issuance of the
additional shares of AmREIT common stock to Mr. Taylor resulting from
the merger pursuant to the terms of the agreement relating to the
external advisor acquisition. Of course, in the event financial
conditions and/or economic conditions change so that positive leverage
is no longer available to AmREIT, the accretive effects of such
positive leverage would be diminished or delayed.
. The independent directors have concluded that the exchange price is a
fair price for the shares of AmREIT common stock for the purposes of the
merger from the viewpoint of AmREIT and the stockholders. In concluding
that the exchange price is fair to AmREIT and its stockholders, the
independent directors noted that the net price received by AmREIT in its
most recent public offering which closed on May 22, 1998 was
approximately $8.71 per share ($10.25 per share less offering expenses of
15% per share). Conversely, in the merger, AmREIT expects to realize a
net value for its shares of AmREIT common stock equal to approximately
$8.87 per share (i.e., $9.34 per share less estimated merger expenses of
approximately $0.47 per share). The independent directors noted that this
analysis ignores the effect on the value of the shares of AmREIT common
stock of the recently completed advisor acquisition. Based on the pro
forma balance sheet, as of June 30, 1999, after giving effect to the
additional shares of AmREIT common stock issuable to Mr. Taylor as a
result of the advisor acquisition upon consummation of the merger, the
book value per share of AmREIT common stock will increase from $6.94 to
approximately $7.73 per share.
. The merger will substantially increase AmREIT's total capitalization and
increase its assets from approximately $37.4 million to up to
approximately $61 million assuming all the partnerships participate in
the merger. If fewer than all ten partnerships participate, AmREIT's
total capitalization
41
<PAGE>
will not be as large, but the benefits described below will nevertheless
be recognized by AmREIT, only to a lesser degree. See "RISK FACTORS--The
Size of AmREIT After the Merger is Uncertain." This increased size
affords several benefits. First, the merger will increase the number of
shares of AmREIT common stock outstanding, which should allow AmREIT to
sooner establish a regular secondary market for the shares and result in
greater liquidity for holders of the shares of AmREIT common stock if and
when such a market exists. The independent directors believe that
institutional investors prefer larger capitalization companies when
making investment decisions due to greater liquidity, which allows the
purchase and sale of larger volumes of shares of AmREIT common stock
without disrupting the market for those shares. The independent directors
also believe that the credit rating agencies generally favor larger
capitalization companies and view them as being more stable for unsecured
debt investors. The independent directors believe all of these factors
increase the attractiveness of AmREIT to potential investors, and that
the merger should ultimately result in an improved ability to access
favorably priced equity and debt capital.
. The independent directors believe that the merger will allow AmREIT to
realize economies of scale by spreading costs over a larger number of
properties located in AmREIT's existing markets, thereby improving
AmREIT's profit margin.
. As a result of the merger, AmREIT will acquire the partnerships'
properties, most of which are located in AmREIT's existing market. The
independent directors believe that this should provide for easier
assimilation of these new properties into AmREIT's existing portfolio
because AmREIT currently has the resources to provide the leasing and
management services for the properties formerly owned by the
participating partnerships.
. The independent directors received and specifically adopted the Morgan
Keegan fairness opinion that the consideration to be paid by AmREIT
pursuant to the merger is fair, from a financial point of view, to AmREIT
as of the date of such opinion, based upon and subject to certain matters
stated therein. The Morgan Keegan fairness opinion is attached to this
proxy statement as Annex 1.
. The independent directors received and relied on the valuations of the
partnerships properties prepared by Valuation Associates.
. The independent directors received and reviewed presentations from, and
discussions with, certain executive officers of AmREIT and Morgan Keegan
regarding the business, real estate assets, financial, accounting and due
diligence with respect to the partnerships and the terms and conditions
of the merger agreements, all of which supported the merger.
The independent directors were unable to compare the value of the
partnerships, as reflected, to recent market prices or historical market prices
for their partnership units because there have been no significant recent
resales of limited partnership units of any partnership.
The independent directors and management also discussed certain potential
negative factors and risks that could arise or do arise from the merger. These
potential negative factors and risks include the following:
. The exchange price is fixed. Therefore, if the fair value of the shares
of AmREIT common stock is higher on the effective date of the merger than
the amount of the exchange price, the number of shares of AmREIT common
stock to be received by the limited partners in the participating
partnerships will not be reduced, thereby increasing the value of the
consideration to be received by the limited partners in the merger. The
independent directors believe this fact was mitigated by the fact that
the number of shares of AmREIT common stock to be received by the limited
partners in the participating partnerships will not be increased if the
value of the shares of AmREIT common stock is lower on the effective date
of the merger.
. Costs related to the merger (including legal and accounting fees,
financial advisory fees, printing and other costs) are expected to be
$1.4 million.
42
<PAGE>
. AmREIT's management will have to devote a great deal of time and effort
to effectuate the merger.
. The merger will not initially result in a significant increase in the
geographic diversification of AmREIT's property portfolio. AmREIT
currently has properties in Arizona, Texas, Georgia, Kansas, Louisiana,
Missouri, Delaware and Mississippi. The merger of Fund IX, Fund X and
Fund XI will add four additional states: Oklahoma, Colorado, Minnesota
and Tennessee. Management considers each of these to be attractive
markets. However, the merger of only Fund III, Fund IV, Fund V, Fund VI,
Fund VII and Fund Goodyear will result in an increased concentration in
Texas. Based on rental income, approximately 50% of AmREIT's investment
in properties is currently in Texas. Following the merger, AmREIT's
investment in properties will continue to be concentrated in the state of
Texas; approximately 50% of AmREIT's rental income will be outside the
state of Texas, assuming that all of the partnerships participate in the
merger. The independent directors believe that geographic diversification
is necessary in order to improve AmREIT's access to attractively priced
alternative sources of capital.
The General Partners' Reasons and Recommendations for the Merger
Mr. Taylor believes, and the corporate general partner of each partnership,
each of which is controlled by Mr. Taylor, believes that the terms of each
merger agreement, including the consideration to be received by the limited
partners in the merger, are fair to and in the best interests of the limited
partners of each partnership, each of whom is unaffiliated with the general
partners. Accordingly, Mr. Taylor, as the sole director of each corporate
general partner, has approved each merger agreement and recommends that the
respective limited partners vote for approval of the merger agreement and
amendment of the respective partnership agreements. Mr. Taylor is a director,
the chief executive officer and a 45% or greater stockholder of each corporate
general partner and, as such, any reference to the "general partners" is, in
effect, a reference to Mr. Taylor.
The general partners engaged Houlihan Lokey to render fairness opinions with
respect to the merger consideration and, together with AmREIT, retained
Valuation Associates, an independent real estate appraisal firm, to appraise
the market value of each partnership and its properties. The general partners
have expressly relied upon and adopted the analysis and conclusions of Houlihan
Lokey and Valuation Associates in connection with finding the merger to be fair
and recommending the merger to the limited partners of its respective
partnership. The board of directors of each corporate general partner has
specifically adopted the Houlihan Lokey fairness opinion and the appraisals
with respect to its respective partnership.
The general partners' fairness determination in the case of each partnership
was based upon the transaction as a whole, as well as combinations involving
fewer than all partnerships, because each partnership's value for the purposes
of the merger is its transaction value, which is determined on a partnership-
by-partnership basis and is not dependent upon which partnerships approve the
merger. The general partners believe that transaction value is a reasonable
estimate of the value of each partnership for the merger as it is directly
derived from the appraisal of the partnerships' assets as determined by
Valuation Associates.
The transaction value of each partnership was determined independently of
those of the other partnerships, except in those instances where a partnership
jointly owns an investment with one or more other partnerships. In those cases,
the negotiated price of the property, the value on which the transaction value
is based, was determined assuming a 100% ownership and control of the property.
The negotiated price so determined was then allocated to the co-owners in
accordance with the percentage of ownership. No premium was allocated for a
majority or controlling interest in these jointly owned properties and no
discount was made with respect to a minority ownership interest in those
properties. The general partners believe that the transaction value methodology
was consistently applied to each partnership and will not result in valuations
more favorable to some partnerships over others. The general partners
determined that the fairness to limited partners of each partnership,
considered separately, of the respective merger agreement and the transactions
contemplated thereby will therefore not be materially affected as to any
partnership in the event the merger is completed in any combination with fewer
than all partnerships.
43
<PAGE>
The general partners have concluded that the exchange price is a fair
valuation of the shares of AmREIT common stock for the purposes of the merger
from the viewpoint of the limited partners. The general partners base their
belief on, among other analyses, their conclusion that, in the absence of
current trading information, the shares of AmREIT common stock can be fairly
valued by reference to AmREIT's last public offering of common stock at a price
of $10.25 in May 1998. The general partners also considered possible
enhancement to the value of the shares of AmREIT common stock due to AmREIT's
additional property investments since that offering and its subsequent
transformation to an internally managed REIT through its acquisition of its
former external advisor. As a result of becoming internally managed, AmREIT has
the ability to acquire additional properties without increasing its
administrative overhead. The general partners noted that most of the costs from
the merger will be born by AmREIT, if it is consummated, and that the
partnerships approving the merger (with the exception of disposition fees paid
by Fund III, Fund IV, Fund V and Fund VI if they approve the merger) will not
incur sales and/or liquidation expenses which they would expect to incur if
their properties were liquidated. In circumstances where the partnerships sold
their properties and liquidated, they would expect to incur liquidation costs
of 5% or more of the price of the properties and, thus, distribute to their
partners 95% or less of the net proceeds from the sale of their properties.
Also, limited partners seeking to reinvest their distributions would expect to
pay transaction costs (including securities commissions) of 5% or more.
The general partners also considered that, immediately after the merger is
consummated, the limited partners' return on the shares of AmREIT common stock
received in the merger as a percentage of their original investment in their
partnership will be less than they currently receive from their partnership
(except in the case of Fund IV). However, the general partners believe that
this reduction will be temporary and that the future return realized by limited
partners from their AmREIT shares of AmREIT common stock will be greater, on a
cumulative basis, than that which they would realize if they remained in their
partnership. This is because the revenues of the partnerships, to varying
degrees, are derived from aging leases on depreciated properties. The general
partners anticipate that partnership distributions will decrease at varying
rates in the future, as the leases near expiration and the partnership incurs
costs in connection with lease renewals and/or replacements and with the costs
of property rehabilitation and/or tenant improvements. Thus, while the current
partnership distributions exceed dividends paid on the shares of AmREIT common
stock, the general partners believe that the return from the shares of AmREIT
common stock will be greater than that which could be received from the
partnership over the next three to five years. Conversely, the general partners
believe that AmREIT, as a result of the merger and its expanded growth financed
thereby, will grow its asset base and FFO. Based on an analysis similar to that
of the independent directors, the general partners concluded that an investment
in AmREIT will be accretive to AmREIT's shares of AmREIT common stock,
including shares of AmREIT common stock issued to the limited partners in the
merger. Also, the general partners believe that, at least qualitatively, an
investment in AmREIT shares of AmREIT common stock will have greater value than
a like investment in partnership units because of the added liquidity of the
shares of AmREIT common stock. In agreeing to the exchange price, the general
partners also took into account their conclusion that the negotiated prices of
the properties exceed the appraisal values of the properties of each
partnership.
The general partners did not consider a partnership's net book value in
reaching their conclusions regarding the fairness of the merger because they do
not believe net book value to be a reliable measure of the value of either the
partnership or its properties. As described below, the general partners
considered the appraised going concern values of the partnerships. The general
partners also considered the appraised liquidation value of the partnership as
measured by the likely value to be realized by the partnership in the event of
the orderly sale of its properties over a 12-month period, net of anticipated
sales and transaction costs of 3% to 7%.
The negotiated prices of the partnerships' properties are based on the
appraised values of the properties prepared by Valuation Associates, an
independent real estate appraisal firm retained by the general partners on
behalf of the partnerships. The negotiated prices exceed the appraised value of
the partnership assets. The limited partners have not had independent
representation during the course of the merger discussions. In determining not
to engage an independent representative for the limited partners, the general
partners were
44
<PAGE>
faced with the conflicts of interest with respect to the partnerships and
limited partners discussed elsewhere in this proxy statement. See "CONFLICTS OF
INTEREST" on page and "RISK FACTORS" on page . The general partners
believe that the absence of independent representation is mitigated by the
similarity of the partnerships, their investments and financial condition and
their longstanding relationship and their familiarity with each partnership.
The partnerships have the same investment objectives and restrictions as
AmREIT, their properties are generally located in the same markets and are of
similar size and quality. Of the 31 properties owned by the partnerships, 16
are jointly owned by two or more partnerships. The general partners were
responsible for acquiring each partnership's properties and are familiar with
each property, its condition and its local market. The general partners also
conferred with Houlihan Lokey regarding local real estate market conditions and
similar factors which could influence the value of the properties. The
financial status of each partnership is substantially the same, as each
typically maintains positive net cash and none has significant debt. The
properties of each partnership are under net leases to the same type of tenants
with similar credit risks. The general partners believe all of these factors
enable them to adequately evaluate, negotiate and determine a fair value of
each partnership property in a manner consistent with their fiduciary duty to
the limited partners.
The general partners have adopted Houlihan's fairness opinion to each
partnership. The general partners also noted that Houlihan Lokey determined
that the consideration to be received by the limited partners of each
partnership in connection with the merger is fair from a financial point of
view to the partnerships' limited partners. Houlihan Lokey was engaged to
represent each partnership and the interests of its limited partners, as a
group in connection with its determination as to the fairness of the
consideration to be received by the limited partners from a financial point of
view without taking into account the specific financial interest of any person
or group of investors.
Alternatives to the Merger
The general partners' assessment of the fairness of the proposed merger was
also based on their review of available alternatives. These alternatives
included liquidation of the partnerships and continuation of the partnerships
through an orderly liquidation period (estimated at up to six years). In order
to determine whether the merger or one of its alternatives would be more
attractive to the limited partners, the general partners compared the potential
benefits and detriments of the merger with the potential benefits and
detriments of the alternatives. The general partners believe that each of the
merger and its alternatives offers potential benefits and suffers from
potential detriments not possessed by the other alternatives. Set forth below
are the conclusions of the general partners regarding the comparisons of the
merger to its alternatives and a detailed discussion of the potential benefits
and detriments of each of these alternatives.
Liquidation. An alternative to the merger would be liquidating each
partnerships' assets, distributing the net liquidation proceeds to the general
partners and the limited partners in accordance with the partnership
agreements, and thereafter dissolving the partnerships. Through the
liquidations, the general partners would provide for a final disposition of the
investors' interest in the partnerships.
. Benefits of Liquidation. Any net proceeds realized upon the liquidation
of a partnership could be utilized by limited partners for investment,
business, personal or other purposes. If the partnerships liquidated
their assets, the assets would be valued through arm's length
negotiations between the partnerships and the prospective purchasers.
Except as described under "Offers from Third Parties" below, none of the
partnerships has to date sold, or received any unsolicited offers to
purchase, their properties.
. Disadvantages of Liquidation. The general partners do not believe that
liquidation would be as beneficial to the limited partners as the merger,
for the following reasons:
. the general partners believe the public market valuation of an
investment in an operating real estate company like AmREIT may exceed
the liquidation value of your partnership's properties; and
45
<PAGE>
. the general partners believe that liquidation of the properties would
be less desirable and could result in various adverse consequences
including:
(1) the liquidation valuation provided by Valuation Associates shows
that the liquidation values of the partnerships are lower than
the values of the shares of AmREIT common stock, based on the
exchange price, to be paid to the partnerships in the merger;
(2) a short term sale of the entire portfolio of a partnership's
properties could result in significant discounts from appraised
values due to the lack of time to properly market the portfolio.
This adverse consequence would affect Fund VII, Fund VIII, Fund
IX, Fund X and Fund XI more than the other partnerships because
of the larger size of their property portfolios; and
(3) the gradual liquidation of properties likely would involve
higher administrative costs and greater uncertainty, either of
which would reduce the portion of net sales proceeds available
for distribution to limited partners. This adverse consequence
would affect Fund III, Fund IV, Fund V, Fund VI and Fund
Goodyear more than the other partnerships because of the smaller
size of their property portfolios, thereby reducing the asset
base over which these costs may be spread.
. Liquidation Procedures. The process for liquidating the partnerships'
assets is in large measure within the control of the limited partners.
The general partners are not authorized, without notice to or the
approval of the limited partners, to sell, refinance or otherwise dispose
of all or substantially all of the partnerships' assets. Liquidation may
be accomplished through a series of separate transactions with the same
or different purchasers or as a part of a multi-property transaction that
might also involve properties owned by other partnerships. The general
partners will need to engage real estate brokers and possibly other
professionals to assist with the disposition of the partnerships'
properties. These persons may assist with the identification of
prospective purchasers, arrangements for asset financing and the
structure of the transaction. The general partners, as fiduciaries of the
limited partners, remain responsible for determining the terms and
conditions of the transaction. Each partnership can expect to incur costs
for these professional and closing costs which, in the aggregate, will
range from 3% to 7% of the sales prices of their properties. These
amounts would be in addition to any disposition fees or other
compensation payable to the general partners by reason of the
partnership's liquidation. In contrast, the partnerships that approve the
merger will bear none of the merger expenses.
. Form of Consideration. Another significant consideration for the general
partners would be the decision whether to insist upon payment in full
upon sale of a property or to accept a portion of the sale price at
closing and the balance through installment payments. Acceptance of a
sale proposal providing for deferred payments would extend the life of a
partnership until receipt of those amounts by the partnership and their
distribution in accordance with the partnership agreement. These
arrangements would also expose a partnership to the risk that deferred
payments might not be collected in full and that the partnership might be
forced to foreclose on any collateral given to secure payment of the
deferred obligations.
. General Partners' Recommendation and Comparison with the Merger. The
general partners favor the merger over liquidation of the partnerships'
assets for the following reasons:
(1) Without merging, it is likely that distributions will need to be
reduced in the near future in Fund III, Fund IV, Fund V, Fund VI,
Fund VII, Fund VIII and Fund Goodyear because each of these
partnerships has at least one lease expiring in the next twelve
months and it is possible the properties will not be able to be
re-leased at comparable rates and/or the need to establish cash
reserves.
(2) Following the merger, assuming all partnerships approve the merger,
AmREIT will own a larger number of properties over a generally
broader geographic area than each individual partnership,
46
<PAGE>
thus reducing limited partner exposure to economic downturns in any
particular region or properties; however, if only Fund III, Fund IV,
Fund V, Fund VI, Fund VII, Fund VIII and Fund Goodyear participate,
the concentration of AmREIT's property portfolio in Texas will
increase.
(3) AmREIT and the general partners also believe that expanding
AmREIT's property portfolio will have a long-term positive impact
on the value of AmREIT's shares.
Continuation of Partnerships. The other alternative to the merger considered
by the general partners would be to continue each of the partnerships in
accordance with its existing business plan, with the partnership remaining as a
separate legal entity, with its own assets and liabilities, and continuing to
be governed by its existing partnership agreement. Nothing in the partnerships'
organizational documents requires the general partners to proceed immediately
with liquidating the partnership's assets. While the disclosure documents,
pursuant to which the limited partnership units were offered to the public,
disclosed the intentions of the partnerships to liquidate their assets after a
maximum of ten to twelve years from acquisition, the general partners are not
under a legal obligation to liquidate assets within that time frame. To the
contrary, each of the partnerships has an original intended operating life of
ten or more years, and the limited partners were advised that the liquidation
of the partnerships would be in the control of the general partners.
. Benefits of Continuation. A number of advantages would be expected to
arise from the continued operation of the partnerships. Limited partners
should continue to receive regular quarterly distributions of net cash
flow, arising from operations and the eventual sale of the partnership
properties. Since the partnerships are not obligated to dispose of their
assets at any particular point in time, continuing the partnerships
allows the general partners to select the most opportune time for
disposing of the partnerships' assets, irrespective of the expected
holding period set forth in the original disclosure documents. In
addition, the decision to continue the partnerships, if selected, would
mean that there would be no change in the nature of the limited partners'
investment. For federal income tax purposes the transfer of partnership
assets to AmREIT in exchange for common stock is a taxable event to the
limited partners. Each limited partner will be required to recognize a
share of their partnership's gain or loss as a result of the transfer of
properties pursuant to the merger. Continuation of the partnerships
avoids the income recognition.
. Disadvantages of Continuation. The primary disadvantage with this
strategy is the general partners' belief that continuation of the
partnerships will not secure for the limited partners the benefits that
the general partners expect to result from merging the partnerships into
AmREIT. These benefits are highlighted under "THE MERGER--The General
Partners' Reasons and Recommendations for the Merger" beginning on page
. The limited partners of a partnership which does not participate in
the merger should be prepared to continue holding their investments in
that partnership for the foreseeable future. The partnerships can hold
limited partners' investments beyond the time period originally
contemplated for the length of those investments. Continuation of the
partnerships may also result in the reduction of distributions to the
limited partners in the near future. Fund III, Fund IV, Fund V, Fund VI,
Fund VII, Fund VIII and Fund Goodyear have leases which expire over the
next twelve months and there can be no assurances that those properties
will be able to be re-leased at comparable rental rates. Additionally,
all of the partnerships will need to establish and/or expand their
capital reserves in the foreseeable future. The general partners believe
that the larger number of properties owned by AmREIT will reduce the risk
that distributions will be affected by adverse consequence at a few
properties. Limited partners also will not have the opportunity for
liquidity that will be afforded through the establishment of a public
trading market for the shares of AmREIT common stock. There is no
established public trading market for the limited partnership units. The
general partners have not historically assisted limited partners desiring
to transfer limited partnership units. The purchase price for the limited
partnership units in the secondary market is subject to negotiation
between the buyer and seller. Another disadvantage of continuation as a
limited partnership is that limited partners would continue to be
burdened by the more complicated Schedule K-1 for the reporting of the
financial results of the partnerships.
47
<PAGE>
. Timing of Sales. Continuing each partnership in accordance with an
orderly liquidation plan would enable the partnerships to sell each
property at a different time to maximize price. The downside to this
option is that the estimated projected time frame for a complete
liquidation of the partnerships ranges from an additional one to six
years based on the number of properties, real estate markets in the
respective cities and the overall economic market conditions at the time
of sale. Because these partnerships were structured as limited life
investment vehicles, this additional time frame would place the
partnerships in a position that exceeds the originally anticipated
holding period for these real estate investments. During this extended
time frame, each individual investor would remain in an illiquid
investment vehicle without the ability to reasonably exit the investment.
Because of the relatively small total size of each partnership, the
advantages of diversification and liquidity would not be available. Given
the size and number of properties held by each of the partnerships, the
sale of each individual property would cause each partnership to continue
to cover fixed administrative charges with the remaining properties,
resulting in future reductions in partnership distributions.
. General Partners' Recommendation and Comparison with Merger. The general
partners have concluded that continuation of the partnerships is not as
attractive an alternative as the merger based on the benefits of the
merger which limited partners would forgo in the event of continuation of
the partnerships. Specifically, the limited partners would not realize
the liquidity or diversification afforded by the merger, and would not be
able to participate in new real estate investment opportunities.
Summary of Positive and Negative Factors Considered by the General Partners.
Following is a summary of all material positive and negative factors considered
by the general partners in recommending the merger to the limited partners of
each partnership. After considering each of these factors individually and in
the aggregate, the general partners strongly recommend that the limited
partners vote "For" the merger. The general partners did not assign a relative
weight to these factors.
. Positive Factors:
(1) The general partners believe that the economic terms of each merger
agreement, regardless of whether the partners elect stock or cash
and notes, including the transaction value for each partnership and
the 52.2% equity interest in the combined AmREIT entity to be
received by the limited partners, assuming all partnerships
participate in the merger, are favorable to the limited partners.
(2) The general partners believe that the transaction values of the
partnerships, upon which the number of shares of AmREIT common stock
and the amounts of cash and notes, if any, to be issued in the
merger are based, represent fair estimates of the value of the
partnership net assets and constitute a reasonable basis for
allocating the consideration offered by AmREIT among all
partnerships that may be combined through the merger.
(3) The general partners believe that, in the future, the combined
entity will have improved access to capital markets for future
growth and limited partners who receive AmREIT common stock will
have enhanced liquidity as a result of the larger total equity
market capitalization of the combined entity.
(4) As separate legal entities with different investors, each of the
partnerships must segregate its assets and liabilities (to avoid
commingling assets), conduct operations independently and maintain
separate books and records for the preparation of financial
statements, tax returns, investor information and, as required,
reports and filings to be made to various governmental regulatory
agencies. These additional expenses incurred by the partnerships as
separate legal entities would not be incurred by AmREIT after the
merger. This would result in savings of approximately $5,000 to
$10,000 for the private funds (Funds III, IV, V, VI, VII and
Goodyear) and approximately $75,000 to 90,000 for the public funds
(Funds IX, X and XI). The assets of one partnership cannot be
employed for the benefit of one or more of the other partnerships
and the general partners' fiduciary duties prevent them from
pursuing activities which might favor some partnerships to the
disadvantage of other partnerships.
48
<PAGE>
(5) Due to the separate nature of the partnerships, with their different
groups of investors, the general partners must always be mindful of
the separate programs, and treat them separately, even if other
courses of action would benefit most if not all of the partnerships.
(6) Potential conflicts of interest arise in the allocation of
management resources and efforts to refinance or dispose of
properties. In contrast, the merger places substantially all of the
assets of the participating partnerships into AmREIT. This allows
these assets to be used to achieve a common set of investment
objectives without taking into account the differences among the
partnerships. The general partners therefore concluded that, through
the merger, AmREIT could secure advantages that cannot be fully
pursued by the partnerships acting on their own. These advantages
include, but are not limited to, the opportunity of making new
investments, the availability of financing and taking advantage of
certain business opportunities (which may not be profitably pursued
by any of the partnerships).
(7) The general partners believe that the merger will provide liquidity
to limited partners by enabling limited partners to sell their units
at the highest price available in the shortest period of time.
(8) The general partners reviewed the terms of each merger agreement,
including the mutuality of the representations, warranties and
covenants, the requirement that each party consult with the other on
significant business and financial matters prior to consummation of
the merger, and the ability of the general partners to pursue an
unsolicited superior competing transaction should its fiduciary
duties so require, and believe that they are fair to the limited
partners.
(9) The general partners believe that the merger will result in
simplified tax administration for most limited partners.
Stockholders will receive Form 1099-DIV to report their
distributions from AmREIT. Forms 1099-DIV are substantially easier
to understand than the more complicated Schedule K-1 prepared for
the reporting of the financial results of the partnerships.
(10) Each year the partnerships must prepare up to ten separate sets of
financial statements, annual and quarterly filings for the SEC, tax
returns and investor communications. The accurate preparation of
this material requires substantial management time and effort.
Furthermore, to the extent other service providers, including legal
counsel, accountants, appraisers, land use consultants and other
professionals, render services benefiting two or more of the
partnerships, the costs and expenses associated with these services
must be fairly and equitably allocated among the partnerships. The
general partners, therefore, believe that, by combining the
participating partnerships into a single ownership entity, the
merger should eliminate much of the duplication in reporting,
filing and other administrative services, simplifying
administration of the consolidated entities including tax
administration as described below. The general partners found it
difficult to quantify to what extent, if any, this merger of
functions would reduce the overall cost of administrative services.
For example, while the merger reduces the number of entities for
which administrative services are required, the merger will not
reduce the number of investors or the assets under management. The
general partners concluded that whether or not the merger reduces
the overall costs, it should eliminate the risk of misallocating
expenses benefiting one or more of the programs, and the problems
of determining a fair method of allocating common costs and
expenses, and simplify the preparation of financial statements, tax
returns, investor information and reports and filings otherwise
required.
(11) The general partners have seen in recent years a number of
significant changes take place in the financial and real estate
markets. These same factors created attractive investment
opportunities for investors which have access to capital. The
general partners also concluded that the partnerships are not in a
position to take advantage of these opportunities since they have
already committed their capital and are not authorized to reinvest
proceeds from the sale of their properties or to raise additional
funds. The general partners believe that, in contrast, AmREIT can
take advantage of investment opportunities that may be available in
current real estate markets. AmREIT has both the right to reinvest
net sale or refinancing proceeds and the authority to raise
49
<PAGE>
additional capital, through the sale of debt and/or equity
securities, to finance investments. This ability will allow those
limited partners who become stockholders in AmREIT to participate in
investment opportunities in the current real estate market.
(12) Moreover, the general partners further believe that even if the
partnerships were able to raise additional funds through debt or
equity offerings, AmREIT, as a combined entity, could more easily
issue additional debt and equity securities on more attractive
terms than would be available to any of the partnerships due to its
larger base of assets and stockholders' equity. If all of the
partnerships participate in the merger, AmREIT will control assets
having a value of approximately $61 million. The general partners
believe that, even if fewer than all the partnerships participate,
AmREIT's capital base may make it a more attractive candidate for
the services of investment banking firms, financial institutions,
institutional lenders and others interested in placing large
amounts of capital. Generally speaking, all other conditions being
equal, the cost of money for large borrowers is less than the cost
of money for borrowers having a smaller capital base.
(13) By combining all ten partnerships with AmREIT, the merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of any of the
partnerships, provided that if only Fund III, Fund IV, Fund V, Fund
VI, Fund VII, Fund VIII and Fund Goodyear participate in the merger
the concentration of AmREIT's portfolio in Texas will increase. The
general partners therefore concluded that this increased size and
the resulting consolidation of operations would spread the risk of
an investment in AmREIT, whether through stock or note ownership,
over a broader group of assets and reduce the dependence of the
investment upon the performance of any particular asset or group of
assets.
. Negative Factors:
(1) The general partners did not retain an unaffiliated representative
to act on behalf of the partnerships, either individually or as a
group, or on behalf of the limited partners in the merger.
(2) Because the exchange price is fixed, a decline in the value of the
shares of AmREIT common stock would reduce the value of the
consideration to be received by limited partners in the merger. Due
to the factors described under the caption "RISK FACTORS--Risks
Associated with an Investment in the Shares," it is likely that
AmREIT common stock will trade at prices below the exchange price
following the merger.
(3) AmREIT intends to maintain distributions at current levels following
the merger, however, there is no assurance it will be able to do so
or, if made, these distributions will not exceed AmREIT's net income
and/or FFO for the periods to which they relate.
(4) There are numerous conditions to AmREIT's obligation to consummate
the merger.
(5) The anticipated benefits of the merger may not be realized.
(6) Under the terms of each merger agreement, each of the general
partners is generally prohibited from initiating, soliciting or
encouraging any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, a transaction
which would compete with the merger. If, however, the general
partner determines in good faith after consultation with outside
legal counsel that it is required by its fiduciary obligations to do
so, the general partner may, among other things, respond to and
engage in discussions and negotiations with persons making
unsolicited proposals or inquiries and may approve or recommend that
type of transaction.
(7) The partnerships currently have no leverage (borrowings). Upon
completion of the merger, AmREIT intends to immediately increase its
leverage to levels up to approximately 50% of its total post-merger
real estate value. This increased debt level may adversely impact
AmREIT's ability to make any required payments under the callable
notes or distributions to holders of common stock.
50
<PAGE>
(8) AmREIT has only recently completed the acquisition of the entity
that had acted as external advisor and the anticipated benefits
therefrom may not be fully realized.
(9) The merger will result in taxable income or loss to each limited
partner which is not a tax-exempt entity. Because the merger will
result in an exchange of limited partnership units for shares of
AmREIT common stock, no limited partner will receive cash (other
than cash in lieu of fractional shares of AmREIT common stock or
cash received as part of the cash/notes option) in the merger to pay
any taxes due on any taxable income arising as a result of the
merger.
(10) AmREIT intends to acquire by development and/or purchase one or
more properties with post-merger financing proceeds, which
properties are currently unidentified.
In light of the wide variety of factors, both positive and negative,
considered by the general partners, the general partners were not able to
quantify or otherwise assign relative weights to the specific factors
considered in making their determination. However, in the general partners'
view, the potentially negative factors considered by them were not sufficient,
either individually or collectively, to outweigh the positive factors
considered by the general partners in their deliberations relating to the
merger. In addition, except as detailed above, no analysis or attempt to
quantify any financial or operational benefits or detriments was made.
THE GENERAL PARTNERS BELIEVE THAT THE TERMS OF EACH MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, REGARDLESS OF WHETHER THE PARTNERS ELECT STOCK OR
CASH AND NOTES, ARE FAIR TO AND IN THE BEST INTERESTS OF THE RESPECTIVE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNERS HAVE APPROVED EACH MERGER AGREEMENT
AND RECOMMEND THAT THE RESPECTIVE LIMITED PARTNERS VOTE FOR APPROVAL OF MERGER
AND AMENDMENT TO THE PARTNERSHIP AGREEMENTS.
In the event the merger is not consummated for any reason, each partnership
will continue to pursue its business objectives of maximizing the value of its
properties.
The Merger Consideration
If a partnership is acquired by AmREIT, each limited partner will receive
shares of AmREIT common stock unless the limited partner votes against the
merger and affirmatively elects the cash/notes option described below. If a
partnership votes against the merger, the partnership will continue as an
independent entity which will continue to contract with AmREIT to provide
property management services. The number of shares of AmREIT common stock
offered to each partnership equals the partnership's transaction value, as
adjusted on the effective date of the merger, divided by the exchange price of
$9.34. Cash will be issued in lieu of fractional shares based on the exchange
price.
51
<PAGE>
The following table sets forth the negotiated prices of real property and
net cash components of the transaction value of each partnership, and the
allocation of shares calculated as if the effective date was June 30, 1999 and
100% of the partnerships participate.
<TABLE>
<CAPTION>
Total No.
of Shares
Negotiated Net Cash Offered to
Price of at June Transaction the
Partnership Properties 30, 1999 Value Partnership
----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
FUND III..................... $ 825,000 $ 52,841 $ 877,841 93,987
FUND IV...................... 498,000 11,337 509,337 54,533
FUND V....................... 443,000 10,473 453,473 48,552
FUND VI...................... 346,000 -- 346,000 37,045
FUND VII..................... 922,000 30,272 952,272 101,956
FUND VIII.................... 1,644,000 61,035 1,705,035 182,552
FUND GOODYEAR................ 1,058,000 13,732 1,071,732 114,746
FUND IX...................... 5,251,000 93,801 5,344,801 572,249
FUND X....................... 10,495,000 -- 10,495,000 1,123,662
FUND XI...................... 6,243,000 83,192 6,326,192 677,322
----------- -------- ----------- ---------
Total...................... $27,725,000 $356,683 $28,081,683 3,006,604
=========== ======== =========== =========
</TABLE>
Transaction Values. The transaction value of each partnership equals (1) the
negotiated price of the partnership's real estate assets (properties), plus (2)
the partnership's net cash (i.e., the excess, if any, of its cash and cash
equivalent assets over its liabilities) as of the effective date. The only
material assets of each partnership are its properties and cash. None of the
partnerships is expected to have any material liabilities at the effective
date. The transaction values of Fund IV and Fund V will be adjusted at the
closing of the merger in an amount equal to the reduction of the unpaid balance
of the Atlas note from June 30, 1999.
The methodology of determining the transaction values of the partnerships
was determined and agreed to by the general partners on behalf of the
partnerships and the independent directors on behalf of AmREIT. The general
partners and the independent directors believe that transaction value is a fair
measure of the value of the partnerships to AmREIT in the merger because each
partnership's transaction value is directly derived from a valuation of each
partnership's assets, which consist only of property investments, cash and
accounts receivable.
Negotiated Prices. The negotiated prices of each partnership's properties
were negotiated and agreed to by the general partners on behalf of the
partnerships and the independent directors on behalf of AmREIT. The negotiated
prices were based on a negotiated premium above the appraised value of the
partnerships and their properties determined by Valuation Associates, an
independent real estate appraisal firm. In determining the negotiated price
premium, the general partners and the independent directors considered other
factors in addition to the appraisals, including the current and projected net
operating income and cash flow, capitalization rate, market rental rates, lease
expirations, and anticipated capital expenditures for leasing and tenant
improvements for each property.
In their negotiations on behalf of the partnerships, the general partners
considered the analysis and conclusions contained in the appraisals and in the
Houlihan Lokey fairness opinions. Houlihan Lokey calculated a range of values
of each partnership's properties. They reached the conclusion that the
consideration to be received by the limited partners in connection with the
merger is fair to the limited partners from a financial point of view. The
negotiated price for each partnership was within the range of value derived by
Houlihan Lokey in rendering its fairness opinions. The analysis and underlying
assumptions used by the general partners in determining the price of the
partnership were substantially the same as those used by Houlihan Lokey in
rendering its fairness opinions. Houlihan Lokey's opinions are subject to
certain qualifications and limitations. See "FAIRNESS OPINIONS -- The Houlihan
Fairness Opinions" below on
52
<PAGE>
page . In their negotiations on behalf of AmREIT, the independent directors
conferred with and considered the analysis of Morgan Keegan. See "FAIRNESS
OPINIONS -- The Morgan Keegan Fairness Opinion" below on page .
Net Cash. A partnership's net cash equals the excess, if any, of its cash
and accounts receivable over its liabilities as of the effective date. Under
each merger agreement, a partnership's net cash cannot be negative for the
purposes of the merger. Most of the partnerships are anticipated to have a
positive net cash balance at the effective date.
The Exchange Price. The exchange price of $9.34 per share was determined and
agreed to by the general partners and the independent directors based on the
last public offering price of $10.25 for AmREIT's common stock net of retail
commissions and certain related costs. AmREIT's last public offering was
completed in May 1998.
AmREIT Shares. The consideration payable to each partnership will consist of
shares of AmREIT common stock. The number of shares that will be issued to each
limited partner upon the consummation of the merger will be allocated based on
each limited partner's partnership units. Limited partners of partnerships that
approve the merger will receive AmREIT common stock unless they vote "Against"
the merger and expressly elect to receive the cash/notes option, in which case
they would receive their portion of the purchase price in a payment consisting
of 10% cash and 90% notes.
Cash/Notes Option. If a partnership approves the merger, any limited
partners who voted "Against" the merger who does not wish to own AmREIT common
stock, may elect the cash/notes option. The payment received by limited
partners who elect the cash/notes option will be equal to their portion of 90%
the transaction value of the partnership, allocated pursuant to each limited
partner's respective partnership units. If limited partners properly elect to
receive the cash/notes option, they will receive (1) a cash payment equal to
the value of 10% of the value attributable to the cash/notes option, and (2)
callable notes, the principal amount of which will be equal to 90% of that
value. The notes will bear interest at % annually and will mature on ,
. The notes are redeemable by AmREIT at any time without permission or
penalty. AmREIT will issue only up to $10 million in an aggregate principal
amount of notes to all limited partners electing the cash/notes option. If more
than $10 million of notes are elected, the notes will be allocated pro rata
among the electing limited partners. The differences between the principal
amount of notes actually received and 90% of the liquidation value allocable to
the limited partners will be payable in shares of AmREIT common stock. The 10%
cash portion of the cash/note election will not be affected by any proration of
the notes. The cash portion of the cash/notes option will be paid by AmREIT
from cash reserves or from cash borrowing from AmREIT's line of credit.
53
<PAGE>
Return to Limited Partners From the Merger. The following table sets forth
the anticipated return to the limited partners as a result of the merger based
on the exchange price of $9.34 per share. The table sets forth the return from
the merger based on the exchange price to the limited partners per $1,000 of
adjusted capital and from the merger plus cumulative distributions through June
30, 1999. The returns are calculated as if the effective date were June 30,
1999.
<TABLE>
<CAPTION>
Total Cumulative
Return from Return from Cumulative Return(3)
Merger per Merger as a Return(3) as a
$1,000 of Percentage of per $1,000 Percentage
Adjusted Adjusted of Adjusted of Adjusted
Partnership Capital(1)(2) Capital(1)(2) Capital(1) Capital(1)
----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
FUND III.................... $1,130 113.01% $2,906 290.56%
FUND IV..................... 828 82.82 1,648 164.76
FUND V...................... 985 98.50 2,042 204.24
FUND VI..................... 1,174 117.39 2,103 210.28
FUND VII.................... 838 83.79 1,716 171.61
FUND VIII................... 910 91.05 1,737 173.72
FUND GOODYEAR............... 863 86.33 1,632 163.19
FUND IX..................... 992 99.15 1,639 163.86
FUND X...................... 916 91.63 1,351 135.09
FUND XI..................... 896 89.59 1,145 114.49
</TABLE>
- --------
(1) A limited partner's adjusted capital as of the date stated, equals his or
her original investment, less distributions constituting a return of
capital under the respective partnership agreement. The general partners
believe that a limited partner's adjusted capital is an accurate and
convenient measure of his or her remaining investment in the partnership.
(2) For the purposes of calculating the return from the merger, the shares of
AmREIT common stock are valued at the exchange price of $9.34 per share.
(3) Cumulative return includes the return from the merger based upon the
exchange price plus cumulative distributions through June 30, 1999.
Distribution Comparison. The following table sets forth the distributions
paid by each partnership to its limited partners during the year ended December
31, 1998 per $1,000 of adjusted capital and the dividends which would have been
paid by AmREIT during the year ended December 31, 1998 had the shares to be
received by the limited partner in the merger for such $1,000 investment been
owned during that period.
<TABLE>
<CAPTION>
Partnership
Distributions Dividends Declared
Declared During During 1998 on
1998 per $1,000 of Shares
$1,000 of to be Received
Partnership Adjusted Capital in Merger
----------- ---------------- ------------------
<S> <C> <C>
FUND III.............................. $117.43 $77.63
FUND IV............................... 62.00 77.63
FUND V................................ 86.53 77.63
FUND VI............................... 81.43 77.63
FUND VII.............................. 82.99 77.63
FUND VIII............................. 86.28 77.63
FUND GOODYEAR......................... 81.68 77.63
FUND IX............................... 85.84 77.63
FUND X................................ 81.02 77.63
FUND XI............................... 74.12 77.63
</TABLE>
54
<PAGE>
Shares Issuable to the General Partners. The general partners will receive
shares in exchange for their partnership units in Funds VII, VIII and Goodyear.
The general partners will not receive shares in conjunction with the other
seven partnerships because the other seven partnerships have not achieved the
minimum cumulative preferred return to the limited partners. In addition to the
shares received for their partnership units, the general partners have agreed
to purchase shares at the exchange price with the proceeds received from any
disposition fees otherwise payable to them by Funds III, IV, V and VI as a
result of the merger. These disposition fees are contractual obligations of the
partnerships and equal 3.0% of the negotiated price of the partnerships'
properties. The following table describes the number of shares to be received
or acquired by the general partners:
<TABLE>
<CAPTION>
No. of
Shares
Partnership Received
----------- --------
<S> <C>
Fund III....................................................... 2,650(1)
Fund IV........................................................ 1,600(1)
Fund V......................................................... 1,423(1)
Fund VI........................................................ 1,111(1)
Fund VII....................................................... 1,020(2)
Fund VIII...................................................... 1,825(2)
Fund Goodyear.................................................. 1,147(2)
</TABLE>
- --------
(1) Represents shares acquired by the general partner with the disposition fees
paid to the general partners.
(2) Represents shares issued to the general partners in exchange for the
general partner interest.
The independent directors and the general partners each believe that the
general partners' use of their disposition fee proceeds to purchase shares of
AmREIT at the exchange price, the same price at which the limited partners'
investment in AmREIT is valued for the purposes of the merger, will promote
commonality of interest of the general partners and the limited partners in the
merger.
Fiduciary Responsibility
Officers and Directors of AmREIT. The directors are accountable to AmREIT
and its stockholders as fiduciaries and must perform their duties in good
faith, in a manner believed to be in the best interests of AmREIT and its
stockholders and with the level of care, including reasonable inquiry, that an
ordinarily prudent person in a like position would use under similar
circumstances. AmREIT's charter provides that no director or officer of AmREIT
shall be liable to AmREIT for any act, omission, loss, damage, or expense
arising from the performance of his or her duties under AmREIT other than as a
result of his or her own willful misfeasance or malfeasance or negligence. In
discharging their duties to AmREIT, directors and officers of AmREIT shall be
entitled to rely upon experts and other matters as provided by Maryland law and
AmREIT's bylaws. The charter provides that AmREIT will indemnify its directors
and officers to the fullest extent permitted under Maryland law. Pursuant to
the charter and Maryland law, AmREIT will generally indemnify each director and
officer against any liability and related expenses (including attorneys' fees)
incurred in connection with any proceeding in which he or she may be involved
by reason of serving in that capacity. A director and officer is also generally
entitled to indemnification against expenses incurred in any action or suit by
or in the director right of AmREIT to procure a judgment in its favor by reason
of serving in that capacity.
The charter authorizes AmREIT to advance reasonable funds to a director or
officer for costs and expenses (including attorneys' fees) incurred in a suit
or proceeding upon receipt of an undertaking by that director or officer to
repay those amounts if it is ultimately determined that he or she is not
entitled to be indemnified. AmREIT has entered into agreements with its
directors and executive officers, indemnifying them to the fullest extent
permitted by Maryland law. Stockholders may have more limited recourse against
those persons than would apply absent these provisions and agreements. To the
extent that the foregoing provisions concerning indemnification apply to
actions arising under the Securities Act, AmREIT has been advised that, in the
opinion
55
<PAGE>
of the SEC, those provisions are contrary to public policy and therefore are
not enforceable. AmREIT intends to obtain and maintain insurance indemnifying
the directors and officers against certain civil liabilities, including
liabilities under the federal securities laws, which might be incurred by them
in such capacity.
General Partners of the Partnerships. Under either Nebraska or Texas
partnership law, as applicable, the general partners are accountable to the
partnerships as fiduciaries and are required to exercise good faith and
integrity in all their dealings in the partnership's affairs. The partnership
agreements generally provide that neither the general partners nor any of their
affiliates performing services on behalf of the partnerships will be liable to
the partnership or any of the limited partners for any act or omission by any
such person performed in good faith pursuant to authority granted to such
person by the partnership agreements, or in accordance with its provisions. As
a result, limited partners that have a more limited right of action than they
would have in the absence of that provision in the partnership agreements.
The partnership agreements also generally provide that the general partners
and related parties are indemnified from losses relating to acts performed or
failures to act in connection with the business of the partnerships (except to
the extent indemnification is prohibited by law) provided that those persons
determined in good faith that the course of conduct did not constitute fraud,
negligence or misconduct. Notwithstanding the foregoing, none of the above-
mentioned persons is to be indemnified by the partnerships from liability,
loss, damage, cost or expense incurred in connection with any claim involving
allegations that such person violated federal or state securities laws unless
(1) there has been a successful adjudication on the merits of the claims
of each count involving alleged securities law violations as to the person
seeking indemnification and the court approves indemnification of the
litigation costs,
(2) those claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction and the court approves indemnification of
the litigation costs, or
(3) a court of competent jurisdiction has approved a settlement of the
claims against the person seeking indemnification and finds that
indemnification of the settlement and related costs should be made. In each
of the foregoing situations, the court of law considering the request for
indemnification must be advised as to the position of the SEC, and any
other applicable regulatory authority regarding indemnification for
violations of securities laws. Indemnification may not be enforceable as to
certain liabilities arising from claims under the Securities Act and state
securities laws; and, in the opinion of the SEC, such indemnification is
contrary to public policy and is therefore unenforceable. For purposes of
the foregoing, the affiliates of the general partners will be indemnified
only when operating within the scope of the general partners' authority.
Any claim for indemnification under the partnership agreement will be
satisfied only out of the assets of the partnership and no limited partner
will have any personal liability to satisfy an indemnification claim made
against the partnership.
The partnerships may also advance funds to a person indemnified under the
partnership agreements for legal expenses incurred as a result of legal action
brought against that person if that person undertakes to repay the advanced
funds to the partnership if it is subsequently determined that the person is
not entitled to indemnification. The partnerships do not pay for any insurance
covering liability of the general partners or any other indemnified person for
acts or omissions for which indemnification is not permitted by the partnership
agreements. As part of its assumption of liabilities in the merger, AmREIT will
indemnify the general partners and their affiliates for periods prior to and
following the merger to the extent of the existing indemnity under the terms of
the partnership agreements and applicable law.
Market Prices and Distributions of AmREIT Common Stock
The Market Price of the AmREIT Common Stock. AmREIT's common stock is not
currently listed or traded on any national securities exchange or quoted on
Nasdaq. Secondary sales of the shares have been limited and sporadic and
management is unaware of the price and terms of any sales to the extent they
have
56
<PAGE>
occurred. In general, management monitors transfers only with respect to their
volume. The offering price of the common stock at the termination of AmREIT's
most recent public offering on May 22, 1998 was $10.25 per share.
AmREIT Distributions. The following table sets forth the amount and dates of
the distributions made by AmREIT through June 30, 1999.
<TABLE>
<CAPTION>
Distributions
Distributions Per Share Payment Date Per Share Payment Date
----------------------- ------------------ ------------- ------------------
<S> <C> <C> <C>
$0.09500................ June 30, 1994 $0.18000 March 31, 1997
$0.10245................ September 30, 1994 $0.18025 June 30, 1997
$0.15305................ December 31, 1994 $0.18051 September 30, 1997
$0.15625................ March 31, 1995 $0.18070 December 31, 1997
$0.15783................ June 30, 1995 $0.18090 March 31, 1998
$0.15795................ September 30, 1995 $0.18120 June 30, 1998
$0.16900................ December 31, 1995 $0.18140 September 30, 1998
$0.17524................ March 31, 1996 $0.18160 December 31, 1998
$0.17615................ June 30, 1996 $0.18180 March 31, 1999
$0.17700................ September 30, 1996 $0.18200 June 30, 1999
$0.17938................ December 31, 1996
</TABLE>
AmREIT intends to evaluate future distributions on a quarterly basis.
Market Price of the Limited Partnership Units. The limited partnership units
are not listed on any national securities exchange or quoted on Nasdaq, and
there is no established public trading market for the limited partnership
units. Secondary sales activity for the limited partnership units has been
limited and sporadic. Also, a number of these transfers were between the same
beneficial owner(s), family members or related persons and cannot be considered
sales at prevailing market prices. The general partners monitor transfers of
the limited partnership units (1) because the admission of the transferee as a
substitute limited partner requires the consent of the general partners under
each partnership agreement; and/or (2) in order to track compliance with safe
harbor provisions to avoid treatment as a "publicly traded partnership" for tax
purposes. It should be noted that some transactions may not be reflected on the
records of the partnerships. Based upon the transfer records of the
partnerships, the general partners are not aware of the price or terms of such
transfers.
Effective Time of the Merger
As soon as practicable after satisfaction of all conditions to consummation
of the merger (see "THE MERGER -- Conditions to Consummation of the Merger" on
page ), AmREIT the parties will file articles of merger with the Maryland
Department of Assessments and Taxation and the general partners will file
articles of merger with the secretaries of state of Texas and of Nebraska, as
applicable, the states of organization of the respective partnerships. The
foregoing notwithstanding, the merger effective date will not be prior to the
16th day following the partnership proxy period expiration date in the event
the merger is consummated with respect to Fund III, Fund IV, Fund V or Fund VI.
For Texas and Nebraska state law purposes, the merger will become effective
upon the later of the filing of the articles of merger described above, or at
any later time which AmREIT and the general partners shall have agreed upon and
designated in those filings in accordance with applicable law. For accounting
purposes, the parties may agree to make the merger effective as of a date prior
to the effective date. AmREIT has the right, acting unilaterally so long as it
has not willfully and materially breached the merger agreements, to terminate
any or all merger agreements should the merger not be consummated by the close
of business on March 31, 2000. Until the effective time of the merger, the
limited partners will retain their rights as limited partners of their
respective partnerships to vote on matters submitted to them. See "THE MERGER
- -- Termination; Extension, Waiver and Amendment" on page .
57
<PAGE>
Conditions to Consummation of the Merger
The respective obligations of AmREIT and the partnerships to effect the
merger are subject to the satisfaction of specific conditions (none of which
may be waived), including the following:
. the respective merger agreement and the transactions contemplated thereby
shall have been approved by the stockholders of AmREIT and the limited
partners of the participating partnerships;
. the definitive proxy statement shall have been timely filed with the SEC
and all necessary state securities laws or "Blue Sky" permits or
approvals required to carry out the transactions contemplated by each
merger agreement shall have been obtained and no stop order with respect
to any of the foregoing shall be in effect;
. none of the parties shall be subject to an order or injunction of a court
of competent jurisdiction or other legal prohibition which prohibits the
consummation of the transactions contemplated by each merger agreement;
. all material actions by or in respect of or filings with any governmental
entity required for consummation of the merger and related transactions
shall have been obtained or made; and
. the shares of AmREIT common stock shall have been listed on an exchange.
Consummation of the merger is also subject to the satisfaction or waiver of
other conditions specified in the merger agreements, including, among others:
. the representations and warranties in each merger agreement of each of
the parties shall be true and correct as of the closing date;
. each party shall have performed its obligations contained in each merger
agreement at or prior to the effective time;
. from and after the date of each merger agreement there shall not have
occurred any change in the financial condition, business or operations of
either party that would have or would be reasonably likely to have a
material adverse effect on the business, results of operations or
financial condition of that party;
. each party shall have received an opinion of counsel; and
. each party shall have obtained all consents and waivers from third
parties necessary to consummate the merger and related transactions.
The parties may waive one or more of the foregoing conditions to the merger
except that if that waiver involves a material change to the terms of the
merger, the parties shall resolicit proxies or consents from the waiving
party's stockholders or limited partners, as applicable.
If only one partnership approves the merger, AmREIT has the right, but not
the obligation, to consummate the merger with the one participating
partnership.
Conduct of Business Pending the Merger
During the period from the date of each merger agreement to its effective
date, the parties have agreed to carry on their respective business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted. In addition, the parties have agreed to use commercially
reasonable efforts to preserve in tact their respective current business
organizations, goodwill and ongoing business. The parties also agreed, except
as disclosed to the other party or in limited circumstances specified in the
merger agreement, that they shall:
. use their reasonable efforts, and shall cause each of their respective
subsidiaries to use their reasonable efforts, to preserve intact their
business organizations and goodwill and keep available the services of
their respective officers and employees;
58
<PAGE>
. except for the continuing payment of quarterly distributions at a rate
not exceeding its respective current annual rate, no party to the merger
shall make any distributions or dividends payable with respect to the
shares and limited partnership units;
. confer on a regular basis with one or more representatives of the other
to report operational matters of materiality and any proposals to engage
in material transactions;
. promptly deliver to the other true and correct copies of any report,
statement or schedule filed with the SEC; and
. promptly notify the other of any material emergency or other material
change in the condition (financial or otherwise) of the business,
properties, assets or liabilities, or any material governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated), or the breach in any material respect of
any representation, warranty, covenant or agreement contained therein.
Prior to the effective time, except as otherwise disclosed pursuant to each
merger agreement, unless AmREIT has consented in writing thereto, each
partnership:
. shall conduct its operations according to its usual, regular and ordinary
course in substantially the same manner as conducted;
. shall not amend its partnership agreement;
. shall not:
--except pursuant to the exercise of options, warrants, conversion
rights and other contractual rights existing on the date of the
respective merger agreement, issue any limited partnership units, make
any distribution, effect any recapitalization or other similar
transaction;
--grant, confer or award any option, warrant, conversion right or other
right not existing on the date of the respective merger agreement to
acquire any limited partnership units;
--increase any compensation or enter into or amend any employment
agreement with the general partners or their affiliates; or
--adopt any new employee benefit plan or amend any existing employee
benefit plan in any material respect, except for changes which are less
favorable to participants in such plans.
. shall not directly or indirectly redeem, purchase or otherwise acquire
any limited partnership units or make any commitment for any such action;
. shall not sell or otherwise dispose of (1) any partnership properties; or
(2) except in the ordinary course of business, any of its other assets
which are material, individually or in the aggregate;
. shall not make any loans, advances or capital contributions to, or
investments in, any other person;
. shall not pay, discharge or satisfy any claims, liabilities or
obligations other than the payment, discharge or satisfaction in the
ordinary course of business, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated financial statements
or incurred in the ordinary course of business;
. shall not enter into any commitment which individually may result in
total payments or liability by or to it in excess of $10,000 (or 5% of
its net asset value, if less) in the case of any one commitment or in
excess of $20,000 (or 10% of its net asset value, if less) for all
commitments;
. shall not, and shall not permit any of its subsidiaries to, enter into
any commitment with any officer, director or affiliate of the partnership
or the general partners or their affiliates except to the extent the same
occur in the ordinary course of business; and
59
<PAGE>
. shall not enter into or terminate any lease representing annual revenues
of $100,000 or more (or 5% of its net asset value, if less).
Prior to the effective time, except as may be otherwise disclosed pursuant
to the merger agreements, unless each partnership has consented in writing
thereto, AmREIT:
. shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
. shall not amend its articles or bylaws;
. shall not:
--except pursuant to the exercise of options, warrants, conversion
rights and other contractual rights existing on the date of the merger
agreements issue any shares of its capital stock, effect any share
split, reverse share split, share dividend, recapitalization or other
similar transaction;
--grant, confer or award any option, warrant, conversion right or other
right not existing on the date hereof to acquire any shares of its
capital shares (except pursuant to any employee incentive plan approved
by stockholders);
--amend any employment agreement with any of its present or future
officers or independent directors; or
--adopt any new employee benefit plan (including any share option, share
benefit or share purchase plan).
. shall not declare, except as provided above for the continuing payment of
quarterly dividends, set aside or pay any dividend or make any other
distribution or payment with respect to any shares or directly or
indirectly redeem, purchase or otherwise acquire any shares or capital
stock of any of its subsidiaries;
. shall not, and shall not permit any of its subsidiaries to, sell or
otherwise dispose of (1) any properties or any of its capital stock of or
other interests in subsidiaries or (2) except in the ordinary course of
business, any of its other assets which are material, individually or in
the aggregate;
. shall not, and shall not permit any of its subsidiaries to, except in the
ordinary course of business, make any loans, advances or capital
contributions to, or investments in, any other person other than in
connection with the sale of properties;
. shall not, and shall not permit any of its subsidiaries to pay, discharge
or satisfy any claims, liabilities or obligations, other than the
payment, discharge or satisfaction in the ordinary course of business, of
liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements of AmREIT included in its
reports filed with the Commission or incurred in the ordinary course of
business;
. shall not, and shall not permit any of its subsidiaries to, enter into
any commitment which individually may result in total payments or
liability by or to it in excess of $50,000 in the case of any one
commitment or in excess of $250,000 for all commitments; and
. shall not, and shall not permit any of its subsidiaries to, enter into
any commitment with any officer, independent director or affiliate of
AmREIT or any of its subsidiaries, except as provided in the merger
agreements or except in the ordinary course of business.
For the purposes of the foregoing, consents on behalf of the partnership may
be given by the general partners and consents on behalf of AmREIT must be given
by the AmREIT board with Mr. Taylor abstaining.
60
<PAGE>
Acquisition Proposals
Prior to the effective time, each partnership and AmREIT have agreed:
. that neither of them nor any of their subsidiaries shall, and each of
them shall direct and use its best efforts to cause its respective
officers, general partners, limited partners, independent directors,
employees, agents, affiliates and representative (including, without
limitation, any investment banker, attorney or accountant retained by it
or any of its subsidiaries), as applicable, not to initiate, solicit or
encourage directly or indirectly any inquiries or the making or
implementation of any alternative transaction involving, all or any
significant portion of the assets or any equity securities of that party
or any of its subsidiaries, other than the transactions contemplated by
the merger agreements;
. that it will immediately cease and terminate any existing activities,
discussions or negotiations with any parties with respect to any
alternative transaction; and
. that it will notify the other party immediately if any inquiries or
proposals are received by a party with respect to an alternative
transaction. However, nothing contained in the merger agreements
prohibits the general partners or AmREIT board from furnishing
information to or entering into discussions or negotiations with any
person or entity that makes an unsolicited bona fide acquisition
proposal, if, and only to the extent that:
(1) the general partners or AmREIT board, as applicable, determines in
good faith that action is required for it to comply with his or its
fiduciary duties to limited partners or stockholders, respectively,
imposed by law as advised by counsel,
(2) prior to furnishing any information to or entering into discussions
or negotiations with, such person or entity, that party provides
written notice to the other party to the effect that it is
furnishing information to, or entering into discussions with, that
person or entity, and
(3) subject to any confidentiality agreement with that person or entity,
that party keeps the other party to the respective merger agreement
informed of the status (but not the terms) of any such discussions
or negotiations.
Termination
Termination by Mutual Consent. Each merger agreement may be terminated and
the merger may be abandoned at any time prior to the effective time, before or
after the approval of the agreement by the limited partners of a partnership or
the stockholders of AmREIT by the mutual written consent of AmREIT and the
partnership.
Termination by Either AmREIT or a Partnership. Each merger agreement may be
terminated and the merger may be abandoned by action of the general partners
for any partnership or the independent directors for AmREIT only for good
reason. Under each merger agreement, the following constitutes "good reason":
(1) By either AmREIT or the partnership if the merger shall not have been
consummated by March 31, 2000;
(2) By AmREIT if the approval of the limited partners of a partnership
shall not have been obtained as required under the merger agreement;
(3) By the partnership if the approval of the stockholders of AmREIT shall
not have been obtained as required under the merger agreement;
(4) By either AmREIT or the partnership upon a change in control, as
defined below, of the other;
(5) By either AmREIT or the partnership if there has been a breach by the
other of any representation or warranty contained in the merger
agreement, which breach is not cured within 30 days after written
notice of that breach is given to the breaching party by the non-
breaching party;
61
<PAGE>
(6) By either AmREIT or the partnership if there has been a material breach
of any of the covenants or agreements set forth in the merger agreement
by the other, which breach is not curable or, if curable, is not cured
within 30 days after written notice of that breach is given to the
breaching party by the non-breaching party;
(7) By the partnership if the general partners determine that termination
is required by reason of an alternative acquisition proposal being
made;
(8) By AmREIT if, the independent directors determine that termination is
required by reason of an alternative acquisition proposal being made;
or
(9) By either AmREIT or the partnership if a or governmental, regulatory or
administrative agency or commission shall have issued an order, decree
or ruling or taken any other action permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by the merger
agreement and such order, decree, ruling or other action shall have
become final and non-appealable, provided that the party seeking to
terminate the merger agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction.
Effect of Termination and Abandonment
If a partnership terminates the merger agreement (1) other than for "good
reason" or (2) for good reason pursuant to paragraph (7) above, and a
partnership acquisition proposal has been made and, within one year from the
date of termination, the partnership consummates a partnership acquisition
proposal or enters into an agreement to consummate a partnership acquisition
proposal to be subsequently consummated, the partnership shall pay a
termination fee to AmREIT, provided that AmREIT was not in material breach of
its obligations at the time of such termination. The termination fee is equal
to the lesser of
(1) the partnership's proportionate share of $500,000; and
(2) the sum of
(a) the maximum amount that can be paid to AmREIT without causing
AmREIT to fail to meet the requirements of the Internal Revenue Code
relating to the payment of the termination fee, plus
(b) an amount equal to the partnership's proportionate share of
$500,000 less the amount payable under clause (a) above in the event
AmREIT is permitted to recover this additional amount under the
Internal Revenue Code.
In addition, AmREIT is entitled to receive from the partnership (or its
successor in interest) all documented out-of-pocket costs and expenses incurred
by it up to a maximum of the partnership's proportionate share of AmREIT's
expenses. The payments to which AmREIT is entitled as described above shall be
its sole remedy with respect to the termination of the merger agreement under
the circumstances contemplated above.
If an election to terminate the merger agreement is made because of a
partnership material adverse effect, the partnership shall, provided that
AmREIT was not in material breach of its obligations at the time of such
termination, pay AmREIT the partnership's proportionate share of AmREIT's
expenses. The payment of the AmREIT expenses shall be AmREIT's sole remedy for
termination of the merger agreement in these circumstances.
If AmREIT terminates the merger agreement, (1) other than for good reason or
(2) for good reason pursuant to paragraph (8) above and, within one year from
the date of termination, AmREIT consummates an AmREIT acquisition proposal or
enters into an agreement to consummate an AmREIT acquisition proposal to be
subsequently consummated, AmREIT shall pay a termination fee to the applicable
partnership, provided that the partnership was not in material breach of its
obligations at the time of termination. The termination fee shall be in an
amount equal to 120% of the partnership's proportionate share of the
partnership merger expenses.
62
<PAGE>
The payments to which the partnership is entitled as described above shall be
its sole remedy with respect to the termination of the merger agreement under
the circumstances contemplated above.
If an election to terminate the merger agreement is made by the partnership
because of an AmREIT material adverse effect, AmREIT shall, provided that the
partnership was not in material breach of its obligations at the time of such
termination, pay the partnership for the proportionate share of the partnership
expenses. This payment shall be the partnership's sole remedy for termination
of the merger agreement in these circumstances.
If the merger agreement is terminated by either party pursuant to paragraph
(4) or paragraph (6) above, the non-terminating party shall, provided that the
terminating party was not in material breach of its obligations at the time of
such termination, pay the terminating party:
. in the case of termination by the partnership the partnership liquidated
damages amount, and in the case of termination by AmREIT, the AmREIT
liquidated damages amount, plus;
. an amount equal to the terminating parties' proportionate share of the
merger expenses; and
. the non-terminating party shall remain liable to the terminating party
for its breach.
If the merger agreement is terminated pursuant to paragraph (1) or paragraph
(9) above, AmREIT shall, provided that the partnership was not in material
breach of its obligations thereunder at the time of termination, pay the
partnership an amount equal to the partnership's proportionate share of the
partnership expenses, which payment shall be the partnership's sole remedy for
termination of the merger agreement in those circumstances.
If either party willfully fails to perform its duties and obligations under
the merger agreement, the non-breaching party is additionally entitled to all
remedies available to it at law or in equity and to recover its expenses from
the breaching party. In the event AmREIT or the partnership is required to file
suit to seek all or a portion of the liquidated damages amount, and it
ultimately succeeds, it shall be entitled to all expenses, including attorney's
fees and expenses, which it has incurred in enforcing its right hereunder.
Extension; Waiver
At any time prior to the effective time, either party, by action taken by
the AmREIT board or the general partners, as applicable, may, to the extent
legally allowed:
. extend the time for the performance of any of the obligations or other
acts of the other party to the merger agreement;
. waive any inaccuracies in the representations and warranties made to the
other party in the merger agreement or in any document delivered pursuant
thereto; and
. waive compliance with any of the agreements or conditions for the benefit
of the other party contained in the merger agreement. Any agreement on
the part of a party hereto to any extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of that party.
Proposed Amendments to Partnership Agreements
The limited partners of each partnership are being asked to consider and
vote upon the partnership amendments which authorize the following:
. the merger of each partnership with and into AmREIT, whether or not
AmREIT would be regarded as a affiliate of the general partners; and
. any other actions as may be necessary under or contemplated by the merger
agreement or this proxy statement, irrespective of any provisions in the
partnership agreements which might otherwise prohibit those actions.
63
<PAGE>
Since a majority vote of the limited partners is required to approve the
partnership amendments, a majority vote is required to approve the merger. The
amendments will not be effective as to any partnership that does not
participate in the merger.
The partnership agreements of the partnerships do not explicitly provide
that the partnerships can merge with and into another entity. Also, the
partnership agreements each place prohibitions on the general partners from
entering into various agreements, contracts or arrangements for and on behalf
of the partnerships with the general partners, their affiliates or otherwise.
The respective general partners are proposing the partnership amendments to
empower and expressly permit them, for the benefit and on behalf of each
respective partnership, to consummate the merger. The merger agreement cannot
be effected unless and until such proposed amendments are adopted.
Proposed AmREIT Bylaw Amendment
At the AmREIT meeting, the AmREIT stockholders will be asked to consider and
vote on a merger proposal which would allow the board of directors to:
. effect the merger with each partnership, the limited partners of whom
approve the merger with AmREIT, and subject to the terms and conditions
of the merger agreements; and
. approve the bylaw amendment which would, upon the effective date of the
merger, amend the bylaws of AmREIT to specifically authorize the merger
on the terms and conditions set forth in the merger agreements,
notwithstanding any other provision, restriction or limitation in
AmREIT's bylaws.
The text of the AmREIT bylaw amendment is as follows:
"The following paragraph shall be added as a new Section to the Bylaws:
"Section 3.21. Approved Merger. Any other provision of
these Bylaws notwithstanding, the Company is expressly
authorized to effect the merger transactions as set forth in
each of those certain Agreements and Plans of Merger dated
June 25, 1999, as may, pursuant to their terms, be amended, by
and between the Company and each of the following
partnerships: Taylor Income Investors, Ltd. ("FUND III"),
Taylor Income Investors IV, Ltd. ("FUND IV"), Taylor Income
Investors V, Ltd. ("FUND V"), Taylor Income Investors VI, Ltd.
("FUND VI"), AAA Net Realty Fund VII, Ltd. ("FUND VII"), AAA
Net Realty Fund VIII, Ltd. ("FUND VIII"), AAA Net Realty Fund
Goodyear, Ltd. ("AAA GOODYEAR"), AAA Net Realty Fund IX, Ltd.
("FUND IX"), AAA Net Realty Fund X, Ltd. ("FUND X"), and AAA
Net Realty Fund XI, Ltd. ("FUND XI")."
Dissenting Partners and Stockholders
Neither the limited partners of any partnership nor the AmREIT stockholders
are entitled to dissenters' appraisal rights with respect to the merger or the
reorganization under applicable state law. The limited partners are also not be
entitled to these rights pursuant to the partnership agreement of any
partnership, as amended by the partnership amendment. Limited partners who vote
against the merger may elect to receive consideration in the form of 10% cash
and 90% notes in the event their partnership participates in the merger.
The Merger Expenses
All transaction costs and expenses of the merger which are estimated to be
$1.4 million shall be paid by AmREIT, except the partnerships rejecting the
merger must pay their the percentages of the partnerships' merger expenses
equal to their transaction value divided by the aggregate transaction values.
Each partnership's percentage of the merger expenses will be allocated between
the partnership and the general partners. The partnership will pay the portion
of those expenses equal to the number of votes cast "For" the merger divided
64
<PAGE>
by the total votes cast. The general partners of any rejecting partnership will
pay the portion of that partnership's merger expenses equal to the number of
votes cast on the percentage of "Against" the merger and abstentions divided by
the total votes cast. The partnership merger expenses include the Houlihan
Lokey fairness opinions, the costs of accountants for the partnerships, 50% of
the costs of the appraisals of the partnership properties and the costs of
partner communications. The aggregate partnership merger expenses are estimated
to be $212,000. Each partnership's proportionate share of the partnership
merger expenses is equal to that partnership's relative net asset value.
AmREIT estimates that the merger expenses will total approximately $1.4
million as follows:
<TABLE>
<S> <C>
Legal Expenses................................................ $ 580,000
Accounting Expenses........................................... 130,000
Fairness Opinions and Valuations.............................. 345,000
Printing...................................................... 170,000
Appraisal Fees................................................ 55,000
Listing Fees.................................................. 100,000
Miscellaneous................................................. 20,000
----------
TOTAL......................................................... $1,400,000
</TABLE>
Anticipated Accounting Treatment
AmREIT will account for the merger as a purchase in accordance with
Accounting Principles Board Opinion No. 16 "Business Combinations." The fair
value of the consideration given by AmREIT in the merger and the fair value of
liabilities assumed will be used as the basis of the purchase price. The
purchase price will be allocated to the assets and liabilities of the
participating partnership based upon their respective fair values at the
effective time of the merger. The financial statements of AmREIT will reflect
the combined operations of AmREIT and the participating partnerships from the
effective time of the merger.
65
<PAGE>
BENEFITS OF THE MERGER TO MR. TAYLOR AND HIS AFFILIATES
Should the merger be consummated, Mr. Taylor and the corporate general
partners with whom he is affiliated could realize the following substantial
financial benefits:
. Mr. Taylor would be entitled to payment of up to 349,995 shares of AmREIT
common stock upon consummation of the merger pursuant to the terms of the
agreement relating to the acquisition of the external advisor. The
acquisition of the external advisor was approved by AmREIT's stockholders
and consummated and, therefore, the limited partners will not have the
opportunity to vote on the advisor acquisition. If valued at the exchange
price, these shares would have a value of up to $3,268,953.
. Should Fund VII, Fund VIII and Fund Goodyear approve the merger, Mr.
Taylor and the corporate general partner, which is an affiliate of Mr.
Taylor, would receive 1,020 shares, 1,825 shares, and 1,147 shares,
respectively. The number of shares to be received in the merger by Mr.
Taylor with respect to his partnership units increases directly with the
respective partnership's transaction value.
. Mr. Taylor and the respective corporate general partners, which are
affiliates of Mr. Taylor, will purchase 2,650 shares, 1,600 shares, 1,423
shares and 1,111 shares, respectively, with the proceeds from disposition
fees from Fund III, Fund IV, Fund V and Fund VI if they participate in
the merger. The amount of the disposition fees increases directly with
the negotiated prices of the properties to which these fees relate.
. If a partnership elects to participate in the merger, Mr. Taylor would be
relieved of his continuing duties and responsibilities as the individual
general partner.
As described under "THE MERGER -- The Independent Directors' Reasons and
Recommendations for the Merger" beginning on page , AmREIT could realize
substantial benefits should the merger be consummated, including the
incremental expansion of its asset base at a cost below that which it might
incur under alternative methods of asset growth, significant savings in costs,
administration and management due to efficiencies of operations from a larger
asset base, improved access to public financing, and the increased potential of
establishing a secondary market for the shares.
Upon consummation of the merger, assuming all ten partnerships participate,
Mr. Taylor will own approximately 622,785 shares of AmREIT common stock
representing approximately 10.8% of all outstanding shares.
66
<PAGE>
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the general partners, the partnerships and AmREIT.
Affiliated General Partners
Mr. Taylor is the individual general partner of Fund IX, Fund X and Fund XI
and controls the corporate general partner of each partnership. He is also the
chairman, chief executive officer and the largest stockholder of AmREIT. Upon
consummation of the merger, assuming all partnerships participate, Mr. Taylor
will own approximately 622,785 shares of AmREIT common stock, representing
approximately 10.8% of the outstanding shares. In determining the terms and
conditions of the merger on behalf of the partnerships, these relationships
caused Mr. Taylor and each corporate general partner to have significant
conflicts of interest.
Mr. Taylor has an inherent financial interest in consummating the merger.
The terms and conditions of the merger might have been structured differently
by persons not having a financial interest in the merger or the merger may not
have proceeded at all. If the effective date were June 30, 1999, Mr. Taylor
would realize the substantial financial benefits from the merger described
under "BENEFITS OF THE MERGER TO MR. TAYLOR AND HIS AFFILIATES" beginning on
page .
Limited partners should consider these conflicting interests of Mr. Taylor
in the merger in negotiating and agreeing to the terms and conditions on behalf
of the partnerships. For instance, except for Fund IX, Fund X or Fund XI, Mr.
Taylor will receive a benefit directly related to merger consideration received
by the partnerships. In the case of Fund III, Fund IV, Fund V and Fund VI, Mr.
Taylor will receive a disposition fee equal to 3% of the negotiated price of
the partnerships' properties (equal to 2,650 shares, 1,600 shares, 1,423 shares
and 1,111 shares, respectively). In the case of Fund VII, Fund VIII and Fund
Goodyear, the general partners are entitled to receive 1% of the consideration
received by the partnerships in the merger (equal to 1,020 shares, 1,825 shares
and 1,147 shares, respectively). In addition, Mr. Taylor will receive 349,995
shares of AmREIT common stock as deferred compensation in connection with
AmREIT's acquisition of its external advisor. The actual number of the deferred
compensation shares issuable to Mr. Taylor as a result of the merger is
directly related to the number of shares issued by AmREIT in the merger. Based
on these interests, Mr. Taylor has a financial incentive to assure the
partnerships receive the greatest consideration possible.
Conversely, as an officer and the principal stockholder of AmREIT, Mr.
Taylor would benefit along with the other AmREIT stockholders and the
independent directors to the extent AmREIT issues a lesser amount of shares in
the merger. In the event a partnership rejects this merger proposal, Mr. Taylor
would also expect to benefit indirectly from the continuation of AmREIT's
management of that partnership and administrative fees and reimbursements to
AmREIT. He would also expect to eventually participate in the proceeds of the
sale or other disposition of that partnership's properties by reason of his
general partner interest and/or right to disposition fees. Also, all other
factors being equal, Mr. Taylor's proportionate ownership of AmREIT will be
diluted by an amount proportionately related to the number of shares issued in
the merger and to the extent the exchange price is less than the value of the
shares on the effective date. Mr. Taylor's proportionate ownership of AmREIT
will be reduced from 11.04% before the merger to 10.84% after the merger if all
partnerships participate.
While the partnerships engaged Houlihan Lokey to render a fairness opinion
and Valuation Associates, an independent real estate appraisal firm, to
appraise the partnerships and properties, no formal procedures were put in
place to minimize the potential conflicts of interest between Mr. Taylor and
the partnerships or as between individual partnerships.
67
<PAGE>
The Independent Directors
The independent directors have sought to honor faithfully their fiduciary
duties to AmREIT and the stockholders. Neither of the independent directors has
any financial interest in any partnership or the general partners of any
partnership, and neither of the independent directors owes a fiduciary duty to
the limited partners.
The general partners and the independent directors have endeavored to
ameliorate conflicts of interest between Mr. Taylor and AmREIT by requiring
that the independent directors determine and agree to the terms of the merger
on behalf of AmREIT and the stockholders in consultation with Morgan Keegan and
their own advisors. However, because neither of them devotes a major portion of
his time to AmREIT's affairs, the independent directors have had to rely on the
management and staff of AmREIT for information, data and analysis of AmREIT and
the partnerships. Because the management and staff of AmREIT are under the
control of Mr. Taylor, in his capacity of AmREIT's chief executive officer, it
is likely that the views and considerations of Mr. Taylor, to some extent,
influenced the information and analysis of AmREIT's management and staff, and
thus, indirectly, the independent directors.
Continuing Conflicts of Interest
After the merger, Mr. Taylor will continue to have business and financial
interests, some of which may conflict with the interests of AmREIT. See
"MANAGEMENT -- Certain Relationships and Related Transactions" on page . Mr.
Taylor has interests in three other limited partnerships that collectively
either own or are developing three properties in Texas and Alabama. None of
these properties is adjacent to any of the properties owned, operated or
managed by AmREIT or the partnerships being asked to participate in the merger.
None of these partnerships competes with AmREIT or your partnership for
properties or tenants nor do any of the tenants of these partnerships directly
compete with the tenants occupying the properties of AmREIT or your
partnership. Also, under the terms of his employment agreement with AmREIT the
agreement and pursuant to which the external advisor was acquired, Mr. Taylor
is contractually restricted, so long as he serves as an officer or director of
AmREIT, from engaging in any competitive real estate venture without the prior
consent of AmREIT. In addition, he must cause any competitive real estate
venture over which he exerts control to, at the election of AmREIT, contract
with AmREIT for the use of certain personnel and/or facilities. See "MANAGEMENT
- -- Advisor Acquisition" on page . While Mr. Taylor no longer participates in
payments for these services, he may eventually participate in the proceeds
and/or disposition fees from the sale or disposition of the partnerships'
properties by reason of his interest as or in the general partner(s) of the
partnerships.
68
<PAGE>
FAIRNESS OPINIONS
Morgan Keegan Fairness Opinion
On June 23, 1999, Morgan Keegan rendered a written opinion to AmREIT to the
effect that, as of that date and based upon the qualifications and assumptions
made and matters considered by Morgan Keegan, the aggregate AmREIT share
consideration offered with respect to all of the partnerships is fair from a
financial point of view to AmREIT's stockholders
The full text of the Morgan Keegan opinion, which sets forth the assumptions
made, procedures followed and matters considered in, and the limitations on,
the review undertaken in connection with the Morgan Keegan opinion, is attached
as Appendix that accompanies this proxy statement and is incorporated in this
document by reference. The summary of opinion set forth below is qualified in
its entirety by reference to the full text of the opinion. Morgan Keegan's
opinion was provided for AmREIT's information and assistance in connection with
AmREIT's consideration of the mergers contemplated by the merger agreements and
the opinions do not constitute a recommendation as to how partners or
stockholders should vote with respect to the merger.
In connection with its opinion, Morgan Keegan reviewed, among other things:
. the financial terms of the merger agreements with respect to the merger;
. the financial statements and the related filings of the partnerships for
the year ended December 31, 1998 and the three months ended March 31,
1999;
. the financial statements and the related filings of AmREIT for the year
ended December 31, 1998 and the three months ended March 31, 1999;
. internal information concerning the business and operations of the
partnerships furnished by the general partners, including a draft of the
partnerships' cash flow projections and operating budgets;
. internal information concerning the business and operations of AmREIT
furnished by management of AmREIT, including cash flow projection and
operating budgets; and
. financial data and operating statistics provided by AmREIT and the
general partners of the partnerships and compared them with similar
information of selected public companies.
Morgan Keegan also held meetings and discussions with AmREIT's and the
partnerships' directors, general partners, officers, and employees, concerning
the operations, financial condition and future prospects of the partnerships
and AmREIT, respectively. In addition, Morgan Keegan has conducted other
financial studies, analyses and investigations and considered other information
as it deemed appropriate.
Morgan Keegan relied upon the accuracy and completeness of all information
that was publicly available, supplied or otherwise communicated to Morgan
Keegan by or on behalf of the partnerships or AmREIT. Morgan Keegan further
relied upon AmREIT's assurances that it is unaware of any factors that would
materially alter the conclusion made in Morgan Keegan's fairness opinion,
including developments or trends that have materially affected or are
reasonably likely to materially affect those conclusions. Morgan Keegan assumed
that the financial forecasts (and the assumptions and bases thereof) examined
by it were reasonably prepared and reflected AmREIT's best currently available
estimates and good faith judgments as to the future performance of the
partnerships and AmREIT, respectively. Morgan Keegan has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy of completeness of these forecasts. Morgan Keegan also assumed, with
consent, that any material liabilities (contingent or otherwise, known or
unknown)
69
<PAGE>
of the partnerships or AmREIT are as set forth in the respective financial
statements of the partnerships and AmREIT. Morgan Keegan also assumed, with
AmREIT's consent, that the table prepared by or for AmREIT of the allocation of
the AmREIT share consideration among the limited partners of each of the
partnerships has been prepared in accordance with, and complies with the terms
and conditions of the partnership agreements of the partnerships. Morgan Keegan
also assumed that the appraisals were reasonably prepared by and reflected the
good faith judgments of Valuation Associates, and that Valuation Associates is
both competent in rendering such valuation and independent from AmREIT and the
partnerships in making its judgment, and Morgan Keegan does not in any respect
assume any responsibility for its accuracy or completeness of the appraisals.
In addition, we also assumed that the properties owned by the limited
partnerships may be used for their intended purposes for the remainder of their
respective lease terms, all of the respective tenants in the properties are
creditworthy and that the deferred maintenance at the properties is not
material. Morgan Keegan did not make an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the partnerships or
AmREIT. Morgan Keegan's opinions necessarily were based upon financial,
economic, market and other conditions and circumstances existing and disclosed
to Morgan Keegan as of the date of its opinion.
It is understood that Morgan Keegan's fairness opinion is for AmREIT's
information in its evaluation of the merger, and Morgan Keegan's opinion does
not constitute a recommendation to AmREIT or the AmREIT stockholders as to how
to vote on the merger or as to whether the AmREIT stockholders should elect to
offer the AmREIT share consideration or the cash and promissory notes of
AmREIT. Morgan Keegan was not requested to, and did not, solicit the interest
of any other party in acquiring interests in the partnerships or their assets.
Additionally, Morgan Keegan's opinion does not compare the relative merits of
the merger with those of any other merger or business strategy which were or
might have been considered by AmREIT as alternatives to the merger.
On rendering its opinion with respect to the fairness, from a financial
point of view, of the aggregate AmREIT shares offered with respect to the
partnerships, Morgan Keegan did not address or render any opinion with respect
to, any other aspect of the merger, including:
. the value or fairness of the cash/notes option;
. the prices at which the AmREIT shares may trade following the merger or
the trading value of the AmREIT shares to be offered compared with the
current fair market value of the partnerships' portfolios or other assets
if liquidated in real estate markets;
. the tax consequences of any aspect of the merger;
. the method of allocating the AmREIT consideration among the partnerships
in the merger;
. the fairness of the amounts or allocation of acquisition cost or the
amounts of acquisition costs allocated to the limited partners; or
. any other matters with respect to any specific individual partner or
class of partners.
The following is a summary of all the material financial analyses set forth
in the merger report provided to AmREIT on June 25, 1999, in connection with
Morgan Keegan rendering its opinion.
In valuing AmREIT and the partnerships, Morgan Keegan considered a variety
of valuation methodologies, including:
. a real estate analysis;
. a pro forma merger analysis;
. an analysis of comparable publicly traded real estate investments trusts;
and
. an analysis of comparable mergers and acquisitions.
70
<PAGE>
Valuation of AmREIT
Real Estate Analysis. Morgan Keegan performed analyses on each of the
partnerships' 31 properties based upon 1999 net operating income estimates
provided by the general partners. Net operating income was adjusted by 3% of
rental revenue for management fees and $0.05 per square foot for capital
expenditure reserves. Morgan Keegan's valuations ranged from $26,678,000 using
a 10% capitalization rate to $29,642,000 using a 9% capitalization rate. Using
the adjusted net operating income and the total merger consideration, the 1999
capitalization rate for the overall property portfolio was determined to be
approximately 9.5%.
Pro Forma Merger Analysis. Morgan Keegan analyzed certain pro forma effects
resulting from the merger, including, among other things, the impact of the
merger on the estimated funds from operations per share of AmREIT common stock
in fiscal year 1999 based on internal estimates of the general partners and
management of AmREIT. The results of the pro forma merger analysis suggested
that the merger would be accretive to funds from operations per share of AmREIT
common stock by 6.5%. The actual results achieved by the combined entity may
vary from projected results and the variations may be material.
Comparable Trading Multiples Analysis. Morgan Keegan compared financial and
operating information and ratios for AmREIT with the corresponding financial
and operating information for a group of publicly traded real estate investment
trusts engaged primarily in the ownership and financing of long-term net leased
properties. Morgan Keegan deemed the following companies as reasonably
comparable to AmREIT:
. Captec Net Leases Realty, Inc.;
. Commercial Net Lease Realty;
. Franchise Finance Corporation of America;
. Lexington Corporate Properties Trust;
. One Liberty Properties, Inc.;
. Realty Income Corporation;
. TriNet Corporate Realty Trust, Inc.; and
. U.S. Restaurant Properties, Inc.
Among other analyses, Morgan Keegan compared the stock price for each of these
comparable companies with their 1998 funds from operations and compared the
adjusted market value for each of these companies with their trailing twelve
months earnings before interest, taxes, depreciation and amortization (EBITDA).
This analysis indicated that the comparable companies' median multiple of 1998
funds from operations was 9.6x and the median multiple of EBITDA for the
trailing twelve months was 11.4x. Morgan Keegan applied these multiples to the
partnerships to establish a valuation range based on trading multiples. 1998
FFO multiples for the comparable companies yield a range of $20,410,000-
$31,090,000. The last twelve months (LTM) EBITDA multiples for the comparable
companies yield a range of $17,777,000-$52,559,000. Morgan Keegan concluded
that the proposed merger terms of $28,082,000 fell within these ranges of
values.
Analysis of Selected Comparable Mergers and Acquisitions. In order to assess
market pricing for comparable mergers, Morgan Keegan reviewed overall merger
transactions in the real estate industry using three different sets of
parameters. Morgan Keegan evaluated:
. acquisitions of retail-oriented real estate investment trusts;
. individual property acquisitions by comparable companies; and
. a comparable transaction between CNL American Properties Fund, Inc., and
18 CNL Income Funds
Morgan Keegan selected seven transactions occurring between June 9, 1997 and
June 25, 1999, involving the sale or pending sale of retail-oriented real
estate investment trusts. Because no transaction was considered
71
<PAGE>
identical to the merger, the medians of the overall transaction multiples were
considered more relevant than the multiples for any specific transaction. The
median multiple of trailing twelve months funds from operations paid in these
transactions was 10.3x and the median multiple of trailing twelve months EBITDA
paid was 12.3x.
Using publicly available documents, Morgan Keegan examined the acquisition
activities of three of the companies deemed reasonably comparable to AmREIT:
. Realty Income Corporation;
. Carey Diversified; and
. Lexington Corporate Properties Trust;
The weighted average annual unlevered return is estimated to be in a range
of between 9.2% and 10.3%. Morgan Keegan applied these multiples to the funds
to establish a valuation range based on capitalization rates.
CNL American filed a proxy statement on March 14, 1999, proposing a
transaction comparable to the one AmREIT is contemplating. Using publicly
available information, Morgan Keegan analyzed the accretion / dilution of the
contribution of 18 CNL Income Funds.
CNL American has raised equity in the private market at $10.00 per share.
Once they have completed the acquisition, CNL American intends to list its
common stock on the New York Stock Exchange. CNL American has stated in its
proxy statement that its best proxy for a per share value is $10.00.
Using this proxy, Morgan Keegan compared the stock price with the 1998
estimated cumulative funds from operations from the 18 CNL Income Funds. This
analysis indicated that the offer from CNL American to acquire the 18 CNL
Income Funds represents a multiple of approximately 12.6x 1998 estimated
cumulative funds from operations. Morgan Keegan applied this multiple to the
partnerships to establish a valuation based on trading multiples.
Based on Morgan Keegan's analysis of comparable transactions:
. LTM FFO multiples for the comparable acquisitions yield a range of
$18,723,000-$41,674,000.
. LTM EBITDA multiples for the comparable acquisitions yield a range of
$26,069,000-$40,718,000.
The proposed merger terms of $28,082,000 fall within this range of values.
Based on publicly available information, comparable companies have recently
acquired properties at a weighted average annual unlevered return between 9.2%-
10.3%.
. if AmREIT applied these capitalization rates to the limited partnerships,
the transaction would be valued at between $26,814,000-$29,905,000.
The proposed merger terms of $28,082,000 fall within this range of values.
Based on publicly available information, CNL is proposing a transaction that
would value the partnerships in the proposed merger at 12.6x 1998 FFO.
. if AmREIT applied these capitalization rates to the limited partnerships,
the transaction would be valued at approximately $34,237,000.
The proposed merger terms of $28,082,000 are below this implied valuation.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to partial analysis or
amenable to
72
<PAGE>
summary description. Accordingly, Morgan Keegan believes that its analysis must
be considered as a whole and that considering any portion of the analysis and
of the factors considered, without considering all analyses and factors, could
create a misleading or incomplete picture of the process underlying the Morgan
Keegan opinion. No entity used in the above analyses, as a comparison is
identical to AmREIT, the partnerships or the combined company. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the
values of businesses are not appraisals and may not reflect the prices at which
businesses may actually be sold. Accordingly, these analyses and estimates are
inherently subject to substantial uncertainty and Morgan Keegan does not assume
responsibility for any future variations from these analyses or estimates. The
above paragraphs summarize the significant quantitative and qualitative
analyses performed by Morgan Keegan in arriving at its opinions. As described
above, Morgan Keegan's opinion to AmREIT was one of many factors AmREIT took
into consideration in making its determination to approve the merger.
AmREIT selected Morgan Keegan as its financial advisor on the basis of
Morgan Keegan's experience in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
secondary distributions of securities, private placements and valuations for
corporate purposes, especially with respect to real estate investment trusts,
franchised real estate and transactions similar to the merger. Morgan Keegan
may provide investment banking services to AmREIT in the future and trade
AmREIT shares for its own account and for the accounts of its customers, and
accordingly, may at any time hold a long or short position in AmREIT shares.
Pursuant to an engagement letter dated as of June 1, 1999, Morgan Keegan
will receive a fee of $100,000 from AmREIT for its services in rendering its
fairness opinion. Morgan Keegan will also be reimbursed for its expenses,
including the reasonable fees and expenses of its attorneys. AmREIT has agreed
to indemnify Morgan Keegan, its affiliates and each of its directors, officers,
employees, agents, consultants, and attorneys, and each person or firm, if any,
controlling Morgan Keegan or any of the foregoing, against certain liabilities,
including liabilities under federal securities law.
The Houlihan Fairness Opinions
General. The general partners retained Houlihan on behalf of each
partnership to render the Houlihan fairness opinions to each participating
partnership regarding the fairness, from a financial point of view, of the
consideration to be received by the limited partners of the participating
partnership in connection with the merger. Houlihan was not requested to, and
did not make, any recommendation to the partnerships as to the form or amount
of consideration to be received by the limited partners in connection with the
merger, which consideration was determined through negotiations between AmREIT
and the general partners. The general partners retained Houlihan to render its
fairness opinions based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuation for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan is a nationally recognized investment banking
firm that is continually engaged in providing financial advisory services in
connection with mergers and acquisitions, leveraged buyouts, business
valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructuring, and private placements of debt and
equity securities.
The general partners first engaged Houlihan on February 10, 1998 and amended
such engagement on April 21, 1999. The general partners had, on behalf of each
participating partnership, solicited proposals from one other firm for the
preparation of fairness opinions. The consideration to be paid by AmREIT in the
merger consists solely of shares or, at the election of dissenting individual
limited partners, total consideration in the form of 10% cash and 90% notes.
Houlihan rendered an opinion as to the valuation of the advisor in connection
with the advisor acquisition for which opinion it received a fee of $40,000.
Houlihan has no material prior relationship with the general partners or their
affiliates. As compensation to Houlihan for its services in connection with the
merger, the general partners have agreed to pay Houlihan an aggregate fee of
$130,000. No portion of Houlihan's fee is contingent upon the successful
completion of the merger. The
73
<PAGE>
general partners and each partnership have also agreed to indemnify Houlihan
and related persons against certain liabilities, including liabilities under
federal securities laws, arising out of the engagement of Houlihan, and to
reimburse Houlihan for certain expenses.
Houlihan delivered its written fairness opinions to the general partners to
the effect that, as of June 25, 1999 on the basis of its analysis summarized
below and subject to the limitations described below, the consideration to be
received by the limited partners of each participating partnership in
connection with the merger was fair, from a financial point of view, to such
limited partners. The fairness opinions do not constitute a recommendation to
any limited partner as to how any such limited partner should vote on the
merger.
THE FULL TEXT OF EACH HOULIHAN LOKEY FAIRNESS OPINION, WHICH SET FORTH,
AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS AN APPENDIX TO THE RESPECTIVE PROSPECTUS
SUPPLEMENT. THE LIMITED PARTNERS ARE URGED TO READ THE APPLICABLE OPINION IN
ITS ENTIRETY.
In arriving at its fairness opinions, Houlihan:
. held discussions with the general partners and certain members of senior
management of the partnerships to discuss the operations, financial
condition, future prospects and projected operations and performance of
the partnerships;
. visited certain facilities and business offices of the general partners
and AmREIT;
. reviewed each of the partnerships' annual reports to partners for the
fiscal years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
general partners have identified as being the most current financial
statements available and have indicated that there has been no material
change in the financial position of the partnerships since such financial
statements;
. reviewed copies of each partnerships' agreement of limited partnership;
. reviewed AmREIT's annual reports to shareholders and on Form 10-K for the
two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
. reviewed drafts of this proxy statement;
. reviewed a draft of the merger agreement to be entered into by and
between AmREIT and each of the partnerships;
. reviewed the appraisal of each of the partnerships' real property
prepared by Valuation Associates;
. reviewed the historical market prices for the AmREIT's publicly traded
securities;
. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the partnerships and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Houlihan did not, and was not requested by the general partners, to make any
recommendations as to the form or amount of consideration to be paid to the
limited partners in connection with the merger. Houlihan was not asked to opine
on and did not express any opinion as to:
. legal or tax consequences of the merger, including but not limited to tax
consequences to the limited partners;
. whether any limited partner should elect the cash/notes option rather
than to receive shares in the merger;
74
<PAGE>
. the public market values or realizable value of the shares or the prices
at which the shares may trade in the future following the merger if and
when a public trading market is established for the common shares;
. the fairness, advisability or desirability of alternatives to the merger;
. the potential capital structure of AmREIT or its impact on the financial
performance of the shares or the cash/notes option; or
. the fairness of any aspect of the merger not expressly addressed in the
Houlihan fairness opinions, including the fairness of the merger as a
whole. Houlihan's opinion relates to fairness from a financial point of
view of the consideration to be received by each limited partner.
Houlihan's opinion does not address the fairness of the merger as a
whole. Houlihan's opinion as to each partnership does not depend on the
participation of any one or a combination of other partnerships. Houlihan
did not perform an independent appraisal of the assets and liabilities of
the partnerships.
Although the general partners and AmREIT advised Houlihan that certain
assumptions were appropriate in their view, no restrictions or limitations were
imposed by the general partners upon Houlihan with respect to its investigation
or the procedures followed by Houlihan in rendering its fairness opinion.
Houlihan's fairness opinions are not intended to be and do not constitute a
recommendation to any limited partner as to whether to accept the consideration
to be received by such limited partner in connection with the merger (whether
in the form of shares or the cash/notes option) or to vote in favor of the
merger. It should be noted that the aggregate value of the consideration that
may be received by each limited partner in connection with the merger
(including any cash consideration in lieu of fractional shares to be received
by the limited partners) is fixed. The ultimate value actually received by each
limited partner at the time of consummation of the merger will vary depending
on the market price of the shares at such time.
Houlihan relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to it have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the partnerships and that there has been no
material change in the assets, financial condition, business or prospects of
each partnership since the date of the most recent financial statements made
available to it. However, Houlihan's conclusions as to the fairness of the
merger to any partnership was not based materially on the financial forecasts.
Houlihan did not independently verify the accuracy and completeness of the
information supplied to it with respect to the partnerships and did not assume
any responsibility with respect to such information. Houlihan has not made any
physical inspection or independent appraisal of any of the properties or assets
of the partnerships.
Partnership Valuation Analysis. In rendering its fairness opinions, Houlihan
calculated a range of the value of each partnership on a controlling interest
basis. Houlihan's analysis of the fair market value of each partnership took
into consideration the income- and cash-generating capability of that
partnership. Typically, an investor contemplating an investment in an
enterprise with income- and cash-generating capability similar to the
partnerships will evaluate the risks and returns of its investment on a going
concern basis. Accordingly, after due consideration of other appropriate and
generally accepted valuation methodologies, the value of each partnership has
been developed primarily on the basis of capitalization of net operating cash
flow and discounted cash flow approaches.
All valuation methodologies that estimate the worth of an enterprise as a
going-concern are predicated on numerous assumptions pertaining to prospective
economic and operating conditions. Houlihan's opinions are necessarily based on
business, economic, market and other conditions as they exist and can be
evaluated by it at the valuation date. Unanticipated events and circumstances
may occur and actual results may vary from those assumed. Any such variations
may be material.
75
<PAGE>
Houlihan Used Several Methodologies in Arriving at its Fairness Opinions.
Each methodology provided an estimate as to the value for each partnership. The
estimated value of each partnership provides a basis of comparison to the
consideration offered in the merger. Several of the analyses conducted by
Houlihan also provided an estimate as to the value of the general partners'
interests in the partnership. In valuing the partnerships, Houlihan performed
the following analyses with respect to each partnership.
. Pursuant to the net sale approach, Houlihan analyzed the value of the
properties of each partnership (and any subject liabilities) under an
orderly sale/liquidation scenario. This approach allowed Houlihan to
determine the net equity value of each partnership by first determining
the value of such partnership's assets and then subtracting the value of
the partnership's liabilities. In order to arrive at the value of the
partnership's assets, Houlihan utilized capitalization rates of net
operating income of the properties of each partnership as well as
multiples of the square footage of each partnership to arrive at a value
for each partnership's real property. Houlihan then aggregated the
resulting property values for each partnership to arrive at an aggregate
value of such partnership.
Capitalization rates utilized in the net sale approach were determined based
upon (1) comparable sales data provided by the general partners; (2) statistics
from the National Real Estate Index, an independent organization that compiles
pricing data from real estate transactions; and (3) certain publicly available
information on assets similar to the partnerships' properties. Additionally, on
a property-by-property basis, a number of characteristics and financial
statistics were considered, including property classification, net operating
income and revenue growth, total revenues, profitability, and property's
relative size. Moreover, the market and location of the property were
considered. In sum, Houlihan selected capitalization rates and applied what it
believes to be the appropriate capitalization rate to each property's net
operating income. The net sale approach generally utilized the higher of each
property's actual or projected net operating income for the annual periods
selected. The net operating income for certain properties were adjusted to
reflect normal income streams for such properties which were newly constructed
or had recently experienced material change of circumstances such as the
addition or departure of a major tenant or a significant renovation.
Applying those selected capitalization rates to each property's normalized
net operating income resulted in an aggregate value for each property. Property
values were then adjusted for reasonable real estate transaction costs (i.e.,
assumed brokerage fees and commissions) and any contractual fees due to the
general partners in the event of a property sale. The net result for each
property owned by each partnership was then aggregated to arrive at an
aggregate property value for each partnership based upon the net sale approach.
Each partnership's aggregate property value was adjusted to reflect the capital
structure of the relevant assets, the working capital assets and liabilities of
the partnership, and any excess cash or other liabilities. The general partners
then divided the resulting value among the limited partners and general
partners of each partnership based upon the rights and privileges of the
partnership agreement.
. An alternative methodology was an income approach analysis which, like
the net sale approach, considered the capitalization rates and multiples
of square footage to arrive at the estimated value of each partnership's
underlying real properties. However, rather than assuming a sale of real
properties, the income approach analysis did not include a reduction in
relative values for the transaction costs associated with the sale of the
properties. Thus, the income approach analysis used the aggregate net
operating income and square footage for each property, as determined in
the net sale analysis, and appropriate capitalization rates and square
foot multiples to determine the aggregate value of each partnership. The
resulting value was then divided among the limited partners and general
partners of each partnership based upon the rights and privileges of the
partnership agreement.
. Another methodology applied was the unit yield approach, pursuant to
which each partnership's estimated value was re-estimated by calculating
capitalization rates for alternative investments such as publicly traded
real estate investment trusts and privately held real estate companies
whose securities sales are periodically monitored in a publication
entitled the "Partnership Spectrum." The capitalization rates for the
indicated alternative investments ranged between approximately 5.0% to
10.0%. Using these capitalization rates as a proxy for the required
return on the partnerships' securities
76
<PAGE>
and then applying the range of required returns to the partnerships'
limited partner distributions as a perpetual flow resulted in an
indication of the value of the limited partners' aggregate interests in
each partnership.
The aforementioned approaches provided Houlihan with a range of values for
the aggregate limited partner interests of each partnership. Additionally,
Houlihan considered the results of the real estate appraisals performed by
Valuation Associates on behalf of each partnership. Houlihan then considered,
among other things, (1) the premiums paid in transactions involving entities
such as the partnerships and the merger as proposed; and (2) the premiums
above net asset value exhibited in secondary market trades of partnership
interests (as reported in such publications as the "Partnership Spectrum") for
control block acquisitions and partnerships with similar assets. After due
consideration of other appropriate and generally accepted valuation
methodologies, Houlihan developed the value of each partnership primarily on
the basis of capitalization of net operating cash flow and discounted cash
flow approaches under the income analysis approach.
Based on all of the aforementioned analyses, Houlihan derived the following
ranges of values of the aggregate limited partnership interests in the
partnerships as set forth in the table below:
<TABLE>
<CAPTION>
Houlihan Lokey
Range of Value
--------------------- Transaction
High Low Value
---------- ---------- -----------
<S> <C> <C> <C>
Fund III...................................... $ 657,000 $ 459,000 $ 877,841
Fund IV....................................... 450,000 219,000 509,337
Fund V........................................ 537,000 390,000 453,473
Fund VI....................................... 398,000 229,000 346,000
Fund VII...................................... 1,242,000 916,000 952,272
Fund VIII..................................... 2,418,000 1,583,000 1,705,035
Fund Goodyear................................. 1,352,000 973,000 1,071,732
Fund IX....................................... 5,494,000 3,985,000 5,344,801
Fund X........................................ 10,686,000 8,798,000 10,495,000
Fund XI....................................... 7,457,000 5,074,000 6,326,192
---------- ---------- ----------
30,691,000 22,626,000 28,081,683
========== ========== ==========
</TABLE>
With respect to arriving at the value of the consideration to be received
by the limited partners, Houlihan then considered the value of the shares
and/or the cash/notes to be received by the limited partners in connection
with the merger. Houlihan considered AmREIT's pro forma net operating income
and, in a manner similar to the aforementioned sale and income approach,
Houlihan capitalized the net operating income to arrive at a pro forma net
asset value for AmREIT. (Houlihan did not assume any liquidation costs in its
pro forma valuation.) Houlihan then added the value of AmREIT's advisory
business, based upon AmREIT's purchase price for the advisor in the advisor
acquisition, to AmREIT's net asset value. Houlihan then multiplied the number
of shares to be received by each partnership by the estimated valuation of the
shares to arrive at the valuation of the consideration to be received by the
limited partners of each partnership.
The foregoing summaries describe the material points of more detailed
analyses performed by Houlihan in connection with rendering the Houlihan
fairness opinions. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most appropriate
and relevant methods of financial analysis and application of those methods to
the particular circumstances and is, therefore, not readily susceptible to
summary description. In rendering its fairness opinions, Houlihan did not
attribute any particular weight to any analysis or factor considered by it but
rather made the appropriate judgments as to the significance and relevance of
each analysis and factor. While there were no material factors that did not
support Houlihan's fairness opinions, Houlihan believes that its analyses and
the summary set forth herein must be considered as a whole and that selecting
portions of its analyses, without considering all analyses and factors, or
portions of this summary, could create an incomplete view of the processes
underlying the analyses set forth
77
<PAGE>
in the Houlihan fairness opinions. In its analysis, Houlihan made numerous
assumptions with respect to the partnerships, general real estate industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond its control and beyond the control of
the partnerships. The estimates contained in the analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be more or less favorable than suggested by the analyses.
Conditions and Limitations. The conclusions resulting from the above-
described analyses lead Houlihan to conclude that the consideration to be
received by the limited partners of each partnership in connection with the
merger is fair to the aggregate limited partners of each partnership from a
financial point of view.
The foregoing analyses required studies of the overall market, economic and
industry conditions in which the partnerships and AmREIT operate, the
partnerships' and AmREIT's operating results, and the partnerships'
distributions to the limited partners. Research into, and consideration of,
these conditions were incorporated into the analyses.
Houlihan's fairness opinions are based on the business, economic, market and
other conditions as they existed as of June 25, 1999. In rendering its
opinions, Houlihan relied upon and assumed, without independent verification,
the accuracy and completeness of the financial and other information provided
to Houlihan by the general partners and AmREIT was reasonably prepared and
reflect the best current available estimates of the financial results and
condition of the partnerships and AmREIT. Houlihan relied on the assurance of
the general partners that any financial projections or pro forma statements or
adjustments provided to Houlihan were in the judgment of the general partners
and AmREIT reasonably prepared or adjusted on bases consistent with actual
historical experience or reflecting the best currently available estimates and
good faith adjustments; that no material changes have occurred in the
information reviewed between the date the information was provided and the date
of the Houlihan fairness opinions; and that the general partners and AmREIT are
not aware of any information or facts regarding the general partners and AmREIT
or the partnerships that would cause the information supplied to Houlihan to be
incomplete or misleading in any material respect. Houlihan did not
independently verify the accuracy or completeness of the information supplied
to it with respect to the partnerships or AmREIT and does not assume
responsibility for the accuracy or completeness of such information. Except as
set forth above, Houlihan did not make any physical inspection or independent
appraisals of the properties or assets of the partnerships or AmREIT.
78
<PAGE>
APPRAISALS
General. Valuation Associates has prepared and delivered to each partnership
an appraisal report dated June 16, 1999, based upon and subject to the matters
referenced in the appraisal, containing its opinion regarding the market value
of each partnership and each of its properties as of May 31, 1999. Valuation
Associates is a nationally recognized independent and fully diversified real
estate firm with extensive valuation experience. AmREIT and the partnerships
decided to retain Valuation Associates to render these appraisals in connection
with the merger because of its valuation experience with respect to real estate
and transactions similar to the merger.
The purpose of the appraisals is to establish the relative leased fee values
of the properties in each partnership's portfolio. Both the independent
directors and the general partners used the appraisals to assist them in
determining the reasonableness of the proposed consideration payable by AmREIT
to each partnership in the merger. Valuation Associates' appraisals of the
partnerships' properties address the market value of each partnership's leased
and ownership interest in each property and the liquidation value of each
partnership's properties, based on certain specified assumptions.
Market Value/Going Concern -- Valuation Methodology. Valuation Associates'
appraisals of the market value of the leased fees of the partnerships'
properties primarily involved the income approach. The cost approach and the
sales comparison approach were usually used only in instances where the
valuation of the underlying property was required or for select closed sales
with no current rent. The uses of the approaches to value are summarized below:
. The income approach to value was relied upon as the primary appraisal
technique based upon the properties' capability to generate net income
and to be bought and sold in the marketplace.
. Income Approach is defined as a set of procedures through which an
appraiser derives a value indication for an income producing property by
converting its anticipated benefits (cash flows and reversion) into
property value. This conversion can be accomplished in two ways, one
year's income expectancy can be capitalized at a market derived
capitalization rate or at a capitalization rate that reflects a specified
income pattern return on investment and change in the value of
investment. Alternatively, the annual cash flows for the holding period
and the reversion can be discounted at a specified yield rate.
. The cost approach and the sales comparison approaches were applied in
Valuation Associates' analysis and were considered to be relevant only:
--where a value for a reversionary interest in the property was required
and the use of direct capitalization would not have been the method of
choice; and
--to estimate rent for vacant properties with no rent.
. Cost Approach is defined as a set of procedures through which a value
indication is derived for the fee simple interest in a property by
estimating the current cost to construct a reproduction of or replacement
for the existing structure, deducting accrued depreciation from the
reproduction or replacement cost and then adding the estimated land value
plus an entrepreneurial profit. Adjustments may be then made to the
indicated fee simple value of the subject property to reflect the value
of the property interest being appraised.
. Sales Comparison Approach is defined as a set of procedures in which a
value indication is derived by comparing the property being appraised to
similar properties that have been sold recently, applying appropriate
units of comparison and making adjustments to the sale prices of the
comparables based on the elements of comparison. The Sales Comparison
Approach may be used to value improved properties, vacant land, or land
being considered as though vacant. It is the most common and preferred
method of land valuation when comparable sales data are available.
79
<PAGE>
Since the appraisals involved the estimation of the aggregate market value
of the leased and ownership interests of each partnerships' properties,
Valuation Associates determined that only the income approach provided a true
test of market value for the properties. The value of the properties was
developed by the capitalization of the lease payments into present value using
the discounted cash flow analysis, whereby anticipated future income streams
over a seven-year holding period were discounted at a market-derived rate of
9.25% to 12.00% (depending on the property) to a net present value estimate
using a cash flow model and a revisionary value (sale at the end of the seventh
year) was discounted at a market-derived terminal capitalization rate of 10.50%
to 12.25%. Terminal Capitalization Rate is defined as the rate used to convert
income (example NOI cash flow) into an indication of the anticipated value of
the subject real property at the end of the holding period. The Terminal
Capitalization Rate is used to estimate the resale value of the property. Also
called Residual Capitalization Rate. Market Derived Rate may be a terminal
capitalization rate or going end capitalization rate or discount rate or yield
rate that is derived from the market from either sales of comparable income
producing properties or via interviews of market participants. Valuation
Associates made certain assumptions in determining its cash flow analysis with
respect to its market value analysis of each partnership. These assumptions
included:
. a seven-year holding period for each property;
. a $250,000 annual allowance related to normal day-to-day operations,
including functions relating to compliance with the SEC reporting
requirements, investor relations and communications and management issues
not specifically related to property level activities;
. a 4% annual allowance for a management fee; and
. a flat amount of $400 per property, per year for miscellaneous expenses
such as bookkeeping, legal fees and other pro rata charges. Anticipated
rental income as well as adjustments for vacancy with no rent being paid,
percentage rent, management fees and administrative expenses were
analyzed over the holding period.
The selection of the discount rate to be applied to the estimated cash flow
over the seven-year holding period for each property was based upon Valuation
Associates' multi-tiered analysis of the risk involved with each property. For
each property, Valuation Associates first analyzed both general and specific
market risks, lessee/borrower risk and property risk. Next, Valuation
Associates evaluated the attitude and expectation of market participants and
compared this to a variety of alternative investment vehicles such as stock,
bonds or other real estate investments. Finally, Valuation Associates looked at
the individual tenants' company profile and financial strength based on stock
reports, investor publications, trade journals and discussions with market
participants.
At the end of the seven-year holding period, Valuation Associates assumed
that the properties of each partnership would be sold in an orderly manner. For
purposes of such sale, Valuation Associates assumed that the partnership would
incur a 3.5% sales expense, which included any fees for brokerage or attorneys,
applicable closing costs and miscellaneous charges upon disposition of the
properties.
Property Valuation Assumptions. The special assumptions made by Valuation
Associates in its appraisals of each partnership's properties are set forth in
summary form as follows:
. Client Provided Information. The partnerships provided Valuation
Associates with leases for properties in the portfolios, summarized data
pertaining to sales volumes, lease data and other property specific data
such as surveys and site plans. Valuation Associates assumed, for
purposes of its appraisals that this information was true and complete as
of the date given and stated in its report that it has no reason to
believe that the data with which AmREIT provided them is inaccurate in
any material respect.
. Physical Inspections. The independent directors and general partners
requested that Valuation Associates conduct personal inspections of each
of the properties.
80
<PAGE>
. Litigation. Valuation Associates assumed that each of the properties is
free from any pending or proposed litigation, civil engineering
improvements or eminent domain proceedings, unless it received specific
information otherwise.
--Material Adverse Changes. The date of the appraisals is May 31, 1999.
In the event that any given tenant within the portfolio files for
bankruptcy or suffers significant adverse financial or operational
changes subsequent to the date of the reports, Valuation Associates
reserves the right to revise the appraisal relating to such tenant and
such property.
--Highest and Best Use. For purposes of the appraisals, Valuation
Associates assumed that the existing building improvements represent
the highest and best use of the respective properties.
--Joint Ventures and Tenants in Common. For the properties in each
partnership that are under a joint venture agreement, Valuation
Associations allocated the respective proportionate value of the
property in question to each Partnership in the joint venture
agreement.
--Real Estate Only. The appraisals are for the value of the real estate
only and do not include furniture, fixtures and equipment in the
stores.
There were no assets subject to any material qualifications by Valuation
Associates with respect to the valuation.
The date of the value of the properties of each partnership, as set forth in
the appraisal rendered by Valuation Associates is May 31, 1999. As of the date
of this proxy statement, neither AmREIT nor any of the partnerships is aware of
any material event subsequent to the date of the appraisal that would result in
any material changes to any of the values set forth in the appraisals rendered
by Valuation Associates. The appraisals rendered by Valuation Associates will
be updated and a supplemental proxy statement will be provided to you if AmREIT
determines that any event has occurred or condition has changed since the date
of the appraisals that may have caused a material change in the values
reported.
In connection with the merger, AmREIT paid or will pay, on behalf of the
partnerships which approve the merger, Valuation Associates approximately
$53,000 in the aggregate for its real estate appraisal services. AmREIT may
engage Valuation Associates for future valuations and appraisals of properties
of AmREIT. There is no contract, agreement or understanding between AmREIT and
Valuation Associates regarding any future engagement.
Liquidation Valuation. AmREIT and the partnerships also requested that
Valuation Associates provide them with a liquidation value for the properties
of each of the partnerships. In providing AmREIT and the partnerships with that
estimate, Valuation Associates made several assumptions regarding the
conditions under which we would be selling the properties of each partnership.
These assumption were then applied to the market value derived for each
property as described above. These assumptions include:
. Time Period. Valuation Associates assumed that the liquidation of the
partnerships' properties would occur over a six-month period. In
estimating the liquidation period, Valuation Associates relied on
interviews with market participants, their professional opinion, and
consideration of the size of the portfolio and the quality of the
properties that it comprises. The six month period was determined to be a
reasonable length of time that would be necessary to liquidate the
portfolios in an orderly manner in light of the number of properties and
quality of properties involved. According to Valuation Associates, this
would shorten the normal marketing period estimate by as much as 50%.
Thus, Valuation Associates assumed that for a six-month period, a
discount of 5% from the appraised discounted present value would be
necessary.
. Marketing of Properties. Each partnership would make an aggressive
marketing effort in the sale of the properties. In connection with this
assumption, Valuation Associates allowed for 2% of the appraised present
value of each property as a reasonable amount for the increased marketing
effort and contingency costs.
81
<PAGE>
. Brokered Sales. In light of the six-month liquidation period assumption,
Valuation Associates assumed (and AmREIT and the partnerships agreed)
that in such a liquidation, AmREIT and the partnerships would enlist the
assistance of brokers. Based upon that assumption and upon current market
research, Valuation Associates applied a 3% brokerage commission to the
present values of the properties.
. Other Fees. Valuation Associates also assumed that AmREIT and the
partnerships would have attorney, consultant and appraisal fees, as well
as transfer taxes, surveys, title insurance and other related expenses
that would amount to approximately 2.5% of the present value of the
properties in each of the Partnerships.
AmREIT PRO FORMA FINANCIAL INFORMATION
The pro forma financial information of AmREIT for the year ended December
31, 1998 and the six months ended June 30, 1999 are included in this proxy
statement starting at page F-2. The pro forma financial balance sheet has been
prepared as if each of the transactions had occurred as of June 30, 1999: (1)
the issuance of 213,260 initial shares pursuant to the advisor acquisition; (2)
the merger and the related transactions. The pro forma statements of operations
of AmREIT for the year ended December 31, 1998 and for the six months ended
June 30, 1999 have been prepared as if each of the transactions had occurred as
of January 1, 1998. The pro forma financial information has been prepared using
the purchase method of accounting whereby the assets and liabilities of the
partnerships are allocated based upon estimated fair value, based upon
preliminary estimates, which are subject to change as additional information is
obtained. The purchase price and the allocations of the purchase price are
subject to final determination based upon estimates and other evaluations of
fair value. Therefore, the purchase price and the allocations reflected in the
pro forma financial information may differ from the amounts ultimately
determined.
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the financial position or results of
operations of AmREIT that would have occurred if such transactions had been
completed on the dates indicated, nor does it purport to be indicative of
future financial position or results of operations. In the opinion of the
AmREIT management, all material adjustments necessary to reflect the effect of
these transactions have been made. The pro forma statements of operations for
the year ended December 31, 1998 and for the six months ended June 30, 1999 are
not necessarily indicative of the results of operations to be expected for the
year ending December 31, 1999.
82
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
General
The following summary of material federal income tax consequences that may
be relevant to a holder of common shares is based on current law, is for
general information only and is not intended as tax advice. The following
discussion, which is not exhaustive of all possible tax consequences, does not
include a detailed discussion of any state, local or foreign tax consequences.
Nor does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective stockholder in light of his or her particular
circumstances or to certain types of stockholders (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States and stockholders holding securities as part of a conversion
transaction, a hedging transaction or as a position in a straddle for tax
purposes) who are subject to special treatment under the federal income tax
laws. Unless otherwise indicated, the terms "we," "us," and "our" when used
herein refer to AmREIT.
The statements in this discussion are based on current provisions of the
Internal Revenue Code of 1986, as amended, existing, temporary and currently
proposed Treasury Regulations under the Code, the legislative history of the
Code, existing administrative rulings and practices of the IRS and judicial
decisions. No assurance can be given that legislative, judicial or
administrative changes will not affect the accuracy of any statements in this
discussion with respect to transactions entered into or contemplated prior to
the effective date of such changes. Any such change could apply retroactively
to transactions preceding the date of the change. We do not plan to request any
rulings from the IRS concerning our tax treatment and the statements in this
discussion are not binding on the IRS or any court. Thus, we can provide no
assurance that these statements will not be challenged by the IRS or that such
challenge will not be sustained by a court. Locke Liddell & Sapp, tax counsel
to AmREIT, is of the opinion that, except for statements of fact or as
otherwise specifically noted, all information contained under this caption
"FEDERAL INCOME TAX CONSIDERATIONS" is correct in all material respects. Unlike
a tax ruling (which will not be sought, except as otherwise described in this
proxy statement), an opinion of counsel, which is based on counsel's review and
analysis of existing law, is not binding on the IRS. Accordingly, no assurance
can be given that the IRS would not successfully challenge the opinions set
forth herein.
This discussion is not intended as a substitute for careful tax planning.
You consult with your own tax advisor regarding the specific tax consequences
to you of the merger and the reorganization and the ownership and disposition
of common stock in an entity electing to be taxed as a REIT, including the
federal, state, local, foreign and other tax consequences of such purchase,
ownership, disposition and election, and of potential changes in applicable tax
laws.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because each partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, limited partners are required to take
into account their share of the income or loss of their respective partnership,
regardless of whether any cash is distributed to them. If a partnership is
acquired by AmREIT, limited partners voting "For" the merger will receive
shares of AmREIT common stock. Limited partners who vote "Against" the merger
but whose partnership approves the merger otherwise will receive shares of
AmREIT common stock unless they elect the cash/notes option, in which case they
will receive cash and notes.
If a partnership is acquired by AmREIT and its limited partners receive
shares of AmREIT common stock, their ownership of shares of AmREIT common stock
will affect the character and amount of income reportable by them in the
future. Each partnership is a partnership for federal income tax purposes and
is not subject to taxation. Currently, as the owners of partnership interests,
limited partners must take into account their distributive share of all income,
loss and separately stated partnership items, regardless of the amount of any
distributions of cash to them. Each partnership supplies that information to
limited partners annually on a Schedule K-1. The character of the income that
limited partners recognize depends upon the assets and
83
<PAGE>
activities of their respective partnership and may, in some circumstances, be
treated as income which may be offset by any losses limited partners may have
from passive activities.
In contrast to treatment as limited partners, if the partnerships and
acquired by AmREIT limited partners receiving shares of AmREIT common stock, as
a stockholders of AmREIT, will be taxed based on the amount of distributions
they receive from AmREIT. Each year AmREIT will send its stockholders a Form
1099-DIV reporting the amount of taxable and nontaxable distributions paid to
its stockholders during the preceding year. The taxable portion of these
distributions depends on the amount of AmREIT's earnings and profits. Because
the merger is a taxable transaction, AmREIT's tax basis in the acquired
properties will be higher than the partnerships' tax basis had been in the same
properties. At the same time, however, AmREIT may be required to utilize a
slower method of depreciation with respect to certain properties than that used
by each partnership. As a result, AmREIT's tax depreciation from the acquired
properties will differ from each partnership's tax depreciation. Accordingly,
under certain circumstances, even if AmREIT were to make the same level of
distributions as each partnership, a larger portion of the distributions could
constitute taxable income to limited partners. In addition, the character of
this income to limited partners as stockholders of AmREIT does not depend on
its character to AmREIT. The income will generally be ordinary dividend income
to stockholders and will be classified as portfolio income under the passive
loss rules, except with respect to capital gains dividends. Furthermore, if
AmREIT incurs a taxable loss, the loss will not be passed through to its
stockholders.
Tax Consequences of the Merger and the Reorganization
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of each partnership acquired by AmREIT will be
transferred to AmREIT in return for shares of AmREIT common stock and/or cash
and notes. Each partnership will then immediately liquidate and distribute such
property to its limited partners. The IRS requires that limited partners
recognize a share of the income or loss, subject to the limits described below,
recognized by their partnership, including gain or loss recognized as a result
of the transfer of properties pursuant to the merger. The estimated taxable
gain and loss based on the exchange price, for an average $1,000 original
limited partner investment in their partnership, is set forth in the table
below for those limited partners subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $1,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
Taylor Income Investors, Ltd........................ $287
Taylor Income Investors IV, Ltd..................... --
Taylor Income Investors V, Ltd...................... 332
AAA Net Realty Fund VI, Ltd......................... 485
AAA Net Realty Fund VII, Ltd........................ 97
AAA Net Realty Fund VIII, Ltd....................... 142
AAA Net Realty Fund Goodyear, Ltd................... 79
AAA Net Realty Fund IX, Ltd......................... 172
AAA Net Realty Fund X, Ltd.......................... 23
AAA Net Realty Fund XI, Ltd......................... (35)
</TABLE>
- --------
(1) Values are based on the exchange price negotiated by the general partner(s)
and AmREIT. Upon listing the shares of AmREIT common stock on an exchange,
the actual prices at which the shares of AmREIT common stock will trade on
the exchange may be significantly below the exchange price.
As a general rule, an actual or deemed transfer of assets of a partnership
to a corporation such as AmREIT in exchange for stock is a taxable transaction.
However, as an exception to this general rule, under section 351(a) of the
Code, no gain or loss is recognized if (1) property is transferred to a
corporation by one or more individuals or entities in exchange for the stock of
that corporation, and (2) immediately after the exchange,
84
<PAGE>
such individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If a partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, such partnership will receive solely shares of AmREIT common
stock in exchange for its partnership's assets. As a result, such partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by such
partnership and (b) the amount of such partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
such partnership to AmREIT.
If a partnership is acquired by AmREIT and one or more limited partners
elect the cash/notes option, such partnership will receive shares of AmREIT
common stock, cash and notes in exchange for such partnership's assets. Because
the principal portion of the notes will not be due until , 2006, the
merger of such partnership's assets, in part, in exchange for notes will be
reported under the installment sales method and a portion of such partnership's
gain may be deferred under the "installment sale" rules. Pursuant to this
method, and assuming that none of the principal amount of the notes is
collected in the year of the merger, the amount of gain recognized by such
partnership in the year of the merger will be at least equal to the value of
the shares of AmREIT common stock and cash received by such partnership
multiplied by the ratio that the gross profit realized by such partnership in
the merger bears to the total contract price for such partnership's assets. To
the extent such partnership realizes depreciation recapture income under
section 1245 or section 1250 of the Code, the recapture income will also be
recognized by such partnership in the year of the merger.
The gross profit that each partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for each partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness encumbering each partnership's assets, if any,
that are assumed or taken subject to by AmREIT. The exact amount of the gain to
be recognized by each partnership in the year of the merger will also vary
depending upon the decisions of the limited partners to receive shares of
AmREIT common stock, cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Each
limited partner's share of gains or losses from the sale of section 1231 assets
of its partnership would be combined with any other section 1231 gains and
losses that such limited partner recognizes in that year. If the result is a
net loss, such loss is characterized as an ordinary loss. If the result is a
net gain, it is characterized as a capital gain, except that the gain will be
treated as ordinary income to the extent that has "non-recaptured net section
1231 losses." For these purposes, the term "non-recaptured net section 1231
losses" means the limited partner's aggregate section 1231 losses for the five
most recent prior years that have not been previously recaptured. However, gain
recognized on the sale of personal property will be taxed as ordinary income to
the extent of all prior depreciation deductions taken by the partnership prior
to sale. In general, each limited partner may only use up to $3,000 of capital
losses in excess of capital gains to offset ordinary income in any taxable
year. Any excess loss is carried forward to future years subject to the same
limitations.
85
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that each partnership recognizes will be allocated to limited partners in
accordance with the terms of the partnership's partnership agreement. Each
limited partner will be allocated and must report its allocable share of such
gain, if any, pursuant to these terms, regardless of the limited partner's
decision to receive cash and notes rather than shares of AmREIT common stock.
Even though a limited partner's election of the cash/notes option may decrease
the amount of gain the partnership recognizes, the electing limited partner
still will be required to take into account its share of the partnership's gain
as determined under the partnership agreement of the partnership. Therefore,
limited partners who elect the cash/notes option may recognize gain in the year
of the merger despite the fact that they will receive only a small amount of
cash and no publicly-traded instruments with which to pay the tax on the gain.
Such limited partners will adjust the basis of the notes as described below,
and the resulting increase in basis will decrease the amount of the gain
recognized over the term of the notes by the limited partners electing the
cash/notes option.
Tax Consequences of the Liquidation and Partnership Termination. If a
partnership is acquired by AmREIT, the partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to its limited partners. The shares of AmREIT common stock
or cash and notes will be distributed among its limited partners in a manner
that the general partners of the partnership determine to be pro rata based on
the respective capital account balances. The taxable year of the partnership
will end at this time, and limited partners must report in their taxable year
that includes the date of the merger, their share of all income, gain, loss,
deduction and credit for the partnership through the date of the merger
(including gain or loss resulting from the merger described above). If their
taxable year is not the calendar year, they could be required to recognize as
income in a single taxable year their share of the partnership's income
attributable to more than one of its taxable years.
Limited partners receiving shares of AmREIT common stock in the merger, in
addition to their share of the gain or loss described above that they
recognized as a result of the deemed sale of their partnership's assets, will
recognize gain or loss equal to the difference between the fair market value of
the shares of AmREIT common stock that they receive (determined on the closing
date of the merger) and their adjusted tax basis in their partnership interests
(adjusted by their distributive share of income, gain, loss, deduction and
credit for the final taxable year of their partnership (including any such
items recognized by their partnership as a result of the merger) as well as any
distributions they receive in such final taxable year (other than the
distribution of the shares of AmREIT common stock)). Their basis in the shares
of AmREIT common stock will then equal the fair market value of the shares of
AmREIT common stock on the closing date of the merger and their holding period
for the shares of AmREIT common stock for purposes of determining capital gain
or loss will begin on the closing date of the merger.
Limited partners that receive cash and notes in the merger, in addition to
their share of the gain or loss described above that they recognized as a
result of the deemed sale of their partnership's assets, will recognize gain to
the extent that the amount of cash they receive in the merger exceeds their
adjusted basis in their partnership interests (adjusted by their distributive
share of income, gain, loss, deduction and credit for the final taxable year of
their partnership (including any such items recognized by their partnership as
a result of the merger) as well as any distributions they receive in such final
taxable year (other than the distributions of the cash and notes)). Their basis
in the notes distributed to them will equal their adjusted basis in their
partnership interests, reduced (but not below zero) by the amount of any cash
distributed to them and their holding period for the notes for purposes of
determining capital gain or loss from the disposition of the notes will include
their holding period for their partnership interests.
Because the assets of each partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by limited partners if they are a tax-exempt investor
that does not hold partnership interests either as a "dealer" or as debt-
financed property within the meaning of section 514, and they are not an
organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment
86
<PAGE>
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. Limited partners that are included in one of the four classes of
exempt organizations noted in the previous sentence may recognize and be taxed
on gain or loss on the merger.
Treatment of Noteholders. Limited partners that receive cash and notes in
the merger, under general principles of the Code, must include stated interest
in income in accordance with their method of tax accounting. Accordingly, if
they use the accrual method of tax accounting, they must include stated
interest in income as it accrues and, if they use the cash method of tax
accounting, they must include stated interest in income as it is actually or
constructively received.
Payments of interest income to limited partners will constitute portfolio
income, not passive activity income for purposes of section 469 of the Code.
Accordingly, such income will not be subject to reduction by your losses from
passive activities if such limited partner are subject to the passive activity
loss rules. Income attributable to interest payments may be offset by
investment expense deductions, however, subject to the limitation that, if such
limited partners are an individual investor, they may only deduct miscellaneous
itemized deductions (including investment expenses) to the extent such
deductions exceed two percent of their adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, holders of notes will recognize gain or loss upon the sale,
exchange, redemption or other taxable disposition of a note measured by the
difference between (1) the amount of cash and the fair market value of property
received (except, for cash method taxpayers, to the extent attributable to the
payment of accrued interest) and (2) their tax basis in the note. Any such gain
or loss will generally be long-term capital gain or loss, provided the note was
a capital asset in your hands and was held for more than one year.
If the face amount of the notes held at the end of the taxable year
(together with any other installment obligations received during the year)
exceeds $5,000,000, the holder may be required to pay to the IRS interest at
the federal underpayment rate based on a portion of the tax liability that such
noteholder has deferred.
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
87
<PAGE>
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
Consequences of Ownership of an Interest in a REIT
We have elected to be treated as a REIT under Sections 856 through 860 of
the Code for federal income tax purposes commencing with our taxable year ended
December 31, 1993. We believe that we have been organized and have operated in
a manner that qualifies for taxation as a REIT under the Code. We also believe
that we will continue to operate in a manner that will preserve our status as a
REIT. We cannot however, assure you that such requirements will be met in the
future.
Locke Liddell & Sapp LLP, our legal counsel, is of the opinion that we have
been organized and have operated in conformity with the requirements for
qualification and taxation as a REIT under the Code and that, after giving
effect to the merger, our proposed method of operation will enable us to meet
the requirements for qualification and taxation as a REIT as of the date of
this proxy statement and that our proposed manner of operation and diversity of
equity ownership will enable us to continue to satisfy the requirements for
qualification as a REIT in the future if we operate in accordance with the
method of operations described herein, including our representations concerning
our intended method of operation. However, no opinion can be given that we will
actually satisfy all REIT requirements in the future since this depends on
future events. You should be aware that opinions of counsel are not binding on
the IRS or on the courts, and, if the IRS were to challenge these conclusions,
no assurance can be given that these conclusions would be sustained in court.
The opinion of Locke Liddell & Sapp LLP is based on various assumptions as well
as on certain representations made by us as to factual matters, including a
factual representation letter provided by us. The rules governing REITs are
highly technical and require ongoing compliance with a variety of tests that
depend, among other things, on future operating results, asset diversification,
distribution levels and diversity of stock ownership. Locke Liddell & Sapp LLP
will not monitor our compliance with these requirements. While we expect to
satisfy these tests, and will use our best efforts to do so, no assurance can
be given that we will qualify as a REIT for any particular year, or that the
applicable law will not change and adversely affect us and our stockholders.
See "-- Failure to Qualify as a REIT" below on page . The following is a
summary of the material federal income tax considerations affecting us as a
REIT and our stockholders. This summary is qualified in its entirety by the
applicable Code provisions, relevant rules and regulations promulgated under
the Code, and administrative and judicial interpretations of the Code and these
rules and regulations.
REIT Qualification
We must be organized as an entity that would, if we do not maintain our REIT
status, be taxable as a regular corporation. We cannot be a financial
institution or an insurance company. We must be managed by one or more
directors. Our taxable year must be the calendar year. Our beneficial ownership
must be evidenced by transferable shares. Our capital stock must be held by at
least 100 persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a taxable year of less than 12 months. Not more
than 50% of the value of the shares of our capital stock may be held, directly
or indirectly, applying the applicable constructive ownership rules of the
Code, by five or fewer individuals at any time during the last half of each of
our taxable years. We must also meet certain other tests, described below,
regarding the nature of our income and assets and the amount of our
distributions.
Our outstanding common shares are owned by a sufficient number of investors
and in appropriate proportions to permit us to satisfy these stock ownership
requirements. To protect against violations of these stock ownership
requirements, our declaration of trust provides that no person is permitted to
own, applying constructive ownership tests set forth in the Code, more than
9.8% of the outstanding common stock, unless the trust managers (including a
majority of the independent trust managers) are provided evidence satisfactory
to
88
<PAGE>
them in their sole discretion that our qualification as a REIT will not be
jeopardized. In addition, our declaration of trust contains restrictions on
transfers of capital stock, as well as provisions that automatically convert
shares of stock into excess securities to the extent that the ownership
otherwise might jeopardize our REIT status. These restrictions, however may not
ensure that we will, in all cases, be able to satisfy the stock ownership
requirements. If we fail to satisfy these stock ownership requirements, except
as provided in the next sentence, our status as a REIT will terminate. However,
if we comply with the rules contained in applicable Treasury Regulations that
require us to ascertain the actual ownership of our shares and we do not know,
or would not have known through the exercise of reasonable diligence, that we
failed to meet the 50% requirement described above, we will be treated as
having met this requirement. See the section below entitled "-- Failure to
Qualify as a REIT" on page 89.
To monitor our compliance with the share ownership requirements, we are
required to and we do maintain records disclosing the actual ownership of
shares of common stock. To do so, we will demand written statements each year
from the record holders of certain percentages of shares in which the record
holders are to disclose the actual owners of the shares (i.e., the persons
required to include in gross income the REIT dividends). A list of those
persons failing or refusing to comply with this demand will be maintained as
part of our records. Stockholders who fail or refuse to comply with the demand
must submit a statement with their tax returns disclosing the actual ownership
of the shares and certain other information.
We currently satisfy, and expect to continue to satisfy, each of these
requirements discussed above. We also currently satisfy, and expect to continue
to satisfy, the requirements that are separately described below concerning the
nature and amounts of our income and assets and the levels of required annual
distributions.
Sources of Gross Income. In order to qualify as a REIT for a particular
year, we also must meet two tests governing the sources of our income -- a 75%
gross income test and a 95% gross income test. These tests are designed to
ensure that a REIT derives its income principally from passive real estate
investments. The Code allows a REIT to own and operate a number of its
properties through wholly-owned subsidiaries which are "qualified REIT
subsidiaries." The Code provides that a qualified REIT subsidiary is not
treated as a separate corporation, and all of its assets, liabilities and items
of income, deduction and credit are treated as assets, liabilities and items of
income of the REIT.
In the case of a REIT which is a partner in a partnership or any other
entity such as a limited liability company that is treated as a partnership for
federal income tax purposes, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership. Also,
the REIT will be deemed to be entitled to its proportionate share of the income
of the partnership. The character of the assets and gross income of the
partnership retains the same character in the hands of the REIT for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, our proportionate share of the assets and items of income of
any partnership in which we own an interest are treated as our assets and items
of income for purposes of applying the requirements described in this
discussion, including the income and asset tests described below.
75% Gross Income Test. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
(1) rents from real property;
(2) interest on loans secured by real property;
(3) gain from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of our business, referred to below as
"dealer property");
(4) income from the operation and gain from the sale of property acquired
in connection with the foreclosure of a mortgage securing that property
("foreclosure property");
(5) distributions on, or gain from the sale of, shares of other qualifying
REITs;
89
<PAGE>
(6) abatements and refunds of real property taxes;
(7) amounts received as consideration for entering into agreements to make
loans secured by real property or to purchase or lease real property;
and
(8) "qualified temporary investment income" (described below).
In evaluating our compliance with the 75% gross income test, as well as the 95%
gross income test described below, gross income does not include gross income
from "prohibited transactions." In general, a prohibited transaction is one
involving a sale of dealer property, not including foreclosure property and not
including certain dealer property we have held for at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property and interest income. Rent from real property
is qualifying income for purposes of the gross income tests only if certain
conditions are satisfied. Rent from real property includes charges for services
customarily rendered to tenants, and rent attributable to personal property
leased together with the real property so long as the personal property rent is
not more than 15% of the total rent received or accrued under the lease for the
taxable year. We do not expect to earn material amounts in these categories.
Rent from real property generally does not include rent based on the income or
profits derived from the property. However, rent based on a percentage of gross
receipt or sales is permitted as rent from real property and we will have
leases where rent is based on a percentage of gross receipt or sales. We
generally do not intend to lease property and receive rentals based on the
tenant's income or profit. Also excluded from "rents from real property" is
rent received from a person or corporation in which we (or any of our 10% or
greater owners) directly or indirectly through the constructive ownership rules
contained in Section 318 and Section 856(d)(5) of the Code, own a 10% or
greater interest.
A third exclusion from qualifying rent income covers amounts received with
respect to real property if we furnish services to the tenants or manage or
operate the property, other than through an "independent contractor" from whom
we do not derive any income. The obligation to operate through an independent
contractor generally does not apply, however, if the services we provide are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the tenant (applying standards that govern in evaluating whether rent from real
property would be unrelated business taxable income when received by a tax-
exempt owner of the property). Further, if the value of the non-customary
service income with respect to a property, valued at no less than 150% of our
direct cost of performing such services, is 1% or less of the total income
derived from the property, then the provision of such non-customary services
shall not prohibit the rental income (except the non-customary service income)
from qualifying as "rents from real property."
We believe that the only material services generally to be provided to
tenants will be those usually or customarily rendered in connection with the
rental of space for occupancy only. We do not intend to provide services that
might be considered rendered primarily for the convenience of the tenants, such
as hotel, health care or extensive recreational or social services.
Consequently, we believe that substantially all of our rental income will be
qualifying income under the gross income tests, and that our provision of
services will not cause the rental income to fail to be included under that
test.
Upon the ultimate sale of our properties, any gains realized also are
expected to constitute qualifying income, as gain from the sale of real
property (not involving a prohibited transaction).
95% Gross Income Test. In addition to earning 75% of our gross income from
the sources listed above, 95% of our gross income for each taxable year must
come either from those sources, or from dividends, interest or gains from the
sale or other disposition of stock or other securities that do not constitute
dealer property. This test permits a REIT to earn a significant portion of its
income from traditional "passive" investment sources that are not necessarily
real estate related. The term "interest" (under both the 75% and 95% tests)
does not include amounts that are based on the income or profits of any person,
unless the computation is based only on a fixed percentage of receipts or
sales.
90
<PAGE>
Failing the 75% or 95% Tests; Reasonable Cause. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their
gross income from active sources, including brokerage commissions or other fees
for services rendered. We may receive certain types of that income. This type
of income will not qualify for the 75% test or 95% test but is not expected to
be significant and that income, together with other nonqualifying income, is
expected to be at all times less than 5% of our annual gross income. While we
do not anticipate that we will earn substantial amounts of nonqualifying
income, if nonqualifying income exceeds 5% of our gross income, we could lose
our status as a REIT. We may establish subsidiaries of which we will hold less
than 10% of the voting stock to hold assets generating non-qualifying income.
The gross income generated by these subsidiaries would not be included in our
gross income. However, dividends we receive from these subsidiaries would be
included in our gross income and qualify for the 95% income test. The ability
to establish such subsidiaries could be adversely impacted by proposals
contained in President Clinton's 2000 Federal Budget Proposal. See the section
below entitled "-- Proposed Legislation" on page 90.
If we fail to meet either the 75% or 95% income tests during a taxable year,
we may still qualify as a REIT for that year if (1) we report the source and
nature of each item of our gross income in our federal income tax return for
that year; (2) the inclusion of any incorrect information in our return is not
due to fraud with intent to evade tax; and (3) the failure to meet the tests is
due to reasonable cause and not to willful neglect. It is not possible,
however, to state whether in all circumstances we would be entitled to the
benefit of this relief provision. For example, if we fail to satisfy the gross
income tests because nonqualifying income that we intentionally accrue or
receive causes us to exceed the limits on nonqualifying income, the IRS could
conclude that our failure to satisfy the tests was not due to reasonable cause.
If these relief provisions do not apply to a particular set of circumstances,
we will not qualify as a REIT. As discussed below, even if these relief
provisions apply, and we retain our status as a REIT, a tax would be imposed
with respect to our non-qualifying income. We would be subject to a 100% tax
based on the greater of the amount by which we fail either the 75% or 95%
income tests for that year. See "-- Taxation as a REIT" below on page 88.
Prohibited Transaction Income. Any gain that we realize on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business (including our share of any such
gain realized by any subsidiary partnerships), will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. This prohibited
transaction income may also adversely affect our ability to satisfy the income
tests for qualification as a REIT. Under existing law, whether property is held
as inventory or primarily for sale to customers in the ordinary course of a
trade or business depends on all the facts and circumstances surrounding the
particular transaction. We intend to hold our and our subsidiary partnerships
intend to hold their properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing and owning
properties, and to make occasional sales of the properties as are consistent
with their investment objectives. The IRS may contend, however, that one or
more of these sales is subject to the 100% penalty tax.
Character of Assets Owned. At the close of each calendar quarter of our
taxable year, we also must meet two tests concerning the nature of our
investments. First, at least 75% of the value of our total assets generally
must consist of real estate assets, cash, cash items (including receivables)
and government securities. For this purpose, "real estate assets" include
interests in real property, interests in loans secured by mortgages on real
property or by certain interests in real property, shares in other REITs and
certain options, but excluding mineral, oil or gas royalty interests. The
temporary investment of new capital in debt instruments also qualifies under
this 75% asset test, but only for the one-year period beginning on the date we
receive the new capital. Second, although the balance of our assets generally
may be invested without restriction, we will not be permitted to own (1)
securities of any one non-governmental issuer that represent more than 5% of
the value of our total assets or (2) more than 10% of the outstanding voting
securities of any single issuer. A REIT, however, may own 100% of the stock of
a qualified REIT subsidiary, in which case the assets, liabilities and items of
income, deduction and credit of the subsidiary are treated as those of the
REIT. In evaluating a REIT's assets, if the REIT invests in a partnership, it
is deemed to own its proportionate share of the assets of the partnership.
91
<PAGE>
After initially meeting the asset tests at the close of any quarter, we will
not lose our status as a REIT for failure to satisfy the asset tests at the end
of a later quarter solely by reason of changes in asset values. If we fail to
satisfy the asset tests because we acquire securities or other property during
a quarter, we can cure this failure by disposing of sufficient nonqualifying
assets within 30 days after the close of that quarter. We intend to take such
action within the 30 days after the close of any quarter as may be required to
cure any noncompliance. If we fail to cure noncompliance with the asset tests
within this time period, we would cease to qualify as a REIT.
Annual Distributions to Stockholders. To maintain our REIT status, we
generally must distribute as a dividend to our stockholders in each taxable
year at least 95% of our net ordinary income. Capital gain is not required to
be distributed. More precisely, we must distribute an amount equal to (1) 95%
of the sum of (a) our "REIT Taxable Income" before deduction of dividends paid
and excluding any net capital gain and (b) any net income from foreclosure
property less the tax on such income, minus (2) certain limited categories of
"excess noncash income," including, income attributable to leveled stepped
rents, cancellation of indebtedness and original issue discount income. REIT
Taxable Income is defined to be the taxable income of the REIT, computed as if
it were an ordinary corporation, with certain modifications. For example, the
deduction for dividends paid is allowed, but neither net income from
foreclosure property, nor net income from prohibited transactions, is included.
In addition, the REIT may carry over, but not carry back, a net operating loss
for 20 years following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar quarter
of the prior year and were payable to stockholders of record on a date during
the last calendar quarter of that prior year are treated as paid on December 31
of the prior year. Other dividends declared before the due date of our tax
return for the taxable year, including extensions, also will be treated as paid
in the prior year if they are paid (1) within 12 months of the end of that
taxable year and (2) no later than our next regular distribution payment.
Dividends that are paid after the close of a taxable year that do not qualify
under the rule governing payments made in January (described above) will be
taxable to the stockholders in the year paid, even though we may take them into
account for a prior year. A nondeductible excise tax equal to 4% will be
imposed for each calendar year to the extent that dividends declared and
distributed or deemed distributed before December 31 are less than the sum of
(a) 85% of our "ordinary income" plus (b) 95% of our capital gain net income
plus (c) any undistributed income from prior periods.
To be entitled to a dividends paid deduction, the amount distributed by a
REIT must not be preferential. For example, every stockholder of the class of
stock to which a distribution is made must be treated the same as every other
stockholder of that class, and no class of stock may be treated otherwise than
in accordance with its dividend rights as a class.
We will be taxed at regular corporate rates to the extent that we retain any
portion of our taxable income. For example, if we distribute only the required
95% of our taxable income, we would be taxed on the retained 5%. Under certain
circumstances we may not have sufficient cash or other liquid assets to meet
the distribution requirement. This could arise because of competing demands for
our funds, or due to timing differences between tax reporting and cash receipts
and disbursements (i.e., income may have to be reported before cash is
received, or expenses may have to be paid before a deduction is allowed).
Although we do not anticipate any difficulty in meeting this requirement, no
assurance can be given that necessary funds will be available. In the event
these circumstances do occur, then in order to meet the 95% distribution
requirement, we may cause our operating partnership to arrange for short-term,
or possibly long-term, borrowings to permit the payment of required dividends.
If we fail to meet the 95% distribution requirement because of an adjustment
to our taxable income by the IRS, we may be able to cure the failure
retroactively by paying a "deficiency dividend," as well as applicable interest
and penalties, within a specified period.
92
<PAGE>
Taxation as a REIT
As a REIT, we generally will not be subject to corporate income tax to the
extent we currently distribute our REIT Taxable Income to our stockholders.
This treatment effectively eliminates the "double taxation" imposed on
investments in most corporations. Double taxation refers to taxation that
occurs once at the corporate level when income is earned and once again at the
stockholder level when such income is distributed. We generally will be taxed
only on the portion of our taxable income that we retain, which will include
any undistributed net capital gain, because we will be entitled to a deduction
for dividends paid to stockholders during the taxable year. A dividends paid
deduction is not available for dividends that are considered preferential
within any given class of shares or as between classes except to the extent
that class is entitled to a preference. We do not anticipate that we will pay
any of those preferential dividends. Because excess stock will represent a
separate class of outstanding shares, the fact that those shares will not be
entitled to dividends should not adversely affect our ability to deduct our
dividend payments.
Even as a REIT, we will be subject to tax in certain circumstances as
follows:
(1) we would be subject to tax on any income or gain from foreclosure
property at the highest corporate rate (currently 35%). Foreclosure
property is generally defined as property acquired through foreclosure
or after a default on a loan secured by the property or a lease of the
property;
(2) a confiscatory tax of 100% applies to any net income from prohibited
transactions which are, in general, certain sales or other dispositions
of property held primarily for sale to customers in the ordinary course
of business;
(3) if we fail to meet either the 75% or 95% source of income tests
described above, but still qualify for REIT status under the reasonable
cause exception to those tests, a 100% tax would be imposed equal to
the amount obtained by multiplying (a) the greater of the amount, if
any, by which it failed either the 75% income test or the 95% income
test, times (b) a fraction intended to reflect our profitability;
(4) we will be subject to the alternative minimum tax on items of tax
preference, excluding items specifically allocable to our stockholders;
(5) if we should fail to distribute with respect to each calendar year at
least the sum of (a) 85% of our REIT ordinary income for that year, (b)
95% of our REIT capital gain net income for that year, and (c) any
undistributed taxable income from prior years, we would be subject to a
4% excise tax on the excess of the required distribution over the
amounts actually distributed;
(6) under regulations that are to be promulgated, we also may be taxed at
the highest regular corporate tax rate on any built-in gain
attributable to assets that we acquire in certain tax-free corporate
transactions, to the extent the gain is recognized during the first ten
years after we acquire those assets. Built-in gain is the excess of (a)
the fair market value of the asset over (b) our adjusted basis in the
asset, in each case determined as of the beginning of the ten-year
recognition period. The results described in this paragraph with
respect to the recognition of built-in gain assume that we will make an
election pursuant to IRS Notice 88-19 and that the availability or
nature of such election is not modified as proposed in President
Clinton's 2000 Federal Budget Proposal. See the section below entitled
"-- Proposed Legislation" on page 90; and
(7) we will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
Failure to Qualify as a REIT
For any taxable year in which we fail to qualify as a REIT and certain
relief provisions do not apply, we would be taxed at regular corporate rates,
including alternative minimum tax rates on all of our taxable income.
Distributions to our stockholders would not be deductible in computing that
taxable income, and distributions would no longer be required to be made. Any
corporate level taxes generally would reduce the amount of cash
93
<PAGE>
available for distribution to our stockholders and, because the stockholders
would continue to be taxed on the distributions they receive, the net after tax
yield to the stockholders from their investment likely would be reduced
substantially. As a result, failure to qualify as a REIT during any taxable
year could have a material adverse effect on an investment in our common stock.
If we lose our REIT status, unless certain relief provisions apply, we would
not be eligible to elect REIT status again until the fifth taxable year which
begins after the taxable year during which our election was terminated. It is
not possible to state whether in all circumstances we would be entitled to this
statutory relief. In addition, President Clinton's 2000 Federal Budget Proposal
contains a provision which, if enacted in its present form, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT in taxable years beginning after
January 1, 2000. If enacted, this provision could effectively preclude us from
re-electing to be taxed as a REIT following a loss of REIT status. See the
section below entitled "-- Proposed Legislation" on page 90.
Taxation of Taxable U.S. Stockholders
Except as discussed below, distributions generally will be taxable to
taxable U.S. stockholders as ordinary income to the extent of our current or
accumulated earnings and profits. We may generate cash in excess of our net
earnings. If we distribute cash to stockholders in excess of our current and
accumulated capital earnings and profits (other than as a capital gain
dividend), the excess cash will be deemed to be a return of capital to each
stockholder to the extent of the adjusted tax basis of the stockholder's
shares. Distributions in excess of the adjusted tax basis will be treated as
gain from the sale or exchange of the shares of stock. A stockholder who has
received a distribution in excess of current and our accumulated earnings and
profits may, upon the sale of the shares, realize a higher taxable gain or a
smaller loss because the basis of the shares as reduced will be used for
purposes of computing the amount of the gain or loss. Distributions we make,
whether characterized as ordinary income or as capital gains, are not eligible
for the dividends received deduction for corporations. For purposes of
determining whether distributions to holders of common stock are out of current
or accumulated earnings and profits, our earnings and profits will be allocated
first to the outstanding preferred stock, if any, and then to the common stock.
Dividends we declare in October, November, or December of any year and
payable to a stockholder of record on a specified date in any of these months
shall be treated as both paid by us and received by the stockholder on December
31 of that year, provided we actually pay the dividend on or before January 31
of the following calendar year. Stockholders may not include in their own
income tax returns any of our net operating losses or capital losses.
Distributions that we properly designate as capital gain dividends will be
taxable to taxable U.S. stockholders as gains from the sale or disposition of a
capital asset to the extent that they do not exceed our actual net capital gain
for the taxable year. Depending on the period of time the tax characteristics
of the assets which produced these gains, and on certain designations, if any,
which we may make, these gains may be taxable to non-corporate U.S.
stockholders at a 20% or 25% rate. U.S. stockholders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income.
We may elect to retain, rather than distribute as a capital gain dividend,
our net long-term capital gains. If we make this election, we would pay tax on
our retained net long-term capital gains. In addition, to the extent we
designate, a U.S. stockholder generally would:
. include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls;
. be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. stockholder's long-term capital
gains;
. receive a credit or refund for the amount of tax deemed paid by it;
94
<PAGE>
. increase the adjusted basis of its common stock by the difference between
the amount of includable gains and the tax deemed to have been paid by
it; and
. in the case of a U.S. stockholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
Distributions we make and gain arising from the sale or exchange by a U.S.
stockholder of our shares will not be treated as income from a passive
activity, within the meaning of Section 469 of the Code, since income from a
passive activity generally does not include dividends and gain attributable to
the disposition of property that produces dividends. As a result, U.S.
stockholders subject to the passive activity rules will generally be unable to
apply any "passive losses" against this income or gain. Distributions we make,
to the extent they do not constitute a return of capital, generally will be
treated as investment income for purposes of computing the investment interest
limitation. Gain arising from the sale or other disposition of our shares,
however, will not be treated as investment income under certain circumstances.
Generally, gain or loss realized by a stockholder upon the sale of common
stock will be reportable as capital gain or loss. If a stockholder receives a
long-term capital gain dividend from us and has held the shares of stock for
six months or less, any loss incurred on the sale or exchange of the shares is
treated as a long-term capital loss to the extent of the corresponding long-
term capital gain dividend received.
In any year in which we fail to qualify as a REIT, the stockholders
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends, corporate stockholders will qualify for the dividends received
deduction and the stockholders will not be required to report any share of our
tax preference items.
Proposed Legislation
The rules dealing with Federal income taxation are constantly under review
by Congress, the IRS and the Treasury Department. For example, on February 1,
1999, President Clinton released a proposed budget for fiscal year 2000. The
budget proposal contained a variety of proposed income tax changes, three of
which pertain to REITs. First, under current law, REITs may not own more than
10% of the voting stock of a regular corporation. Under the proposal, they also
would not be permitted to own more than 10% of the value of all classes of
stock of a corporation unless the corporation qualified as a "qualified
business subsidiary" or a "qualified independent contractor subsidiary." Even
if it did so qualify, the proposal would disallow a deduction for all interest
payments on debt to, or guaranteed by, a REIT that owns stock of such entities.
Second, a new restriction would be imposed on REITs, prohibiting any one person
other than a REIT from owning more than 50% of the total combined voting power
of all voting stock or more than 50% of the total value of shares of all
classes of stock of the REIT. Current law already contains ownership
restrictions applicable to individuals; this new limitation would affect owners
other than individuals. This proposal would be effective for entities electing
REIT status for taxable years beginning on or after the date of first committee
action. Third, a regular C corporation with a fair market value of more than
$5,000,000 which elects REIT status or merges into a REIT would be treated as
if it had liquidated and distributed all its assets to its shareholders, and
its shareholders had then contributed the assets to the electing or existing
REIT. This deemed liquidation would cause the regular corporation to be taxed
as if it had sold its assets for fair market value and would cause its
shareholders to be taxed as if they had sold their stock for fair market value.
The proposal would be effective for elections that are first effective for a
taxable year beginning after January 1, 2000, and for mergers into REITs after
December 31, 1999. Changes to the Federal laws and interpretations thereof
could adversely affect the tax consequences of an investment in our common
shares. We cannot predict whether, when, in what forms, or with what effective
dates, these or any other provisions could become effective.
Partially in response to the first proposal described above, legislation has
been introduced in the House of Representatives and the Senate proposing the
adoption of the Real Estate Investment Modernization Act of 1999. This proposed
legislation, if enacted, also would prohibit a REIT from owning more than 10%
of the
95
<PAGE>
total voting power and more than 10% of the total value of the outstanding
securities of any one issuer, unless that issuer constitutes a "taxable REIT
subsidiary." However, the definition of a taxable REIT subsidiary contained in
this proposed legislation is broader than the budget proposal definition of a
qualified business subsidiary or a qualified independent contractor subsidiary.
Changes to the federal laws and interpretations thereof could adversely affect
the tax consequences of an investment in us. We cannot predict whether, when,
in what forms, or with what effective dates, these or any other provisions
could become effective.
Backup Withholding
We will report to our stockholders and the IRS the amount of dividends paid
during each calendar year and the amount of tax withheld, if any. If a
stockholder is subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that stockholder a tax of 31%. These
rules may apply (1) when a stockholder fails to supply a correct taxpayer
identification number, (2) when the IRS notifies us that the stockholder is
subject to the rules or has furnished an incorrect taxpayer identification
number, or (3) in the case of corporations or others within certain exempt
categories, when they fail to demonstrate that fact when required. A
stockholder that does not provide a correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount withheld as backup
withholding may be credited against the stockholder's federal income tax
liability. We also may be required to withhold a portion of capital gain
distributions made to stockholders who fail to certify their non-foreign
status.
The United States Treasury has recently issued final regulations (the "Final
Regulations") regarding the withholding and information reporting rules
discussed above. In general, the Final Regulations do not alter the substantive
withholding and information reporting requirements but unify current
certification procedures and clarify reliance standards. The Final Regulations
are generally effective for payments made on or after January 1, 2000, subject
to certain transition rules. Prospective investors should consult their own tax
advisors concerning the adoption of the Final Regulations and the potential
effect on their ownership of common stock.
Taxation of Tax-Exempt Entities
In general, a tax-exempt entity that is a stockholder will not be subject to
tax on distributions or gain realized on the sale of shares. In Revenue Ruling
66-106, the IRS confirmed that a REIT's distributions to a tax-exempt
employees' pension trust did not constitute unrelated business taxable income
(UBTI). A tax-exempt entity may be subject to UBTI, however, to the extent that
it has financed the acquisition of its shares with "acquisition indebtedness"
within the meaning of the Code. The Revenue Reconciliation Act of 1993 has
modified the rules for tax-exempt employees' pension and profit sharing trusts
which qualify under Section 401(a) of the Code and are exempt from tax under
Section 501(a) of the Code ("qualified trusts") for tax years beginning after
December 31, 1993. In determining the number of stockholders a REIT has for
purposes of the "50% test" described above under "-- REIT Qualification" on
page , generally, any stock held by a qualified trust will be treated as
held directly by its beneficiaries in proportion to their interests in the
trust and will not be treated as held by the trust.
A qualified trust owning more than 10% of a REIT may be required to treat a
percentage of dividends from the REIT as UBTI. The percentage is determined by
dividing the REIT's gross income (less direct expenses related thereto) derived
from an unrelated trade or business for the year (determined as if the REIT
were a qualified trust) by the gross income of the REIT for the year in which
the dividends are paid. However, if this percentage is less than 5%, dividends
are not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a
REIT because of the change in the 50% test discussed above and if the trust is
"predominantly held" by qualified trusts. A REIT is predominantly held by
qualified trusts if at least one pension trust owns more than 25% of the value
of the REIT or a group of pension trusts each owning more than 10% of the value
of the REIT collectively own more than 50% of the value of the REIT. We do not
currently meet either of these requirements.
96
<PAGE>
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt
from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and
(c)(20) of the Code, respectively, income from an investment in our capital
stock will constitute UBTI unless the organization is able to deduct an amount
properly set aside or placed in reserve for certain purposes so as to offset
the UBTI generated by the investment in our capital stock. These prospective
investors should consult their own tax advisors concerning the "set aside" and
reserve requirements.
Taxation of Foreign Investors
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders are complex and no attempt will be made herein to provide more
than a summary of such rules. Prospective foreign stockholders should consult
with their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in shares of common stock,
including any reporting requirements, as well as the tax treatment of such an
investment under the laws of their home country.
Dividends that are not attributable to gain from any sales or exchanges we
make of United States real property interests and which we do not designate as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of our current or accumulated earnings and
profits. Those dividends ordinarily will be subject to a withholding tax equal
to 30% of the gross amount of the dividend unless an applicable tax treaty
reduces or eliminates that tax. However, if income from the investment in the
common stock is treated as effectively connected with the foreign stockholder's
conduct of a United States trade or business, the foreign stockholder generally
will be subject to a tax at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to those dividends, and may also be subject
to the 30% branch profits tax in the case of a stockholder that is a foreign
corporation. For withholding tax purposes, we are currently required to treat
all distributions as if made out of our current and accumulated earnings and
profits and thus we intend to withhold at the rate of 30%, or a reduced treaty
rate if applicable, on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a foreign stockholder unless (1)
the foreign stockholder files on IRS Form 1001 claiming that a lower treaty
rate applies or (2) the foreign stockholder files an IRS Form 4224 claiming
that the dividend is effectively connected income.
Under the Final Regulations, generally effective for distributions on or
after January 1, 2000, we would not be required to withhold at the 30% rate on
distributions we reasonably estimate to be in excess of our current and
accumulated earnings and profits. Dividends in excess of our current and
accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of those shares. To the extent that
those dividends exceed the adjusted basis of a foreign stockholder's shares of
stock, they will give rise to tax liability if the foreign stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
shares, as described below. If it cannot be determined at the time a dividend
is paid whether or not a dividend will be in excess of current and accumulated
earnings and profits, the dividend will be subject to such withholding. We do
not intend to make quarterly estimates of that portion of dividends that are in
excess of earnings and profits, and, as a result, all dividends will be subject
to such withholding. However, the foreign stockholder may seek a refund of
those amounts from the IRS.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from our sales or exchanges of United States real property
interests will be taxed to a foreign stockholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Under FIRPTA,
those dividends are taxed to a foreign stockholder as if the gain were
effectively connected with a United States business. Foreign stockholders would
thus be taxed at the normal capital gain rates applicable to U.S. stockholders
subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals. Also, dividends subject to
FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
foreign stockholder not entitled to treaty exemption. We are required by the
Code and applicable
97
<PAGE>
Treasury Regulations to withhold 35% of any dividend that could be designated
as a capital gain dividend. This amount is creditable against the foreign
stockholder's FIRPTA tax liability.
Gain recognized by a foreign stockholder upon a sale of shares generally
will not be taxed under FIRPTA if we are a "domestically controlled REIT,"
defined generally as a REIT in which at all times during a specified testing
period less than 50% in value of the shares was held directly or indirectly by
foreign persons. It is currently anticipated that we will be a "domestically
controlled REIT," and therefore the sale of shares will not be subject to
taxation under FIRPTA. Because the shares of common stock will be publicly
traded, however, no assurance can be given that we will remain a "domestically
controlled REIT." However, gain not subject to FIRPTA will be taxable to a
foreign stockholder if (1) investment in the shares of common stock is
effectively connected with the foreign stockholder's United States trade or
business, in which case the foreign stockholder will be subject to the same
treatment as U.S. stockholders with respect to that gain, and may also be
subject to the 30% branch profits tax in the case of a corporate foreign
stockholder, or (2) the foreign stockholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% withholding tax on the individual's
capital gains. If we were not a domestically controlled REIT, whether or not a
foreign stockholder's sale of shares of common stock would be subject to tax
under FIRPTA would depend on whether or not the shares of common stock were
regularly traded on an established securities market (such as the NYSE) and on
the size of selling foreign stockholder's interest in our capital stock. If the
gain on the sale of shares were to be subject to taxation under FIRPTA, the
foreign stockholder will be subject to the same treatment as U.S. stockholders
with respect to that gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of shares of common stock may be required to withhold 10% of
the gross purchase price.
State and Local Taxes
We, and our stockholders, may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in our capital stock.
AmREIT AND ITS BUSINESS
Description of AmREIT
AmREIT was organized on August 17, 1993, as a Maryland business corporation
and operates as a real estate investment trust (REIT) under the federal income
tax laws. AmREIT acquires, owns and manages a diversified portfolio of
freestanding and specialty retail properties leased to national and regional
retail tenants. Each of AmREIT's properties is initially leased under a full-
credit, long-term net lease, under which the tenant is responsible for the
operation costs of the property, including taxes, insurance and maintenance
costs. As of June 30, 1999, AmREIT owned a total of 16 properties. The
aggregate purchase prices of these 16 properties are approximately $24,251,000
and total annualized rents are approximately $2,616,000, with an annual
capitalization rate of approximately 10.8% based on purchase price. These 16
properties are leased to a total of nine different tenants and are located in
eight states. AmREIT's properties contain an aggregate of approximately 193,920
square feet of gross leaseable area. AmREIT's principal executive offices are
located at 8 Greenway Plaza, Suite 824, Houston, Texas 77046, and its telephone
number is (713) 850-1400.
AmREIT intends to continue its focus on acquiring frontage retail properties
and may acquire multi-structure properties leased to two or more unrelated
tenants.
Formerly, substantially all aspects of AmREIT's business and affairs were
administered under the direction of AmREIT's board of directors by the advisor,
American Assets Advisers Realty Corporation. The
98
<PAGE>
advisor provided administrative, acquisition, development, management and
operational services to AmREIT pursuant to an Omnibus Services Agreement. The
terms and conditions of the Omnibus Services Agreement are described under
"MANAGEMENT -- Advisor Acquisition" below on page 110. AmREIT had only one
part-time employee, Mr. H. Kerr Taylor, AmREIT's chairman and chief executive
officer. Mr. Taylor also served in similar capacities to the advisor and each
of its affiliates. Mr. Taylor was the sole stockholder, the principal officer
and a director of the advisor. AmREIT's objective is to be an efficient and
competitive real estate operating company focusing on a diversified portfolio
of frontage retail properties located throughout the United States.
AmREIT's Investment Objectives
AmREIT's principal investment objectives are:
. To provide regular dividends to stockholders.
. To provide stockholders with long-term appreciation on their investment.
. To conserve stockholders' capital through a diversified portfolio of
quality real estate.
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 AmREIT.
AmREIT may commit to purchase properties prior to, during or upon their
physical completion at agreed prices or pursuant to pricing formulas. To the
extent possible, AmREIT intends to diversify the type and location of its
properties.
Employees
AmREIT currently has 11 full-time employees and retains the services of five
managerial consultants on an as-needed basis.
Competition
AmREIT's properties are predominantly located in the southern half of the
United States and, in particular, in the Houston and Dallas metropolitan areas.
All of AmREIT's properties are located in areas that include competing
properties. The number of competitive properties in a particular area could
have a material adverse effect on both AmREIT's ability to lease space at any
of its properties or at any newly developed or acquired properties and the
rents charged. AmREIT may be competing with owners, including, but not limited
to, other REITs, insurance companies and pension funds that have greater
resources than AmREIT. There is no dominant competitor in any of AmREIT's
markets.
Properties
Description. AmREIT currently owns 16 properties consisting of single
structure, single tenant retail properties. Each of the properties is subject
to general competitive conditions in the area of its location, including
competition for replacement tenants with new and sometimes better located
properties at prevailing rental rates which are dependent on local economic and
financial conditions. To date, AmREIT has not sold any of its properties.
Information concerning the properties owned by AmREIT as of June 30, 1999, is
presented in the following tables:
99
<PAGE>
AmREIT Property Information
<TABLE>
<CAPTION>
Current Lease
Date Purchase Percent Leasable Annual Expiration
Property (Location) Acquired Price Owned(1) Area Rent Date
------------------- -------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Radio Shack
(Dallas, TX)........... 06/15/94 $ 1,062,000 100.00% 5,200 $ 108,900 11/30/06
Church's
(Atlanta, GA).......... 07/22/94 790,000 100.00% 2,200 90,796 07/22/14
Wherehouse Entertainment
(Independence, MO)..... 11/14/94 850,000 54.84%(2) 14,047 93,517 04/30/04
OneCare
(Houston, TX).......... 07/01/95 1,680,000 100.00% 14,000 197,341 09/30/05
Wherehouse Entertainment
(Wichita, KS).......... 09/12/95 867,000 51%(3) 15,158 95,864 12/31/04
Just For Feet
(Tucson, AZ)........... 09/11/96 1,739,000 51.9%(4) 19,550 197,719 09/30/16
Bank United
(The Woodlands, TX).... 09/23/96 255,000 51%(3) 3,685 27,569 09/30/11
Bank United
(Houston, TX).......... 12/11/96 828,000 100.00% 3,685 88,965 12/31/11
Just For Feet
(Baton Rouge, LA)...... 06/09/97 1,431,000 51%(3) 20,575 153,275 05/15/12
Hollywood Video
(Lafayette, LA)........ 10/31/97 838,000 74.58%(3) 7,488 100,466 09/24/12
Hollywood Video
(Ridgeland, MS)........ 12/30/97 1,208,000 100.00% 7,488 138,453 12/22/12
OfficeMax
(Lake Jackson, TX)..... 02/20/98 2,240,000 100.00% 23,500 230,300 04/01/13
OfficeMax
(Dover, DE)............ 04/14/98 2,548,000 100.00% 23,500 264,679 04/30/13
Just For Feet
(The Woodlands, TX).... 06/03/98 3,542,000 100.00% 16,922 371,914 05/01/13
Just For Feet
(Sugar Land, TX)....... 07/01/98 3,635,000 100.00% 16,922 381,705 07/01/13
Don Pablos
(Peachtree City, GA)... 12/18/98 738,000 100.00% Land Lease 75,000 12/17/08
----------- ---------- ----------
TOTAL................... $24,251,000 193,920 $2,616,463
</TABLE>
- --------
(1) Amounts reflect percentage of property owned.
(2) Owned in joint venture with FUND X.
(3) Owned in joint venture with FUND XI.
(4) Owned in joint venture with FUND X and FUND XI.
100
<PAGE>
Leases. Each property is under lease to a regional or national tenant. When
entered into, each lease was long-term. Each lease is a net lease requiring the
tenant to pay all or substantially all expenses related to operation of the
property. The following table sets forth information concerning AmREIT's 5
largest tenants.
<TABLE>
<CAPTION>
Current Percent of
Scheduled Total
Annual Scheduled
Rent Annual Rents
---------- ------------
<S> <C> <C>
Just For Feet, Inc................................ $1,104,613 42.22%
OfficeMax, Inc.................................... 494,979 18.92%
Hollywood Entertainment Corp...................... 238,919 9.13%
OneCare Health Industries, Inc.................... 197,341 7.54%
Wherehouse Entertainment.......................... 189,381 7.24%
Other Tenants..................................... 391,230 14.95%
---------- ------
TOTAL........................................... $2,616,463 100.00%
========== ======
</TABLE>
The following table summarizes the minimum future rentals, exclusive of any
renewals, under AmREIT's operating and direct financing leases in existence at
December 31,1998.
<TABLE>
<S> <C>
1999.......................................................... $ 3,193,642
2000.......................................................... 3,221,895
2001.......................................................... 3,237,593
2002.......................................................... 3,292,558
2003.......................................................... 3,312,140
2004-2016..................................................... 26,823,927
</TABLE>
Just For Feet, Inc. (JFFI) operates a Just For Feet discount shoe store on
its leased properties as part of its national chain of retail stores which sell
athletic footwear, athletic apparel and related items. JFFI reported
consolidated revenues in excess of $774 million and $478 million for the years
ended January 31, 1999 and 1998, respectively. JFFI had consolidated net
earnings of $26.6 million and $21.4 million, respectively, for these periods.
JFFI's current assets exceeded its current liabilities at January 31, 1999 by
$316 million and its total assets exceeded its total liabilities on such date
by more than $325 million.
OfficeMax, Inc. operates an OfficeMax discount office supply store on each
of its leased properties as part of its nationwide network of OfficeMax stores.
OfficeMax, Inc. had total consolidated revenues of more than $4.3 billion and
$3.7 billion for the years ended January 24, 1999 and 1998, respectively.
OfficeMax, Inc. had consolidated net earnings of in excess of $48 million and
$89 million for the years ended January 24, 1999 and 1998, respectively.
OfficeMax, Inc.'s current assets exceed its current liabilities at January 24,
1999 by more than $501 million and total assets on that date exceeded total
liabilities by more than $1.1 billion.
Debt and Credit Facilities
In November 1998, AmREIT entered into an unsecured credit facility, which is
used to provide funds for the acquisition of properties and working capital,
and repaid all amounts outstanding under AmREIT's prior credit facility. Under
the unsecured facility, which has a one year term, AmREIT may borrow up to $30
million subject to certain covenants such as the value of unencumbered assets.
The unsecured facility contains covenants which, among other restrictions,
require AmREIT to maintain a minimum net worth, a maximum leverage ratio, and
specified interest coverage and fixed charge coverage ratios. The unsecured
facility bears interest at an annual rate of LIBOR plus a spread ranging from
1.625% to 2.150%, set quarterly depending on AmREIT's leverage ratio. AmREIT's
current interest rate on the unsecured facility is 7.2%.
101
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AmREIT
AmREIT is a fully integrated, self-administered real estate investment
trust. AmREIT 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
major retail businesses and to hold the properties with the expectation of
equity appreciation producing a steadily rising income stream for its
shareholders. Through a wholly-owned subsidiary, AmREIT also provides advisory
services to eleven real estate limited partnerships.
On June 5, 1998 the Company acquired its adviser, American Asset Advisers
Realty Corporation ("AAA"), which was owned by Mr. H. Kerr Taylor, and became a
self-administered and self-managed real estate investment trust. Historically,
the Company did not have a large enough asset base to provide the economies of
scale needed to efficiently support the extensive general and administrative
expenses of an in-house management team. As a result, AAA incurred the full
expense of a management and acquisition team while receiving advisory and
acquisition fees. Due to the Company's historical and projected growth,
management and the independent board of directors believed that the
efficiencies derived from being externally advised had diminished and that it
would be more cost effective to become self-administered.
The adviser acquisition agreement provided for the merger of AAA into a
wholly owned subsidiary of the Company pursuant to which all of the outstanding
common stock of AAA was exchanged for up to 900,000 shares (the "Share
Consideration") of the Company's common stock. On June 5, 1998, 213,260 shares
were issued and up to 686,740 shares will be issuable based on the amount of
additional capital raised by the Company, in an amount which, when added to the
Share Consideration previously issued, does not exceed 9.8% of the total number
of the Company's common shares outstanding. In the period that additional
shares are issued, the Company will recognize expense based on the value of the
shares issued.
Liquidity and Capital Resources
Cash flow from operations has been the principal source of capital to fund
AmREIT's ongoing operations. AmREIT's issuance of common stock and the use of
AmREIT's credit facility have been the principal sources of capital required to
fund its growth.
In order to continue to expand and develop its portfolio of properties and
other investments, AmREIT intends to finance future acquisitions and growth
through the most advantageous sources of capital available to AmREIT at the
time. Such capital sources may include proceeds from public or private
offerings of AmREIT's debt or equity securities, secured or unsecured
borrowings from banks or other lenders, or the disposition of assets, as well
as undistributed funds from operations.
AmREIT's leases typically provide that the tenant bears responsibility for
substantially all property costs and expenses associated with ongoing
maintenance and operation, including utilities, property taxes and insurance.
In addition, seven of AmREIT's leases provide that the tenant is responsible
for roof and structural repairs. Nine of AmREIT's properties are subject to
leases under which AmREIT retains responsibility for roof and structural
repairs associated with the property. Because many of the properties which are
subject to leases that place these responsibilities on AmREIT are recently
constructed, management anticipates that capital demands to meet obligations
with respect to these properties will be minimal for the foreseeable future and
can be met with cash flow from operating results and working capital. AmREIT
may be required to use bank borrowing or other sources of capital in the event
of unforeseen significant capital expenditures.
The initial Capitalization of AmREIT, Inc., formerly American Asset Advisers
Trust, Inc., on August 17, 1993 was the issuance of 20,001 shares of stock for
$200,010 to American Asset Advisers Realty Corporation, AmREIT's previous
advisor. On March 17, 1994, AmREIT commenced an offering of 2,000,000 shares of
common stock, together with 1,000,000 warrants. Until the completion of the
offering in March 1996, the
102
<PAGE>
securities were offered on the basis of two shares of common stock and one
warrant for a total purchase price of $20.00. The shares and warrants are
separately transferable by an investor. Each warrant entitled the holder to
purchase one share for $9.00 until March 15, 1998. The offering period for the
initial public offering terminated on March 15, 1996 with gross proceeds
totaling $10,082,520 (1,008,252 shares). In addition, $515,844 (57,316 shares)
was received from the exercise of the warrants. On June 18, 1996, AmREIT
commenced a follow-on offering of up to $29,250,000 (2,853,659 shares) of
additional shares of its common stock. The offering terminated on May 22, 1998
with gross proceeds totaling $10,827,300 (1,056,946 shares).
In November 1998, AmREIT entered into an unsecured credit facility with a
borrowing capacity up to $30 million, subject to certain covenants such as the
value of unencumbered assets, through November 1999. The credit facility
contains covenants which, among other restrictions, require AmREIT to maintain
a minimum net worth, a maximum leverage ratio, and specified interest coverage
and fixed charge coverage ratios. The credit facility bears interest at an
annual rate of LIBOR plus a spread ranging from 1.625% to 2.150%, set quarterly
depending on AmREIT's leverage ratio. As of June 30, 1999, $14,380,111 was
outstanding under the credit facility. These funds were used to acquire
properties.
In March 1999, AmREIT entered into a ten year mortgage note payable with NW
L.L.C. for $1,000,000 with $999,379 being outstanding at June 30, 1999. The
interest rate is fixed at 8.375% with payments of principal and interest due
monthly. The note matures March 1, 2009. The note is collateralized by a first
lien mortgage on property with an aggregate carrying value of approximately
$1,253,706, net of $32,148 of accumulated depreciation.
As of June 30, 1999, AmREIT had acquired 10 properties directly and six
properties through joint ventures with entities with common management and had
invested $27,421,942, exclusive of any minority interests, including certain
acquisition expenses related to AmREIT's investment in these properties. These
expenditures resulted in a corresponding decrease in AmREIT's liquidity.
Until AmREIT acquires properties, proceeds are held in short-term, highly
liquid investments which AmREIT believes to have appropriate safety of
principal. This investment strategy has allowed, and continues to allow, high
liquidity to facilitate AmREIT's use of these funds to acquire properties at
such time as properties suitable for acquisition are located. At June 30, 1999,
AmREIT's cash and cash equivalents totaled $1,204,876.
As of June 30, 1999, the Company is committed to incur additional costs of
approximately $4,466,000, not to exceed $4,761,000, in connection with
properties under development. The Company intends to fund these commitments
through a combination of existing cash, proceeds from payment of notes
receivable of approximately $1,800,000 and by utilizing the
Company's unsecured credit facility.
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
AmREIT properties. These factors, however, also may have an adverse impact on
the operating margins of the tenants of the properties.
Results of Operations
Comparison of the Six Months Ended June 30, 1999 to June 30, 1998:
During the six months ended June 30, 1999 and 1998, the Company owned and
leased 16 and 14 properties, respectively. During the six months ended June 30,
1999 and 1998, the Company earned $1,748,767 and $1,133,460, respectively, in
rental income from operating leases and earned income from direct financing
leases. This 54 percent increase in rental income and earned income from direct
financing leases is primarily due to rental income earned on the two additional
properties owned during 1999.
103
<PAGE>
During the six months ended June 30, 1999 and 1998, the Company's expenses
were $1,677,970 and $2,991,757, respectively. The $1,313,787 decrease in
expenses is primarily attributable to a $2,389,918 decrease in merger costs as
a result of the completion of the adviser merger in 1998. The change is also
attributable to an increase in (i) potential acquisition costs of $215,558
related to the acquisition of properties, (ii) interest expense of $477,526 due
to higher borrowing levels on the line of credit related to the addition of
seven properties, and (iii) general operating and administrative of $339,737
related to the Merger with the adviser, AAA, whereby salaries and other
corporate overhead of the Company is now paid by the Company as opposed to the
adviser. Pursuant to the Merger, the Company acquired AAA and became internally
managed. Effective June 5, 1998, the reimbursements and fees paid to AAA were
replaced with actual personnel and other operating costs associated with being
internally managed.
Comparison of the Twelve Months Ended December 31, 1998 to December 31, 1997:
During the years ended December 31, 1998 and 1997, the Company owned and
leased 17 and 11 properties, respectively. During the years ended December 31,
1998 and 1997, the Company earned $2,741,757 and $1,556,815, respectively, in
rental income from operating leases and earned income from direct financing
leases. The 76 percent increase in rental income and earned income during 1998,
as compared to 1997, is primarily attributable to rental income earned on the
six properties acquired during 1998. In addition, rental and earned income
increased during 1998 as a result of the fact that the three properties
acquired during 1997 were operational in a full fiscal year in 1998. Rental and
earned income is expected to increase in 1999 as the Company acquires
additional properties and due to the fact that the six properties acquired
during 1998 will contribute to the Company's income for a full fiscal year in
1999.
During the years ended December 31, 1998 and 1997, the Company's expenses
were $4,315,253 and $716,627, respectively. The $3,598,626 increase in expenses
is primarily attributable to $2,427,658 of merger costs incurred during 1998
related to the acquisition of the Company's advisor, AAA, on June 5, 1998. The
increase is also attributable to (i) $464,303 increase in costs incurred during
1998 related to potential acquisition costs related to the proposed acquisition
of properties, (ii) a $209,099 increase in depreciation as a result of the
depreciation of the additional properties owned during 1998, and (iii) a
$396,707 increase in interest expense as a result of higher average borrowing
levels. In addition, the increase in expenses is attributable to a $449,646
increase in general operating and administrative expenses related to the Merger
with the Advisor, AAA, whereby salaries and other Corporate overhead of the
Company is now paid by the Company as opposed to the adviser. Pursuant to the
Merger, the Company acquired AAA and became internally managed. Effective June
5, 1998, the reimbursements and fees paid to AAA were replaced with the actual
personnel and other operating costs associated with being internally managed.
Funds From Operations
Comparison of the Six Months Ended June 30, 1999 to June 30, 1998:
Funds from operations (FFO) increased $200,588 or 32% to $836,280 for the
six months ended June 30, 1999 from $635,692 for the six months ended June 30,
1998. AmREIT has adopted the National Association of Real Estate Investment
Trusts definition of FFO. FFO is calculated as net income (computed in
accordance with generally accepted accounting principles) excluding gains or
losses from sales of property, depreciation and amortization of real estate
assets, and nonrecurring items of income or expense. For purposes of the table
below, FFO excludes nonrecurring merger costs and potential acquisition costs.
Management considers FFO an appropriate measure of performance of an equity
REIT because it is predicated on a cash flow analysis. However, FFO should not
be considered an alternative to cash flows from operating, investing and
financing activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to meet cash
needs. AmREIT's computation of FFO may differ from the methodology for
calculating FFO utilized by other equity REITs and, therefore, may not be
comparable to such other REITs. FFO is not defined by generally accepted
accounting principles and should not be considered an alternative to net income
as an indication of AmREIT's performance.
104
<PAGE>
Comparison of the Twelve Months Ended December 31, 1998 to December 31, 1997:
Funds from operations (FFO) increased $468,301 or 48% to $1,436,063 in 1998
from $967,762 in 1997. The Company has adopted the National Association of Real
Estate Investment Trusts (NAREIT) definition of FFO. FFO is calculated as net
income (computed in accordance with generally accepted accounting principles)
excluding gains or losses from sales of property, depreciation and amortization
of real estate assets, and nonrecurring items of income or expense. For
purposes of the table below, FFO excludes nonrecurring merger costs and
potential acquisition costs. Management considers FFO an appropriate measure of
performance of an equity REIT because it is predicated on a cash flow analysis.
However, FFO should not be considered an alternative to cash flows from
operating, investing and financing activities in accordance with generally
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. The Company's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity REIT's and,
therefore, may not be comparable to such other REIT's. FFO is not defined by
generally accepted accounting principles and should not be considered an
alternative to net income as an indication of the Company's performance.
Below is the reconciliation of net income to funds from operations for the
six months ended June 30 and the twelve months ended December 31:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------- ---------------------
1999 1998 1998 1997
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Net income......................... $202,091 $(2,067,712) $(1,805,786) $538,857
Plus depreciation.................. 235,890 130,745 349,888 146,015
Plus merger costs.................. -- 2,389,918 2,427,658 282,890
Plus potential acquisition costs... 398,299 182,741 464,303 --
-------- ----------- ----------- --------
Total funds from operations........ $836,280 $ 635,692 $ 1,436,063 $967,762
======== =========== =========== ========
</TABLE>
Cash flows from operating activities, investing activities, and financing
activities for the six months ended June 30 and the twelve months ended
December 31 are presented below:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------ -------------------------
1999 1998 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operating activities....... $ 724,393 $ 597,935 $ 1,510,069 $ 1,080,157
Investing activities....... $(3,225,293) $(4,737,503) $(7,687,454) $(11,708,075)
Financing activities....... $ 3,657,256 $ 4,115,588 $ 4,824,165 $ 10,413,347
</TABLE>
Year 2000 Compliance
The Year 2000 problem (Y2K) concerns the inability of information and non-
information technology systems to properly recognize and process date-sensitive
information beyond January 1, 2000. AmREIT's information technology system
consists of a network of personal computers and servers built using hardware
and software from mainstream suppliers. AmREIT has no internally generated
programmed software coding to correct, as all of the software utilized by
AmREIT is purchased or licensed from external providers. All accounting,
management support and operation of the partnerships is maintained and
performed by AmREIT, Inc. and its subsidiaries. As such, the steps taken by
AmREIT and the Y2K readiness of AmREIT translates directly to the Y2K readiness
of the Partnerships.
In 1998, AmREIT formed a Year 2000 committee for the purpose of identifying,
understanding and addressing the various issues associated with the Year 2000
problems. The Y2K committee consists of members from AmREIT, including
representatives from senior management, accounting and computer consultants.
The Y2K committee's initial step in assessing AmREIT's Y2K readiness consists
of identifying any systems that are date-sensitive and, accordingly, could have
potential Y2K problems. The Y2K committee
105
<PAGE>
is in the process of conducting inspections, interviews and tests to identify
which of AmREIT's systems could have a potential Y2K problem.
AmREIT's information system is comprised of hardware and software
applications from mainstream suppliers; accordingly, the Y2K committee is in
the process of contacting the respective vendors and manufacturers to verify
the Y2K compliance of their products. In addition, the Y2K committee has also
requested and is evaluating documentation from other companies with which
AmREIT and the Partnership's have a material third party relationship,
including tenants, major vendors, financial institutions and transfer agents.
AmREIT depends on its tenants for rents and cash flows, its financial
institutions for availability of cash and financing and its transfer agent to
maintain and track investor information. Although AmREIT continues to receive
positive responses from its third party relationships regarding their Y2K
compliance, AmREIT cannot be assured that the tenants, financial institutions,
transfer agent and other vendors have adequately considered the impact of the
Year 2000. AmREIT does not expect the Y2K impact of third parties to have a
materially adverse effect on its results of operation or financial position.
AmREIT has identified and has implemented upgrades for certain hardware
equipment. In addition, AmREIT has identified certain software applications
which will require upgrades to become Year 2000 compliant. AmREIT has spent
approximately $7,000 in order to upgrade its accounting software and for
information technology consulting fees paid to third parties in order to
evaluate AmREIT's Systems. AmREIT expects all of these upgrades as well as any
other necessary remedial measures on the information technology systems used in
the business activities and operations of AmREIT to be completed by September
30, 1999. AmREIT does not expect the aggregate cost of the Year 2000 remedial
measures to exceed $10,000.
Based upon the progress AmREIT has made in addressing its Year 2000 issues,
AmREIT does not foresee significant risks associated with its Year 2000
compliance at this time. AmREIT plans to address its significant Year 2000
issues prior to being affected by them; therefore, it has not developed a
comprehensive contingency plan. However, if AmREIT identifies significant risks
related to its Year 2000 compliance, AmREIT will develop contingency plans as
deemed necessary at that time.
AmREIT'S POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
AmREIT's Stated Investment Policies
AmREIT's stated investment policies are investment policies and restrictions
set forth in its bylaws pursuant to which AmREIT must conduct its affairs. The
board of directors may not make any material change in a stated investment
policy without first obtaining the approval of stockholders owning a majority
of the then outstanding shares, excluding shares held by officers, directors
and their affiliates. Set forth below is a summary of AmREIT's stated
investment policies.
Investments in Properties. AmREIT must:
. invest only in interests in (including mortgage loan interests secured
by) income-producing, undeveloped, development stage and improved real
estate properties using borrowed capital only where prudent as determined
by the board;
. not invest more than 10% of its total assets in unimproved real property
or mortgage loans on unimproved real property;
. not engage in the purchase and sale of investments, other than real
property interests which satisfy AmREIT's investment objectives or for
the purpose of investing on a short-term basis reserves and funds
available for the purchase of properties; and
. pay consideration for a property which is based on its fair market value
as determined by a majority of the directors. In cases where the majority
of the independent directors determine, and in all
106
<PAGE>
acquisitions from interested persons, such fair market value shall be
determined by an independent expert selected by the independent
directors.
Policy Restrictions. AmREIT may not:
. invest more than ten percent (10%) of its total assets in second
mortgages, excluding wrap-around type second mortgage loans;
. make or invest in mortgage loans, including construction loans, on any
one property if the aggregate amount of all mortgage loans outstanding on
the property, including AmREIT's loan(s), would exceed an amount equal to
eighty-five percent (85%) of the appraised value of the property as
determined by appraisal unless substantial justification exists because
of the presence of other underwriting criteria. For purposes of this
subsection, the "aggregate amount of all mortgage loans outstanding on
the property" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged
property), the current payment of which may be deferred pursuant to the
terms of such loans, to the extent that deferred interest on each loan
exceeds five percent (5%) per annum of the principal balance of the loan;
. make or invest in any mortgage loans that are subordinate to any mortgage
or equity interest of an Advisor, directors or any affiliate of AmREIT;
or
. invest in any mortgage loans that are subordinate to any liens or other
indebtedness on a property if the effect of such mortgage loans would be
to cause the aggregate value of all such subordinated indebtedness to
exceed twenty-five percent (25%) of AmREIT's tangible assets.
. invest in equity securities of other issuers unless a majority of the
directors, including a majority of the independent directors, not
otherwise interested in the transaction approve the transaction as being
fair, competitive and commercially reasonable;
. invest in the equity securities of any non-governmental issue, including
other real estate investment trusts or limited partnerships for a period
in excess of eighteen (18) months, unless approved by a majority of the
directors, including a majority of the independent directors;
. engage in underwriting or the agency distribution of securities issued by
others;
. invest in commodities or commodity futures contracts, other than solely
for hedging purposes;
. engage in short sales of securities or trading, as distinguished from
investment activities;
. invest in real estate contracts of sale, otherwise known as land sale
contracts, unless such contracts are in recordable form and appropriately
recorded in the chain of title;
. issue equity securities which are redeemable at the election of the
holder of such securities;
. issue debt securities unless the historical debt service coverage (in the
most recently completed fiscal year) as adjusted for known changes is
sufficient to properly service that higher level of debt;
. issue warrants, options or similar evidences of a right to buy its
securities, unless
--issued to all of its security holders ratably, or
. issued as part of a financing arrangement; or
. issue shares on a deferred payment basis or other similar arrangement.
Restrictions on Leverage. AmREIT may not borrow funds in order to distribute
the proceeds to the stockholders and thereby offset under-performance by the
properties, unless it is required to do so for REIT qualification purposes.
The directors must review AmREIT's borrowings at least quarterly for
reasonableness in relation to its net assets. AmREIT may not incur indebtedness
if, after giving effect to the incurrence thereof, aggregate
107
<PAGE>
indebtedness, secured and unsecured, would exceed three hundred percent (300%)
of its net assets on a consolidated basis. For this purpose, the term "net
assets" means AmREIT's total assets (less intangibles) at cost, before
deducting depreciation or other non-cash reserves, less total liabilities, as
calculated at the end of each quarter on a basis consistently applied.
Transactions with Advisor, Sponsor, Director or Their Affiliates. The bylaws
restrict dealings between AmREIT and its officers, directors, sponsors and any
advisor. AmREIT's sponsors are Mr. Taylor and his affiliates. In the bylaws, an
advisor is defined as "the Person responsible for directing or performing the
day-to-day business affairs of AmREIT, including a Person to which an advisor
subcontracts substantially all such functions." AmREIT is self-managed and does
not have an external advisor. The following restrictions apply to sponsors,
advisors, directors and/or other interested persons and their respective
affiliates.
Sales To Interested Persons. An advisor, officer or director may not acquire
assets from AmREIT except as approved by a majority of directors (including a
majority of independent directors), not otherwise interested in such
transaction, as being fair and reasonable to AmREIT.
Acquisitions From Interested Persons. Any transaction with a director,
officer or affiliate that involves the acquisition of a property from an
interested person must be approved by a majority of the independent directors
as being fair and reasonable to AmREIT and at a price not greater than the cost
of the property to such seller, or if at a greater price only if substantial
justification exists and such excess is reasonable and not in excess of the
properties' current appraised value.
Leases to Interested Persons. AmREIT may lease assets to an advisor, or a
director only if such transaction is approved by a majority of directors
(including a majority of independent directors), not otherwise interested in
such transaction, as being fair and reasonable to AmREIT.
Loans From Interested Persons. AmREIT may not borrow money from an advisor
or a director unless a majority of the directors, including a majority of the
independent directors, not otherwise interested in such transaction approve the
transaction as being fair, competitive, and commercially reasonable and no less
favorable to AmREIT than loans between unaffiliated parties under the same
circumstances.
Loans To Interested Persons. AmREIT may not make or invest in loans to a
sponsor, advisor or director, which includes any affiliate thereof, except for
mortgage loans for the construction of improvements on properties to be
acquired by AmREIT that are under lease or binding contract to be leased to
qualifying tenants and those loans insured or guaranteed by a government or
government agency or unless an appraisal is obtained on the underlying
property. An appraisal of the underlying property shall be obtained in
connection with any loan to an advisor, director or their affiliate.
Other Transactions With Interested Persons. All other transactions between
AmREIT and the sponsor, advisor, or a director shall require approval by a
majority of the directors (including a majority of the independent directors)
not otherwise interested in such transactions as being fair and reasonable to
AmREIT and on terms and conditions not less favorable to AmREIT than those
available from unaffiliated third parties.
Joint Venture Investments. AmREIT may enter into joint ventures with
unaffiliated third parties. AmREIT may also invest jointly with another
publicly-registered entity sponsored by a sponsor, advisor or director that has
investment objectives and management compensation provisions substantially
identical to those of AmREIT, provided that the following conditions must be
satisfied:
. the joint venture must have approval of a majority of the directors,
including a majority of the independent directors;
. the joint venture must have investment objectives comparable to AmREIT;
. the investment by each party to the joint venture must be on
substantially the same terms and conditions; provided, however, AmREIT
shall own more than fifty percent (50%) of any joint venture between it
and its sponsor or affiliate;
108
<PAGE>
. in making any such joint venture investment, AmREIT may not pay more than
once, directly or indirectly, for the same services and may not act
indirectly through any such joint venture if AmREIT would be prohibited
from doing so directly because of restrictions contained in the bylaws;
and
. in the event of a proposed sale of the property initiated by the other
joint venture partner, AmREIT must have a right of first refusal to
purchase the other party's interest.
Operating Expenses. Under AmREIT's bylaws, its total operating expenses,
including, but not limited to certain administration items such as personnel
salaries and the salary of Mr. Taylor, are (in the absence of a satisfactory
showing to the contrary) deemed 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 have the responsibility of limiting such
expenses to amounts that do not exceed such limitations unless they determine
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.
Real Estate Commissions on Resale of Property. If an advisor, officer or
director provides a substantial amount of the services in the effort to sell an
AmREIT property, that such person may receive up to one-half of the brokerage
commission paid but in no event to exceed an amount equal to 3% of the contract
price for the property. In addition, the amount paid when added to the sums
paid to unaffiliated parties in such a capacity shall not exceed the lesser of
the Competitive Real Estate Commission or an amount equal to 6% of the contract
price for the property. The "Competitive Real Estate Commission" is the 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. The "contract price" is the amount actually paid or
allocated to the purchase, development, or construction or improvement of a
property exclusive of the acquisition fees and acquisition expenses.
Acquisition Fees and Acquisition Expenses. AmREIT may not pay acquisition
fees and acquisition expenses which are unreasonable. The total amount of such
fees may not exceed 6% of the contract price of the property, or in the case of
a mortgage loan, 6% of the funds advanced. Notwithstanding the foregoing, a
majority of the directors, including a majority of the independent directors,
not otherwise interested in the transaction may approve fees in excess of these
limits if they determine the transaction to be commercially competitive, fair
and reasonable to AmREIT.
AmREIT's Operating Strategy
AmREIT's policies with respect to the following activities have been
determined by the board within the restrictions of AmREIT's stated investment
policies and, in general, may be amended or revised, from time to time, subject
to the stated objections and policies, by the board without a vote of the
stockholders.
Growth Strategy. AmREIT intends to pursue a growth strategy which will
maximize the total return to its stockholders. AmREIT intends to continue to
focus on the frontage retail sector of the real estate market, believing that
this sector is capable of providing appealing returns at more attractive risk
levels than other sectors of the retail/commercial real estate market. AmREIT's
growth strategy will focus on major markets in the Southwest, with the goal of
achieving a significant presence in major retail corridor markets of targeted
cities. In pursuing its growth strategy, AmREIT intends to utilize research-
driven investment analysis, disciplined buy/sell decisions and up-to-date
operating systems.
AmREIT presently intends to raise public and private equity capital and
institutional and investor debt capital to fund its growth strategy through
unsecured credit facilities, traditional mortgage debt transactions, and
private equity placements and/or public securities offerings.
Investment Strategy. AmREIT will continue to invest in existing, newly-
developed, development stage or undeveloped retail properties subject to leases
under which the tenant is responsible for all operating costs (i.e.,
109
<PAGE>
the tenant pays non-capital costs associated with operating the leased
premises), frequently referred to as a net lease. AmREIT will continue to seek
to lease its properties to single tenants, but may acquire multiple tenant
properties. AmREIT intends to continue to concentrate its investments in the
Southwest, but may invest in properties anywhere in the continental United
States.
In determining whether a property is a suitable for investment, management
considers the following factors, among others:
.the safety of the investment;
. 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 AmREIT;
. the cash flow expected to be generated by the property;
. 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);
. the creditworthiness of the lessee (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;
. the prospects for long-term appreciation of the property;
. the prospects for long-range liquidity of the investment; and
. the stability and potential growth of the community.
AmREIT invests in properties which are either under current lease or are to
be leased upon completion of development to a national or regional corporation.
However, in circumstances deemed appropriate, leases may be with a sole
proprietor or franchisee operating the businesses on the property. AmREIT has
no minimum financial requirements for its tenants, which will vary depending on
individual circumstances of the property and the lease. With respect to the
credit of a prospective tenant, AmREIT 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.
Management also considers a property's prospects for long-term appreciation
and the prospects for long-range liquidity of the investment. Other
considerations of AmREIT 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.
AmREIT'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 AmREIT's directors. Where neither lender nor
title insurer conditions raise issues regarding environmental due diligence,
AmREIT may nevertheless require certain protective representations from the
seller of a property, including a satisfactory level one environmental study of
the property site.
AmREIT 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 AmREIT and which are likely to
have
110
<PAGE>
resources greater than those of AmREIT. Management continually monitors the
real estate market in order to identify potential desirable property
acquisitions and advantageous disposition opportunities for its properties.
AmREIT plans to explore possible acquisitions of properties in whole or
partial exchange for its equity securities. AmREIT has authority to issue
additional shares or other securities in exchange for property and other valid
consideration, and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. AmREIT has
authorized preferred stock, but has not issued such senior securities.
Management of Properties. AmREIT internally manages each of its properties.
Such management includes providing leasing services in connection with
identifying and qualifying prospective tenants, assisting in the negotiation of
the leases, providing 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.
AmREIT pays no property management fees or advisory fees. The tenants will be
responsible, at their expense, for day-to-day oversight and maintenance of the
properties.
AmREIT acquires marketable title to each of its properties, subject only to
such liens and encumbrances as are acceptable to management. Evidence of title
includes 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.
Development of Properties. AmREIT intends to continue to increase its own
development of properties. Under AmREIT's bylaws not more than 10% of AmREIT's
total assets may be invested in unimproved real property and AmREIT does not
intend to seek stockholder approval to exceed such percentage. Depending upon
the circumstances, improvements will be developed and/or constructed either
through joint ventures with third party development companies from whom AmREIT
purchases the properties, by the tenants to whom such properties are leased, or
by development companies other than the sellers of the properties. AmREIT
finances the construction or completion of improvements on particular
properties through borrowing under its current credit facilities, which it
intends to increase should the merger be consummated.
To the extent AmREIT acquires property on which improvements are to be
constructed or completed, AmREIT 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. 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 AmREIT'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.
AmREIT may use one or more of the following techniques to reduce the risk of
any non-performance by the builder and to assure compliance with approved plans
and specifications:
. a labor and material bond, a completion bond or a performance bond, or
more than one of the foregoing, may be required;
. if in management's opinion, the financial position of the builder so
represents, a personal guaranty or pledge of other assets may be accepted
in lieu of, or required in addition to, a bond;
. in some cases, the builder of the property will be required to leaseback
the property from AmREIT until construction is completed with lease
payments designed to return to AmREIT a portion of its funds paid to the
builder during construction and to require the builder to bear the risk
of construction;
. where possible, AmREIT will purchase property subject to the construction
loan and management will endeavor not to have AmREIT be liable on such
loan; and
111
<PAGE>
. 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.
Property Sale and Disposition Strategy. AmREIT intends to sell some
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, management will consider factors such as potential capital
appreciation, cash flow and federal income tax consequences. Affiliates of
AmREIT or of one or more of its directors may be selected to perform various
substantial real estate brokerage functions in connection with the sale of
properties by AmREIT. AmREIT will not sell or lease any property to the
directors or their affiliates.
Management will periodically review the assets comprising AmREIT's
portfolio. AmREIT has no current intention to dispose of any of its properties
or other properties acquired in the merger unless the sale of properties is
necessary or appropriate because of liquidity problems. AmREIT reserves the
right to dispose of any of the properties or any property that may be acquired
in the future if the directors, based in part upon management's periodic
reviews, determines that the disposition of such property is in the best
interests of AmREIT.
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 stockholders or be reinvested in other
properties. A reinvestment in other properties would be feasible only if it
could be accomplished so that the status of AmREIT as a REIT would not be
adversely affected. Any properties in which net proceeds from a sale are
reinvested will be subject to the same acquisition guidelines as properties
initially acquired by AmREIT. See "AmREIT AND ITS BUSINESS -- Properties" above
on page 94.
In connection with the sale of a property owned by AmREIT, purchase money
obligations secured by mortgages may be taken as partial payment. The terms of
payment to AmREIT 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 AmREIT 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 collected, sold, refinanced or
otherwise liquidated. Therefore, dividends to stockholders 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. AmREIT 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 AmREIT elects otherwise it will report
the gain on such sale ratably as principal payments are received under the
installment method of accounting.
Borrowing Policies. In the exercise of their duties, the directors may elect
to borrow funds on behalf of AmREIT 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. The amount of borrowings will be
determined from time to time based on 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 directors will not borrow funds in order to use the
proceeds from the borrowing to pay dividends to AmREIT's stockholders, unless
such borrowings are necessary for REIT qualification purposes.
AmREIT may not borrow from a director, officer 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 AmREIT
than loans between unaffiliated parties under the same circumstances.
112
<PAGE>
AmREIT will not issue any senior securities nor will it invest in junior
mortgages, junior deeds of trust or similar obligations.
Conflict of Interest and Affiliate Transaction Policy. Mr. Taylor is
prohibited from engaging in competitive real estate activities, including any
real estate acquisitions, development or management activities in connection
therewith, during his employment with AmREIT, except as may be approved by the
independent directors.
AmREIT will not enter into any transactions, including, without limitation,
loans, acquisitions or sales of property, joint ventures and partnerships, in
which AmREIT or a subsidiary is a party and in which any officer, director,
principal security holder or affiliate has any direct or indirect pecuniary
interest, unless such transaction is approved by a majority of the independent
directors after full disclosure of such interests. In determining whether to
approve the transaction, the independent directors will condition such approval
on the transaction being fair and reasonable to AmREIT and, to the extent
deemed relevant by such independent directors, on terms no less favorable to
AmREIT than prevailing market terms and conditions for comparable transactions.
Independent directors will be considered to be disinterested for this purpose
provided they have no direct or indirect pecuniary interest in the transaction.
Dividend Reinvestment Plan
AmREIT intends to institute a dividend reinvestment program, and may from
time to time repurchase shares in the open market for the purposes of
fulfilling its obligations under the program or may elect to issue additional
shares.
113
<PAGE>
MANAGEMENT
The directors and executive officers of AmREIT are as follows:
<TABLE>
<CAPTION>
Director or
Name Age Position Held Officer Since
---- --- ------------- -------------
<S> <C> <C> <C>
H. Kerr Taylor.......... 48 Chairman of the Board, Chief Executive 1993
Officer and President
Robert S. Cartwright,
Jr. ................... 49 Director 1993
George A. McCanse,
Jr. ................... 45 Director 1993
L. Larry Mangum......... 34 Chief Financial Officer and Treasurer 1996
Chad C. Braun........... 27 Vice President of Finance and Secretary 1999
AmREIT's other officers are as follows:
<CAPTION>
Director or
Name Age Position Held Officer Since
---- --- ------------- -------------
<S> <C> <C> <C>
Tim Kelley.............. 51 Vice President of Investment Programs 1996
Lisa Lyles.............. 34 Vice President of Real Estate 1999
Don Grieb............... 46 Director of Development and Acquisitions 1997
Jane Costello........... 42 Tax Reporting and Special Projects 1998
</TABLE>
H. Kerr Taylor serves as the president and chairman of the board of
directors of AmREIT. Mr. Taylor has served in this capacity since AmREIT's
formation. Mr. Taylor is a graduate of Trinity University. Mr. Taylor also
received a Masters of Business Degree from Southern Methodist University and a
Doctor of Jurisprudence from South Texas College of Law. Mr. Taylor has over
twenty years experience and has participated in over 300 real estate
transactions. Mr. Taylor has served on a board and governing bodies of a bank,
numerous private and public corporations and charitable institutions. Mr.
Taylor was the president, the sole director and sole stockholder of the
advisor, a real estate operating company he founded in 1988, prior to its
acquisition by AmREIT. Mr. Taylor is currently a general partner or principal
of a general partner of eleven affiliated limited partnerships. Mr. Taylor is a
member of the National Board of Realtors, Texas Association of Realtors, the
Texas Bar Association and the National Association of Real Estate Investment
Trusts.
Robert S. Cartwright, Jr. is currently a Professor of Computer Science at
Rice University. He 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. He has been a member of the Rice
faculty since 1980 and twice served as department chair. Professor Cartwright
has compiled an extensive record of professional service. He is a Fellow of the
Association for Computing Machinery (ACM) and chair of the ACM Pre-College
Education Committee. He is also a member of the board of directors of the
Computing Research Association, an umbrella organization representing academic
and industrial computing researchers. Professor Cartwright has served as a
charter member of the editorial boards of two professional journals and has
chaired several major ACM conferences. From 1991-1996, he was a member of the
ACM Turning Award Committee, which selects the annual recipient of the most
prestigious international prize for computer science research.
George A. McCanse, Jr. serves as director of AmREIT. Mr. McCanse is the
President of Valuation OnLine, Inc., an Internet data access service for the
commercial real estate valuation industry. Mr. McCanse also advises owners of
investment real estate and invests in commercial real estate for his own
account. Mr. McCanse is a member of the Appraisal Institute (MAI designation)
and the International Council of Shopping Centers. He was formally a member of
the Valuation Committee of the National Council of Real Estate Investment
Fiduciaries. Mr. McCanse resides in Austin, Texas. He holds a B.B.A. 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
million of real estate during the 1970s and 1980s.
114
<PAGE>
L. Larry Mangum serves as chief financial officer and treasurer of AmREIT.
He has over 11 years of accounting experience, including four years with a
public accounting firm. 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.
Chad C. Braun serves as vice president of finance and Secretary of AmREIT.
Mr. Braun has over five years of accounting and real estate experience. He
previously worked as a manager for Ernst & Young, LLP in their real estate
advisory services group. He has provided extensive consulting and audit
services to a number of REITs and private real estate companies. Mr. Braun
received a B.B.A. degree in accounting and finance from Hardin Simmons
University and subsequently earned the CPA designation.
Timothy W. Kelley serves as vice president of investment programs. Mr.
Kelley's career spans over twenty years of debt and equity industry experience.
Mr. Kelley has held senior management, compliance and sales responsibilities in
broker/dealers and in investment banking firms including Lehman Brothers Kuhn
Loeb, Oppenheimer and Co., Inc., and McKenna and Company. Mr. Kelley holds the
series 24, 27, 7, 3, 15, and 63 NASD licenses. He received his B.S. degree from
Kent State University.
Lisa Lyles serves as vice president of Real Estate for AmREIT. Ms. Lyles has
over seven years of experience in the commercial real estate industry, spending
most of her time with Grubb & Ellis Company. During her employment with G. & E.
she was elected to the Grubb & Ellis Retail Council and earned "Rookie of the
Year" in 1996 for top production in the Houston office ranking in the top five
nationally. Ms. Lyles received her B.B.A. in Management at Southwest Texas
State University.
Other individuals who are specialists in their respective fields will be
periodically employed by AmREIT and engaged on an as-needed basis to perform
services on behalf of AmREIT. These individuals are not employees of AmREIT nor
are they employees of other advisor-sponsored partnerships, although they do
perform various services and activities for those partnerships. These
individuals are:
Don Grieb serves as the director of development and acquisitions of AmREIT
and previously served in the same capacity with the advisor. Mr. Grieb has over
20 years experience within the real estate industry including development,
investment analysis and administration. Mr. Grieb has served within management
of such real estate firms as Hines Interests and AEW. Mr. Grieb received his
B.S. and M.B.A. from the University of Illinois and is a registered architect.
Jane Costello is a certified public accountant and special consultant to
AmREIT regarding tax accounting issues. She previously served in the same
capacity for the advisor. Ms. Costello has over 18 years experience as an
accountant including over four years with a national public accounting firm and
the last 10 years with her own accounting practice. Ms. Costello received a
B.B.A. degree in accounting from the University of Texas.
Executive Compensation
Mr. Taylor, our Chairman of the Board, Chief Executive Officer and
President, received a salary of $12,500 during fiscal year ended December 31,
1998. None of our executive officers received salary or bonus in excess of
$100,000 during the fiscal year ended December 31, 1998. In the fiscal year
ended December 31, 1997 none of our executive officers received any salary or
bonus.
115
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 16, 1999, the beneficial
ownership interest of the executive officers and directors of AmREIT:
<TABLE>
<CAPTION>
Title
of Name and Address of Amount and Nature of
Class Beneficial Owner Beneficial Ownership Percentage of Class(1)
----- ------------------- -------------------- ---------------------
<C> <S> <C> <C>
H. Kerr Taylor.......... 262,061 11.04%
George A. McCanse, Jr... 770 (2)
Robert S. Cartwright,
Jr..................... 2,166 (2)
L. Larry Mangum......... 5 (2)
(All directors and
executive
officers as a group)... 265,002 11.17%
</TABLE>
- --------
(1) Based on 2,372,744 shares outstanding as of August 16, 1999.
(2) Represents less than 1%.
As of August 16, 1999, no other person was known by AmREIT to be the
beneficial owner of more than 5% of the shares of AmREIT.
Certain Relationships and Related Transactions
On August 31, 1998, Mr. Taylor accepted 9,811 shares in repayment of
$100,563 then owing on AmREIT's promissory note payable to him. The shares were
valued at $10.25 per share for the purposes of payment. The unpaid balance of
$65,860 on the note was paid to Mr. Taylor on October 5, 1998.
On July 30, 1998, AmREIT invested approximately $356,000 in 100% of the
preferred stock of AmREIT Realty Investment Corporation, a newly formed Texas
corporation (ARIC). ARIC was organized to acquire, develop, hold and sell real
estate and to provide related real estate development and management services
to unrelated parties. The preferred stock entitles AmREIT to dividends equal to
95% of the net income of ARIC. All of the outstanding common stock of ARIC is
owned by Mr. H. Kerr Taylor, president of AmREIT.
Effective June 5, 1998, AmREIT issued to Mr. Taylor 213,260 shares and the
right to receive up to an additional 686,740 shares, subject to certain
conditions, in connection with the advisor acquisition. See "Advisor
Acquisition" below on page .
On May 10, 1998, Mr. Taylor agreed to accept 18,789 shares of AmREIT's
common stock in payment in full of a note payable to him by AmREIT with the
unpaid balance of approximately $171,500.
Legal Proceedings
Neither AmREIT nor any of its properties is subject to any claim or legal
proceeding, nor to management's best knowledge, is any such claim or legal
proceeding threatened which could have a material adverse effect on AmREIT or
its properties.
Advisor Acquisition
Terms of the Acquisition. As of June 5, 1998, AmREIT became a self-managed
REIT by acquiring its former advisor in the advisor acquisition. As a self-
managed REIT, AmREIT acquires, develops and manages its own real property
investments and internally administers its affairs and activities.
AmREIT acquired the advisor pursuant to a merger of the advisor into
AmREIT's newly formed wholly-owned subsidiary corporation, AmREIT Operating
Corporation, which is the surviving corporation. Pursuant to the acquisition,
Mr. H. Kerr Taylor, the sole stockholder of the advisor, will receive up to
900,000 shares of
116
<PAGE>
AmREIT's common stock, of which 213,260 initial shares were issued upon the
closing date of the advisor acquisition. The remaining 686,740 shares of common
stock are issuable over the 24 consecutive calendar quarters commencing July 1,
1998. Subject to certain conditions, the remaining shares of AmREIT common
stock are issuable at the rate of 98 shares for each 1,000 shares otherwise
issued for consideration (sold) by AmREIT during the payment period. The
independent directors, who agreed to and approved the advisor acquisition terms
on behalf of AmREIT, concluded that the remaining shares of AmREIT common stock
payment provisions were fair and in the best interests of AmREIT and the AmREIT
stockholders because they defer and condition payment for the advisor until
such time or times as AmREIT's asset base increases through equity growth to
levels which would allow AmREIT to realize the significant benefits of the
advisor acquisition and self-management. The significant anticipated benefits
from the advisor acquisition which increase directly with AmREIT's asset size
include: efficiencies of administration and property management and any
increases in operating margins resulting therefrom; reductions in acquisition
expenses; financial benefits of proprietary real estate development; and
financial benefits from providing real estate related services such as
brokerage, management and development services to third parties. The advisor
acquisition was approved by AmREIT's stockholders on June 5, 1998.
The advisor had served as advisor to AmREIT since AmREIT's organization in
May 1994. Under the direction of the board, the advisor had the responsibility
for the day-to-day operations of AmREIT, including raising capital, the
investigation and identification of investment acquisitions, the negotiation of
acquisitions, due diligence in investment research, property management and
administrative and accounting services.
The advisor was organized on April 4, 1989 and since that time has been
acquiring, developing, operating and managing real property for its own account
and for the account of managed real estate investment programs, including
AmREIT. In addition to AmREIT, the advisor co-sponsored with Mr. Taylor each of
the partnerships. In addition to services for AmREIT, the advisor provided
acquisition, management and administrative services to the partnerships and
development and management services to AmREIT Development Corp, a Texas
corporation owned by Mr. Taylor and to AAA Net Developers, Ltd., a privately
held Texas limited partnership for which Mr. Taylor and AmREIT Development
Corp, serve as general partners. AAA Net Developers, Ltd. is in the business of
developing for resale, frontage retail properties under net lease to retail
tenants.
For the period from January 1, 1998 to June 5, 1998, and the year ended
December 31, 1997, revenues to the advisor from all sources aggregated
$562,465, and $1,602,580, respectively. These amounts included payments from
AmREIT of $181,189 and $1,166,309 during the period from January 1, 1998 to
June 5, 1998, and the year ended December 31, 1997, respectively. For the same
periods, the advisor incurred total expenses of $683,633, and $1,473,676,
respectively. These expenses are not allocated between services provided by the
advisor under the services agreements with AmREIT and the partnerships vs. the
advisor's other activities.
Also, the advisor incurred certain costs in connection with the organization
and syndication of AmREIT. Reimbursement of these costs becomes obligations of
AmREIT in accordance with the terms of the offering. Costs of $164,985 and
$98,494 were incurred by the advisor in 1997 and 1996, respectively, in
connection with the issuance and marketing of AmREIT's stock.
Consequences of Acquisition. As a self-managed REIT, AmREIT no longer pays
any of the advisor fees and pays directly for the overhead necessary to provide
the services that the advisor provided under the Omnibus Services Agreement. By
acquiring the advisor's staff and facilities, AmREIT now has personnel with
substantial experience and long-term relationships in the commercial net leased
property industry, including but not limited to relationships with both
AmREIT's significant tenants and those of the partnerships. Management believes
these capabilities provide AmREIT with a competitive advantage over many larger
and more established REITs in the management and operation of properties and in
the identification and acquisition of attractive investments.
Following the advisor acquisition, AmREIT, through AmREIT Operating
Corporation, continues to provide these services, including administrative and
management services to the partnerships and administrative
117
<PAGE>
and development services, facilities and personnel to AmREIT Development Corp.
However, its ability to do so may be significantly limited under current and
possible future changes to the REIT Rules.
AmREIT, through AmREIT Operating Corporation, and/or other affiliates, also
conducts various real estate development activities both for its account and
for the accounts of others, including AmREIT Development Corp. Through the
advisor acquisition, AmREIT acquired expertise and ability to develop
properties for tenants in order to be more competitive in obtaining attractive
acquisitions for itself and the advisor's other affiliates. Management believes
that its ability to competitively construct and deliver completed properties on
a timely basis will continue to be an important consideration for many actively
growing and expanding retail and commercial tenants.
Terms of the Acquisition. The advisor acquisition was approved and
recommended to AmREIT's stockholders by the independent directors. AmREIT's
stockholders approved the advisor acquisition on June 5, 1998. In finding that
the advisor acquisition was fair to AmREIT and its stockholders, the
independent directors engaged Bishop-Crown as their financial advisor to advise
them in analyzing and evaluating, and to provide a written opinion with respect
to, the fairness of the acquisition to AmREIT and to the stockholders of AmREIT
(other than Mr. Taylor). The independent directors also engaged Houlihan to
opine as to the likely range of strategic values of the advisor for the
purposes of the acquisition. The independent directors obtained a fairness
opinion from Bishop-Crown that the advisor acquisition was fair from a
financial point of view, to AmREIT and its stockholders (other than Mr.
Taylor), and obtained the opinion of Houlihan regarding the valuation of the
advisor. The independent directors engaged Broocks, Baker & Lange, LLP to
advise them regarding, but not to negotiate, the terms of the advisor
acquisition.
Under the acquisition agreement, AmREIT has agreed to issue up to 900,000
common shares as the consideration for the advisor acquisition. AmREIT issued
the 213,260 initial shares on the closing date and will issue up to the
remaining shares of AmREIT common stock of 686,740 shares, subject to
adjustment as described below, as follows: No later than 30 days after the end
of the calendar quarter in which the closing date occurred, and within 30 days
after the end of each calendar quarter thereafter until the twenty-fourth
consecutive calendar quarter following the closing date, or, if sooner, until
the entire remaining shares of AmREIT common stock has been issued. AmREIT will
issue a portion of the then unissued remaining shares of AmREIT common stock
equal to, when added to the aggregate shares of the consideration theretofore
issued, 9.8% of the total number of common shares outstanding at the end of the
respective calendar quarter after giving effect to the issuance of such
additional shares.
At the closing date of the acquisition, Mr. Taylor owned 252,250 shares of
AmREIT's common stock which represents approximately 10.62% of AmREIT's total
outstanding shares. For the 24 calendar quarters following the closing date,
Mr. Taylor's additional share ownership by reason of his receipt of the
consideration cannot exceed the number of shares which represent 9.8% of
AmREIT's total outstanding shares.
The acquisition agreement requires that, in the event of Mr. Taylor's death,
AmREIT must promptly purchase from his estate his right, title and interest in
the unissued remaining shares of AmREIT common stock at a price determined on a
value of $10.25 per share or, if AmREIT's common shares are then traded in a
national securities market, the average closing price of AmREIT's common shares
on the 10 consecutive trading days preceding the date of death, whichever is
greater. To fund this obligation, AmREIT must maintain one or more insurance
policies, payable to AmREIT, insuring Mr. Taylor's life in the amount necessary
to purchase the unissued remaining shares of AmREIT common stock.
The foregoing notwithstanding, the unissued remaining shares of AmREIT
common stock is immediately issuable in the event any of the following should
occur:
. An event which results in or is likely to result in a change in control
of AmREIT;
. The failure by AmREIT to timely issue the remaining shares of AmREIT
common stock, or any portion thereof as required above;
118
<PAGE>
. In the event Mr. Taylor's employment by AmREIT is terminated without
cause as defined in his employment agreement with AmREIT then in effect;
or
. AmREIT's failure to purchase, upon the death of Mr. Taylor, all of his
right, title and interest in the unissued remaining shares of AmREIT
common stock, which interest will be valued as of the date of death at
the greater of $10.25 per share or, if the common shares are traded in a
national securities market, the average closing price of such shares
during the 10 consecutive trading days immediately preceding the date of
death. Under the acquisition Agreement, AmREIT is required to maintain
insurance on the life of Mr. Taylor to fund this obligation.
For the purposes of the foregoing, a "change in control" means:
. the sale or transfer of substantially all of the assets of AmREIT,
whether in one transaction or a series of transactions, except a sale to
a successor corporation in which the stockholders immediately prior to
the transaction hold, directly or indirectly, at least 50% of the total
voting power of the successor corporation immediately after the
transaction;
. any merger or consolidation between AmREIT and another corporation
immediately after which the stockholders hold, directly or indirectly,
less than 50% of the total voting power of the surviving corporation;
. the dissolution or liquidation of AmREIT;
. the acquisition by any person or group of persons of direct or indirect
beneficial ownership of AmREIT's common shares representing more than 50%
of AmREIT's common shares; or
. the date the board changes. For the purposes of the foregoing, a "board
change" means the date that a majority of the board is comprised of
persons other than persons (1) whose election consents shall have been
solicited by management, or (2) who are serving as directors appointed by
the board to fill vacancies caused by death or resignation (but not by
removal) or to fill newly created directorships.
Under the acquisition agreement, so long as Mr. Taylor serves as an officer
or director of AmREIT he may not, without AmREIT's express authorization,
engage or participate directly or indirectly as a principal, agent, or owner
(including serving as a partner of or owning any stock or other equity
investment or debt of) any competitive real estate venture, as defined.
Excluded from the foregoing are competitive real estate ventures in which Mr.
Taylor is currently interested, including AAA Net Developers, Ltd. and the AAA
partnerships and their respective general partners. Also excluded from the
foregoing restriction is the present or future ownership of not more than one
percent (1%) of the total outstanding class of equity or debt securities of any
competitive real estate venture whose equity or debt securities are publicly
traded.
"Competitive real estate venture" is defined as any enterprise entered into
for profit whose activities in at least material part consist of the
acquisition, development, ownership and/or management of real estate leased or
intended to be leased to commercial or retail tenants.
Under the acquisition agreement, Mr. Taylor entered into full-time
employment by AmREIT. Mr. Taylor entered into a two-year agreement where his
annual base salary is $25,000 until July 1999 and $30,000 through July 2000.
Mr. Taylor may not receive any compensation from any competitive real estate
venture under his control except as may, from time to time, be approved by the
board. It is the board's intent to use this restriction to limit the aggregate
compensation received by Mr. Taylor from AmREIT and his other controlled
competitive real estate ventures, if any. Expressly excluded from the foregoing
agreement would be any compensation in connection with Mr. Taylor's ownership
of the general partners of the partnerships.
In an effort to eliminate existing and potential conflicts of interest
between Mr. Taylor and AmREIT, Mr. Taylor agreed to cause any competitive real
estate venture (as defined) over which he has control, including the general
partners of the partnerships and ARIC to, at the election of the board,
contract for acquisition and
119
<PAGE>
management services and/or the use of facilities and personnel with AmREIT or
such affiliated provider as may be designated by the board. Any such contracts
are subject to the requirements and restrictions on such contracts as may be
provided in each entities organizational documents. AmREIT, through AmREIT
Operating Corporation and ARIC, currently provides property management, general
administration and acquisition services, real estate brokerage services and
support personnel and/or facilities to these entities. However, its ability to
do so may be significantly limited under current and possible future changes to
the REIT Rules. Under this requirement, Mr. Taylor must cause such competitive
real estate venture to first satisfy its requirements for personnel and/or
facilities by the use of available, qualified facilities and personnel of
AmREIT or its affiliates on a reimbursement for use basis.
Also, Mr. Taylor must cause such competitive real estate venture to offer to
AmREIT the right to purchase any property which the competitive real estate
venture acquires or contracts to acquire, subject to its then-existing
fiduciary obligations to any other persons at a price equal to the cost of the
property to the competitive real estate venture.
AmREIT CHARTER AND BYLAWS
The following summary of the terms of AmREIT's articles of incorporation and
by-laws contains all material terms, but does not set forth all the provisions
of AmREIT's articles of incorporation or by-laws. For additional information
about AmREIT's articles and by-laws, you should read these documents which are
exhibits to the registration statement of which this proxy is a part.
Authorized Stock
The charter provides that AmREIT is authorized to issue 110,000,000 shares,
consisting of 100,000,000 shares of $0.01 par value common stock and 10,000,000
shares of preferred stock, par value $.01 per share. Shares of preferred stock
may be issued from time to time, in one or more series, each of which series
shall have such voting powers, designations, preferences and rights, and the
qualifications, limitations or restrictions relating thereto, as shall be
authorized by the board of directors. See "DESCRIPTION OF AmREIT'S CAPITAL
STOCK" beginning on page 117.
Directors
The bylaws provide that the number of directors shall consist of not less
than three nor more than nine members, the exact number of which shall be fixed
by the board from time to time. The bylaws provide that, except as otherwise
provided by law or the charter, a quorum of the board for the transaction of
business shall consist of a majority of the entire board. The act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the board. The charter and the bylaws do not provide for a classified
board or for cumulative voting in the election of directors to the board. The
bylaws provide that vacancies and any newly-created directorships resulting
from an increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum.
Stockholder Meetings and Special Voting Requirements
The annual meetings of stockholders are held on such date as shall be fixed
by the board. The bylaws specify such date to be not fewer than 30 days nor
more than 61 days after distribution of AmREIT's annual report to stockholders.
Special meetings of stockholders 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 stockholders 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 stockholders' meeting. The charter
and the bylaws may in general be amended by a majority vote of the
stockholders. However, an amendment of any provision of the charter or bylaws
which requires a greater than
120
<PAGE>
majority vote must itself be approved by a vote of the stockholders holding
shares representing at least 66 2/3% of the votes entitled to be cast thereon.
Other matters on which the stockholders are entitled to vote include:
. the election and removal of directors;
. a voluntary change in AmREIT's status as a REIT; and/or
. the dissolution of AmREIT.
A majority of the directors (including a majority of the independent
directors) may in their discretion, from time to time, amend, without a
stockholder vote, certain portions of the bylaws, but not a stated investment
policy. The stockholders may amend the bylaws by a majority vote.
Amendment of the Charter and Bylaws
Maryland law and the charter provide that approval of a majority of the
stockholders entitled to vote thereon is required to amend the charter. A bylaw
may be amended or repealed, or a new bylaw adopted, by (1) the affirmative vote
of the holders of a majority of the stock entitled to vote thereon, or (2) a
majority of the board.
Transactions With Interested Officers or Directors
The bylaws provide, in accordance with Maryland law, that contracts or
transactions between AmREIT and a director or officer of AmREIT or a
corporation or entity in which such officer or director is also an officer or
director or has a financial interest, are not void or voidable solely for such
reason or solely because the officer or director is present at or participates
in any meeting of the board which authorizes the transaction or contract, or
solely because such officer's or director's vote is counted for such purpose,
if the bylaw restrictions regarding such transactions are satisfied (see
discussion under stated investment policies above) and:
. the material facts as to his relationship or interest are disclosed or
are known to the board or a committee and the board or a committee in
good faith authorizes such contract or transaction;
. the material facts as to his relationship or interest are disclosed or
are known to the stockholders entitled to vote thereon and the
stockholders in good faith specifically approve such contract or
transact; or
. the contract or transaction is fair to AmREIT at the time it is
authorized, approved or ratified by the board, a committee or the
stockholders.
In addition, the bylaws provide that any transactions with interested
directors or officers or their affiliates shall be made on commercially
reasonable terms substantially equivalent to terms available from third parties
in an arm's-length transaction in the competitive marketplace.
Rollup Transactions
AmREIT's bylaws contain certain restrictions and requirements on AmREIT's
ability to participate in "rollup" transactions which include any transaction
involving the acquisition of AmREIT. The merger as structured and proposed
constitutes a "rollup" transaction under these provisions. However, as a
condition to their approval of the merger, the stockholders will expressly
approve the exclusion of the merger from the requirements of the rollup
provisions of the bylaws to the extent they could apply to the merger.
Limitations on Holdings and Transfer
For AmREIT to continue 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
121
<PAGE>
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 a REIT is made. The 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 AmREIT being disqualified as a "REIT"
under the Code. Such restrictions authorize the board to refuse to give effect
to such transfer on AmREIT's books 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 AmREIT's
status as a REIT under the Code, there can be no assurance that such
restrictions will achieve their intent.
A transferee who acquires shares in a restricted transfer is required to
indemnify, defend, and hold AmREIT and its other stockholders harmless from and
against all damages, losses, costs, and expenses, including, without
limitation, reasonable attorneys' fees, incurred or suffered by AmREIT or such
stockholders by virtue of AmREIT's loss of its qualification as a REIT if such
loss is a result of the transferee's acquisition. See "FEDERAL INCOME TAX
CONSEQUENCES" beginning on page 78.
Anti-takeover Effect of Authorized But Undesignated Preferred Stock
As described below, the board is authorized to provide for the issuance of
shares of preferred stock, in one or more series, and to fix by resolution of
the board and to the extent permitted by Maryland law, the terms and conditions
of each such series. Management believes that the availability of preferred
stock will provide AmREIT with increased flexibility in structuring possible
future financings and acquisitions and in meeting other corporate needs which
might arise from time to time. Authorized but unissued shares of preferred
stock, as well as authorized but unissued shares of common stock, will be
available for issuance without further action by stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which any class of stock may then be listed for
trading.
Although the board has no present intention of doing so, it will be able to
issue a series of preferred stock that could, depending on its terms, either
impede or facilitate the completion of a merger, tender offer or other takeover
attempt. For instance, such new shares might impede a business combination by
including class voting rights which would enable the holder to block such
transaction or facilitate a business combination by including voting rights
which would provide a required percentage vote of stockholders. The board will
make any determination to issue such shares based on its judgment as to the
best interests of AmREIT and its then existing stockholders. The board, in so
acting, will be able to issue preferred stock having terms which would
discourage an acquisition attempt or other transaction that some or a majority
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of such stock.
Liability for Monetary Damages
The charter provides that no director will be personally liable to AmREIT or
its stockholders for monetary damages for breach of fiduciary duty as a
director, other than liability for breach of the duty of loyalty to AmREIT or
its stockholders, acts or omissions not in good faith, intentional misconduct,
a knowing violation of law, certain unlawful dividends, stock repurchases or
redemptions or any transaction from which the director derived an improper
personal benefit. Any repeal or modification of such provision by the
stockholders of AmREIT will not adversely affect any right or protection of a
director existing at the time of such repeal or modification with respect to
acts or omissions occurring prior to such repeal or modification.
Indemnification And Advancement of Expenses
The charter provides for the indemnification of present and former directors
and officers of AmREIT and persons serving as directors, officers, employees or
agents of another corporation or entity at the request of
122
<PAGE>
AmREIT to the fullest extent permitted by Maryland law. Indemnified parties are
specifically indemnified in the charter and the bylaws for expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by an indemnified party (1) in connection with a
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that he is or
was a director or officer of AmREIT or is or was serving as a director,
officer, employee or agent of another corporation or entity at the request of
AmREIT, or (2) in connection with the defense or settlement of a threatened,
pending or completed action or suit by or in the right of AmREIT, provided that
such indemnification is permitted only with judicial approval if the
indemnified party is adjudged to be liable to AmREIT. Such indemnified party
must have acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the subject corporation and, with
respect to any criminal action or proceeding, must have had no reasonable cause
to believe his conduct was unlawful. Any indemnification under the
indemnification provisions must be authorized based on a determination that the
indemnification is proper if the applicable standard of conduct has been met by
the indemnified party, provided that no such authorization is required, and
indemnification is mandatory, where a director or officer of AmREIT is
successful in the defense of such action, suit or proceeding or any claim or
matter therein. Otherwise, such determination will be made by a majority vote
of a quorum of the board consisting of directors not a party to the suit,
action or proceeding, by a written opinion of independent legal counsel or by
the stockholders. In the event that a determination is made that a director or
officer is not entitled to indemnification under the indemnification
provisions, the indemnification provisions provide that the indemnified party
may seek a judicial determination of his right to indemnification. The
indemnification provisions further provide that the indemnified party is
entitled to indemnification for all expenses (including attorneys' fees)
incurred in any proceeding seeking to collect from AmREIT an indemnity claim
under the indemnification provisions if such indemnified party is successful.
Other than proceedings to enforce rights to indemnification, AmREIT is not
obligated to indemnify any person in connection with a proceeding initiated by
such person, unless authorized by the board.
AmREIT will pay expenses incurred by a director or officer of AmREIT, or a
former director or officer, in advance of the final disposition of an action,
suit or proceeding, if he undertakes to repay amounts advanced if it is
ultimately determined that he is not entitled to be indemnified by AmREIT.
The indemnification provisions and provisions for advancing expenses in the
charter will be expressly not exclusive of any other rights of indemnification
or advancement of expenses pursuant to the bylaws. The indemnification
provisions and provisions for advancing expenses in the bylaws and the charter
will be expressly not exclusive of any other rights of indemnification or
advancement of expenses pursuant to any agreement, vote of the stockholders or
disinterested directors or pursuant to judicial direction. AmREIT will be
authorized to purchase insurance on behalf of an indemnified party for
liabilities incurred, whether or not AmREIT would have the power or obligation
to indemnify him pursuant to the charter, the bylaws or Maryland law.
In addition, AmREIT will enter into indemnification agreements with its
directors and certain of its executive officers pursuant to which such persons
are indemnified for costs and expenses actually and reasonably incurred by such
persons in connection with a threatened, pending or completed claim arising out
of service as a director, officer, employee, trustee and/or agent of AmREIT or
another entity at the request of AmREIT.
123
<PAGE>
DESCRIPTION OF AMREIT'S CAPITAL STOCK
General
AmREIT's authorized capital stock consists of 100,000,000 shares of common
stock, $0.01 par value and 10,000,000 shares of preferred stock. As of June 30,
1999, AmREIT had outstanding 2,372,744 shares of common stock and no shares of
preferred stock.
Common Stock
Voting Rights. Each holder of common stock will be entitled to one vote for
each share registered in his name on the books of AmREIT on all matters
submitted to a vote of stockholders. Except as otherwise provided by law, the
holders of common stock will vote as one class. The shares of common stock will
not have cumulative voting rights. As a result, subject to the voting rights,
if any, of the holders of any shares of preferred stock which may at the time
be outstanding, the holders of common stock entitled to exercise more than 50%
of the voting rights in an election of directors will be able to elect 100% of
the directors to be elected if they choose to do so. In such event, the holders
of the remaining shares of common stock voting for the election of directors
will not be able to elect any persons to the board. The charter and the bylaws
contain certain provisions that could have an anti-takeover effect. See "AmREIT
CHARTER AND BYLAWS" on page 113.
Dividend Rights. Subject to the rights of the holders of any shares of
preferred stock which may at the time be outstanding, holders of AmREIT Stock
will be entitled to such dividends as the board may declare out of funds
legally available therefor. Because portions of the operations of AmREIT may be
conducted through wholly-owned subsidiaries, AmREIT's cash flow and consequent
ability to pay dividends on common stock may be dependent to some degree upon
the earnings of such subsidiaries and on dividends and other payments
therefrom.
Liquidation Rights and Other Provisions. Subject to the prior rights of
creditors and the holders of any preferred stock which may be outstanding from
time to time, the holders of common stock are entitled in the event of
liquidation, dissolution or winding up to share pro rata in the distribution of
all remaining assets.
The common stock is not liable for any calls or assessments and is not
convertible into any other securities. In addition, there are no redemption or
sinking fund provisions applicable to the common stock.
Transfer Agent. The transfer agent and registrar for AmREIT common stock is
The Bank of New York, 101 Barclay Street, New York, NY 10286.
Preferred Stock
The charter provides that the board is authorized to provide for the
issuance of shares of preferred stock, from time to time, in one or more
series. Prior to the issuance of shares in each series, the board is required
by the charter and Maryland law to adopt resolutions and file articles
supplementary with the State of Maryland, fixing for each such series the
designations, preferences and relative, participating, optional or other
special rights applicable to the shares to be included in any such series and
any qualifications, limitations or restrictions thereon, including, but not
limited to, dividend rights, dividend rate or rates, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences as are permitted by
Maryland law.
124
<PAGE>
REORGANIZATION OF AmREIT
AS A TEXAS REAL ESTATE INVESTMENT TRUST
The board of directors has unanimously approved and recommends that the
stockholders of AmREIT approve the agreement of merger, which provides for
AmREIT's change of domicile from Maryland to Texas and for the reorganization
of AmREIT from its current status as a Maryland corporation to a Texas real
estate investment trust pursuant to the provisions of the Texas REIT Act, which
corresponds closely with existing corporate statutes. Under the Texas REIT Act,
as revised, AmREIT will be able to conduct its operations on substantially the
same terms as currently permitted under Maryland law. The reorganization will
not result in a change in AmREIT's business, management, capitalization or
assets, liabilities or net worth (other than due to the costs of the
transaction).
To effect the reorganization, AmREIT will be merged into a newly-formed
Texas REIT, which we will refer to as AmREIT-Texas. AmREIT-Texas will be
organized as soon as practicable after stockholder approval of this proposal.
When the merger becomes effective:
. AmREIT will cease to exist as a Maryland corporation;
. The Texas REIT will succeed as a Texas REIT, to the fullest extent
permitted by law, to all of AmREIT's prior business, assets and
liabilities; and
. each share of common stock of AmREIT will be automatically converted into
a corresponding common share of beneficial interest of the Texas REIT.
Pursuant to Maryland law, AmREIT's board retains discretion to abandon or
terminate the reorganization after receipt of stockholder approval, but prior
to filing the necessary documentation with Maryland and Texas, if the board of
directors determines the reorganization is no longer in AmREIT's best interest.
AmREIT'S BOARD ANTICIPATES THAT STOCKHOLDERS WILL NOT BE REQUIRED TO
SURRENDER OR EXCHANGE THEIR EXISTING STOCK CERTIFICATES FOR NEW SHARE
CERTIFICATES OF AMREIT' COMMON SHARES OF BENEFICIAL INTEREST. Following the
reorganization and as a condition of the merger, the Texas REIT common shares
of beneficial interest will be listed on an exchange and the board expects that
delivery of certificates representing existing shares of AmREIT common stock
will constitute "good delivery" for subsequent transactions. If the rules,
regulations or directives of the exchange upon which the shares are listed
require surrender of the certificates representing shares of AmREIT common
stock, each stockholder will be entitled to receive a certificate representing
one common share of beneficial interest of the Texas REIT for each share of
AmREIT common stock represented by the AmREIT certificate.
As a result of the merger, AmREIT and the rights of its stockholders,
directors and officers will be governed by the Texas REIT Act and by the
declaration of trust and bylaws of the Texas REIT, rather than by Maryland law
and AmREIT's existing amended and restated articles of incorporation and
amended and restated bylaws.
A discussion of the material similarities and differences to AmREIT and its
stockholders, directors and officers resulting from the reorganization appears
below. This discussion does not address each difference between Maryland and
Texas law, but focuses on those differences which the board of directors
believes are most relevant to existing stockholders. This discussion is not
intended to be complete and is qualified in its entirety by reference to the
anticipated form of the declaration of trust attached as Annex 2 and to
Maryland law and the Texas REIT Act. The AmREIT board shall have the right,
prior to filing the declaration of trust with the appropriate Texas regulatory
authorities, to make ministerial changes and such other changes as the board
shall determine in order to permit AmREIT to comply fully with the Texas REIT
Act and the rules relating to qualification as a REIT for federal income tax
purposes, and to conform to the provisions of its Maryland charter.
125
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Background
The Texas REIT Act was amended effective September 1, 1995, to conform
substantially to modern corporation statutes based upon the Model Business
Corporation Act. Accordingly, a Texas REIT, and the rights, duties and
obligations of its stockholders, will be very similar to a corporation, and the
rights, duties and obligations of its stockholders, organized and existing
under Texas law. If the Texas REIT Act does not specifically address a
situation, the question is governed by the Texas Business Corporation Act and
related case law.
REIT Qualification
Maryland law has no corresponding provision.
The Texas REIT Act provides that
to the extent any provision of the
Texas REIT Act is contrary to or
inconsistent with the sections of
the Code (or any successor statute)
which relate to or govern REITs or
the regulations adopted under those
sections, or requires any trust
formed under the Texas REIT Act to
take (or prohibits any such trust
from taking) any action required to
secure or maintain its status as a
REIT under such sections or
regulations, the sections of the
Code (or any successor statute)
shall prevail over the provisions of
the Texas REIT Act as to any REIT
qualifying or attempting to qualify
under such sections or regulations.
Liability of Stockholders and Shareholders
In most cases, a stockholder or Like Maryland law, the Texas REIT
subscriber for shares is not Act generally limits a stockholder's
obligated or liable to a Maryland or subscriber's obligation to a
corporation or its creditors except Texas REIT or its creditors to full
for any unpaid subscription price or payment of the consideration for the
unpaid consideration or unless shares. A stockholder of a Texas
liability is imposed pursuant to REIT will not be liable for any
another provision of Maryland law. contractual obligation of a Texas
Common law theories of "piercing the REIT on the basis (1) that the
corporate veil" may be used to person is or was the alter ego of a
impose liability on stockholders in Texas REIT, or (2) of actual or
certain instances. constructive fraud, a sham to
perpetrate a fraud, or similar
theory, unless the obligee
demonstrates that the stockholder
caused the Texas REIT to be used for
the purpose of perpetrating and did
perpetrate an actual fraud on the
obligee primarily for the direct
personal benefit of the stockholder.
A holder of shares in a Texas REIT
is not under any obligation to the
Texas REIT or to its obligees with
respect to any obligation of the
Texas REIT on the basis of the
failure of the Texas REIT to observe
any formality, including the failure
to comply with any requirement of
the Texas REIT Act or of the
declaration of trust or bylaws, or
observe any requirement prescribed
by the Texas REIT Act or by the
declaration of trust or bylaws for
acts taken by the Texas REIT, its
trust managers,
126
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
or its stockholders. These
limitations in the Texas REIT Act
are exclusive and are not preempted
by common law or otherwise. Further,
like the Texas REIT Act, the Texas
REITs declaration of trust provides
that no stockholder will be
personally liable for any of the
Texas REITs obligations. To the
extent, however, that the Texas REIT
conducts operations in another
jurisdiction where the law of such
jurisdiction both does not recognize
the limitations of liability
afforded by contract, the Texas REIT
Act and the declaration of trust,
and does not provide similar
limitations of liability applicable
to real estate investments or other
trusts, a third party could attempt,
under limited circumstances, to
assert a claim against a
stockholder. AmREIT believes, based
on its current operating structure
and its review of relevant law, that
there should not be a material risk
of such liability. AmREIT has taken
and will continue to take such
actions as it considers necessary or
advisable in order to eliminate or
minimize, to the extent possible,
any such risk of liability.
Inspection Rights
Under Maryland law, one or more Under the Texas REIT Act any
stockholders who together have been person who has been a stockholder of
stockholders of record for at least record for more than six months
six months and who together hold at immediately preceding his demand, or
least 5% of the outstanding stock of shall be the record holder of more
any class may inspect the than 5% of all the outstanding
corporation's books of account and shares of a Texas REIT, upon written
stock ledger, request a statement of demand stating the purpose thereof,
the corporation's affairs and shall have the right to examine, at
request a stockholders' list. Any any reasonable time or times, for
stockholder may inspect the bylaws, any proper purpose, its books and
minutes of proceedings of the records of account, minutes and
stockholders, annual statement of record of stockholders, and shall be
affairs and voting trust agreement entitled to make extracts therefrom.
on file of a Maryland corporation
and may request a statement showing
all stock and securities issued by
the corporation during a specified
period of not more than 12 months
before the date of the request.
Special Meetings of Stockholders
A special meeting of stockholders
of AmREIT and AmREIT-Texas may be A special meeting of stockholders
called by the chairman of the board, of the Texas REIT may be called by
the chief executive officer, the the chairman of the board, the chief
president, the board of directors executive officer, the president,
pursuant to a resolution adopted by the board of trust managers pursuant
a majority of the directors, or by to a resolution adopted by a
the Secretary upon the written majority of the trust managers, or
request of holders of not less than by the secretary upon the written
25% of all shares then outstanding request of holders of not less than
and entitled to vote at such 25% of all shares then outstanding
meeting. and entitled to vote at such
meeting.
127
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Stockholder Action Without a Meeting
Maryland law provides that The Texas REIT Act provides that
stockholders may take such action stockholders may take such action
only upon unanimous written consent, only upon unanimous written consent,
a requirement unattainable by a a requirement unattainable by a
public company in most public company in most
circumstances. circumstances.
Preemptive Rights
The existing charter does not The declaration of trust will not
provide any stockholder with any provide stockholders with any
preemptive right to subscribe for preemptive right to subscribe for
any newly-issued stock or other any newly-issued stock or other
securities of AmREIT. Accordingly, securities of the Texas REIT.
AmREIT does not offer stockholders a Accordingly, the Texas REIT does not
prior right to purchase any new offer stockholders a prior right to
issue of the entity's shares in purchase any new issue of its shares
order to maintain their in order to maintain their
proportionate ownership. proportionate ownership.
Vote for Reorganization
Maryland law provides that the The Texas REIT Act provides that
affirmative vote of two-thirds of the affirmative vote of two-thirds
all the votes entitled to be cast is of all the votes entitled to be cast
required to approve a consolidation, is required to approve a
merger, share exchange or transfer consolidation, merger, share
of assets, subject to certain exchange or transfer of assets,
exceptions. subject to certain exceptions.
Authorized Capital Stock
AmREIT has 100,000,000 authorized The Texas REIT will have
shares of common stock and 100,000,000 shares of authorized
10,001,000 shares of authorized common stock and will have
preferred. 10,001,000 shares of authorized
preferred stock as AmREIT.
128
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Stock Redemption and Retirement
Under Maryland law, a corporation Under the Texas REIT Act, a Texas
may purchase or acquire its own REIT may purchase or acquire its own
shares, unless: shares, unless:
. the corporation would not be . after giving effect thereto,
able to pay its debts as they the Texas REIT would be
become due in the usual course insolvent, or
of business, or
. the amount paid therefor
. the corporation's total assets exceeds the surplus of the
would be less than the sum of Texas REIT. The term "surplus"
the corporation's total is not defined in the Texas
liabilities plus the amount REIT Act. The term "surplus"
that would be needed, if the is defined in the Texas
corporation were to be Business Corporation Act as
dissolved at the time of the the excess of the net assets
purchase or acquisition, to of a corporation over its
satisfy the preferential rights stated capital. If the net
upon dissolution of assets of a Texas REIT are not
stockholders whose preferential less than the proposed
rights on dissolution are distribution, a Texas REIT may
superior to those whose shares make a distribution to
are purchased or acquired. purchase or redeem any of its
own shares if the purchase or
redemption is made, for
example, to effect the
purchase or redemption of
redeemable shares in
accordance with the Texas REIT
Act.
Dividends
Maryland law permits the payment Under the Texas REIT Act, a Texas
of dividends unless: REIT may make a distribution,
unless:
. the corporation would not be
able to pay its debts as they . after giving effect thereto,
become due in the usual course the Texas REIT would be
of business or insolvent, or
. the corporation's total assets . the distribution exceeds the
would be less than the sum of surplus of the Texas REIT. The
the corporation's total term "surplus," for a Texas
liabilities plus the amount REIT, is the excess of the net
that would be needed, if the assets of the Texas REIT over
corporation were to be its stated capital
dissolved at the time of
payment of such dividends, to
satisfy the preferential rights
upon dissolution of
stockholders whose preferential
rights upon dissolution are
superior to those receiving the
dividends. Maryland law avoids
the concepts of "surplus" and
"net profits" and thereby
simplifies the analysis of
whether a dividend may be paid.
129
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Director/Trust Manager Number and Election
AmREIT's charter documents The Texas REIT's charter
provide that the number of directors documents will provide that the
shall be fixed by a resolution of number of trust managers shall be
the entire board and shall not fixed by a resolution of the entire
exceed nine or be less than three. board and shall not exceed nine or
Currently, AmREIT has three be less than three.
directors.
Under Maryland law and the AmREIT
charter and bylaws, directors are Under declaration of trust,
elected by a plurality vote of the however, only those nominees for
stockholders, which means that those director that receive a majority of
nominees receiving the greatest the votes entitled to be cast on the
number of votes are elected as matter and present in person or
directors, whether or not any represented by proxy will be
nominee for director receives a considered to have been elected as
majority of the votes entitled to be directors.
cast on the matter and present in
person or represented by proxy.
Director/Trust Manager Removal and Vacancies
AmREIT's charter documents The Texas REIT's charter
provide that, subject to the right documents will provide that, subject
of any holders of any series of to the right of any holders of any
preferred stock to elect additional series of preferred stock to elect
directors (or remove such additional additional trust managers (or remove
directors, once elected), under such additional trust managers, once
specified circumstances, any elected), under specified
director may be removed from office circumstances, any trust manager may
at any time, but only for cause and be removed from office at any time,
only by the affirmative vote of the but only for cause and only by the
holders of 80% of the then- affirmative vote of the holders of
outstanding shares entitled to vote 80% of the then-outstanding shares
generally in the election of entitled to vote generally in the
directors, voting together as a election of trust managers, voting
single class. AmREIT's charter together as a single class. Both
documents further provide that sets of charter documents further
vacancies resulting from death, provide that vacancies resulting
resignation, retirement, from death, resignation, retirement,
disqualification, or other cause may disqualification, or other cause may
be filled by the affirmative vote of be filled by the affirmative vote of
the remaining directors, though less the remaining trust managers, though
than a quorum, and vacancies due to less than a quorum, and vacancies
an increase in the size of the board due to an increase in the size of
of directors may be filled by the the board of trust managers may be
affirmative vote of the entire board filled by the affirmative vote of
of directors. Directors selected by the entire board of trust managers.
the board of directors to fill Trust managers selected by the board
vacancies serve until the next of trust managers to fill vacancies
annual meeting of stockholders or serve until the next annual meeting
until their successors are elected of stockholders and until their
and qualified. successors are elected and
qualified.
130
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Limitations on Liability
The Texas REIT's declaration of
The AmREIT charter protects trust will protect trust managers
directors from liability to the from liability to the extent
extent permissible under Maryland permissible under Texas law.
law.
The Maryland charter provides The Texas REIT Act provides that
that no director or officer shall be no trust manager shall be liable to
liable to the corporation or to its a Texas REIT for any act, omission,
stockholders for money damages loss, damage or expense arising from
except: the performance of his or her duty
under a Texas REIT, save only for
his or her willful misfeasance,
willful malfeasance or gross
negligence.
. To the extent that it is proved
that such director or officer
actually received an improper
benefit or profit in money,
property or services, for the
amount of the benefit or profit in
money, property or services
actually received, or
The declaration of trust provides
that the liability of each trust
manager for monetary damages shall
be eliminated to the fullest extent
permitted under Texas law, as
amended, and no trust manager shall
be liable for monetary damages
except to the extent expressly
prohibited under Texas law.
. To the extent that a judgment or
other final adjudication adverse
to such director or officer is
interested in a proceeding based
on a finding in such proceeding
that such director's of officer's
action, or failure to act, was the
result of active and deliberate
dishonesty and was material to the
cause of action adjudicated in the
proceeding.
. The Maryland charter further
provides that neither amendment
nor repeal of the liability
limitation, nor adoption of any
charter or bylaw provision
inconsistent with the liability
limitation will apply to or affect
in any respect the applicability
of the liability limitation to any
act or failure to act which
occurred prior to such amendment,
repeal or adoption, and the
declaration of trust will contain
a similar provision.
131
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Indemnification
The Texas REIT's charter
AmREIT's charter documents documents will provide
provide indemnification to the indemnification to the extent
extent authorized by applicable law, authorized by applicable law, as
as currently in effect and currently in effect and thereafter
thereafter amended, and states that amended, and will state that the
the indemnification provisions found indemnification provisions found in
in those documents are nonexclusive. those documents are nonexclusive.
The provisions of Maryland law The provisions of the Texas REIT Act
governing indemnification are governing indemnification are
similar to the Texas REIT Act in similar to Maryland law in most
most respects. respects.
Maryland law provides that a The Texas REIT Act provides that
corporation may indemnify any a provision for a Texas REIT to
director made a party to any indemnify or to advance expenses to
proceeding by reason of service in a trust manager who was, is, or is
that capacity unless it is threatened to be made a named
established that: defendant or respondent in a
proceeding, whether contained in the
. the act or omission of the declaration of trust, the bylaws, a
director was material to the resolution of stockholders or trust
matter giving rise to the managers, an agreement, or
proceeding; and (A) was committed otherwise, except in accordance with
in bad faith; or (B) was the the provisions of the Texas REIT Act
result of active and deliberate permitting a Texas REIT to purchase
dishonesty; and maintain insurance or another
arrangement on behalf of any person
. the director actually received an who is or was a trust manager,
improper personal benefit in officer, employee or agent of a
money, property, or services; or Texas REIT or who was serving at the
request of a Texas REIT as a trust
. in the case of a criminal manger or a director, officer,
proceeding, the director had partner, venturer, proprietor,
reasonable cause to believe that trustee, employee, agent or similar
the act or omission was unlawful. functionary of another REIT or of a
foreign or domestic corporation,
Maryland law provides that the partnership, joint venture, sole
indemnification and advancement of proprietorship, trust, employee
expenses provided or authorized by benefit plan or other enterprise, is
Maryland law may not be deemed valid only to the extent it is
exclusive of any other rights, by consistent with the Texas REIT Act
indemnification or otherwise, to indemnification provisions as
which a director may be entitled limited by the declaration of trust,
under the charter, the bylaws, a if such a limitation exists.
resolution of stockholders or
directors, an agreement or
otherwise, both as to action in an The Texas REIT Act provides that
official capacity and as to action a Texas REIT may indemnify a person
in another capacity while holding who is a named defendant or
such office. respondent in a proceeding because
the person is or was a trust manager
Maryland law provides that the only if it is determined in
termination of any proceeding by accordance with the Texas REIT Act
judgment, order or settlement does that the person satisfied the
not create a presumption that the following three conditions, to the
director did not meet the requisite extent applicable. First, the person
standard of conduct to be must have conducted himself in good
indemnified, and the termination of faith. Second, the person must have
any proceeding by conviction or plea reasonably believed (1) in the case
of nolo contendere, or its of conduct in his official capacity
equivalent, or an entry of an order as a trust manger of a Texas REIT,
of probation prior to judgment, that his conduct was in The Texas
creates a rebuttable presumption REIT Act provides that a Texas REIT
that the director did not meet the the Texas REIT's best interests; and
requisite standard of conduct to be (2) in all other cases, that his
indemnified. conduct was at least not opposed to
the Texas REIT's best interests.
Third, in the case of any criminal
proceeding, the person must have had
no reasonable cause to believe that
his conduct was
132
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
unlawful. The shifting of the burden
of proof to the person seeking
indemnification may make it more
difficult for a trust manager of a
Texas REIT to be indemnified than a
director of a Maryland corporation.
The Texas REIT Act provides that a
provision contained in the
declaration of trust, bylaws or an
agreement that makes mandatory the
indemnification permitted by the
Texas REIT Act, or the payment or
reimbursement of expenses permitted
by the Texas REIT Act, shall be
deemed to constitute authorization
of indemnification in the manner
required by the Texas REIT Act even
though such provision may not have
been adopted or authorized in the
same manner as the determination
that indemnification is permissible.
The declaration of trust and the
Texas Bylaws each contain such a
mandatory provision. Maryland law
does not contain a similar
provision, although the Maryland
Charter and the Maryland Bylaws make
indemnification mandatory.
The Texas REIT Act further
provides that the termination of a
proceeding by judgment, order,
settlement, or conviction, or on a
plea of nolo contendere or its
equivalent, is not of itself
determinative that the person did
not meet the requirements for
indemnification set forth in the
Texas REIT Act.
Amendment of Charter
Maryland law requires the board The Texas REIT Act requires the
of directors to approve any board of trust managers to approve
amendment to a corporation's any amendments to a REIT's
articles of incorporation and declaration of trust and provides
provides that a vote of two-thirds that a vote of two-thirds of all
of all votes entitled to be cast on votes entitled to be cast on the
the matter by stockholders of the matter by stockholders of the REIT
corporation is required to approve is required to approve any such
any such amendment. amendment.
133
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Amendment of Bylaws
Under Maryland law, the power to Under the Texas REIT Act, the
adopt, amend or repeal bylaws is power to adopt, amend or repeal
vested in the stockholders, unless bylaws is vested in the stockholders
the articles of incorporation unless the declaration of trust
confers such power to the board of confers such power to the board of
directors. trust managers.
. Under both Maryland law and the On the other hand, the Texas REIT
Texas REIT Act, the power to Act contemplates either concurrent
adopt, amend or repeal bylaws stockholder and trust manager power
is vested in the stockholders to amend, alter or repeal bylaws or
or stockholders, as the case a divesting of stockholder power or
may be, unless the articles of trust manager power to the trust
incorporation or the managers or the stockholders,
declaration of trust confers respectively. Under the declaration
such power to the board of of trust, the board of trust
directors or trust managers managers of the Texas REIT will
retain sole power to amend, alter or
. Maryland law provides, however, repeal the its bylaws unless:
that conferring such power to
the board of directors does not . the board of trustees
divest the stockholders of specifically authorizes, by
their power to alter, amend or duly adopted resolution,
repeal a corporation's bylaws, stockholders to amend, repeal
and the Maryland charter or adopt a particular bylaw, or
expressly confirms that
authority subject only to . the board, by resolution,
compliance with any specified specifically authorizes
voting requirements of Maryland stockholders to amend, adopt or
law or the Maryland charter. repeal.
Accordingly, except for bylaw
provisions of the type described in
the preceding sentence, the Texas
REIT stockholders would not be able
to amend any provision of the bylaws
unless they first amended the
declaration of trust (which requires
a two-thirds stockholder vote).
134
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Business Combinations
Maryland law establishes special
requirements with respect to The Texas REIT Act has no
"business combinations" (including a comparable provision, although the
merger, consolidation, share Texas REIT declaration of trust
exchange, or, in certain contains a provision to the same
circumstances, an asset transfer or effect.
issuance of reclassification of
equity securities) between a
Maryland corporation and any
"interested stockholder" who
beneficially owns, directly or
indirectly, 10% or more of the
voting power of the corporation's
shares, subject to certain
exemptions. In general, such
interested stockholders or any
affiliate thereof may not engage in
a "business combination" with the
corporation for a period of five
years following the date one becomes
an interested stockholder.
Thereafter, such transactions must
be (1) approved by the board of
directors of such corporation and
(2) approved by the affirmative vote
of at least (a) 80% of the votes
entitled to be cast by holders of
voting shares other than voting
shares held by the interested
stockholder with whom the business
combination is to be effected,
unless, among other things, the
corporation's common stockholders
receive a minimum price (as defined
in the statute) for their shares and
the consideration is received in
cash or in the same form as
previously paid by the interested
stockholder for his shares. These
provisions of Maryland law do not
apply, however, to business
combinations that are approved or
exempted by the board of directors
of such corporation prior to the
time that the interested stockholder
becomes an interested stockholder.
135
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
Control Share Acquisitions
Maryland law provides that
"control shares" of a Maryland The Texas REIT Act has no
corporation acquired in a control comparable provision, although the
share acquisition have no voting Texas REIT declaration of trust
rights except to the extent approved contains a provision to the same
by a vote of two-thirds of the votes effect.
entitled to be cast by stockholders,
excluding shares owned by the
acquirer and officers and directors
who are employees of the
corporation. "Control shares" are
shares which, if aggregated with all
other shares previously acquired
which the person is entitled to
vote, would entitle the acquirer to
vote:
. 20% or more but less than one-
third;
. one-third or more but less than
a majority; or
. a majority of the outstanding
shares
Control shares do not include
shares that the acquiring person is
entitled to vote on the basis of
prior stockholder approval. A
"control share acquisition" means
the acquisition of control shares
subject to certain exemptions.
A person who has made or proposed
to make a control share acquisition
and who has obtained a definitive
financing agreement with a
responsible financial institution
providing for any amount of
financing not to be provided by the
acquiring person may compel the
board of directors of the
corporation to call a special
meeting of stockholders 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 stockholders'
meeting.
If voting rights are not approved
at a stockholders' meeting or if the
acquiring person does not deliver an
acquiring person statement as
required by 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 voting rights, as
of the date of the last control
share acquisition or of any meeting
of stockholders at which the voting
rights of such shares are considered
and not approved. If voting rights
for control shares are approved at a
stockholders' meeting and the
acquiror is entitled to vote a
majority of the shares entitled to
vote, all other stockholders may
exercise appraisal rights. The fair
136
<PAGE>
- --------------------------------------------------------------------------------
MARYLAND CORPORATION TEXAS REIT
- --------------------------------------------------------------------------------
value of the shares for purposes of
such appraisal rights may not be
less than the highest price per
share in the control share
acquisition, and certain limitations
and restrictions otherwise
applicable to the exercise of
dissenters' rights do not apply.
The control share acquisition
statute does not apply to shares
acquired in a merger, consolidation
or share exchange if the corporation
is a party to the transaction, or if
the acquisition is approved or
excepted by the articles of
incorporation or bylaws of the
corporation prior to a control share
acquisition.
137
<PAGE>
THE NOTES
General. The notes are part of a series of up to $10,000,000 in principal
amount of % notes due 2006, which may be issued pursuant to the terms
of the loan agreement. The interest rate on the notes was determined based on
120% of the applicable federal rate of on , 1999. The notes will be
issued as of the closing date and will bear interest from the date of issuance.
Elections to receive notes in lieu of shares of AmREIT common stock in the
merger will be accepted on the basis described elsewhere in this proxy
statement. The material terms of the loan agreement are described below, and a
copy of the loan agreement may be obtained upon request from AmREIT.
Registered Form. The notes will be issued in registered form, without
coupons, in denominations of the exact amount of the investment. Ownership of
the notes will be documented only on the records of AmREIT, and such
documentation will constitute the sole evidence of ownership. The copies of the
notes issued to the noteholders will be facsimiles and will not be negotiable.
Transfers of the notes will be effective only when evidenced on the records of
AmREIT.
Transfers Of Record. The notes may be transferred only on the records of
AmREIT upon written request to transfer in a form specified by AmREIT, and
delivered to AmREIT at its principal business offices together with the
noteholder's facsimile copy of the note. No service charge will be made for the
registration of transfer or exchange of the note, but AmREIT may require
payment of a sum sufficient to pay any transfer tax or similar governmental
charge payable in connection with a transfer of the note.
Interest and Principal Payments. Interest will be paid at the rate of %
per annum, uncompounded, from the date of issuance. The loan agreement provides
for AmREIT to make payments to the holders of the notes as follows:
. quarterly installments of accrued interest on the fifth day of the first
calendar quarter following the closing date and on the fifth day of each
calendar quarter period thereafter with respect to interest accrued
during the immediately preceding calendar quarter until the maturity date
(interest will be computed on a 365-day year for actual days elapsed);
and
. the unpaid balance of principal and accrued interest on the maturity
date.
AmREIT will pay principal and interest by check, and will mail such checks
to the noteholder's address of record as of the last day of the calendar
quarter for which interest is paid. The names and addresses of registered
holders of the notes will be maintained by AmREIT at its principal business
offices. A noteholder's "address of record" will be the address specified in
the subscription documents, or such other address of which the noteholder
advises AmREIT by written notice. The notes will not be subject to a sinking
fund.
Maturity. Unless sooner redeemed or called as described below, all notes
will mature on , 2006 at which time the entire unpaid balance of principal
and accrued interest will be due and payable.
Redemption by AmREIT. The notes may be called for prepayment by AmREIT, in
whole or in part, at any time, or from time to time, by delivering to the
noteholders' address of record a written notice of such redemption. Such notice
shall be made not less than 30 days nor more than 60 days prior to the
redemption date. The redemption price of the notes will be their unpaid
principal balance plus accrued interest to the date called for prepayment. To
the extent that less than all of the notes are called for redemption, the notes
may be redeemed either pro rata or by lot in the sole discretion of AmREIT.
Satisfaction and Discharge. Upon maturity, AmREIT will make payment to the
registered noteholder at his or her address shown on the records of AmREIT on
the date of payment. Upon such final required payment, the notes will be paid
in full and cease to be outstanding. The noteholder's copy of the note, which
is a facsimile, need not be presented to AmREIT for payment. AmREIT's
obligation to pay interest on the notes will end on the maturity date.
138
<PAGE>
Nature of Obligation. The notes constitute general obligations of AmREIT. In
the event AmREIT should default on the notes, AmREIT's obligation for payment
would be in pari passu to AmREIT's obligations to its other general creditors.
noteholders are entitled to have recourse only against AmREIT for payment of
any principal and interest on the notes and for any recovery of attorneys' fees
and/or costs, or for any other claim based hereon, and noteholders may not seek
to impose any personal liability for any such indebtedness on the trustee, if
appointed. Moreover, no director, officer, employee, stockholder or agent of
AmREIT, in his or her capacity as such, shall have any liability whatsoever for
any obligations of AmREIT under the notes, or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each
noteholder, as a condition to receiving a note, waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the notes.
Reports/Noteholder Lists. AmREIT is required to deliver to the noteholders
(or the trustee, if one is then appointed) an annual statement regarding
compliance with the terms and conditions of the notes. In addition, AmREIT will
provide to any noteholder, upon written request, a list of the names and
addresses of the noteholders.
The Loan Agreement. As a condition to the purchase of the notes, each
noteholder is required to execute the loan agreement whereby the noteholder
appoints the trustee to act as the noteholders' exclusive trustee to take
certain administrative and ministerial acts on their behalf and exercise
certain remedies in the event of a default under the note. noteholders may not
enforce the terms of the notes except as provided in the loan agreement.
Subject to certain limitations, the noteholders may authorize the trustee to
exercise its powers only by the written direction signed or adopted by the
noteholders holding a majority of the unpaid principal amount of the notes then
outstanding. The trustee may be appointed by the noteholders at any time by a
majority vote.
Certain Covenants. The loan agreement contains, among other things, the
following covenants:
No Default On Other Debt. AmREIT shall not be in default with respect to any
other of its debt, including any payment of principal or interest thereon. For
the purposes hereof, "default" means AmREIT's failure to cure any default under
the terms of any debt obligation within 30 days of written notice of such
default by a creditor under the respective debt obligations.
For the purposes of the foregoing, "debt" means any unsecured indebtedness,
contingent or otherwise, with respect to borrowed money (whether or not the
recourse of the lender is to the whole of the assets of AmREIT or only to a
portion thereof), or evidenced by bonds, notes, debentures or similar
instruments or letters of credit, except any such balance that constitutes a
trade payable, if and to the extent such indebtedness would appear as a
liability upon the balance sheet of AmREIT in accordance with generally
accepted accounting principles.
Limitation On Merger, Consolidation Or Sale Of Assets. During the time any
principal or interest is owed on the notes, AmREIT may not merge, consolidate
with or transfer all or substantially all of its assets to another person or
entity, unless:
. the successor assumes all obligations of AmREIT with respect to the
notes; and
. after such transaction, no event of default under the notes exists.
Prepayment of Notes. AmREIT may prepay the notes, in whole or in part, at
any time in its sole discretion.
Books and Records. AmREIT shall keep proper books of record and account, in
which full and correct entries shall be made of all dealings or transactions of
or in relation to the notes and the business and affairs of AmREIT in
accordance with generally accepted accounting principles. AmREIT shall furnish
to the trustee any and all information related to the notes as the trustee may
reasonably request and which is in AmREIT's possession.
139
<PAGE>
Events of Default. An event of default, under the terms of the loan
agreement, is any one of the following:
. A default of 30 days in the payment of interest on the notes;
. A default of 30 days in payment, when due, of principal on the notes;
. AmREIT's failure to comply with any of its covenants or other obligations
under the terms of the notes, including its obligation to maintain
current AmREIT's other debt, to redeem the notes as required, or keep
and/or maintain aggregate unsecured indebtedness on the required maximum
amounts, if not cured in a timely manner;
. If not cured in a timely manner, default under the instruments governing
any other indebtedness or any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any other indebtedness for money borrowed by AmREIT, whether such other
indebtedness or guarantee now exists or is hereafter created, which
default (1) is caused by a failure to pay when due principal or interest
on such other indebtedness within the grace period provided and which
continues beyond any applicable grace period or (2) results in the
acceleration of such other indebtedness prior to its express maturity,
provided in each case the principal amount of any such other
indebtedness, together with the principal amount of any other such other
indebtedness under which there has been a payment default or the maturity
of which has been so accelerated, aggregates $250,000 or more; or
. AmREIT's bankruptcy or insolvency.
Under the terms of the notes, "bankruptcy" or "insolvency" means:
. the filing by AmREIT in any court, pursuant to any statute of the United
States or of any state, a petition in bankruptcy or insolvency;
. the filing for reorganization or for the appointment of a receiver or
trustee of all or a material portion of AmREIT's assets;
. an assignment for the benefit of creditors, if AmREIT admits in writing
its inability to pay its debts as they fall due; or
. the seeking, consenting to, or acquiescing in the appointment of a
trustee, receiver or liquidator of any material portion of its property.
Bankruptcy or insolvency shall also include the filing against AmREIT, in any
court, pursuant to any statute of the United States or of any state, a
petition in bankruptcy or insolvency, or for reorganization, or for
appointment of a receiver or trustee of all or a substantial portion of
AmREIT's property, if within 90 days after such commencement of any such
proceeding against AmREIT such petition shall not have been dismissed.
Cure of Default. In order to cure payment default, AmREIT must mail to the
noteholders the amount of the nonpayment plus a late payment penalty equal to
simple interest on the amount unpaid at the rate of 10% per annum, measured
from the date the payment should have been mailed, deposited or credited
pursuant to the terms of the notes until the date it actually is mailed,
deposited or credited.
Trustee in the Event of an Uncured Default. If an event of default occurs
and is continuing, then the noteholders of a majority in interest of the
outstanding notes may, within 30 days of such event of default, appoint a
trustee to represent the interests of all the Holders pursuant to the loan
agreement and may instruct the trustee to declare all the notes to be due and
payable immediately and take any action allowed by law to collect such
amounts. Upon acceptance of such appointment by the trustee, the operation of
the trust shall commence and the power and rights of the trustee thereunder
shall begin. If a majority in interest of the noteholders cannot agree on a
trustee, the trust will not be instituted.
140
<PAGE>
AmREIT has committed to engage and pay a fee to an appropriate unaffiliated
entity, such as an accounting firm, for organizing a vote of the noteholders as
soon as practicable upon the occurrence of an event of default for the purpose
of appointing a trustee in accordance to the terms of the loan agreement. The
entity is not required to act as a trustee. AmREIT must supply such entity with
the names, addresses and occurrence of any event of default. AmREIT agreed to
pay the reasonable expenses of any trustee duly appointed by a majority in
interest of the noteholders pursuant to the loan agreement.
BY EXECUTING THE SUBSCRIPTION DOCUMENT, EACH NOTEHOLDER IS AGREEING TO BE
BOUND BY THE TERMS OF THE LOAN AGREEMENT SHOULD IT COME INTO FORCE BY THE
APPOINTMENT OF A TRUSTEE PURSUANT TO ITS TERMS. EACH PROSPECTIVE INVESTOR
SHOULD CAREFULLY REVIEW THE FORMS OF NOTE AND LOAN AGREEMENT (ATTACHED AS ANNEX
3). THE FOREGOING IS ONLY A SUMMARY OF THE PROVISIONS OF THE LOAN AGREEMENT.
Remedies in Event of Default. If any event of default occurs and is
continuing, a majority in interest may appoint a trustee under the loan
agreement and may instruct the trustee to declare all notes to be due and
payable immediately and take any action allowed by law to collect such amounts.
Notwithstanding the foregoing, in the case of an event of default arising from
events of bankruptcy or insolvency, all outstanding notes will become due and
payable without further action or notice. If an event of default has occurred
and is continuing, AmREIT must, upon written request of the trustee, cure such
default and pay for the benefit of the noteholders the whole amount then due,
any penalties which may be due and such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the trustee, its agents
and counsel and all other amounts due to the trustee hereunder. If AmREIT fails
to cure such defaults and pay such amounts forthwith upon such demand, the
trustee, in its own name and as trustee of an express trust, shall be entitled
to sue for and recover judgment against AmREIT and any other obligor on the
notes for the amount so due and unpaid pursuant to the terms of the notes.
A trustee appointed under the terms of the loan agreement may not make any
settlement or compromise concerning the rights of the noteholders, in regard to
payments of principal or interest, unless it is approved in a separate vote by
a majority in interest of the noteholders. Any settlement or compromise so
approved would be binding upon all the noteholders. The trustee may withhold
from the noteholders notice of any default or event of default if it believes
that withholding notice is in their interest except a default or event of
default relating to the payment of principal or interest or penalties. NO
NOTEHOLDER SHALL HAVE THE RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING,
JUDICIAL OR OTHERWISE, WITH RESPECT TO THE LOAN AGREEMENT, THE NOTES, OR FOR
THE APPOINTMENT OF A RECEIVER OR TRUSTEE OR FOR ANY OTHER REMEDY HEREUNDER,
DURING THE PERIOD OF THE OPERATION OF THE LOAN AGREEMENT, UNLESS CERTAIN
CONDITIONS, AS SET FORTH IN THE LOAN AGREEMENT, ARE SATISFIED. THE LOAN
AGREEMENT REQUIRES NOTEHOLDERS WHO SUFFER AN ACTUAL DEFAULT ON THEIR NOTES TO
OBTAIN THE CONSENT OF A MAJORITY OF ALL NOTEHOLDERS TO APPOINT A TRUSTEE AND
TAKE ACTION AGAINST AMREIT. THIS REQUIREMENT, IN EFFECT, MAY LEAVE MANY
NOTEHOLDERS WITHOUT PRACTICAL RECOURSE.
Authority of Trustee. Under the loan agreement, the trustee would be the
exclusive trustee of the noteholders to act for them in the event of an action
authorized by them upon the default by AmREIT. In general, the trustee may only
act upon express written instructions by a majority vote of the noteholders.
The trustee is the sole agent authorized to present AmREIT with notices of
default, demands or requests for information on behalf of the noteholders. The
trustee will notify all noteholders of any actions requested or taken by it
upon the written instructions received after a majority vote of the
noteholders, and any reports or information received by it from AmREIT on
behalf of the noteholders. The noteholders of not less than a majority in
interest may, on behalf of all noteholders, waive any past default under the
loan agreement and settle or compromise any claim related to the payment of
principal and interest on the outstanding notes; provided the terms of such
settlement or compromise have been made known to all noteholders. The rights of
141
<PAGE>
the noteholders upon the occurrence of a default, as well as a description of
those actions constituting a default under the notes, are summarized above.
The trustee is authorized to engage legal counsel, accountants or other
experts who are, in its judgment, reasonably required to effect the course of
action authorized. The trustee may undertake the action directed by a majority
vote only if it is adequately indemnified against its costs and expense for
such action. Such indemnification would likely require the prepayment of any
fees or expenses, including legal fees, accounting fees or other professional
or third party fees reasonably required to effect the action by the
noteholders. The trustee is not required to advance any funds for the payment
of expenses, including attorneys' fees, on behalf of the noteholders or to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers.
The trustee has the right to be compensated in a reasonable and timely
amount for its services in connection with its actions as the trustee,
including prior reimbursement for any costs or expenses incurred by it. The
trustee is entitled to receive reimbursement for fees and costs incurred by it
in taking any action on behalf of the noteholders from any proceeds realized by
it in enforcing the terms of the notes. The trustee's compensation for any
additional acts authorized by the noteholders will be paid by the noteholders
in the amounts and on the terms prescribed by the trustee. To the extent any of
these fees or costs are incurred as the result of a default by AmREIT, AmREIT
must reimburse such amounts to the noteholders.
The trustee is charged to perform such duties, and only such duties, as are
specifically set forth in the loan agreement. The trustee is not liable to the
noteholders for any act taken in good faith and not involving its willful
misconduct, and the noteholders jointly and severally agree to indemnify
trustee and to hold it harmless against, any loss, liability or expense,
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the loan agreement. The
loan agreement authorizes the trustee to act on the part of the noteholders
only to the extent provided in the loan agreement. The trustee is not empowered
to, nor will it, keep the note registration ownership records, hold the notes
on behalf of the noteholders, or collect or disburse funds with respect to the
notes on behalf of the noteholders.
Removal, Replacement and Resignation of Trustee. The loan agreement provides
that the noteholders, by a majority vote, may appoint and thereafter remove and
replace the trustee upon prior written notice. The trustee may resign, at any
time, upon prior written notice to the noteholders and AmREIT. No resignation
or removal of the trustee or appointment of a successor trustee shall become
effective until the acceptance of appointment by the successor trustee.
Amendment of Loan Agreement and Note. The terms and conditions of the loan
agreement and the notes, which constitute contractual agreements between AmREIT
and the noteholders, may be amended or supplemented by a majority vote of the
noteholders. The foregoing notwithstanding, AmREIT may, without the consent of
any noteholder, amend or supplement the note terms to cure any ambiguity,
defect or inconsistency, to provide for the assumption of its obligations to
the noteholders in the case of merger or acquisition, or to make any change
that does not materially, adversely affect the rights of any registered
noteholder. However, without the consent of each registered noteholder
affected, AmREIT may not:
. reduce the principal amount of the notes;
. reduce the number of noteholders who must consent to an amendment of any
of the note terms;
. reduce the interest rate or change the interest payment date for any
note;
. reduce the principal of, or change the fixed maturity date of, any note;
or
. make any change in the provisions concerning waiver of a default or event
of default by the noteholders or the rights of the noteholders to receive
payment of principal or interest.
142
<PAGE>
REPORTS TO STOCKHOLDERS
AmREIT provides periodic reports to the stockholders regarding its
operations over the course of the year. Financial information contained in all
reports to stockholders will be prepared on an accrual basis of accounting in
accordance with generally accepted accounting principles. Tax information will
be mailed to stockholders within 30 days following the close of each fiscal
year. AmREIT'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 AmREIT to the management and its affiliates. The information required by
Form 10-Q will be made available to stockholders within 45 days of the close of
each of the first three fiscal quarters of each year.
AmREIT provides the stockholders 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 stockholders would receive if properties were
sold at their appraised values as of the close of AmREIT's fiscal year and if
such proceeds, together with the other AmREIT funds, were distributed in
liquidation. Until 1999, AmREIT is permitted to value all properties at cost,
although it is not required to do so. Thereafter, whenever AmREIT is not
offering shares of its common stock, it will perform a valuation update based
on capitalization of income for each of its properties unless it 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
board may elect to deliver such reports to all stockholders. Stockholders will
not be forwarded copies of appraisals or updates. In providing such reports to
the stockholders, neither AmREIT nor its affiliates thereby make any warranty,
guarantee or representation that (1) the stockholders or AmREIT, upon
liquidation, will actually realize the estimated value per share, or (2) the
stockholders will realize the estimated net asset value if they attempt to sell
their shares.
Stockholders have the right under applicable federal and Maryland law to
obtain certain information about AmREIT and, at their expense, may obtain a
list of names and addresses of the stockholders. Stockholders have the right to
inspect and duplicate AmREIT'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, AmREIT's reporting
requirements are reduced, AmREIT may cease preparing and filing certain of the
aforementioned reports if the directors determine such action to be in AmREIT's
best interests 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.
THE PARTNERSHIPS
General
Each of the partnerships was sponsored and organized by the general partners
for the purpose of one or more retail properties under long-term net lease to
creditworthy tenants. Each partnership has a separate corporate general
partner. In addition, Mr. Taylor serves as individual general partner for Fund
IX, Fund X and Fund XI. Mr. Taylor is the owner of 45% to 100% of the
outstanding common stock of each of the corporate general partners. Each of the
corporate general partners of Fund IX and Fund X is a Nebraska corporation and
those of each other partnership is a Texas corporation. Each corporate general
partner's only assets are its general partner interest in its respective
partnership. No corporate general partner has any known liabilities other than
certain amounts owing to Mr. Taylor for certain organizational and operating
costs.
143
<PAGE>
Each of the partnerships is restricted from using leverage to finance its
investments and thus, none of the partnerships has any significant debt. Each
of the partnerships was formed for long-term investment, intending to hold its
properties for resale over a 10 to 15 year period, although each partnership
agreement provides for a longer term. Each of the partnerships was organized
under Texas limited partnership law except for Fund IX and Fund X which were
organized under Nebraska limited partnership law. The partnerships share
executive offices with the general partners and their affiliates, including
AmREIT. The following tables provide selected information regarding the
partnerships.
PARTNERSHIP ORGANIZATION AND CAPITALIZATION
<TABLE>
<CAPTION>
Original Price per No. of
Limited Limited Limited
No. of Date of Partner Partnership Partnership
Name of Partnership Partners Organization Capital Unit Units Sold
------------------- -------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FUND III.............. 43 2/86 $ 945,000 $30,000 31.5
FUND IV............... 31 10/86 615,000 30,000 20.5
FUND V................ 21 2/87 480,000 30,000 16.0
FUND VI............... 13 8/87 300,000 30,000 10.0
FUND VII.............. 40 3/88 1,125,100 30,000 37.5
FUND VIII............. 55 4/90 1,860,000 30,000 62.0
FUND GOODYEAR......... 37 10/90 1,335,000 30,000 44.5
FUND IX............... 326 6/90 5,390,500 1,000 5,390.5
FUND X................ 727 9/92 11,453,610 1,000 11,453.6
FUND XI............... 269 5/94 7,061,209 1,000 7,061.2
</TABLE>
Properties
Description. The partnerships own alone or jointly a total of 31 properties
and one mortgage note. The property interests of the partnerships consist of
fee simple interests owned directly or through joint ventures with one or more
other partnerships, or in the case of Fund IX, Fund X and Fund XI, AmREIT. Fund
IV and V are the only exceptions to the foregoing to the extent they jointly
own interests in the Atlas note, a secured note.
The following tables set forth information regarding the properties of each
of the partnerships as of June 30, 1999.
PARTNERSHIP PROPERTY INFORMATION
<TABLE>
<CAPTION>
Negotiated
Percentage Purchase Price of
Partnership Tenant/User (Location) Owned Price Properties
----------- --------------------- ---------- -------- ----------
<C> <S> <C> <C> <C>
FUND III Steak & Ale (Houston, TX)............... 44% $277,200
Bank of America (Houston, TX)........ 100% 315,000
--------
TOTAL $592,200 $825,000
======== ========
FUND IV Steak & Ale (Houston, TX)............... 56% $352,800
Atlas Note........................... 51.3% 99,044
--------
TOTAL $451,844 $498,000
======== ========
FUND V Pizza Inn (Clute, TX)................... 50% $ 74,809
Whataburger (Clute, TX).............. 50% 128,899
La Petite Academy (Houston, TX)...... 6.02% 32,494
Atlas Note........................... 48.7% 93,986
--------
TOTAL $330,188 $443,000
======== ========
</TABLE>
144
<PAGE>
<TABLE>
<CAPTION>
Negotiated
Percentage Purchase Price of
Partnership Tenant/User (Location) Owned Price Properties
----------- --------------------- ---------- ---------- -----------
<C> <S> <C> <C> <C>
FUND VI Pizza Inn (Clute, TX)......... 50% $ 74,809
Whataburger (Clute, TX)....... 50% 128,899
La Petite Academy (Houston,
TX).......................... 2.74% 14,771
----------
TOTAL $ 218,479 $ 346,000
========== ===========
La Petite Academy (Houston,
FUND VII TX).......................... 91.25% $ 492,734
Whataburger (Dallas, TX)...... 54.88% 299,095
Superior Sound (Houston, TX).. 27.28% 67,649
AFC, Inc./Church's (Houston,
TX).......................... 27.28% 57,283
Eller Media/Billboard
(Houston, TX)................ 27.28% --
----------
TOTAL $ 916,761 $ 922,000
========== ===========
FUND VIII Whataburger (Dallas, TX)...... 45.12% $ 245,905
Superior Sound (Houston, TX).. 72.72% 180,351
AFC, Inc./Church's (Houston,
TX).......................... 72.72% 152,717
Eller Media/Billboard
(Houston, TX)................ 72.72% --
Discount Tire (Fort Worth,
TX).......................... 100% 358,000
La Petite Academy (Houston,
TX).......................... 100% 457,000
Goodyear Tire-Marsh Lane
(Dallas, TX)................. 25.28% 150,149
----------
TOTAL $1,544,122 $ 1,644,000
========== ===========
Goodyear Tire-Marsh Lane
FUND (Dallas, TX)................. 74.72% $ 443,851
Goodyear Tire-Hillcrest
GOODYEAR (Dallas, TX)................. 100% 555,000
----------
TOTAL $ 998,851 $ 1,058,000
========== ===========
Foodmaker/Jack-in-the-Box
FUND IX (Dallas, TX)................. 100% $ 565.000
Baptist Health Services
(Memphis, TN)................ 100% 1,540,000
Waldenbooks/Payless (Austin,
TX).......................... 100% 535,000
Golden Corral I-45 (Houston,
TX).......................... 100% 1,575,456
Golden Corral Hwy 1960
(Houston, TX)................ 4.80% 74,894
----------
TOTAL $4,290,350 $ 5,251,000
========== ===========
Golden Corral Hwy 1960
FUND X (Houston, TX)................ 95.20% $1,485,106
TGI Friday's (Houston, TX).... 100% 1,473,461
Goodyear Tire (Houston, TX)... 100% 510,000
CompUSA (Minneapolis, MN)..... 100% 2,407,317
AFC, Inc./Popeye's (Atlanta,
GA).......................... 100% 834,500
Wherehouse Entertainment
(Independence, MO)........... 45.16% 699,000
Ronald Cucillo, M.D.
(Sugarland, TX).............. 100% 1,405,006
Just For Feet (Tucson, AZ).... 18.25% 611,394
----------
TOTAL $9,425,784 $10,495,000
========== ===========
Wherehouse Entertainment
FUND XI (Wichita, KS)................ 49% $ 833,000
Blockbuster Video (Oklahoma
City, OK).................... 100% 752,663
Just For Feet (Tucson, AZ).... 29.85% 1,000,007
Bank United (The Woodlands,
TX).......................... 49% 245,000
Just For Feet (Baton Rouge,
LA).......................... 49% 1,375,014
Hollywood Video (Lafayette,
LA).......................... 25.42% 285,624
Pier One (Longmont, CO)....... 100% 1,195,741
----------
* Unpaid balance of Atlas note on March 31,
1999. TOTAL $5,687,049 $ 6,243,000
========== ===========
</TABLE>
145
<PAGE>
Leases. Leases on the properties provide that the tenant bears
responsibility for substantially all property costs and expenses associated
with ongoing maintenance and operation, including utilities, property taxes and
insurance. In general, these leases also provide that the tenant is responsible
for roof and structural repairs. Certain of the properties are subject to
leases under which the landlord retains responsibility for certain costs and
expenses associated with the property.
None of the properties of any partnership, if the partnership is acquired by
AmREIT, would represent 10% or more of AmREIT's currently scheduled annual
rental income, the cost basis of AmREIT's properties or AmREIT's net rental
income. However, the acquisition of certain partnerships would, in the absence
of the acquisition of the remaining partnerships, result in an increase in the
portion of AmREIT's properties under lease to Just For Feet, Wherehouse
Entertainment, Blockbuster Video and Hollywood Video. Even so, AmREIT's
dependence on these tenants would not materially increase over current levels
unless certain partnerships are acquired and others are not. Further tenant
concentration would be most severe in the event the partnership were to acquire
only Fund XI, in which event Just For Feet and Wherehouse Entertainment would
account for up to 42.2% and 8.7%, respectively, of AmREIT's combined scheduled
annual rentals. Currently, Just For Feet and Wherehouse Entertainment account
for approximately 42.2% and 7.2%, respectively, of AmREIT's current scheduled
annual rentals.
Lease Information
The following table sets forth certain information regarding the leases on
the properties of each of the partnerships.
<TABLE>
<CAPTION>
Lease
Percentage Square Annual Termination
Partnership Tenant/User (Location) Owned Footage(1) Rent(1) Date
----------- ---------------------- ---------- ---------- -------- -----------
<C> <S> <C> <C> <C> <C>
Steak & Ale (Houston,
FUND III TX).................... 44% Land Lease $ 19,800 03/21/02
Bank of America
(Houston, TX).......... 100% 2,815 62,370 05/11/00
---------- --------
TOTAL 2,815 $ 82,170
========== ========
Steak & Ale (Houston,
FUND IV TX).................... 56% Land Lease $ 25,200 03/21/02
--------
TOTAL Land Lease $ 25,200
========
FUND V Pizza Inn (Clute, TX)... 50% 1,495 $ 12,120 07/31/03
Whataburger (Clute,
TX).................... 50% 1,400 14,543 01/18/00
La Petite Academy
(Houston, TX).......... 6.02% 407 3,493 03/28/04
---------- --------
TOTAL 3,302 $ 30,156
========== ========
FUND VI Pizza Inn (Clute, TX)... 50% 1,495 $ 12,120 07/31/03
Whataburger (Clute,
TX).................... 50% 1,400 14,543 01/18/00
La Petite Academy
(Houston, TX).......... 2.74% 180 1,588 03/28/04
---------- --------
TOTAL 3,075 $ 28,251
========== ========
La Petite Academy
FUND VII (Houston, TX).......... 91.25% 6,178 $ 52,969 03/28/04
Whataburger (Dallas,
TX).................... 54.88% 1,212 32,879 09/30/06
Superior Sound (Houston,
TX).................... 27.28% 453 8,183 08/31/01
AFC, Inc./Church's
(Houston, TX).......... 27.28% 360 4,092 05/14/00
Eller Media/Billboard
(Houston, TX).......... 27.28% Land Lease 4,910 02/28/19
---------- --------
TOTAL 8,203 $103,033
========== ========
</TABLE>
146
<PAGE>
<TABLE>
<CAPTION>
Lease
Percentage Square Annual Termination
Partnership Tenant/User (Location) Owned Footage(1) Rent(1) Date
----------- ---------------------- ---------- ---------- ---------- -----------
<C> <S> <C> <C> <C> <C>
Whataburger (Dallas,
FUND VIII TX).................... 45.12% 996 $ 27,032 09/30/06
Superior Sound (Houston,
TX).................... 72.72% 1,208 21,817 08/31/01
AFC, Inc./Church's
(Houston, TX).......... 72.72% 960 10,908 05/14/00
Eller Media/Billboard
(Houston, TX).......... 72.72% Land Lease 13,090 02/28/19
Discount Tire (Fort
Worth, TX)............. 100% 4,147 44,400 05/31/05
La Petite Academy
(Houston, TX).......... 100% 5,998 49,128 03/31/05
Goodyear Tire-Marsh Lane
(Dallas, TX)........... 25.28% 1,472 16,080 05/31/05
---------- ----------
TOTAL 14,781 $ 182,455
========== ==========
FUND Goodyear Tire-Marsh Lane
(Dallas, TX)........... 74.72% 4,352 $ 47,520 05/31/05
GOODYEAR Goodyear Tire-Hillcrest
(Dallas, TX)........... 100% 5,772 59,400 02/29/00
---------- ----------
TOTAL 10,124 $ 106,920
========== ==========
FUND IX Foodmaker/Jack-in-the-
Box (Dallas, TX)....... 100% 2,238 $ 68,998 07/11/09
Baptist Health Services
(Memphis, TN).......... 100% 15,000 187,500 08/31/07
Waldenbooks/Payless
(Austin, TX)........... 100% 4,000 82,000 01/30/03
Golden Corral I-45
(Houston, TX).......... 100% 12,000 182,994 11/30/07
Golden Corral Hwy 1960
(Houston, TX).......... 4.80% 576 8,723 03/14/08
---------- ----------
TOTAL 33,814 $ 530,215
========== ==========
Golden Corral Hwy 1960
FUND X (Houston, TX).......... 95.20% 11,424 $ 172,965 03/14/08
TGI Friday's (Houston,
TX).................... 100% 8,500 180,500 01/31/03
Goodyear Tire (Houston,
TX).................... 100% 5,209 51,756 03/31/09
CompUSA (Minneapolis,
MN).................... 100% 15,000 246,750 08/31/09
AFC, Inc./Popeye's
(Atlanta, GA).......... 100% 2,583 95,867 07/19/14
Wherehouse Entertainment
(Independence, MO)..... 45.16% 6,774 77,010 04/30/04
Ronald Pacillo, M.D.
(Sugarland, TX)........ 100% 15,000 157,200 01/31/09
Just For Feet (Tucson,
AZ).................... 18.25% 2,801 69,526 09/30/16
---------- ----------
TOTAL 67,291 $1,051,574
========== ==========
FUND XI Wherehouse Entertainment
(Wichita, KS).......... 49% 6,860 $ 92,104 12/31/04
Blockbuster Video
(Oklahoma City, OK).... 100% 6,500 80,523 08/31/05
Just For Feet (Tucson,
AZ).................... 29.85% 4,582 113,717 09/30/16
Bank United (The
Woodlands, TX)......... 49% Land Lease 26,488 09/30/11
Just For Feet (Baton
Rouge, LA)............. 49% 7,838 147,264 05/15/12
Hollywood Video
(Lafayette, LA)........ 25.42% 1,904 34,243 09/24/12
Pier One (Longmont,
CO).................... 100% 8,014 127,502 02/29/08
---------- ----------
TOTAL 35,698 $ 621,841
========== ==========
</TABLE>
- --------
(1) Reflects ownership percentages.
147
<PAGE>
Partnership Distributions
The following table sets forth the distributions paid per limited
partnership unit per partnership from the partnerships' inception through June
30, 1999. Amounts paid in the indicated quarter were determined based upon
partnership operations during the preceding quarter. The original cost per
limited partnership unit was $30,000 for each of the partnerships, except Fund
IX, Fund X and Fund XI whose original limited partnership units cost $1,000
each. All distributions were made from cash flow from operations except as
otherwise noted.
The tables below set forth information for each partnership regarding its
cash distributions from inception through June 30, 1999.
CUMULATIVE CASH DISTRIBUTIONS SINCE FORMATION THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
Cumulative Cumulative
Distributions Distributions
of Operational of Operational
Cashflow Cashflow as%
Year of Through of Original
Partnership First June 30, Invested
Name Investment 1999 Capital
----------- ---------- -------------- --------------
<S> <C> <C> <C>
FUND III............................... 1986 $ 1,221,291 129.24%
FUND IV................................ 1986 503,942 81.94%
FUND V................................. 1987 486,808 101.42%
FUND VI................................ 1987 273,753 91.25%
FUND VII............................... 1988 988,015 87.82%
FUND VIII.............................. 1990 1,532,686 82.40%
FUND GOODYEAR.......................... 1990 944,713 70.77%
FUND IX................................ 1990 3,488,132 64.71%
FUND X................................. 1992 4,977,472 43.46%
FUND XI................................ 1994 1,757,848 24.89%
-----------
Total................................ $16,174,660
===========
</TABLE>
<TABLE>
<CAPTION>
Adjusted
Distributions L.P.
in Return of Capital
Original L.P. Capital Through
L.P. Through June June 30,
Partnership Capital 30, 1999 1999
----------- ----------- ------------- -----------
<S> <C> <C> <C>
FUND III.................................. $ 945,000 $168,186(1) $ 776,814
FUND IV................................... 615,000 -- 615,000
FUND V.................................... 480,000 19,611 460,389
FUND VI................................... 300,000 5,267 294,733
FUND VII.................................. 1,125,100 -- 1,125,100
FUND VIII................................. 1,860,000 6,020 1,853,980
FUND GOODYEAR............................. 1,335,000 105,910 1,229,090
FUND IX................................... 5,390,500 -- 5,390,500
FUND X.................................... 11,453,610 -- 11,453,610
FUND XI................................... 7,061,209 -- 7,061,209
----------- -------- -----------
Total................................... $30,565,419 $304,994 $30,260,425
=========== ======== ===========
</TABLE>
- --------
(1) Distributions in return of L.P. Capital include $158,000 related to the
sale of Taco Bell. Although these proceeds were not distributed until July
1999, for purposes of this analysis, we have included them as a
distribution because the asset is no longer part of the partnership and the
offer made does not include any consideration for the Taco Bell property.
148
<PAGE>
Distributions in return of capital are distributions constituting a return
of a partner's capital under the respective partnership agreement. In general,
distributions in return of capital are distributions paid in excess of current
or cumulative income or paid from proceeds from the sale of property.
Operational Cash flow is distributions which do not constitute distributions in
return of capital.
A limited partner's adjusted capital as of the date stated, equals his or
her original investment, less distributions constituting a return of capital.
In the case of each partnership, adjusted capital has been calculated by
deducting from the limited partner's original capital contribution all
distributions constituting a return of capital under the partnerships'
partnership agreement. The limited partners in five of the 10 partnerships have
not heretofore received distributions in return of capital and, thus, their
adjusted capital is equal to their original invested capital. In the case of
five partnerships receiving distributions in return of capital, such
distributions represent distributions in excess of earnings, except in the case
of Fund GOODYEAR, where $105,910 of such distributions represent a return of
uninvested original capital.
Management of the Properties
Since its inception, each partnership was administered and managed by the
advisor, until its acquisition by AmREIT on June 5, 1998. After that time,
these functions have been continued under the same contractual terms by AmREIT
Realty Investment Corporation and/or other affiliates of AmREIT.
Employees
The partnerships do not employ their own personnel. The partnerships'
business activities are conducted by AmREIT Realty Investment Corporation
and/or other affiliates of AmREIT pursuant to management agreements. Under
these agreements, AmREIT Realty Investment Corporation and/or other affiliates
of AmREIT are reimbursed by the partnerships for the actual cost of the
employees providing services to the partnerships.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES
The partnerships and AmREIT are each vehicles recognized as appropriate for
the holding of real estate investments and afford passive investors, such as
limited partners and stockholders, certain benefits, including limited
liability, a professionally managed portfolio and the avoidance of double-level
taxation on distributed income. The information below highlights a number of
the significant differences between the partnerships and AmREIT relating to,
among other things, form of organization, investment objectives, policies and
restrictions, asset diversification, capitalization, management structure,
compensation and fees, and investor rights, and compares certain of the
respective legal rights associated with the ownership of limited partnership
units and shares. These comparisons are intended to assist limited partners in
understanding how their investments will be changed if, as a result of the
merger, their limited partnership units are exchanged for shares. In addition,
there are significant differences in the tax treatment of the partnerships and
REITs, and some of the material tax differences are summarized below under the
captions "Taxation of Taxable U.S. Stockholders" and "Taxation of Foreign
Investors" on pages 89 and 92 respectively and "Taxation of Tax-Exempt
Entities" on page 91. This discussion is summary in nature and does not
constitute a complete discussion of these matters, and limited partners should
carefully review the balance of this proxy statement for additional
discussions.
You should note, however, that AmREIT's board of directors has proposed
reorganizing AmREIT as a Texas REIT as soon as practicable following the
merger. If the reorganization is approved, each limited partner which would
otherwise receive shares of AmREIT common stock in this merger will receive
instead common shares of beneficial interest of the Texas REIT of equal value.
Consequently, limited partners should read the following comparison in
conjunction with the comparison of Texas law and Maryland law under the heading
"Reorganization of AmREIT as a Texas Real Estate Investment Trust" beginning on
page 118.
149
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
An investment in each of the Unlike the partnerships, AmREIT
partnerships was presented to intends to continue its operations
limited partners as a finite life for an indefinite time period and
investment, with the limited has no specific plans for
partners to receive regular cash disposition of the assets acquired
distributions out of the through the merger or subsequent
partnership's net operating income acquisitions. AmREIT intends to
and special distributions of net distribute at least 95% of its REIT
sale proceeds through the taxable income, but expects to
liquidation of the partnership's retain net sale or refinancing
real estate investments. Under each proceeds for new investments,
of the partnership agreements, the capital expenditures, working
partnership's stated term of capital reserves or other
existence was for a substantial appropriate purposes. In contrast to
period (from 30 to 45 years from the partnerships, AmREIT will
inception, depending upon the constitute a vehicle for taking
partnership), but the general advantage of future investment
partners stated their general opportunities that may be available
intention of selling the in the real estate markets. See "THE
partnership's properties within a MERGER" on page 34.
period of 10 to 15 years after
acquisition or development of the
properties. Limited partners were
advised that sale of the
partnership's assets would, however,
be dependent upon market conditions
and as such, might vary from time to
time.
Limited partners in each of the partnerships expect liquidation of their
investment when the assets of the partnership are liquidated. In contrast,
AmREIT does not expect to dispose of its investments within any prescribed
periods and, in any event, plans to retain the net sale proceeds for future
investments unless distributions are required to retain REIT status.
Stockholders are expected to achieve liquidity for their investments by trading
the shares in the market and not through the liquidation of AmREIT's assets.
The completion of the merger is subject to the listing of the shares of AmREIT
common stock on an exchange. Upon listing, such shares may ultimately trade at
a discount from, or premium to, their pro rata interest in the liquidation
value of AmREIT's properties.
Properties And Diversification
The investment portfolio of each As a result of the merger, AmREIT
of the partnerships is limited to will acquire substantially all of
the assets acquired with the initial the properties of the participating
equity raised from the general and partnerships. In addition, AmREIT
limited partners. The partnerships may issue debt and/or equity
may not use debt financing to securities in the future, and retain
acquire investments. all, or substantially all, of the
net liquidation proceeds from the
sale of AmREIT's assets to finance
expansion of AmREIT's investment
portfolio.
Through the merger, AmREIT's current portfolio and additional investments
that may be made from time to time, AmREIT will have an investment portfolio
substantially larger and more diversified than the portfolio of any of the
partnerships. An investment in AmREIT is subject to the risks normally
attendant to ongoing real estate ownership and, if AmREIT develops property,
the risks related to property development.
150
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
Permitted Investments
Each of the partnerships was Under its bylaws, AmREIT may
generally authorized to invest only purchase for investment, lease,
in income-producing single tenant manage, sell, develop, subdivide and
retail properties. The partnerships improve a wider range of retail real
have concentrated their investment property and interests therein,
in single tenant retail buildings. including mortgage loans secured
In general, the partnerships are not thereby. See "AMREIT AND ITS
permitted to invest in mortgage BUSINESS" beginning on page 93.
loans.
Like the partnerships, AmREIT has
concentrated its investments in
freestanding and specialty retail
properties, AmREIT's bylaws,
however, authorizes it to make other
real estate investments.
Consequently, after the merger,
AmREIT's investments will be more
diversified than the investments of
the partnerships. Such
diversification, if it occurs, may
serve as a hedge against the risk of
having all of AmREIT's investments
limited to a single asset group but
will also expose AmREIT to the risk
of owning and operating assets not
directly related to its primary
property type.
Additional Equity
The partnerships are authorized AmREIT may, in the discretion of
to issue only their respective its directors, issue additional
limited partnership units. None of equity securities consisting of
the partnerships is authorized to common stock or preferred stock,
issue additional equity securities. provided that the total number of
shares issued does not exceed the
authorized number of shares of
common stock or preferred stock set
forth in its charter. AmREIT expects
to raise additional equity from time
to time to increase its available
capital for investment.
Unlike the partnerships, AmREIT has substantial flexibility to raise equity,
through the sale of common shares or preferred shares, to finance its business
and affairs. AmREIT, through the issuance of new equity securities, may
substantially expand its capital base to make new real estate investments.
An investment in AmREIT should not be viewed as an investment in a specified
pool of assets, but instead as an investment in an ongoing real estate
investment business, subject to the risks associated with a real estate
portfolio that is expected to change from time to time. The issuance of
additional equity securities by AmREIT will dilute the interests of
stockholders if sold at prices below their fair market value.
Borrowing Policies
None of the partnerships is In conducting its business,
authorized to borrow funds for the AmREIT may borrow funds to the
acquisition of their portfolio. extent believed appropriate. Because
the partnerships are currently debt-
free, AmREIT is more leveraged than
the partnerships. Borrowing funds
may allow AmREIT to substantially
expand its asset base, but likewise
will increase AmREIT's risks due to
its leveraged investments.
151
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
Restrictions Upon Related Party Transactions
In varying degrees, each of the Maryland law allows AmREIT to
partnership agreements restricts the engage in transactions with
applicable partnership from entering directors, or other persons a
into a variety of business director is directly or indirectly
transactions with the general interested in or connected with, as
partners and their affiliates. Since a trustee, partner, trust manager,
each of the partnership agreements stockholder, member, employee,
may be amended by a majority vote of officer or agent of such other
limited partners, it is possible to persons. Its bylaws prohibit AmREIT
amend the partnership agreement to from entering into a transaction
authorize any transaction with the with any of the interested parties
general partners and affiliates. unless the terms and conditions of
such transaction have been disclosed
Except for transactions to AmREIT directors and approved by
specifically approved in the a majority of directors not
partnership agreements, the otherwise interested in the matter
partnerships are, to varying (including a majority of independent
degrees, not authorized to enter directors)
into transactions with the general or has been disclosed in reasonable
partners and their affiliates detail to the stockholders, and
without limited partner approval. approved by holders of a majority of
shares then outstanding or entitled
to vote thereon.
Maryland law allows AmREIT to
enter into transactions with
interested parties, such as
directors, officers, significant
stockholders and affiliates thereof,
but such transactions must be
approved by a majority of AmREIT
directors not interested in the
matter provided that they have
determined the transaction to be
fair, competitive and commercially
reasonable. Since neither the bylaws
nor the charter require the approval
of stockholders for entering into
transactions with interested
parties, it may be easier for AmREIT
to enter into such transactions than
it would be for the partnerships,
where limited partner approval for
such transactions is mandated.
152
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
Management Control And Responsibility
Under each of the partnership The board of directors will have
agreements, the general partners exclusive control over AmREIT's
are, subject to certain narrow business and affairs subject only to
limitations, vested with all the restrictions in its charter and
management authority to conduct the the bylaws. Stockholders have the
business of the partnership, right to elect members of the board
including authority and to act in good faith and exercise
responsibility for overseeing all care in conducting AmREIT's affairs.
executive, supervisory and See "THE MERGER-- Fiduciary
administrative services rendered to Responsibility" on page 51.
the partnership. The general
partners have the right to continue
to serve in such capacities unless
removed by a majority vote of
limited partners. Limited partners
have no right to participate in the
management and control of the
partnership and have no voice in its
affairs except for certain limited
matters that must be submitted to a
vote of the limited partners under
the terms of the partnership
agreements or as required by law.
See "VOTING RIGHTS" below beginning
on page 148. The general partners
are accountable as fiduciaries to
the partnerships and are required to
exercise good faith and integrity in
their dealings in conducting the
partnership's affairs. See "THE
MERGER -- Fiduciary Responsibility"
on page 51.
Stockholders will have greater control over management of AmREIT than the
limited partners have over the partnerships because AmREIT's board is elected
by the stockholders. The general partners do not need to seek re-election
annually, but instead serve unless removed by an affirmative vote of the
limited partners, which is generally regarded as an extraordinary event only
appropriate in cases of mismanagement and changes in control due to shifts in
the ownership of limited partnership units.
153
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
Management Liability And Indemnification
As a matter of state law, the AmREIT's charter and Maryland law
general partners have liability for provide broad indemnification rights
the payment of partnership to directors and officers who act in
obligations and debts unless good faith, and in a manner
limitations upon such liability are reasonably believed to be in or not
expressly stated in the obligation. opposed to the best interests of
Each of the partnership agreements AmREIT and, with respect to criminal
provides generally that neither actions or proceedings, without
general partners nor any of their reasonable cause to believe their
affiliates performing services on conduct was unlawful. In addition,
behalf of the partnership will be the charter indemnifies directors
liable to the partnership or its and officers against amounts paid in
limited partners for any act or settlement, authorizes AmREIT to
omission performed in good faith advance expenses incurred in defense
pursuant to authority granted by the of AmREIT's receipt of an
partnership agreement, and in a appropriate undertaking to repay
manner reasonably believed to be such amounts if appropriate, and
within the scope of the authority authorizes AmREIT to carry insurance
granted and in the best interest of for benefit of its offices and trust
the partnerships, provided that such managers even for matters as to
act or omission did not constitute which such persons are not entitled
fraud, misconduct, bad faith or to indemnification. See "THE MERGER
AmREIT negligence. In addition, the -- Fiduciary Responsibility" on page
partnership agreements indemnify the 51. Through the merger, AmREIT will
general partners and their be assuming all existing and
affiliates for liability, loss, contingent liabilities of the
damage, cost and expenses, including participating partnerships,
attorneys' fees, incurred by them in including their obligations to
conducting the partnerships' indemnify the general partners and
business, except in events such as others for litigation expenses that
fraud, misconduct, bad faith or might be incurred by them for
negligence. To varying degrees, the serving as general partners of the
general partners of each of the partnerships or its limited partners
partnerships have limited liability for any act or omission performed in
to the partnership for acts of good faith pursuant to authority
omissions undertaken by them when in granted by the partnership
good faith, in a manner reasonably agreement, and in a manner
performed believed to be within the reasonably believed to be within the
scope of their authority and in the scope of the authority granted and
best interests of the partnership. in the best interest of the
The general partners also have, partnerships, provided that such act
under specified circumstances, a or omission did not constitute
right to be reimbursed for fraud, misconduct, bad faith or
liability, loss, damage, costs and AmREIT negligence. In addition, the
expenses incurred by them by virtue partnership agreements indemnify the
of serving as general partners. general partners and their
affiliates for liability, loss,
damage, cost and expenses, including
attorneys' fees, incurred by them in
conducting the partnerships'
business, or for sponsoring the
merger. Although the standards are
expressed somewhat differently,
there are limitations similar to
those on the general partners of the
partnerships upon the liability and
indemnification of the directors and
officers of AmREIT.
AmREIT believes that the scope of the liability and indemnification
provisions in AmREIT's governing documents provides protection against claims
for personal liability against AmREIT's directors and officers which is
comparable to, though not identical with, the protections afforded to the
general partners and their affiliates under the partnership agreements. Through
the merger, AmREIT will be assuming all of the existing and contingent
liabilities of the participating partnerships, including their obligations to
indemnify the general partners and other persons.
154
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
Anti-Takeover Provisions
Changes in management can be The charter and bylaws contain a
effected only by removal of the number of provisions that might have
general partners, which action the effect of entrenching current
requires a majority vote of limited management and delaying or
partners. Due to transfer discouraging a hostile takeover of
restrictions in the partnership AmREIT. These provisions include,
agreements, the general partners may among others, the following:
restrict transfers of the limited
partnership units and, in . the power of AmREIT's directors
particular, affect whether the to issue 10,000,000 preferred
transferees have voting rights. Of shares, with such rights and
particular significance is that an preferences as determined by
assignee of limited partnership AmREIT directors;
units may not become a substitute
limited partner, entitling him to . the power of AmREIT's directors
vote on matters that may be to stop transfers and/or redeem
submitted to the limited partners shares under the following
for approval, unless such conditions: from any
substitution is consented to by the stockholder who owns, directly
general partners, which consent, in or indirectly, 9.8% or more of
the general partners' absolute the outstanding shares, from
discretion, may be withheld. The any five or fewer stockholders
general partners may exercise this who own, directly or
right of approval to deter, delay or indirectly, more than 50% of
hamper attempts by persons to the outstanding shares, or from
acquire a majority interest of the any other stockholder if
limited partners. AmREIT's directors otherwise
determine in good faith that
ownership of the outstanding
shares has or may become
concentrated to an extent that
may prevent AmREIT from
qualifying as a REIT under the
Code. Any shares transferred in
violation of this restriction
become "excess shares," with no
voting or distribution rights.
AmREIT has the power to
purchase or direct the sale of
such excess shares, with the
sale proceeds being paid to the
former owner;
. directors remain in office
unless removed by the
stockholders or if another
nominee for director receives
the vote of a majority of the
outstanding shares; directors
remain on the board regardless
of whether they receive a vote
of the majority of the
outstanding shares at AmREIT's
annual meeting; and
. the requirement that, except in
certain circumstances, certain
"business combinations" (as
defined therein) between AmREIT
and a "related person" (as also
defined therein, generally a
person or entity which owns
more than 50% of the
outstanding shares of AmREIT)
be approved by the affirmative
vote of the holders of 80% of
the outstanding shares
155
<PAGE>
- -------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- -------------------------------------------------------------------------------
and preferred shares, including
the vote of the holders of not
less than 50% of the shares and
preferred shares not owned by
the related person. The charter
is designed to prevent a
purchaser from utilizing two-
tier pricing and similar
tactics in an attempted
takeover of AmREIT, and it may
have the overall effect of
making it more difficult to
acquire and exercise control of
AmREIT. In very general terms,
the fair price provision
requires that unless a
potential purchaser were
willing to purchase 80% of the
outstanding shares of AmREIT as
the first step in a business
combination (or unless a
potential purchaser were
assured of obtaining the
affirmative votes of at least
80% of AmREIT's outstanding
shares), the purchaser would be
required either to negotiate
with AmREIT directors and offer
terms acceptable to them or to
abandon the proposed business
combination. The charter may
provide AmREIT directors with
enhanced ability to block any
proposed acquisition of AmREIT
and to retain their positions
in the event of a takeover bid
and may require a related
person to pay a higher price
for shares or structure his,
her or its transaction
differently than would be the
case in the absence of the fair
price provision. Although it
may, under certain
circumstances, have the effect
of discouraging unilateral
tender offers or other takeover
proposals and enhance the
ability of AmREIT directors to
retain their positions in the
event of a takeover bid, the
business combination provision
in the charter assures, to some
degree, fair treatment of all
stockholders in the event of a
two-step takeover attempt.
Certain provisions of the governing documents of the partnerships and
AmREIT could be used to deter attempts to obtain control of the partnerships
and AmREIT in transactions not approved by the general partners and AmREIT
directors, respectively. When and if the shares are traded on a national
securities system there will be a greater likelihood of changes in control in
the case of AmREIT, notwithstanding those provisions that might be employed by
the AmREIT board to resist efforts to change control.
156
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
Voting Rights
Limited partners by a majority Stockholders are entitled to
vote may, without the concurrence of elect the AmREIT board at each
the general partners, amend the annual meeting. However, directors
partnership agreement, dissolve the remain in office even if they do not
partnership, remove and/or elect a receive the majority vote of
general partner, and approve or outstanding shares unless another
disapprove the sale of all or nominee for his seat receives such a
substantially all of the vote.
partnership's assets. Limited
partners may not exercise these The charter grants stockholders
rights in any way to extend the term the non-exclusive right, with
of the partnership, change the approval of the directors, to amend
partnership to a general the charter or without board
partnership, change the limited approval, to amend the bylaws,
liability to the limited partners or dissolve AmREIT, vote to remove
affect the status of the partnership members of the board of directors,
for federal income tax purposes. and approve or disapprove the sale
Furthermore, the partnerships cannot of substantially all of AmREIT's
change the allocations of income, assets. In addition, certain other
losses and cash distributions or the actions may not be taken by the
powers, rights and duties of the directors without the approval of
general partners without the consent stockholders, such as, in general,
of the general partners. any merger or consolidation of
AmREIT with or into a corporation
limited partnership, limited
liability company or participation
in a share exchange transaction; or
any business combination, as
defined, with an interested
stockholder, as defined. The charter
requires any such actions to be
approved by a majority vote of the
stockholders.
Stockholders have broader voting rights (i.e., the right to elect AmREIT
directors at each annual meeting) than those currently afforded to limited
partners.
Limited Liability of Investors
Under each of the partnership Under Maryland law, stockholders
agreements and applicable state law, will not be liable for AmREIT's
the liability of limited partners debts or obligations. The shares,
for the partnership's debts and upon issuance, will be fully paid
obligations is generally limited to and nonassessable.
the amount of their investment in
the partnership, together with an
interest in undistributed income, if
any. The limited partnership units
are fully paid and nonassessable.
The limitation on personal liability of stockholders is substantially the
same as that of limited partners in the partnerships.
Review of Investor Lists
Generally speaking, limited A stockholder is entitled, upon
partners of each of the partnerships written demand, to inspect and copy
are entitled to request copies of the share records of AmREIT, at any
investor lists showing the names and time during usual business hours,
addresses of all general and limited for a purpose reasonably related to
partners. The right to receive such his interest as a stockholder.
investor lists may be conditioned
upon the limited partners' payment
of the cost of duplication and a
showing that the request is for a
reasonable purpose. Reasonable
requests would include requests for
investor lists for the purpose of
opposing the merger.
157
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
The right of stockholders to review investor lists is substantially the same
as the right afforded limited partners.
Taxation of Taxable Investors
Income or loss earned by each of If AmREIT qualifies as a REIT
the partnerships, is not taxed at (and AmREIT intends to conduct its
the partnership level. Limited business to so qualify), AmREIT
partners are required to report generally is permitted to deduct
their allocable share of partnership distributions to its stockholders,
income and loss on their respective which effectively reduces or
tax returns. Income and loss from a eliminates the "double taxation" (at
partnership generally constitute the corporate and stockholder
"passive" income and loss, which can levels) that typically results when
generally offset "passive" income a corporation earns income and
and loss from other investments. Due distributes that income to
to depreciation and other non cash stockholders in the form of
items, cash distributions are not dividends. Stockholders will only
generally equivalent to the income recognize income on amounts actually
and loss allocated to limited distributed by AmREIT. Dividends
partners. During operations, such received by stockholders from AmREIT
cash distributions are partially generally will constitute portfolio
sheltered but, if the properties income; which cannot offset
retain their value or appreciate, "passive" income and loss from other
gain upon liquidation of the asset investments. Losses and credits
will exceed the cash distributions generated within AmREIT, however, do
available to limited partners. After not pass through to the
the end of each fiscal year, limited stockholders. Because the amount of
partners receive annual Schedule K-1 distributions required to be made by
forms showing their allocable share AmREIT for purposes of maintaining
of partnership income and loss for its REIT characterization is
inclusion on their federal income determined based on a percentage of
tax returns. taxable income (calculated with
depreciation deductions, excluding
any net capital gains and prior to
payment of any dividends) the amount
of distributions required to be made
by AmREIT may be less than the
distributions made by the
partnerships. After the end of
AmREIT's calendar year, stockholders
should receive a Form 1099-DIV used
by corporations to report their
dividend income.
Each of the partnerships is a pass-through entity, whose income and loss is
not taxed at the entity level but instead allocated directly to the general
partners and limited partners. Limited partners are taxed on income or loss
allocated to them, whether or not cash distributions are made to the limited
partners. In contrast, AmREIT intends to qualify as a REIT, allowing it to
deduct dividends paid to its stockholders. To the extent AmREIT has net income
(after taking into account the dividends paid deduction), such income will be
taxed at AmREIT's level at the standard corporate tax rates. Dividends paid to
stockholders will constitute portfolio income and not passive income.
158
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIPS AmREIT
- --------------------------------------------------------------------------------
Taxation of Tax-Exempt Investors
Income or loss earned by each of The IRS has ruled that income
the partnerships is generally attributable to an investment in a
treated as UBTI unless the type of REIT will not constitute UBTI to
income generated by the partnership certain tax-exempt investors as long
would constitute qualified rental as such investor does not hold its
income or other specifically shares subject to acquisition
excluded types of income. For indebtedness. The amount of
partnership income to be dividends paid to tax-exempt
characterized as rental income, the stockholders may be less than the
partnership could not provide distributions made to such entities
services to tenants that are from their respective partnership
considered other than those usually because of the REIT requirement that
or customarily rendered in distributions be income.
connection with the rental of rooms
for occupancy only. Because of the
inherently factual nature of this
issue, it is uncertain whether the
income received by the partnerships
in connection with the leasing of
its Properties constitutes rental
income for these UBTI purposes.
Accordingly, there is risk that the
partnership's income could be
treated as UBTI for tax-exempt
limited partners. A tax-exempt
entity is treated as owning and
carrying on the business activity
conducted by a partnership in which
such entity owns an interest.
Accordingly, to the extent a tax-
exempt limited partner owns an
partnership units, the income
received by such partnership must
not constitute UBTI in order for the
tax-exempt limited partner to avoid
taxation.
Distribution Policies
The partnership agreement of each None of AmREIT's governing
partnership requires that net cash documents mandate the payment of
from operations must be distributed distributions to stockholders.
quarterly to partners. Further, each Distributions by AmREIT will be
partnership agreement would require determined by AmREIT directors and
that net proceeds obtained from the will be dependent upon a number of
sale or refinancing of properties be factors, including the federal
distributed to partners, rather than income tax requirement that a REIT
being retained by the applicable must distribute annually at least
partnership for reinvestment or 95% of its taxable income. It is the
working capital. See "Comparison of policy of AmREIT to retain proceeds
Ownership of Units and Shares-- from the sale, financing or
Comparative Compensation, Fees and refinancing of properties for
Distributions" on page 151 for a reinvestment in new properties or
more detailed history of the for working capital purposes.
distributions paid by the
partnerships to their respective
partners.
Limited partners participating in the merger may experience substantial
differences in the payment of distributions as stockholders of AmREIT in
comparison to owning limited partnership units in the partnerships. Rather than
owning equity interests in an entity whose governing instruments require the
distribution of net cash from operations and the net proceeds or refinancing of
properties, they will own shares in an entity whose governing documents do not
require distributions under similar circumstances, with the payment of such
distribution being subject to the discretion of AmREIT's board of directors.
Further, unlike the partnerships, which must distribute net proceeds from the
sale or refinancing of properties, AmREIT currently does not intend to
distribute the net proceeds resulting from the sale or refinancing of
properties, but rather to use such proceeds to acquire additional properties or
for working capital purposes.
159
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIP AmREIT
- --------------------------------------------------------------------------------
Comparative Compensation, Fees and Distributions
The partnerships pay or may be The right to compensation for
required to pay the following services performed as an employee of
compensation to the general partners AmREIT. See "MANAGEMENT -- Executive
or their affiliates: Compensation" on page 107.
. Property management fees of up Distributions with respect to
to 3% of revenues per annum. AmREIT shares owned by the general
partners or their affiliates
. Management and administrative (including shares received in the
reimbursements which have merger) on the same basis as the
historically equaled 3% to 7.5% other stockholders.
of rental revenues per annum.
. Acquisition fees and expenses
upon the acquisition of
properties not to exceed 6.5%
of the contract price of the
property. Leasing fees at
competitive rates if and when
properties are leased or
released.
. Disposition fee of 3% of the
disposition price of the
property or, if less, one-half
of the Competitive Real Estate
Commission, the payment of
which, except in the case of
Fund VII, Fund VIII and Fund
Goodyear, is conditioned upon
limited partners first
receiving a specified minimum
cumulative return, which
condition will not be satisfied
for any partnerships by the
merger.
. A promotional interest from 10%
to 25% of the net proceeds from
the sale of partnership
property, the payment of which,
in the case of each
partnership, is conditioned
upon the limited partners first
receiving a specified minimum
cumulative return, which
condition will not be satisfied
for any partnership by the
merger.
. The right to receive
distributions equal to 1% of
cashflow from operations and 1%
of net proceeds from the sale
or disposition of partnership
property, the payment of which
with respect to net proceeds
from the sale of property is
(except in Fund III, Fund IV,
Fund V and Fund VI),
conditioned upon the limited
partners first receiving a
specified minimum cumulative
return, which condition will
not be satisfied for any
partnership by the merger.
160
<PAGE>
The foregoing is intended to provide limited partners with a comparison of
the compensation, fees and distributions currently payable by the partnerships
to the general partners and AmREIT and the compensation payable by AmREIT to
the general partners and their affiliates after the merger. If the merger is
consummated, the general partners and their affiliates will receive
distributions on shares they receive in exchange for their partnership units
(in the case of Fund III, Fund IV, Fund V and Fund VI).
The general partners believe that any conflicts that may have arisen between
their interests and those of their affiliates and the interests of the limited
partners in connection with the merger in regard to the compensation and fees
the general partners, and payable to them by AmREIT after the merger are
insignificant because such compensation in connection with the management,
administration and operation of the partnerships is currently payable to AmREIT
or its affiliates. Moreover, the general partners' interest in partnership
cashflow from operations and property dispositions, which will be lost in the
merger, is a negative factor of the merger from the general partners'
standpoint.
COMPARISON OF PARTNERSHIP UNITS, AmREIT COMMON STOCK AND NOTES
The following compares certain of the investment attributes and legal status
rights associated with the ownership of limited partnership units, shares of
AmREIT common stock, and notes.
- --------------------------------------------------------------------------------
PARTNERSHIP UNITS AmREIT COMMON STOCK NOTES
- --------------------------------------------------------------------------------
General
The limited The shares The notes will be
partnership units of constitute equity unsecured debt obligations
each partnership interest in AmREIT. of AmREIT, issued pursuant
constitute equity Each stockholder will to the loan agreement, the
interests entitling each be entitled to his pro notes will bear interest
limited partner to his rata share of the at a fixed rate of %
pro rata share of cash dividends made with per annum and will mature
distributions. Each of respect to the common approximately seven years
the partnership stock. The dividends after the closing date.
agreements specifies how payable to the Prior to maturity,
the cash available for stockholders are not quarterly installments of
distribution, whether fixed in amount and are accrued interest will be
arising from operations, only paid if and when paid to noteholders on the
sales or refinancings, declared by AmREIT's first day of each January,
is to be shared among board of directors. April, July and October,
the general partners and continuing until the
limited partners. The entire interest and
distributions payable to principal is paid in full.
the limited partners are The unpaid principal
not fixed in amount and balance and all accrued
depend upon the but unpaid interest shall
operating results and be paid to the noteholders
net sale or refinancing upon the maturity date of
proceeds available from the notes. AmREIT reserves
the disposition of the the right to redeem the
partnership's assets. notes without a premium. A
failure to make principal
and (subject to a 30-day
grace period) interest
payments when due
constitutes an event of
default under the notes,
allowing the noteholders
of more than 50% in
principal amount of the
notes then outstanding to
declare the outstanding
principal amount of the
notes, plus accrued but
unpaid interest, to be
immediately due and
payable.
161
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIP UNITS AmREIT COMMON STOCK NOTES
- --------------------------------------------------------------------------------
Issuance of Additional Securities
Since the The board of Since the notes are
partnerships are not directors may, in its debt obligations of
authorized to issue discretion, issue AmREIT, their payment has
additional equity additional shares of priority over dividends or
securities, there can be common stock or distributions payable to
no dilution of the preferred stock with the stockholders or
distributive share of such powers, holders of AmREIT's common
the limited partners of preferences and rights or preferred stock. As
cash available for as the board of unsecured obligations of
distribution. directors may at the AmREIT, the notes have no
time designate. The priority over other
issuance of additional unsubordinated and
shares of common stock unsecured AmREIT debt as
or preferred stock, to the net liquidation
beyond the shares to be proceeds of any of
issued in the merger, AmREIT's assets. There are
may result in the no restrictions upon
dilution of the AmREIT's authority to
interests of the grant mortgages, liens or
stockholders. In other security interests
addition, shares of in AmREIT's real and
preferred stock could personal property
be issued with powers, contained in the notes;
preferences and rights and such security
adversely affecting the interests, if granted,
holders of common would permit the holders
stock. thereof to have a priority
claim against such
collateral in the event
the secured obligations
were in default, or upon
the bankruptcy or
insolvency of AmREIT.
Both the limited partnership units and shares represent equity interests
entitling the holders thereof to participate in the earnings of the
partnerships and AmREIT, respectively. Distributions and dividends payable with
respect to the limited partnership units and shares depend upon the performance
of the partnerships and AmREIT, respectively. In contrast, the notes constitute
unsecured debt obligations providing for variable payments of interest and a
lump sum payment at maturity.
The limited partnership units are not subject to dilution, since the
partnerships are not authorized to issue additional equity securities. AmREIT
may issue additional shares of common stock and shares of preferred stock with
priorities or preferences with respect to dividends and liquidation proceeds.
Payment of the notes will have priority over distributions to the shares of any
class of equity securities that might be issued by AmREIT. Since the notes are,
however, unsecured obligations, any senior secured obligations issued by AmREIT
would have prior claims against the collateral given for security in the event
AmREIT defaults in the payments of those secured obligations, or upon the
bankruptcy or insolvency of AmREIT.
162
<PAGE>
- --------------------------------------------------------------------------------
PARTNERSHIP UNITS AmREIT COMMON STOCK NOTES
- --------------------------------------------------------------------------------
Liquidity
The transfer of the The shares will be The notes will be
limited partnership freely transferable. freely transferable.
units is subject to a AmREIT is required to AmREIT will not seek to
number of restrictions list its shares of list the notes on an
imposed by the common stock on an exchange. There will not
partnership agreements, exchange as a condition be a regular secondary
which are designed precedent to the market for the notes.
primarily to preserve merger. The breadth and
the tax status of the strength of the
partnership as a secondary market for
"partnership" under the AmREIT's common stock
Code. No transferee of will depend upon, among
limited partnership other things, the
units has the right to number of shares
vote on matters outstanding, AmREIT's
submitted to a vote of financial results and
the limited partners prospects, the general
unless, among other investment interest in
things, such companies like AmREIT
substitution is approved and the relative
by the general partners. attractiveness of
In view of the AmREIT's yields
foregoing, no secondary compared to those of
market for the limited alternative
partnership units is investments.
available.
One of the primary objectives of the merger is to provide increased
liquidity to the limited partners. The shares, will be freely transferable and
will be listed on an exchange. The breadth of the secondary market for AmREIT's
common stock cannot yet be determined. There will be no market for the notes.
There is no secondary market for the limited partnership units.
163
<PAGE>
VOTING PROCEDURES
AmREIT Special Stockholders Meeting
General. Each copy of this proxy statement mailed to holders of shares is
accompanied by a form of proxy furnished in connection with the solicitation of
proxies by the board for use at the AmREIT special stockholders meeting and any
adjournments or postponements thereof. The AmREIT meeting is scheduled to be
held on , 1999 at 10:00 a.m., Houston time, at
. Only holders of record of shares on the record
date are entitled to receive notice of and to vote at the AmREIT meeting. At
the AmREIT meeting, stockholders will consider and vote upon a proposal to
approve the merger agreements and the bylaw amendment. See "The Merger"
beginning on page 34.
EACH HOLDER OF SHARES IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING AmREIT PROXY AND RETURN IT PROMPTLY TO THE BANK OF NEW YORK IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE OR BY FACSIMILE. THE MERGER AND THE BYLAW
AMENDMENT WILL BE APPROVED IF THE MERGER RECEIVES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE SHARES ENTITLED TO VOTE AT THE AmREIT SPECIAL MEETING.
Voting and Revocation of Proxies. Any holder of shares who has executed and
delivered a proxy may revoke it at any time before it is voted by attending and
voting in person at the AmREIT meeting, or by giving written notice of
revocation or submitting a signed proxy bearing a later date, provided such
notice or proxy is actually received by AmREIT prior to the vote. Stockholders
may vote via facsimile by delivering the enclosed AmREIT proxy. AmREIT proxies
must be returned to the Bank of New York, AmREIT's transfer agent, at 101
Barclay Street, New York, NY 10286; Attention AmREIT Proxies, or by faxing
their AmREIT proxy to . Faxed AmREIT proxies will be accepted until
5:00 p.m., New York time, on , 1999. A proxy will not be revoked by the
death or incapacity of the stockholder executing it unless, before the shares
are voted, notice of such death or supervening incapacity is filed with the
secretary or other person authorized to tabulate the votes on behalf of AmREIT.
The shares represented by properly executed proxies received at or before the
AmREIT meeting and not subsequently revoked will be voted as directed by the
stockholders submitting such proxies. If instructions are not given, AmREIT
proxies will be voted for approval of the merger agreements and the bylaw
amendment and will be voted in the discretion of the proxy holders on any other
matters properly presented for consideration at the AmREIT meeting or any
adjournment thereof. AmREIT's bylaws permit the holders of a majority of the
shares represented at the AmREIT meeting, whether or not constituting a quorum,
to adjourn the AmREIT meeting or any adjournment thereof. If necessary, unless
authority to do so is withheld, the proxy holders also may vote in favor of a
proposal to adjourn the AmREIT meeting for any reason, including to permit
further solicitation of proxies in order to obtain sufficient votes to approve
any of the matters being considered at the AmREIT meeting. The persons named as
Proxies voting against the merger will be voted in favor of adjourning the
AmREIT meeting.
Solicitation of Proxies. AmREIT will bear the costs of soliciting proxies
from its stockholders. In addition to use of the mails, AmREIT proxies may be
solicited personally or by telephone or facsimile by directors, officers and
other employees of AmREIT, who will not be specially compensated for such
solicitation activities. Arrangements may also be made with brokerage firms and
other custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of shares held of record by such persons,
and such persons will be reimbursed by AmREIT for their reasonable expenses
incurred in that effort.
Vote Required. The merger will be approved if it receives the affirmative
vote of a majority of the shares entitled to vote at the AmREIT meeting. The
holders of a majority of the shares entitled to vote, present in person or by
proxy, constitute a quorum for purposes of the AmREIT meeting. A holder of a
share will be treated as being present at the AmREIT meeting if the holder of
such share is (1) present in person at the meeting, or (2) represented at the
meeting by a valid proxy, whether the instrument granting such proxy is marked
as casting a vote or abstaining, is left blank or does not empower such proxy
to vote with respect to some or all matters to be voted upon at the AmREIT
meeting. The proposal allowing AmREIT to postpone or
164
<PAGE>
adjourn the AmREIT meeting to solicit additional votes will be approved if it
receives the affirmative vote of a majority of the votes cast at the AmREIT
meeting, whether or not a quorum is present. Abstentions and "broker non-votes"
(where a nominee holding shares for a beneficial owner has not received voting
instructions from the beneficial owner with respect to a particular matter and
such nominee does not possess or choose to exercise discretionary authority
with respect thereto) will be included in the determination of the number of
shares present at the AmREIT meeting for quorum purposes. Abstentions and
broker non-votes will have the same effect as a vote against the merger
proposal. Failure to return the proxy or failure to vote at the AmREIT meeting
will have the same effect as a vote against the merger proposal.
Recommendation. For the reasons described herein, the independent directors
approved the merger agreements and the bylaw amendment thereunder. THE
INDEPENDENT DIRECTORS BELIEVE THE TERMS OF THE MERGER AGREEMENTS ARE FAIR FROM
A FINANCIAL POINT OF VIEW TO THE STOCKHOLDERS OF AmREIT AND IN THE BEST
INTEREST OF AmREIT AND ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMEND THAT THE
STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENTS AND THE ISSUANCE OF
SHARES PURSUANT THERETO. In making their recommendation, the independent
directors considered, among other things, the opinion of Morgan Keegan that the
consideration to be paid by AmREIT pursuant to the merger is fair to AmREIT and
its stockholders from a financial point of view and the independent appraisals
of the partnerships' properties prepared by Valuation Associates. See "THE
MERGER -- Background of the Merger" on page 34, "THE MERGER -- Independent
Directors' Reasons and Recommendations for the Merger" on page 35, and
"FAIRNESS OPINIONS" on page 66.
Other Matters. AmREIT is unaware of any matter to be presented at the
special stockholders meeting other than the proposal to approve the merger
agreements and the bylaw amendment and the issuance of shares thereunder and
the proposal to permit the postponement or adjournment of the AmREIT meeting
for any reason, including to solicit additional votes.
Partnership Voting Procedures
Distribution of Proxy Materials. This proxy statement, together with the
accompanying transmittal letter, the power of attorney and the limited partner
consent (we refer, collectively, to the power of attorney and limited partner
consent as the consent form), constitute the proxy materials being distributed
to the limited partners to obtain their votes "For" or "Against" each
respective partnership's participation in the merger.
In order for AmREIT to acquire each partnership, limited partners holding
greater than 50% of the outstanding partnership units must approve the merger.
Each partnership will be acquired by a merger with AmREIT in the manner
described below and in the supplement relating to each respective partnership.
Therefore, limited partners who are not planning to attend the special meeting
of the limited partners and vote in person should complete and return the
consent form before the expiration of the solicitation period which is the time
period during which limited partners may vote "For" or "Against" the merger.
The solicitation period will commence upon delivery of the proxy materials to
limited partners (on or about , 1999), and will continue until the later
of (1) , 1999 (a date not more than 60 calendar days from the initial
delivery of the proxy materials), or (2) such later date as the general
partners may select and as to which they give you notice. At their discretion,
the general partners may elect to extend the solicitation period. Any consent
form received by the company that the general partners hired to tabulate your
votes, MAVRICC Management Systems, Inc., prior to p.m. time, on the last
day of the solicitation period will be effective provided that such consent
form has been properly completed and signed. If limited partners fail to return
a signed consent form by the end of the solicitation period, their respective
partnership units will be counted as voting "Against" the merger and they will
receive AmREIT shares if their partnership is acquired.
The consent form consists of two parts. Part A seeks limited partner
approval of the merger and certain related matters. If limited partners have
units in more than one partnership, they will receive multiple
165
<PAGE>
supplements and consent forms which will provide for separate votes for each
partnership in which they own an interest. If any limited partners return a
signed consent form but fails to indicate whether they are voting "For" or
"Against" any matter (including the merger), they will be deemed to have voted
"For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints H. Kerr Taylor as the attorney-in-
fact for the purpose of executing all other documents and instruments advisable
or necessary to complete the merger. The power of attorney is intended solely
to ease the administrative burden of completing the merger without needing to
obtain each limited partner's signature on multiple documents.
Special Meetings. The general partners have scheduled special meetings of
the limited partners of each of the partnerships to discuss the proxy materials
and the terms of the merger prior to voting on the merger. The special meetings
will be held at a.m., time, on , 1999, at . The
general partners intend to actively solicit limited partner support for the
merger and would like to use the special meetings to answer questions about the
merger and the proxy materials and to explain the reasons for the
recommendation that limited partners vote to approve the merger. Costs of
solicitation will be allocated as set forth in "THE MERGER -- Merger Expenses"
on page 62. No person will receive compensation contingent upon solicitation of
a favorable vote.
Required Vote and Other Conditions. In order for AmREIT to acquire each
partnership, limited partners of each partnership holding a majority of the
outstanding partnership units and the general partners must approve the merger
and the amendments to each partnership's partnership agreement.
Record Date and Outstanding Partnership Units. The record date is ,
1999 for all partnerships. As of , 1999, the following number of
partnership units were held of record by the number of limited partners
indicated below:
<TABLE>
<CAPTION>
Number of
Number of Partnership
Number of Partnership Units Required
Limited Units Held for Approval
Partnership Partners of Record of Merger
----------- --------- ----------- --------------
<S> <C> <C> <C>
Taylor Income Investors, Ltd..............
Taylor Income Investors IV, Ltd...........
Taylor Income Investors V, Ltd............
Taylor Income Investors VI, Ltd...........
AAA Net Realty Fund VII, Ltd..............
AAA Net Realty Fund VIII, Ltd.............
AAA Net Realty Fund Goodyear, Ltd.........
AAA Net Realty Fund IX, Ltd...............
AAA Net Realty Fund X, Ltd................
AAA Net Realty Fund XI, Ltd...............
</TABLE>
Limited partners are entitled to one vote for each partnership unit held.
Accordingly, the number of partnership units entitled to vote with respect to
the merger is equivalent to the number of partnership units held of record at
the record date.
Investor Lists. Under the federal securities laws, each partnership is
required, upon a limited partner's written request, to provide to such limited
partner (1) a statement of the approximate number of limited partners in such
partnership and (2) the estimated cost of mailing a proxy statement, form of
consent or other similar communication to such limited partners. In addition,
limited partners have the right, at the general partners' option, either (A) to
have such partnership mail (at the limited partner's expense) copies of any
proxy
166
<PAGE>
statement, consent form or other soliciting materials furnished by the general
partners to the other limited partners of such partnership or (B) to have such
partnership deliver to the limited partner, within five business days of the
receipt of the request, a reasonably current list of the names, addresses and
partnership units held by the limited partners of such partnership. The right
to receive the list of limited partners is subject to the requesting limited
partner's payment of the cost of mailing and duplication at a rate of $0.25 per
page.
Tabulation of Votes. An automated system administered by MAVRICC Management
Systems, Inc. will tabulate the votes. Abstentions will be tabulated with
respect to the merger and related matters. Abstentions will have the effect of
a vote against the merger, as will the failure to return a proxy form and
broker nonvotes (where a broker submits a proxy but does not have authority to
vote a limited partner's partnership units on one or more matters).
Revocability of Consents. Limited partners can change their votes at any
time before their proxies are voted at the special meeting. They can do this in
three ways: first, they can send any of the general partners a written
statement that they would like to revoke their consent; second, they can send
any of the general partners a new consent form, or third, they can attend the
special meeting and vote in person.
Limited Partner Information. Pursuant to the partnership agreements of each
of Fund III, Fund IV, Fund V and Fund VI, each limited partner has the right to
at all times upon reasonable request, free access to inspect and copy the
records of the partnership and the right to obtain by mail a list of the names,
addresses and units owned by the limited partners of the partnerships. The
limited partners of each of Fund VII, Fund VIII, Fund GOODYEAR, and Fund IX
have the right at all times to obtain from the managing general partner, upon
payment of a fee to cover the costs of reproduction and mailing, a current list
of the names, addresses and number of limited partnership units owned by each
limited partner. Under the partnership agreement of both Fund X and Fund XI,
limited partners may obtain a current list of the names, addresses and number
of limited partnership units owned by each limited partner upon written request
delivered to the general partners and the payment of a reasonable charge for
copying and mailing. To satisfy the requirements of each partnership, the
general partners will provide a list of the names, addresses and number of
limited partnership units owned by the limited partners of their partnership to
any limited partner who delivers a written request therefor to the general
partners and pays a reproduction and mailing charge of $10.00.
Recommendation. For the reasons described herein, the general partners
approved each merger agreement for each partnership. THE GENERAL PARTNERS
BELIEVE THAT THE TERMS OF EACH MERGER AGREEMENT, INCLUDING THE CONSIDERATION TO
BE RECEIVED BY THE LIMITED PARTNERS IN THE MERGER, ARE FAIR TO AND IN THE BEST
INTERESTS OF THE RESPECTIVE LIMITED PARTNERS AND RECOMMEND THAT THE LIMITED
PARTNERS VOTE FOR APPROVAL OF EACH MERGER AGREEMENT AND THE PARTNERSHIP
AMENDMENT. In making their recommendation, the general partners considered,
among other things, the Houlihan fairness opinion that the consideration to be
received by the limited partners in connection with the merger is fair to the
limited partners from a financial point of view. See "FAIRNESS OPINIONS -- The
Houlihan Fairness Opinions" beginning on page 70.
167
<PAGE>
EXPERTS
The (i) consolidated financial statements of AmREIT, Inc. as of December 31,
1998 and for each of the two years in the period ended December 31, 1998 (ii)
the financial statements of AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund
X, Ltd. and AAA Net Realty Fund XI, Ltd. as of December 31, 1998 and for each
of the two years in the period ended December 31, 1998 and (iii) the combined
statements of revenues and certain expenses of real estate properties
anticipated to be acquired for each of the two years in the period ended
December 31, 1998 included in this Joint Proxy and Consent Solicitation
Statement and Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and have
been so included in reliance upon the reports of such firm given their
authority as experts in accounting and auditing.
LEGAL OPINIONS
The legality of the shares to be issued in the merger will be passed on for
AmREIT by Locke Liddell & Sapp LLP, Dallas, Texas, counsel to AmREIT and to
each partnership, which will deliver opinions to AmREIT and each partnership
respectively, concerning federal income tax consequences of the merger.
WHERE YOU CAN FIND MORE INFORMATION
AmREIT, Fund IX and Fund X are each subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and, in
accordance therewith, file reports, proxy or proxy statements and other
information with the SEC. All reports, proxy or consent solicitation statements
and other information filed by AmREIT, Fund IX and Fund X with the SEC can be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices at Suite 1400, 500 West Madison Street, Chicago, Illinois
60661 and Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed
fees. The SEC maintains a Web site that contains reports, proxy or consent
solicitation and information statements and other information regarding AmREIT,
Fund IX and Fund X and other registrants that have filed electronically with
the SEC. The address of the site is http://www.sec.gov.
AmREIT has filed a registration statement on Form S-4 to register with the
SEC the AmREIT common stock to be delivered to the limited partners in this
merger. This proxy statement is a part of that registration statement and
constitutes a proxy statement of AmREIT in addition to being a proxy statement
of AmREIT for its special meeting and a proxy statement for the limited
partners.
A separate supplement to this proxy statement has been prepared for each
partnership to highlight the risks, effects and fairness of the merger that are
particular to the respective partnership. The limited partners of each
partnership will receive, with this proxy statement , the supplement that
corresponds to their partnership. The limited partners of a particular
partnership may also receive copies of the supplements prepared for any or all
of the partnerships and copies of such supplements will be provided promptly,
without charge, to each limited partner or his or her representative who has
been so designated in writing upon written request to the particular
partnership at 8 Greenway Plaza, Suite 824, Houston, Texas 77046.
168
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Pro Forma Financial Information (Unaudited)............................... F-3
Assumption 1--100% Partnership Participation.............................. F-4
Pro Forma Balance Sheet as of June 30, 1999 (Unaudited)................. F-4
Notes to Pro Forma Balance Sheet (Unaudited)............................ F-5
Pro Forma Statement of Operations for the Year Ended December 31, 1998
(Unaudited)............................................................ F-7
Notes to Pro Forma Statement of Operations (Unaudited).................. F-8
Pro Forma Statement of Operations for the Six Months Ended June 30, 1999
(Unaudited)............................................................ F-9
Notes to Pro Forma Statement of Operations (Unaudited).................. F-10
Assumption 2--100% Partnership Participation with notes issued to 20% of
the Investors............................................................ F-11
Pro Forma Balance Sheet as of June 30, 1999 (Unaudited)................. F-11
Notes to Pro Forma Balance Sheet (Unaudited)............................ F-12
Pro Forma Statement of Operations for the Year Ended December 31, 1998
(Unaudited)............................................................ F-14
Notes to Pro Forma Statement of Operations (Unaudited).................. F-15
Pro Forma Statement of Operations for the Six Months Ended June 30, 1999
(Unaudited)............................................................ F-16
Notes to Pro Forma Statement of Operations (Unaudited).................. F-17
Assumption 3--50% Partnership Participation............................... F-18
Pro Forma Balance Sheet as of June 30, 1999 (Unaudited)................. F-18
Notes to Pro Forma Balance Sheet (Unaudited)............................ F-19
Pro Forma Statement of Operations for the Year Ended December 31, 1998
(Unaudited)............................................................ F-21
Notes to Pro Forma Statement of Operations (Unaudited).................. F-22
Pro Forma Statement of Operations for the Six Months Ended June 30, 1999
(Unaudited)............................................................ F-23
Notes to Pro Forma Statement of Operations (Unaudited).................. F-24
Assumption 4--50% Partnership Participation with notes issued to 20% of
the Investors............................................................ F-25
Pro Forma Balance Sheet as of June 30, 1999 (Unaudited)................. F-25
Notes to Pro Forma Balance Sheet (Unaudited)............................ F-26
Pro Forma Statement of Operations for the Year Ended December 31, 1998
(Unaudited)............................................................ F-28
Notes to Pro Forma Statement of Operations (Unaudited).................. F-29
Pro Forma Statement of Operations for the Six Months Ended June 30, 1999
(Unaudited)............................................................ F-30
Notes to Pro Forma Statement of Operations (Unaudited).................. F-31
AmREIT Historical Financial Information................................... F-32
AmREIT Financial Statements for the Three and Six Months Ended June 30,
1999 and 1998 (Unaudited):
Consolidated Balance Sheet as of June 30, 1999 (Unaudited)............ F-32
Consolidated Statement of Income for the Three and Six Months Ended
June 30, 1999 and 1998 (Unaudited)................................... F-33
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1999 and 1998 (Unaudited)........................................ F-34
Notes to Consolidated Financial Statements for Three Months Ended
March 31, 1999 and 1998 (Unaudited).................................. F-35
AmREIT Financial Statements for the Years Ended December 31, 1998 and
1997................................................................... F-41
Independent Auditors' Report.......................................... F-41
Consolidated Balance Sheet, December 31, 1998......................... F-42
Consolidated Statements of Operations for the Years Ended December 31,
1998 and 1997........................................................ F-43
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998 and 1997........................................... F-44
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998 and 1997........................................................ F-45
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998 and 1997........................................... F-46
Fund IX Financial Statements for the Years Ended December 31, 1998 and
1997................................................................... F-55
Independent Auditors Report........................................... F-55
Balance Sheet, December 31, 1998...................................... F-56
Statement of Income for the Years Ended December 31, 1998 and 1997.... F-57
Statement of Partners Equity for the Years Ended December 31, 1998 and
1997................................................................. F-58
Statement of Cash Flows for the Years Ended December 31, 1998 and
1997................................................................. F-59
Notes to Financial Statements for the Years Ended December 31, 1998
and 1997............................................................. F-60
Fund X Financial Statements for the Years Ended December 31, 1998 and
1997................................................................... F-64
Independent Auditors Report........................................... F-64
Balance Sheet, December 31, 1998...................................... F-65
Statement of Income for the Years Ended December 31, 1998 and 1997.... F-66
Statement of Partners Equity for the Years Ended December 31, 1998 and
1997................................................................. F-67
Statement of Cash Flows for the Years Ended December 31, 1998 and
1997................................................................. F-68
Notes to Financial Statements for the Years Ended December 31, 1998
and 1997............................................................. F-69
Fund XI Financial Statements for the Years Ended December 31, 1998 and
1997................................................................... F-74
Independent Auditors Report........................................... F-74
Balance Sheet, December 31, 1998...................................... F-75
Statement of Income for the Years Ended December 31, 1998 and 1997.... F-76
Statement of Partners Equity for the Years Ended December 31, 1998 and
1997................................................................. F-77
Statement of Cash Flows for the Years Ended December 31, 1998 and
1997................................................................. F-78
Notes to Financial Statements for the Years Ended December 31, 1998
and 1997............................................................. F-79
Partnership Properties.................................................. F-84
Combined Statements of Revenues and Certain Expenses of the Real
Estate Properties Anticipated to be Acquired:
Independent Auditors Report........................................... F-84
Combined Statements of Revenue and Certain Expenses of Real Estate
Properties Anticipated to be Acquired for the Years Ended December
31, 1998 and 1997 and the Six Months Ended June 30, 1999 and 1998
(Unaudited).......................................................... F-85
Notes to Combined Statements of Revenue and Certain Expenses of Real
Estate Properties Anticipated to be Acquired......................... F-86
</TABLE>
F-2
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected unaudited pro forma financial information for AmREIT,
Inc. and subsidiaries (the "Company") gives effect to the merger as defined
elsewhere herein and is based on estimates and assumptions set forth in the
notes to the pro-forma financial statements which include pro forma
adjustments. The unaudited pro forma financial information also gives effect to
the merger completed June 5, 1998 between the Company and American Asset
Advisers Realty Corporation (the "Adviser"). This unaudited pro forma financial
information has been prepared from the historical financial statements of the
Company, the Adviser and the Partnerships that currently own the properties
(the "Partnerships"). The pro forma balance sheet assumes that the merger
occurred on June 30, 1999. The pro forma statements of operations assumed that
both mergers occurred on January 1, 1998. The pro forma financial information
has been prepared using the purchase method of accounting whereby the assets
and liabilities of the partnerships are allocated based upon estimated fair
market value, based upon preliminary estimates, which are subject to change as
additional information is obtained. The purchase price and the allocations of
the purchase price are subject to final determination based upon estimates and
other evaluations of fair market value. Therefore, the purchase price and the
allocations reflected in the following pro forma financial information may
differ from the amounts ultimately determined.
There are a large number of combinations of Partnership participation in the
merger. The actual combination that will result cannot possibly be known or
predicted until the votes of the partners of the Partnerships have been
determined.
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 and notes thereto of the Partnerships and the Company.
F-3
<PAGE>
ASSUMPTION 1 - 100% PARTNERSHIP PARTICIPATION
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (1)
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ 1,204,876 $ -- $ 414,454 (3) $ 1,619,330
Accounts receivable..... 75,076 -- 16,815 (3) 91,891
Notes receivable........ 1,540,485 -- 188,821 (3) 1,729,306
Property, net........... 30,655,973 -- 22,335,371 (3) 53,252,456
261,112 (5)
Net investment in direct
financing leases....... 3,175,895 -- -- 3,175,895
Other assets............ 751,832 -- -- 751,832
----------- ---------- ----------- -----------
TOTAL ASSETS........ $37,404,137 $ -- $23,216,573 $60,620,710
=========== ========== =========== ===========
LIABILITIES &
SHAREHOLDERS' &
PARTNERS' EQUITY
Notes payable........... $15,379,489 $ -- $ -- $15,379,489
Accounts payable........ 345,252 -- 522,224 (5) 918,762
51,286 (3)
Security deposit........ 15,050 -- 23,300 (3) 38,350
----------- ---------- ----------- -----------
TOTAL LIABILITIES... 15,739,791 -- 596,810 16,336,601
MINORITY INTEREST....... 5,200,808 -- (5,200,808)(3) --
SHAREHOLDERS' AND
PARTNERS' EQUITY
Preferred stock, $.01
par value, 10,001,000
shares authorized, none
issued
Common Stock, $.01 par
value, 100,010,000
shares authorized,
2,384,117 and 5,739,979
shares issued and
outstanding on
historical and pro-
forma basis,
respectively........... 23,841 (2) 3,493 (2) 30,066 (3),(4) 57,400
Capital in excess of par
value.................. 21,657,868 (2) 3,576,401 (2) 28,051,617 (3),(4) 53,024,774
(261,112)(5)
Accumulated
distributions in excess
of earnings............ (5,111,678)(2) (3,579,894)(2) -- (8,691,572)
Cost of Treasury Stock,
11,373 shares.......... (106,493) -- -- (106,493)
----------- ---------- ----------- -----------
TOTAL SHAREHOLDERS' AND
PARTNERS' EQUITY....... 16,463,538 -- 27,820,571 44,284,109
----------- ---------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' AND
PARTNERS' EQUITY....... $37,404,137 $ -- $23,216,573 $60,620,710
=========== ========== =========== ===========
PRO FORMA BOOK VALUE PER
SHARE:
Basic................. $ 6.94 $ 7.73
=========== ===========
Diluted............... $ 6.94 $ 7.73
=========== ===========
PRO FORMA DISTRIBUTIONS
PER SHARE FOR THE SIX
MONTHS ENDED JUNE 30,
1999:
Basic................. $ 0.36 $ 0.36
=========== ===========
Diluted............... $ 0.36 $ 0.36
=========== ===========
</TABLE>
See Notes to Pro Forma Balance Sheet.
F-4
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties was completed on June 30, 1999. The Partnership properties
include the acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition of the
Partnership properties are based on the assumption that the acquisitions
are approved by 100% of the limited partners and that none of the partners
elect to take a note in lieu of Company stock.
(2) On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock were issuable effective June 5, 1998. The issuance
of these shares is included in the historical financial information of the
Company included in the Pro Forma Balance Sheet.
In addition, the remaining 686,740 shares of stock currently valued at
$7,039,085 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
total shares issued to the shareholder of the Adviser pursuant to the
acquisition of the Adviser does not exceed 9.8% of the Company's total
shares then issued and outstanding. The issuance of these additional shares
will be expensed as they are issued. Accordingly, the Pro Forma Balance
Sheet includes an adjustment to reflect the issuance of 349,258 additional
shares of common stock as a result of the proposed merger, leaving a
balance of 337,482 shares, as contigently issuable.
(3) Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair value of the properties acquired, and other net assets (cash,
receivables, payables and security deposits) of the Partnerships as
follows:
<TABLE>
<CAPTION>
Total
Purchase
Real Estate Other-Net Price
----------- --------- -----------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd............. $ 825,000 $ 52,841 $ 877,841
Taylor Income Investors IV, Ltd.............. 401,116 108,221 509,337
Taylor Income Investors V, Ltd............... 351,063 102,410 453,473
Taylor Income Investors VI, Ltd.............. 346,000 0 346,000
AAA Net Realty Fund VII, Ltd................. 922,000 30,272 952,272
AAA Net Realty Fund VIII, Ltd................ 1,644,000 61,035 1,705,035
AAA Net Realty Fund Goodyear, Ltd............ 1,058,000 13,732 1,071,732
AAA Net Realty Fund IX, Ltd.................. 5,251,000 93,801 5,344,801
AAA Net Realty Fund X, Ltd................... 10,495,000 0 10,495,000
AAA Net Realty Fund XI, Ltd.................. 6,243,000 83,192 6,326,192
----------- --------- -----------
27,536,179 545,504 28,081,683
Less: Minority Interest...................... 5,200,808 -- 5,200,808
----------- --------- -----------
Net Adjustment............................... $22,335,371 $ 545,504 $22,880,875
=========== ========= ===========
</TABLE>
F-5
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(Continued)
(Unaudited)
(4) Represents the issuance of 3,006,604 shares of Company stock valued at
$28,081,683 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Trust
Exchange L.P. Units Shares
Ratio Outstanding Issued Value
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd... 99.46 945.00 93,987 $ 877,841
Taylor Income Investors IV, Ltd.... 88.67 615.00 54,533 509,337
Taylor Income Investors V, Ltd..... 101.15 480.00 48,552 453,473
Taylor Income Investors VI, Ltd.... 123.48 300.00 37,045 346,000
AAA Net Realty Fund VII, Ltd....... 89.72 1125.00 100,936 942,745
AAA Net Realty Fund VIII, Ltd...... 97.16 1860.00 180,719 1,687,915
AAA Net Realty Fund Goodyear,
Ltd............................... 85.09 1335.00 113,599 1,061,019
AAA Net Realty Fund IX, Ltd........ 106.16 5390.50 572,249 5,344,801
AAA Net Realty Fund X, Ltd......... 98.11 11453.60 1,123,662 10,495,000
AAA Net Realty Fund XI, Ltd........ 95.92 7061.21 677,322 6,326,192
--------- -----------
Total Limited Partners............. 3,002,604 28,044,323
--------- -----------
General Partners................... 4,000 37,360
--------- -----------
Total.............................. 3,006,604 $28,081,683
========= ===========
</TABLE>
The share price was agreed to by the General Partner of each of the
Partnerships and the Independent Directors of the Company based upon the
price of the Company's shares in its last public offering reduced by
selling commissions and related expenses.
(5) Represents estimated legal fees, professional fees, and other costs
incurred in the acquisition of the Partnership properties. These costs are
considered capital costs, of which a portion is capitalized into the basis
of the acquired properties and a portion is shown as a reduction of capital
related to the costs of issuing AmREIT common stock.
F-6
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Eliminations
Pro Forma and
Historical Adviser and Historical Pro Forma Pro Forma
Company Adjustments Partnership Adjustments Total
----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues
Rental income from
operating leases..... $ 2,401,048 $ -- $2,221,053 $ -- $4,622,101
Earned income from
direct financing
leases............... 340,709 -- 70,374 -- 411,083
Service fees and other
income............... 187,577 130,870(2) 4,182 (188,972)(4) 133,657
Income from joint
ventures............. -- -- 518,559 (518,559)(4) --
Gain on sale of
property............. -- -- 7,615 (7,615)(4) --
Interest income....... 98,692 -- 48,511 -- 147,203
----------- ------- ---------- ---------- ----------
TOTAL REVENUES....... 3,028,026 130,870 2,870,294 (715,146 ) 5,314,044
----------- ------- ---------- ---------- ----------
Expenses
General operating and
administrative....... 562,110 92,819(2) 109,575 -- 764,504
Reimbursements and
fees to related
party................ 40,607 -- 188,972 (188,972)(4) 40,607
Amortization.......... 62,754 177(2) 62,262 (62,262)(4) 62,931
Depreciation.......... 355,114 8,644(2) 382,749 142,375 (4) 888,882
Interest.............. 402,707 3,896(2) -- -- 406,603
Merger costs.......... 2,427,658 -- -- (2,427,658)(3) --
Potential acquisition
costs................ 464,303 -- -- (464,303)(5) --
----------- ------- ---------- ---------- ----------
TOTAL EXPENSES....... 4,315,253 105,536 743,558 (3,000,820) 2,163,527
----------- ------- ---------- ---------- ----------
Pro forma income (loss)
before minority
interest in net income
of consolidated joint
ventures............... (1,287,227) 25,334 2,126,736 2,285,674 3,150,517
Minority interest in net
income of consolidated
joint ventures......... (518,559) -- -- 518,559 (4) --
----------- ------- ---------- ---------- ----------
Pro forma net income
(loss)................. $(1,805,786) $25,334 $2,126,736 $2,804,233 $3,150,517
=========== ======= ========== ========== ==========
Pro forma earnings
(loss) per share:
Basic................. $ (0.81) $ 0.57
=========== ==========
Diluted............... $ (0.81) $ 0.57
=========== ==========
Weighted average common
and common equivalent
shares outstanding:
Basic................. 2,226,403 5,571,284
=========== ==========
Diluted............... 2,226,403 5,571,284
=========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-7
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows for operations of the Adviser
from January 1 through June 5:
. Amortization expense, depreciation expense and interest expense are
recorded at historical amounts.
. Service fee income is recorded for administrative, acquisition and
management services provided to entities other than the Company. Service
fee income of $459,472 for services provided to the Company has been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
. General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which has been allocated
to the Company or has been capitalized by the Company has been excluded
from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeded the fair
value of the net tangible assets received, an expense was 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 been
eliminated in the pro forma financial statement. For the year ended
December 31, 1998, this pro forma expense would have been $5,741,855 based
on the issuance of 213,260 shares at closing on January 1, 1998 and 346,921
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. 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 total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 339,819 of these
shares remain at December 31, 1998. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and 75% of the additional shares issued for
the Adviser during 1998. The additional shares are recorded at 75% to
reflect weighted average shares outstanding.
(4) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of a property which is being
accounted for on an installment basis.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation, based upon the purchase price which
represents the fair value of the buildings over 33 years. The purchase
price of the properties has been allocated 70% to buildings and 30% to
land.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(5) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
F-8
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Eliminations
and
Historical HIstorical Pro Forma Pro Forma
Company Partnership Adjustments Total
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Rental income from
operating leases....... $1,577,965 $1,128,855 $ -- $2,706,820
Earned income from
direct financing
leases................. 170,802 35,336 -- 206,138
Other income............ 308,926 865 (105,966)(2) 203,825
Income from joint
ventures............... -- 263,271 (263,271)(2) --
Gain on sale of
property............... -- 98,695 (98,695)(2) --
Interest income......... 149,235 21,300 -- 170,535
---------- ---------- -------- ----------
TOTAL REVENUES......... 2,206,928 1,548,322 (467,932) 3,287,318
---------- ---------- -------- ----------
Expenses
General operating and
administrative......... 501,082 144,501 (105,966)(2) 539,617
Interest................ 515,357 -- -- 515,357
Depreciation............ 235,890 189,926 72,636 (2) 498,452
Amortization............ 27,342 18,822 (18,822)(2) 27,342
Potential acquisition
costs.................. 398,299 -- (398,299)(3) --
---------- ---------- -------- ----------
TOTAL EXPENSES......... 1,677,970 353,249 (450,451) 1,580,768
---------- ---------- -------- ----------
Pro forma income before
minority interest in net
income of consolidated
joint ventures........... 528,958 1,195,073 (17,481) 1,706,550
Federal income tax
expense, non-qualified
reit subsidiary.......... (63,596) -- -- (63,596)
Minority interest in net
income of consolidated
joint ventures........... (263,271) -- 263,271 (2) --
---------- ---------- -------- ----------
Pro forma net income...... $ 202,091 $1,195,073 $245,790 $1,642,954
========== ========== ======== ==========
Pro forma earnings per
share:
Basic................... $ 0.09 $ 0.29
========== ==========
Diluted................. $ 0.09 $ 0.29
========== ==========
Weighted average common
and common equivalent
shares outstanding:
Basic................... 2,372,744 5,716,130(4)
========== ==========
Diluted................. 2,372,744 5,716,130(4)
========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-9
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of two properties.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation based upon the purchase price which
represents the fair market value of the buildings over 33 years. The
purchase price of the properties has been allocated 70% to buildings and
30% to land.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(3) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
(4) Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and the additional shares issued for the
Adviser during 1998.
F-10
<PAGE>
ASSUMPTION 2 - 100% PARTNERSHIP PARTICIPATION
WITH NOTES ISSUED TO 20% OF THE INVESTORS
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (1)
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equiva-
lents.................. $ 1,204,876 $ -- $ 414,454 (3) $1,114,532
(504,798)(6)
Accounts receivable... 75,076 -- 16,815 (3) 91,891
Notes receivable...... 1,540,485 -- 188,821 (3) 1,729,306
Property, net......... 30,655,973 -- 21,774,485 (3) 52,691,570
261,112 (5)
Net investment in di-
rect financing
leases............... 3,175,895 -- -- 3,175,895
Other assets.......... 751,832 -- -- 751,832
----------- ----------- ----------- -----------
TOTAL ASSETS........ $37,404,137 $ -- $22,150,889 $59,555,026
=========== =========== =========== ===========
LIABILITIES AND SHARE-
HOLDERS' AND
PARTNERS' EQUITY
Liabilities
Notes payable......... $15,379,489 $ -- $ 4,543,181 (6) $19,922,670
Accounts payable...... 345,252 -- 522,224 (5) 918,762
51,286 (3)
Security deposit...... 15,050 -- 23,300 (3) 38,350
----------- ----------- ----------- -----------
TOTAL LIABILITIES... 15,739,791 -- 5,139,991 20,879,782
Minority interest....... 5,200,808 -- (5,200,808)(3) --
Shareholders' and
partners' equity:
Preferred stock, $.01
par value, 10,001,000
shares
authorized, none is-
sued ................
Common Stock, $.01 par
value, 100,010,000
shares authorized,
2,384,117 and
5,074,213 shares
issued and outstand-
ing on historical and
pro-forma basis, re-
spectively........... 23,841 (2) 2,840 (2) 24,061 (3)(4) 50,742
Capital in excess of
par value............ 21,657,868 (2) 2,908,292 (2) 22,448,757 (3)(4) 46,753,805
(261,112)(5)
Accumulated distribu-
tions in excess of
earnings............. (5,111,678)(2) (2,911,132)(2) -- (8,022,810)
Cost of Treasury
Stock, 11,373
shares............... (106,493) -- -- (106,493)
----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS'
AND
PARTNERS' EQUITY... 16,463,538 -- 22,211,706 38,675,244
----------- ----------- ----------- -----------
TOTAL LIABILITIES
AND
SHAREHOLDERS' AND
PARTNERS' EQUITY... $37,404,137 $ -- $22,150,889 $59,555,026
=========== =========== =========== ===========
Pro forma book value per
share:
Basic................. $ 6.94 $ 7.64
=========== ===========
Diluted............... $ 6.94 $ 7.64
=========== ===========
Pro forma distributions
per share for the six
months ended June 30,
1999:
Basic................. $ 0.36 $ 0.36
=========== ===========
Diluted............... $ 0.36 $ 0.36
=========== ===========
</TABLE>
See Notes to Pro Forma Balance Sheet.
F-11
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties was completed on June 30, 1999. The Partnership properties
include the acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition of the
Partnership properties are based on the assumption that the acquisitions
are approved by 100% of the limited partners and that 20% of the partners
elect to take notes and cash in lieu of Company stock.
(2) On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock were issuable effective June 5, 1998. The issuance
of these shares is included in the historical financial information of the
Company included in the Pro Forma Balance Sheet.
In addition, the remaining 686,740 shares of stock currently valued at
$7,039,085 are contingently issuable for a period of up to 24 calendar
quarters following June 5, 1998, the closing date of the transaction. Within
30 days after the end of each calendar quarter, shares will be issued up to
the level where total shares issued to the shareholder of the Adviser
pursuant to the acquisition of the Adviser does not exceed 9.8% of the
Company's total shares then issued and outstanding. The issuance of these
additional shares will be expensed as they are issued. Accordingly, the Pro
Forma Balance Sheet includes an adjustment to reflect the issuance of
284,013 additional shares of common stock as a result of the merger, leaving
a balance of 402,827 shares, as contigently issuable.
(3) Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair value of the properties acquired, and other net cash (cash,
receivables, payables and security deposits) of the Partnerships as
follows:
<TABLE>
<CAPTION>
Total
Purchase
Real Estate Other-Net Price
----------- --------- -----------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd............. $ 808,196 $ 52,841 $ 861,037
Taylor Income Investors IV, Ltd.............. 392,946 108,221 501,167
Taylor Income Investors V, Ltd............... 343,912 102,410 446,322
Taylor Income Investors VI, Ltd.............. 338,952 0 338,952
AAA Net Realty Fund VII, Ltd................. 903,220 30,272 933,492
AAA Net Realty Fund VIII, Ltd................ 1,610,513 61,035 1,671,548
AAA Net Realty Fund Goodyear, Ltd............ 1,036,450 13,732 1,050,182
AAA Net Realty Fund IX, Ltd.................. 5,144,042 93,801 5,237,843
AAA Net Realty Fund X, Ltd................... 10,281,226 0 10,281,226
AAA Net Realty Fund XI, Ltd.................. 6,115,836 83,192 6,199,028
----------- --------- -----------
26,975,293 545,504 27,520,797
Less: Minority Interest...................... 5,200,808 -- 5,200,808
----------- --------- -----------
Net Adjustment............................... $21,774,485 $ 545,504 $22,319,989
=========== ========= ===========
</TABLE>
F-12
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(Continued)
(Unaudited)
(4) Represents the issuance of 2,406,083 shares of Company stock valued at
$22,472,818 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Trust
Exchange L.P. Units Shares
Ratio Outstanding Issued Value
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd... 99.46 756.00 75,190 $ 702,273
Taylor Income Investors IV, Ltd.... 88.67 492.00 43,626 407,470
Taylor Income Investors V, Ltd..... 101.15 384.00 38,841 362,778
Taylor Income Investors VI, Ltd.... 123.48 240.00 29,636 276,800
AAA Net Realty Fund VII, Ltd....... 89.72 900.00 80,749 754,196
AAA Net Realty Fund VIII, Ltd...... 97.16 1488.00 144,575 1,350,332
AAA Net Realty Fund Goodyear,
Ltd............................... 85.09 1068.00 90,880 848,815
AAA Net Realty Fund IX, Ltd........ 106.16 4312.40 457,799 4,275,841
AAA Net Realty Fund X, Ltd......... 98.11 9162.90 898,929 8,396,000
AAA Net Realty Fund XI, Ltd........ 95.92 5649.00 541,858 5,060,953
--------- -----------
Total Limited Partners............. 2,402,083 22,435,458
--------- -----------
General Partners................... 4,000 37,360
--------- -----------
Total.............................. 2,406,083 $22,472,818
========= ===========
</TABLE>
The share price was agreed to by the General Partner of each of the
Partnerships and the Independent Directors of the Company based upon the price
of the Company's shares in its last public offering reduced by selling
commissions and related expenses.
(5) Represents estimated legal fees, professional fees, and other costs
incurred in the acquisition of the Partnership properties. These costs are
considered capital costs, of which a portion is capitalized into the basis
of the acquired properties and a portion is shown as a reduction of capital
related to the costs of issuing AmREIT common stock.
(6) Represents notes and cash to 20% of the limited partners in lieu of Company
stock.
F-13
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Eliminations
Historical Adviser and Historical and Pro Forma Pro Forma
Company Adjustments Partnership Adjustments Total
----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases..... $ 2,401,048 $ -- $2,221,053 $ -- $4,622,101
Earned income from
direct financing
leases............... 340,709 -- 70,374 -- 411,083
Service fees and other
income............... 187,577 130,870(2) 4,182 (188,972)(4) 133,657
Income from joint
ventures............. -- -- 518,559 (518,559)(4) --
Gain on sale of
property............. -- -- 7,615 (7,615)(4) --
Interest income....... 98,692 -- 48,511 -- 147,203
----------- -------- ---------- ---------- ----------
TOTAL REVENUES...... 3,028,026 130,870 2,870,294 (715,146) 5,314,044
----------- -------- ---------- ---------- ----------
Expenses:
General operating and
administrative....... 562,110 92,819(2) 109,575 -- 764,504
Reimbursements and
fees to related
party................ 40,607 -- 188,972 (188,972)(4) 40,607
Amortization.......... 62,754 177(2) 62,262 (62,262)(4) 62,931
Depreciation.......... 355,114 8,644(2) 382,749 130,517 (4) 877,024
Interest.............. 402,707 3,896(2) -- 271,671 678,274
Merger costs.......... 2,427,658 -- -- (2,427,658)(3) --
Potential acquisition
costs................ 464,303 -- -- (464,303)(5) --
----------- -------- ---------- ---------- ----------
TOTAL EXPENSES...... 4,315,253 105,536 743,558 (2,741,007) 2,423,340
----------- -------- ---------- ---------- ----------
Pro forma income (loss)
before minority
interest in net income
of consolidated joint
ventures............... (1,287,227) 25,334 2,126,736 2,025,861 2,890,704
Minority interest in net
income of consolidated
joint ventures......... (518,559) -- -- 518,559 (4) --
----------- -------- ---------- ---------- ----------
Pro forma net income
(loss)................. $(1,805,786) $ 25,334 $2,126,736 $2,544,420 $2,890,704
=========== ======== ========== ========== ==========
Pro forma earnings
(loss) per share:
Basic................. $ (0.81) $ 0.59
=========== ==========
Diluted............... $ (0.81) $ 0.59
=========== ==========
Weighted average common
and common equivalent
shares outstanding:
Basic................. 2,226,403 4,924,020
=========== ==========
Diluted............... 2,226,403 4,924,020
=========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-14
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that 20% of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows for operations of the Adviser
from January 1 through June 5:
. Amortization expense, depreciation expense and interest expense are
recorded at historical amounts.
. Service fee income is recorded for administrative, acquisition and
management services provided to entities other than the Company. Service
fee income of $459,472 for services provided to the Company has been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
. General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which has been allocated
to the Company or has been capitalized by the Company has been excluded
from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeded the fair
value of the net tangible assets received, an expense was 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 been
eliminated in the pro forma financial statement. For the year ended
December 31, 1998, this pro forma expense would have been $5,075,349 based
on the issuance of 213,260 shares at closing on January 1, 1998 and 281,896
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. 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 total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 404,844 of these
shares remain at December 31, 1998. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and 75% of the additional shares issued for
the Adviser during 1998. The additional shares are recorded at 75% to
reflect weighted average shares outstanding.
(4) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of a property which is being
accounted for on an installment basis.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation, based upon the purchase price which
represents the fair value of the buildings over 33 years. The purchase
price of the properties has been allocated 70% to buildings and 30% to
land.
. Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(5) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
F-15
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Eliminations
Historical Historical and Pro Forma Pro Forma
Company Partnership Adjustments Total
---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues
Rental income from
operating leases...... $1,577,965 $1,128,855 $ -- $2,706,820
Earned income from
direct financing
leases................ 170,802 35,336 -- 206,138
Other income........... 308,926 865 (105,966)(2) 203,825
Income from joint
ventures.............. -- 263,271 (263,271)(2) --
Gain on sale of
property.............. -- 98,695 (98,695)(2) --
Interest income........ 149,235 21,300 -- 170,535
---------- ---------- --------- ----------
TOTAL REVENUES....... 2,206,928 1,548,322 (467,932) 3,287,318
---------- ---------- --------- ----------
Expenses
General operating and
administrative........ 501,082 144,501 (105,966)(2) 539,617
Interest............... 515,357 -- 135,836 651,193
Depreciation........... 235,890 189,926 66,708 (2) 492,524
Amortization........... 27,342 18,822 (18,822)(2) 27,342
Potential acquisition
costs................. 398,299 -- (398,299)(3) --
---------- ---------- --------- ----------
TOTAL EXPENSES....... 1,677,970 353,249 (320,543) 1,710,676
---------- ---------- --------- ----------
Pro forma income before
minority interest in net
income of consolidated
joint ventures.......... 528,958 1,195,073 (147,389) 1,576,642
Federal income tax
expense non-qualified
reit subsidiary......... (63,596) -- -- (63,596)
Minority interest in net
income of consolidated
joint ventures.......... (263,271) -- 263,271 (2) --
---------- ---------- --------- ----------
Pro forma net income... $ 202,091 $1,195,073 $ 115,882 $1,513,046
========== ========== ========= ==========
Pro forma earnings per
share:..................
Basic.................. $ 0.09 $ 0.30
========== ==========
Diluted................ $ 0.09 $ 0.30
========== ==========
Weighted average common
and common equivalent
shares outstanding:.....
Basic.................. 2,372,744 5,052,610(4)
========== ==========
Diluted................ 2,372,744 5,052,610(4)
========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-16
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that 20% of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of two properties.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation based upon the purchase price which
represents the fair market value of the buildings over 33 years. The
purchase price of the properties has been allocated 70% to buildings and
30% to land.
. Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(3) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
(4) Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and the additional shares issued for the
Adviser during 1998.
F-17
<PAGE>
ASSUMPTION 3 - 50% PARTNERSHIP PARTICIPATION
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (1)
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
----------- ----------- -------------- -----------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents.. $ 1,204,876 $ -- $ 207,227 (3) $ 1,412,103
Accounts receivable........ 75,076 -- 8,407 (3) 83,483
Notes receivable........... 1,540,485 -- 94,410 (3) 1,634,895
Property, net.............. 30,655,973 -- 11,167,686 (3) 41,954,215
130,556 (5)
Net investment in direct
financing leases.......... 3,175,895 -- -- 3,175,895
Other assets............... 751,832 -- -- 751,832
----------- ----------- ----------- -----------
TOTAL ASSETS........... $37,404,137 $ -- $11,608,286 $49,012,423
=========== =========== =========== ===========
<CAPTION>
LIABILITIES & SHAREHOLDERS'
& PARTNERS' EQUITY
<S> <C> <C> <C> <C>
Notes payable.............. $15,379,489 $ -- $ -- $15,379,489
Accounts payable........... 345,252 -- 261,112 (5) 632,007
25,643 (3)
Security deposit........... 15,050 -- 11,650 (3) 26,700
----------- ----------- ----------- -----------
TOTAL LIABILITIES...... 15,739,791 -- 298,405 16,038,196
MINORITY INTEREST.......... 5,200,808 -- (2,600,404)(3) 2,600,404
SHAREHOLDERS' AND PARTNERS'
EQUITY:
Preferred stock, $.01 par
value, 10,001,000 shares
authorized, none issued
Common Stock, $.01 par
value, 100,010,000
shares authorized,
2,384,117 and 4,073,347
shares issued and
outstanding on
historical and pro-forma
basis, respectively..... 23,841 (2) 1,859 (2) 15,033 (3)(4) 40,733
Capital in excess of par
value................... 21,657,868 (2) 1,903,903 (2) 14,025,808 (3),(4) 37,457,023
(130,556)(5)
Accumulated distributions
in excess of earnings... (5,111,678)(2) (1,905,762)(2) -- (7,017,440)
Cost of Treasury Stock,
11,373 shares........... (106,493) -- -- (106,493)
----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS' AND
PARTNERS' EQUITY...... 16,463,538 -- 13,910,285 30,373,823
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' AND
PARTNERS' EQUITY...... $37,404,137 $ -- $11,608,286 $49,012,423
=========== =========== =========== ===========
PRO FORMA BOOK VALUE PER
SHARE:
Basic.................... $ 6.94 $ 7.48
=========== ===========
Diluted.................. $ 6.94 $ 7.48
=========== ===========
PRO FORMA DISTRIBUTIONS PER
SHARE FOR THE SIX MONTHS
ENDED JUNE 30, 1999:
Basic.................... $ 0.36 $ 0.36
=========== ===========
Diluted.................. $ 0.36 $ 0.36
=========== ===========
</TABLE>
See Notes to Pro Forma Balance Sheet.
F-18
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties was completed on June 30, 1999. The Partnership properties
include the acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition of the
Partnership properties are based on the assumption that the acquisitions
are approved by 50% of the limited partnerships and that none of the
partners elect to take notes and cash in lieu of Company stock. All of the
Partnership properties have the same characteristics and, therefore, the
50% assumption is provided to assist the reader in evaluating various
scenarios.
(2) On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock were issuable effective June 5, 1998. The issuance
of these shares is included in the historical financial information of the
Company included in the Pro Forma Balance Sheet.
In addition, the remaining 686,740 shares of stock currently valued at
$7,039,085 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
total shares issued to the shareholder of the Adviser pursuant to the
acquisition of the Adviser does not exceed 9.8% of the Company's total
shares then issued and outstanding. The issuance of these additional shares
will be expensed as they are issued. Accordingly the Pro Forma Balance
Sheet includes an adjustment to reflect the issuance of 185,928 additional
shares of common stock, leaving a balance of 500,812 shares, as
contingently issuable.
(3) Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair value of the properties acquired, and other net assets (cash,
receivables, payables and security deposits) of the Partnership. For the
purpose of estimating the total purchase price, the following calculations
were made:
<TABLE>
<CAPTION>
Total
Other-- Purchase
Real Estate Net Price
----------- --------- -----------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd............. $ 412,500 $ 26,421 $ 438,921
Taylor Income Investors IV, Ltd.............. 200,558 54,110 254,668
Taylor Income Investors V, Ltd............... 175,532 51,205 226,737
Taylor Income Investors VI, Ltd.............. 173,000 0 173,000
AAA Net Realty Fund VII, Ltd................. 461,000 15,136 476,136
AAA Net Realty Fund VIII, Ltd................ 822,000 30,518 852,518
AAA Net Realty Fund Goodyear, Ltd............ 529,000 6,866 535,866
AAA Net Realty Fund IX, Ltd.................. 2,625,500 46,900 2,672,400
AAA Net Realty Fund X, Ltd................... 5,247,500 0 5,247,500
AAA Net Realty Fund XI, Ltd.................. 3,121,500 41,596 3,163,096
----------- --------- -----------
13,768,090 272,752 14,040,842
Less: Minority Interest...................... 2,600,404 -- 2,600,404
----------- --------- -----------
Net Adjustment............................... $11,167,686 $ 272,752 $11,440,438
=========== ========= ===========
</TABLE>
F-19
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(continued)
(Unaudited)
(4) Represents the issuance of 1,503,302 shares of Company stock valued at
$14,040,841 based upon a per share price of $9.34. For the purpose of
estimating the total value, the following calculations were made:
<TABLE>
<CAPTION>
Trust
Exchange L.P. Units Shares
Ratio Outstanding Issued Value
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd... 99.46 472.50 46,994 $ 438,925
Taylor Income Investors IV, Ltd.... 88.67 307.50 27,266 254,664
Taylor Income Investors V, Ltd..... 101.15 240.00 24,276 226,738
Taylor Income Investors VI, Ltd.... 123.48 150.00 18,523 173,002
AAA Net Realty Fund VII, Ltd....... 89.72 562.50 50,468 471,372
AAA Net Realty Fund VIII, Ltd...... 97.16 930.00 90,359 843,953
AAA Net Realty Fund Goodyear,
Ltd............................... 85.09 667.50 56,800 530,512
AAA Net Realty Fund IX, Ltd........ 106.16 2695.25 286,124 2,672,399
AAA Net Realty Fund X, Ltd......... 98.11 5726.80 561,831 5,247,502
AAA Net Realty Fund XI, Ltd........ 95.92 3530.61 338,661 3,163,094
--------- -----------
Total Limited Partners............. 1,501,302 14,022,161
--------- -----------
General Partners................... 2,000 18,680
--------- -----------
Total.............................. 1,503,302 $14,040,841
========= ===========
</TABLE>
The share price was agreed to by the General Partner of each of the
Partnerships and the Independent Directors of the Company based upon the
price of the Company's shares in its last public offering reduced by
selling commissions and related expenses.
(5) Represents estimated legal fees, professional fees, and other costs
incurred in the acquisition of the Partnership properties. These costs are
considered capital costs, of which a portion is capitalized into the basis
of the acquired properties and a portion is shown as a reduction of capital
related to the costs of issuing AmREIT common stock.
F-20
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Eliminations
Historical Adviser and Historical and Pro Forma Pro Forma
Company Adjustments Partnership Adjustments Total
----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Rental income from
operating leases..... $ 2,401,048 $ -- $1,110,527 $ -- $3,511,575
Earned income from
direct financing
leases............... 340,709 -- 35,187 -- 375,896
Service fees and other
income............... 187,577 130,870(2) 2,091 (94,486)(4) 226,052
Income from joint
ventures............. -- -- 259,280 (259,280)(4) --
Gain on sale of
property............. -- -- 3,807 (3,807)(4) --
Interest income....... 98,692 -- 24,255 -- 122,947
----------- -------- ---------- ----------- ----------
TOTAL REVENUES...... 3,028,026 130,870 1,435,147 (357,573) 4,236,470
----------- -------- ---------- ----------- ----------
Expenses
General operating and
administrative....... 562,110 92,819(2) 54,788 -- 709,717
Reimbursements and
fees to related
party;............... 40,607 -- 94,486 (94,486)(4) 40,607
Amortization.......... 62,754 177(2) 31,131 (31,131)(4) 62,931
Depreciation.......... 355,114 8,644(2) 191,374 41,951 (4) 597,083
Interest.............. 402,707 3,896(2) -- -- 406,603
Merger costs.......... 2,427,658 -- -- (2,427,658)(3) --
Potential acquisition
costs................ 464,303 -- -- (464,303)(5) --
----------- -------- ---------- ----------- ----------
TOTAL EXPENSES...... 4,315,253 105,536 371,779 (2,975,627) 1,816,941
----------- -------- ---------- ----------- ----------
Pro forma income (loss)
before minority
interest in net income
of consolidated joint
ventures............... (1,287,227) 25,334 1,063,368 2,618,054 2,419,529
Minority interest in net
income of consolidated
joint ventures......... (518,559) -- -- 259,280 (4) (259,279)
----------- -------- ---------- ----------- ----------
Pro forma net income
(loss)............... $(1,805,786) $ 25,334 $1,063,368 $ 2,877,334 $2,160,250
=========== ======== ========== =========== ==========
Pro forma earnings
(loss) per share:
Basic................. $ (0.81) $ 0.55
=========== ==========
Diluted............... $ (0.81) $ 0.55
=========== ==========
Weighted average common
and
common equivalent
shares
outstanding:
Basic................. 2,226,403 3,950,967
=========== ==========
Diluted............... 2,226,403 3,950,967
=========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-21
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2) Includes pro forma adjustments as follows for operations of the Adviser
from January 1 through June 5:
. Amortization expense, depreciation expense and interest expense are
recorded at historical amounts.
. Service fee income is recorded for administrative, acquisition and
management services provided to entities other than the Company. Service
fee income of $459,472 for services provided to the Company has been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
. General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which has been allocated
to the Company or has been capitalized by the Company has been excluded
from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeded the fair
value of the net tangible assets received, an expense was 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 been
eliminated in the pro forma financial statement. For the year ended
December 31, 1998, this pro forma expense would have been $4,073,371 based
on the issuance of 213,260 shares at closing on January 1, 1998 and 184,142
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. 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 total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 502,598 of these
shares remain at December 31, 1998. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and 75% of the additional shares issued for
the Adviser during 1998. The additional shares are recorded at 75% to
reflect weighted average shares outstanding.
(4) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of a property which is being
accounted for on an installment basis.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation, based upon the purchase price which
represents the fair value of the buildings over 33 years. The purchase
price of the properties has been allocated 70% to buildings and 30% to
land.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(5) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
F-22
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Eliminations
Historical Historical and Pro Forma Pro Forma
Company Partnership Adjustments Total
---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues
Rental income from
operating leases...... $1,577,965 $564,427 $ -- $2,142,392
Earned income from
direct financing
leases................ 170,802 17,668 -- 188,470
Other income........... 308,926 433 (52,983)(2) 256,376
Income from joint
ventures.............. -- 131,636 (131,636)(2) --
Gain on sale of
property.............. -- 49,347 (49,347)(2) --
Interest income........ 149,235 10,650 -- 159,885
---------- -------- --------- ----------
TOTAL REVENUES....... 2,206,928 774,161 (233,966) 2,747,123
---------- -------- --------- ----------
Expenses
General operating and
administrative........ 501,082 72,250 (52,983)(2) 520,349
Interest............... 515,357 -- -- 515,357
Depreciation........... 235,890 94,963 21,700 (2) 352,553
Amortization........... 27,342 9,411 (9,411)(2) 27,342
Potential acquisition
costs................. 398,299 -- (398,299)(3) --
---------- -------- --------- ----------
TOTAL EXPENSES....... 1,677,970 176,624 (438,993) 1,415,601
---------- -------- --------- ----------
Pro forma income before
minority interest in net
income of consolidated
joint ventures.......... 528,958 597,537 205,027 1,331,522
Federal income tax
expense non-qualified
REIT subsidiary......... (63,596) -- -- (63,596)
Minority interest in net
income of consolidated
joint ventures.......... (263,271) -- 131,636 (2) (131,635)
---------- -------- --------- ----------
Pro forma net income..... $ 202,091 $597,537 $ 336,663 $1,136,291
========== ======== ========= ==========
Pro forma earnings per
share:
Basic.................. $ 0.09 $ 0.28
========== ==========
Diluted................ $ 0.09 $ 0.28
========== ==========
Weighted average common
and common equivalent
shares outstanding:
Basic.................. 2,372,744 4,055,119(4)
========== ==========
Diluted................ 2,372,744 4,055,119(4)
========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-23
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of two properties.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation based upon the purchase price which
represents the fair market value of the buildings over 33 years. The
purchase price of the properties has been allocated 70% to buildings and
30% to land.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(3) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
(4) Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and the additional shares issued for the
Adviser during 1998.
F-24
<PAGE>
ASSUMPTION 4 - 50% PARTNERSHIP PARTICIPATION
WITH NOTES ISSUED TO 20% OF THE INVESTORS
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (1)
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ 1,204,876 $ -- $ 207,227 (3) $ 1,159,704
(252,399)(6)
Accounts receivable..... 75,076 -- 8,407 (3) 83,483
Notes receivable........ 1,540,485 -- 94,410 (3) 1,634,895
Property, net........... 30,655,973 -- 10,887,243 (3) 41,673,772
130,556 (5)
Net investment in direct
financing leases....... 3,175,895 -- -- 3,175,895
Other assets............ 751,832 -- -- 751,832
----------- ----------- ----------- -----------
TOTAL ASSETS........ $37,404,137 $ -- $11,075,444 $48,479,581
=========== =========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' AND
PARTNERS' EQUITY
Liabilities:
Notes payable......... $15,379,489 $ -- $ 2,271,590 (6) $17,651,079
Accounts payable...... 345,252 -- 261,112 (5) 632,007
25,643 (3)
Security deposit...... 15,050 -- 11,650 (3) 26,700
----------- ----------- ----------- -----------
TOTAL LIABILITIES... 15,739,791 -- 2,569,995 18,309,786
MINORITY INTEREST....... 5,200,808 -- (2,600,404)(3) 2,600,404
SHAREHOLDERS' AND PART-
NERS' EQUITY:
Preferred stock, $.01
par value, 10,001,000
shares authorized,
none issued..........
Common Stock, $.01 par
value, 100,010,000
shares authorized,
2,384,117 and
3,740,465 shares
issued and
outstanding on
historical and pro-
forma basis,
respectively......... 23,841(2) 1,533 (2) 12,030 (3)(4) 37,404
Capital in excess of
par value............ 21,657,868(2) 1,569,849 (2) 11,224,379 (3)(4) 34,321,540
(130,556)(5)
Accumulated distribu-
tions in excess of
earnings............. (5,111,678)(2) (1,571,382)(2) -- (6,683,060)
Cost of Treasury
Stock, 11,373
shares............... (106,493) -- -- (106,493)
----------- ----------- ----------- -----------
TOTAL SHAREHOLDERS'
AND PARTNERS'
EQUITY............. 16,463,538 -- 11,105,853 27,569,391
----------- ----------- ----------- -----------
TOTAL LIABILITIES
AND SHAREHOLDERS'
AND PARTNERS'
EQUITY............. $37,404,137 $ -- $11,075,444 $48,479,581
=========== =========== =========== ===========
PRO FORMA BOOK VALUE PER
SHARE:
Basic................. $ 6.94 $ 7.39
=========== ===========
Diluted............... $ 6.94 $ 7.39
=========== ===========
PRO FORMA DISTRIBUTIONS
PER SHARE FOR THE SIX
MONTHS ENDED JUNE 30,
1999:
Basic................. $ 0.36 $ 0.36
=========== ===========
Diluted............... $ 0.36 $ 0.36
=========== ===========
</TABLE>
See Notes to Pro Forma Balance Sheet.
F-25
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties was completed on June 30, 1999. The Partnership properties
include the acquisition of a minority interest in several joint ventures
with the Company. Pro forma adjustments from the acquisition of the
Partnership properties are based on the assumption that the acquisitions
are approved by 50% of the limited partnerships and that 20% of these
partners elect to take a notes and cash in lieu of Company stock. All of
the Partnership properties have the same characteristics and, therefore,
the 50% assumption is provided to assist the reader in evaluating various
scenarios
(2) On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock were issuable effective June 5, 1998. The issuance
of these shares is included in the historical financial information of the
Company included in the Pro Forma Balance Sheet.
In addition, the remaining 686,740 shares of stock currently valued at
$7,039,085 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
total shares issued to the shareholder of the Adviser pursuant to the
acquisition of the Adviser does not exceed 9.8% of the Company's total
shares then issued and outstanding. The issuance of these additional shares
will be expensed as they are issued. Accordingly, the Pro Forma Balance
Sheet includes an adjustment to reflect the issuance of 153,306 additional
shares of common stock, leaving a balance of 533,434 shares, as contigently
issuable.
(3) Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair value of the properties acquired, and other net assets (cash,
receivables, payables and security deposits) of the Partnerships. For the
purpose of estimating the total purchase price, the following calculations
were made:
<TABLE>
<CAPTION>
Total
Purchase
Real Estate Other-Net Price
----------- --------- -----------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd............. $ 404,098 $ 26,421 $ 430,519
Taylor Income Investors IV, Ltd.............. 196,473 54,110 250,583
Taylor Income Investors V, Ltd............... 171,956 51,205 223,161
Taylor Income Investors VI, Ltd.............. 169,476 0 169,476
AAA Net Realty Fund VII, Ltd................. 451,610 15,136 466,746
AAA Net Realty Fund VIII, Ltd................ 805,257 30,518 835,775
AAA Net Realty Fund Goodyear, Ltd............ 518,225 6,866 525,091
AAA Net Realty Fund IX, Ltd.................. 2,572,021 46,900 2,618,921
AAA Net Realty Fund X, Ltd................... 5,140,613 0 5,140,613
AAA Net Realty Fund XI, Ltd.................. 3,057,918 41,596 3,099,514
----------- --------- -----------
13,487,647 272,752 13,760,399
Less: Minority Interest...................... 2,600,404 -- 2,600,404
----------- --------- -----------
Net Adjustment............................... $10,887,243 $ 272,752 $11,159,995
=========== ========= ===========
</TABLE>
F-26
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(Continued)
(Unaudited)
(4) Represents the issuance of 1,203,042 shares of Company stock valued at
$11,236,409 based upon a per share price of $9.34. For the purpose of
estimating the total value, the following calculations were made :
<TABLE>
<CAPTION>
Trust
Exchange L.P. Units Shares
Ratio Outstanding Issued Value
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd... 99.46 378.00 37,595 $ 351,136
Taylor Income Investors IV, Ltd.... 88.67 246.00 21,813 203,735
Taylor Income Investors V, Ltd..... 101.15 192.00 19,421 181,389
Taylor Income Investors VI, Ltd.... 123.48 120.00 14,818 138,400
AAA Net Realty Fund VII, Ltd....... 89.72 450.00 40,375 377,098
AAA Net Realty Fund VIII, Ltd...... 97.16 744.00 72,288 675,166
AAA Net Realty Fund Goodyear,
Ltd............................... 85.09 534.00 45,440 424,408
AAA Net Realty Fund IX, Ltd........ 106.16 2156.20 228,899 2,137,920
AAA Net Realty Fund X, Ltd......... 98.11 4581.45 449,465 4,198,000
AAA Net Realty Fund XI, Ltd........ 95.92 2824.49 270,928 2,530,477
------ ------- --------- -----------
Total Limited Partners............. 1,201,042 11,217,729
--------- -----------
General Partners................... 2,000 18,680
--------- -----------
Total.............................. 1,203,042 $11,236,409
========= ===========
</TABLE>
The share price was agreed to by the General Partner of each of the
Partnerships and the Independent Directors of the Company based upon the
price of the Company's shares in its last public offering reduced by
selling commissions and related expenses.
(5) Represents estimated legal fees, professional fees, and other costs
incurred in the acquisition of the Partnership properties. These costs are
considered capital costs, of which a portion is capitalized into the basis
of the acquired properties and a portion is shown as a reduction of capital
related to the costs of issuing AmREIT common stock.
(6) Represents notes and cash to 20% of the limited partners in lieu of Company
stock.
F-27
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Eliminations
Pro Forma and Pro
Historical Adviser and Historical Forma Pro Forma
Company Adjustments Partnership(4) Adjustments Total
----------- ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues
Rental income from
operating leases..... $ 2,401,048 $ -- $1,110,527 $ -- $3,511,575
Earned income from
direct financing
leases............... 340,709 -- 35,187 -- 375,896
Service fees and other
income............... 187,577 130,870(2) 2,091 (94,486)(4) 226,052
Income from joint
ventures............. -- -- 259,280 (259,280)(4) --
Gain on sale of
property............. -- -- 3,807 (3,807)(4) --
Interest income....... 98,692 -- 24,255 -- 122,947
----------- ------- ---------- ----------- ----------
TOTAL REVENUES...... 3,028,026 130,870 1,435,147 (357,573) 4,236,470
----------- ------- ---------- ----------- ----------
Expenses
General operating and
administrative....... 562,110 92,819(2) 54,788 -- 709,717
Reimbursements and
fees to related
party................ 40,607 -- 94,486 (94,486)(4) 40,607
Amortization.......... 62,754 177(2) 31,131 (31,131)(4) 62,931
Depreciation.......... 355,114 8,644(2) 191,374 36,023 (4) 591,155
Interest.............. 402,707 3,896(2) -- 135,835 542,438
Merger costs.......... 2,427,658 -- -- (2,427,658)(3) --
Potential acquisition
costs................ 464,303 -- -- (464,303)(5) --
----------- ------- ---------- ----------- ----------
TOTAL EXPENSES...... 4,315,253 105,536 371,779 (2,845,720) 1,946,848
----------- ------- ---------- ----------- ----------
Pro forma income (loss)
before minority
consolidated joint
ventures............... (1,287,227) 25,334 1,063,368 2,488,147 2,289,622
Minority interest in net
income of consolidated
joint ventures......... (518,559) -- -- 259,280 (4) (259,279)
----------- ------- ---------- ----------- ----------
Pro forma net income
(loss)................. $(1,805,786) $25,334 $1,063,368 $ 2,747,427 $2,030,343
=========== ======= ========== =========== ==========
Pro forma earnings
(loss) per share:
Basic................. $ (0.81) $ 0.56
=========== ==========
Diluted............... $ (0.81) $ 0.56
=========== ==========
Weighted average common
and common equivalent
shares outstanding:
Basic................. 2,226,403 3,627,335
=========== ==========
Diluted............... 2,226,403 3,627,335
=========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-28
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that 20% of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2) Includes pro forma adjustments as follows for operations of the Adviser
from January 1 through June 5:
. Amortization expense, depreciation expense and interest expense are
recorded at historical amounts.
. Service fee income is recorded for administrative, acquisition and
management services provided to entities other than the Company. Service
fee income of $459,472 for services provided to the Company has been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
. General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which has been allocated
to the Company or has been capitalized by the Company has been excluded
from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeded the fair
value of the net tangible assets received, an expense was 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 been
eliminated in the pro forma financial statement. For the year ended
December 31, 1998, this pro forma expense would have been $3,740,112 based
on the issuance of 213,260 shares at closing on January 1, 1998 and 151,629
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. 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 total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 535,111 of the
shares remain at December 31, 1998. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and 75% of the additional shares issued for
the Adviser during 1998. The additional shares are recorded at 75% to
reflect weighted average shares outstanding.
(4) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of a property which is being
accounted for on an installment basis.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation, based upon the purchase price which
represents the fair value of the buildings over 33 years. The purchase
price of the properties has been allocated 70% to buildings and 30% to
land.
. Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(5) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
F-29
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Eliminations
and Pro
Historical Historical Forma Pro Forma
Company Partnership Adjustments Total
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Rental income from
operating leases........ $1,577,965 $564,427 $ -- $2,142,392
Earned income from direct
financing leases........ 170,802 17,668 -- 188,470
Other income............. 308,926 433 (52,983)(2) 256,376
Income from joint
ventures................ -- 131,636 (131,636)(2) --
Gain on sale of
property................ -- 49,347 (49,347)(2) --
Interest income.......... 149,235 10,650 -- 159,885
---------- -------- -------- ----------
TOTAL REVENUES......... 2,206,928 774,161 (233,966) 2,747,123
---------- -------- -------- ----------
Expenses
General operating and
administrative.......... 501,082 72,250 (52,983)(2) 520,349
Interest................. 515,357 -- 67,918 583,275
Depreciation............. 235,890 94,963 18,736 (2) 349,589
Amortization............. 27,342 9,411 (9,411)(2) 27,342
Potential acquisition
costs................... 398,299 -- (398,299)(2) --
---------- -------- -------- ----------
TOTAL EXPENSES......... 1,677,970 176,624 (374,039) 1,480,555
---------- -------- -------- ----------
Pro forma income before
minority interest in net
income of consolidated
joint ventures............ 528,958 597,537 140,073 1,266,568
Federal income tax expense
non-qualified reit
subsidiary................ (63,596) -- -- (63,596)
Minority interest in net
income of consolidated
joint ventures............ (263,271) -- 131,636 (2) (131,635)
---------- -------- -------- ----------
Pro forma net income....... $ 202,091 $597,537 $271,709 $1,071,337
========== ======== ======== ==========
Pro forma earnings per
share:
Basic.................... $ 0.09 $ 0.29
========== ==========
Diluted.................. $ 0.09 $ 0.29
========== ==========
Weighted average common and
common equivalent shares
outstanding:
Basic.................... 2,372,744 3,723,358
========== ==========
Diluted.................. 2,372,744 3,723,358
========== ==========
</TABLE>
See Notes to Pro Forma Statement of Operations.
F-30
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1998. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that 20% of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2) Includes pro forma adjustments as follows:
. Elimination of the gain on the sale of two properties.
. Elimination of administrative fees paid to a subsidiary of the Company.
. Recording of additional depreciation based upon the purchase price which
represents the fair market value of the buildings over 33 years. The
purchase price of the properties has been allocated 70% to buildings and
30% to land.
. Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
. Elimination of amortization of organization costs.
. Elimination of the Partnership interest in certain properties which are
majority owned by the Company as the historical financial statements of
the Company are reflected on a consolidated basis.
(3) Adjustments include elimination of costs incurred in connection with the
acquisition of the Partnership properties which are not reflected in future
operations and are non-recurring.
(4) Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1998 and the additional shares issued for the
Adviser during 1998.
F-31
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents......................................... $ 1,204,876
Accounts receivable............................................... 75,076
Note receivable................................................... 1,540,485
Property:
Land............................................................ 13,662,625
Buildings....................................................... 17,834,384
Furniture, fixture and equipment................................ 91,237
-----------
31,588,246
Accumulated depreciation........................................ (932,273)
-----------
Total property................................................ 30,655,973
-----------
Net investment in direct financing leases......................... 3,175,895
Other assets:
Prepaid acquisition costs....................................... 378,700
Accrued rental income........................................... 294,134
Other........................................................... 78,998
-----------
Total other assets............................................ 751,832
-----------
TOTAL ASSETS.................................................. 37,404,137
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Liabilities:
Notes payable................................................... $15,379,489
Accounts payable................................................ 345,252
Security deposit................................................ 15,050
-----------
TOTAL LIABILITIES............................................. 15,739,791
-----------
MINORITY INTEREST................................................. 5,200,808
Commitments (Note 8)
Shareholders' equity:
Preferred stock, $.01 par value, 10,001,000 shares authorized,
none issued
Common stock, $.01 par value, 100,010,000 shares authorized,
2,384,117 shares issued and outstanding........................ 23,841
Capital in excess of par value.................................. 21,657,868
Accumulated distributions in excess of earnings................. (5,111,678)
Cost of treasury stock, 11,373 shares........................... (106,493)
-----------
TOTAL SHAREHOLDERS' EQUITY.................................... 16,463,538
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $37,404,137
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Quarter Year to Date
---------------------- -----------------------
1999 1998 1999 1998
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 800,205 $ 527,197 $1,577,965 $ 963,206
Earned income from direct
financing leases........... 85,427 85,151 170,802 170,254
Interest income............. 124,260 20,940 149,235 40,722
Service fees and other
income..................... 106,914 12,931 308,926 12,931
--------- ----------- ---------- -----------
TOTAL REVENUES............ 1,116,806 646,219 2,206,928 1,187,113
--------- ----------- ---------- -----------
Expenses:
General operating and
administrative............. 318,063 92,552 501,082 161,345
Reimbursements and fees to
related party.............. -- 40,140 -- 57,800
Interest.................... 267,383 10,936 515,357 37,831
Depreciation................ 118,220 73,796 235,890 130,745
Amortization................ 11,654 15,689 27,342 31,377
Merger costs (Note 6)....... -- 2,339,635 -- 2,389,918
Potential acquisition
costs...................... 377,776 50,702 398,299 182,741
--------- ----------- ---------- -----------
TOTAL EXPENSES............ 1,093,096 2,623,450 1,677,970 2,991,757
--------- ----------- ---------- -----------
Income (loss) before federal
income taxes and minority
interest in net income of
consolidated joint ventures.. 23,710 (1,977,231) 528,958 (1,804,644)
Federal income taxes from non
REIT subsidiaries............ (11,656) -- (63,596) --
Minority interest in net
income of consolidated joint
ventures..................... (131,651) (127,709) (263,271) (263,068)
--------- ----------- ---------- -----------
Net income (loss)............. $(119,597) $(2,104,940) $ 202,091 $(2,067,712)
========= =========== ========== ===========
Basic and diluted earnings
(loss) per share............. $ (0.05) $ (0.95) $ 0.09 $ (1.00)
========= =========== ========== ===========
Weighted average number of
common shares outstanding.... 2,372,744 2,222,662 2,372,744 2,075,216
========= =========== ========== ===========
Weighted average number of
common shares outstanding
plus dilutive potential com-
mon shares................... 2,372,744 2,222,662 2,372,744 2,075,216
========= =========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Quarter Year to Date
----------------------- -----------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $ (119,597) $(2,104,940) $ 202,091 $(2,067,712)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Amortization............. 11,654 15,689 27,342 31,377
Depreciation............. 118,220 73,796 235,890 130,745
Merger costs............. -- 2,283,322 -- 2,283,322
Increase (decrease) in
accounts receivable..... 15,612 (132,009) (61,938) (45,455)
Increase (decrease) in
prepaid expenses........ (1,250) -- 12,284 --
Increase in accounts
payable................. 35,985 155,528 143,973 62,752
Cash receipts from direct
financing leases less
than income recognized.. (2,138) (2,593) (4,225) (5,137)
Decrease (increase) in
escrow deposits, net of
minority interest
partners................ -- (24,000) 10,000 (23,900)
Increase in accrued
rental income........... (22,843) (883) (48,546) (31,125)
Increase in other
assets.................. (8,006) -- (55,749) --
Increase in minority
interest................ 131,651 127,709 263,271 263,068
---------- ----------- ---------- -----------
Net cash provided by
operating activities.... 159,288 391,619 724,393 597,935
---------- ----------- ---------- -----------
Cash flows from investing
activities:
Acquisition of real
estate.................... (40,518) (947,694) (2,001,622) (4,679,217)
Acquisition of furniture,
fixtures and equipment.... (21,445) -- (22,258) --
Investments in joint
venture................... 348,936 -- 362,149 --
Change in notes
receivable................ 26,543 (1,540,485)
Change in prepaid
acquisition costs......... (10,368) (29,210) (23,077) (58,286)
---------- ----------- ---------- -----------
Net cash provided by
(used in) investing
activities.............. 303,148 (976,904) (3,225,293) (4,737,503)
---------- ----------- ---------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
stock, net................ 2,000 1,337,108 2,000 2,479,782
Proceeds from (reduction
of) notes payable......... 299,378 (134,141) 4,799,379 2,653,254
Distributions paid to
shareholders.............. (431,839) (387,634) (862,661) (729,599)
Distributions to minority
interest partners......... (141,381) (147,761) (281,462) (287,849)
---------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities.............. (271,842) 667,572 3,657,256 4,115,588
---------- ----------- ---------- -----------
Net increase (decrease) in
cash and cash equivalents... 190,594 82,287 1,156,356 (23,980)
Cash and cash equivalents at
beginning of period......... 1,014,282 1,295,473 48,520 1,401,740
---------- ----------- ---------- -----------
Cash and cash equivalents at
end of period............... $1,204,876 $ 1,377,760 $1,204,876 $ 1,377,760
========== =========== ========== ===========
Supplemental disclosure of
non-cash financing
activities:
Issuance of stock in lieu
of note payment........... $ -- $ 170,000 $ -- $ 170,000
Issuance of stock in
connection with Merger.... $ -- $ 2,244,380 $ -- $ 2,244,380
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AmREIT, Inc., formerly American Asset Advisers Trust, Inc. ("Issuer" or the
"Company"), was incorporated in the state of Maryland on August 17, 1993. The
Company is a real estate investment trust (a "REIT") that acquires, develops,
owns and manages high-quality, freestandingretail properties leased to major
retail businesses under long-term commercial net leases. Through a wholly-owned
subsidiary, the Company also provides advisory services to eleven real estate
limited partnerships.
The consolidated financial statements include the accounts of AmREIT, Inc.,
its wholly-owned subsidiaries, AmREIT Realty Investment Corporation ("ARIC"),
AmREIT Securities Company ("ASC"), AmREIT Operating Corporation ("AOC"), AmREIT
Opportunity Corporation ("AOP"), and AmREIT SPE 1, Inc. ("SPE 1"), and its six
joint ventures with related parties. The three subsidiaries were formed in
June, July and April 1998, respectively. ARIC was organized to acquire,
develop, hold and sell real estate in the short-term for capital gains and/or
receive fee income. The Company owns 100% of the outstanding preferred shares
of ARIC and AOP. The preferred shares are entitled to receive dividends equal
to 95% of net income and are expected to be paid from cash flows, if any. AOC
and AOP were formed with the intention to qualify and to operate as a real
estate investment trust under federal tax laws. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company
owns greater than 50% of the aforementioned joint ventures and exercises
control over operations.
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.
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. $6,096 and $0 have been paid for income taxes
during 1999 and 1998, respectively, for the Company's non-qualified REIT
subsidiary. There has been no cash paid for income taxes during 1999 or 1998.
For the three and six months ended June 30, 1999, the Company paid interest of
$267,285 and $515,259, respectively. There was no other cash paid for interest
during the first six months of 1998.
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 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. Unearned income is deferred and amortized to income over the
life of the lease so as to produce a constant periodic rate of return.
Expenditures related to the development of real estate are carried at cost
plus capitalized carrying charges, acquisition costs and development costs.
Carrying charges, primarily interest and loan acquisition costs, and direct and
indirect development costs related to buildings under construction are
capitalized as part of construction in progress. The Company capitalizes
acquisition costs once the acquisition of the property becomes probable.
Management reviews its properties for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets, including
accrued rental income, may not be recoverable through
F-35
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
operations. Management determines whether an impairment in value occurred by
comparing the estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with the carrying cost
of the individual property. If an impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the asset exceeds its
fair value.
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years.
Issuance costs incurred in the raising of capital through the sale of common
stock are treated as a reduction of shareholders' 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 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.
The Company believes the carrying value of financial instruments consisting
of cash, cash equivalents, accounts receivable, notes receivable and accounts
and notes payable approximate their fair value.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB 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 and six month periods ended June 30, 1999 and 1998.
The financial statements of AmREIT, Inc. contained herein should be read in
conjunction with the financial statements included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1998.
2. NOTES RECEIVABLE
On January 19, 1999, the Company entered into a note agreement with KMH Land
Development, Inc. in the amount of $1,953,715 for the construction of a
property. As of June 30, 1999, the Company had advanced $1,540,485 on the note.
The note bears interest at the prime lending rate plus one percent with
principal and interest payable monthly. The note is secured by the land and
construction in progress and is due on February 1, 2000.
3. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital, and repaid all amounts outstanding under the
Company's prior credit facility. Under the Credit Facility, which has a one-
year original term and was extended under the same terms and covenants through
February 2000, the Company may borrow
F-36
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
up to $30 million subject to the value of unencumbered assets. The Credit
Facility contains covenants which, among other restrictions, require the
Company to maintain a minimum net worth, a maximum leverage ratio, and
specified interest coverage and fixed charge coverage ratios. The Credit
Facility bears interest at an annual rate of LIBOR plus a spread ranging from
1.625% to 2.150% (6.625% as of June 30, 1999), set quarterly depending on the
Company's leverage ratio. As of June 30, 1999, $14,380,110 was outstanding
under the Credit Facility.
In March 1999, the Company entered into a ten year mortgage note payable
with NW L.L.C. for $1,000,000 with $999,379 being outstanding at June 30, 1999.
The interest rate is fixed at 8.375% with payments of principal and interest
due monthly. The note matures April 1, 2009. The note is collateralized by a
first lien mortgage on property with an aggregate carrying value of
approximately $1,253,706, net of $32,148 of accumulated depreciation.
Aggregate annual maturity of the mortgage note payable for each of the
following five years ending December 31 are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 48,920
2000............................................................. 71,068
2001............................................................. 77,253
2002............................................................. 83,978
2003............................................................. 91,287
Thereafter....................................................... 626,873
--------
$999,379
========
</TABLE>
As part of the Merger (Note 7), the Company assumed a 5-year lease agreement
for its office telephone system. The lease terminates in September 2000, at
which time the Company has the option to purchase the equipment. Monthly lease
payments total $313. Future minimum lease payments required under this lease
are summarized as follows:
<TABLE>
<S> <C>
1999............................................................... $1,880
2000............................................................... $2,820
</TABLE>
F-37
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
4. MAJOR TENANTS
The following schedule summarizes rental income by lessee for the three and
six months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Quarter Year to Date
------------------ ---------------------
1999 1998 1999 1998
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Tandy Corporation..................... $ 27,225 $ 27,225 $ 54,450 $ 54,450
America's Favorite Chicken Co......... 23,903 24,566 47,808 49,132
Blockbuster Music Retail, Inc......... 94,475 94,476 188,951 188,952
One Care/ Memorial Hermann Hospital... 50,411 50,409 100,818 100,818
Just For Feet, Inc.................... 365,385 188,847 730,712 373,399
Bank United........................... 39,447 39,449 78,898 78,898
Hollywood Entertainment Corp.......... 68,290 68,290 136,581 140,427
Don Pablos............................ 19,612 -- 39,224 --
Krispy Kreme.......................... 40,441 -- 85,260 --
OfficeMax, Inc........................ 129,623 119,086 259,245 147,384
HOP Properties, Inc................... 26,820 -- 26,820 --
-------- --------- ---------- ----------
$885,632 $ 612,348 $1,748,767 $1,133,460
======== ========= ========== ==========
</TABLE>
5. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share has been computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per share has been computed by dividing net income (loss) (as
adjusted) by the weighted average number of common shares outstanding plus
dilutive potential common shares.
The following table presents information necessary to calculate basic and
diluted earnings (loss) per share for the periods indicated:
<TABLE>
<CAPTION>
Quarter To Date Year To Date
---------------------- ---------------------
1999 1998 1999 1998
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Weighted average common shares
outstanding.................. 2,372,744 2,222,662 2,372,744 2,075,216
========= =========== ========= ===========
Basic earnings (loss) per
share........................ $ (.05) $ (0.95) $ .09 $ (1.00)
========= =========== ========= ===========
DILUTED EARNINGS (LOSS) PER
SHARE
Weighted average common shares
outstanding.................. 2,372,744 2,222,662 2,372,744 2,075,216
Shares issuable from assumed
conversion of warrants....... -- -- -- --
--------- ----------- --------- -----------
Weighted average common shares
outstanding, as adjusted..... 2,372,744 2,222,662 2,372,744 2,075,216
========= =========== ========= ===========
Diluted earnings (loss) per
share...................... $ (.05) $ (0.95) $ .09 $ (1.00)
========= =========== ========= ===========
EARNINGS (LOSS) FOR BASIC AND
DILUTED COMPUTATION
Net income (loss) to common
shareholders (basic and
diluted Earnings (loss) per
share computation)........... $(119,597) $(2,104,940) $ 202,091 $(2,067,712)
========= =========== ========= ===========
</TABLE>
F-38
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
6. MERGER TRANSACTION
On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with American Asset Advisers Advisers Realty
CorporationTrust, Inc. ("AAA"), whereby the stockholder of AAA agreed to
exchange 100% of the outstanding shares of common stock of AAA for up to
900,000 shares (the "Share Consideration") of the Company's common stock (the
"Merger"). The common stock of AAA was wholly owned by the president and
director of the Company. As a result of the Merger, the Company became a fully
integrated, self-administered real estate investment trust ("REIT") effective
June 5, 1998. Effective June 5, 1998, 213,260 shares were paid and the balance
(the "Share Balance") of the Share Consideration is to be paid over a six year
period to the extent certain goals are achieved after the Merger. None of the
Share Balance has been earned subsequent to June 5, 1998. The market value of
the common shares issued effective June 5, 1998 was $2,185,915 was accounted
for as expenses incurred in acquiring AAA from a related party. In addition,
the Company assumed an obligation to the stockholder of AAA in the amount of
$97,407. This obligation and the related accrued interest of $3,157 were
subsequently paid with the issuance of 9,811 shares. In connection with the
Merger, the Company incurred costs during the six months ended June 30, 1998 of
$182,741, consisting primarily of legal and accounting fees, valuation opinions
and fairness opinions. For accounting purposes, AAA was not considered a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations," and therefore, the market value of the common shares issued in
excess of the fair value of the net tangible assets acquired was charged to
expense rather than capitalized as goodwill. To the extent the Share Balance is
paid over time, the market value of the common shares issued will also be
charged to expense. Upon consummation of the Merger on June 5, 1998, certain
employees of AAA became employees of the Company, and any obligation to pay
fees under the advisor agreement between the Company and AAA was terminated.
7. RELATED PARTY TRANSACTIONS
See Note 6 regarding the Merger.
Related Party Transactions Subsequent to the Merger:
Beginning June 5, 1998, the Company provides property acquisition, leasing,
administrative and management services for eleven affiliated real estate
limited partnerships (the "Partnerships"). The president and director of the
Company owns between 45% and 100% of the stock of the companies that serve as
the general partner of the Partnerships.
Related Party Transactions Prior to the Merger:
The Company had entered into an Omnibus Services Agreement with AAA whereby
AAA provided property acquisition, leasing, administrative and management
services for the Company. There were no reimbursements and fees incurred or
charged to expense for the three and six months ended June 30, 1999.
Reimbursements and fees of $40,140 and $57,800 were incurred and charged to
expense for the three and six months ended June 30, 1998, respectively.
AAA had incurred certain costs in connection with the organization and
syndication of the Company. Reimbursement of these costs become obligations of
the Company in accordance with the terms of the offering. There were no costs
incurred by AAA for the three and six months ended June 30, 1999, in connection
with the issuance and marketing of the Company's stock. Costs of $37,190 and
$56,164 were incurred by AAA for the three and six months ended June 30, 1998,
respectively, in connection with the issuance and marketing of the Company's
stock. These costs are reflected as issuance costs and are recorded as a
reduction to capital in excess of par value.
F-39
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
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.
There were no acquisition fees incurred or paid to AAA for the three and six
months ended June 30, 1999. Acquisition fees of $67,961 and $123,389 were
incurred and paid to AAA for the three and six months ended June 30, 1998,
respectively. Acquisition fees paid to AAA included $430,972 that was earned
prior to purchasing certain properties.
On October 16, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd., an entity with common management. The joint venture was formed
to purchase a property, which is being operated as a Hollywood Video store in
Lafayette, Louisiana. The property was purchased on October 31, 1997 after the
construction was completed. The Company's interest in the joint venture is
74.58%.
On February 11, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd. The joint venture was formed to purchase a property, which is
being operated as a Just For Feet retail store in Baton Rouge, Louisiana. The
property was purchased on June 9, 1997 after the construction was completed.
The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company entered into a joint venture with AAA Net
Realty XI, Ltd. The joint venture was formed to purchase a parcel of land in
The Woodlands, Texas upon which the tenant, Bank United, constructed a branch
bank building at its cost. At the termination of the lease the improvements
will be owned by the joint venture. The Company's interest in the joint venture
is 51%.
On April 5, 1996, the Company entered into a joint venture with AAA Net
Realty Fund XI, Ltd. and AAA Net Realty Fund X, Ltd., entities with common
management, to purchase 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 the construction was completed. The Company's interest in the joint
venture is 51.9%.
On September 12, 1995, the Company entered into a joint venture agreement
with AAA Net Realty Fund XI, Ltd. to purchase a property, which is being
operated as a Blockbuster Music Store in Wichita, Kansas. The Company's
interest in the joint venture is 51%.
On October 27, 1994, the Company entered into a joint venture agreement with
AAA Net Realty Fund X, Ltd., an entity with common management. The joint
venture was formed to purchase a property, which is being operated as a
Blockbuster Music Store in Independence, Missouri. The Company's interest in
the joint venture is 54.84%.
8. COMMITMENTS
At June 30, 1999, the Company is committed to incur additional costs of
approximately $4,466,000, not to exceed $4,761,000, in connection with
properties under development.
F-40
<PAGE>
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AmREIT, Inc.
We have audited the accompanying consolidated balance sheet of AmREIT, Inc.
and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 1999
F-41
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents......................................... $ 48,520
Accounts receivable............................................... 13,138
Prepaid expenses.................................................. 13,534
Investment in joint venture....................................... 362,149
Property:
Escrow deposits................................................. 10,000
Land............................................................ 11,663,291
Buildings....................................................... 17,832,096
Furniture, fixtures and equipment............................... 68,979
-----------
29,574,366
Accumulated depreciation........................................ (696,384)
-----------
Total property................................................ 28,877,982
-----------
Net investment in direct financing leases......................... 3,171,670
Other assets:
Preacquisition costs............................................ 355,623
Accrued rental income........................................... 245,588
Other........................................................... 49,342
-----------
Total other assets............................................ 650,553
-----------
TOTAL ASSETS.................................................. $33,137,546
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Liabilities:
Note payable.................................................... $10,580,110
Accounts payable................................................ 201,279
Security deposit................................................ 15,050
-----------
TOTAL LIABILITIES............................................. 10,796,439
-----------
MINORITY INTEREST................................................. 5,218,999
Commitments (Note 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,001,000 shares authorized,
none issued.................................................... --
Common stock, $.01 par value, 100,010,000 shares authorized,
2,384,117 shares issued........................................ 23,841
Capital in excess of par value.................................. 21,655,867
Accumulated distributions in excess of earnings................. (4,451,107)
Cost of treasury stock, 11,373 shares........................... (106,493)
-----------
TOTAL SHAREHOLDERS' EQUITY.................................... 17,122,108
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $33,137,546
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-42
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Revenues:
Rental income from operating leases................ $ 2,401,048 $1,217,187
Earned income from direct financing leases......... 340,709 339,628
Interest income.................................... 98,692 153,895
Service fees and other income...................... 187,577 --
----------- ----------
TOTAL REVENUES................................... 3,028,026 1,710,710
----------- ----------
Expenses:
General operating and administrative............... 562,110 112,464
Reimbursements and fees to related party........... 40,607 106,504
Interest........................................... 402,707 6,000
Depreciation....................................... 355,114 146,015
Amortization....................................... 62,754 62,754
Merger costs (Note 8).............................. 2,427,658 282,890
Potential acquisition costs........................ 464,303 --
----------- ----------
TOTAL EXPENSES................................... 4,315,253 716,627
----------- ----------
Income (loss) before minority interest in net income
of consolidated joint ventures...................... (1,287,227) 994,083
Minority interest in net income of consolidated joint
ventures............................................ (518,559) (455,226)
----------- ----------
Net income (loss).................................... $(1,805,786) $ 538,857
=========== ==========
Basic earnings (loss) per share...................... $ (0.81) $ 0.34
=========== ==========
Diluted earnings (loss) per share.................... $ (0.81) $ 0.33
=========== ==========
Weighted average number of common shares
outstanding......................................... 2,226,403 1,563,048
=========== ==========
Weighted average number of common shares outstanding
plus dilutive potential common shares............... 2,226,403 1,624,217
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-43
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Distributions Cost of
----------------- Excess of in Excess of Treasury
Number Amount Par Value Earnings Stock Total
--------- ------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 1,204,925 $12,049 $10,780,847 $ (499,194) $ -- $10,293,702
Net income............ -- -- -- 538,857 -- 538,857
Distributions ($.72
per share)........... -- -- -- (1,093,439) -- (1,093,439)
Issuance of common
stock................ 663,288 6,633 6,783,642 -- -- 6,790,275
Stock issuance costs.. -- -- (899,189) -- -- (899,189)
--------- ------- ----------- ----------- --------- -----------
Balance at December 31,
1997................... 1,868,213 18,682 16,665,300 (1,053,776) -- 15,630,206
Net income (loss)..... -- -- -- (1,805,786) -- (1,805,786)
Distributions ($.73
per share)........... -- -- -- (1,591,545) -- (1,591,545)
Issuance of common
stock................ 515,904 5,159 5,252,768 -- -- 5,257,927
Stock issuance costs.. -- -- (262,201) -- -- (262,201)
Cost of treasury
stock, 11,373
shares............... -- -- -- -- (106,493) (106,493)
--------- ------- ----------- ----------- --------- -----------
Balance at December 31,
1998................... 2,384,117 $23,841 $21,655,867 $(4,451,107) $(106,493) $17,122,108
========= ======= =========== =========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-44
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(1,805,786) $ 538,857
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization.................................... 62,754 62,754
Depreciation.................................... 355,114 146,015
Merger costs.................................... 2,283,322 --
Decrease (increase) in accounts receivable...... 111,462 (119,481)
Increase in prepaid expenses.................... (13,534) --
Increase in accounts payable.................... 106,961 72,588
Cash receipts from direct financing leases less
than income recognized......................... (10,474) (9,398)
Decrease in escrow deposits, net of minority
interest partners.............................. 1,100 27,150
Increase in accrued rental income............... (77,409) (93,554)
Increase in other assets........................ (22,000) --
Increase in minority interest................... 518,559 455,226
----------- ------------
Net cash provided by operating activities..... 1,510,069 1,080,157
----------- ------------
Cash flows from investing activities:
Acquisition of real estate........................ (7,337,349) (11,409,725)
Additions of furniture, fixtures and equipment.... (5,019) --
Investment in joint venture....................... (362,149) --
Change in preacquisition costs.................... 17,063 (298,350)
----------- ------------
Net cash used in investing activities........... (7,687,454) (11,708,075)
Cash flows from financing activities:
Proceeds from issuance of stock, net.............. 2,480,782 5,891,086
Common stock repurchases.......................... (106,493) --
Prepaid issuance costs............................ -- 101,399
Proceeds from note payable........................ 4,601,778 5,981,489
Distributions paid to shareholders................ (1,591,545) (1,093,439)
Distributions to minority interest partners....... (560,357) (467,188)
----------- ------------
Net cash provided by financing activities....... 4,824,165 10,413,347
----------- ------------
Net decrease in cash and cash equivalents........... (1,353,220) (214,571)
Cash and cash equivalents at beginning of year...... 1,401,740 1,616,311
----------- ------------
Cash and cash equivalents at end of year............ $ 48,520 $ 1,401,740
=========== ============
Supplemental disclosure of non-cash financing
activities:
Real estate and escrow deposit contributed by
partners of the consolidated joint ventures
(minority interest).............................. $ -- $ 1,677,659
=========== ============
Issuance of stock in lieu of note payment......... $ 270,564 $ --
=========== ============
Issuance of stock in connection with Merger....... $ 2,244,380 $ --
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-45
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations
AmREIT, Inc., formerly American Asset Advisers Trust, Inc. ("Issuer" or the
"Company"), was incorporated in the state of Maryland on August 17, 1993. The
Company is a real estate investment trust (a "REIT") that acquires, develops,
owns and manages high-quality, freestanding properties leased to major retail
businesses under long-term commercial net leases. Through a wholly-owned
subsidiary, the Company also provides advisory services to eleven real estate
limited partnerships.
Basis of Consolidation
The consolidated financial statements include the accounts of AmREIT, Inc.,
its wholly-owned subsidiaries, AmREIT Realty Investment Corporation ("ARIC"),
AmREIT Operating Corporation ("AOC"), and AmREIT Opportunity Corporation
("AOP"), and its six joint ventures with related parties. The three
subsidiaries were formed in June, July and April 1998, respectively. ARIC was
organized to acquire, develop, hold and sell real estate in the short-term for
capital gains and/or receive fee income. The Company owns 100% of the
outstanding preferred shares of ARIC. The preferred shares are entitled to
receive dividends equal to 95% of net income and are expected to be paid from
cash flows, if any. AOC and AOP were formed with the intention to qualify and
to operate as a real estate investment trust under federal tax laws. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The Company owns greater than 50% of the aforementioned joint
ventures and exercises control over operations.
Basis of Accounting
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
recorded when incurred.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash and cash equivalents consist of
demand deposits at commercial banks and money market funds.
Real Estate
Real estate is leased to others on a net lease basis whereby all operating
expenses related to the properties, including property taxes, insurance and
common area maintenance are the responsibility of the tenant. The leases are
accounted for under the operating 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 based upon the estimated useful life of the property. 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.
Expenditures related to the development of real estate are carried at cost
plus capitalized carrying charges, acquisition costs and development costs.
Carrying charges, primarily interest and loan acquisition costs, and direct and
indirect development costs related to buildings under construction are
capitalized as part of construction in progress. The Company capitalizes
acquisition costs once the acquisition of the property
F-46
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
becomes probable. Prior to that time, the Company expenses these costs as
acquisition expense. Interest of $316,492 and $155,108 was capitalized on
properties under construction during 1998 and 1997, respectively.
Management reviews its properties for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets, including
accrued rental income, may not be recoverable through operations. Management
determines whether an impairment in value occurred by comparing the estimated
future cash flows (undiscounted and without interest charges), including the
residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, a loss will be recorded for the amount
by which the carrying value of the asset exceeds its fair value.
Depreciation
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years.
Other Assets
Other assets include organization costs and loan acquisition costs.
Organization costs of $313,768 incurred in the formation of the Company are
amortized on a straight-line basis over five years. Accumulated amortization
related to organization costs as of December 31, 1998 totaled $286,426. Loan
acquisition costs of $24,000 incurred in obtaining property financing are
amortized to interest expense on a straight-line basis over the term of the
debt agreements. Accumulated amortization related to loan acquisition costs as
of December 31, 1998 totaled $2,000.
Stock Issuance Costs
Issuance costs incurred in the raising of capital through the sale of common
stock are treated as a reduction of shareholders' equity.
Statement of Cash Flows--Supplemental Information
There has been no cash paid for income taxes during 1998 or 1997. During
1998 and 1997, the Company paid interest of $635,177 and $149,108,
respectively, of which $316,492 and $149,108 were capitalized on properties
under construction.
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
Basic earnings per share has been computed by dividing net income to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share has been computed by dividing net income to common
shareholders (as adjusted) by the weighted average number of common shares
outstanding plus dilutive potential common shares.
F-47
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1998 1997
----------- ---------
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding............ 2,226,403 1,563,048
=========== =========
Basic earnings (loss) per share..................... $ (.81) $ .34
=========== =========
DILUTED EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding............ 2,226,403 1,563,048
Shares issuable from assumed conversion of warrants... -- 61,169
----------- ---------
Weighted average common shares outstanding, as
adjusted............................................. 2,226,403 1,624,217
=========== =========
Diluted earnings (loss) per share................... $ (.81) $ .33
=========== =========
EARNINGS (LOSS) FOR BASIC AND DILUTED COMPUTATION
Net income (loss) to common shareholders (basic and
diluted earnings per share computation).............. $(1,805,786) $ 538,857
=========== =========
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company believes the carrying value of financial instruments consisting
of cash, cash equivalents, accounts receivable and accounts and notes payable
approximate their fair value.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement, which is effective for all Fiscal
quarters of fiscal years beginning after June 1, 1999, establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. The Statement requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The Company is currently
reviewing the Statement to see what impact, if any, it will have on the
Company's consolidated financial statements.
F-48
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
2. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals, under
noncancellable operating leases in existence at December 31, 1998 is as
follows:
<TABLE>
<S> <C>
1999.......................................................... $ 2,860,477
2000.......................................................... $ 2,885,305
2001.......................................................... $ 2,894,342
2002.......................................................... $ 2,929,325
2003.......................................................... $ 2,948,914
2004-2016..................................................... $21,782,827
</TABLE>
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at December 31,
1998 included:
<TABLE>
<S> <C>
Minimum lease payments receivable............................ $ 6,780,584
Unguaranteed residual value.................................. 1,557,904
Less: Unearned income........................................ 5,166,818
-----------
$ 3,171,670
===========
</TABLE>
A summary of minimum future rentals, exclusive of any renewals, under the
noncancellable direct financing leases follows:
<TABLE>
<S> <C>
1999........................................................... $ 333,165
2000........................................................... $ 336,590
2001........................................................... $ 343,251
2002........................................................... $ 363,233
2003........................................................... $ 363,226
2004-2016...................................................... $5,041,100
</TABLE>
4. JOINT VENTURES
Investment in Joint Venture
On June 29, 1998, the Company entered into a joint venture agreement with
GDC, Ltd. The joint venture was formed to develop a multi-tenant retail center
and to sell to a third party upon completion. The Company's interest in the
joint venture is approximately 6.67% and is accounted for using the cost
method. In addition, the Company shall receive a preferred return on its
investment. The Company is not required to contribute any additional money to
the joint venture.
Consolidated Joint Ventures
The Company consolidates its joint ventures listed below due to its ability
to control operations. Pursuant to the Joint Venture Agreements that
incorporate the provisions to the Texas Revised Partnership Act, the Company as
majority owner may make management decisions, such as the sale of the property,
without the consent of the minority joint venture interests.
F-49
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 1998 and 1997
(Unaudited)
On October 16, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd., an entity with common management. The joint venture was formed
for the purchase of a property, which is being operated as a Hollywood Video
store in Lafayette, Louisiana. The property was purchased on October 31, 1997
after the construction was completed. The Company's interest in the joint
venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd. The joint venture was formed for the purchase of a property,
which is being operated as a Just For Feet retail store in Baton Rouge,
Louisiana. The property was purchased on June 9, 1997 after the construction
was completed. The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company formed a joint venture, AAA Joint Venture
96-2, with AAA Net Realty Fund XI, Ltd. The joint venture was formed for the
purpose of acquiring a parcel of land in The Woodlands, Texas upon which the
tenant, Bank United, constructed a branch bank building at its cost. At the
termination of the lease the improvements will be owned by the joint venture.
The Company's interest in the joint venture is 51%.
On April 5, 1996, the Company formed a joint venture, AAA Joint Venture
96-1, with AAA Net Realty Fund XI, Ltd. and AAA Net Realty Fund X, Ltd.,
entities with common management, for the purpose of acquiring a property which
is being operated as a Just For Feet retail store in Tucson, Arizona. The
property was purchased on September 11, 1996 after construction was completed.
The Company's interest in the joint venture is 51.9%.
On September 12, 1995, the Company formed a joint venture, AAA Joint Venture
95-2, with AAA Net Realty Fund XI, Ltd. for the purpose of acquiring a property
in Wichita, Kansas on lease to Blockbuster Music Retail, Inc. The Company's
interest in the joint venture is 51%.
On October 27, 1994, the Company formed a joint venture, AAA Joint Venture
94-1, with AAA Net Realty Fund X, Ltd. for the purpose of acquiring a property
in Independence, Missouri on lease to Blockbuster Music Retail, Inc. The
Company's interest in the joint venture is 54.84%.
5. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital, and repaid all amounts outstanding under the
Company's prior credit facility. Under the Credit Facility, which has a one-
year term, the Company may borrow up to $30 million subject to the value of
unencumbered assets. The Credit Facility contains covenants which, among other
restrictions, require the Company to maintain a minimum net worth, a maximum
leverage ratio, and specified interest coverage and fixed charge coverage
ratios. The Credit Facility bears interest at an annual rate of LIBOR plus a
spread ranging from 1.625% to 2.150% (6.938% as of December 31, 1998), set
quarterly depending on the Company's leverage ratio. As of December 31, 1998,
$10,580,110 was outstanding under the Credit Facility.
F-50
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
As part of the Merger, the Company assumed a 5-year lease agreement for its
office telephone system. The lease terminates in September 2000, at which time
the Company has the option to purchase the equipment. Monthly lease payments
total $313. Future minimum lease payments required under this lease are
summarized as follows:
<TABLE>
<S> <C>
1999............................................................... $3,760
2000............................................................... $2,820
</TABLE>
6. MAJOR TENANTS
The Company's operations are related to the acquisition and leasing of
commercial real estate properties. The following schedule summarizes rental
income by lessee for 1998 and 1997 under both operating and direct financing
methods of accounting:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Tandy Corporation (Mesquite, Texas)...................... $ 108,900 $ 108,900
America's Favorite Chicken Company (Smyrna, Georgia)..... 98,265 97,931
Blockbuster Music Retail, Inc. (Independence, Missouri
and Wichita, Kansas).................................... 377,901 377,901
OneCare Health Industries, Inc. (Houston, Texas)......... 202,800 201,638
Just For Feet, Inc. (Tucson, Arizona; Baton Rouge,
Louisiana; The Woodlands, Texas and Sugar Land, Texas).. 1,096,233 590,192
Bank United (The Woodlands, Texas and Houston, Texas).... 157,801 157,801
Hollywood Entertainment Corp. (Lafayette, Louisiana and
Ridgeland, Mississippi)................................. 273,931 22,452
OfficeMax, Inc. (Lake Jackson, Texas and Dover,
Delaware)............................................... 406,622 --
D F & R Operating Company, Inc. (Peachtree City,
Georgia)................................................ 3,288 --
Krispy Kreme Doughnuts of the Gulf Coast, Ltd. (Houston,
Texas).................................................. 16,016 --
---------- ----------
Total.................................................. $2,741,757 $1,556,815
========== ==========
</TABLE>
7. FEDERAL INCOME TAXES
The differences between net income for financial reporting purposes and
taxable income before distribution deductions relate primarily to temporary
differences, to certain organization costs which are amortized for financial
reporting purposes only and to merger costs and potential acquisition costs
which are expensed for financial reporting purposes.
For income tax purposes, distributions paid to shareholders consist of
ordinary income, capital gains and return of capital as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Ordinary Income..................................... $ 780,588 $ 795,918
Return of capital................................... 810,957 297,521
---------- ----------
$1,591,545 $1,093,439
========== ==========
</TABLE>
F-51
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
8. MERGER TRANSACTION
On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with American Asset Advisers Realty Corporation ("AAA"),
whereby the stockholder of AAA agreed to exchange 100% of the outstanding
shares of common stock of AAA for up to 900,000 shares (the "Share
Consideration") of the Company's common stock (the "Merger"). The common stock
of AAA was wholly owned by the president and director of the Company. As a
result of the Merger, the Company became a fully integrated, self-administered
real estate investment trust ("REIT") effective June 5, 1998. Effective June 5,
1998, 213,260 shares were issued and the balance (the "Share Balance") of the
Share Consideration is to be paid over a six year period to the extent certain
goals are achieved after the Merger. None of the Share Balance has been earned
subsequent to June 5, 1998. The market value of the common shares issued
effective June 5, 1998 was $2,185,915 which was accounted for as expenses
incurred in acquiring AAA from a related party. In addition, the Company
assumed an obligation to the stockholder of AAA in the amount of $97,407. This
obligation and the related accrued interest of $3,157 were subsequently paid
with the issuance of 9,811 shares. In connection with the Merger, the Company
incurred costs during 1998 and 1997 of $144,336 and $282,890, respectively,
consisting primarily of legal and accounting fees, valuation opinions and
fairness opinions. For accounting purposes, AAA was not considered a "business"
for purposes of applying APB Opinion No. 16, "Business Combinations," and
therefore, the market value of the common shares issued in excess of the fair
value of the net tangible assets acquired was charged to expense rather than
capitalized as goodwill. To the extent the Share Balance is paid over time, the
market value of the common shares issued will also be charged to expense. Upon
consummation of the Merger on June 5, 1998, certain employees of AAA became
employees of the Company, and any obligation to pay fees under the advisor
agreement between the Company and AAA was terminated.
9. RELATED PARTY TRANSACTIONS
See Note 8 regarding the Merger and Note 4 regarding joint venture
agreements with related parties.
Related Party Transactions Subsequent to the Merger:
Beginning June 5, 1998, the Company provides property acquisition, leasing,
administrative and management services for eleven affiliated real estate
limited partnerships (the "Partnerships"). The president and director of the
Company owns between 45% and 100% of the stock of the companies that serve as
the general partner of the Partnerships. Service fees of $138,340 were paid by
the Partnerships to the Company for 1998.
Related Party Transactions Prior to the Merger:
Prior to June 5, 1998, the Company was a party to an Omnibus Services
Agreement with AAA whereby AAA provided property acquisition, leasing,
administrative and management services for the Company. Service fees of $40,607
were incurred and charged to expense for the period beginning January 1, 1998
through June 5, 1998. Service fees of $106,504 were incurred and charged to
expense for 1997.
AAA had incurred certain costs in connection with the organization and
syndication of the Company. Reimbursement of these costs become obligations of
the Company in accordance with the terms of the offering. Costs of $56,164 were
incurred by AAA for the period ended June 5, 1998 in connection with the
issuance and marketing of the Company's stock. Costs of $164,985 were incurred
by AAA during 1997 in connection with
F-52
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
the issuance and marketing of the Company's stock. These costs are reflected as
issuance costs and are recorded as a reduction to capital in excess of par
value.
Acquisition fees, including real estate commissions, finders fees,
consulting fees and any other non-recurring fees incurred in connection with
locating, evaluating and selecting properties and structuring and negotiating
the acquisition of properties are included in the basis of the properties.
Acquisition fees of $123,389 were incurred and paid to AAA for the period ended
June 5, 1998. Acquisition fees of $1,059,805 were incurred and paid to AAA
during 1997. Acquisition fees paid to AAA included $355,623 that was earned
prior to purchasing certain properties.
10. PROPERTY ACQUISITIONS IN 1998
On December 18, 1998, the Company acquired a parcel of land for a purchase
price of $773,800 upon which the tenant, D F & R Operating Company, Inc.,
constructed a restaurant building at its cost. At the termination of the lease,
the improvements will be owned by the Company. This property is being operated
as a Don Pablo's Mexican restaurant on State Highway 54 in Peachtree City,
Georgia. The lease agreement extends for ten years, however the tenant has the
option to renew the lease for four additional terms of five years each. The
lease has provisions for an escalation in the rent after the fifth year of the
lease. The Company recorded $3,288 of revenue from this property in 1998.
On November 23, 1998, the Company acquired a newly constructed property on
lease to Krispy Kreme Doughnuts of the Gulf Coast, Ltd. for a purchase price of
$1,371,742. This property is being operated as a Krispy Kreme restaurant on
Westheimer Road in Houston, Texas. The lease agreement extends for fifteen
years, however the tenant has the option to renew the lease for four additional
terms of five years each. The lease has provisions for an escalation in the
rent after the fifth and tenth years of the lease. The Company recorded $16,016
of revenue from this property in 1998.
On July 1, 1998, the Company acquired a newly constructed property on lease
to Just For Feet, Inc. for a purchase price of $3,928,997. This property is
being operated as a Just For Feet retail store on U.S. 59 at First Colony
Boulevard in Sugar Land, Texas. The lease agreement extends for fifteen years,
however the tenant has the option to renew the lease for two additional terms
of five years each. The lease has provisions for an escalation in the rent
after the fifth and tenth years of the lease. The Company recorded $190,853 of
revenue from this property in 1998.
On June 3, 1998, the Company acquired a newly constructed property on lease
to Just For Feet, Inc. for a purchase price of $3,751,555. This property is
being operated as a Just For Feet retail store on Lake Woodlands Drive in The
Woodlands, Texas. The lease agreement extends for fifteen years, however the
tenant has the option to renew the lease for two additional terms of five years
each. The lease has provisions for an escalation in the rent after the fifth
and tenth years of the lease. The Company recorded $213,851 of revenue from
this property in 1998.
On April 14, 1998, the Company acquired a newly constructed property on
lease to OfficeMax, Inc. for a purchase price of $2,848,793. This property is
being operated as an OfficeMax store on U.S. Route 13 in Dover, Delaware. The
lease agreement extends for fifteen years, however the tenant has the option to
renew the lease for four additional terms of five years each. The lease has
provisions for an escalation in the rent after the fifth and tenth years of the
lease. The Company recorded $196,793 of revenue from this property in 1998.
F-53
<PAGE>
AmREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
On February 20, 1998, the Company acquired a newly constructed property on
lease to OfficeMax, Inc. for a purchase price of $2,405,666. This property is
being operated as an OfficeMax store on the northwest corner of State Highway
332 and This Way in Lake Jackson, Texas. The lease agreement extends for
fifteen years, however the tenant has the option to renew the lease for three
additional terms of five years each. The lease has provisions for an escalation
in the rent after the fifth and tenth years of the lease. The Company recorded
$209,829 of revenue from this property in 1998.
11. COMMITMENT
As part of the Merger, the Company assumed a 3-year lease agreement for its
office facilities. The lease terminates in September 2000, however the Company
has the option to renew the lease for an additional three years. Rental expense
for the year ended December 31, 1998 was $36,256. Future minimum lease payments
required under this operating lease, excluding renewal options, are summarized
as follows:
<TABLE>
<S> <C>
1999.............................................................. $58,635
2000.............................................................. $43,976
</TABLE>
F-54
<PAGE>
INDEPENDENT AUDITORS' REPORT
AAA Net Realty Fund IX, Ltd.
We have audited the accompanying balance sheet of AAA Net Realty Fund IX,
Ltd. as of December 31, 1998 and the related statements of income, partnership
equity (deficit) and cash flows for each of the two years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Partnerships 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 financial statements present fairly, in all material
respects, the financial position of AAA Net Realty Fund IX, Ltd. as of December
31, 1998 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 1999
F-55
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents............................................. $ 216,302
Property:
Land................................................................ 1,490,494
Buildings........................................................... 2,946,375
----------
4,436,869
Accumulated depreciation............................................ (640,101)
----------
Total property.................................................... 3,796,768
----------
Other assets:
Accrued rental income............................................... 28,240
----------
TOTAL ASSETS...................................................... $4,041,310
==========
<CAPTION>
LIABILITIES AND PARTNERSHIP EQUITY
<S> <C>
Liabilities:
Accounts payable.................................................... $ 13,427
----------
TOTAL LIABILITIES................................................. 13,427
----------
Partnership equity (deficit):
General partners.................................................... (2,835)
Limited partners.................................................... 4,030,718
----------
TOTAL PARTNERSHIP EQUITY.......................................... 4,027,883
----------
TOTAL LIABILITIES AND PARTNERSHIP EQUITY.......................... $4,041,310
==========
</TABLE>
See Notes to Financial Statements.
F-56
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years
Ended December
31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Rental income.............................................. $551,395 $514,719
Interest income............................................ 6,075 5,474
-------- --------
Total revenues........................................... 557,470 520,193
-------- --------
Expenses:
Advisory fees to related party............................. 30,378 17,678
Depreciation............................................... 93,536 93,536
Professional fees.......................................... 18,636 18,780
-------- --------
Total expenses........................................... 142,550 129,994
-------- --------
Net income................................................... $414,920 $390,199
======== ========
Allocation of net income:
General partners........................................... $ 4,149 $ 3,902
Limited partners........................................... 410,771 386,297
-------- --------
$414,920 $390,199
======== ========
Net income per unit.......................................... $ 76.97 $ 72.39
======== ========
Weighted average units outstanding........................... 5,390.5 5,390.5
======== ========
</TABLE>
See Notes to Financial Statements.
F-57
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERSHIP EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996.................. $(4,886) $4,156,964 $4,152,078
Net income.................................. 3,902 386,297 390,199
Distributions ($85.45 per Limited
Partnership Unit).......................... (3,000) (460,593) (463,593)
------- ---------- ----------
Balance at December 31, 1997.................. (3,984) 4,082,668 4,078,684
Net income.................................. 4,149 410,771 414,920
Distributions ($85.84 per Limited
Partnership Unit).......................... (3,000) (462,721) (465,721)
------- ---------- ----------
Balance at December 31, 1998.................. $(2,835) $4,030,718 $4,027,883
======= ========== ==========
</TABLE>
See Notes to Financial Statements.
F-58
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 414,920 $ 390,199
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 93,536 93,536
Decrease (increase) in accounts receivable............. 46,875 (45,825)
Increase in accrued rental income...................... (21,180) (7,060)
Increase (decrease) in accounts payable................ (2,047) 2,520
--------- ---------
Net cash provided by operating activities............ 532,104 433,370
--------- ---------
Cash flows from financing activities:
Distributions paid to partners.......................... (465,721) (463,593)
--------- ---------
Net cash used in financing activities................ (465,721) (463,593)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 66,383 (30,223)
Cash and cash equivalents at beginning of year........... 149,919 180,142
--------- ---------
Cash and cash equivalents at end of year................. $ 216,302 $ 149,919
========= =========
</TABLE>
See Notes to Financial Statements.
F-59
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations
AAA Net Realty Fund IX, Ltd. (the "Partnership") is a limited partnership
formed February 1, 1990, under the laws of the State of Nebraska. The
Partnership commenced operations as of June 6, 1990. American Asset Advisers
Management Corporation IX (a Nebraska corporation) is the Managing General
Partner and H. Kerr Taylor is the Individual General Partner.
The Partnership was formed to acquire commercial properties for cash, own,
lease, operate, manage and eventually sell the properties. Prior to June 5,
1998, the supervision of the operations of the properties was managed by
American Asset Advisers Realty Corporation, ("AAA"), a related party. Beginning
June 5, 1998, the supervision of the operations of the properties is managed by
AmREIT Realty Investment Corporation, ("ARIC"), a related party.
Basis of Accounting
The financial records of the Partnership 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 Partnership 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.
Property
Property 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 under which 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.
The Partnerships lease agreements do not provide for contingent rentals.
The Partnership 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.
The final property acquisition was completed as a joint venture. The
Partnerships interest in the joint venture is 4.8%. At December 31, 1998, the
net book value of this property comprised 1.6% of total assets, the rental
income of $8,723 comprised 1.6% of total rental income and 2.1% of net income.
Because of the immateriality of these amounts to the financial statements as a
whole, the initial purchase and the subsequent rental income and depreciation
have been accounted for on the proportionate consolidation method.
F-60
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Depreciation
Buildings are depreciated using the straight-line method over an estimated
useful life of 31.5 years.
Statement of Cash Flows--Supplemental Information
No cash was paid for income taxes or interest during 1998 or 1997.
Federal Income Taxes
All income and expense items flow through to the partners for tax purposes.
Consequently, no provisions for federal or state income taxes is provided in
the accompanying financial statements.
Fair Value of Financial Instruments
The carrying value of financial instruments, consisting of cash, cash
equivalents, accounts receivable and liabilities approximate their fair value.
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.
2. PARTNERSHIP EQUITY
The Managing General Partner, American Asset Advisers Management Corporation
IX, and the Individual General Partner, H. Kerr Taylor, have made capital
contributions in the amounts of $990 and $10, respectively. All other
contributions have been made by the limited partners. The General Partners
shall not be obligated to make any other contributions to the capital of the
Partnership, except that, in the event that the General Partners have negative
balances in their capital accounts after dissolution and winding up of, or
withdrawal from, the Partnership, the General Partners will contribute to the
Partnership an amount equal to the lesser of the deficit balances in their
capital accounts or 1.01% of the total capital contributions of the limited
partners over the amount previously contributed by the General Partners.
3. ALLOCATIONS AND DISTRIBUTIONS
All income, profits, gains and losses of the Partnership for each fiscal
year, other than any gain or loss realized upon the sale, exchange or other
disposition of any of the Partnership properties, shall be allocated as
follows: (a) net loss shall be allocated 99% to the limited partners, .99% to
the Managing General Partner and .01% to the Individual General Partner; and
(b) net income will be allocated first in the ratio, and to the extent, net
cash flow is distributed to the partners for such year and any additional
income for such year will be allocated 99% to the limited partners, 1% to the
General Partners.
For income tax purposes, the gain realized upon the sale, exchange or other
disposition of any property will be allocated as follows:
a. first, to and among the partners in an amount equal to the negative
balances in their respective capital accounts (pro rata based on the
relative amounts of such negative balances);
F-61
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
b. then, to each limited partner until the balance in such limited
partners capital account equals the amount to be distributed to such
limited partner in the first tier of the distributions of net proceeds of
sale;
c. then, to the General Partners, until the balance in their capital
accounts equals the amounts to be distributed to the General Partners in
the second tier of distributions of net proceeds of sale;
d. then, 85% to the limited partners and 15% to the General Partners;
and,
e. thereafter, the Partners shall be allocated gain or loss in order to
meet Treasury Regulation regarding qualified income offset requirements.
Any loss on the sale, exchange, or other disposition of any property shall
be allocated 99% to the limited partners and 1% to the General Partners.
4. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals, under
noncancellable operating leases in existence at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................... $ 530,215
2000........................................................... $ 535,840
2001........................................................... $ 547,090
2002........................................................... $ 511,923
2003........................................................... $ 472,193
2004-2009...................................................... $1,972,668
</TABLE>
5. MAJOR TENANTS
The Partnerships operations are related to the acquisition and leasing of
commercial real estate properties. The following schedule summarizes rental
income by lessee for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Foodmaker (Texas)..................................... $ 68,995 $ 66,212
Tandy Corporation (Tennessee)......................... $ -- $109,896*
Baptist Memorial Health Services, Inc. (Tennessee).... $208,680 $ 69,560
Payless ShoeSource/WaldenBooks (Texas)................ $ 82,000 $ 77,331
Golden Corral Corporation (Texas)..................... $191,720 $191,720
-------- --------
Total............................................... $551,395 $514,719
======== ========
</TABLE>
- --------
* Lease terminated during 1997
6. INCOME RECONCILIATION
A reconciliation of net income for financial reporting purposes to income
for federal income tax purposes is as follows for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income for financial reporting purposes........... $414,920 $390,199
Accrued rental income................................. (21,180) (7,060)
-------- --------
Income for tax reporting purposes..................... $393,740 $383,139
======== ========
</TABLE>
F-62
<PAGE>
AAA NET REALTY FUND IX, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. RELATED PARTY TRANSACTIONS
The Partnership Agreement provides for the reimbursement for administrative
services necessary for the prudent operation of the Partnership and its assets
with the exception that no reimbursement is permitted for rent, utilities,
capital equipment, salaries, fringe benefits or travel expenses allocated to
the Individual General Partner or to any controlling persons of the Managing
General Partner. In connection with administrative services rendered to the
Partnership, $30,378 and $17,678 was incurred and paid to ARIC and AAA in 1998
and 1997, respectively.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
AAA Net Realty Fund X, Ltd.
We have audited the accompanying balance sheet of AAA Net Realty Fund X,
Ltd. as of December 31, 1998 and the related statements of income, partnership
equity and cash flows for each of the two years in the period ended December
31, 1998. These financial statements are the responsibility of the Partnerships
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 financial statements present fairly, in all material
respects, the financial position of AAA Net Realty Fund X, Ltd. as of December
31, 1998 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 1999
F-64
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents............................................. $ 241,636
Accounts receivable................................................... 1,170
Property:
Land................................................................ 2,566,250
Buildings........................................................... 5,370,984
----------
7,937,234
Accumulated depreciation............................................ (689,350)
----------
Total property.................................................... 7,247,884
----------
Net investment in direct financing leases............................. 618,232
Investment in joint ventures.......................................... 1,370,213
Accrued rental income................................................. 120,342
----------
TOTAL ASSETS........................................................ $9,599,477
==========
<CAPTION>
LIABILITIES AND PARTNERSHIP EQUITY
<S> <C>
Liabilities:
Accounts payable.................................................... $ 1,614
Security deposit.................................................... 12,000
----------
TOTAL LIABILITIES................................................. 13,614
----------
Partnership equity:
General partners.................................................... 17,071
Limited partners.................................................... 9,568,792
----------
TOTAL PARTNERSHIP EQUITY.......................................... 9,585,863
----------
TOTAL LIABILITIES AND PARTNERSHIP EQUITY.......................... $9,599,477
==========
</TABLE>
See Notes to Financial Statements.
F-65
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Rental income from operating leases.................... $ 857,483 $ 856,318
Earned income from direct financing leases............. 70,374 70,026
Interest income........................................ 6,524 3,151
Equity income from investment in joint ventures........ 142,195 142,054
---------- ----------
TOTAL REVENUES....................................... 1,076,576 1,071,549
---------- ----------
Expenses:
Advisory fees to related party......................... 74,734 68,932
Amortization........................................... 27,755 60,000
Depreciation........................................... 144,466 144,466
Professional fees...................................... 26,651 19,532
---------- ----------
TOTAL EXPENSES....................................... 273,606 292,930
---------- ----------
Net income............................................... $ 802,970 $ 778,619
========== ==========
Allocation of net income:
General partners....................................... $ 8,030 $ 7,786
Limited partners....................................... 794,940 770,833
---------- ----------
$ 802,970 $ 778,619
========== ==========
Net income per unit...................................... $ 70.10 $ 67.98
========== ==========
Weighted average units outstanding....................... 11,454 11,454
========== ==========
</TABLE>
See Notes to Financial Statements.
F-66
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERSHIP EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996.................. $11,105 $9,854,245 $9,865,350
Net income.................................. 7,786 770,833 778,619
Distributions ($80.61 per Limited
Partnership Unit).......................... (4,450) (923,254) (927,704)
------- ---------- ----------
Balance at December 31, 1997.................. 14,441 9,701,824 9,716,265
Net income.................................. 8,030 794,940 802,970
Distributions ($81.02 per Limited
Partnership Unit).......................... (5,400) (927,972) (933,372)
------- ---------- ----------
Balance at December 31, 1998.................. $17,071 $9,568,792 $9,585,863
======= ========== ==========
</TABLE>
See Notes to Financial Statements.
F-67
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 802,970 $ 778,619
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization........................................... 27,755 60,000
Depreciation........................................... 144,466 144,466
Decrease (increase) in accounts receivable............. 13,229 (14,204)
(Decrease) increase in accounts payable................ (17,353) 17,558
Cash received from direct financing leases less than
income recognized..................................... (3,274) (2,922)
Investment in joint ventures:
Equity income......................................... (142,195) (142,054)
Distributions received................................ 142,195 142,054
Increase in accrued rental income...................... (19,548) (31,342)
--------- ---------
Net cash provided by operating activities............ 948,245 952,175
--------- ---------
Cash flows from investing activities:
Joint venture distributions in excess of income......... 4,344 4,482
--------- ---------
Net cash provided by investing activities............ 4,344 4,482
--------- ---------
Cash flows from financing activities:
Distributions paid to partners.......................... (933,372) (927,704)
--------- ---------
Net cash used in financing activities................ (933,372) (927,704)
--------- ---------
Net increase in cash and cash equivalents................ 19,217 28,953
Cash and cash equivalents at beginning of year........... 222,419 193,466
--------- ---------
Cash and cash equivalents at end of year................. $ 241,636 $ 222,419
========= =========
</TABLE>
See Notes to Financial Statements.
F-68
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations
AAA Net Realty Fund X, Ltd. ("the Partnership") is a limited partnership
formed April 15, 1992, under the laws of the State of Nebraska. The Partnership
commenced operations as of September 17, 1992. American Asset Advisers
Management Corporation X (a Nebraska corporation) is the Managing General
Partner and H. Kerr Taylor is the Individual General Partner.
The Partnership was formed to acquire commercial properties for cash, own,
lease, operate, manage and eventually sell the properties. Prior to June 5,
1998, the supervision of the operations of the properties was managed by
American Asset Advisers Realty Corporation, ("AAA"), a related party. Beginning
June 5, 1998, the supervision of the operations of the properties is managed by
AmREIT Realty Investment Corporation, ("ARIC"), a related party.
Basis of Accounting
The financial records of the Partnership 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 Partnership 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.
Property
Property 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, the properties are recorded at their net
investment (see Note 5). 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 Partnership's lease agreements do not provide for contingent rentals.
The Partnership 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.
Investment in Joint Ventures
The Partnership's interest in joint ventures are accounted for under the
equity method whereby the Partnership's investment is increased or decreased by
its share of earnings or losses in the joint ventures and
F-69
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
also decreased by any distributions. The Partnership owns a minority interest
and does not exercise control over the management of the joint ventures.
Depreciation
Buildings are depreciated using the straight-line method over estimated
useful lives ranging from 31.5 to 39 years.
Organization Costs
Organization costs incurred in the formation of the Partnership are
amortized on a straight-line basis over five years.
Syndication Costs
Syndication costs incurred in the raising of capital through the sale of
units are treated as a reduction of partnership equity.
Statement of Cash Flows--Supplemental Information
No cash was paid for income taxes or interest during 1998 or 1997.
Income Taxes
All income and expense items flow through to the partners for tax purposes.
Consequently, no provision for federal or state income taxes is provided in the
accompanying financial statements.
Fair Value of Financial Instruments
The carrying value of financial instruments, consisting of cash, cash
equivalents, accounts receivable and liabilities approximate their fair value.
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.
2. PARTNERSHIP EQUITY
The Managing General Partner, American Asset Advisers Management Corporation
X, and the Individual General Partner, H. Kerr Taylor, have made capital
contributions in the amounts of $990 and $10, respectively. All other
contributions have been made by the limited partners. The General Partners
shall not be obligated to make any other contributions to the capital of the
Partnership, except that, in the event that the General Partners have negative
balances in their capital accounts after dissolution and winding up of, or
withdrawal from, the Partnership, the General Partners will contribute to the
Partnership an amount equal to the lesser of the deficit balances in their
capital accounts or 1.01% of the total capital contributions of the limited
partners over the amount previously contributed by the General Partners.
F-70
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. ALLOCATIONS AND DISTRIBUTIONS
All income, profits, gains and losses of the Partnership for each fiscal
year, other than any gain or loss realized upon the sale, exchange or other
disposition of any of the Partnership's properties, shall be allocated as
follows: (a) net loss shall be allocated 99% to the limited partners, .99% to
the Managing General Partner and .01% to the Individual General Partner; and
(b) net income will be allocated first in the ratio, and to the extent, net
cash flow is distributed to the partners for such year and any additional
income for such year will be allocated 99% to the limited partners, 1% to the
General Partners.
For income tax purposes, the gain realized upon the sale, exchange or other
disposition of any property will be allocated as follows:
(a) first, to and among the partners in an amount equal to the negative
balances in their respective capital accounts (pro rata based on the
relative amounts of such negative balances).
(b) then, to each limited partner until the balance in such limited
partner's capital account equals the amount to be distributed to such
limited partner in the first tier of distributions of net proceeds of sale.
(c) then, to the General Partners, until the balance in their capital
accounts equals the amounts to be distributed to the General Partners in
the second tier of distributions of net proceeds of sale.
(d) then 94% to the limited partners and 6% to the General Partners, and
(e) thereafter, the partners shall be allocated gain or loss in order to
meet Treasury Regulations regarding qualified income offset requirements.
Any loss on the sale, exchange or other disposition of any property shall be
allocated 99% to the limited partners and 1% to the General Partners.
4. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals, under
noncancellable operating leases in existence at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................... $ 942,297
2000........................................................... $ 946,442
2001........................................................... $ 960,815
2002........................................................... $ 962,683
2003........................................................... $ 827,308
2004-2016...................................................... $3,475,867
</TABLE>
5. NET INVESTMENT IN DIRECT FINANCING LEASE
The Partnership's net investment in a direct financing lease at December 31,
1998 included:
<TABLE>
<S> <C>
Minimum lease payments receivable............................. $1,261,854
Unguaranteed residual value................................... 300,558
Less: Unearned income......................................... 944,180
----------
$ 618,232
==========
</TABLE>
F-71
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of minimum future rentals, exclusive of any renewals, under a
noncancellable direct financing lease in existence at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999............................................................. $ 70,237
2000............................................................. $ 73,892
2001............................................................. $ 73,892
2002............................................................. $ 73,892
2003............................................................. $ 73,892
2004-2016........................................................ $896,049
</TABLE>
6. INVESTMENT IN JOINT VENTURES
On April 5, 1996, the Partnership formed a joint venture, AAA Joint Venture
96-1, with AAA Net Realty Fund XI, Ltd. and AmREIT, Inc., (formerly American
Asset Advisers Trust, Inc.), entities with common management, for the purpose
of acquiring a property which is being operated as a Just For Feet retail
store in Tucson, Arizona. The property was purchased on September 11, 1996
after construction was completed. The Partnerships interest in the joint
venture is 18.25%.
On October 27, 1994, the Partnership formed a joint venture, AAA Joint
Venture 94-1, with AmREIT, Inc., for the purpose of acquiring a property on
lease to BlockBuster Music Retail Inc. in Missouri. The Company's interest in
the joint venture is 45.16%.
Summarized financial information for the joint ventures at December 31,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land & building, net of accumulated
depreciation.................................... $2,616,454 $2,645,823
Net investment in direct financing lease......... $2,586,324 $2,578,954
Accounts receivable.............................. $ 2,435 $ 2,435
Accrued rental income............................ $ 78,055 $ 50,602
Partners' capital................................ $5,283,268 $5,277,814
Rental income from operating lease............... $ 179,670 $ 179,670
Equity income from direct financing lease........ $ 406,648 $ 405,901
Net income....................................... $ 556,948 $ 556,201
</TABLE>
The Partnership recognized equity income of $142,195 and $142,054 from the
joint ventures in 1998 and 1997, respectively.
F-72
<PAGE>
AAA NET REALTY FUND X, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. MAJOR TENANTS
The Partnership's operations are related to the acquisition and leasing of
commercial real estate properties. The following schedule summarizes rental
income by lessee for 1998 and 1997 under both operating lease and direct
financing lease methods of accounting:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation (Texas)............................ $172,956 $172,956
TGI Friday's, Inc. (Texas)................................... 180,500 180,500
Goodyear Tire & Rubber Company (Texas)....................... 52,920 52,920
Tandy Corporation (Minnesota)................................ 256,620 256,620
America's Favorite Chicken Company (Georgia)................. 103,707 102,830
One Care Health Industries, Inc. (Texas)..................... 161,154 160,518
-------- --------
Total...................................................... $927,857 $926,344
======== ========
</TABLE>
8. INCOME RECONCILIATION
A reconciliation of net income for financial reporting purposes to income
for federal income tax purposes is as follows for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income for financial reporting purposes............... $802,970 $778,619
Direct financing lease recorded as operating lease for tax
reporting purposes....................................... (32,355) (31,869)
Accrued rental income..................................... (27,022) (38,815)
-------- --------
Income for tax reporting purposes......................... $743,593 $707,935
======== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Partnership Agreement provides for the reimbursement for administrative
services necessary for the prudent operation of the Partnership and its assets
with the exception that no reimbursement is permitted for rent, utilities,
capital equipment, salaries, fringe benefits or travel expenses allocated to
the Individual General Partner or to any controlling persons of the Managing
General Partner. In connection with administrative services rendered to the
Partnership, $74,734 and $68,932 was incurred and paid to ARIC and AAA in 1998
and 1997, respectively.
See Note 6 for joint venture agreements with entities with common
management.
F-73
<PAGE>
INDEPENDENT AUDITORS' REPORT
AAA Net Realty Fund XI, Ltd.
We have audited the accompanying balance sheet of AAA Net Realty Fund XI,
Ltd. as of December 31, 1998 and the related statements of income, partnership
equity and cash flows for each of the two years in the period ended December
31, 1998. These financial statements are the responsibility of the Partnerships
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 financial statements present fairly, in all material
respects, the financial position of AAA Net Realty Fund XI, Ltd. as of December
31, 1998 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 1999
F-74
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents........................................... $ 201,991
Accounts receivable................................................. 18,810
Property:
Land.............................................................. 593,570
Buildings......................................................... 1,390,000
----------
1,983,570
Accumulated depreciation.......................................... (67,447)
----------
Total property.................................................. 1,916,123
----------
Investment in joint ventures........................................ 3,848,788
Other assets:
Accrued rental income............................................. 18,759
Organization costs, net of accumulated amortization of $124,412... 48,121
----------
Total other assets.............................................. 66,880
----------
TOTAL ASSETS.................................................... $6,052,592
==========
LIABILITIES AND PARTNERSHIP EQUITY
Liabilities:
Accounts payable.................................................. $ 1,222
----------
TOTAL LIABILITIES............................................... 1,222
----------
Partnership equity:
General partners.................................................. 4,977
Limited partners.................................................. 6,046,393
----------
TOTAL PARTNERSHIP EQUITY........................................ 6,051,370
----------
TOTAL LIABILITIES AND PARTNERSHIP EQUITY........................ $6,052,592
==========
</TABLE>
See Notes to Financial Statements.
F-75
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Rental income from operating leases...................... $ 214,279 $ 106,255
Interest income.......................................... 5,490 99,988
Equity income from investment in joint ventures.......... 376,364 313,172
--------- ---------
TOTAL REVENUES......................................... 596,133 519,415
--------- ---------
Expenses:
Advisory fees to related party........................... 43,442 25,350
Amortization............................................. 34,507 34,507
Depreciation............................................. 35,642 17,040
Professional fees and other.............................. 20,966 17,734
--------- ---------
TOTAL EXPENSES......................................... 134,557 94,631
--------- ---------
Net income................................................. $ 461,576 $ 424,784
========= =========
Allocation of net income:
General partners......................................... 4,616 4,248
Limited partners......................................... 456,960 420,536
--------- ---------
$ 461,576 $ 424,784
========= =========
Net income per unit........................................ $ 65.37 $ 60.16
========= =========
Weighted average units outstanding......................... 7,061 7,061
========= =========
</TABLE>
See Notes to Financial Statements.
F-76
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERSHIP EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996.................. $ 2,053 $6,175,450 $6,177,503
Net income.................................. 4,248 420,536 424,784
Distributions ($68.43 per Limited Partner-
ship Unit)................................. (2,820) (483,176) (485,996)
------- ---------- ----------
Balance at December 31, 1997.................. 3,481 6,112,810 6,116,291
Net income.................................. 4,616 456,960 461,576
Distributions ($74.12 per Limited
Partnership Unit).......................... (3,120) (523,377) (526,497)
------- ---------- ----------
Balance at December 31, 1998.................. $ 4,977 $6,046,393 $6,051,370
======= ========== ==========
</TABLE>
See Notes to Financial Statements.
F-77
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 461,576 $ 424,784
Adjustments to reconcile net income to net cash
provided by from operating activities:
Amortization....................................... 34,507 34,507
Depreciation....................................... 35,642 17,040
Increase in accounts receivable.................... (15,157) (1,417)
Increase (decrease) in accounts payable............ (6,113) 5,528
Increase (decrease) in deferred revenue............ (10,625) 10,625
Investment in joint ventures:
Equity income.................................... (376,364) (313,172)
Distributions received........................... 376,364 313,172
Increase in accrued rental income.................. (6,254) (6,253)
--------- -----------
Net cash provided by operating activities........ 493,576 484,814
--------- -----------
Cash flows from investing activities:
Acquisition of real estate........................... -- (1,195,909)
Investment in joint ventures......................... -- (1,640,909)
Joint venture distributions in excess of income...... 37,452 7,479
Change in prepaid acquisition costs.................. -- 12,106
--------- -----------
Net cash provided by (used in) investing
activities........................................ 37,452 (2,817,233)
--------- -----------
Cash flows from financing activities:
Distributions paid to partners....................... (526,497) (485,996)
--------- -----------
Net cash used in financing activities.............. (526,497) (485,996)
--------- -----------
Net increase (decrease) in cash and cash equivalents... 4,531 (2,818,415)
Cash and cash equivalents at beginning of year......... 197,460 3,015,875
--------- -----------
Cash and cash equivalents at end of year............... $ 201,991 $ 197,460
========= ===========
</TABLE>
See Notes to Financial Statements.
F-78
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations
AAA Net Realty Fund XI, Ltd. (the Partnership) is a limited partnership
formed May 26, 1994 under the laws of the State of Texas. The Partnership
commenced operations on May 26, 1994. American Asset Advisers Management
Corporation XI, a Texas corporation, is the Managing General Partner and H.
Kerr Taylor is the Individual General Partner. Both are related parties. An
aggregate of 20,000 Units were offered at a $1,000 maximum offering price per
Unit. The Partnership closed its offering on October 26, 1996, having received
capital contributions for 7,061.21 Units ($7,061,208).
The Partnership was formed to acquire commercial properties for cash, own,
lease, operate, manage and eventually sell the properties. Prior to June 5,
1998, the supervision of the operations of the properties was managed by
American Asset Advisers Realty Corporation, ("AAA"), a related party. Beginning
June 5, 1998, the supervision of the operations of the properties is managed by
AmREIT Realty Investment Corporation, ("ARIC"), a related party.
Basis of Accounting
The financial records of the Partnership 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 Partnership 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.
Property
Property 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 under which 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.
The Partnerships lease agreements do not provide for contingent rentals.
The Partnership 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.
Investment in Joint Ventures
The Partnerships interest in joint ventures are accounted for under the
equity method whereby the Partnerships investment is increased or decreased by
its share of earnings or losses in the joint ventures and also decreased by
distributions. The Partnership owns a minority interest and does not exercise
control over the management of the joint ventures.
F-79
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Partnership are
amortized on a straight-line basis over five years.
Syndication Costs
Syndication costs incurred in the raising of capital through the sale of
units are treated as a reduction of partnership equity.
Statement of Cash Flows--Supplemental Information
No cash was paid for income taxes or interest during 1998 or 1997.
Income Taxes
All income and expense items flow through to the partners for tax purposes.
Consequently, no provision for income taxes is provided.
Fair Value of Financial Instruments
The carrying value of financial instruments, consisting of cash, cash
equivalents, accounts receivable and liabilities approximate their fair value.
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.
2. PARTNERSHIP EQUITY
The Managing General Partner, American Asset Advisers Management Corporation
XI, and the Individual General Partner, H. Kerr Taylor, have made capital
contributions in the amounts of $990 and $10, respectively. All other
contributions have been made by the limited partners. The General Partners
shall not be obligated to make any other contributions to the capital of the
Partnership, except that, in the event that the General Partners have negative
balances in their capital accounts after dissolution and winding up of, or
withdrawal from, the Partnership, the General Partners will contribute to the
Partnership an amount equal to the deficit balances in their capital accounts.
3. ALLOCATIONS AND DISTRIBUTIONS
Income and losses will be allocated to the partners according to the
partnership agreement. All income, profits, gains and losses of the Partnership
for each fiscal year, other than any gain or loss realized upon the
F-80
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
sale, exchange or other disposition of any of the Partnership properties, shall
be allocated as follows: (a) net loss shall be allocated 99% to the limited
partners, .99% to the Managing General Partner and .01% to the Individual
General Partner; and (b) net income will be allocated first in the ratio in
which, and to the extent, net cash flow is distributed to the partners for such
year, and in the absence of the distribution of any net cash flow, 99% to the
limited partners and 1% to the general partners.
For income tax purposes, the gain realized upon the sale, exchange or other
disposition of any property will be allocated as follows:
a. First, to and among the partners in an amount equal to the negative
balances in their respective capital accounts (pro rata based on the
relative amounts of such negative balances),
b. then, to each limited partner until the balance in such limited
partners capital account equals the amount to be distributed to such
limited partner in the first tier of the distributions of net
proceeds of sale,
c. then, to the General Partners, until the balance in their capital
accounts equals the amounts to be distributed to the General Partners
in the second tier of distributions of net proceeds of sale,
d. then, 94% to the limited partners and 6% to the General Partners, and
e. thereafter, the Partners shall be allocated gain or loss in order to
meet Treasury Regulation regarding qualified income offset
requirements.
Any loss on the sale, exchange, or other disposition of any property
shall be allocated 99% to the limited partners and 1% to the General
Partners.
4. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals, under
noncancellable operating leases in existence at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................... $ 395,612
2000........................................................... $ 408,289
2001........................................................... $ 417,863
2002........................................................... $ 423,742
2003........................................................... $ 430,423
2004-2016...................................................... $1,896,584
</TABLE>
5. INVESTMENT IN JOINT VENTURES
On October 16, 1997, the Partnership entered into a joint venture with
AmREIT, Inc. (formerly American Asset Advisers Trust, Inc.), an entity with
common management. The joint venture was formed for the purpose of acquiring a
property, which is being operated as a Hollywood Video store in Lafayette,
Louisiana. The property was purchased on October 31, 1997 after the
construction was completed. The Partnerships interest in the joint venture is
25.42%.
On February 11, 1997, the Partnership entered into a joint venture with
AmREIT, Inc. The joint venture was formed for the purpose of acquiring a
property, which is being operated as a Just For Feet retail store in Baton
Rouge, Louisiana. The property was purchased on June 9, 1997 after the
construction was completed. The Partnerships interest in the joint venture is
49%.
F-81
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
On September 23, 1996, the Partnership formed a joint venture, AAA Joint
Venture 96-2, with AmREIT, Inc. The joint venture was formed for the purpose
of acquiring a parcel of land in The Woodlands, Texas upon which the tenant,
Bank United, constructed a branch bank building at its cost. At the
termination of the lease the improvements will be owned by the joint venture.
The Partnership's interest in the joint venture is 49%.
On April 5, 1996, the Partnership formed a joint venture, AAA Joint Venture
96-1, with AmREIT, Inc. and AAA Net Realty Fund X, Ltd., entities with common
management, for the purpose of acquiring a property which is being operated as
a Just For Feet retail store in Tucson, Arizona. The property was purchased on
September 11, 1996 after construction was completed. The Partnership's
interest in the joint venture is 29.85%.
On September 12, 1995, the Partnership formed a joint venture, AAA Joint
Venture 95-2, with AmREIT, Inc. for the purpose of acquiring a property on
lease to Blockbuster Music Retail, Inc. located in Wichita, Kansas. The
Partnerships interest in the joint venture is 49%.
Summarized financial information for the joint ventures at December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Land and building, net of accumulated
depreciation................................... $7,274,145 $ 7,373,595
Net investment in direct financing lease........ $2,586,324 $ 2,578,954
Accounts receivable............................. $ 9,810 $ 2,481
Accrued rental income........................... $ 87,104 $ 68,610
Partners' capital............................... $9,957,383 $10,023,640
Rental income from operating leases............. $ 677,456 $ 464,615
Equity income from direct financing lease....... $ 406,648 $ 405,901
Net income...................................... $ 980,996 $ 806,051
</TABLE>
The partnership recognized equity income of $376,364 and $313,172 from the
joint ventures in 1998 and 1997, respectively.
6. MAJOR TENANTS
The Partnership's operations are related to the acquisition and leasing of
commercial real estate properties. The following schedule summarizes rental
income by lessee for 1998 and 1997 under the operating method of accounting:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Blockbuster Videos, Inc. (Oklahoma).................... $ 86,776 $ 86,776
Pier 1 Imports (Colorado).............................. 127,503 19,479
-------- --------
Total.............................................. $214,279 $106,255
======== ========
</TABLE>
7. INCOME RECONCILIATION
A reconciliation of net income for financial reporting purposes to income
for federal income tax purposes is as follows for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income for financial reporting purposes......... $461,576 $424,784
Direct financing lease recorded as operating lease
for tax reporting purposes......................... (21,855) (21,623)
Accrued rental income............................... (11,805) (27,151)
-------- --------
Income for tax reporting purposes................... $427,916 $376,010
======== ========
</TABLE>
F-82
<PAGE>
AAA NET REALTY FUND XI, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. RELATED PARTY TRANSACTIONS
The Partnership Agreement provides for the reimbursement for administrative
services necessary for the prudent operation of the Partnership and its assets
with the exception that no reimbursement is permitted for rent, utilities,
capital equipment, salaries, fringe benefits or travel expenses allocated to
the Individual General Partner or to any controlling persons of the Managing
General Partner. In connection with administrative services rendered to the
Partnership, $43,442 and $25,350 was incurred and paid to ARIC and AAA in 1998
and 1997, respectively.
See Note 5 for joint venture agreements with related parties.
F-83
<PAGE>
PARTNERSHIP PROPERTIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AmREIT, Inc.
(formerly American Asset Advisers Trust, Inc.)
We have audited the accompanying combined statements of revenues and certain
expenses (defined as being operating revenues less direct operating expenses)
of real estate properties anticipated to be acquired (as disclosed at Note 1 of
the combined statement of revenues and certain expenses) (the "Acquired
Properties") for the years ended December 31, 1998 and 1997. These combined
financial statements are the responsibility of the management of the Acquired
Properties. Our responsibility is to express an opinion on the combined
statements of revenues and certain expenses 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 combined statements of revenues and
certain expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statements of revenues and certain expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
combined statements of revenues and certain expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying combined statements of revenues and certain expenses were
prepared for the purpose of inclusion in a proxy statement to be filed on Form
S-4 by AmREIT. Material amounts, described in Note 1 to the combined statements
of revenues and certain expenses, that would not be comparable to those
resulting from the proposed future operations of the properties are excluded
and the statements are not intended to be a complete presentation of the
revenues and expenses of these properties.
In our opinion, such combined statements of revenues and certain expenses
presents fairly, in all material respects, the combined revenues and certain
expenses, as defined above, of the various real estate properties (as disclosed
at Note 1 of the combined statements of revenues and certain expenses) for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
May 21, 1999
F-84
<PAGE>
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
OF REAL ESTATE PROPERTIES ANTICIPATED TO BE ACQUIRED FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------- ---------------------
1998 1997 1999 1998
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues
Rental income from operating
leases........................... $2,221,052 $2,089,958 $1,128,855 $1,108,357
Earned income from direct
financing leases................. 70,374 70,026 35,336 35,188
---------- ---------- ---------- ----------
TOTAL REVENUES................ 2,291,426 2,159,984 1,164,191 1,143,545
---------- ---------- ---------- ----------
Expenses
Property expenses................. 3,368 3,368 1,620 1,786
---------- ---------- ---------- ----------
TOTAL EXPENSES................ 3,368 3,368 1,620 1,786
---------- ---------- ---------- ----------
Revenues in excess of certain
expenses ........................ $2,288,058 $2,156,616 $1,162,571 $1,141,759
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-85
<PAGE>
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
REAL ESTATE PROPERTIES ANTICIPATED TO BE ACQUIRED
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1--DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
The operations of the following real estate assets anticipated to be
acquired ("Acquired Properties") are included in the accompanying combined
statements for the years ended December 31, 1998 and 1997:
<TABLE>
<S> <C>
Steak and Ale (Houston, TX) Goodyear Tire (Carrollton, TX)
Bank of America (Houston, TX) Foodmaker--Jack In The Box (Dallas, TX)
Taco Bell (Houston, TX) Baptist Memorial Health (Memphis, TN)
Pizza Inn (Clute, TX) Payless Shoes--WaldenBooks (Austin, TX)
Whataburger (Clute, TX) Golden Corral (Houston, TX)
La Petite Academy (Houston, TX) Golden Corral (Humble, TX)
Whataburger (Dallas, TX) TGI Friday's (Houston, TX)
Superior Sound (Houston, TX) Goodyear Tire (Houston, TX)
AFC, Inc.--Church's (Houston, TX) Computer City (Minnesota, MN)
Gannett--Billboard (Houston, TX) AFC, Inc.--Popeye's (Atlanta, GA)
Discount Tire (Fort Worth, TX) OneCare Health (Sugar Land, TX)
La Petite Academy (Houston, TX) Blockbuster Video (Oklahoma City, OK)
Goodyear Tire (Dallas, TX) Pier One Imports (Longmont, CO)
</TABLE>
Basis of presentation
The accompanying financial statements are presented on a combined basis
because the partnerships owning the properties have a common general partner
and are under common management. Until June 5, 1998, each of the properties
were managed by an entity which was previously owned by the chairman, president
and 11.04% shareholder of AmREIT, Inc. (the "Company"). On June 5, 1998, this
entity was acquired by the Company.
The accompanying historical financial statement information is presented in
conformity with Item 310(e) of Regulation S-B of the Securities and Exchange
Commission. Accordingly, the accompanying combined financial statements include
only expenses directly related to the operations of the properties. Expenses
not directly related to the future operations of the properties, such as
depreciation, amortization, management fees and professional fees, are not
included in the accompanying combined financial statements.
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 revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue recognition
Operating revenues are presented on the accrual basis of accounting. Rental
income is recognized ratably over the life of the lease. Lease agreements do
not provide for contingent rentals.
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.
F-86
<PAGE>
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 based upon the estimated useful life of the property. 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.
Interim Financial Statements
In the opinion of management all adjustments necessary for a fair
presentation of such interim unaudited financial statements have been included.
Such adjustments consisted of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
NOTE 2--OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals, under non-
cancelable operating leases in existence at December 31, 1998 is as follows:
<TABLE>
<S> <C>
1999.......................................................... $ 2,132,271
2000.......................................................... 2,006,226
2001.......................................................... 1,959,212
2002.......................................................... 1,888,324
2003.......................................................... 1,690,245
2004-2016..................................................... 6,203,607
-----------
$15,879,884
===========
</TABLE>
NOTE 3--MAJOR TENANTS
Following is a summary of rental income by lessee for 1998 and 1997 who have
contributed 10% or more of the total revenues:
<TABLE>
<CAPTION>
Tenant 1998 1997
------ -------- --------
<S> <C> <C>
Golden Corral Corporation.............................. $364,682 $364,676
Tandy Corporation...................................... $ -- $366,516
</TABLE>
F-87
<PAGE>
MORGAN KEEGAN FAIRNESS OPINION
ANNEX 1
To AmREIT Joint Proxy and Consent
Solicitation Statement and Prospectus
June 23, 1999
Board of Directors
AmREIT, Inc.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Gentlemen:
The Board of Directors of AmREIT, Inc., a Maryland real estate investment
trust ("AmREIT" or the "Company") has requested the opinion of Morgan Keegan &
Company, Inc. ("Morgan Keegan") as to whether the consideration to be paid to
the partners of the Limited Partnerships (defined below) in connection with the
merger of Taylor Income Investors, Ltd. (also known as Taylor Income Investors,
III, Ltd.), Taylor Income Investors IV, Ltd., Taylor Income Investors V, Ltd.,
Taylor Income Investors VI, Ltd., AAA Net Realty Fund VII, Ltd., AAA Net Realty
Fund VIII, Ltd., AAA Net Realty Fund Goodyear, Ltd., AAA Net Realty Fund IX,
Ltd., AAA Net Realty Fund X, Ltd. and AAA Net Realty Fund XI, Ltd.
(collectively, the "Limited Partnerships") with and into the Company (the
"Transaction") is fair, from a financial point of view, to the Company's
shareholders.
The Company has advised Morgan Keegan that the Transaction is described more
fully in those certain Amended and Restated Agreements and Plans of Merger, all
dated June 1999, by and between the Company and each Limited Partnership and
in accordance with the Maryland General Corporation Law (the "Maryland Law")
and the Texas Revised Uniform Limited Partnership Act (the "LP Act") (the
"Agreement").
Morgan Keegan, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
purposes, in particular, with respect to real estate investment trusts and
franchised real estate. We have acted as financial advisor to the Board of
Directors of the Company in connection with the Transaction and will receive a
fee for our services. Our fee is not contingent upon the consummation of the
Transaction. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement and in particular with regard to our
rendering of this opinion.
In connection with our opinion, we have (1) participated in discussions with
various members of management and representatives of the Limited Partnerships
and the Company concerning the Limited Partnerships' and the Company's
historical and current operations, financial condition and prospects, the
strategic objectives of each and the possible benefits which might be realized
following the Transaction; (2) reviewed historical financial and operating data
that was furnished to us by the Limited Partnerships and the Company relating
to their respective businesses; (3) reviewed internal financial analyses,
financial and operating forecasts, reports and other information prepared by
officers and representatives of the Limited Partnerships and the Company
relating to their respective businesses; (4) reviewed certain publicly
available information with respect to certain other companies in lines of
business that we believe to be generally comparable to those of the Company and
the trading markets for such other companies' securities; (5) reviewed certain
publicly available information concerning the financial terms of certain other
transactions that we deemed relevant to our inquiry; (6) analyzed the value of
projected net operating income of the Limited
1
<PAGE>
Partnerships; (7) reviewed the financial terms of the Agreement; (8) reviewed
the appraisals of each Limited Partnership completed by Valuation Associates,
Inc. and (9) undertaken such other studies, analyses and investigations, and
considered such other information, as we deemed relevant.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us and reviewed. We have not been engaged to, and have
not attempted to, independently verify any of such information and have further
relied upon the assurances of management of the Company and of the Limited
Partnerships that they are not aware of any facts or circumstances that would
make such information inaccurate or misleading. With respect to the financial
and operational forecasts made available to us by the management of the Limited
Partnerships and the Company and used in our analysis, we have assumed that
such financial and operational forecasts have been reasonably prepared in good
faith on bases reflecting the best currently available estimates and judgments
of the management of the Limited Partnerships and the Company as to the matters
covered thereby. We have not been engaged to assess the achievability of such
projections or the assumptions on which they were based and express no view as
to such projections or assumptions. In addition, we have not conducted an
independent evaluation, physical inspection or appraisal of any of the assets
or liabilities of the Company or the Limited Partnership (including the assets
to be acquired and any liabilities to be assumed in the Transaction), nor have
we made any independent judgment with respect to any such evaluation or
appraisal. Morgan Keegan also assumed that the allocation of the Company share
consideration among the partners of each of the Limited Partnerships complies
with the terms and conditions of the limited partnership agreements of the
Limited Partnerships. Morgan Keegan also assumed that the appraisals were
reasonably prepared by and reflected the good faith judgments of Valuation
Associates, and Morgan Keegan does not in any respect assume any responsibility
for its accuracy or completeness. In addition, we also assumed that the
properties owned by the Limited Partnerships (the "Properties") may be used for
their intended purposes for the remainder of their respective lease terms, all
of the respective tenants in the Properties are creditworthy and that the
deferred maintenance at the Properties is not material.
It should be noted that this opinion is based upon economic, market,
financial and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such
date. In addition, our opinion is, in any event, limited to the fairness, as of
the date hereof, from a financial point of view, of the consideration to be
paid to the Limited Partnerships in connection with the Transaction and does
not address the underlying business decision to effect the Transaction or any
other terms of the Transaction. We have also assumed that the conditions to the
Transaction as set forth in the Agreement would be satisfied, without any
waiver or modification thereof, and that the Transaction would be consummated
on a timely basis in the manner contemplated by the Agreement. In addition, we
are not expressing any opinion as to the prices at which the Company's common
stock may trade following the date of this opinion.
Our opinion is rendered to the Board of the Company in connection with its
consideration of the Transaction and does not constitute a recommendation to
any shareholder of the Company as to how such shareholder should vote in
connection with the Transaction.
This letter and the opinion stated herein are solely for the use and benefit
of the Company's Board of Directors and may not be reproduced, summarized,
excerpted from or otherwise publicly referred to in any manner without the
prior written consent of Morgan Keegan.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that, as of the date hereof, the
consideration to be paid in connection with the Transaction is fair, from a
financial point of view, to the Company's shareholders.
Very truly yours,
MORGAN KEEGAN & COMPANY, INC.
2
<PAGE>
DECLARATION OF TRUST
ANNEX 2
To AmREIT Joint Proxy and Consent
Solicitation Statement and Prospectus
[To be filed by amendment.]
1
<PAGE>
Forms of
THE NOTE AND LOAN AGREEMENT
ANNEX 3
To AmREIT Joint Proxy and Consent
Solicitation Statement and Prospectus
[To be filed by amendment.]
1
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
Taylor Income Investors, Ltd.
If you are a limited partner of Taylor Income Investors, Ltd., your vote is
very important:
AmREIT is seeking to merge with 10 partnerships, including, Taylor Income
Investors, Ltd. AmREIT is a Maryland corporation that has elected to be taxed
as a real estate investment trust under the Internal Revenue Code . Like Taylor
Income Investors, Ltd., the primary business of AmREIT is the ownership of
properties leased to national and regional tenants. AmREIT's independent
directors and the general partners of Taylor Income Investors, Ltd. seek your
approval of the merger. In the merger, AmREIT will issue shares of common stock
or, under specified situations more fully described in the accompanying proxy
statement, cash and % callable notes to the limited partners of the 10
partnerships. At the completion of the merger, the existing limited partners of
partnerships approving the merger will become stockholders (or noteholders as
the case may be) of AmREIT and will no longer be limited partners in their
respective partnerships. As a condition precedent to the merger the AmREIT
shares will be listed for trading on the Nasdaq Stock Market's National Market.
The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of Taylor
Income Investors, Ltd., for the purpose of enabling you to evaluate the
proposed merger of your partnership with AmREIT, Inc. This supplement is
designed to summarize only the risks, effects, fairness and other
considerations of the proposed merger that are unique to you and the other
limited partners of your partnership. This supplement does not purport to
provide an overall summary of the proposed merger and should be read in
conjunction with the accompanying Joint Proxy and Consent Solicitation
Statement/Prospectus, which includes detailed discussions regarding AmREIT and
the other partnerships being merged with AmREIT. Accordingly, the discussions
in this supplement are qualified by the more expanded treatment of these
matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 93,987 shares of AmREIT common stock, which we
estimate amounts to $1,130 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
--------------------- --------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fund III............................. $877,841 $790,057 $793,000 $711,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $287 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $286 per average original $1,000
investment of this gain at long term capital gains rates, which will be 20%.
The remaining $1 of gain per average original $1,000 investment will be taxable
at the rates for ordinary income.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $96.53 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Expiration of Leases. The leases on your partnership's properties all
expire within the next five years. Also, there is a significant chance
that Bank of America, your partnership's largest tenant, will not renew
its lease when it expires in May 2000 or will renew its lease only if
your partnership makes significant improvements to the property. Also,
should any of these tenants fail to renew their leases, your partnership
would need to find a new tenant and incur significant additional costs by
reason of temporary vacancy and/or significant rehabilitation and/or
tenant improvement costs.
. Concentration of Investment. Your partnership has concentrated its
investments in two properties. If a vacancy or other interruption of
rents occur in one or both of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns one of its properties,
Steak & Ale, in co-ownership with Fund IV. Your partnership owns 44% of
this property and is dependent upon the consent and cooperation of the
Fund IV to sell or re-lease the property. No assurance can be given that
Fund IV will agree to the merger or to the sale or re-lease of the
property at such time or under the terms your partnership may desire. We
are soliciting Fund IV's approval to merge with AmREIT. If your
partnership approves the merger but Fund IV rejects the merger, the
AmREIT board must approve owning this property jointly with Fund IV.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$776,814 $822 93,987 $877,841 $1,130
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $945,000.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $6,588 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................. $ --
Accounting............................................................ 140
Fairness Opinions/Valuations.......................................... 5,530
Printing.............................................................. --
Appraisal Fees........................................................ 856
Listing Fees.......................................................... --
Miscellaneous......................................................... 62
------
Total............................................................... $6,588
======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31, Six Months Ended
1996 1997 1998 June 30, 1999
---------------- ---------------- ---------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $5,700 $ -- $5,700 $ -- $7,617 $ -- $4,512 $ --
Cash Distributions(2)... 1,800 -- 1,800 -- 1,800 -- 900 --
General Partners'
Salary(3).............. -- 409 -- 409 -- 409 -- 245
General Partners'
Distributions(4)....... -- 7,768 -- 7,877 -- 7,987 -- 3,939
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $287 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $286 per average original $1,000 investment of
S-11
<PAGE>
this gain at long term capital gains rates, which will be 20%. The remaining $1
of gain per average original $1,000 investment will be taxable at the rates for
ordinary income. The actual amount of gain recognized by the partnership and
allocated to each limited partner will depend upon the value ascribed to the
shares of AmREIT common stock for federal income tax purposes. Because the
shares will not be publicly traded until immediately after the merger, it is
possible that the value of the shares used for purposes of calculating the
taxable income (or loss) and the taxable income (or loss) per average original
$1,000 investment will differ from the calculation stated above. Your
partnership's federal income tax returns are subject to review and possible
adjustment by the IRS. Under federal income tax laws, regulations and
administrative rulings, certain types of transactions may be accorded varying
interpretations. Accordingly, your partnership's financial statements, as well
as your individual tax return, may be changed to cause them to conform to the
tax treatment resulting from such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $96.50 $96.52 $96.53 $96.53 $96.53 $72.40
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and Taylor
Income Investors, Ltd. (the "Partnership"). AmREIT is a real estate investment
trust that was organized as a Maryland corporation in 1993. AmREIT became
internally managed upon its acquisition of its external advisor in June 1998
(the "Adviser Acquisition"), as a result, AmREIT is a self-managed and self-
administered REIT. AmREIT acquires, develops, owns and manages a diversified
portfolio of freestanding and specialty retail properties leased to national
and regional retail tenants.
Mr. Kerr Taylor serves as the President of Taylor Income Investors, Inc.,
which is the corporate general partner of the Partnership (the "General
Partner"). The Partnership owns interests in two retail properties. Following
the Adviser Acquisition, Mr. Taylor and his affiliated corporation retained
their fiduciary responsibilities associated with such General Partner of the
Partnership. However, the Partnership's properties are currently managed by
AmREIT Realty Investment Corporation, an affiliate of AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 93,526 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors, Ltd.
June 25, 1999 -2-
4. reviewed copies of the 1985 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K
for the two fiscal years ended 1998 and quarterly reports on Form 10-Q for
the quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared
by Valuation Associates dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of Taylor
Income Investors, Ltd. in connection with the Transaction is fair to them from
a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and Taylor Income
Investors, Ltd., a Texas limited partnership (the "Partnership"). Taylor
Investments, Inc., a Texas corporation, the General Partner of the Partnership
(referred to herein as the "General Partner"), is a party to this Agreement
solely for the purpose of binding itself to the provisions of Section 5 and
Section 7.9, hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
CONSIDERATION FOR PARTNERSHIP ASSETS
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the Effective
Time, each unit of limited partner interest of the Partnership (the "Units")
and the interest of the General Partner entitled to receive consideration, if
any, shall, in the Merger, be converted into the number of shares of the REIT's
common stock, $0.01 par value per share (the "REIT Shares"), as provided in
Section 4 hereof. No fractional REIT Shares shall be issued. Any Partner who
would be entitled to a fractional REIT Share will receive cash based on the
price of $9.34 per REIT Share (the "Exchange Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership approves
the Merger each Unit held of record by a Partner who votes against the Merger
(a "Dissenting Limited Partner") will receive REIT Shares unless he or she
affirmatively elects to receive consideration in the form of 10% cash and 90%
notes (the "Cash/Notes Option") based on the liquidation value of the
Partnership, as determined by Valuation Associates (the "Liquidation Value").
The Liquidation Value will be lower than the value of the REIT Shares offered
to the Partnership in the merger, based on the Exchange Price. The notes (the
"Notes") shall be in the form described in the Note and Loan Agreement attached
hereto as Exhibit A and incorporated herein by reference. In the event the
principal amount of Notes issuable to Dissenting Limited Partners electing the
Cash/Notes Option, when aggregated with the principal amounts of the Notes to
be issued to electing dissenting limited partners (the "Other Dissenting
Partners") in all other partnerships to whom offers are being made by the REIT
that approve the merger with the REIT (the "Other Partnerships"), exceeds
$10,000,000, Dissenting Limited Partners electing the Cash/Notes Option shall
receive their pro rata portion of the $10,000,000 aggregate principal amount of
the Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of the
Dissenting Limited Partners' Note consideration to be paid in REIT Shares. The
cash component of the Cash/Notes Option will not be affected by any such pro
ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
PARTNERSHIP INTERESTS
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in accordance
with the Partnership's Net Asset Value or Liquidation Value, respectively, as
set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cast at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$825,000 $48,537 $873,537
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
-------------- --------------
<S> <C> <C>
To Limited Partners............................... 93,526 2,969.09
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Marketing/ Liquidation
Value Expenses Discount Commission Legal/Closing Contingency Value
- ----------- ----------- ----------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$816,890 ($4,048) ($40,845) ($24,507) ($20,422) ($16,338) $710,740
</TABLE>
Cash/Notes
Payable to Partnership(/1/)
<TABLE>
<CAPTION>
Principal
Maximum Amount of Cash Maximum Principal Amount of
Aggregate Offered Amount of Notes Note Offered
Amount of Cash per Unit Offered Per Unit
-------------- -------------- ----------------- ------------
<S> <C> <C> <C> <C>
To Limited Partners..... $34,839 $2,257 $313,551 $20,314
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to
a different number of shares or securities by reason of any share
dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the
number of REIT Shares to be issued in the Merger shall be appropriately
adjusted;
B-3
<PAGE>
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount
shown in Section 3.1 above, the Net Cash of the Partnership shall be
increased (if greater) or decreased (if less) and the Merger
Consideration issuable to the Partnership in the Merger shall be
increased or decreased, as the case may be, by an amount equal to such
difference divided by the Exchange Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $825,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as of
the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the Partnership's
liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to be
deposited, with an exchange agent selected by the REIT, which shall be the
REIT's transfer agent, or such other party reasonably satisfactory to the
Partnership (the "Exchange Agent"), for the benefit of the Partners, for
exchange in accordance with this Section 3, Share Certificates representing the
total number of REIT Shares issuable to Partners (other than Dissenting Limited
Partners electing the Cash/Notes Option) and the aggregate amount of Cash and
Notes issuable to Dissenting Limited Partners electing the Cash/Notes Option
(such cash, Share Certificates and Notes, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Sections 3.1 and 3.2 and paid
pursuant to this Section 3.4 in exchange for the outstanding Units and
interests.
(b) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented outstanding Units
(the "Unit Certificates") whose Units were converted into the right to receive
the Merger Consideration pursuant to Section 3.1 hereof (i) a letter of
transmittal (which shall specify that delivery shall be effected, and the risk
of loss and title to the Unit Certificates shall pass, only upon delivery of
the Unit Certificates to the Exchange Agent and shall be in a form and have
such other provisions as the REIT may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Unit Certificates in exchange for the
Merger Consideration. Upon surrender of a Unit Certificate for cancellation to
the Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such other
documents as may be reasonably requested by the Exchange Agent, the holder of
such Unit Certificate shall be entitled to receive in exchange therefor the
Merger Consideration into which the Units previously represented by the Unit
Certificate shall have been converted pursuant to Section 3.1 hereto and any
dividends or other distributions to which such holder is entitled pursuant to
the terms of the agreement of limited partnership of the Partnership (the
"Agreement of Limited Partnership"), and the Unit Certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of a Unit
which is not registered in the transfer records of the Partnership, payment may
be made to a person other than the person in whose name the Unit Certificate so
surrendered is registered if such Unit Certificate shall be properly endorsed
or otherwise be in proper form for transfer and the person requesting such
payment either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such Unit
Certificate or establish to the satisfaction of the REIT that such tax or taxes
have been paid or are not applicable. Upon surrender as contemplated by this
Section 3.4, each Unit Certificate shall be deemed at anytime after the
Effective Time to represent only the right to receive upon such surrender the
Merger
B-4
<PAGE>
Consideration, without interest, into which the Units previously represented by
such Unit Certificate shall have been converted pursuant to Section 3.1 hereof,
and any dividends or other distributions to which such holder is entitled
pursuant to the terms of the Agreement of Limited Partnership. No interest will
be paid or will accrue on the Merger Consideration upon the surrender of any
Unit Certificate or on any cash payable pursuant to Section 3.1 or Section
3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the contrary,
no fractional REIT Shares shall be issued in connection with the Merger. All
REIT Shares to which a holder of Units is entitled immediately prior to the
Effective Time shall be aggregated. If a fractional share results from such
aggregation, in lieu of any such fractional share, each holder of Units who
would otherwise have been entitled to receive a fraction of a REIT Share upon
surrender of Unit Certificates for exchange pursuant to Section 3.4(b) hereof
shall be entitled to receive from the Exchange Agent a cash payment equal to
such fraction multiplied by the Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon) that
remains unclaimed by the former Partners of the Partnership one year after the
Effective Time shall be delivered to the REIT. Any former Partners of the
Partnership who have not theretofore complied with this Section 3.4 shall
thereafter look only to the REIT for delivery of their REIT Shares and/or
Cash/Notes, and payment of cash in lieu of fractional shares and/or dividends
on such REIT Shares, in respect of each Unit such Partners hold as determined
pursuant to this Agreement, in each case, without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or with
respect to the Units for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
SECTION 4
REPRESENTATIONS AND WARRANTIES
OF THE PARTNERSHIP
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's actual
knowledge, the Partnership is duly licensed or qualified to do business as a
foreign limited partnership and is in good standing under the laws of any other
state of the United States in which the character of the properties owned or
leased by it therein or in which the transaction of its business makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the business, results of operations or
financial condition of the Partnership (a "Partnership Material Adverse
Effect"). The Partnership has all requisite power and authority to own,
operate, lease and encumber its properties and carry on its business as now
conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or
B-5
<PAGE>
regulation to which the Partnership or any of its properties or assets are
subject, where such violation would have a Partnership Material Adverse Effect.
The Partnership has obtained all licenses, permits and other authorizations and
has taken all actions required by applicable law or governmental regulations in
connection with its business as now conducted, where the failure to obtain any
such item or to take any such action would have a Partnership Material Adverse
Effect. A copy of the Partnership's Agreement of Limited Partnership and
Certificate of Limited Partnership (collectively, the "Partnership
Organizational Documents") have been delivered or made available to the REIT
and its counsel and such documents will be listed in the Partnership Disclosure
Letter and were or will be true and correct when delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years ended
December 31, 1998 and 1997 and the financial statements for the fiscal quarter
ended March 31, 1999 (collectively, the "Partnership Financial Statements")
present fairly, in conformity with generally accepted accounting principles
applied on a consisted basis (except as may be indicated in the notes thereto),
the financial position of the Partnership as of the dates thereof and its
results of operations and cash flows for the periods then ended (subject to
normal year-end adjustments in the case of the interim financial statements).
Copies of the Partnership Financial Statements have been delivered or made
available to the REIT and its financial advisers and such documents will be
listed in the Partnership Disclosure Letter and were or will be true and
correct when delivered or made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise set
forth in the Partnership Financial Statements, the Partnership has no material
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) that would be required to be reflected on, or reserved against
in, a balance sheet of the Partnership or in the notes thereto, prepared in
accordance with generally accepted accounting principles consistently applied,
except liabilities arising in the ordinary course of business since such date
which would not have a Partnership Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated
B-6
<PAGE>
hereby in accordance with the terms hereof will: (a) conflict with or result in
a breach of any provisions of the Agreement of Limited Partnership of the
Partnership; (b) except as contemplated by the Partnership Ancillary Agreements
or as set forth in the Partnership Disclosure Letter, violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of the Partnership under, or result in being declared void, voidable
or without further binding effect, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which the Partnership is a party, or by which the Partnership
or any of its properties is bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a Partnership
Material Adverse Effect; or (c) other than the filings provided for in this
Agreement to effect the Merger, any filings required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), or applicable state securities and
"Blue Sky" laws (collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing
or registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to be
filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has been
granted and has not expired and all such returns are accurate and complete in
all material respects, (ii) has paid or accrued all taxes shown to be due and
payable on such returns or which have become due and payable pursuant to any
assessment, deficiency notice, 30-day letter or other notice received by it and
(iii) has properly accrued all taxes for such periods and periods subsequent to
the periods covered by such returns. The Partnership has not received notice
that the federal, state and local income and franchise tax returns of the
Partnership have been or will be examined by any taxing authority. The
Partnership has not executed or filed with the Internal Revenue Service (the
"IRS") or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
B-7
<PAGE>
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim for
assessment or collection of taxes has been asserted against it. True, correct
and complete copies of all federal, state and local income or franchise tax
returns filed by the Partnership since its inception and all communications
relating thereto have been delivered to the REIT or made available to
representatives of the REIT or will be so delivered or made available prior to
the Closing. The Partnership does not hold any asset (i) the disposition of
which could be subject to rules similar to Section 1374 of the Internal Revenue
Code of 1986, as amended (the "Code"), as a result of an election under IRS
Notice 88-19 or (ii) that is subject to a consent filed pursuant to Section
341(f) of the Code and regulations thereunder. For purposes of this
Section 4.9, "taxes" includes any interest, penalty or additional amount
payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on the
most recent balance sheet of the Partnership included in the Partnership
Reports or as identified in the Partnership Disclosure Letter (the "Partnership
Properties"), which are all of the real estate properties owned by it, free and
clear of liens, mortgages or deeds of trust, claims against title, charges
which are liens or security interests ("Encumbrances"), except as set forth in
the Partnership Disclosure Letter. To the General Partner's actual knowledge,
the Partnership Properties are not subject to any rights of way, written
agreements, laws, ordinances and regulations affecting building use or
occupancy, or reservations of an interest in title (collectively, "Property
Restrictions"), except for (i) Encumbrances and Property Restrictions set forth
in the Partnership Disclosure Letter, (ii) Property Restrictions imposed or
promulgated by law or any governmental body or authority with respect to real
property, including zoning regulations that do not materially adversely affect
the current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case copies
of which title reports and surveys have been or will be delivered or made
available to the REIT prior to the Closing) and/or (iv) mechanics', carriers',
workmen's, repairmen's liens and other Encumbrances, Property Restrictions and
other limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the Partnership Disclosure Letter) or which individually or
in the aggregate do not exceed $10,000, do not materially detract from the
value of or materially interfere with the present use of any of the Partnership
Properties subject thereto or affected thereby, and do not otherwise materially
impair business operations conducted by the Partnership and which have arisen
or been incurred only in its construction activities or in the ordinary course
of business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only to
the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force and
effect and no claim has been made against any such policy. To the General
Partner's actual knowledge, except as set forth in the Partnership Disclosure
Letter: (i) there is no certificate, permit or license from any governmental
authority having jurisdiction over any of the Partnership Properties or any
agreement, easement or other right which is necessary to permit the lawful use
and operation of the buildings and improvements on any of the Partnership
Properties or which is necessary to permit the lawful use and operation of all
driveways, roads and other means of egress and ingress to and from any of the
Partnership Properties that has not been obtained and is not in full force and
effect, or any pending threat of modification or cancellation of any of same;
(ii) the Partnership has not received written notice of any material violation
of any federal, state or municipal law, ordinance, order, regulation or
requirement affecting any portion of any of the Partnership Properties issued
by any governmental authority; (iii) there are no structural defects relating
to the Partnership Properties and no Partnership Properties whose building
systems are not in working order in any material respect; and (iv) there is (A)
no physical damage to any Partnership Property in excess of $10,000 for which
there is no insurance in effect covering the
B-8
<PAGE>
cost of the restoration, (B) no current renovation to any Partnership Property
the cost of which exceeds $10,000 and (C) no current restoration (excluding
tenant improvements) of any Partnership Property, the cost of which exceeds
$10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be performed,
payments to be made and actions to be taken by the Partnership pursuant to any
agreement entered into with a governmental body or authority in connection with
a site approval, zoning reclassification or other similar action relating to
the Partnership Properties (e.g., Local Improvement District, Road Improvement
District, Environmental Mitigation) has been performed, paid or taken, as the
case may be, and the General Partner is not aware of any planned or proposed
work, payments or actions that may be required pursuant to such agreements,
except as set forth in the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the
B-9
<PAGE>
transactions contemplated hereby. The Partnership is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partners actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE REIT
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
B-10
<PAGE>
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under the
laws of the State of Maryland. To the REIT's actual knowledge, the REIT is duly
licensed or qualified to do business and is in good standing under the laws of
any other state of the United States in which the character of the properties
owned or leased by it therein or in which the transaction of its business makes
such qualification necessary, except where the failure to be so qualified would
not have a material adverse effect on the business, results of operations or
financial condition of the REIT and its subsidiaries taken as a whole (a "REIT
Material Adverse Effect"). The REIT has all requisite power and authority to
own, operate, lease and encumber its properties and carry on its business as
now conducted. Each of the REIT's Subsidiaries is a corporation or partnership
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has the requisite power and
authority to own its properties and to carry on its business as it is now being
conducted, and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not have a REIT
Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental authority or
arbitration board or tribunal, or any law, ordinance, governmental rule or
regulation to which the REIT or any REIT Subsidiary or any of their respective
properties or assets are subject, where such violation would have a REIT
Material Adverse Effect. The REIT and its Subsidiaries have obtained all
licenses, permits and other authorizations and have taken all actions required
by applicable law or governmental regulations in connection with their business
as now conducted, where the failure to obtain any such item or to take any such
action would have a REIT Material Adverse Effect. Copies of the REIT's and its
Subsidiaries' Articles of Incorporation, Bylaws, organizational documents and
partnership and joint venture agreements have been or will be prior to the
Closing, delivered or made available to the Partnership and such documents will
be listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT Disclosure
Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other equity interest of
the REIT or any of its Subsidiaries, except under any employee incentive plan
approved by the REIT's stockholders. There are no agreements or understandings
to which the REIT is a party with respect
B-11
<PAGE>
to the voting of any REIT Shares or which restrict the transfer of any such
shares, except in order to protect its REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the Partnership
prior to the Closing, the registration statements of the REIT filed with the
SEC in connection with public offerings of REIT securities since its inception
and all exhibits, amendments and supplements thereto (the "REIT Registration
Statements"), and each report, proxy statement or information statement and all
exhibits thereto prepared by it or relating to its properties since the
effective date of the latest REIT Registration Statement, each in the form
(including exhibits and any amendments thereto) filed with the SEC
(collectively, the "REIT Reports"). The REIT Reports, which were or will be
filed with the SEC in a timely manner, constitute all forms, reports and
documents required to be filed by the REIT under the Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the REIT
Reports (i) complied as to form in all material respects with the applicable
requirements of the Securities Laws and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in the light
of the circumstances under which they were made, not misleading. To the REIT's
actual acknowledge, each of the consolidated balance sheets of the REIT
included in or incorporated by reference into the REIT Reports (including the
related notes and schedules) fairly presents the consolidated financial
position of the REIT and the REIT Subsidiaries as of its date and each of the
consolidated statements of income, retained earnings and cash flows of the REIT
included in or incorporated by reference into the REIT Reports (including any
related notes and schedules) fairly presents the results of operations,
retained earnings or cash flows, as the case may be, of the REIT and the REIT
Subsidiaries for the periods set forth therein (subject, in the case of unaided
statements, to normal year-end audit adjustments which
B-12
<PAGE>
would not be material in amount or effect), in each case in accordance with
generally accepted accounting principles consistently applied during the
periods involved, except as may be noted therein and except, in the case of the
unaided statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance sheet
of the REIT and its Subsidiaries at March 31, 1999, including all notes
thereto, or as set forth in the REIT Reports, neither the REIT nor any of the
REIT Subsidiaries has any material liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that would be required to
be reflected on, or reserved against in, a balance sheet of the REIT or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a REIT Material Adverse
Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each of
its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports required
to be filed by any of them for tax periods ended prior to the date of this
Agreement or requests for extensions have been timely filed and any such
request has been granted and has not expired and all such returns are absolute
and complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other notice
received by it and (iii) has properly accrued all taxes for such periods
subsequent to the periods covered by such returns. Neither the REIT nor any of
its Subsidiaries has received notice that the federal, state and local income
and franchise tax returns of the REIT or any such Subsidiary has been or will
be examined by any taxing authority. Neither the REIT nor any of its
Subsidiaries has executed or filed with the IRS or any other taxing authority
any agreement now in effect extending the period for assessment or collection
of any income or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT nor
any of its Subsidiaries is a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim for
assessment or collection of taxes has been asserted against it. True, correct
and complete copies of all federal, state and local income or franchise tax
returns filed by the REIT and each of its Subsidiaries and all communications
relating thereto have been delivered to the Partnership or made available to
representatives of the Partnership or will be so delivered or made available
prior to the Closing. The REIT (i) has qualified to be taxed as a REIT pursuant
to Sections 856 through 859 of the Code for its taxable years
B-13
<PAGE>
ended December 31, 1995 through 1998, inclusive; (ii) has operated, and intends
to continue to operate, in such a manner as to qualify to be taxed as a REIT
pursuant to Sections 856 through 859 of the Code for its taxable year ended on
the effective date of the Merger; and (iii) has not taken or omitted to take
any action which could result in, and each of the executive officers of the
REIT, each acting in his respective capacity as such, has no actual knowledge
of, a challenge to its status as a REIT. The REIT represents that each of its
Subsidiaries is a Qualified REIT Subsidiary as defined in Section 856(i) of the
Code. Neither the REIT nor any of its Subsidiaries holds any asset (x) the
disposition of which could be subject to rules similar to Section 1374 of the
Code as a result of an election under IRS Notice 88-19 or (y) that is subject
to a consent filed pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 5.10, "taxes" includes any interest,
penalty or additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have been
maintained in accordance with good business practices, and are accurately
reflected in all material respects in the financial statements included in the
REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of the
shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which the
REIT or any of its Subsidiaries is a party owns, fee simple title to each of
the real properties reflected on the most recent balance sheet of the REIT
included in the REIT Reports or as identified in the REIT Disclosure Letter
(the "REIT Properties"), which are all of the real estate properties owned by
them, free and clear of Encumbrances, except as set forth in the REIT
Disclosures Letter. To the REIT's actual knowledge, the REIT Properties are not
subject to any Property Restrictions, except for (i) Encumbrances and Property
Restrictions set forth in the REIT Disclosure Letter, (ii) Property
Restrictions imposed or promulgated by law or any governmental body or
authority with respect to real property, including zoning regulations that do
not materially adversely affect the current use of the property, (iii)
Encumbrances and Property Restrictions disclosed on existing title reports or
surveys (in either case copies of which title reports and surveys have been or
will be delivered or made available to the Partnership prior to the Closing and
(iv) mechanics', carriers', workmen's, repairmen's liens and other
Encumbrances, Property Restrictions and other limitations of any kind, if any,
which have heretofore been bonded (and that are listed in the REIT Disclosure
Letter) or which individually or in the aggregate, do not exceed $100,000, do
not materially detract from the value of or materially interfere with the
present use of any of the REIT Properties subject thereto or affected thereby,
and do not otherwise materially impair business operations conducted by the
REIT and its Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the REIT's
or any of its Subsidiaries' fee simple title to the REIT Properties, subject
only to the matters disclosed above and as may be set forth in the REIT
Disclosure Letter, and such policies are, at the date hereof, in full force and
effect and no material claim has been made against any such policy. To the
REIT's actual knowledge, except as will be set forth in the REIT Disclosure
Letter, (i) there is no certificate, permit or license from any governmental
authority having jurisdiction over any of the REIT Properties or any agreement,
easement or other right which is necessary to permit the lawful use and
operation of the buildings and improvements on any of the REIT Properties or
which is necessary to permit the lawful use and operation of all driveways,
roads and other means of egress and ingress to and from any of the REIT
Properties that has not been obtained and is not in full force and effect, or
any pending threat of modification or cancellation of any of same; (ii) neither
the REIT nor its Subsidiaries has received written notice of any material
violation of any federal, state or municipal law, ordinance, order, regulation
or requirement affecting any portion of any of the REIT Properties issued by
any governmental
B-14
<PAGE>
authority; (iii) there are no structural defects relating to the REIT
Properties and no REIT Properties whose building systems are not in working
order in any material respect; and (iv) there is (A) no physical damage to any
the REIT Property in excess of $100,000 for which there is no insurance in
effect covering the cost of the restoration, (B) no current renovation to any
the REIT Property the cost of which exceeds $100,000 and (C) no current
restoration (excluding tenant improvements) of any the REIT Property the cost
of which exceeds $100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT nor
its Subsidiaries have received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the REIT Properties or (ii) any zoning, building or similar
laws, codes, ordinances, orders or regulations that are or will be violated by
the continued maintenance, operation or use of any buildings or other
improvements on any of the REIT Properties or by the continued maintenance,
operation or use of the parking areas in any material respect. All work to be
performed, payments to be made and actions to be taken by the REIT or its
Subsidiaries prior to the date hereof pursuant to any agreement entered into
with a governmental body or authority in connection with a site approval,
zoning reclassification or other similar action relating to the REIT Properties
(e.g., Local Improvement District, Road Improvement District, Environmental
Mitigation) has been performed, paid or taken, as the case may be, and the REIT
is not aware of any planned or proposed work, payments or actions that may be
required after the date hereof pursuant to such agreements, except as set forth
in the REIT Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan") as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
B-15
<PAGE>
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
B-16
<PAGE>
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
COVENANTS
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such party
determined in good faith was required to be executed in order for the General
Partner or the Board, as applicable, to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement informed of the
status (but not the terms) of any such discussions or negotiations; and (ii) to
the extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
B-17
<PAGE>
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as contemplated
by this Agreement, unless the other party has consented in writing thereto, the
REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to preserve intact
their business organizations and goodwill and keep available the services
of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more representatives of
the other to report operational matters of materiality and, subject to
Section 6.1, any proposals to engage in material transactions;
(iii) Shall promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the business,
properties, assets or liabilities, or any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated), or the breach in any material respect of any
representation, warranty, covenant or agreement contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as the
case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds resulting
from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, issue any Units or
other interests in the Partnership, make any distribution, effect any
recapitalization or other similar transaction, (B) grant, confer or award
any option, warrant, conversion right or other right not existing on the
date hereof to acquire any Partnership Units, (C) increase any compensation
or enter into or amend any employment agreement with the General Partner or
any of the present or future affiliates of the General Partner, or (D)
adopt any new employee benefit plan or amend any existing employee benefit
plan in any material respect, except for changes which are less favorable
to participants in such plans;
(iv) Shall not declare, set aside or make any distribution or payment
with respect to any Units or other interests in the Partnership or directly
or indirectly redeem, purchase or otherwise acquire any Units or other
interests in the Partnership, or make any commitment for any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of its
other assets which are material, individually or in the aggregate;
B-18
<PAGE>
(vi) Shall not make any loans, advances or capital contributions to, or
investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent Partnership Financial Statements (or the
notes thereto) or incurred in the ordinary course of business consistent
with past practice;
(viii) Shall not enter into any commitment which individually may result
in total payments or liability by or to it in excess of $10,000 (or 5% of
its Net Asset Value, if less) in the case of any one commitment or in
excess of $20,000 (or 10% of its Net Asset Value, if less) for all
commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the
Partnership or its general partner(s) except to the extent the same occur
in the ordinary course of business consistent with past practice and would
not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except as
contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of its capital
stock, share dividend, recapitalization or other similar transaction, ( B)
grant, confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital stock
(except pursuant to any employee incentive plan approved by shareholders),
(C) amend any employment agreement with any of its present or future
officers or the Board or (D) adopt any new employee benefit plan (including
any share option, share benefit or share purchase plan), except the
employee incentive plan to be voted on at its stockholder meeting for the
fiscal year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make any
other distribution or payment with respect to any REIT Shares or directly
or indirectly redeem, purchase or otherwise acquire any capital stock of
any of its Subsidiaries, or make any commitment for any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not, and
shall not permit any of its subsidiaries to, sell or otherwise dispose of
(A) any REIT Properties or any of its capital stock of or other interests
in subsidiaries or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to (except
in the ordinary course of business), make any loans, advances or capital
contributions to, or investments in, any other person other than in
connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice or in
B-19
<PAGE>
accordance with their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated financial statements
(or the notes thereto) of the REIT included in the REIT Reports or incurred
in the ordinary course of business consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment which individually may result in total payments or
liability by or to it in excess of $50,000 in the case of any one
commitment or in excess of $250,000 for all commitments, except for those
commitments in connection with the acquisition and/or development of
property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the REIT or
any of its subsidiaries, except as herein or in the REIT Disclosure Letter
provided and except in the ordinary course of business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any
consents required from third parties in form reasonably satisfactory to the
Partnership and the REIT necessary to effectuate the Merger; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such necessary
action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise
B-20
<PAGE>
making public statements with respect to the transactions contemplated hereby
and in making any filings with any federal or state governmental or regulatory
agency or with any national securities exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to
B-21
<PAGE>
indemnification under the Agreement of Limited Partnership existing on the date
hereof to the same extent as such partners or agents are entitled to
indemnification under such Agreement of Limited Partnership in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
SECTION 7
CONDITIONS
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have been
approved in the manner required by the charter and bylaws and Agreement of
Limited Partnership of the REIT and the Partnership, respectively, and by the
holders of the REIT Shares and Partnership interests and no stockholder or
partner shall have appraisal or dissenter's rights as a result of the Merger
under applicable law or the charter, bylaws or Agreement of Limited
Partnership, as the case may be.
B-22
<PAGE>
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the event
any such order or injunction shall have been issued, each party agrees to use
its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory body
or third parties required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to be
filed after the Effective Time and except where the failure to have obtained or
made any such consent, authorization, order, approval, filing or registration
would not have a material adverse effect on the business, results of operations
or financial condition of the REIT and the Partnership (and their respective
subsidiaries), taken as a whole, following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Effective Time and the
representations and warranties of the REIT contained in this Agreement shall be
true and correct in all material respects as of the Closing Date as if made on
the Closing Date, and the Partnership shall have received a certificate of the
President or an Executive or Senior Vice President of the REIT, dated the
Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to the
REIT, as approved by the Partnership, dated the Closing Date, to the effect
that the REIT met the requirements for qualification and taxation as a REIT for
its taxable years 1995 through 1998; the REIT's diversity of equity ownership,
operations through the Closing Date and proposed method of operation as
described in the Proxy Statement should allow it to qualify as a REIT for its
taxable year ending December 31, 1999; and the discussion contained under the
caption "Material Federal Income Tax Aspects" in the Proxy Statement accurately
reflects existing law and fairly addresses the material federal income tax
issues described therein. In rendering its opinion, said counsel shall be
entitled to rely as to any factual matter upon certificates given by executive
officers and other duly authorized representatives of the Partnership and the
REIT and shall be entitled to assume that the covenants set forth in Section 6
shall be fully complied with.
(c) From the date of the Agreement through the Effective Time, there shall
not have occurred any change in the financial condition, business or operations
of the REIT and its subsidiaries, taken as a whole, that would have or would be
reasonably likely to have a REIT Material Adverse Effect other than any such
change that affects both the Partnership and the REIT in a substantially
similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to the
REIT, as approved by the Partnership, dated the Closing Date, as to such
customary matters as the General Partner may reasonably request, such opinion
to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and the
representations and warranties of the Partnership contained
B-23
<PAGE>
in this Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have received a
certificate of the General Partner or the corporate general partner if
applicable dated the Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure to
continue to satisfy the requirements for qualification as a REIT for federal
income tax purposes. In rendering its opinion, said counsel shall be entitled
to rely as to any factual matter upon certificates given by executive officers
and other duly authorized representatives of the REIT and the Partnership and
shall be entitled to assume that the covenants of Section 6 shall be fully
complied with.
(c) From the date of this Agreement through the Effective Time, there shall
not have occurred any change in the financial condition, business or operations
of the Partnership and its subsidiaries, taken as a whole, that would have or
would be reasonably likely to have a Partnership Material Adverse Effect, other
than any such change that affects both the Partnership and the REIT in a
substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of the
REIT, that the consideration to be paid by the REIT pursuant to the Merger is
fair, from a financial point of view, to the REIT and its stockholders shall
not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or the independent directors of the
Board only for good reason. Only the following shall constitute termination for
"good reason" for the purposes of this Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have been
consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the Partnership
shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT shall
not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by the
other of any representation or warranty contained in the this Agreement which
would have or would be reasonably likely to have a REIT Material Adverse Effect
or a Partnership Material Adverse Effect, as the case may be, which breach is
not cured within 30 days after written notice of such breach is given to the
breaching party by the non-breaching party;
B-24
<PAGE>
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger Agreement
by the other, which breach is not curable or, if curable, is not cured within
30 days after written notice of such breach is given to the breaching party by
the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as to
its fiduciary duties as imposed by law, and as advised by counsel, the General
Partner determines that such termination is required by reason of an
Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the independent
directors of the Board determine that such termination is required by reason of
a Acquisition Proposal relating to the REIT being made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by this Agreement and such order, decree, ruling or other action shall have
become final and non-appealable, provided that the party seeking to terminate
this Agreement shall have used all reasonable efforts to remove such order,
decree, ruling or injunction; provided, however, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the Partnership
(i) other than for good reason or (ii) for good reason pursuant to Section
8.2(f) hereof, and a Partnership Acquisition Proposal shall have been made and,
within one year from the date of such termination, the Partnership consummates
a Partnership Acquisition Proposal or enters into an agreement to consummate a
Partnership Acquisition Proposal to be subsequently consummated, the
Partnership shall pay as liquidated damages (not as a penalty or forfeiture) to
the REIT, provided that the REIT was not in material breach of its obligations
at the time of such termination, an amount equal to the lesser of (x) the
Partnership's Proportionate Share of $500,000 (a "REIT Liquidated Damages
Amount") and (y) the sum of (1) the maximum amount that can be paid to the REIT
without causing the REIT to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I)
of the Code ("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount less
the amount payable under clause (1) above in the event the REIT receives a
letter from its counsel indicating that it has received a ruling from the IRS
to the effect that the REIT Liquidated Damages Amount payment constitutes
Qualifying Income. In addition to the REIT Liquidated Damages Amount, the REIT
shall be entitled to receive from the Partnership (or its successor in
interest) all documented out-of-pocket costs and expenses incurred by it, up to
a maximum of the Partnership's Proportionate Share of the REIT Expenses. The
payments to which the REIT is entitled as described above shall be its sole
remedy with respect to the termination of this Agreement under the
circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT because
of a Partnership Material Adverse Effect under Section 8.2(d), the Partnership
shall, provided that the REIT was not in material breach of its obligations at
the time of such termination, pay the REIT for the REIT Expenses, up to a
maximum of the Partnership's Proportionate Share thereof (although it shall not
be required to pay the REIT Liquidated Damages Amount), which payment of the
REIT Expenses shall be the REIT's sole remedy for termination of this Agreement
in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i) other
than for good reason or (ii) for good reason pursuant to Section 8.2(g) and,
within one year from the date of such termination, the REIT
B-25
<PAGE>
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the REIT
shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of its
obligations at the time of such termination. Such liquidated damages shall be
in an amount equal to 120% of the Partnership's Proportionate Share of the
Partnership Merger Expenses (the "Partnership Liquidated Damages Amount"). The
payments to which the Partnership is entitled as described above shall be its
sole remedy with respect to the termination of this Agreement under the
circumstances contemplated above.
(d) If an election to terminate this Agreement is made by the Partnership
pursuant to Section 8.2(d) because of REIT Material Adverse Effect, the REIT
shall, provided that the Partnership was not in material breach of its
obligations at the time of such termination, pay the Partnership for the
Partnership's Proportionate Share of the Partnership Merger Expenses (although
it shall not be required to pay the Partnership Liquidated Damages Amount),
which payment shall be the Partnership's sole remedy for termination of this
Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating party
was not in material breach of its obligations at the time of such termination,
pay the terminating party (i) in the case of termination by the Partnership the
Partnership Liquidated Damages Amount, and in the case of termination by the
REIT, the REIT Liquidated Damages Amount, plus (ii) an amount equal to the
terminating parties' Proportionate Share of the Merger Expenses and (iii) the
non-terminating party shall remain liable to the terminating party for its
breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a result
of the condition set forth in Section 7.2(c) or Section 8.2(h) not being
satisfied), the REIT shall, provided that the Partnership was not in material
breach of its obligations hereunder at the time of such termination, pay the
Partnership an amount equal to the Partnership's Proportionate Share of the
Partnership Merger Expenses, which payment shall be the Partnership's sole
remedy for termination of the Agreement in such circumstances.
(g) If an election to terminate this Agreement is made pursuant to Section
8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a REIT
Acquisition Proposal shall have been made and, within one year from the date of
such termination, the terminating party consummates such Acquisition Proposal
or enters into an agreement to consummate such Acquisition Proposal which is
subsequently consummated, the terminating party shall pay to the non-
terminating party, provided that the non-terminating party was not in material
breach of its obligations hereunder at the time of such termination, as
liquidated damages and not as a penalty or forfeiture, an amount equal to (x)
in the case of termination by the Partnership, the Partnership Liquidated
Damages Amount, and in the case of termination by the REIT, the REIT Liquidated
Damages Amount, plus (y) its Proportionate Share of the Merger Expenses. In
addition to such amount, the non-terminating party shall be entitled to receive
from the terminating party (or its successor in interest) all of its documented
out-of-pocket costs and expenses in connection with this Agreement and the
transactions contemplated thereby. The payments to which the non-terminating
party is entitled under this Section 8.3(g) shall be its sole remedy with
respect to the termination of the Agreement under the circumstances
contemplated in this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without causing
the REIT to fail to meet the requirements of Sections 856(c)(2) and (3) of the
Code or (ii) improve the REIT's chances of securing a favorable ruling
described in this Section 8.3, provided that no such amendment may result in
any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of the
Merger pursuant to this Section 8, all obligations of the parties hereto shall
terminate, except the obligations of the parties pursuant to this Section 8.3
and Section 6.9 and except for the provisions of Sections 9.3, 9.4, 9.5, 9.6,
9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT or the Partnership has
received a Liquidated Damages Amount as provided in this Section 8.3, such
recipient shall not assert or pursue in any manner, directly or indirectly, any
claim or
B-26
<PAGE>
cause of action against the other party hereto or any of its officers,
independent directors of the Board, or General Partner, as applicable, based in
whole or part upon its or their receipt, consideration, recommendation or
approval of an Acquisition Proposal or the exercise by the REIT of its right to
termination under Section 8.2(g) or the exercise by the Partnership of its
right to termination under Section 8.2(f). Notwithstanding the foregoing, in
the event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it shall
be entitled to all expenses, including attorney's fees and expenses, which it
has incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and obligations
under this Agreement, the non-breaching party is additionally entitled to all
remedies available to it at law or in equity and to recover its expenses from
the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
GENERAL PROVISIONS
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
Taylor Income Investors, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or
B-27
<PAGE>
otherwise) without the prior written consent of the other party. Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the contrary, except as
provided in the following sentence, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective heirs, successors, executors, administrators and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement. The provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and
6.16 (collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to either
party hereto (the "Providing Party"), all information (written or oral)
furnished (whether before or after the date hereof) by the Providing Party and
its directors, partners, officers, employees, affiliates or representatives of
advisors, including counsel, lenders and financial advisors (collectively, the
"Providing Party Representatives") to the other party hereto (the "Receiving
Party") or such Receiving Party's directors, partners, officers, employees,
affiliates or representatives of advisors, including counsel, lenders and
financial advisors or the Receiving Party's potential sources of financing for
the transactions contemplated by this Agreement (collectively "the Receiving
Party Representatives") and all analyses, compilations, forecasts and other
studies or other documents prepared by the Providing Party or the Providing
Party Representatives in connection with its or their review of the
transactions contemplated by this Agreement which contain or reflect such
information. The term "Confidential Material" does not include, however,
information which (i) at the time of disclosure or thereafter is generally
available to and known by the public other than as a result of a disclosure
directly or indirectly by the Receiving Party or the Receiving Party
Representatives in violation of this Agreement, (ii) at the time of disclosure
was available on a nonconfidential basis from a source other than the Providing
Party or the Providing Party Representatives, providing that such source is not
and was not bound by a confidentiality agreement with the Providing Party,
(iii) was known by the Receiving Party prior to receiving the Confidential
Material from the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its obligations under
this Agreement or (iv) is contained in the REIT Reports or Registration
Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the prior
written consent of the Providing Party, be disclosed by the Receiving Party or
the Receiving Party Representatives, in whole or in part, and will not be used
by the Receiving Party or the Receiving Party Representatives, directly or
indirectly, for any purpose other than in connection with this Agreement, the
Merger or the evaluating, negotiating or advising with respect to a transaction
contemplated herein. Moreover, each Receiving Party agrees to transmit
Confidential Material to the Receiving Party Representatives only if and to the
extent that the Receiving Party Representatives need to know the Confidential
Material for purposes of such transaction and are informed by such Receiving
Party of the confidential nature of the Confidential Material and of the terms
of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving Party
Representatives supply the Confidential Material, are requested or required (by
oral questions, interrogatories, requests for information or documents,
subpoena, civil investigative demand, any informal or formal investigation by
any government or governmental agency or authority or
B-28
<PAGE>
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the Providing
Party of the existence, terms and circumstances surrounding such a request,
(ii) to consult with the Providing Party on the advisability of taking legally
available steps to resist or narrow such request and (iii) if disclosure of
such information is required, to furnish only that portion of the Confidential
Material which, in the opinion of such Receiving Party's counsel, such
Receiving Party is legally compelled to disclose and to cooperate with any
action by the Providing Party to obtain an appropriate protective order or
otherwise reliable assurances that confidential treatment will be accorded the
Confidential Material (it being agreed that the Providing Party shall reimburse
the Receiving Party for all reasonable out-of-pocket expenses incurred by the
Receiving Party in connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with its
terms, promptly upon request from the Providing Party, the Receiving Party
shall, except to the extent prevented by law, redeliver to the Providing Party
or destroy all tangible Confidential Material and will not retain any copies,
extracts or other reproductions thereof in whole or in part. Any such
destruction shall be certified in writing to the Providing Party by an
authorized officer of the Receiving Party supervising the same. Notwithstanding
the foregoing, each Receiving Party and one Receiving Party Representative
designated by each Receiving Party shall be permitted to retain one permanent
file copy of each document constituting Confidential Material.
(e) Each party hereto further agrees that if this Agreement is terminated in
accordance with its terms, until one year from the date of termination, (i) it
will not offer to hire or hire any person currently or formerly employed by the
other party with whom such party has had contact prior hereto other than
persons whose employment shall have been terminated by such other party prior
to the date of such offer to hire or hiring and (ii) neither it nor its
affiliates shall directly or indirectly, (A)(w) solicit, seek or offer to
effect or effect, (x) negotiate with or provide any information to the Board or
General Partner(s), as applicable, of the other party, or officer of the other
party or any stockholder or partner, as applicable, of the other party with
respect to, (y) make any statement or proposal, whether written or oral, either
alone or in concert with others, to the Board or board of directors of the
General Partner(s) of the other party, any director, officer of the other party
or any stockholder or partner of the other party or any other person with
respect to, or (z) make any public announcement (except as required by law in
respect of actions permitted hereby) or proposal or offer whatsoever
(including, without limitation, any solicitation of consents as such terms are
defined or used in Regulation 14A of the Exchange Act) with respect to, (1) any
form of business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3) any
purchase of any securities or assets, or rights or options to acquire any
securities or assets (through purchase, exchange, conversion or otherwise), of
the other party or any affiliate thereof, (4) any proposal to seek
representation on the Board or the board of directors of the General
Partner(s), as applicable, or otherwise to seek to control or influence the
management, Board or the board of directors of the General Partner(s), as
applicable, or policies of the other party or any affiliate thereof, (5) any
request or proposal to waive, terminate or amend the provisions of this Section
9.5, or (6) any proposal or other statement inconsistent with the terms of this
Section 9.5 or (B) instigate, encourage, join, act in concert with or assist
(including, without limitation, providing or assisting in any way in the
obtaining of financing for, or acting as a joint or co-bidder for the other
party with) any third party to do any of the foregoing, unless and until such
party has received the prior written invitation or approval of a majority of
the Board or the General Partner(s), as applicable, to do any of the foregoing;
provided that, without such invitation or approval, either party may at any
time, on a confidential non-public basis, submit to the Chief Executive Officer
of the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party providing
for the acquisition of all or substantially all of the assets or the securities
of the other party, including, without limitation, a merger, tender offer or
exchange offer. Each party hereto agrees that it will not agree with any third
party to waive its rights under this Section 9.5.
B-29
<PAGE>
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or
B-30
<PAGE>
was otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any Texas Court,
this being in addition to any other remedy to which they are entitled at law or
in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
-------------------------------------
H. Kerr Taylor, President and Chief
Executive Officer
Taylor Income Investors, Ltd.
By: Taylor Investments, Inc.
Its General Partner
By: _________________________________
H.Kerr Taylor, President
B-31
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
Taylor Income Investors IV, Ltd.
If you are a limited partner of Taylor Income Investors IV, Ltd., your vote
is very important:
AmREIT is seeking to merge with 10 partnerships, including Taylor Income
Investors IV, Ltd. AmREIT is a Maryland corporation that has elected to be
taxed as a real estate investment trust under the Internal Revenue Code . Like
Taylor Income Investors IV, Ltd., the primary business of AmREIT is the
ownership of properties leased to national and regional tenants. AmREIT's
independent directors and the general partners of Taylor Income Investors IV,
Ltd. seek your approval of the merger. In the merger, AmREIT will issue shares
of common stock or, under specified situations more fully described in the
accompanying proxy statement, cash and % callable notes to the limited
partners of the 10 partnerships. At the completion of the merger, the existing
limited partners of partnerships approving the merger will become stockholders
(or noteholders as the case may be) of AmREIT and will no longer be limited
partners in their respective partnerships. As a condition precedent to the
merger the AmREIT shares will be listed for trading on the Nasdaq Stock
Market's National Market. The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS IV, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of Taylor
Income Investors IV, Ltd., for the purpose of enabling you to evaluate the
proposed merger of your partnership with AmREIT, Inc. This supplement is
designed to summarize only the risks, effects, fairness and other
considerations of the proposed merger that are unique to you and the other
limited partners of your partnership. This supplement does not purport to
provide an overall summary of the proposed merger and should be read in
conjunction with the accompanying Joint Proxy and Consent Solicitation
Statement/Prospectus, which includes detailed discussions regarding AmREIT and
the other partnerships being merged with AmREIT. Accordingly, the discussions
in this supplement are qualified by the more expanded treatment of these
matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 54,533 shares of AmREIT common stock, which we
estimate amounts to $828 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
--------------------- --------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fund IV.............................. $509,337 $458,403 $479,000 $425,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $1 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $1 per average original $1,000
investment of this gain at long term capital gains rates, which will be 20%.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is more
than the annual rate of distributions paid to the limited partners
(approximately $62.00 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Expiration of Leases. The lease on your partnership's property expires
within the next three years. Also, there is a significant chance that
Steak & Ale, your partnership's only tenant, will not renew its lease
when it expires in March 2002 or will renew its lease only if your
partnership makes significant improvements to the property. Also, should
this tenant fail to renew their lease, your partnership would need to
find a new tenant and incur significant additional costs by reason of
temporary vacancy and/or significant rehabilitation and/or tenant
improvement costs.
. Concentration of Investment. Your partnership has concentrated its
investments in one property. If a vacancy or other interruption of rents
occur in this property, the distributions of your partnership may be
significantly reduced. Your partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, your partnership may experience more difficulty in re-
leasing its property than it would experience if the property was more
geographically diversified.
. Co-ownership of Property. Your partnership owns its property, Steak &
Ale, in co-ownership with Fund III. Your partnership owns 56% of this
property and is dependent upon the consent and cooperation of Fund III to
sell or re-lease the property. No assurance can be given that Fund III
will agree to the merger or to the sale or re-lease of the property at
such time or under the terms your partnership may desire. We are
soliciting Fund III's approval to merge with AmREIT. If your partnership
approves the merger but Fund III rejects the merger, the AmREIT board
must approve owning this property jointly with Fund III.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$615,000 $1,000 54 533 $509,337 $828
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $615,000.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $3,842 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................. $ --
Accounting............................................................ 82
Fairness Opinions/Valuations.......................................... 3,225
Printing.............................................................. --
Appraisal Fees........................................................ 499
Listing Fees.......................................................... --
Miscellaneous......................................................... 36
------
Total............................................................... $3,842
======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31, Six Months Ended
1996 1997 1998 June 30, 1999
---------------- ---------------- ---------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $1,656 $ -- $1,656 $ -- $2,453 $ -- $1,518 $ --
Cash Distributions(2)... 720 -- 720 -- 1,490 -- 1,083 --
General Partners'
Salary(3).............. -- 237 -- 237 -- 237 -- 142
General Partners'
Distributions(4)....... -- 4,507 -- 4,571 -- 4,634 -- 2,285
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $1 per average original $1,000 investment. This amount equals the
limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $1 per average original $1,000 investment of
S-11
<PAGE>
this gain at long term capital gains rates, which will be 20%. The actual
amount of gain recognized by the partnership and allocated to each limited
partner will depend upon the value ascribed to the shares of AmREIT common
stock for federal income tax purposes. Because the shares will not be publicly
traded until immediately after the merger, it is possible that the value of the
shares used for purposes of calculating the taxable income (or loss) and the
taxable income (or loss) per average original $1,000 investment will differ
from the calculation stated above. Your partnership's federal income tax
returns are subject to review and possible adjustment by the IRS. Under federal
income tax laws, regulations and administrative rulings, certain types of
transactions may be accorded varying interpretations. Accordingly, your
partnership's financial statements, as well as your individual tax return, may
be changed to cause them to conform to the tax treatment resulting from such
review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $62.17 $62.00 $62.00 $62.00 $62.00 $46.50
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors IV, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and Taylor
Income Investors IV, Ltd. (the "Partnership"). AmREIT is a real estate
investment trust that was organized as a Maryland corporation in 1993. AmREIT
became internally managed upon its acquisition of its external advisor in June
1998 (the "Adviser Acquisition"), as a result, AmREIT is a self-managed and
self-administered REIT. AmREIT acquires, develops, owns and manages a
diversified portfolio of freestanding and specialty retail properties leased to
national and regional retail tenants.
Mr. Kerr Taylor serves as the President of Taylor Income Investors IV, Inc.,
which is the corporate general partner of the Partnership (the "General
Partner"). The Partnership owns interests in one retail property. Following the
Adviser Acquisition, Mr. Taylor and his affiliated corporation retained their
fiduciary responsibilities associated with such General Partner of the
Partnership. However, the Partnership's properties are currently managed by
AmREIT Realty Investment Corporation, an affiliate of AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 54,546 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors IV, Ltd.
June 25, 1999 -2-
4. reviewed copies of the 1986 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K
for the two fiscal years ended 1998 and quarterly reports on Form 10-Q for
the quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared
by Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of Taylor
Income Investors IV, Ltd. in connection with the Transaction is fair to them
from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and Taylor Income Investors
IV, Ltd., a Texas limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and Taylor Investors IV,
Inc., a Texas corporation, the General Partners of the Partnership (referred to
herein as the "General Partner"), is a party to this Agreement solely for the
purpose of binding itself to the provisions of Section 5 and Section 7.9,
hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
CONSIDERATION FOR PARTNERSHIP ASSETS
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the Effective
Time, each unit of limited partner interest of the Partnership (the "Units")
and the interest of the General Partner entitled to receive consideration, if
any, shall, in the Merger, be converted into the number of shares of the REIT's
common stock, $0.01 par value per share (the "REIT Shares"), as provided in
Section 4 hereof. No fractional REIT Shares shall be issued. Any Partner who
would be entitled to a fractional REIT Share will receive cash based on the
price of $9.34 per REIT Share (the "Exchange Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership approves
the Merger each Unit held of record by a Partner who votes against the Merger
(a "Dissenting Limited Partner") will receive REIT Shares unless he or she
affirmatively elects to receive consideration in the form of 10% cash and 90%
notes (the "Cash/Notes Option") based on the liquidation value of the
Partnership, as determined by Valuation Associates (the "Liquidation Value").
The Liquidation Value will be lower than the value of the REIT Shares offered
to the Partnership in the merger, based on the Exchange Price. The notes (the
"Notes") shall be in the form described in the Note and Loan Agreement attached
hereto as Exhibit A and incorporated herein by reference. In the event the
principal amount of Notes issuable to Dissenting Limited Partners electing the
Cash/Notes Option, when aggregated with the principal amounts of the Notes to
be issued to electing dissenting limited partners (the "Other Dissenting
Partners") in all other partnerships to whom offers are being made by the REIT
that approve the merger with the REIT (the "Other Partnerships"), exceeds
$10,000,000, Dissenting Limited Partners electing the Cash/Notes Option shall
receive their pro rata portion of the $10,000,000 aggregate principal amount of
the Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of the
Dissenting Limited Partners' Note consideration to be paid in REIT Shares. The
cash component of the Cash/Notes Option will not be affected by any such pro
ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
PARTNERSHIP INTERESTS
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in accordance
with the Partnership's Net Asset Value or Liquidation Value, respectively, as
set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$498,000 $11,457 $509,457
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
-------------- --------------
<S> <C> <C>
To Limited Partners............................... 54,546 2,660.77
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of Marketing/
Partnership Partnership Liquidation Brokers' Legal/ Contingency Liquidation
Value Expenses Discount Commission Closing V Value
- ----------- ----------- ----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$488,792 ($2,416) ($24,440) ($14,664) ($12,220) ($9,776) $425,276
</TABLE>
Cash/Notes
Payable to Partnership(/1/)
<TABLE>
<CAPTION>
Principal
Maximum Amount of Cash Maximum Principal Amount of
Aggregate Offered Amount of Notes Note Offered
Amount of Cash per Unit Offered Per Unit
-------------- -------------- ----------------- ------------
<S> <C> <C> <C> <C>
To Limited Partners..... $20,825 $2,073 $187,425 $18,659
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
B-3
<PAGE>
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to
a different number of shares or securities by reason of any share
dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the
number of REIT Shares to be issued in the Merger shall be appropriately
adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount
shown in Section 3.1 above, the Net Cash of the Partnership shall be
increased (if greater) or decreased (if less) and the Merger
Consideration issuable to the Partnership in the Merger shall be
increased or decreased, as the case may be, by an amount equal to such
difference divided by the Exchange Price;
(c) The Net Cash of the Partnership shall be reduced by the difference
between the Partnership's share of the unpaid balance of principal and
interest on the Atlas Note on May 31, 1999 and such balance as of the
Effective Time, and the number of REIT Shares issuable to the
Partnership in the Merger shall be reduced by the number of REIT Shares
equal to the amount of such difference divided by the Exchange Price.
For the purposes hereof, the Atlas Note shall refer to that certain
note dated October 9, 1997 by Transmark, Inc. in favor of Taylor Income
Investors IV and V Joint Venture in the original principal amount of
$215,000; and
(d) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $498,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as of
the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the Partnership's
liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to be
deposited, with an exchange agent selected by the REIT, which shall be the
REIT's transfer agent, or such other party reasonably satisfactory to the
Partnership (the "Exchange Agent"), for the benefit of the Partners, for
exchange in accordance with this Section 3, Share Certificates representing the
total number of REIT Shares issuable to Partners (other than Dissenting Limited
Partners electing the Cash/Notes Option) and the aggregate amount of Cash and
Notes issuable to Dissenting Limited Partners electing the Cash/Notes Option
(such cash, Share Certificates and Notes, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Sections 3.1 and 3.2 and paid
pursuant to this Section 3.4 in exchange for the outstanding Units and
interests.
(b) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented outstanding Units
(the "Unit Certificates") whose Units were converted into the right to receive
the Merger Consideration pursuant to Section 3.1 hereof (i) a letter of
transmittal (which shall specify that delivery shall be effected, and the risk
of loss and title to the Unit Certificates shall pass, only upon delivery of
the Unit Certificates to the Exchange Agent and shall be in a form and have
such other provisions as the REIT may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Unit Certificates in exchange for the
Merger Consideration. Upon surrender of a Unit Certificate for cancellation to
the Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such other
documents as may be reasonably requested by the Exchange Agent, the holder of
such Unit Certificate shall be entitled to receive in exchange therefor the
Merger Consideration into which the Units
B-4
<PAGE>
previously represented by the Unit Certificate shall have been converted
pursuant to Section 3.1 hereto and any dividends or other distributions to
which such holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"), and
the Unit Certificate so surrendered shall forthwith be cancelled. In the event
of a transfer of ownership of a Unit which is not registered in the transfer
records of the Partnership, payment may be made to a person other than the
person in whose name the Unit Certificate so surrendered is registered if such
Unit Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment either shall pay any transfer
or other taxes required by reason of such payment being made to a person other
than the registered holder of such Unit Certificate or establish to the
satisfaction of the REIT that such tax or taxes have been paid or are not
applicable. Upon surrender as contemplated by this Section 3.4, each Unit
Certificate shall be deemed at anytime after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration, without
interest, into which the Units previously represented by such Unit Certificate
shall have been converted pursuant to Section 3.1 hereof, and any dividends or
other distributions to which such holder is entitled pursuant to the terms of
the Agreement of Limited Partnership. No interest will be paid or will accrue
on the Merger Consideration upon the surrender of any Unit Certificate or on
any cash payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the contrary,
no fractional REIT Shares shall be issued in connection with the Merger. All
REIT Shares to which a holder of Units is entitled immediately prior to the
Effective Time shall be aggregated. If a fractional share results from such
aggregation, in lieu of any such fractional share, each holder of Units who
would otherwise have been entitled to receive a fraction of a REIT Share upon
surrender of Unit Certificates for exchange pursuant to Section 3.4(b) hereof
shall be entitled to receive from the Exchange Agent a cash payment equal to
such fraction multiplied by the Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon) that
remains unclaimed by the former Partners of the Partnership one year after the
Effective Time shall be delivered to the REIT. Any former Partners of the
Partnership who have not theretofore complied with this Section 3.4 shall
thereafter look only to the REIT for delivery of their REIT Shares and/or
Cash/Notes, and payment of cash in lieu of fractional shares and/or dividends
on such REIT Shares, in respect of each Unit such Partners hold as determined
pursuant to this Agreement, in each case, without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or with
respect to the Units for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
SECTION 4
REPRESENTATIONS AND WARRANTIES
OF THE PARTNERSHIP
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
B-5
<PAGE>
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's actual
knowledge, the Partnership is duly licensed or qualified to do business as a
foreign limited partnership and is in good standing under the laws of any other
state of the United States in which the character of the properties owned or
leased by it therein or in which the transaction of its business makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the business, results of operations or
financial condition of the Partnership (a "Partnership Material Adverse
Effect"). The Partnership has all requisite power and authority to own,
operate, lease and encumber its properties and carry on its business as now
conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation to
which the Partnership or any of its properties or assets are subject, where
such violation would have a Partnership Material Adverse Effect. The
Partnership has obtained all licenses, permits and other authorizations and has
taken all actions required by applicable law or governmental regulations in
connection with its business as now conducted, where the failure to obtain any
such item or to take any such action would have a Partnership Material Adverse
Effect. A copy of the Partnership's Agreement of Limited Partnership and
Certificate of Limited Partnership (collectively, the "Partnership
Organizational Documents") have been delivered or made available to the REIT
and its counsel and such documents will be listed in the Partnership Disclosure
Letter and were or will be true and correct when delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years ended
December 31, 1998 and 1997 and the financial statements for the fiscal quarter
ended March 31, 1999 (collectively, the "Partnership Financial Statements")
present fairly, in conformity with generally accepted accounting principles
applied on a consisted basis (except as may be indicated in the notes thereto),
the financial position of the Partnership as of the dates thereof and its
results of operations and cash flows for the periods then ended (subject to
normal year-end adjustments in the case of the interim financial statements).
Copies of the Partnership Financial Statements have been delivered or made
available to the REIT and its financial advisers and such documents will be
listed in the Partnership Disclosure Letter and were or will be true and
correct when delivered or made available.
B-6
<PAGE>
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise set
forth in the Partnership Financial Statements, the Partnership has no material
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) that would be required to be reflected on, or reserved against
in, a balance sheet of the Partnership or in the notes thereto, prepared in
accordance with generally accepted accounting principles consistently applied,
except liabilities arising in the ordinary course of business since such date
which would not have a Partnership Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated hereby in
accordance with the terms hereof will: (a) conflict with or result in a breach
of any provisions of the Agreement of Limited Partnership of the Partnership;
(b) except as contemplated by the Partnership Ancillary Agreements or as set
forth in the Partnership Disclosure Letter, violate, or conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination or in a right of termination or cancellation of,
or accelerate the performance required by, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties of
the Partnership under, or result in being declared void, voidable or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which the Partnership is a party, or by which the Partnership or any of its
properties is bound or affected, except for any of the foregoing matters which,
individually or in the aggregate, would not have a Partnership Material Adverse
Effect; or (c) other than the filings provided for in this Agreement to effect
the Merger, any filings required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act of 1933, as amended (the
"Securities Act"), or applicable state securities and "Blue Sky" laws
(collectively, the "Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority, except where the failure to obtain any
such consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to be
filed
B-7
<PAGE>
by it for tax periods ended prior to the date of this Agreement or requests for
extensions have been timely filed and any such request has been granted and has
not expired and all such returns are accurate and complete in all material
respects, (ii) has paid or accrued all taxes shown to be due and payable on
such returns or which have become due and payable pursuant to any assessment,
deficiency notice, 30-day letter or other notice received by it and (iii) has
properly accrued all taxes for such periods and periods subsequent to the
periods covered by such returns. The Partnership has not received notice that
the federal, state and local income and franchise tax returns of the
Partnership have been or will be examined by any taxing authority. The
Partnership has not executed or filed with the Internal Revenue Service (the
"IRS") or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim for
assessment or collection of taxes has been asserted against it. True, correct
and complete copies of all federal, state and local income or franchise tax
returns filed by the Partnership since its inception and all communications
relating thereto have been delivered to the REIT or made available to
representatives of the REIT or will be so delivered or made available prior to
the Closing. The Partnership does not hold any asset (i) the disposition of
which could be subject to rules similar to Section 1374 of the Internal Revenue
Code of 1986, as amended (the "Code"), as a result of an election under IRS
Notice 88-19 or (ii) that is subject to a consent filed pursuant to Section
341(f) of the Code and regulations thereunder. For purposes of this
Section 4.9, "taxes" includes any interest, penalty or additional amount
payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on the
most recent balance sheet of the Partnership included in the Partnership
Reports or as identified in the Partnership Disclosure Letter (the "Partnership
Properties"), which are all of the real estate properties owned by it, free and
clear of liens, mortgages or deeds of trust, claims against title, charges
which are liens or security interests ("Encumbrances"), except as set forth in
the Partnership Disclosure Letter. To the General Partner's actual knowledge,
the Partnership Properties are not subject to any rights of way, written
agreements, laws, ordinances and regulations affecting building use or
occupancy, or reservations of an interest in title (collectively, "Property
Restrictions"), except for (i) Encumbrances and Property Restrictions set forth
in the Partnership Disclosure Letter, (ii) Property Restrictions imposed or
promulgated by law or any governmental body or authority with respect to real
property, including zoning regulations that do not materially adversely affect
the current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case copies
of which title reports and surveys have been or will be delivered or made
available to the REIT prior to the Closing) and/or (iv) mechanics', carriers',
workmen's, repairmen's liens and other Encumbrances, Property Restrictions and
other limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the Partnership Disclosure Letter) or which individually or
in the aggregate do not exceed $10,000, do not materially detract from the
value of or materially interfere with the present use of any of the Partnership
Properties subject thereto or affected thereby, and do not otherwise materially
impair business operations conducted by the Partnership and which have arisen
or been incurred only in its construction activities or in the ordinary course
of business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only to
the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force and
effect and no claim has been made against any such policy. To the General
Partner's actual knowledge, except as set forth in the Partnership
B-8
<PAGE>
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on any of
the Partnership Properties or which is necessary to permit the lawful use and
operation of all driveways, roads and other means of egress and ingress to and
from any of the Partnership Properties that has not been obtained and is not in
full force and effect, or any pending threat of modification or cancellation of
any of same; (ii) the Partnership has not received written notice of any
material violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any portion of any of the Partnership
Properties issued by any governmental authority; (iii) there are no structural
defects relating to the Partnership Properties and no Partnership Properties
whose building systems are not in working order in any material respect; and
(iv) there is (A) no physical damage to any Partnership Property in excess of
$10,000 for which there is no insurance in effect covering the cost of the
restoration, (B) no current renovation to any Partnership Property the cost of
which exceeds $10,000 and (C) no current restoration (excluding tenant
improvements) of any Partnership Property, the cost of which exceeds $10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be performed,
payments to be made and actions to be taken by the Partnership pursuant to any
agreement entered into with a governmental body or authority in connection with
a site approval, zoning reclassification or other similar action relating to
the Partnership Properties (e.g., Local Improvement District, Road Improvement
District, Environmental Mitigation) has been performed, paid or taken, as the
case may be, and the General Partner is not aware of any planned or proposed
work, payments or actions that may be required pursuant to such agreements,
except as set forth in the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership
and joint venture in which the Partnership is an owner, together with the
ownership interest of the Partnership and the jurisdiction in which such
subsidiary or joint venture is incorporated or otherwise organized is
identified in the Partnership Disclosure Letter. Other than its investments in
its subsidiaries and joint ventures, the Partnership does not own, directly or
indirectly, any outstanding capital stock or equity interest in any
corporation, partnership, joint venture or other entity. For purposes of this
Agreement, (a) "subsidiary" means, with respect to any entity, any corporation
of which securities or other ownership interests have an ordinary voting power
to elect a majority of the board of directors of other persons performing
similar functions are directly or indirectly owned by such entity and (b)
"joint venture" means, with respect to any entity, any corporation or
organization (other than such entity and any subsidiary thereof) of which such
entity or any subsidiary thereof is, directly or indirectly, the beneficial
owner of 40% or more of any class of equity securities or equivalent profit
participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair
B-9
<PAGE>
labor practice or labor arbitration proceeding pending or, to the actual
knowledge of the General Partner, threatened against the Partnership relating
to its business, except for any such proceeding which would not have a
Partnership Material Adverse Effect. To the actual knowledge of the General
Partner, there are no organizational efforts with respect to the formation of a
collective bargaining unit presently being made or threatened involving
employees of the Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
B-10
<PAGE>
SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE REIT
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under the
laws of the State of Maryland. To the REIT's actual knowledge, the REIT is duly
licensed or qualified to do business and is in good standing under the laws of
any other state of the United States in which the character of the properties
owned or leased by it therein or in which the transaction of its business makes
such qualification necessary, except where the failure to be so qualified would
not have a material adverse effect on the business, results of operations or
financial condition of the REIT and its subsidiaries taken as a whole (a "REIT
Material Adverse Effect"). The REIT has all requisite power and authority to
own, operate, lease and encumber its properties and carry on its business as
now conducted. Each of the REIT's Subsidiaries is a corporation or partnership
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has the requisite power and
authority to own its properties and to carry on its business as it is now being
conducted, and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not have a REIT
Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental authority or
arbitration board or tribunal, or any law, ordinance, governmental rule or
regulation to which the REIT or any REIT Subsidiary or any of their respective
properties or assets are subject, where such violation would have a REIT
Material Adverse Effect. The REIT and its Subsidiaries have obtained all
licenses, permits and other authorizations and have taken all actions required
by applicable law or governmental regulations in connection with their business
as now conducted, where the failure to obtain any such item or to take any such
action would have a REIT Material Adverse Effect. Copies of the REIT's and its
Subsidiaries' Articles of Incorporation, Bylaws, organizational documents and
partnership and joint venture agreements have been or will be prior to the
Closing, delivered or made available to the Partnership and such documents will
be listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT Disclosure
Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and
B-11
<PAGE>
10,001,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). As of March 31, 1999, 2,384,117 REIT Common Shares were outstanding
and no shares of Preferred Stock were outstanding. The REIT has no outstanding
bonds, debentures, notes or other obligations, the holders of which have the
right to vote (or which are convertible into or exercisable for securities
having the right to vote) with the stockholders of the REIT on any matter. All
such issued and outstanding REIT Shares are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. Except as set forth in
the REIT Disclosure Letter, there are not any existing options, warrants,
calls, subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the REIT or any of its Subsidiaries to issue,
transfer or sell any shares or other equity interest of the REIT or any of its
Subsidiaries, except under any employee incentive plan approved by the REIT's
stockholders. There are no agreements or understandings to which the REIT is a
party with respect to the voting of any REIT Shares or which restrict the
transfer of any such shares, except in order to protect its REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the Partnership
prior to the Closing, the registration statements of the REIT filed with the
SEC in connection with public offerings of REIT securities since its inception
and all exhibits, amendments and supplements thereto (the "REIT Registration
Statements"), and each report, proxy statement or information statement and all
exhibits thereto prepared by it or relating to its properties since the
effective date of the latest REIT Registration Statement, each in the form
(including exhibits and any amendments thereto) filed with the SEC
(collectively, the "REIT Reports"). The REIT Reports, which were or will be
filed with the SEC in a timely manner, constitute all forms, reports and
documents required to be filed by the REIT under the Securities Laws.
B-12
<PAGE>
(b) To the REIT's actual knowledge, as of their respective dates, the REIT
Reports (i) complied as to form in all material respects with the applicable
requirements of the Securities Laws and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in the light
of the circumstances under which they were made, not misleading. To the REIT's
actual acknowledge, each of the consolidated balance sheets of the REIT
included in or incorporated by reference into the REIT Reports (including the
related notes and schedules) fairly presents the consolidated financial
position of the REIT and the REIT Subsidiaries as of its date and each of the
consolidated statements of income, retained earnings and cash flows of the REIT
included in or incorporated by reference into the REIT Reports (including any
related notes and schedules) fairly presents the results of operations,
retained earnings or cash flows, as the case may be, of the REIT and the REIT
Subsidiaries for the periods set forth therein (subject, in the case of unaided
statements, to normal year-end audit adjustments which would not be material in
amount or effect), in each case in accordance with generally accepted
accounting principles consistently applied during the periods involved, except
as may be noted therein and except, in the case of the unaided statements, as
permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance sheet
of the REIT and its Subsidiaries at March 31, 1999, including all notes
thereto, or as set forth in the REIT Reports, neither the REIT nor any of the
REIT Subsidiaries has any material liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that would be required to
be reflected on, or reserved against in, a balance sheet of the REIT or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a REIT Material Adverse
Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each of
its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports required
to be filed by any of them for tax periods ended prior to the date of this
Agreement or requests for extensions have been timely filed and any such
request has been granted and has not expired and all such returns are absolute
and complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other notice
received by it and (iii) has properly accrued all taxes for such periods
subsequent to the periods covered by such returns. Neither the REIT nor any of
its Subsidiaries has received notice that the federal, state and local income
and franchise tax returns of the REIT or any such Subsidiary has been or will
be
B-13
<PAGE>
examined by any taxing authority. Neither the REIT nor any of its Subsidiaries
has executed or filed with the IRS or any other taxing authority any agreement
now in effect extending the period for assessment or collection of any income
or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT nor
any of its Subsidiaries is a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim for
assessment or collection of taxes has been asserted against it. True, correct
and complete copies of all federal, state and local income or franchise tax
returns filed by the REIT and each of its Subsidiaries and all communications
relating thereto have been delivered to the Partnership or made available to
representatives of the Partnership or will be so delivered or made available
prior to the Closing. The REIT (i) has qualified to be taxed as a REIT pursuant
to Sections 856 through 859 of the Code for its taxable years ended December
31, 1995 through 1998, inclusive; (ii) has operated, and intends to continue to
operate, in such a manner as to qualify to be taxed as a REIT pursuant to
Sections 856 through 859 of the Code for its taxable year ended on the
effective date of the Merger; and (iii) has not taken or omitted to take any
action which could result in, and each of the executive officers of the REIT,
each acting in his respective capacity as such, has no actual knowledge of, a
challenge to its status as a REIT. The REIT represents that each of its
Subsidiaries is a Qualified REIT Subsidiary as defined in Section 856(i) of the
Code. Neither the REIT nor any of its Subsidiaries holds any asset (x) the
disposition of which could be subject to rules similar to Section 1374 of the
Code as a result of an election under IRS Notice 88-19 or (y) that is subject
to a consent filed pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 5.10, "taxes" includes any interest,
penalty or additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have been
maintained in accordance with good business practices, and are accurately
reflected in all material respects in the financial statements included in the
REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of the
shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which the
REIT or any of its Subsidiaries is a party owns, fee simple title to each of
the real properties reflected on the most recent balance sheet of the REIT
included in the REIT Reports or as identified in the REIT Disclosure Letter
(the "REIT Properties"), which are all of the real estate properties owned by
them, free and clear of Encumbrances, except as set forth in the REIT
Disclosures Letter. To the REIT's actual knowledge, the REIT Properties are not
subject to any Property Restrictions, except for (i) Encumbrances and Property
Restrictions set forth in the REIT Disclosure Letter, (ii) Property
Restrictions imposed or promulgated by law or any governmental body or
authority with respect to real property, including zoning regulations that do
not materially adversely affect the current use of the property, (iii)
Encumbrances and Property Restrictions disclosed on existing title reports or
surveys (in either case copies of which title reports and surveys have been or
will be delivered or made available to the Partnership prior to the Closing and
(iv) mechanics', carriers', workmen's, repairmen's liens and other
Encumbrances, Property Restrictions and other limitations of any kind, if any,
which have heretofore been bonded (and that are listed in the REIT Disclosure
Letter) or which individually or in the aggregate, do not exceed $100,000, do
not materially detract from the value of or materially interfere with the
present use of any of the REIT Properties subject thereto or affected thereby,
and do not otherwise materially impair business operations conducted by the
REIT and its Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the REIT's
or any of its Subsidiaries' fee simple title to the REIT Properties, subject
only to the matters disclosed above and as may be set forth in the
B-14
<PAGE>
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such policy.
To the REIT's actual knowledge, except as will be set forth in the REIT
Disclosure Letter, (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the REIT Properties or
any agreement, easement or other right which is necessary to permit the lawful
use and operation of the buildings and improvements on any of the REIT
Properties or which is necessary to permit the lawful use and operation of all
driveways, roads and other means of egress and ingress to and from any of the
REIT Properties that has not been obtained and is not in full force and effect,
or any pending threat of modification or cancellation of any of same; (ii)
neither the REIT nor its Subsidiaries has received written notice of any
material violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any portion of any of the REIT Properties
issued by any governmental authority; (iii) there are no structural defects
relating to the REIT Properties and no REIT Properties whose building systems
are not in working order in any material respect; and (iv) there is (A) no
physical damage to any the REIT Property in excess of $100,000 for which there
is no insurance in effect covering the cost of the restoration, (B) no current
renovation to any the REIT Property the cost of which exceeds $100,000 and (C)
no current restoration (excluding tenant improvements) of any the REIT Property
the cost of which exceeds $100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT nor
its Subsidiaries have received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the REIT Properties or (ii) any zoning, building or similar
laws, codes, ordinances, orders or regulations that are or will be violated by
the continued maintenance, operation or use of any buildings or other
improvements on any of the REIT Properties or by the continued maintenance,
operation or use of the parking areas in any material respect. All work to be
performed, payments to be made and actions to be taken by the REIT or its
Subsidiaries prior to the date hereof pursuant to any agreement entered into
with a governmental body or authority in connection with a site approval,
zoning reclassification or other similar action relating to the REIT Properties
(e.g., Local Improvement District, Road Improvement District, Environmental
Mitigation) has been performed, paid or taken, as the case may be, and the REIT
is not aware of any planned or proposed work, payments or actions that may be
required after the date hereof pursuant to such agreements, except as set forth
in the REIT Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to
B-15
<PAGE>
this Agreement or the consummation of the transactions contemplated hereby. The
REIT is not aware of any claim for payment of any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights
B-16
<PAGE>
thereunder are in full force and effect. All joint venture agreements to which
the REIT or any of its Subsidiaries is a party are set forth in the REIT
Disclosure Letter and the REIT or its Subsidiaries are not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
COVENANTS
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action
B-17
<PAGE>
is required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such party
determined in good faith was required to be executed in order for the General
Partner or the Board, as applicable, to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement informed of the
status (but not the terms) of any such discussions or negotiations; and (ii) to
the extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as contemplated
by this Agreement, unless the other party has consented in writing thereto, the
REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to preserve intact
their business organizations and goodwill and keep available the services
of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more representatives of
the other to report operational matters of materiality and, subject to
Section 6.1, any proposals to engage in material transactions;
(iii) Shall promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the business,
properties, assets or liabilities, or any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated), or the breach in any material respect of any
representation, warranty, covenant or agreement contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as the
case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds resulting
from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, issue any Units or
other interests in the Partnership, make any distribution, effect any
recapitalization or other similar transaction, (B) grant, confer or award
any option, warrant, conversion right or other right not existing on
B-18
<PAGE>
the date hereof to acquire any Partnership Units, (C) increase any
compensation or enter into or amend any employment agreement with the
General Partner or any of the present or future affiliates of the General
Partner, or (D) adopt any new employee benefit plan or amend any existing
employee benefit plan in any material respect, except for changes which are
less favorable to participants in such plans;
(iv) Shall not declare, set aside or make any distribution or payment
with respect to any Units or other interests in the Partnership or directly
or indirectly redeem, purchase or otherwise acquire any Units or other
interests in the Partnership, or make any commitment for any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of its
other assets which are material, individually or in the aggregate;
(vi) Shall not make any loans, advances or capital contributions to, or
investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent Partnership Financial Statements (or the
notes thereto) or incurred in the ordinary course of business consistent
with past practice;
(viii) Shall not enter into any commitment which individually may result
in total payments or liability by or to it in excess of $10,000 (or 5% of
its Net Asset Value, if less) in the case of any one commitment or in
excess of $20,000 (or 10% of its Net Asset Value, if less) for all
commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the
Partnership or its general partner(s) except to the extent the same occur
in the ordinary course of business consistent with past practice and would
not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except as
contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of its capital
stock, share dividend, recapitalization or other similar transaction, ( B)
grant, confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital stock
(except pursuant to any employee incentive plan approved by shareholders),
(C) amend any employment agreement with any of its present or future
officers or the Board or (D) adopt any new employee benefit plan (including
any share option, share benefit or share purchase plan), except the
employee incentive plan to be voted on at its stockholder meeting for the
fiscal year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make any
other distribution or payment with respect to any REIT Shares or directly
or indirectly redeem, purchase or otherwise acquire any capital stock of
any of its Subsidiaries, or make any commitment for any such action;
B-19
<PAGE>
(v) Except as set forth in the REIT Disclosure Letter, shall not, and
shall not permit any of its subsidiaries to, sell or otherwise dispose of
(A) any REIT Properties or any of its capital stock of or other interests
in subsidiaries or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to (except
in the ordinary course of business), make any loans, advances or capital
contributions to, or investments in, any other person other than in
connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the most
recent consolidated financial statements (or the notes thereto) of the REIT
included in the REIT Reports or incurred in the ordinary course of business
consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment which individually may result in total payments or
liability by or to it in excess of $50,000 in the case of any one
commitment or in excess of $250,000 for all commitments, except for those
commitments in connection with the acquisition and/or development of
property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the REIT or
any of its subsidiaries, except as herein or in the REIT Disclosure Letter
provided and except in the ordinary course of business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any
consents required from third parties in form reasonably satisfactory to the
Partnership and the REIT necessary to effectuate the Merger; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further
B-20
<PAGE>
action is necessary or desirable to carry out the purpose of this Agreement,
the proper officers and directors of the REIT and the General Partner shall
take all such necessary action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships and 50% of the costs of the appraisals of
the
B-21
<PAGE>
partnership properties and the costs of partner communications (and any other
costs incurred for the benefit of such partnerships or their partners) (the
"Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
B-22
<PAGE>
SECTION 7
CONDITIONS
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have been
approved in the manner required by the charter and bylaws and Agreement of
Limited Partnership of the REIT and the Partnership, respectively, and by the
holders of the REIT Shares and Partnership interests and no stockholder or
partner shall have appraisal or dissenter's rights as a result of the Merger
under applicable law or the charter, bylaws or Agreement of Limited
Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the event
any such order or injunction shall have been issued, each party agrees to use
its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory body
or third parties required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to be
filed after the Effective Time and except where the failure to have obtained or
made any such consent, authorization, order, approval, filing or registration
would not have a material adverse effect on the business, results of operations
or financial condition of the REIT and the Partnership (and their respective
subsidiaries), taken as a whole, following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Effective Time and the
representations and warranties of the REIT contained in this Agreement shall be
true and correct in all material respects as of the Closing Date as if made on
the Closing Date, and the Partnership shall have received a certificate of the
President or an Executive or Senior Vice President of the REIT, dated the
Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to the
REIT, as approved by the Partnership, dated the Closing Date, to the effect
that the REIT met the requirements for qualification and taxation as a REIT for
its taxable years 1995 through 1998; the REIT's diversity of equity ownership,
operations through the Closing Date and proposed method of operation as
described in the Proxy Statement should allow it to qualify as a REIT for its
taxable year ending December 31, 1999; and the discussion contained under the
caption "Material Federal Income Tax Aspects" in the Proxy Statement accurately
reflects existing law and fairly addresses the material federal income tax
issues described therein. In rendering its opinion, said counsel shall be
entitled to rely as to any factual matter upon certificates given by executive
officers and other duly authorized representatives of the Partnership and the
REIT and shall be entitled to assume that the covenants set forth in Section 6
shall be fully complied with.
(c) From the date of the Agreement through the Effective Time, there shall
not have occurred any change in the financial condition, business or operations
of the REIT and its subsidiaries, taken as a whole, that would have or would be
reasonably likely to have a REIT Material Adverse Effect other than any such
change that affects both the Partnership and the REIT in a substantially
similar manner.
B-23
<PAGE>
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to the
REIT, as approved by the Partnership, dated the Closing Date, as to such
customary matters as the General Partner may reasonably request, such opinion
to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and the
representations and warranties of the Partnership contained in this Agreement
shall be true and correct in all material respects as of the Closing Date as if
made on the Closing Date, and the REIT shall have received a certificate of the
General Partner or the corporate general partner if applicable dated the
Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure to
continue to satisfy the requirements for qualification as a REIT for federal
income tax purposes. In rendering its opinion, said counsel shall be entitled
to rely as to any factual matter upon certificates given by executive officers
and other duly authorized representatives of the REIT and the Partnership and
shall be entitled to assume that the covenants of Section 6 shall be fully
complied with.
(c) From the date of this Agreement through the Effective Time, there shall
not have occurred any change in the financial condition, business or operations
of the Partnership and its subsidiaries, taken as a whole, that would have or
would be reasonably likely to have a Partnership Material Adverse Effect, other
than any such change that affects both the Partnership and the REIT in a
substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of the
REIT, that the consideration to be paid by the REIT pursuant to the Merger is
fair, from a financial point of view, to the REIT and its stockholders shall
not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or the independent directors of the
Board only for good reason. Only the following shall constitute termination for
"good reason" for the purposes of this Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have been
consummated by March 31, 2000;
B-24
<PAGE>
(b) By the REIT if the approval of the Limited Partners of the Partnership
shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT shall
not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by the
other of any representation or warranty contained in the this Agreement which
would have or would be reasonably likely to have a REIT Material Adverse Effect
or a Partnership Material Adverse Effect, as the case may be, which breach is
not cured within 30 days after written notice of such breach is given to the
breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger Agreement
by the other, which breach is not curable or, if curable, is not cured within
30 days after written notice of such breach is given to the breaching party by
the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as to
its fiduciary duties as imposed by law, and as advised by counsel, the General
Partner determines that such termination is required by reason of an
Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the independent
directors of the Board determine that such termination is required by reason of
a Acquisition Proposal relating to the REIT being made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by this Agreement and such order, decree, ruling or other action shall have
become final and non-appealable, provided that the party seeking to terminate
this Agreement shall have used all reasonable efforts to remove such order,
decree, ruling or injunction; provided, however, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the Partnership
(i) other than for good reason or (ii) for good reason pursuant to Section
8.2(f) hereof, and a Partnership Acquisition Proposal shall have been made and,
within one year from the date of such termination, the Partnership consummates
a Partnership Acquisition Proposal or enters into an agreement to consummate a
Partnership Acquisition Proposal to be subsequently consummated, the
Partnership shall pay as liquidated damages (not as a penalty or forfeiture) to
the REIT, provided that the REIT was not in material breach of its obligations
at the time of such termination, an amount equal to the lesser of (x) the
Partnership's Proportionate Share of $500,000 (a "REIT Liquidated Damages
Amount") and (y) the sum of (1) the maximum amount that can be paid to the REIT
without causing the REIT to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I)
of the Code ("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount less
the amount payable under clause (1) above in the event the REIT receives a
letter from its counsel indicating that it has received a ruling from the IRS
to the effect that the REIT Liquidated Damages Amount payment constitutes
Qualifying Income. In addition to the REIT Liquidated Damages Amount, the REIT
shall be entitled to receive from the Partnership (or its successor in
interest) all documented out-of-pocket costs and expenses incurred by it, up to
a maximum of the Partnership's Proportionate Share of the REIT Expenses. The
payments to which the REIT is entitled as
B-25
<PAGE>
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT because
of a Partnership Material Adverse Effect under Section 8.2(d), the Partnership
shall, provided that the REIT was not in material breach of its obligations at
the time of such termination, pay the REIT for the REIT Expenses, up to a
maximum of the Partnership's Proportionate Share thereof (although it shall not
be required to pay the REIT Liquidated Damages Amount), which payment of the
REIT Expenses shall be the REIT's sole remedy for termination of this Agreement
in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i) other
than for good reason or (ii) for good reason pursuant to Section 8.2(g) and,
within one year from the date of such termination, the REIT consummates a REIT
Acquisition Proposal or enters into an agreement to consummate a REIT
Acquisition Proposal to be subsequently consummated; the REIT shall pay
liquidated damages (not as a penalty or forfeiture) to the Partnership,
provided that the Partnership was not in material breach of its obligations at
the time of such termination. Such liquidated damages shall be in an amount
equal to 120% of the Partnership's Proportionate Share of the Partnership
Merger Expenses (the "Partnership Liquidated Damages Amount"). The payments to
which the Partnership is entitled as described above shall be its sole remedy
with respect to the termination of this Agreement under the circumstances
contemplated above.
(d) If an election to terminate this Agreement is made by the Partnership
pursuant to Section 8.2(d) because of REIT Material Adverse Effect, the REIT
shall, provided that the Partnership was not in material breach of its
obligations at the time of such termination, pay the Partnership for the
Partnership's Proportionate Share of the Partnership Merger Expenses (although
it shall not be required to pay the Partnership Liquidated Damages Amount),
which payment shall be the Partnership's sole remedy for termination of this
Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating party
was not in material breach of its obligations at the time of such termination,
pay the terminating party (i) in the case of termination by the Partnership the
Partnership Liquidated Damages Amount, and in the case of termination by the
REIT, the REIT Liquidated Damages Amount, plus (ii) an amount equal to the
terminating parties' Proportionate Share of the Merger Expenses and (iii) the
non-terminating party shall remain liable to the terminating party for its
breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a result
of the condition set forth in Section 7.2(c) or Section 8.2(h) not being
satisfied), the REIT shall, provided that the Partnership was not in material
breach of its obligations hereunder at the time of such termination, pay the
Partnership an amount equal to the Partnership's Proportionate Share of the
Partnership Merger Expenses, which payment shall be the Partnership's sole
remedy for termination of the Agreement in such circumstances.
(g) If an election to terminate this Agreement is made pursuant to Section
8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a REIT
Acquisition Proposal shall have been made and, within one year from the date of
such termination, the terminating party consummates such Acquisition Proposal
or enters into an agreement to consummate such Acquisition Proposal which is
subsequently consummated, the terminating party shall pay to the non-
terminating party, provided that the non-terminating party was not in material
breach of its obligations hereunder at the time of such termination, as
liquidated damages and not as a penalty or forfeiture, an amount equal to (x)
in the case of termination by the Partnership, the Partnership Liquidated
Damages Amount, and in the case of termination by the REIT, the REIT Liquidated
Damages Amount, plus (y) its Proportionate Share of the Merger Expenses. In
addition to such amount, the non-terminating party shall be entitled to receive
from the terminating party (or its successor in interest) all of its documented
out-of-pocket costs and expenses in connection with this Agreement and the
transactions contemplated thereby. The payments to which the non-terminating
party is entitled under this Section 8.3(g) shall be its sole remedy with
respect to the termination of the Agreement under the circumstances
contemplated in this Section 8.3(g).
B-26
<PAGE>
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without causing
the REIT to fail to meet the requirements of Sections 856(c)(2) and (3) of the
Code or (ii) improve the REIT's chances of securing a favorable ruling
described in this Section 8.3, provided that no such amendment may result in
any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of the
Merger pursuant to this Section 8, all obligations of the parties hereto shall
terminate, except the obligations of the parties pursuant to this Section 8.3
and Section 6.9 and except for the provisions of Sections 9.3, 9.4, 9.5, 9.6,
9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT or the Partnership has
received a Liquidated Damages Amount as provided in this Section 8.3, such
recipient shall not assert or pursue in any manner, directly or indirectly, any
claim or cause of action against the other party hereto or any of its officers,
independent directors of the Board, or General Partner, as applicable, based in
whole or part upon its or their receipt, consideration, recommendation or
approval of an Acquisition Proposal or the exercise by the REIT of its right to
termination under Section 8.2(g) or the exercise by the Partnership of its
right to termination under Section 8.2(f). Notwithstanding the foregoing, in
the event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it shall
be entitled to all expenses, including attorney's fees and expenses, which it
has incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and obligations
under this Agreement, the non-breaching party is additionally entitled to all
remedies available to it at law or in equity and to recover its expenses from
the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
GENERAL PROVISIONS
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
B-27
<PAGE>
If to the Partnership:
Taylor Income Investors IV, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to either
party hereto (the "Providing Party"), all information (written or oral)
furnished (whether before or after the date hereof) by the Providing Party and
its directors, partners, officers, employees, affiliates or representatives of
advisors, including counsel, lenders and financial advisors (collectively, the
"Providing Party Representatives") to the other party hereto (the "Receiving
Party") or such Receiving Party's directors, partners, officers, employees,
affiliates or representatives of advisors, including counsel, lenders and
financial advisors or the Receiving Party's potential sources of financing for
the transactions contemplated by this Agreement (collectively "the Receiving
Party Representatives") and all analyses, compilations, forecasts and other
studies or other documents prepared by the Providing Party or the Providing
Party Representatives in connection with its or their review of the
transactions contemplated by this Agreement which contain or reflect such
information. The term "Confidential Material" does not include, however,
information which (i) at the time of disclosure or thereafter is generally
available to and known by the public other than as a result of a disclosure
directly or indirectly by the Receiving Party or the Receiving Party
Representatives in violation of this Agreement, (ii) at the time of disclosure
was available on a nonconfidential basis from a source other than the Providing
Party or the Providing Party Representatives, providing that such source is not
and was not bound by a confidentiality agreement with the Providing Party,
(iii) was known by the Receiving Party prior to receiving the Confidential
Material from the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its obligations under
this Agreement or (iv) is contained in the REIT Reports or Registration
Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the prior
written consent of the Providing Party, be disclosed by the Receiving Party or
the Receiving Party Representatives, in whole or in part, and will not be used
by the Receiving Party or the Receiving Party Representatives, directly or
indirectly, for any purpose other than in
B-28
<PAGE>
connection with this Agreement, the Merger or the evaluating, negotiating or
advising with respect to a transaction contemplated herein. Moreover, each
Receiving Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential nature
of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving Party
Representatives supply the Confidential Material, are requested or required (by
oral questions, interrogatories, requests for information or documents,
subpoena, civil investigative demand, any informal or formal investigation by
any government or governmental agency or authority or otherwise in connection
with legal processes) to disclose any Confidential Material, such Receiving
Party agrees (i) to immediately notify the Providing Party of the existence,
terms and circumstances surrounding such a request, (ii) to consult with the
Providing Party on the advisability of taking legally available steps to resist
or narrow such request and (iii) if disclosure of such information is required,
to furnish only that portion of the Confidential Material which, in the opinion
of such Receiving Party's counsel, such Receiving Party is legally compelled to
disclose and to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that confidential
treatment will be accorded the Confidential Material (it being agreed that the
Providing Party shall reimburse the Receiving Party for all reasonable out-of-
pocket expenses incurred by the Receiving Party in connection with such
cooperation).
(d) In the event of the termination of this Agreement in accordance with its
terms, promptly upon request from the Providing Party, the Receiving Party
shall, except to the extent prevented by law, redeliver to the Providing Party
or destroy all tangible Confidential Material and will not retain any copies,
extracts or other reproductions thereof in whole or in part. Any such
destruction shall be certified in writing to the Providing Party by an
authorized officer of the Receiving Party supervising the same. Notwithstanding
the foregoing, each Receiving Party and one Receiving Party Representative
designated by each Receiving Party shall be permitted to retain one permanent
file copy of each document constituting Confidential Material.
(e) Each party hereto further agrees that if this Agreement is terminated in
accordance with its terms, until one year from the date of termination, (i) it
will not offer to hire or hire any person currently or formerly employed by the
other party with whom such party has had contact prior hereto other than
persons whose employment shall have been terminated by such other party prior
to the date of such offer to hire or hiring and (ii) neither it nor its
affiliates shall directly or indirectly, (A)(w) solicit, seek or offer to
effect or effect, (x) negotiate with or provide any information to the Board or
General Partner(s), as applicable, of the other party, or officer of the other
party or any stockholder or partner, as applicable, of the other party with
respect to, (y) make any statement or proposal, whether written or oral, either
alone or in concert with others, to the Board or board of directors of the
General Partner(s) of the other party, any director, officer of the other party
or any stockholder or partner of the other party or any other person with
respect to, or (z) make any public announcement (except as required by law in
respect of actions permitted hereby) or proposal or offer whatsoever
(including, without limitation, any solicitation of consents as such terms are
defined or used in Regulation 14A of the Exchange Act) with respect to, (1) any
form of business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3) any
purchase of any securities or assets, or rights or options to acquire any
securities or assets (through purchase, exchange, conversion or otherwise), of
the other party or any affiliate thereof, (4) any proposal to seek
representation on the Board or the board of directors of the General
Partner(s), as applicable, or otherwise to seek to control or influence the
management, Board or the board of directors of the General Partner(s), as
applicable, or policies of the other party or any affiliate thereof, (5) any
request or proposal to waive, terminate or amend the provisions of this Section
9.5, or (6) any proposal or other statement inconsistent with the terms of this
Section 9.5 or (B) instigate, encourage, join, act in concert with or assist
(including, without limitation, providing or assisting in any way in the
obtaining of financing for, or acting as a joint or co-bidder for the
B-29
<PAGE>
other party with) any third party to do any of the foregoing, unless and until
such party has received the prior written invitation or approval of a majority
of the Board or the General Partner(s), as applicable, to do any of the
foregoing; provided that, without such invitation or approval, either party may
at any time, on a confidential non-public basis, submit to the Chief Executive
Officer of the REIT or the General Partner(s), as applicable, a proposal to (a)
amend any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party providing
for the acquisition of all or substantially all of the assets or the securities
of the other party, including, without limitation, a merger, tender offer or
exchange offer. Each party hereto agrees that it will not agree with any third
party to waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be
B-30
<PAGE>
materially and adversely affected thereby, such provision shall be fully
separable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
and the remaining provisions of this Agreement shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance therefrom. In lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a part of this
Agreement, a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible, and the parties
hereto request the court or any arbitrator to whom disputes relating to this
Agreement are submitted to reform the otherwise illegal, invalid or
unenforceable provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
----------------------------------------
H. Kerr Taylor, President and Chief
Executive Officer
Taylor Income Investors IV, Ltd.
By:Taylor Investors IV, Inc.
Its General Partner
By:
--------------------------------
H. Kerr Taylor, President
By:
------------------------------------
H. Kerr Taylor,
Its General Partner
B-31
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
Taylor Income Investors V, Ltd.
If you are a limited partner of Taylor Income Investors V, Ltd. your vote is
very important.
AmREIT is seeking to merge with 10 partnerships, including Taylor Income
Investors V, Ltd. AmREIT is a Maryland corporation that has elected to be taxed
as a real estate investment trust under the Internal Revenue Code . Like Taylor
Income Investors V, Ltd., the primary business of AmREIT is the ownership of
properties leased to national and regional tenants. AmREIT's independent
directors and the general partners of Taylor Income Investors V, Ltd. seek your
approval of the merger. In the merger, AmREIT will issue shares of common stock
or, under specified situations more fully described in the accompanying proxy
statement, cash and % callable notes to the limited partners of the 10
partnerships. At the completion of the merger, the existing limited partners of
partnerships approving the merger will become stockholders (or noteholders as
the case may be) of AmREIT and will no longer be limited partners in their
respective partnerships. As a condition precedent to the merger the AmREIT
shares will be listed for trading on the Nasdaq Stock Market's National Market.
The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS V, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of Taylor
Income Investors V, Ltd., for the purpose of enabling you to evaluate the
proposed merger of your partnership with AmREIT, Inc. This supplement is
designed to summarize only the risks, effects, fairness and other
considerations of the proposed merger that are unique to you and the other
limited partners of your partnership. This supplement does not purport to
provide an overall summary of the proposed merger and should be read in
conjunction with the accompanying Joint Proxy and Consent Solicitation
Statement/Prospectus, which includes detailed discussions regarding AmREIT and
the other partnerships being merged with AmREIT. Accordingly, the discussions
in this supplement are qualified by the more expanded treatment of these
matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 48,552 shares of AmREIT common stock, which we
estimate amounts to $985 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
--------------------- --------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fund V............................... $453,473 $408,126 $426,000 $380,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $332 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $212 per average original $1,000
investment of this gain at long term capital gains rates, which will be 20%.
The remaining $120 of gain per average original $1,000 investment will be
taxable at the 25% rate.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $83.00 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Expiration of Leases. The leases on your partnership's properties all
expire within the next five years. Also, there is a significant chance
that Whataburger, your partnership's largest tenant, will not renew its
lease when it expires in January 2000 or will renew its lease only if
your partnership makes significant improvements to the property. Also,
should any of these tenants fail to renew their leases, your partnership
would need to find a new tenant and incur significant additional costs by
reason of temporary vacancy and/or significant rehabilitation and/or
tenant improvement costs.
. Concentration of Investment. Your partnership has concentrated its
investments in three properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns all of its properties,
Pizza Inn (Cl.ute, TX), Whataburger (Clute, TX) and La Petite Academy
(Houston, TX), , in co-ownership with other funds. Your partnership owns
50%, 50% and 6.02%, respectively, of these properties and is dependent
upon the consent and cooperation of the majority co-owner to sell or re-
lease the property. No assurance can be given that the co-owner will
agree to the merger or to the sale or re-lease of the property at such
time or under the terms your partnership may desire. We are soliciting
the other co-owners' approval to merge with AmREIT. If your partnership
approves the merger the other co-owners reject the merger, the AmREIT
board must approve owning this property jointly with the other co-owners.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$460,389 $959 48,552 $453,473 $985
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $480,000.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $3,417 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................. $ --
Accounting............................................................ 73
Fairness Opinions/Valuations.......................................... 2,868
Printing.............................................................. --
Appraisal Fees........................................................ 444
Listing Fees.......................................................... --
Miscellaneous......................................................... 32
------
Total............................................................... $3,417
======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31, Six Months Ended
1996 1997 1998 June 30, 1999
---------------- ---------------- ---------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $2,880 $ -- $2,880 $ -- $2,667 $ -- $1,254 $ --
Cash Distributions(2)... 600 -- 600 -- 1,854 -- 1,526 --
General Partners'
Salary(3).............. -- 211 -- 211 -- 211 -- 127
General Partners'
Distributions(4)....... -- 4,013 -- 4,069 -- 4,126 -- 2,035
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $332 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $212 per average original $1,000 investment of
S-11
<PAGE>
this gain at long term capital gains rates, which will be 20%. The remaining
$120 of gain per average original $1,000 investment will be taxable at the 25%
rate. The actual amount of gain recognized by the partnership and allocated to
each limited partner will depend upon the value ascribed to the shares of
AmREIT common stock for federal income tax purposes. Because the shares will
not be publicly traded until immediately after the merger, it is possible that
the value of the shares used for purposes of calculating the taxable income (or
loss) and the taxable income (or loss) per average original $1,000 investment
will differ from the calculation stated above. Your partnership's federal
income tax returns are subject to review and possible adjustment by the IRS.
Under federal income tax laws, regulations and administrative rulings, certain
types of transactions may be accorded varying interpretations. Accordingly,
your partnership's financial statements, as well as your individual tax return,
may be changed to cause them to conform to the tax treatment resulting from
such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $82.50 $83.00 $83.00 $83.00 $83.00 $62.25
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors V, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and Taylor
Income Investors V, Ltd. (the "Partnership"). AmREIT is a real estate
investment trust that was organized as a Maryland corporation in 1993. AmREIT
became internally managed upon its acquisition of its external advisor in June
1998 (the "Adviser Acquisition"), as a result, AmREIT is a self-managed and
self-administered REIT. AmREIT acquires, develops, owns and manages a
diversified portfolio of freestanding and specialty retail properties leased to
national and regional retail tenants.
Mr. Kerr Taylor serves as the President of Taylor Income Investors V, Inc.,
which is the corporate general partner of the Partnership (the "General
Partner"). The Partnership owns interests in three retail properties. Following
the Adviser Acquisition, Mr. Taylor and his affiliated corporation retained
their fiduciary responsibilities associated with such General Partner of the
Partnership. However, the Partnership's properties are currently managed by
AmREIT Realty Investment Corporation, an affiliate of AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 48,514 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors V, Ltd.
June 25, 1999 -2-
4. reviewed copies of the 1986 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K
for the two fiscal years ended 1998 and quarterly reports on Form 10-Q for
the quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared
by Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of Taylor
Income Investors V, Ltd. in connection with the Transaction is fair to them
from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and Taylor Income Investors
V, Ltd., a Texas limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and Taylor Investors V,
Inc., a Texas corporation, the General Partners of the Partnership (referred to
herein as the "General Partner"), is a party to this Agreement solely for the
purpose of binding itself to the provisions of Section 5 and Section 7.9,
hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
CONSIDERATION FOR PARTNERSHIP ASSETS
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
PARTNERSHIP INTERESTS
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part
B-2
<PAGE>
of holder thereof, be converted into REIT Shares or Cash/Notes determined
in accordance with the Partnership's Net Asset Value or Liquidation Value,
respectively, as set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$ 443,000 $ 10,125 $ 453,125
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT Shares Offered No. of REIT Shares Offered per Unit
-------------------------- -----------------------------------
<S> <C> <C>
To Limited Partners:.... 48,514 3,032.15
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Legal/ Marketing/ Liquidation
Value Expenses Discount Commission Closing Contingency Value
----------- ----------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$436,487 $(2,158) $(21,824) $(13,095) $(10,912) $(8,730) $379,769
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Maximum
Maximum Principal Amount Principal
Aggregate Amount of Cash of Notes Amount of Note
Amount of Cash Offered per Unit Offered Offered Per Unit
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
To Limited Partners:.... $18,620 $2,375 $167,580 $21,375
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share dividend,
subdivision, reclassification, recapitalization, share split, reverse share
split, combination, exchange of shares or the like, the number of REIT
Shares to be issued in the Merger shall be appropriately adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be
B-3
<PAGE>
increased (if greater) or decreased (if less) and the Merger Consideration
issuable to the Partnership in the Merger shall be increased or decreased,
as the case may be, by an amount equal to such difference divided by the
Exchange Price;
(c) The Net Cash of the Partnership shall be reduced by the difference
between the Partnership's share of the unpaid balance of principal and
interest on the Atlas Note on May 31, 1999 and such balance as of the
Effective Time, and the number of REIT Shares issuable to the Partnership
in the Merger shall be reduced by the number of REIT Shares equal to the
amount of such difference divided by the Exchange Price. For the purposes
hereof, the Atlas Note shall refer to that certain note dated October 9,
1997 by Transmark, Inc. in favor of Taylor Income Investors IV and V Joint
Venture in the original principal amount of $215,000; and
(d) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $443,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as
of the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the
Partnership's liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the transfer records of the Partnership, payment may be made to a person
other than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes
B-4
<PAGE>
have been paid or are not applicable. Upon surrender as contemplated by
this Section 3.4, each Unit Certificate shall be deemed at anytime after
the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration, without interest, into which the Units
previously represented by such Unit Certificate shall have been converted
pursuant to Section 3.1 hereof, and any dividends or other distributions to
which such holder is entitled pursuant to the terms of the Agreement of
Limited Partnership. No interest will be paid or will accrue on the Merger
Consideration upon the surrender of any Unit Certificate or on any cash
payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
REPRESENTATIONS AND WARRANTIES
OF THE PARTNERSHIP
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all requisite
power and authority to own, operate, lease and encumber its properties and
carry on its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or
B-5
<PAGE>
regulation to which the Partnership or any of its properties or assets are
subject, where such violation would have a Partnership Material Adverse
Effect. The Partnership has obtained all licenses, permits and other
authorizations and has taken all actions required by applicable law or
governmental regulations in connection with its business as now conducted,
where the failure to obtain any such item or to take any such action would
have a Partnership Material Adverse Effect. A copy of the Partnership's
Agreement of Limited Partnership and Certificate of Limited Partnership
(collectively, the "Partnership Organizational Documents") have been
delivered or made available to the REIT and its counsel and such documents
will be listed in the Partnership Disclosure Letter and were or will be
true and correct when delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years
ended December 31, 1998 and 1997 and the financial statements for the
fiscal quarter ended March 31, 1999 (collectively, the "Partnership
Financial Statements") present fairly, in conformity with generally
accepted accounting principles applied on a consisted basis (except as may
be indicated in the notes thereto), the financial position of the
Partnership as of the dates thereof and its results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in
the case of the interim financial statements). Copies of the Partnership
Financial Statements have been delivered or made available to the REIT and
its financial advisers and such documents will be listed in the Partnership
Disclosure Letter and were or will be true and correct when delivered or
made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the Partnership has no
material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected
on, or reserved against in, a balance sheet of the Partnership or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a Partnership
Material Adverse Effect.
B-6
<PAGE>
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated hereby in
accordance with the terms hereof will: (a) conflict with or result in a breach
of any provisions of the Agreement of Limited Partnership of the Partnership;
(b) except as contemplated by the Partnership Ancillary Agreements or as set
forth in the Partnership Disclosure Letter, violate, or conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination or in a right of termination or cancellation of,
or accelerate the performance required by, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties of
the Partnership under, or result in being declared void, voidable or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which the Partnership is a party, or by which the Partnership or any of its
properties is bound or affected, except for any of the foregoing matters which,
individually or in the aggregate, would not have a Partnership Material Adverse
Effect; or (c) other than the filings provided for in this Agreement to effect
the Merger, any filings required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act of 1933, as amended (the
"Securities Act"), or applicable state securities and "Blue Sky" laws
(collectively, the "Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority, except where the failure to obtain any
such consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are accurate and
complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such
periods and periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and local
income and franchise tax returns of the Partnership have been or will be
examined by any taxing authority. The Partnership has not executed or filed
with the Internal Revenue Service (the "IRS") or any other taxing authority
any agreement now in effect extending the period for
B-7
<PAGE>
assessment or collection of any income or other taxes.
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT or made
available to representatives of the REIT or will be so delivered or made
available prior to the Closing. The Partnership does not hold any asset (i)
the disposition of which could be subject to rules similar to Section 1374
of the Internal Revenue Code of 1986, as amended (the "Code"), as a result
of an election under IRS Notice 88-19 or (ii) that is subject to a consent
filed pursuant to Section 341(f) of the Code and regulations thereunder.
For purposes of this Section 4.9, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there
B-8
<PAGE>
are no structural defects relating to the Partnership Properties and no
Partnership Properties whose building systems are not in working order in
any material respect; and (iv) there is (A) no physical damage to any
Partnership Property in excess of $10,000 for which there is no insurance
in effect covering the cost of the restoration, (B) no current renovation
to any Partnership Property the cost of which exceeds $10,000 and (C) no
current restoration (excluding tenant improvements) of any Partnership
Property, the cost of which exceeds $10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not
entered into any contract, arrangement or understanding with any person or firm
which may result in the
B-9
<PAGE>
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE REIT
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on
B-10
<PAGE>
the Closing Date.
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT Subsidiary or
any of their respective properties or assets are subject, where such
violation would have a REIT Material Adverse Effect. The REIT and its
Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
REIT Material Adverse Effect. Copies of the REIT's and its Subsidiaries'
Articles of Incorporation, Bylaws, organizational documents and partnership
and joint venture agreements have been or will be prior to the Closing,
delivered or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT
Disclosure Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other
B-11
<PAGE>
equity interest of the REIT or any of its Subsidiaries, except under any
employee incentive plan approved by the REIT's stockholders. There are no
agreements or understandings to which the REIT is a party with respect to the
voting of any REIT Shares or which restrict the transfer of any such shares,
except in order to protect its REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the REIT included in or incorporated by reference into
the REIT Reports (including the related notes and schedules) fairly
presents the consolidated financial position of the REIT and the REIT
Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any related
notes and schedules)
B-12
<PAGE>
fairly presents the results of operations, retained earnings or cash flows,
as the case may be, of the REIT and the REIT Subsidiaries for the periods
set forth therein (subject, in the case of unaided statements, to normal
year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may
be noted therein and except, in the case of the unaided statements, as
permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each
of its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports
required to be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such returns.
Neither the REIT nor any of its Subsidiaries has received notice that the
federal, state and local income and franchise tax returns of the REIT or
any such Subsidiary has been or will be examined by any taxing authority.
Neither the REIT nor any of its Subsidiaries has executed or filed with the
IRS or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made
B-13
<PAGE>
available to representatives of the Partnership or will be so delivered or
made available prior to the Closing. The REIT (i) has qualified to be taxed
as a REIT pursuant to Sections 856 through 859 of the Code for its taxable
years ended December 31, 1995 through 1998, inclusive; (ii) has operated,
and intends to continue to operate, in such a manner as to qualify to be
taxed as a REIT pursuant to Sections 856 through 859 of the Code for its
taxable year ended on the effective date of the Merger; and (iii) has not
taken or omitted to take any action which could result in, and each of the
executive officers of the REIT, each acting in his respective capacity as
such, has no actual knowledge of, a challenge to its status as a REIT. The
REIT represents that each of its Subsidiaries is a Qualified REIT
Subsidiary as defined in Section 856(i) of the Code. Neither the REIT nor
any of its Subsidiaries holds any asset (x) the disposition of which could
be subject to rules similar to Section 1374 of the Code as a result of an
election under IRS Notice 88-19 or (y) that is subject to a consent filed
pursuant to Section 341(f) of the Code and regulations thereunder. For
purposes of this Section 5.10, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
B-14
<PAGE>
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such
policy. To the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or license from
any governmental authority having jurisdiction over any of the REIT
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the REIT Properties or which is necessary to permit the lawful use
and operation of all driveways, roads and other means of egress and ingress
to and from any of the REIT Properties that has not been obtained and is
not in full force and effect, or any pending threat of modification or
cancellation of any of same; (ii) neither the REIT nor its Subsidiaries has
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the REIT Properties issued by any governmental authority;
(iii) there are no structural defects relating to the REIT Properties and
no REIT Properties whose building systems are not in working order in any
material respect; and (iv) there is (A) no physical damage to any the REIT
Property in excess of $100,000 for which there is no insurance in effect
covering the cost of the restoration, (B) no current renovation to any the
REIT Property the cost of which exceeds $100,000 and (C) no current
restoration (excluding tenant improvements) of any the REIT Property the
cost of which exceeds $100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the REIT Properties or by the continued
maintenance, operation or use of the parking areas in any material respect.
All work to be performed, payments to be made and actions to be taken by
the REIT or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar action
relating to the REIT Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and the REIT is not aware of any planned or
proposed work, payments or actions that may be required after the date
hereof pursuant to such agreements, except as set forth in the REIT
Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding
B-15
<PAGE>
with any person or firm which may result in the obligation of the REIT or the
Partnership to pay any finder's fees, brokerage or agent's commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby. The REIT is not aware
of any claim for payment of any finder's fees, brokerage or agent's commissions
or other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations
B-16
<PAGE>
thereunder beyond any applicable grace periods. All options of the REIT or any
of its Subsidiaries to purchase real property are set forth in the REIT
Disclosure Letter and such options and the REIT's or its Subsidiaries' rights
thereunder are in full force and effect. All joint venture agreements to which
the REIT or any of its Subsidiaries is a party are set forth in the REIT
Disclosure Letter and the REIT or its Subsidiaries are not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
COVENANTS
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
B-17
<PAGE>
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such party
determined in good faith was required to be executed in order for the General
Partner or the Board, as applicable, to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement informed of the
status (but not the terms) of any such discussions or negotiations; and (ii) to
the extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as contemplated
by this Agreement, unless the other party has consented in writing thereto, the
REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to preserve intact
their business organizations and goodwill and keep available the services
of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more representatives
of the other to report operational matters of materiality and, subject to
Section 6.1, any proposals to engage in material transactions;
(iii) Shall promptly notify the other of any material emergency or
other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated), or the breach in any material respect of any
representation, warranty, covenant or agreement contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as
the case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds resulting
from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, issue any Units or
other interests in the Partnership, make any distribution, effect any
recapitalization or other similar
B-18
<PAGE>
transaction, (B) grant, confer or award any option, warrant, conversion
right or other right not existing on the date hereof to acquire any
Partnership Units, (C) increase any compensation or enter into or amend any
employment agreement with the General Partner or any of the present or
future affiliates of the General Partner, or (D) adopt any new employee
benefit plan or amend any existing employee benefit plan in any material
respect, except for changes which are less favorable to participants in
such plans;
(iv) Shall not declare, set aside or make any distribution or payment
with respect to any Units or other interests in the Partnership or directly
or indirectly redeem, purchase or otherwise acquire any Units or other
interests in the Partnership, or make any commitment for any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of its
other assets which are material, individually or in the aggregate;
(vi) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent Partnership Financial Statements (or the
notes thereto) or incurred in the ordinary course of business consistent
with past practice;
(viii) Shall not enter into any commitment which individually may
result in total payments or liability by or to it in excess of $10,000 (or
5% of its Net Asset Value, if less) in the case of any one commitment or in
excess of $20,000 (or 10% of its Net Asset Value, if less) for all
commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the
Partnership or its general partner(s) except to the extent the same occur
in the ordinary course of business consistent with past practice and would
not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except as
contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of its capital
stock, share dividend, recapitalization or other similar transaction, ( B)
grant, confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital stock
(except pursuant to any employee incentive plan approved by shareholders),
(C) amend any employment agreement with any of its present or future
officers or the Board or (D) adopt any new employee benefit plan (including
any share option, share benefit or share purchase plan), except the
employee incentive plan to be voted on at its stockholder meeting for the
fiscal year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make any
other distribution or payment with respect to any REIT Shares or directly
or indirectly redeem, purchase or otherwise acquire any capital stock of
any of its Subsidiaries, or make any commitment for any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not, and
shall not permit any of its subsidiaries to, sell or otherwise dispose of
(A) any REIT Properties or any of its capital stock of or other
B-19
<PAGE>
interests in subsidiaries or (B) except in the ordinary course of business,
any of its other assets which are material, individually or in the
aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to
(except in the ordinary course of business), make any loans, advances or
capital contributions to, or investments in, any other person other than in
connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the most
recent consolidated financial statements (or the notes thereto) of the REIT
included in the REIT Reports or incurred in the ordinary course of business
consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment which individually may result in total payments
or liability by or to it in excess of $50,000 in the case of any one
commitment or in excess of $250,000 for all commitments, except for those
commitments in connection with the acquisition and/or development of
property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the REIT or
any of its subsidiaries, except as herein or in the REIT Disclosure Letter
provided and except in the ordinary course of business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any
consents required from third parties in form reasonably satisfactory to the
Partnership and the REIT necessary to effectuate the Merger; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such necessary
action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all
B-20
<PAGE>
reasonable times to the records and files, correspondence, audits and
properties, as well as to all information relating to commitments, contracts,
titles and financial position, or otherwise pertaining to the business and
affairs of the Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of
B-21
<PAGE>
which is the total number of votes cast on the Merger. The General Partners'
Proportionate Share of the Partnership Merger Expenses, for purposes of this
Merger Agreement, shall be the fraction the numerator of which is the number of
votes cast "Against" the Merger and abstentions and the denominator of which is
the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
B-22
<PAGE>
SECTION 7
CONDITIONS
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice President of
the REIT, dated the Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
B-23
<PAGE>
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have
received a certificate of the General Partner or the corporate general
partner if applicable dated the Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors
of the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or the independent directors of the
Board only for good reason. Only the following shall constitute termination for
"good reason" for the purposes of this Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
B-24
<PAGE>
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in the this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment
as to its fiduciary duties as imposed by law, and as advised by counsel,
the General Partner determines that such termination is required by reason
of an Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of a Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into
an agreement to consummate a Partnership Acquisition Proposal to be
subsequently consummated, the Partnership shall pay as liquidated damages
(not as a penalty or forfeiture) to the REIT, provided that the REIT was
not in material breach of its obligations at the time of such termination,
an amount equal to the lesser of (x) the Partnership's Proportionate Share
of $500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter from its counsel indicating that it has received a ruling
from the IRS to the effect that the REIT Liquidated Damages Amount payment
constitutes Qualifying Income. In addition to the REIT Liquidated Damages
Amount, the REIT shall be entitled to receive from the Partnership (or its
successor in interest) all documented out-of-pocket costs and expenses
incurred by it, up to a maximum of the Partnership's Proportionate Share of
the REIT Expenses. The payments to which the REIT is entitled as described
above shall be its sole remedy with respect to the termination of this
Agreement under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the
B-25
<PAGE>
REIT Liquidated Damages Amount), which payment of the REIT Expenses shall
be the REIT's sole remedy for termination of this Agreement in such
circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
non-terminating party shall be entitled to receive from the terminating
party (or its successor in interest) all of its documented out-of-pocket
costs and expenses in connection with this Agreement and the transactions
contemplated thereby. The payments to which the non-terminating party is
entitled under this Section 8.3(g) shall be its sole remedy with respect to
the termination of the Agreement under the circumstances contemplated in
this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6,
B-26
<PAGE>
9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT or the Partnership
has received a Liquidated Damages Amount as provided in this Section 8.3,
such recipient shall not assert or pursue in any manner, directly or
indirectly, any claim or cause of action against the other party hereto or
any of its officers, independent directors of the Board, or General
Partner, as applicable, based in whole or part upon its or their receipt,
consideration, recommendation or approval of an Acquisition Proposal or the
exercise by the REIT of its right to termination under Section 8.2(g) or
the exercise by the Partnership of its right to termination under Section
8.2(f). Notwithstanding the foregoing, in the event the REIT or the
Partnership is required to file suit to seek all or a portion of such
Liquidated Damages Amount, and it ultimately succeeds, it shall be entitled
to all expenses, including attorney's fees and expenses, which it has
incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
GENERAL PROVISIONS
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
Taylor Income Investors V, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
B-27
<PAGE>
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or reflect such information. The term
"Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by
the public other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in violation of
this Agreement, (ii) at the time of disclosure was available on a
nonconfidential basis from a source other than the Providing Party or the
Providing Party Representatives, providing that such source is not and was
not bound by a confidentiality agreement with the Providing Party, (iii)
was known by the Receiving Party prior to receiving the Confidential
Material from the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its obligations
under this Agreement or (iv) is contained in the REIT Reports or
Registration Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the Receiving
Party or the Receiving Party Representatives, in whole or in part, and will
not be used by the Receiving Party or the Receiving Party Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Merger or the evaluating, negotiating or advising with
respect to a transaction contemplated herein. Moreover, each Receiving
Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena,
B-28
<PAGE>
civil investigative demand, any informal or formal investigation by any
government or governmental agency or authority or otherwise in connection
with legal processes) to disclose any Confidential Material, such Receiving
Party agrees (i) to immediately notify the Providing Party of the
existence, terms and circumstances surrounding such a request, (ii) to
consult with the Providing Party on the advisability of taking legally
available steps to resist or narrow such request and (iii) if disclosure of
such information is required, to furnish only that portion of the
Confidential Material which, in the opinion of such Receiving Party's
counsel, such Receiving Party is legally compelled to disclose and to
cooperate with any action by the Providing Party to obtain an appropriate
protective order or otherwise reliable assurances that confidential
treatment will be accorded the Confidential Material (it being agreed that
the Providing Party shall reimburse the Receiving Party for all reasonable
out-of-pocket expenses incurred by the Receiving Party in connection with
such cooperation).
(d) In the event of the termination of this Agreement in accordance
with its terms, promptly upon request from the Providing Party, the
Receiving Party shall, except to the extent prevented by law, redeliver to
the Providing Party or destroy all tangible Confidential Material and will
not retain any copies, extracts or other reproductions thereof in whole or
in part. Any such destruction shall be certified in writing to the
Providing Party by an authorized officer of the Receiving Party supervising
the same. Notwithstanding the foregoing, each Receiving Party and one
Receiving Party Representative designated by each Receiving Party shall be
permitted to retain one permanent file copy of each document constituting
Confidential Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any director, officer of the other party or any stockholder or
partner of the other party or any other person with respect to, or (z) make
any public announcement (except as required by law in respect of actions
permitted hereby) or proposal or offer whatsoever (including, without
limitation, any solicitation of consents as such terms are defined or used
in Regulation 14A of the Exchange Act) with respect to, (1) any form of
business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or the board of directors of the General
Partner(s), as applicable, or policies of the other party or any affiliate
thereof, (5) any request or proposal to waive, terminate or amend the
provisions of this Section 9.5, or (6) any proposal or other statement
inconsistent with the terms of this Section 9.5 or (B) instigate,
encourage, join, act in concert with or assist (including, without
limitation, providing or assisting in any way in the obtaining of financing
for, or acting as a joint or co-bidder for the other party with) any third
party to do any of the foregoing, unless and until such party has received
the prior written invitation or approval of a majority of the Board or the
General Partner(s), as applicable, to do any of the foregoing; provided
that, without such invitation or approval, either party may at any time, on
a confidential non-public basis, submit to the Chief Executive Officer of
the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party
providing for the acquisition of all or substantially all
B-29
<PAGE>
of the assets or the securities of the other party, including, without
limitation, a merger, tender offer or exchange offer. Each party hereto
agrees that it will not agree with any third party to waive its rights
under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible,
B-30
<PAGE>
and the parties hereto request the court or any arbitrator to whom disputes
relating to this Agreement are submitted to reform the otherwise illegal,
invalid or unenforceable provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and Chief
Executive Officer
Taylor Income Investors V, Ltd.
By:Taylor Investors V, Inc.
Its General Partner
By: __________________________
H. Kerr Taylor, President
By: _____________________________
H. Kerr Taylor
Its General Partner
B-31
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
Taylor Income Investors VI, Ltd.
If you are a limited partner of Taylor Income Investors VI, Ltd., your vote
is very important:
AmREIT is seeking to merge with 10 partnerships, including Taylor Income
Investors VI, Ltd. AmREIT is a Maryland corporation that has elected to be
taxed real estate investment trust under the Internal Revenue Code . Like
Taylor Income Investors VI, Ltd., the primary business of AmREIT is the
ownership of properties leased to national and regional tenants. AmREIT's
independent directors and the general partners of Taylor Income Investors VI,
Ltd. seek your approval of the merger. In the merger, AmREIT will issue shares
of common stock or, under specified situations more fully described in the
accompanying proxy statement, cash and % callable notes to the limited
partners of the 10 partnerships. At the completion of the merger, the existing
limited partners of partnerships approving the merger will become stockholders
(or noteholders as the case may be) of AmREIT and will no longer be limited
partners in their respective partnerships. As a condition precedent to the
merger the AmREIT shares will be listed for trading on the Nasdaq Stock
Market's National Market. The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS VI, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of Taylor
Income Investors VI, Ltd., for the purpose of enabling you to evaluate the
proposed merger of your partnership with AmREIT, Inc. This supplement is
designed to summarize only the risks, effects, fairness and other
considerations of the proposed merger that are unique to you and the other
limited partners of your partnership. This supplement does not purport to
provide an overall summary of the proposed merger and should be read in
conjunction with the accompanying Joint Proxy and Consent Solicitation
Statement/Prospectus, which includes detailed discussions regarding AmREIT and
the other partnerships being merged with AmREIT. Accordingly, the discussions
in this supplement are qualified by the more expanded treatment of these
matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 37,045 shares of AmREIT common stock, which we
estimate amounts to $1,174 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
--------------------- --------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fund VI.............................. $346,000 $311,400 $333,000 $299,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $485 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $334 per average original $1,000
investment of this gain at long term capital gains rates, which will be 20%.
The remaining $151 of gain per average original $1,000 investment will be
taxable at the 25% rate.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $80.00 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Expiration of Leases. The leases on your partnership's properties all
expire within the next five years. Also, there is a significant chance
that Whataburger, your partnership's largest tenant, will not renew its
lease when it expires in January 2000 or will renew its lease only if
your partnership makes significant improvements to the property. Also,
should any of these tenants fail to renew their leases, your partnership
would need to find a new tenant and incur significant additional costs by
reason of temporary vacancy and/or significant rehabilitation and/or
tenant improvement costs.
. Concentration of Investment. Your partnership has concentrated its
investments in three properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns all of its properties,
Pizza Hut (Clute, TX), Whataburger (Clute, TX) and La Petite Academy
(Houston, TX), in co-ownership with other funds. Your partnership owns
50%, 50% and 2.74%, respectively, of these properties and is dependent
upon the consent and cooperation of the majority co-owner to sell or re-
lease the property. No assurance can be given that the co-owner will
agree to the merger or to the sale or re-lease of the property at such
time or under the terms your partnership may desire. We are soliciting
the other co-owners' approval to merge with AmREIT. If your partnership
approves the merger the other co-owners reject the merger, the AmREIT
board must approve owning this property jointly with the other co-owners.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$294,733 $982 37,045 $346,000 $1,174
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $300,000.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $2,609 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................. $ --
Accounting............................................................ 55
Fairness Opinions/Valuations.......................................... 2,190
Printing.............................................................. --
Appraisal Fees........................................................ 339
Listing Fees.......................................................... --
Miscellaneous......................................................... 25
------
Total............................................................... $2,609
======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31, Six Months Ended
1996 1997 1998 June 30, 1999
---------------- ---------------- ---------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $504 $ -- $504 $ -- $1,418 $ -- $1,044 $ --
Cash Distributions(2)... 360 -- 360 -- 1,233 -- 1,076 --
General Partners'
Salary(3).............. -- 161 -- 161 -- 161 -- 97
General Partners'
Distributions(4)....... -- 3,062 -- 3,105 -- 3,148 -- 1,552
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $485 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $334 per average original $1,000 investment of
S-11
<PAGE>
this gain at long term capital gains rates, which will be 20%. The remaining
$151 of gain per average original $1,000 investment will be taxable at the 25%
rate. The actual amount of gain recognized by the partnership and allocated to
each limited partner will depend upon the value ascribed to the shares of
AmREIT common stock for federal income tax purposes. Because the shares will
not be publicly traded until immediately after the merger, it is possible that
the value of the shares used for purposes of calculating the taxable income (or
loss) and the taxable income (or loss) per average original $1,000 investment
will differ from the calculation stated above. Your partnership's federal
income tax returns are subject to review and possible adjustment by the IRS.
Under federal income tax laws, regulations and administrative rulings, certain
types of transactions may be accorded varying interpretations. Accordingly,
your partnership's financial statements, as well as your individual tax return,
may be changed to cause them to conform to the tax treatment resulting from
such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $77.90 $80.00 $80.00 $80.00 $80.00 $60.00
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors VI, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and Taylor
Income Investors VI, Ltd. (the "Partnership"). AmREIT is a real estate
investment trust that was organized as a Maryland corporation in 1993. AmREIT
became internally managed upon its acquisition of its external advisor in June
1998 (the "Adviser Acquisition"), as a result, AmREIT is a self-managed and
self-administered REIT. AmREIT acquires, develops, owns and manages a
diversified portfolio of freestanding and specialty retail properties leased to
national and regional retail tenants.
Mr. Kerr Taylor serves as the President of Taylor Income Investors VI, Inc.,
which is the corporate general partner of the Partnership (the "General
Partner"). The Partnership owns interests in three retail properties. Following
the Adviser Acquisition, Mr. Taylor and his affiliated corporation retained
their fiduciary responsibilities associated with such General Partner of the
Partnership. However, the Partnership's properties are currently managed by
AmREIT Realty Investment Corporation, an affiliate of AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 37,045 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
4. reviewed copies of the 1987 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared by
Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of Taylor
Income Investors VI, Ltd. in connection with the Transaction is fair to them
from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors VI, Ltd.
June 25, 1999 -2-
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and Taylor Income Investors
VI, Ltd., a Texas limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and Taylor Investors VI,
Inc., a Texas corporation, the General Partners of the Partnership (referred to
herein as the "General Partner"), is a party to this Agreement solely for the
purpose of binding itself to the provisions of Section 5 and Section 7.9,
hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
CONSIDERATION FOR PARTNERSHIP ASSETS
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
PARTNERSHIP INTERESTS
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in
accordance with the Partnership's Net Asset Value or Liquidation Value,
respectively, as set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$ 346,000 -- $346,000
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT Shares Offered No. of REIT Shares Offered per Unit
-------------------------- -----------------------------------
<S> <C> <C>
To Limited
Partners:... 37,045 3,704.50
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Legal/ Marketing/ Liquidation
Value Expenses Discount Commission Closing Contingency Value
----------- ----------- ----------- ---------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$343,150 ($1,696) ($17,157) ($10,294) ($8,579) ($6,863) $298,560
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Amount Maximum Principal
Maximum of Cash Principal Amount of
Aggregate Offered Amount of Note
Amount of per Notes Offered
Cash Unit Offered Per Unit
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
To Limited Partners:................... $14,651 $2,990 $131,859 $26,910
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to
be issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share dividend,
subdivision, reclassification, recapitalization, share split, reverse share
split, combination, exchange of shares or the like, the number of REIT
Shares to be issued in the Merger shall be appropriately adjusted;
B-3
<PAGE>
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be increased
(if greater) or decreased (if less) and the Merger Consideration issuable
to the Partnership in the Merger shall be increased or decreased, as the
case may be, by an amount equal to such difference divided by the Exchange
Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $346,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as
of the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the
Partnership's liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the transfer records of the Partnership, payment may be made to a person
other than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes have been paid or are not applicable. Upon surrender as
contemplated by this Section 3.4, each Unit Certificate shall be deemed at
anytime after the Effective Time to represent only the right to receive
upon such surrender the Merger Consideration, without interest, into which
the Units previously represented by such Unit Certificate shall have been
converted pursuant to Section 3.1 hereof, and any dividends or other
B-4
<PAGE>
distributions to which such holder is entitled pursuant to the terms of the
Agreement of Limited Partnership. No interest will be paid or will accrue
on the Merger Consideration upon the surrender of any Unit Certificate or
on any cash payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
REPRESENTATIONS AND WARRANTIES
OF THE PARTNERSHIP
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all requisite
power and authority to own, operate, lease and encumber its properties and
carry on its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation
to which the Partnership or any of its properties or assets are subject,
where such violation would have a Partnership Material Adverse Effect. The
Partnership has obtained all licenses, permits and other authorizations and
has taken all actions required by applicable law or governmental
regulations in connection with its business as now conducted, where the
failure to obtain any such item or to take any such action would have a
Partnership Material Adverse Effect. A copy of the Partnership's
B-5
<PAGE>
Agreement of Limited Partnership and Certificate of Limited Partnership
(collectively, the "Partnership Organizational Documents") have been
delivered or made available to the REIT and its counsel and such documents
will be listed in the Partnership Disclosure Letter and were or will be
true and correct when delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years
ended December 31, 1998 and 1997 and the financial statements for the
fiscal quarter ended March 31, 1999 (collectively, the "Partnership
Financial Statements") present fairly, in conformity with generally
accepted accounting principles applied on a consisted basis (except as may
be indicated in the notes thereto), the financial position of the
Partnership as of the dates thereof and its results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in
the case of the interim financial statements). Copies of the Partnership
Financial Statements have been delivered or made available to the REIT and
its financial advisers and such documents will be listed in the Partnership
Disclosure Letter and were or will be true and correct when delivered or
made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the Partnership has no
material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected
on, or reserved against in, a balance sheet of the Partnership or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a Partnership
Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated hereby in
accordance with the terms hereof will: (a) conflict with or result in a breach
of any provisions of the Agreement of Limited Partnership of the Partnership;
(b) except as contemplated by the Partnership Ancillary Agreements or as set
forth in the Partnership Disclosure Letter, violate, or conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would
B-6
<PAGE>
constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of the Partnership under, or result in being
declared void, voidable or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any license, franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which the Partnership is a party, or by
which the Partnership or any of its properties is bound or affected, except for
any of the foregoing matters which, individually or in the aggregate, would not
have a Partnership Material Adverse Effect; or (c) other than the filings
provided for in this Agreement to effect the Merger, any filings required under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act of 1933, as amended (the "Securities Act"), or applicable state
securities and "Blue Sky" laws (collectively, the "Regulatory Filings"),
require any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain any such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are accurate and
complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such
periods and periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and local
income and franchise tax returns of the Partnership have been or will be
examined by any taxing authority. The Partnership has not executed or filed
with the Internal Revenue Service (the "IRS") or any other taxing authority
any agreement now in effect extending the period for assessment or
collection of any income or other taxes.
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception
B-7
<PAGE>
and all communications relating thereto have been delivered to the REIT or
made available to representatives of the REIT or will be so delivered or
made available prior to the Closing. The Partnership does not hold any
asset (i) the disposition of which could be subject to rules similar to
Section 1374 of the Internal Revenue Code of 1986, as amended (the "Code"),
as a result of an election under IRS Notice 88-19 or (ii) that is subject
to a consent filed pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 4.9, "taxes" includes any
interest, penalty or additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose building systems
are not in working order in any material respect; and (iv) there is (A) no
physical damage to any Partnership Property in excess of $10,000 for which
there is no insurance in effect covering the cost of the restoration, (B)
no current renovation to any Partnership Property the cost of which exceeds
$10,000 and (C) no current restoration (excluding tenant improvements) of
any Partnership Property, the cost of which exceeds $10,000.
B-8
<PAGE>
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
B-9
<PAGE>
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE REIT
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the
B-10
<PAGE>
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT Subsidiary or
any of their respective properties or assets are subject, where such
violation would have a REIT Material Adverse Effect. The REIT and its
Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
REIT Material Adverse Effect. Copies of the REIT's and its Subsidiaries'
Articles of Incorporation, Bylaws, organizational documents and partnership
and joint venture agreements have been or will be prior to the Closing,
delivered or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT
Disclosure Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other equity interest of
the REIT or any of its Subsidiaries, except under any employee incentive plan
approved by the REIT's stockholders. There are no agreements or understandings
to which the REIT is a party with respect to the voting of any REIT Shares or
which restrict the transfer of any such shares, except in order to protect its
REIT status.
B-11
<PAGE>
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the REIT included in or incorporated by reference into
the REIT Reports (including the related notes and schedules) fairly
presents the consolidated financial position of the REIT and the REIT
Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any related
notes and schedules) fairly presents the results of operations, retained
earnings or cash flows, as the case may be, of the REIT and the REIT
Subsidiaries for the periods set forth therein (subject, in the case of
unaided statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in
B-12
<PAGE>
accordance with generally accepted accounting principles consistently
applied during the periods involved, except as may be noted therein and
except, in the case of the unaided statements, as permitted by the
Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and
each of its Subsidiaries (i) has timely filed all federal, state and
foreign tax returns including, without limitation, information returns and
reports required to be filed by any of them for tax periods ended prior to
the date of this Agreement or requests for extensions have been timely
filed and any such request has been granted and has not expired and all
such returns are absolute and complete in all material respects, (ii) has
paid or accrued all taxes shown to be due and payable on such returns or
which have become due and payable pursuant to any assessment, deficiency
notice, 30-day letter or other notice received by it and (iii) has properly
accrued all taxes for such periods subsequent to the periods covered by
such returns. Neither the REIT nor any of its Subsidiaries has received
notice that the federal, state and local income and franchise tax returns
of the REIT or any such Subsidiary has been or will be examined by any
taxing authority. Neither the REIT nor any of its Subsidiaries has executed
or filed with the IRS or any other taxing authority any agreement now in
effect extending the period for assessment or collection of any income or
other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made available to representatives of the Partnership or will be so
delivered or made available prior to the Closing. The REIT (i) has
qualified to be taxed as a REIT pursuant to Sections 856 through 859 of the
B-13
<PAGE>
Code for its taxable years ended December 31, 1995 through 1998, inclusive;
(ii) has operated, and intends to continue to operate, in such a manner as
to qualify to be taxed as a REIT pursuant to Sections 856 through 859 of
the Code for its taxable year ended on the effective date of the Merger;
and (iii) has not taken or omitted to take any action which could result
in, and each of the executive officers of the REIT, each acting in his
respective capacity as such, has no actual knowledge of, a challenge to its
status as a REIT. The REIT represents that each of its Subsidiaries is a
Qualified REIT Subsidiary as defined in Section 856(i) of the Code. Neither
the REIT nor any of its Subsidiaries holds any asset (x) the disposition of
which could be subject to rules similar to Section 1374 of the Code as a
result of an election under IRS Notice 88-19 or (y) that is subject to a
consent filed pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 5.10, "taxes" includes any
interest, penalty or additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and
its Subsidiaries are in all material respects true, complete and correct,
have been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such
policy. To the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or license from
any governmental authority having jurisdiction over any of the REIT
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the REIT Properties or which is necessary to permit the lawful use
and operation of all driveways, roads and other means of egress and ingress
to and from any of the REIT Properties that has not been obtained and is
not in full force and effect, or any pending threat of modification or
cancellation of any of same;
B-14
<PAGE>
(ii) neither the REIT nor its Subsidiaries has received written notice of
any material violation of any federal, state or municipal law, ordinance,
order, regulation or requirement affecting any portion of any of the REIT
Properties issued by any governmental authority; (iii) there are no
structural defects relating to the REIT Properties and no REIT Properties
whose building systems are not in working order in any material respect;
and (iv) there is (A) no physical damage to any the REIT Property in excess
of $100,000 for which there is no insurance in effect covering the cost of
the restoration, (B) no current renovation to any the REIT Property the
cost of which exceeds $100,000 and (C) no current restoration (excluding
tenant improvements) of any the REIT Property the cost of which exceeds
$100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the REIT Properties or by the continued
maintenance, operation or use of the parking areas in any material respect.
All work to be performed, payments to be made and actions to be taken by
the REIT or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar action
relating to the REIT Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and the REIT is not aware of any planned or
proposed work, payments or actions that may be required after the date
hereof pursuant to such agreements, except as set forth in the REIT
Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
B-15
<PAGE>
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
B-16
<PAGE>
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
COVENANTS
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such party
determined in good faith was required to be executed in order for the General
Partner or the Board, as applicable, to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement informed of the
status (but not the terms) of any such discussions or negotiations; and (ii) to
the extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
B-17
<PAGE>
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as contemplated
by this Agreement, unless the other party has consented in writing thereto, the
REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to preserve intact
their business organizations and goodwill and keep available the services
of their respective officers and employees;
(ii)Shall confer on a regular basis with one or more representatives of
the other to report operational matters of materiality and, subject to
Section 6.1, any proposals to engage in material transactions;
(iii)Shall promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the business,
properties, assets or liabilities, or any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated), or the breach in any material respect of any
representation, warranty, covenant or agreement contained herein;
(iv)Shall continue to pay quarterly dividends or distributions, as the
case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds resulting
from the sale of properties; and
(v)Shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the Partnership:
(i)Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(ii)Shall not amend the Partnership Organizational Documents;
(iii)Shall not (A) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date hereof
and disclosed pursuant to this Agreement, issue any Units or other
interests in the Partnership, make any distribution, effect any
recapitalization or other similar transaction, (B) grant, confer or award
any option, warrant, conversion right or other right not existing on the
date hereof to acquire any Partnership Units, (C) increase any compensation
or enter into or amend any employment agreement with the General Partner or
any of the present or future affiliates of the General Partner, or (D)
adopt any new employee benefit plan or amend any existing employee benefit
plan in any material respect, except for changes which are less favorable
to participants in such plans;
(iv)Shall not declare, set aside or make any distribution or payment
with respect to any Units or other interests in the Partnership or directly
or indirectly redeem, purchase or otherwise acquire any Units or other
interests in the Partnership, or make any commitment for any such action;
(v)Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of its
other assets which are material, individually or in the aggregate;
B-18
<PAGE>
(vi)Shall not make any loans, advances or capital contributions to, or
investments in, any other person;
(vii)Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent Partnership Financial Statements (or the
notes thereto) or incurred in the ordinary course of business consistent
with past practice;
(viii)Shall not enter into any commitment which individually may result
in total payments or liability by or to it in excess of $10,000 (or 5% of
its Net Asset Value, if less) in the case of any one commitment or in
excess of $20,000 (or 10% of its Net Asset Value, if less) for all
commitments;
(ix)Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the
Partnership or its general partner(s) except to the extent the same occur
in the ordinary course of business consistent with past practice and would
not have a Partnership Material Adverse Effect; and
(x)Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, the REIT:
(i)Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii)Shall not amend its Articles of Incorporation or Bylaws except as
contemplated by this Agreement;
(iii)Shall not (A) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights (including the REIT's
existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of its capital
stock, share dividend, recapitalization or other similar transaction, (B)
grant, confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital stock
(except pursuant to any employee incentive plan approved by shareholders),
(C) amend any employment agreement with any of its present or future
officers or the Board or (D) adopt any new employee benefit plan (including
any share option, share benefit or share purchase plan), except the
employee incentive plan to be voted on at its stockholder meeting for the
fiscal year ended December 31, 1998;
(iv)Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make any
other distribution or payment with respect to any REIT Shares or directly
or indirectly redeem, purchase or otherwise acquire any capital stock of
any of its Subsidiaries, or make any commitment for any such action;
(v)Except as set forth in the REIT Disclosure Letter, shall not, and
shall not permit any of its subsidiaries to, sell or otherwise dispose of
(A) any REIT Properties or any of its capital stock of or other interests
in subsidiaries or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi)Shall not, and shall not permit any of its subsidiaries to (except
in the ordinary course of business), make any loans, advances or capital
contributions to, or investments in, any other person other than in
connection with the sale of properties;
(vii)Shall not, and shall not permit any of its subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the most
B-19
<PAGE>
recent consolidated financial statements (or the notes thereto) of the REIT
included in the REIT Reports or incurred in the ordinary course of business
consistent with past practice;
(viii)Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment which individually may result in total payments or
liability by or to it in excess of $50,000 in the case of any one
commitment or in excess of $250,000 for all commitments, except for those
commitments in connection with the acquisition and/or development of
property disclosed in the REIT Disclosure Letter; and
(ix)Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the REIT or
any of its subsidiaries, except as herein or in the REIT Disclosure Letter
provided and except in the ordinary course of business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any
consents required from third parties in form reasonably satisfactory to the
Partnership and the REIT necessary to effectuate the Merger; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such necessary
action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise
B-20
<PAGE>
making public statements with respect to the transactions contemplated hereby
and in making any filings with any federal or state governmental or regulatory
agency or with any national securities exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to
B-21
<PAGE>
indemnification under the Agreement of Limited Partnership existing on the date
hereof to the same extent as such partners or agents are entitled to
indemnification under such Agreement of Limited Partnership in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
SECTION 7
CONDITIONS
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
B-22
<PAGE>
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice President of
the REIT, dated the Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership
B-23
<PAGE>
contained in this Agreement shall be true and correct in all material
respects as of the Closing Date as if made on the Closing Date, and the
REIT shall have received a certificate of the General Partner or the
corporate general partner if applicable dated the Closing Date, certifying
to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors
of the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or the independent directors of the
Board only for good reason. Only the following shall constitute termination for
"good reason" for the purposes of this Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in the this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment
as to its fiduciary duties as imposed by law, and as advised by counsel,
the General Partner determines that such termination is required by reason
of an Acquisition Proposal relating to the Partnership being made;
B-24
<PAGE>
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of a Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into
an agreement to consummate a Partnership Acquisition Proposal to be
subsequently consummated, the Partnership shall pay as liquidated damages
(not as a penalty or forfeiture) to the REIT, provided that the REIT was
not in material breach of its obligations at the time of such termination,
an amount equal to the lesser of (x) the Partnership's Proportionate Share
of $500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter from its counsel indicating that it has received a ruling
from the IRS to the effect that the REIT Liquidated Damages Amount payment
constitutes Qualifying Income. In addition to the REIT Liquidated Damages
Amount, the REIT shall be entitled to receive from the Partnership (or its
successor in interest) all documented out-of-pocket costs and expenses
incurred by it, up to a maximum of the Partnership's Proportionate Share of
the REIT Expenses. The payments to which the REIT is entitled as described
above shall be its sole remedy with respect to the termination of this
Agreement under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the REIT Liquidated Damages
Amount), which payment of the REIT Expenses shall be the REIT's sole remedy
for termination of this Agreement in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
B-25
<PAGE>
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
non-terminating party shall be entitled to receive from the terminating
party (or its successor in interest) all of its documented out-of-pocket
costs and expenses in connection with this Agreement and the transactions
contemplated thereby. The payments to which the non-terminating party is
entitled under this Section 8.3(g) shall be its sole remedy with respect to
the termination of the Agreement under the circumstances contemplated in
this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6, 9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT
or the Partnership has received a Liquidated Damages Amount as provided in
this Section 8.3, such recipient shall not assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the other
party hereto or any of its officers, independent directors of the Board, or
General Partner, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination under
Section 8.2(g) or the exercise by the Partnership of its right to
termination under Section 8.2(f). Notwithstanding the foregoing, in the
event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it
shall be entitled to all expenses, including attorney's fees and expenses,
which it has incurred in enforcing its rights hereunder.
B-26
<PAGE>
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
GENERAL PROVISIONS
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
Taylor Income Investors VI, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
B-27
<PAGE>
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or reflect such information. The term
"Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by
the public other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in violation of
this Agreement, (ii) at the time of disclosure was available on a
nonconfidential basis from a source other than the Providing Party or the
Providing Party Representatives, providing that such source is not and was
not bound by a confidentiality agreement with the Providing Party, (iii)
was known by the Receiving Party prior to receiving the Confidential
Material from the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its obligations
under this Agreement or (iv) is contained in the REIT Reports or
Registration Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the Receiving
Party or the Receiving Party Representatives, in whole or in part, and will
not be used by the Receiving Party or the Receiving Party Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Merger or the evaluating, negotiating or advising with
respect to a transaction contemplated herein. Moreover, each Receiving
Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legally available steps to resist or narrow such request and (iii)
if disclosure of such information is required, to furnish only that portion
of the Confidential Material which, in the opinion of such Receiving
Party's counsel, such Receiving Party is legally compelled to disclose and
to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that
confidential treatment will be accorded the Confidential Material (it being
agreed that the Providing Party shall reimburse the Receiving Party for all
reasonable out-of-pocket expenses incurred by the Receiving Party in
connection with such cooperation).
B-28
<PAGE>
(d) In the event of the termination of this Agreement in accordance
with its terms, promptly upon request from the Providing Party, the
Receiving Party shall, except to the extent prevented by law, redeliver to
the Providing Party or destroy all tangible Confidential Material and will
not retain any copies, extracts or other reproductions thereof in whole or
in part. Any such destruction shall be certified in writing to the
Providing Party by an authorized officer of the Receiving Party supervising
the same. Notwithstanding the foregoing, each Receiving Party and one
Receiving Party Representative designated by each Receiving Party shall be
permitted to retain one permanent file copy of each document constituting
Confidential Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any director, officer of the other party or any stockholder or
partner of the other party or any other person with respect to, or (z) make
any public announcement (except as required by law in respect of actions
permitted hereby) or proposal or offer whatsoever (including, without
limitation, any solicitation of consents as such terms are defined or used
in Regulation 14A of the Exchange Act) with respect to, (1) any form of
business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or the board of directors of the General
Partner(s), as applicable, or policies of the other party or any affiliate
thereof, (5) any request or proposal to waive, terminate or amend the
provisions of this Section 9.5, or (6) any proposal or other statement
inconsistent with the terms of this Section 9.5 or (B) instigate,
encourage, join, act in concert with or assist (including, without
limitation, providing or assisting in any way in the obtaining of financing
for, or acting as a joint or co-bidder for the other party with) any third
party to do any of the foregoing, unless and until such party has received
the prior written invitation or approval of a majority of the Board or the
General Partner(s), as applicable, to do any of the foregoing; provided
that, without such invitation or approval, either party may at any time, on
a confidential non-public basis, submit to the Chief Executive Officer of
the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party
providing for the acquisition of all or substantially all of the assets or
the securities of the other party, including, without limitation, a merger,
tender offer or exchange offer. Each party hereto agrees that it will not
agree with any third party to waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
B-29
<PAGE>
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which
B-30
<PAGE>
it is a party. The Partnership will not seek recourse or commence any action
against any of the stockholders of the REIT or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the REIT or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the REIT
hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and Chief
Executive Officer
Taylor Income Investors VI, Ltd.
By: Taylor Investors VI, Inc.
Its General Partner
By: _____________________________
H. Kerr Taylor, President
By: _________________________________
H. Kerr Taylor
Its General Partner
B-31
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
AAA Net Realty Fund VII, Ltd.
If you are a limited partner of AAA Net Realty Fund VII, Ltd., your vote is
very important:
AmREIT is seeking to merge with 10 partnerships, including AAA Net Realty
Fund VII, Ltd. AmREIT is a Maryland corporation that has elected to be taxed as
a real estate investment trust under the Internal Revenue Code . Like AAA Net
Realty Fund VII, Ltd., the primary business of AmREIT is the ownership of
properties leased to national and regional tenants. AmREIT's independent
directors and the general partners of AAA Net Realty Fund VII, Ltd. seek your
approval of the merger. In the merger, AmREIT will issue shares of common stock
or, under specified situations more fully described in the accompanying proxy
statement, cash and % callable notes to the limited partners of the 10
partnerships. At the completion of the merger, the existing limited partners of
partnerships approving the merger will become stockholders (or noteholders as
the case may be) of AmREIT and will no longer be limited partners in their
respective partnerships. As a condition precedent to the merger the AmREIT
shares will be listed for trading on the Nasdaq Stock Market's National Market.
The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND VII, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of AAA Net
Realty Fund VII, Ltd., for the purpose of enabling you to evaluate the proposed
merger of your partnership with AmREIT, Inc. This supplement is designed to
summarize only the risks, effects, fairness and other considerations of the
proposed merger that are unique to you and the other limited partners of your
partnership. This supplement does not purport to provide an overall summary of
the proposed merger and should be read in conjunction with the accompanying
Joint Proxy and Consent Solicitation Statement/Prospectus, which includes
detailed discussions regarding AmREIT and the other partnerships being merged
with AmREIT. Accordingly, the discussions in this supplement are qualified by
the more expanded treatment of these matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 100,937 shares of AmREIT common stock, which
we estimate amounts to $838 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
--------------------- --------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fund VII............................. $952,272 $857,045 $886,000 $794,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $97 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $100 of gain per average original
$1,000 investment at the 25% rate offset by a $3 loss per average original
$1,000 investment at long term capital gains rates of 20%.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $83.00 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Expiration of Leases. The majority of leases on your partnership's
properties expire within the next five years. Also, there is a
significant chance that La Petite Academy, your partnership's largest
tenant, will not renew its lease when it expires in March 2004 or will
renew its lease only if your partnership makes significant improvements
to the property. Also, should any of these tenants fail to renew their
leases, your partnership would need to find a new tenant and incur
significant additional costs by reason of temporary vacancy and/or
significant rehabilitation and/or tenant improvement costs.
. Concentration of Investment. Your partnership has concentrated its
investments in five properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns all of its properties, La
Petite Academy (Houston, TX), Whataburger (Dallas, TX), Superior Sound
(Houston, TX), AFC, Inc./Church's (Houston, TX) and Eller Media/Billboard
(Houston, TX), in co-ownership with other funds. Your partnership owns
91.25%, 54.88%, 27.28%, 27.28% and 27.28%, respectively, of all these
properties and is dependent upon the consent and cooperation of the
majority co-owner to sell or re-lease the property. No assurance can be
given that the co-owners will agree to the merger or to the sale or re-
lease of the property at such time or under the terms your partnership
may desire. We are soliciting the co-owner's approval to merge with
AmREIT. If your partnership approves the merger but the co-owners reject
the merger, the AmREIT board must approve owning this property jointly
with the co-owners.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$1,125,100 $1,000 100,937 $942,749 $838
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $1,125,100.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $7,177 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................. $ --
Accounting............................................................ 153
Fairness Opinions/Valuations.......................................... 6,024
Printing.............................................................. --
Appraisal Fees........................................................ 932
Listing Fees.......................................................... --
Miscellaneous......................................................... 68
------
Total............................................................... $7,177
======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31, Six Months Ended
1996 1997 1998 June 30, 1999
---------------- ---------------- ---------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $5,400 $ -- $5,400 $ -- $6,831 $ -- $3,942 $ --
Cash Distributions(2)... 900 -- 900 -- 2,455 -- 2,203 --
General Partners'
Salary(3).............. -- 443 -- 443 -- 443 -- 266
General Partners'
Distributions(4)....... -- 8,427 -- 8,545 -- 8,664 -- 4,273
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $97 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $100 of gain per average original $1,000
S-11
<PAGE>
investment at the 25% rate offset by a $3 loss per average original $1,000
investment at long term capital gains rates of 20%. The actual amount of gain
recognized by the partnership and allocated to each limited partner will depend
upon the value ascribed to the shares of AmREIT common stock for federal income
tax purposes. Because the shares will not be publicly traded until immediately
after the merger, it is possible that the value of the shares used for purposes
of calculating the taxable income (or loss) and the taxable income (or loss)
per average original $1,000 investment will differ from the calculation stated
above. Your partnership's federal income tax returns are subject to review and
possible adjustment by the IRS. Under federal income tax laws, regulations and
administrative rulings, certain types of transactions may be accorded varying
interpretations. Accordingly, your partnership's financial statements, as well
as your individual tax return, may be changed to cause them to conform to the
tax treatment resulting from such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $82.50 $82.87 $83.00 $83.00 $83.00 $62.25
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
Individual General Partner
AAA Net Realty Fund VII, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and AAA Net
Realty Fund VII, Ltd. (the "Partnership"). AmREIT is a real estate investment
trust that was organized as a Maryland corporation in 1993. AmREIT became
internally managed upon its acquisition of its external advisor in June 1998
(the "Adviser Acquisition"), as a result, AmREIT is a self-managed and self-
administered REIT. AmREIT acquires, develops, owns and manages a diversified
portfolio of freestanding and specialty retail properties leased to national
and regional retail tenants.
Mr. Kerr Taylor serves as individual general partner of the Partnership (
the "General Partner"). The Partnership owns interests in five retail
properties. Following the Adviser Acquisition, Mr. Taylor and his affiliated
corporation retained their fiduciary responsibilities associated with such
General Partner of the Partnership. However, the Partnership's properties are
currently managed by AmREIT Realty Investment Corporation, an affiliate of
AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 100,876 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
4. reviewed copies of the 1988 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared by
Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of AAA Net
Realty Fund VII, Ltd. in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund VII, LTD
June 25, 1999 -2-
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and AAA Net Realty Fund
VII, Ltd., a Texas limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and American Asset Advisers
Management Corporation, VII, a Texas corporation, the General Partners of the
Partnership (referred to herein as the "General Partner"), is a party to this
Agreement solely for the purpose of binding itself to the provisions of Section
5 and Section 7.9, hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
The Merger
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
Consideration For Partnership Assets
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
Partnership Interests
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in
accordance with the Partnership's Net Asset Value or Liquidation Value,
respectively, as set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$922,000 $29,700 $951,700
REIT Shares
Payable to Partnership
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
-------------- ---------------
<S> <C> <C>
To Limited Partners: 100,876 2,690.03
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Legal/ Marketing/ Liquidation
Value Expenses Discount Commission Closing Contingency Value
----------- ----------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$912,430 $(4,511) $(45,622) $(27,373) $(22,811) $(18,249) $793,866
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Maximum Amount of Maximum Principal
Aggregate Cash Offered Principal Amount Amount of Note
Amount of Cash per Unit of Notes Offered Offered Per Unit
-------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
To Limited Partners: $38,906 $2,117 $350,154 $19,056
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from , 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share
B-3
<PAGE>
dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the
number of REIT Shares to be issued in the Merger shall be appropriately
adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be increased
(if greater) or decreased (if less) and the Merger Consideration issuable
to the Partnership in the Merger shall be increased or decreased, as the
case may be, by an amount equal to such difference divided by the Exchange
Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $922,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as
of the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the
Partnership's liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the transfer records of the Partnership, payment may be made to a person
other than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes have been paid or are not applicable. Upon surrender as
contemplated by this Section 3.4, each Unit
B-4
<PAGE>
Certificate shall be deemed at anytime after the Effective Time to
represent only the right to receive upon such surrender the Merger
Consideration, without interest, into which the Units previously
represented by such Unit Certificate shall have been converted pursuant to
Section 3.1 hereof, and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the Agreement of Limited
Partnership. No interest will be paid or will accrue on the Merger
Consideration upon the surrender of any Unit Certificate or on any cash
payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
Representations and Warranties
of The Partnership
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all requisite
power and authority to own, operate, lease and encumber its properties and
carry on its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation
to which the Partnership or any of its properties or assets are subject,
where such violation
B-5
<PAGE>
would have a Partnership Material Adverse Effect. The Partnership has
obtained all licenses, permits and other authorizations and has taken all
actions required by applicable law or governmental regulations in
connection with its business as now conducted, where the failure to obtain
any such item or to take any such action would have a Partnership Material
Adverse Effect. A copy of the Partnership's Agreement of Limited
Partnership and Certificate of Limited Partnership (collectively, the
"Partnership Organizational Documents") have been delivered or made
available to the REIT and its counsel and such documents will be listed in
the Partnership Disclosure Letter and were or will be true and correct when
delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years
ended December 31, 1998 and 1997 and the financial statements for the
fiscal quarter ended March 31, 1999 (collectively, the "Partnership
Financial Statements") present fairly, in conformity with generally
accepted accounting principles applied on a consisted basis (except as may
be indicated in the notes thereto), the financial position of the
Partnership as of the dates thereof and its results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in
the case of the interim financial statements). Copies of the Partnership
Financial Statements have been delivered or made available to the REIT and
its financial advisers and such documents will be listed in the Partnership
Disclosure Letter and were or will be true and correct when delivered or
made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the Partnership has no
material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected
on, or reserved against in, a balance sheet of the Partnership or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a Partnership
Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated
B-6
<PAGE>
hereby in accordance with the terms hereof will: (a) conflict with or result in
a breach of any provisions of the Agreement of Limited Partnership of the
Partnership; (b) except as contemplated by the Partnership Ancillary Agreements
or as set forth in the Partnership Disclosure Letter, violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of the Partnership under, or result in being declared void, voidable
or without further binding effect, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which the Partnership is a party, or by which the Partnership
or any of its properties is bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a Partnership
Material Adverse Effect; or (c) other than the filings provided for in this
Agreement to effect the Merger, any filings required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), or applicable state securities and
"Blue Sky" laws (collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing
or registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are accurate and
complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such
periods and periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and local
income and franchise tax returns of the Partnership have been or will be
examined by any taxing authority. The Partnership has not executed or filed
with the Internal Revenue Service (the "IRS") or any other taxing authority
any agreement now in effect extending the period for assessment or
collection of any income or other taxes.
B-7
<PAGE>
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT or made
available to representatives of the REIT or will be so delivered or made
available prior to the Closing. The Partnership does not hold any asset (i)
the disposition of which could be subject to rules similar to Section 1374
of the Internal Revenue Code of 1986, as amended (the "Code"), as a result
of an election under IRS Notice 88-19 or (ii) that is subject to a consent
filed pursuant to Section 341(f) of the Code and regulations thereunder.
For purposes of this Section 4.9, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose
B-8
<PAGE>
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any Partnership Property in excess of
$10,000 for which there is no insurance in effect covering the cost of the
restoration, (B) no current renovation to any Partnership Property the cost
of which exceeds $10,000 and (C) no current restoration (excluding tenant
improvements) of any Partnership Property, the cost of which exceeds
$10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
B-9
<PAGE>
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
SECTION 5
Representations and Warranties of The Reit
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
B-10
<PAGE>
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT Subsidiary or
any of their respective properties or assets are subject, where such
violation would have a REIT Material Adverse Effect. The REIT and its
Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
REIT Material Adverse Effect. Copies of the REIT's and its Subsidiaries'
Articles of Incorporation, Bylaws, organizational documents and partnership
and joint venture agreements have been or will be prior to the Closing,
delivered or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT
Disclosure Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other equity interest of
the REIT or any of its Subsidiaries, except under any employee incentive plan
approved by
B-11
<PAGE>
the REIT's stockholders. There are no agreements or understandings to which the
REIT is a party with respect to the voting of any REIT Shares or which restrict
the transfer of any such shares, except in order to protect its REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the REIT included in or incorporated by reference into
the REIT Reports (including the related notes and schedules) fairly
presents the consolidated financial position of the REIT and the REIT
Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any related
notes and schedules)
B-12
<PAGE>
fairly presents the results of operations, retained earnings or cash flows,
as the case may be, of the REIT and the REIT Subsidiaries for the periods
set forth therein (subject, in the case of unaided statements, to normal
year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may
be noted therein and except, in the case of the unaided statements, as
permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each
of its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports
required to be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such returns.
Neither the REIT nor any of its Subsidiaries has received notice that the
federal, state and local income and franchise tax returns of the REIT or
any such Subsidiary has been or will be examined by any taxing authority.
Neither the REIT nor any of its Subsidiaries has executed or filed with the
IRS or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made
B-13
<PAGE>
available to representatives of the Partnership or will be so delivered or
made available prior to the Closing. The REIT (i) has qualified to be taxed
as a REIT pursuant to Sections 856 through 859 of the Code for its taxable
years ended December 31, 1995 through 1998, inclusive; (ii) has operated,
and intends to continue to operate, in such a manner as to qualify to be
taxed as a REIT pursuant to Sections 856 through 859 of the Code for its
taxable year ended on the effective date of the Merger; and (iii) has not
taken or omitted to take any action which could result in, and each of the
executive officers of the REIT, each acting in his respective capacity as
such, has no actual knowledge of, a challenge to its status as a REIT. The
REIT represents that each of its Subsidiaries is a Qualified REIT
Subsidiary as defined in Section 856(i) of the Code. Neither the REIT nor
any of its Subsidiaries holds any asset (x) the disposition of which could
be subject to rules similar to Section 1374 of the Code as a result of an
election under IRS Notice 88-19 or (y) that is subject to a consent filed
pursuant to Section 341(f) of the Code and regulations thereunder. For
purposes of this Section 5.10, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such
policy. To the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or license from
any governmental authority having jurisdiction over any of the REIT
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the REIT Properties or which is necessary to permit the lawful use
and operation of all driveways, roads and
B-14
<PAGE>
other means of egress and ingress to and from any of the REIT Properties
that has not been obtained and is not in full force and effect, or any
pending threat of modification or cancellation of any of same; (ii) neither
the REIT nor its Subsidiaries has received written notice of any material
violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any portion of any of the REIT
Properties issued by any governmental authority; (iii) there are no
structural defects relating to the REIT Properties and no REIT Properties
whose building systems are not in working order in any material respect;
and (iv) there is (A) no physical damage to any the REIT Property in excess
of $100,000 for which there is no insurance in effect covering the cost of
the restoration, (B) no current renovation to any the REIT Property the
cost of which exceeds $100,000 and (C) no current restoration (excluding
tenant improvements) of any the REIT Property the cost of which exceeds
$100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the REIT Properties or by the continued
maintenance, operation or use of the parking areas in any material respect.
All work to be performed, payments to be made and actions to be taken by
the REIT or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar action
relating to the REIT Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and the REIT is not aware of any planned or
proposed work, payments or actions that may be required after the date
hereof pursuant to such agreements, except as set forth in the REIT
Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
B-15
<PAGE>
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
B-16
<PAGE>
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
Covenants
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and
B-17
<PAGE>
(C) subject to any confidentiality agreement with such person or entity (which
such party determined in good faith was required to be executed in order for
the General Partner or the Board, as applicable, to comply with its fiduciary
duties to limited partners or shareholders, as applicable, imposed by law as
advised by counsel), such party keeps the other party to this Agreement
informed of the status (but not the terms) of any such discussions or
negotiations; and (ii) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as
contemplated by this Agreement, unless the other party has consented in
writing thereto, the REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of
their respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more
representatives of the other to report operational matters of
materiality and, subject to Section 6.1, any proposals to engage in
material transactions;
(iii) Shall promptly notify the other of any material emergency or
other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant or agreement
contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as
the case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds
resulting from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent
not to be unreasonably withheld or delayed) in writing thereto, the
Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed pursuant to this Agreement, issue any
Units or other interests in the Partnership, make any distribution,
effect any recapitalization or other similar transaction, (B) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any Partnership Units, (C)
increase any compensation or enter into or amend any employment
agreement with the General Partner or any of the present or
B-18
<PAGE>
future affiliates of the General Partner, or (D) adopt any new employee
benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans;
(iv) Shall not declare, set aside or make any distribution or
payment with respect to any Units or other interests in the Partnership
or directly or indirectly redeem, purchase or otherwise acquire any
Units or other interests in the Partnership, or make any commitment for
any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent Partnership Financial
Statements (or the notes thereto) or incurred in the ordinary course of
business consistent with past practice;
(viii) Shall not enter into any commitment which individually may
result in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value, if
less) for all commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the Partnership or its general partner(s) except to the extent the same
occur in the ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except
as contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its
capital stock, share dividend, recapitalization or other similar
transaction, (B) grant, confer or award any option, warrant, conversion
right or other right not existing on the date hereof to acquire any
shares of its capital stock (except pursuant to any employee incentive
plan approved by shareholders), (C) amend any employment agreement with
any of its present or future officers or the Board or (D) adopt any new
employee benefit plan (including any share option, share benefit or
share purchase plan), except the employee incentive plan to be voted on
at its stockholder meeting for the fiscal year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make
any other distribution or payment with respect to
B-19
<PAGE>
any REIT Shares or directly or indirectly redeem, purchase or otherwise
acquire any capital stock of any of its Subsidiaries, or make any
commitment for any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not,
and shall not permit any of its subsidiaries to, sell or otherwise
dispose of (A) any REIT Properties or any of its capital stock of or
other interests in subsidiaries or (B) except in the ordinary course of
business, any of its other assets which are material, individually or
in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to
(except in the ordinary course of business), make any loans, advances
or capital contributions to, or investments in, any other person other
than in connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
the notes thereto) of the REIT included in the REIT Reports or incurred
in the ordinary course of business consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case of
any one commitment or in excess of $250,000 for all commitments, except
for those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the REIT or any of its subsidiaries, except as herein or in the REIT
Disclosure Letter provided and except in the ordinary course of
business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in
B-20
<PAGE>
writing any consents required from third parties in form reasonably
satisfactory to the Partnership and the REIT necessary to effectuate the
Merger; and (c) use all reasonable efforts to take, or cause to be taken, all
other action and do, or cause to be done, all other things necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of the REIT and the General Partner shall take all such
necessary action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
B-21
<PAGE>
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
B-22
<PAGE>
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
SECTION 7
Conditions
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice President of
the REIT, dated the Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
B-23
<PAGE>
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have
received a certificate of the General Partner or the corporate general
partner if applicable dated the Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of
the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or
B-24
<PAGE>
the independent directors of the Board only for good reason. Only the following
shall constitute termination for "good reason" for the purposes of this
Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in the this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as
to its fiduciary duties as imposed by law, and as advised by counsel, the
General Partner determines that such termination is required by reason of
an Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of a Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into
an agreement to consummate a Partnership Acquisition Proposal to be
subsequently consummated, the Partnership shall pay as liquidated damages
(not as a penalty or forfeiture) to the REIT, provided that the REIT was
not in material breach of its obligations at the time of such termination,
an amount equal to the lesser of (x) the Partnership's Proportionate Share
of $500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter
B-25
<PAGE>
from its counsel indicating that it has received a ruling from the IRS to
the effect that the REIT Liquidated Damages Amount payment constitutes
Qualifying Income. In addition to the REIT Liquidated Damages Amount, the
REIT shall be entitled to receive from the Partnership (or its successor in
interest) all documented out-of-pocket costs and expenses incurred by it,
up to a maximum of the Partnership's Proportionate Share of the REIT
Expenses. The payments to which the REIT is entitled as described above
shall be its sole remedy with respect to the termination of this Agreement
under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the REIT Liquidated Damages
Amount), which payment of the REIT Expenses shall be the REIT's sole remedy
for termination of this Agreement in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
nonterminating party shall be entitled to receive from the terminating
party (or its successor in
B-26
<PAGE>
interest) all of its documented out-of-pocket costs and expenses in
connection with this Agreement and the transactions contemplated thereby.
The payments to which the non-terminating party is entitled under this
Section 8.3(g) shall be its sole remedy with respect to the termination of
the Agreement under the circumstances contemplated in this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6, 9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT
or the Partnership has received a Liquidated Damages Amount as provided in
this Section 8.3, such recipient shall not assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the other
party hereto or any of its officers, independent directors of the Board, or
General Partner, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination under
Section 8.2(g) or the exercise by the Partnership of its right to
termination under Section 8.2(f). Notwithstanding the foregoing, in the
event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it
shall be entitled to all expenses, including attorney's fees and expenses,
which it has incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
General Provisions
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
B-27
<PAGE>
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
AAA Net Realty Fund VII, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or reflect such information. The term
"Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by
the public other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in violation of
this Agreement, (ii) at the time of disclosure was available on a
nonconfidential basis from a source other than the Providing Party or the
Providing Party Representatives, providing that such source
B-28
<PAGE>
is not and was not bound by a confidentiality agreement with the Providing
Party, (iii) was known by the Receiving Party prior to receiving the
Confidential Material from the Providing Party or has been independently
acquired or developed by the Receiving Party without violating any of its
obligations under this Agreement or (iv) is contained in the REIT Reports
or Registration Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the Receiving
Party or the Receiving Party Representatives, in whole or in part, and will
not be used by the Receiving Party or the Receiving Party Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Merger or the evaluating, negotiating or advising with
respect to a transaction contemplated herein. Moreover, each Receiving
Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legally available steps to resist or narrow such request and (iii)
if disclosure of such information is required, to furnish only that portion
of the Confidential Material which, in the opinion of such Receiving
Party's counsel, such Receiving Party is legally compelled to disclose and
to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that
confidential treatment will be accorded the Confidential Material (it being
agreed that the Providing Party shall reimburse the Receiving Party for all
reasonable out-of-pocket expenses incurred by the Receiving Party in
connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from the Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the
Providing Party or destroy all tangible Confidential Material and will not
retain any copies, extracts or other reproductions thereof in whole or in
part. Any such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising the same.
Notwithstanding the foregoing, each Receiving Party and one Receiving Party
Representative designated by each Receiving Party shall be permitted to
retain one permanent file copy of each document constituting Confidential
Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any director, officer of the other party or any stockholder or
partner of the other party or any other person with respect to, or (z) make
any public announcement (except as required by law in respect of actions
permitted hereby) or proposal or offer whatsoever (including, without
limitation, any solicitation of consents as such terms are defined or used
in Regulation 14A of the Exchange Act) with respect to, (1) any form of
business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's
B-29
<PAGE>
assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or the board of directors of the General
Partner(s), as applicable, or policies of the other party or any affiliate
thereof, (5) any request or proposal to waive, terminate or amend the
provisions of this Section 9.5, or (6) any proposal or other statement
inconsistent with the terms of this Section 9.5 or (B) instigate,
encourage, join, act in concert with or assist (including, without
limitation, providing or assisting in any way in the obtaining of financing
for, or acting as a joint or co-bidder for the other party with) any third
party to do any of the foregoing, unless and until such party has received
the prior written invitation or approval of a majority of the Board or the
General Partner(s), as applicable, to do any of the foregoing; provided
that, without such invitation or approval, either party may at any time, on
a confidential non-public basis, submit to the Chief Executive Officer of
the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party
providing for the acquisition of all or substantially all of the assets or
the securities of the other party, including, without limitation, a merger,
tender offer or exchange offer. Each party hereto agrees that it will not
agree with any third party to waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision
B-30
<PAGE>
hereunder shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
B-31
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and
Chief Executive Officer
AAA Net Realty Fund VII, Ltd.
By: American Asset Advisers
Management Corporation, VII
Its General Partner
By: _________________________________
H. Kerr Taylor, President
By: _________________________________
H. Kerr Taylor
Its General Partner
B-32
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
AAA Net Realty Fund VIII, Ltd.
If you are a limited partner of AAA Net Realty Fund VIII, Ltd., your vote is
very important:
AmREIT is seeking to merge with 10 partnerships, including AAA Net Realty
Fund VIII, Ltd. AmREIT is a Maryland corporation that has elected to be taxed
as a real estate investment trust under the Internal Revenue Code . Like AAA
Net Realty Fund VIII, Ltd., the primary business of AmREIT is the ownership of
properties leased to national and regional tenants. AmREIT's independent
directors and the general partners of AAA Net Realty Fund VIII, Ltd. seek your
approval of the merger. In the merger, AmREIT will issue shares of common stock
or, under specified situations more fully described in the accompanying proxy
statement, cash and % callable notes to the limited partners of the 10
partnerships. At the completion of the merger, the existing limited partners of
partnerships approving the merger will become stockholders (or noteholders as
the case may be) of AmREIT and will no longer be limited partners in their
respective partnerships. As a condition precedent to the merger the AmREIT
shares will be listed for trading on the Nasdaq Stock Market's National Market.
The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND VIII, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of AAA Net
Realty Fund VIII, Ltd., for the purpose of enabling you to evaluate the
proposed merger of your partnership with AmREIT, Inc. This supplement is
designed to summarize only the risks, effects, fairness and other
considerations of the proposed merger that are unique to you and the other
limited partners of your partnership. This supplement does not purport to
provide an overall summary of the proposed merger and should be read in
conjunction with the accompanying Joint Proxy and Consent Solicitation
Statement/Prospectus, which includes detailed discussions regarding AmREIT and
the other partnerships being merged with AmREIT. Accordingly, the discussions
in this supplement are qualified by the more expanded treatment of these
matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 180,726 shares of AmREIT common stock, which
we estimate amounts to $910 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
---------------------- ----------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fund VIII......................... $1,705,035 $1,534,532 $1,580,000 $1,413,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $142 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $169 of gain per average original
$1,000 investment at the 25% rate offset by a $27 loss per average original
$1,000 investment at long term capital gains rates of 20%.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $86.00 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Expiration of Leases. The majority of leases on your partnership's
properties expire within the next five years. Also, there is a
significant chance that La Petite Academy, your partnership's largest
tenant, will not renew its lease when it expires in March 2005 or will
renew its lease only if your partnership makes significant improvements
to the property. Also, should any of these tenants fail to renew their
leases, your partnership would need to find a new tenant and incur
significant additional costs by reason of temporary vacancy and/or
significant rehabilitation and/or tenant improvement costs.
. Concentration of Investment. Your partnership has concentrated its
investments in seven properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns several of its
properties, Whataburger (Dallas, TX), Superior Sound (Houston, TX), AFC,
Inc./Church's (Houston, TX), Eller Media/Billboard (Houston, TX) and
Goodyear Tire--Marsh Lane (Dallas, TX), in co-ownership with other funds.
Your partnership owns 45.12%, 72.72%, 72.72%, 72.72% and 25.28%,
respectively, of these properties and is dependent upon the consent and
cooperation of the majority owner to sell or re-lease the property. No
assurance can be given that the majority co-owner will agree to the
merger or to the sale or re-lease of the property at such time or under
the terms your partnership may desire. We are soliciting the co-owner's
approval to merge with AmREIT. If your partnership approves the merger
but a co-owner rejects the merger, the AmREIT board must approve owning
this property jointly with that co-owner.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$1,853,980 $997 180,726 $1,687,985 $910
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $1,860,000.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $12,831 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................ $ --
Accounting........................................................... 273
Fairness Opinions/Valuations......................................... 10,770
Printing............................................................. --
Appraisal Fees....................................................... 1,667
Listing Fees......................................................... --
Miscellaneous........................................................ 121
-------
Total.............................................................. $12,831
=======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Six Months Ended
December 31, 1996 December 31, 1997 December 31, 1998 June 30, 1999
----------------- ----------------- ----------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------- --------- ------- --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $12,960 $ -- $12,960 $ -- $13,621 $ -- $7,050 $ --
Cash Distributions(2)... 1,500 -- 1,500 -- 3,631 -- 3,108 --
General Partners'
Salary(3).............. -- 794 -- 794 -- 794 -- 476
General Partners'
Distributions(4)....... -- 15,088 -- 15,300 -- 15,513 -- 7,650
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $142 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $169 of gain per average original $1,000
S-11
<PAGE>
investment at the 25% rate offset by a $27 loss per average original $1,000
investment at long term capital gains rates of 20%. The actual amount of gain
recognized by the partnership and allocated to each limited partner will depend
upon the value ascribed to the shares of AmREIT common stock for federal income
tax purposes. Because the shares will not be publicly traded until immediately
after the merger, it is possible that the value of the shares used for purposes
of calculating the taxable income (or loss) and the taxable income (or loss)
per average original $1,000 investment will differ from the calculation stated
above. Your partnership's federal income tax returns are subject to review and
possible adjustment by the IRS. Under federal income tax laws, regulations and
administrative rulings, certain types of transactions may be accorded varying
interpretations. Accordingly, your partnership's financial statements, as well
as your individual tax return, may be changed to cause them to conform to the
tax treatment resulting from such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $85.50 $86.00 $86.00 $86.00 $86.00 $64.50
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
Individual General Partner
AAA Net Realty Fund VIII, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and AAA Net
Realty Fund VIII, Ltd. (the "Partnership"). AmREIT is a real estate investment
trust that was organized as a Maryland corporation in 1993. AmREIT became
internally managed upon its acquisition of its external advisor in June 1998
(the "Adviser Acquisition"), as a result, AmREIT is a self-managed and self-
administered REIT. AmREIT acquires, develops, owns and manages a diversified
portfolio of freestanding and specialty retail properties leased to national
and regional retail tenants.
Mr. Kerr Taylor serves as individual general partner of the Partnership (
the "General Partner"). The Partnership owns interests in seven retail
properties. Following the Adviser Acquisition, Mr. Taylor and his affiliated
corporation retained their fiduciary responsibilities associated with such
General Partner of the Partnership. However, the Partnership's properties are
currently managed by AmREIT Realty Investment Corporation, an affiliate of
AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 180,340 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
4. reviewed copies of the 1989 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared by
Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of AAA Net
Realty Fund VIII, Ltd. in connection with the Transaction is fair to them from
a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund VIII, LTD
June 25, 1999 -2-
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and AAA Net Realty Fund
VIII, Ltd., a Texas limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and American Asset Advisers
Management Corporation, VIII, a Texas corporation, the General Partners of the
Partnership (referred to herein as the "General Partner"), is a party to this
Agreement solely for the purpose of binding itself to the provisions of Section
5 and Section 7.9, hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
The Merger
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
Consideration For Partnership Assets
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
Partnership Interests
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in
accordance with the Partnership's Net Asset Value or Liquidation Value,
respectively, as set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$1,644,000 $57,393 $1,701,393
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
-------------- --------------
<S> <C> <C>
To Limited Partners: 180,340 2,908.72
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Legal/ Marketing/ Liquidation
Value Expenses Discount Commission Closing Contingency Value
----------- ----------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$1,623,487 $(8,026) $(81,174) $(48,705) $(40,587) $(32,470) $1,412,526
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Maximum Amount of Maximum Principal
Aggregate Cash Offered Principal Amount Amount of Note
Amount of Cash per Unit of Notes Offered Offered Per Unit
-------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
To Limited Partners: $69,237 $2,279 $623,133 $20,511
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share
B-3
<PAGE>
dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the
number of REIT Shares to be issued in the Merger shall be appropriately
adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be increased
(if greater) or decreased (if less) and the Merger Consideration issuable
to the Partnership in the Merger shall be increased or decreased, as the
case may be, by an amount equal to such difference divided by the Exchange
Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $1,644,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as
of the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the
Partnership's liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the transfer records of the Partnership, payment may be made to a person
other than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes have been paid or are not applicable. Upon surrender as
contemplated by this Section 3.4, each Unit
B-4
<PAGE>
Certificate shall be deemed at anytime after the Effective Time to
represent only the right to receive upon such surrender the Merger
Consideration, without interest, into which the Units previously
represented by such Unit Certificate shall have been converted pursuant to
Section 3.1 hereof, and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the Agreement of Limited
Partnership. No interest will be paid or will accrue on the Merger
Consideration upon the surrender of any Unit Certificate or on any cash
payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
Representations and Warranties
of the Partnership
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all requisite
power and authority to own, operate, lease and encumber its properties and
carry on its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation
to which the Partnership or any of its properties or assets are subject,
where such violation
B-5
<PAGE>
would have a Partnership Material Adverse Effect. The Partnership has
obtained all licenses, permits and other authorizations and has taken all
actions required by applicable law or governmental regulations in
connection with its business as now conducted, where the failure to obtain
any such item or to take any such action would have a Partnership Material
Adverse Effect. A copy of the Partnership's Agreement of Limited
Partnership and Certificate of Limited Partnership (collectively, the
"Partnership Organizational Documents") have been delivered or made
available to the REIT and its counsel and such documents will be listed in
the Partnership Disclosure Letter and were or will be true and correct when
delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years
ended December 31, 1998 and 1997 and the financial statements for the
fiscal quarter ended March 31, 1999 (collectively, the "Partnership
Financial Statements") present fairly, in conformity with generally
accepted accounting principles applied on a consisted basis (except as may
be indicated in the notes thereto), the financial position of the
Partnership as of the dates thereof and its results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in
the case of the interim financial statements). Copies of the Partnership
Financial Statements have been delivered or made available to the REIT and
its financial advisers and such documents will be listed in the Partnership
Disclosure Letter and were or will be true and correct when delivered or
made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the Partnership has no
material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected
on, or reserved against in, a balance sheet of the Partnership or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a Partnership
Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated
B-6
<PAGE>
hereby in accordance with the terms hereof will: (a) conflict with or result in
a breach of any provisions of the Agreement of Limited Partnership of the
Partnership; (b) except as contemplated by the Partnership Ancillary Agreements
or as set forth in the Partnership Disclosure Letter, violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of the Partnership under, or result in being declared void, voidable
or without further binding effect, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which the Partnership is a party, or by which the Partnership
or any of its properties is bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a Partnership
Material Adverse Effect; or (c) other than the filings provided for in this
Agreement to effect the Merger, any filings required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), or applicable state securities and
"Blue Sky" laws (collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing
or registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are accurate and
complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such
periods and periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and local
income and franchise tax returns of the Partnership have been or will be
examined by any taxing authority. The Partnership has not executed or filed
with the Internal Revenue Service (the "IRS") or any other taxing authority
any agreement now in effect extending the period for assessment or
collection of any income or other taxes.
B-7
<PAGE>
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT or made
available to representatives of the REIT or will be so delivered or made
available prior to the Closing. The Partnership does not hold any asset (i)
the disposition of which could be subject to rules similar to Section 1374
of the Internal Revenue Code of 1986, as amended (the "Code"), as a result
of an election under IRS Notice 88-19 or (ii) that is subject to a consent
filed pursuant to Section 341(f) of the Code and regulations thereunder.
For purposes of this Section 4.9, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose
B-8
<PAGE>
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any Partnership Property in excess of
$10,000 for which there is no insurance in effect covering the cost of the
restoration, (B) no current renovation to any Partnership Property the cost
of which exceeds $10,000 and (C) no current restoration (excluding tenant
improvements) of any Partnership Property, the cost of which exceeds
$10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
B-9
<PAGE>
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
SECTION 5
Representations and Warranties of The Reit
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
B-10
<PAGE>
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT Subsidiary or
any of their respective properties or assets are subject, where such
violation would have a REIT Material Adverse Effect. The REIT and its
Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
REIT Material Adverse Effect. Copies of the REIT's and its Subsidiaries'
Articles of Incorporation, Bylaws, organizational documents and partnership
and joint venture agreements have been or will be prior to the Closing,
delivered or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT
Disclosure Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other equity interest of
the REIT or any of its Subsidiaries, except under any employee incentive plan
approved by
B-11
<PAGE>
the REIT's stockholders. There are no agreements or understandings to which the
REIT is a party with respect to the voting of any REIT Shares or which restrict
the transfer of any such shares, except in order to protect its REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the REIT included in or incorporated by reference into
the REIT Reports (including the related notes and schedules) fairly
presents the consolidated financial position of the REIT and the REIT
Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any related
notes and schedules)
B-12
<PAGE>
fairly presents the results of operations, retained earnings or cash flows,
as the case may be, of the REIT and the REIT Subsidiaries for the periods
set forth therein (subject, in the case of unaided statements, to normal
year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may
be noted therein and except, in the case of the unaided statements, as
permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each
of its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports
required to be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such returns.
Neither the REIT nor any of its Subsidiaries has received notice that the
federal, state and local income and franchise tax returns of the REIT or
any such Subsidiary has been or will be examined by any taxing authority.
Neither the REIT nor any of its Subsidiaries has executed or filed with the
IRS or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made
B-13
<PAGE>
available to representatives of the Partnership or will be so delivered or
made available prior to the Closing. The REIT (i) has qualified to be taxed
as a REIT pursuant to Sections 856 through 859 of the Code for its taxable
years ended December 31, 1995 through 1998, inclusive; (ii) has operated,
and intends to continue to operate, in such a manner as to qualify to be
taxed as a REIT pursuant to Sections 856 through 859 of the Code for its
taxable year ended on the effective date of the Merger; and (iii) has not
taken or omitted to take any action which could result in, and each of the
executive officers of the REIT, each acting in his respective capacity as
such, has no actual knowledge of, a challenge to its status as a REIT. The
REIT represents that each of its Subsidiaries is a Qualified REIT
Subsidiary as defined in Section 856(i) of the Code. Neither the REIT nor
any of its Subsidiaries holds any asset (x) the disposition of which could
be subject to rules similar to Section 1374 of the Code as a result of an
election under IRS Notice 88-19 or (y) that is subject to a consent filed
pursuant to Section 341(f) of the Code and regulations thereunder. For
purposes of this Section 5.10, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such
policy. To the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or license from
any governmental authority having jurisdiction over any of the REIT
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the REIT Properties or which is necessary to permit the lawful use
and operation of all driveways, roads and
B-14
<PAGE>
other means of egress and ingress to and from any of the REIT Properties
that has not been obtained and is not in full force and effect, or any
pending threat of modification or cancellation of any of same; (ii) neither
the REIT nor its Subsidiaries has received written notice of any material
violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any portion of any of the REIT
Properties issued by any governmental authority; (iii) there are no
structural defects relating to the REIT Properties and no REIT Properties
whose building systems are not in working order in any material respect;
and (iv) there is (A) no physical damage to any the REIT Property in excess
of $100,000 for which there is no insurance in effect covering the cost of
the restoration, (B) no current renovation to any the REIT Property the
cost of which exceeds $100,000 and (C) no current restoration (excluding
tenant improvements) of any the REIT Property the cost of which exceeds
$100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the REIT Properties or by the continued
maintenance, operation or use of the parking areas in any material respect.
All work to be performed, payments to be made and actions to be taken by
the REIT or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar action
relating to the REIT Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and the REIT is not aware of any planned or
proposed work, payments or actions that may be required after the date
hereof pursuant to such agreements, except as set forth in the REIT
Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
B-15
<PAGE>
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
B-16
<PAGE>
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
Covenants
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and
B-17
<PAGE>
(C) subject to any confidentiality agreement with such person or entity (which
such party determined in good faith was required to be executed in order for
the General Partner or the Board, as applicable, to comply with its fiduciary
duties to limited partners or shareholders, as applicable, imposed by law as
advised by counsel), such party keeps the other party to this Agreement
informed of the status (but not the terms) of any such discussions or
negotiations; and (ii) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as
contemplated by this Agreement, unless the other party has consented in
writing thereto, the REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of
their respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more
representatives of the other to report operational matters of
materiality and, subject to Section 6.1, any proposals to engage in
material transactions;
(iii) Shall promptly notify the other of any material emergency or
other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant or agreement
contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as
the case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds
resulting from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent
not to be unreasonably withheld or delayed) in writing thereto, the
Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed pursuant to this Agreement, issue any
Units or other interests in the Partnership, make any distribution,
effect any recapitalization or other similar transaction, (B) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any Partnership Units, (C)
increase any compensation or enter into or amend any employment
agreement with the General Partner or any of the present or
B-18
<PAGE>
future affiliates of the General Partner, or (D) adopt any new employee
benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans;
(iv) Shall not declare, set aside or make any distribution or
payment with respect to any Units or other interests in the Partnership
or directly or indirectly redeem, purchase or otherwise acquire any
Units or other interests in the Partnership, or make any commitment for
any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent Partnership Financial
Statements (or the notes thereto) or incurred in the ordinary course of
business consistent with past practice;
(viii) Shall not enter into any commitment which individually may
result in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value, if
less) for all commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the Partnership or its general partner(s) except to the extent the same
occur in the ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except
as contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its
capital stock, share dividend, recapitalization or other similar
transaction, (B) grant, confer or award any option, warrant, conversion
right or other right not existing on the date hereof to acquire any
shares of its capital stock (except pursuant to any employee incentive
plan approved by shareholders), (C) amend any employment agreement with
any of its present or future officers or the Board or (D) adopt any new
employee benefit plan (including any share option, share benefit or
share purchase plan), except the employee incentive plan to be voted on
at its stockholder meeting for the fiscal year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make
any other distribution or payment with respect to
B-19
<PAGE>
any REIT Shares or directly or indirectly redeem, purchase or otherwise
acquire any capital stock of any of its Subsidiaries, or make any
commitment for any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not,
and shall not permit any of its subsidiaries to, sell or otherwise
dispose of (A) any REIT Properties or any of its capital stock of or
other interests in subsidiaries or (B) except in the ordinary course of
business, any of its other assets which are material, individually or
in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to
(except in the ordinary course of business), make any loans, advances
or capital contributions to, or investments in, any other person other
than in connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
the notes thereto) of the REIT included in the REIT Reports or incurred
in the ordinary course of business consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case of
any one commitment or in excess of $250,000 for all commitments, except
for those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the REIT or any of its subsidiaries, except as herein or in the REIT
Disclosure Letter provided and except in the ordinary course of
business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in
B-20
<PAGE>
writing any consents required from third parties in form reasonably
satisfactory to the Partnership and the REIT necessary to effectuate the
Merger; and (c) use all reasonable efforts to take, or cause to be taken, all
other action and do, or cause to be done, all other things necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of the REIT and the General Partner shall take all such
necessary action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
B-21
<PAGE>
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
B-22
<PAGE>
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
SECTION 7
Conditions
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice President of
the REIT, dated the Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
B-23
<PAGE>
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have
received a certificate of the General Partner or the corporate general
partner if applicable dated the Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of
the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or
B-24
<PAGE>
the independent directors of the Board only for good reason. Only the following
shall constitute termination for "good reason" for the purposes of this
Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in the this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as
to its fiduciary duties as imposed by law, and as advised by counsel, the
General Partner determines that such termination is required by reason of
an Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of a Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into
an agreement to consummate a Partnership Acquisition Proposal to be
subsequently consummated, the Partnership shall pay as liquidated damages
(not as a penalty or forfeiture) to the REIT, provided that the REIT was
not in material breach of its obligations at the time of such termination,
an amount equal to the lesser of (x) the Partnership's Proportionate Share
of $500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter
B-25
<PAGE>
from its counsel indicating that it has received a ruling from the IRS to
the effect that the REIT Liquidated Damages Amount payment constitutes
Qualifying Income. In addition to the REIT Liquidated Damages Amount, the
REIT shall be entitled to receive from the Partnership (or its successor in
interest) all documented out-of-pocket costs and expenses incurred by it,
up to a maximum of the Partnership's Proportionate Share of the REIT
Expenses. The payments to which the REIT is entitled as described above
shall be its sole remedy with respect to the termination of this Agreement
under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the REIT Liquidated Damages
Amount), which payment of the REIT Expenses shall be the REIT's sole remedy
for termination of this Agreement in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
nonterminating party shall be entitled to receive from the terminating
party (or its successor in
B-26
<PAGE>
interest) all of its documented out-of-pocket costs and expenses in
connection with this Agreement and the transactions contemplated thereby.
The payments to which the non-terminating party is entitled under this
Section 8.3(g) shall be its sole remedy with respect to the termination of
the Agreement under the circumstances contemplated in this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6, 9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT
or the Partnership has received a Liquidated Damages Amount as provided in
this Section 8.3, such recipient shall not assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the other
party hereto or any of its officers, independent directors of the Board, or
General Partner, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination under
Section 8.2(g) or the exercise by the Partnership of its right to
termination under Section 8.2(f). Notwithstanding the foregoing, in the
event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it
shall be entitled to all expenses, including attorney's fees and expenses,
which it has incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
General Provisions
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
B-27
<PAGE>
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
AAA Net Realty Fund VIII, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or reflect such information. The term
"Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by
the public other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in violation of
this Agreement, (ii) at the time of disclosure was available on a
nonconfidential basis from a source other than the Providing Party or the
Providing Party Representatives, providing that such source
B-28
<PAGE>
is not and was not bound by a confidentiality agreement with the Providing
Party, (iii) was known by the Receiving Party prior to receiving the
Confidential Material from the Providing Party or has been independently
acquired or developed by the Receiving Party without violating any of its
obligations under this Agreement or (iv) is contained in the REIT Reports
or Registration Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the Receiving
Party or the Receiving Party Representatives, in whole or in part, and will
not be used by the Receiving Party or the Receiving Party Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Merger or the evaluating, negotiating or advising with
respect to a transaction contemplated herein. Moreover, each Receiving
Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legally available steps to resist or narrow such request and (iii)
if disclosure of such information is required, to furnish only that portion
of the Confidential Material which, in the opinion of such Receiving
Party's counsel, such Receiving Party is legally compelled to disclose and
to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that
confidential treatment will be accorded the Confidential Material (it being
agreed that the Providing Party shall reimburse the Receiving Party for all
reasonable out-of-pocket expenses incurred by the Receiving Party in
connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from the Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the
Providing Party or destroy all tangible Confidential Material and will not
retain any copies, extracts or other reproductions thereof in whole or in
part. Any such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising the same.
Notwithstanding the foregoing, each Receiving Party and one Receiving Party
Representative designated by each Receiving Party shall be permitted to
retain one permanent file copy of each document constituting Confidential
Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any director, officer of the other party or any stockholder or
partner of the other party or any other person with respect to, or (z) make
any public announcement (except as required by law in respect of actions
permitted hereby) or proposal or offer whatsoever (including, without
limitation, any solicitation of consents as such terms are defined or used
in Regulation 14A of the Exchange Act) with respect to, (1) any form of
business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's
B-29
<PAGE>
assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or the board of directors of the General
Partner(s), as applicable, or policies of the other party or any affiliate
thereof, (5) any request or proposal to waive, terminate or amend the
provisions of this Section 9.5, or (6) any proposal or other statement
inconsistent with the terms of this Section 9.5 or (B) instigate,
encourage, join, act in concert with or assist (including, without
limitation, providing or assisting in any way in the obtaining of financing
for, or acting as a joint or co-bidder for the other party with) any third
party to do any of the foregoing, unless and until such party has received
the prior written invitation or approval of a majority of the Board or the
General Partner(s), as applicable, to do any of the foregoing; provided
that, without such invitation or approval, either party may at any time, on
a confidential non-public basis, submit to the Chief Executive Officer of
the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party
providing for the acquisition of all or substantially all of the assets or
the securities of the other party, including, without limitation, a merger,
tender offer or exchange offer. Each party hereto agrees that it will not
agree with any third party to waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision
B-30
<PAGE>
hereunder shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
B-31
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and
Chief Executive Officer
AAA Net Realty Fund VIII, Ltd.
By: American Asset Advisers
Management
Corporation, VIII
Its General Partner
By: _________________________________
H. Kerr Taylor, President
By: _________________________________
H. Kerr Taylor
Its General Partner
B-32
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
AAA Net Realty Fund Goodyear, Ltd.
If you are a limited partner of AAA Net Realty Fund Goodyear, Ltd., your
vote is very important:
AmREIT is seeking to merge with 10 partnerships, including AAA Net Realty
Fund Goodyear, Ltd. AmREIT is a Maryland corporation that has elected to be
taxed as a real estate investment trust under the Internal Revenue Code . Like
AAA Net Realty Fund Goodyear, Ltd., the primary business of AmREIT is the
ownership of properties leased to national and regional tenants. AmREIT's
independent directors and the general partners of AAA Net Realty Fund Goodyear,
Ltd. seek your approval of the merger. In the merger, AmREIT will issue shares
of common stock or, under specified situations more fully described in the
accompanying proxy statement, cash and % callable notes to the limited
partners of the 10 partnerships. At the completion of the merger, the existing
limited partners of partnerships approving the merger will become stockholders
(or noteholders as the case may be) of AmREIT and will no longer be limited
partners in their respective partnerships. As a condition precedent to the
merger the AmREIT shares will be listed for trading on the Nasdaq Stock
Market's National Market. The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND GOODYEAR, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of AAA Net
Realty Fund Goodyear, Ltd., for the purpose of enabling you to evaluate the
proposed merger of your partnership with AmREIT, Inc. This supplement is
designed to summarize only the risks, effects, fairness and other
considerations of the proposed merger that are unique to you and the other
limited partners of your partnership. This supplement does not purport to
provide an overall summary of the proposed merger and should be read in
conjunction with the accompanying Joint Proxy and Consent Solicitation
Statement/Prospectus, which includes detailed discussions regarding AmREIT and
the other partnerships being merged with AmREIT. Accordingly, the discussions
in this supplement are qualified by the more expanded treatment of these
matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 113,599 shares of AmREIT common stock, which
we estimate amounts to $863 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
--------------------- ----------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Fund Goodyear...................... $1,071,732 $964,559 $1,017,000 $916,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $79 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $7 per average original $1,000
investment of this gain at long term capital gains rates, which will be 20%.
The remaining $72 of gain per average original $1,000 investment will be
taxable at the 25% rate.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $75.20 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Expiration of Leases. The leases on your partnership's properties all
expire within the next five years. Also, there is a significant chance
that Goodyear Tire--Hillcrest, your partnership's largest tenant, will
not renew its lease when it expires in February 2000 or will renew its
lease only if your partnership makes significant improvements to the
property. Also, should any of these tenants fail to renew their leases,
your partnership would need to find a new tenant and incur significant
additional costs by reason of temporary vacancy and/or significant
rehabilitation and/or tenant improvement costs.
. Concentration of Investment. Your partnership has concentrated its
investments in three properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns one of its properties,
Goodyear Tire--Marsh Lane, in co-ownership with Fund VIII. Your
partnership owns 74.72% of this property and is dependent upon the
consent and cooperation of Fund VIII to sell or re-lease the property. No
assurance can be given that Fund VIII will agree to the merger or to the
sale or re-lease of the property at such time or under the terms your
partnership may desire. We are soliciting Fund VIII's approval to merge
with AmREIT. If your partnership approves the merger but Fund VIII
rejects the merger, the AmREIT board must approve owning this property
jointly with Fund VIII.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$1,229,090 $921 113,599 $1,061,015 $863
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $1,335,000.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $8,099 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................. $ --
Accounting............................................................ 172
Fairness Opinions/Valuations.......................................... 6,798
Printing.............................................................. --
Appraisal Fees........................................................ 1,052
Listing Fees.......................................................... --
Miscellaneous......................................................... 77
------
Total............................................................... $8,099
======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31, Six Months Ended
1996 1997 1998 June 30, 1999
---------------- ---------------- ---------------- ----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $2,820 $ -- $2,820 $ -- $5,811 $ -- $4,008 $ --
Cash Distributions(2)... 960 -- 960 -- 2,287 -- 2,021 --
General Partners'
Salary(3).............. -- 499 -- 499 -- 499 -- 299
General Partners'
Distributions(4)....... -- 9,484 -- 9,617 -- 9,751 -- 4,809
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $79 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $7 per average original $1,000 investment of
S-11
<PAGE>
this gain at long term capital gains rates, which will be 20%. The remaining
$72 of gain per average original $1,000 investment will be taxable at the 25%
rate. The actual amount of gain recognized by the partnership and allocated to
each limited partner will depend upon the value ascribed to the shares of
AmREIT common stock for federal income tax purposes. Because the shares will
not be publicly traded until immediately after the merger, it is possible that
the value of the shares used for purposes of calculating the taxable income (or
loss) and the taxable income (or loss) per average original $1,000 investment
will differ from the calculation stated above. Your partnership's federal
income tax returns are subject to review and possible adjustment by the IRS.
Under federal income tax laws, regulations and administrative rulings, certain
types of transactions may be accorded varying interpretations. Accordingly,
your partnership's financial statements, as well as your individual tax return,
may be changed to cause them to conform to the tax treatment resulting from
such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $75.20 $75.20 $75.20 $75.20 $75.20 $56.40
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
Individual General Partner
AAA Net Realty Fund -- Goodyear, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and AAA Net
Realty Fund -- Goodyear, Ltd. (the "Partnership"). AmREIT is a real estate
investment trust that was organized as a Maryland corporation in 1993. AmREIT
became internally managed upon its acquisition of its external advisor in June
1998 (the "Adviser Acquisition"), as a result, AmREIT is a self-managed and
self-administered REIT. AmREIT acquires, develops, owns and manages a
diversified portfolio of freestanding and specialty retail properties leased to
national and regional retail tenants.
Mr. Kerr Taylor serves as individual general partner of the Partnership (
the "General Partner"). The Partnership owns interests in two retail
properties. Following the Adviser Acquisition, Mr. Taylor and his affiliated
corporation retained their fiduciary responsibilities associated with such
General Partner of the Partnership. However, the Partnership's properties are
currently managed by AmREIT Realty Investment Corporation, an affiliate of
AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 113,830 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31. 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
4. reviewed copies of the 1990 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared by
Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of AAA Net
Realty Fund -- Goodyear, Ltd. in connection with the Transaction is fair to
them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund -- Goodyear, Ltd.
June 25, 1999 -2-
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and AAA Net Realty Fund
Goodyear, Ltd., a Texas limited partnership (the "Partnership"). H. Kerr
Taylor, on behalf of himself as the individual General Partner and AAARC
Management '90, Inc., a Texas corporation, the General Partners of the
Partnership (referred to herein as the "General Partner"), is a party to this
Agreement solely for the purpose of binding itself to the provisions of Section
5 and Section 7.9, hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
The Merger
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
Consideration For Partnership Assets
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon
as practicable after the Effective Time, the REIT shall distribute in
accordance with Section 3.4 hereof to the holders of the Units of the
Partnership certificates representing the REIT Shares (the "Share
Certificates") and the Cash/Notes to which they are entitled pursuant
hereto.
SECTION 3
Partnership Interests
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part
B-2
<PAGE>
of holder thereof, be converted into REIT Shares or Cash/Notes determined
in accordance with the Partnership's Net Asset Value or Liquidation Value,
respectively, as set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of
Partnership Net Cash at Partnership
Properties March 31, 1999 Net Asset Value
------------------- -------------- ---------------
<S> <C> <C>
$1,058,000 $15,907 $1,073,907
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
--------------- --------------
<S> <C> <C>
To Limited Partners: 113,830 2,557.97
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Legal/ Marketing/ Liquidation
Value Expenses Discount Commission Closing Contingency Value
----------- ----------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$1,052,705 $(5,204) $(52,635) $(31,581) $(26,318) $(21,054) $915,912
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Amount of Maximum Principal
Amount Cash Offered Principal Amount Amount of Note
of Cash per Unit of Notes Offered Offered Per Unit
------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
To Limited Partners: $44,884 $2,058 $403,956 $18,526
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share
B-3
<PAGE>
dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the
number of REIT Shares to be issued in the Merger shall be appropriately
adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be increased
(if greater) or decreased (if less) and the Merger Consideration issuable
to the Partnership in the Merger shall be increased or decreased, as the
case may be, by an amount equal to such difference divided by the Exchange
Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $1,058,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as of
the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the Partnership's
liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the transfer records of the Partnership, payment may be made to a person
other than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes
B-4
<PAGE>
have been paid or are not applicable. Upon surrender as contemplated by
this Section 3.4, each Unit Certificate shall be deemed at anytime after
the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration, without interest, into which the Units
previously represented by such Unit Certificate shall have been converted
pursuant to Section 3.1 hereof, and any dividends or other distributions to
which such holder is entitled pursuant to the terms of the Agreement of
Limited Partnership. No interest will be paid or will accrue on the Merger
Consideration upon the surrender of any Unit Certificate or on any cash
payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
Representations And Warranties
Of The Partnership
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all requisite
power and authority to own, operate, lease and encumber its properties and
carry on its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or
B-5
<PAGE>
regulation to which the Partnership or any of its properties or assets are
subject, where such violation would have a Partnership Material Adverse
Effect. The Partnership has obtained all licenses, permits and other
authorizations and has taken all actions required by applicable law or
governmental regulations in connection with its business as now conducted,
where the failure to obtain any such item or to take any such action would
have a Partnership Material Adverse Effect. A copy of the Partnership's
Agreement of Limited Partnership and Certificate of Limited Partnership
(collectively, the "Partnership Organizational Documents") have been
delivered or made available to the REIT and its counsel and such documents
will be listed in the Partnership Disclosure Letter and were or will be
true and correct when delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years
ended December 31, 1998 and 1997 and the financial statements for the
fiscal quarter ended March 31, 1999 (collectively, the "Partnership
Financial Statements") present fairly, in conformity with generally
accepted accounting principles applied on a consisted basis (except as may
be indicated in the notes thereto), the financial position of the
Partnership as of the dates thereof and its results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in
the case of the interim financial statements). Copies of the Partnership
Financial Statements have been delivered or made available to the REIT and
its financial advisers and such documents will be listed in the Partnership
Disclosure Letter and were or will be true and correct when delivered or
made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the Partnership has no
material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected
on, or reserved against in, a balance sheet of the Partnership or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a Partnership
Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated
B-6
<PAGE>
hereby in accordance with the terms hereof will: (a) conflict with or result in
a breach of any provisions of the Agreement of Limited Partnership of the
Partnership; (b) except as contemplated by the Partnership Ancillary Agreements
or as set forth in the Partnership Disclosure Letter, violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of the Partnership under, or result in being declared void, voidable
or without further binding effect, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which the Partnership is a party, or by which the Partnership
or any of its properties is bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a Partnership
Material Adverse Effect; or (c) other than the filings provided for in this
Agreement to effect the Merger, any filings required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), or applicable state securities and
"Blue Sky" laws (collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing
or registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are accurate and
complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such
periods and periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and local
income and franchise tax returns of the Partnership have been or will be
examined by any taxing authority. The Partnership has not executed or filed
with the Internal Revenue Service (the "IRS") or any other taxing authority
any agreement now in effect extending the period for assessment or
collection of any income or other taxes.
B-7
<PAGE>
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT or made
available to representatives of the REIT or will be so delivered or made
available prior to the Closing. The Partnership does not hold any asset (i)
the disposition of which could be subject to rules similar to Section 1374
of the Internal Revenue Code of 1986, as amended (the "Code"), as a result
of an election under IRS Notice 88-19 or (ii) that is subject to a consent
filed pursuant to Section 341(f) of the Code and regulations thereunder.
For purposes of this Section 4.9, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there
B-8
<PAGE>
are no structural defects relating to the Partnership Properties and no
Partnership Properties whose building systems are not in working order in
any material respect; and (iv) there is (A) no physical damage to any
Partnership Property in excess of $10,000 for which there is no insurance
in effect covering the cost of the restoration, (B) no current renovation
to any Partnership Property the cost of which exceeds $10,000 and (C) no
current restoration (excluding tenant improvements) of any Partnership
Property, the cost of which exceeds $10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not
B-9
<PAGE>
entered into any contract, arrangement or understanding with any person or firm
which may result in the obligation of the Partnership or the REIT to pay any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby. The Partnership is not aware of any
claim for payment of any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
SECTION 5
Representations And Warranties Of The REIT
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be
B-10
<PAGE>
amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT Subsidiary or
any of their respective properties or assets are subject, where such
violation would have a REIT Material Adverse Effect. The REIT and its
Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
REIT Material Adverse Effect. Copies of the REIT's and its Subsidiaries'
Articles of Incorporation, Bylaws, organizational documents and partnership
and joint venture agreements have been or will be prior to the Closing,
delivered or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT
Disclosure Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid,
B-11
<PAGE>
nonassessable and free of preemptive rights. Except as set forth in the REIT
Disclosure Letter, there are not any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the REIT or any of its Subsidiaries to issue,
transfer or sell any shares or other equity interest of the REIT or any of its
Subsidiaries, except under any employee incentive plan approved by the REIT's
stockholders. There are no agreements or understandings to which the REIT is a
party with respect to the voting of any REIT Shares or which restrict the
transfer of any such shares, except in order to protect its REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the
B-12
<PAGE>
REIT included in or incorporated by reference into the REIT Reports
(including the related notes and schedules) fairly presents the
consolidated financial position of the REIT and the REIT Subsidiaries as of
its date and each of the consolidated statements of income, retained
earnings and cash flows of the REIT included in or incorporated by
reference into the REIT Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings or cash flows,
as the case may be, of the REIT and the REIT Subsidiaries for the periods
set forth therein (subject, in the case of unaided statements, to normal
year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may
be noted therein and except, in the case of the unaided statements, as
permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each
of its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports
required to be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such returns.
Neither the REIT nor any of its Subsidiaries has received notice that the
federal, state and local income and franchise tax returns of the REIT or
any such Subsidiary has been or will be examined by any taxing authority.
Neither the REIT nor any of its Subsidiaries has executed or filed with the
IRS or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
B-13
<PAGE>
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made available to representatives of the Partnership or will be so
delivered or made available prior to the Closing. The REIT (i) has
qualified to be taxed as a REIT pursuant to Sections 856 through 859 of the
Code for its taxable years ended December 31, 1995 through 1998, inclusive;
(ii) has operated, and intends to continue to operate, in such a manner as
to qualify to be taxed as a REIT pursuant to Sections 856 through 859 of
the Code for its taxable year ended on the effective date of the Merger;
and (iii) has not taken or omitted to take any action which could result
in, and each of the executive officers of the REIT, each acting in his
respective capacity as such, has no actual knowledge of, a challenge to its
status as a REIT. The REIT represents that each of its Subsidiaries is a
Qualified REIT Subsidiary as defined in Section 856(i) of the Code. Neither
the REIT nor any of its Subsidiaries holds any asset (x) the disposition of
which could be subject to rules similar to Section 1374 of the Code as a
result of an election under IRS Notice 88-19 or (y) that is subject to a
consent filed pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 5.10, "taxes" includes any
interest, penalty or additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no
B-14
<PAGE>
material claim has been made against any such policy. To the REIT's actual
knowledge, except as will be set forth in the REIT Disclosure Letter, (i)
there is no certificate, permit or license from any governmental authority
having jurisdiction over any of the REIT Properties or any agreement,
easement or other right which is necessary to permit the lawful use and
operation of the buildings and improvements on any of the REIT Properties
or which is necessary to permit the lawful use and operation of all
driveways, roads and other means of egress and ingress to and from any of
the REIT Properties that has not been obtained and is not in full force and
effect, or any pending threat of modification or cancellation of any of
same; (ii) neither the REIT nor its Subsidiaries has received written
notice of any material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion of any of
the REIT Properties issued by any governmental authority; (iii) there are
no structural defects relating to the REIT Properties and no REIT
Properties whose building systems are not in working order in any material
respect; and (iv) there is (A) no physical damage to any the REIT Property
in excess of $100,000 for which there is no insurance in effect covering
the cost of the restoration, (B) no current renovation to any the REIT
Property the cost of which exceeds $100,000 and (C) no current restoration
(excluding tenant improvements) on any of the REIT Property the cost of
which exceeds $100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the REIT Properties or by the continued
maintenance, operation or use of the parking areas in any material respect.
All work to be performed, payments to be made and actions to be taken by
the REIT or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar action
relating to the REIT Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and the REIT is not aware of any planned or
proposed work, payments or actions that may be required after the date
hereof pursuant to such agreements, except as set forth in the REIT
Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay
B-15
<PAGE>
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
B-16
<PAGE>
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
Covenants
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such
B-17
<PAGE>
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that nothing
contained in this Section 6.1 shall prohibit the General Partner or the Board
of Directors of this REIT (the "Board") from (i) furnishing information to or
entering into discussions or negotiations with, any person or entity that makes
an unsolicited bona fide Acquisition Proposal, if, and only to the extent that,
(A) the General Partner or the Board, as applicable, determines in good faith
that such action is required for it to comply with its fiduciary duties to
limited partners or stockholders, as applicable, imposed by law as advised by
counsel, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, such party provides
written notice to the other party to this Agreement to the effect that it is
furnishing information to, or entering into discussions with, such person or
entity, and (C) subject to any confidentiality agreement with such person or
entity (which such party determined in good faith was required to be executed
in order for the General Partner or the Board, as applicable, to comply with
its fiduciary duties to limited partners or shareholders, as applicable,
imposed by law as advised by counsel), such party keeps the other party to this
Agreement informed of the status (but not the terms) of any such discussions or
negotiations; and (ii) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as
contemplated by this Agreement, unless the other party has consented in
writing thereto, the REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of
their respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more
representatives of the other to report operational matters of
materiality and, subject to Section 6.1, any proposals to engage in
material transactions;
(iii) Shall promptly notify the other of any material emergency or
other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant or agreement
contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as
the case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds
resulting from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent
not to be unreasonably withheld or delayed) in writing thereto, the
Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
B-18
<PAGE>
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed pursuant to this Agreement, issue any
Units or other interests in the Partnership, make any distribution,
effect any recapitalization or other similar transaction, (B) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any Partnership Units, (C)
increase any compensation or enter into or amend any employment
agreement with the General Partner or any of the present or future
affiliates of the General Partner, or (D) adopt any new employee
benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans;
(iv) Shall not declare, set aside or make any distribution or
payment with respect to any Units or other interests in the Partnership
or directly or indirectly redeem, purchase or otherwise acquire any
Units or other interests in the Partnership, or make any commitment for
any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent Partnership Financial
Statements (or the notes thereto) or incurred in the ordinary course of
business consistent with past practice;
(viii) Shall not enter into any commitment which individually may
result in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value, if
less) for all commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the Partnership or its general partner(s) except to the extent the same
occur in the ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except
as contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its
capital stock, share
B-19
<PAGE>
dividend, recapitalization or other similar transaction, ( B) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital
stock (except pursuant to any employee incentive plan approved by
shareholders), (C) amend any employment agreement with any of its
present or future officers or the Board or (D) adopt any new employee
benefit plan (including any share option, share benefit or share
purchase plan), except the employee incentive plan to be voted on at
its stockholder meeting for the fiscal year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make
any other distribution or payment with respect to any REIT Shares or
directly or indirectly redeem, purchase or otherwise acquire any
capital stock of any of its Subsidiaries, or make any commitment for
any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not,
and shall not permit any of its subsidiaries to, sell or otherwise
dispose of (A) any REIT Properties or any of its capital stock of or
other interests in subsidiaries or (B) except in the ordinary course of
business, any of its other assets which are material, individually or
in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to
(except in the ordinary course of business), make any loans, advances
or capital contributions to, or investments in, any other person other
than in connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
the notes thereto) of the REIT included in the REIT Reports or incurred
in the ordinary course of business consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case of
any one commitment or in excess of $250,000 for all commitments, except
for those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the REIT or any of its subsidiaries, except as herein or in the REIT
Disclosure Letter provided and except in the ordinary course of
business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the
B-20
<PAGE>
General Partner, as the case may be, in the exercise of its good faith judgment
as to its fiduciary duties to its stockholders or partners, as applicable,
imposed by law as advised by counsel. The REIT and the Partnership shall
coordinate and cooperate with respect to the timing of such meetings and shall
use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any
consents required from third parties in form reasonably satisfactory to the
Partnership and the REIT necessary to effectuate the Merger; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such necessary
action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment
B-21
<PAGE>
or supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The REIT
will advise the Partnership, promptly after it receives notice thereof, of the
time when the Registration Statement may be filed or any supplement or
amendment has been filed or when the Registration Statement will become
effective, the issuance of any stop order, the suspension of the qualification
of the REIT Shares issuable in connection with the Merger for offering or sale
in any jurisdiction, or any request by the SEC for amendment of the Proxy
Statement or comments thereon and responses thereto or requests by the SEC for
additional information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
B-22
<PAGE>
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
SECTION 7
Conditions
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the
B-23
<PAGE>
Closing Date, and the Partnership shall have received a certificate of the
President or an Executive or Senior Vice President of the REIT, dated the
Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have
received a certificate of the General Partner or the corporate general
partner if applicable dated the Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of
the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
B-24
<PAGE>
SECTION 8
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or the independent directors of the
Board only for good reason. Only the following shall constitute termination for
"good reason" for the purposes of this Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in the this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as
to its fiduciary duties as imposed by law, and as advised by counsel, the
General Partner determines that such termination is required by reason of
an Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of an Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership
B-25
<PAGE>
consummates a Partnership Acquisition Proposal or enters into an agreement
to consummate a Partnership Acquisition Proposal to be subsequently
consummated, the Partnership shall pay as liquidated damages (not as a
penalty or forfeiture) to the REIT, provided that the REIT was not in
material breach of its obligations at the time of such termination, an
amount equal to the lesser of (x) the Partnership's Proportionate Share of
$500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter from its counsel indicating that it has received a ruling
from the IRS to the effect that the REIT Liquidated Damages Amount payment
constitutes Qualifying Income. In addition to the REIT Liquidated Damages
Amount, the REIT shall be entitled to receive from the Partnership (or its
successor in interest) all documented out-of-pocket costs and expenses
incurred by it, up to a maximum of the Partnership's Proportionate Share of
the REIT Expenses. The payments to which the REIT is entitled as described
above shall be its sole remedy with respect to the termination of this
Agreement under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the REIT Liquidated Damages
Amount), which payment of the REIT Expenses shall be the REIT's sole remedy
for termination of this Agreement in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
B-26
<PAGE>
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
nonterminating party shall be entitled to receive from the terminating
party (or its successor in interest) all of its documented out-of-pocket
costs and expenses in connection with this Agreement and the transactions
contemplated thereby. The payments to which the non-terminating party is
entitled under this Section 8.3(g) shall be its sole remedy with respect to
the termination of the Agreement under the circumstances contemplated in
this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6, 9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT
or the Partnership has received a Liquidated Damages Amount as provided in
this Section 8.3, such recipient shall not assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the other
party hereto or any of its officers, independent directors of the Board, or
General Partner, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination under
Section 8.2(g) or the exercise by the Partnership of its right to
termination under Section 8.2(f). Notwithstanding the foregoing, in the
event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it
shall be entitled to all expenses, including attorney's fees and expenses,
which it has incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
General Provisions
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
B-27
<PAGE>
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
AAA Net Realty Fund Goodyear, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or
B-28
<PAGE>
reflect such information. The term "Confidential Material" does not
include, however, information which (i) at the time of disclosure or
thereafter is generally available to and known by the public other than as
a result of a disclosure directly or indirectly by the Receiving Party or
the Receiving Party Representatives in violation of this Agreement, (ii) at
the time of disclosure was available on a nonconfidential basis from a
source other than the Providing Party or the Providing Party
Representatives, providing that such source is not and was not bound by a
confidentiality agreement with the Providing Party, (iii) was known by the
Receiving Party prior to receiving the Confidential Material from the
Providing Party or has been independently acquired or developed by the
Receiving Party without violating any of its obligations under this
Agreement or (iv) is contained in the REIT Reports or Registration
Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the Receiving
Party or the Receiving Party Representatives, in whole or in part, and will
not be used by the Receiving Party or the Receiving Party Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Merger or the evaluating, negotiating or advising with
respect to a transaction contemplated herein. Moreover, each Receiving
Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legally available steps to resist or narrow such request and (iii)
if disclosure of such information is required, to furnish only that portion
of the Confidential Material which, in the opinion of such Receiving
Party's counsel, such Receiving Party is legally compelled to disclose and
to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that
confidential treatment will be accorded the Confidential Material (it being
agreed that the Providing Party shall reimburse the Receiving Party for all
reasonable out-of-pocket expenses incurred by the Receiving Party in
connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from the Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the
Providing Party or destroy all tangible Confidential Material and will not
retain any copies, extracts or other reproductions thereof in whole or in
part. Any such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising the same.
Notwithstanding the foregoing, each Receiving Party and one Receiving Party
Representative designated by each Receiving Party shall be permitted to
retain one permanent file copy of each document constituting Confidential
Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any
B-29
<PAGE>
director, officer of the other party or any stockholder or partner of the
other party or any other person with respect to, or (z) make any public
announcement (except as required by law in respect of actions permitted
hereby) or proposal or offer whatsoever (including, without limitation, any
solicitation of consents as such terms are defined or used in Regulation
14A of the Exchange Act) with respect to, (1) any form of business
combination or similar or other extraordinary transaction involving the
other party or any affiliate thereof, including, without limitation, a
merger, tender or exchange offer or liquidation of the other party's
assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or the board of directors of the General
Partner(s), as applicable, or policies of the other party or any affiliate
thereof, (5) any request or proposal to waive, terminate or amend the
provisions of this Section 9.5, or (6) any proposal or other statement
inconsistent with the terms of this Section 9.5 or (B) instigate,
encourage, join, act in concert with or assist (including, without
limitation, providing or assisting in any way in the obtaining of financing
for, or acting as a joint or co-bidder for the other party with) any third
party to do any of the foregoing, unless and until such party has received
the prior written invitation or approval of a majority of the Board or the
General Partner(s), as applicable, to do any of the foregoing; provided
that, without such invitation or approval, either party may at any time, on
a confidential non-public basis, submit to the Chief Executive Officer of
the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party
providing for the acquisition of all or substantially all of the assets or
the securities of the other party, including, without limitation, a merger,
tender offer or exchange offer. Each party hereto agrees that it will not
agree with any third party to waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
B-30
<PAGE>
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
B-31
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and
Chief Executive Officer
AAA Net Realty Fund Goodyear, Ltd.
By: AAARC Management '90, Inc.
Its General Partner
By: _________________________________
H. Kerr Taylor, President
By: _________________________________
H. Kerr Taylor
Its General Partner
By: _________________________________
President
B-32
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
AAA Net Realty Fund IX, Ltd.
If you are a limited partner of AAA Net Realty Fund IX, Ltd., your vote is
very important:
AmREIT is seeking to merge with 10 partnerships, including AAA Net Realty
Fund IX, Ltd. AmREIT is a Maryland corporation that has elected to be taxed as
a real estate investment trust under the Internal Revenue Code . Like AAA Net
Realty Fund IX, Ltd., the primary business of AmREIT is the ownership of
properties leased to national and regional tenants. AmREIT's independent
directors and the general partners of AAA Net Realty Fund IX, Ltd. seek your
approval of the merger. In the merger, AmREIT will issue shares of common stock
or, under specified situations more fully described in the accompanying proxy
statement, cash and % callable notes to the limited partners of the 10
partnerships. At the completion of the merger, the existing limited partners of
partnerships approving the merger will become stockholders (or noteholders as
the case may be) of AmREIT and will no longer be limited partners in their
respective partnerships. As a condition precedent to the merger the AmREIT
shares will be listed for trading on the Nasdaq Stock Market's National Market.
The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND IX, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of AAA Net
Realty Fund IX, Ltd., for the purpose of enabling you to evaluate the proposed
merger of your partnership with AmREIT, Inc. This supplement is designed to
summarize only the risks, effects, fairness and other considerations of the
proposed merger that are unique to you and the other limited partners of your
partnership. This supplement does not purport to provide an overall summary of
the proposed merger and should be read in conjunction with the accompanying
Joint Proxy and Consent Solicitation Statement/Prospectus, which includes
detailed discussions regarding AmREIT and the other partnerships being merged
with AmREIT. Accordingly, the discussions in this supplement are qualified by
the more expanded treatment of these matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 572,249 shares of AmREIT common stock, which
we estimate amounts to $992 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
---------------------- ----------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fund IX........................... $5,344,801 $4,810,321 $5,047,000 $4,561,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $172 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $46 per average original $1,000
investment of this gain at long term capital gains rates, which will be 20%.
The remaining $126 of gain per average original $1,000 investment will be
taxable at the 25% rate.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $85.84 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Concentration of Investment. Your partnership has concentrated its
investments in five properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns one of its properties,
Golden Corral Hwy 1960 (Houston, TX), in co-ownership with Fund X. Your
partnership owns 4.80% of this property and is dependent upon the consent
and cooperation of the Fund X to sell or re-lease the property. No
assurance can be given that Fund X will agree to the merger or to the
sale or re-lease of the property at such time or under the terms your
partnership may desire. We are soliciting Fund X's approval to merge with
AmREIT. If your partnership approves the merger but Fund X rejects the
merger, the AmREIT board must approve owning this property jointly with
Fund X.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$5,390,500 $1,000 572,249 $5,344,801 $992
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $5,390,500.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $40,292 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................ $ --
Accounting........................................................... 856
Fairness Opinions/Valuations......................................... 33,821
Printing............................................................. --
Appraisal Fees....................................................... 5,234
Listing Fees......................................................... --
Miscellaneous........................................................ 381
-------
Total.............................................................. $40,292
=======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Six Months Ended
December 31, 1996 December 31, 1997 December 31, 1998 June 30, 1999
----------------- ----------------- ----------------- -----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $16,200 $ -- $17,678 $ -- $30,378 $ -- $19,920 $ --
Cash Distributions(2)... 3,000 -- 3,000 -- 3,000 -- 1,500 --
General Partners'
Salary(3).............. -- 2,489 -- 2,489 -- 2,489 -- 1,493
General Partners'
Distributions(4)....... -- 47,296 -- 47,963 -- 48,629 -- 23,981
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $172 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $46 per average original $1,000 investment of
S-11
<PAGE>
this gain at long term capital gains rates, which will be 20%. The remaining
$126 of gain per average original $1,000 investment will be taxable at the 25%
rate. The actual amount of gain recognized by the partnership and allocated to
each limited partner will depend upon the value ascribed to the shares of
AmREIT common stock for federal income tax purposes. Because the shares will
not be publicly traded until immediately after the merger, it is possible that
the value of the shares used for purposes of calculating the taxable income (or
loss) and the taxable income (or loss) per average original $1,000 investment
will differ from the calculation stated above. Your partnership's federal
income tax returns are subject to review and possible adjustment by the IRS.
Under federal income tax laws, regulations and administrative rulings, certain
types of transactions may be accorded varying interpretations. Accordingly,
your partnership's financial statements, as well as your individual tax return,
may be changed to cause them to conform to the tax treatment resulting from
such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $84.00 $85.00 $85.05 $85.45 $85.84 $64.63
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund IX, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and AAA Net
Realty Fund IX, Ltd. (the "Partnership"). AmREIT is a real estate investment
trust that was organized as a Maryland corporation in 1993. AmREIT became
internally managed upon its acquisition of its external advisor in June 1998
(the "Adviser Acquisition"), as a result, AmREIT is a self-managed and self-
administered REIT. AmREIT acquires, develops, owns and manages a diversified
portfolio of freestanding and specialty retail properties leased to national
and regional retail tenants.
Mr. Kerr Taylor serves as the President of American Asset Advisors
Management Corporation IX, the general partner of the Partnership ( the
"General Partner"). The Partnership owns interests in five retail properties.
Following the Adviser Acquisition, Mr. Taylor and his affiliated corporation
retained their fiduciary responsibilities associated with such General Partner
of the Partnership. However, the Partnership's properties are currently managed
by AmREIT Realty Investment Corporation, an affiliate of AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 572,041 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
4. reviewed copies of the undated Agreement of Limited Partnership of
the Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared by
Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of AAA Net
Realty Fund IX, Ltd. in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund IX, LTD
June 25, 1999 -2-
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and AAA Net Realty Fund IX,
Ltd., a Nebraska limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and American Asset Advisers
Management Corporation IX, a Nebraska corporation, the General Partners of the
Partnership (referred to herein as the "General Partner"), is a party to this
Agreement solely for the purpose of binding itself to the provisions of Section
5 and Section 7.9, hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
The Merger
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Nebraska Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation
and shall remain directors until their successors are duly elected and
qualified or their prior resignation, removal or death.
SECTION 2
Consideration For Partnership Assets
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
Partnership Interests
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in
accordance with the Partnership's Net Asset Value or Liquidation Value,
respectively, as set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$5,251,000 $91,862 $5,342,862
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
-------------- --------------
<S> <C> <C>
To Limited Partners: 572,041 106.12
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of Marketing/
Partnership Partnership Liquidation Brokers' Legal/ Contingency Liquidation
Value Expenses Discount Commission Closing V Value
----------- ----------- ----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$5,241,876 ($25,913) ($262,094) ($157,256) ($131,047) ($104,838) $4,580,728
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Amount of Maximum Principal Principal
Maximum Aggregate Cash Offered Amount of Amount of Note
Amount of Cash per Unit Notes Offered Offered Per Unit
----------------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C>
To
Limited
Partners: $233,489 $85 $2,011,401 $762
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
B-3
<PAGE>
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share dividend,
subdivision, reclassification, recapitalization, share split, reverse share
split, combination, exchange of shares or the like, the number of REIT
Shares to be issued in the Merger shall be appropriately adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be increased
(if greater) or decreased (if less) and the Merger Consideration issuable
to the Partnership in the Merger shall be increased or decreased, as the
case may be, by an amount equal to such difference divided by the Exchange
Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $5,251,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as
of the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the
Partnership's liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the
B-4
<PAGE>
transfer records of the Partnership, payment may be made to a person other
than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes have been paid or are not applicable. Upon surrender as
contemplated by this Section 3.4, each Unit Certificate shall be deemed at
anytime after the Effective Time to represent only the right to receive
upon such surrender the Merger Consideration, without interest, into which
the Units previously represented by such Unit Certificate shall have been
converted pursuant to Section 3.1 hereof, and any dividends or other
distributions to which such holder is entitled pursuant to the terms of the
Agreement of Limited Partnership. No interest will be paid or will accrue
on the Merger Consideration upon the surrender of any Unit Certificate or
on any cash payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
Representations And Warranties
Of The Partnership
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Nebraska. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified
B-5
<PAGE>
would not have a material adverse effect on the business, results of
operations or financial condition of the Partnership (a "Partnership
Material Adverse Effect"). The Partnership has all requisite power and
authority to own, operate, lease and encumber its properties and carry on
its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation
to which the Partnership or any of its properties or assets are subject,
where such violation would have a Partnership Material Adverse Effect. The
Partnership has obtained all licenses, permits and other authorizations and
has taken all actions required by applicable law or governmental
regulations in connection with its business as now conducted, where the
failure to obtain any such item or to take any such action would have a
Partnership Material Adverse Effect. A copy of the Partnership's Agreement
of Limited Partnership and Certificate of Limited Partnership
(collectively, the "Partnership Organizational Documents") have been
delivered or made available to the REIT and its counsel and such documents
will be listed in the Partnership Disclosure Letter and were or will be
true and correct when delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4. Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The audited financial statements of the Partnership for the fiscal
years ended December 31, 1998 and 1997 and the unaudited financial
statements for the fiscal quarter ended March 31, 1999 (collectively, the
"Partnership Financial Statements") present fairly, in conformity with
generally accepted accounting principles applied on a consisted basis
(except as may be indicated in the notes thereto), the financial position
of the Partnership as of the dates thereof and its results of operations
and cash flows for the periods then ended (subject to normal year-end
adjustments in the case of the interim financial statements). Copies of the
Partnership Financial Statements have been delivered or made available to
the REIT and its financial advisers and such documents will be listed in
the Partnership Disclosure Letter and were or will be true and correct when
delivered or made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the
B-6
<PAGE>
Partnership has no material liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that would be required
to be reflected on, or reserved against in, a balance sheet of the
Partnership or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a Partnership Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated hereby in
accordance with the terms hereof will: (a) conflict with or result in a breach
of any provisions of the Agreement of Limited Partnership of the Partnership;
(b) except as contemplated by the Partnership Ancillary Agreements or as set
forth in the Partnership Disclosure Letter, violate, or conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination or in a right of termination or cancellation of,
or accelerate the performance required by, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties of
the Partnership under, or result in being declared void, voidable or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which the Partnership is a party, or by which the Partnership or any of its
properties is bound or affected, except for any of the foregoing matters which,
individually or in the aggregate, would not have a Partnership Material Adverse
Effect; or (c) other than the filings provided for in this Agreement to effect
the Merger, any filings required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act of 1933, as amended (the
"Securities Act"), or applicable state securities and "Blue Sky" laws
(collectively, the "Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority, except where the failure to obtain any
such consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are
B-7
<PAGE>
accurate and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods and periods subsequent to the periods covered by
such returns. The Partnership has not received notice that the federal,
state and local income and franchise tax returns of the Partnership have
been or will be examined by any taxing authority. The Partnership has not
executed or filed with the Internal Revenue Service (the "IRS") or any
other taxing authority any agreement now in effect extending the period for
assessment or collection of any income or other taxes.
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT or made
available to representatives of the REIT or will be so delivered or made
available prior to the Closing. The Partnership does not hold any asset (i)
the disposition of which could be subject to rules similar to Section 1374
of the Internal Revenue Code of 1986, as amended (the "Code"), as a result
of an election under IRS Notice 88-19 or (ii) that is subject to a consent
filed pursuant to Section 341(f) of the Code and regulations thereunder.
For purposes of this Section 4.9, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
B-8
<PAGE>
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose building systems
are not in working order in any material respect; and (iv) there is (A) no
physical damage to any Partnership Property in excess of $10,000 for which
there is no insurance in effect covering the cost of the restoration, (B)
no current renovation to any Partnership Property the cost of which exceeds
$10,000 and (C) no current restoration (excluding tenant improvements) of
any Partnership Property, the cost of which exceeds $10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There
B-9
<PAGE>
is no unfair labor practice or labor arbitration proceeding pending or, to the
actual knowledge of the General Partner, threatened against the Partnership
relating to its business, except for any such proceeding which would not have a
Partnership Material Adverse Effect. To the actual knowledge of the General
Partner, there are no organizational efforts with respect to the formation of a
collective bargaining unit presently being made or threatened involving
employees of the Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
B-10
<PAGE>
4.21 SEC Documents.
(a) The Partnership has made available or will make available to the
REIT prior to , 1999, each registration statement, report, proxy
statement or information statement and all exhibits thereto prepared by it
or relating to its properties since January 1, 1995, each in the form
(including exhibits and any amendments thereto) filed with the U.S.
Securities and Exchange Commission (the "SEC") (collectively, the
"Partnership Reports"). The Partnership Reports, which were or will be
filed with the SEC in a timely manner, constitute all forms, reports and
documents required to be filed by the Partnership under the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder
(collectively the "Securities Laws") for the periods stated above.
(b) To the General Partner's actual knowledge, as of their respective
dates, the Partnership Reports (i) complied as to form in all material
respects with the applicable requirements of the Securities Laws and (ii)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. To the General Partner's actual knowledge, each
of the balance sheets of the Partnership included in or incorporated by
reference into the Partnership Reports (including the related notes and
schedules) fairly presents the financial position of the Partnership as of
its date and each of the consolidated statements of income, retained
earnings and cash flows of the Partnership included in or incorporated by
reference into the Partnership Reports (including any related notes and
schedules) fairly presents the results of operations, retained earnings and
cash flows, as the case may be, of the Partnership for the periods set
forth therein (subject, in the case of unaided statements, to normal year-
end audit adjustments which would not be material in amount or effect), in
each case in accordance with generally accepted accounting principles
consistently applied during the periods involved, except as may be noted
therein and except, in the case of the unaided statements, as permitted by
the Securities Laws.
SECTION 5
Representations And Warranties Of The REIT
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
B-11
<PAGE>
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT
Subsidiary or any of their respective properties or assets are subject,
where such violation would have a REIT Material Adverse Effect. The
REIT and its Subsidiaries have obtained all licenses, permits and other
authorizations and have taken all actions required by applicable law or
governmental regulations in connection with their business as now
conducted, where the failure to obtain any such item or to take any
such action would have a REIT Material Adverse Effect. Copies of the
REIT's and its Subsidiaries' Articles of Incorporation, Bylaws,
organizational documents and partnership and joint venture agreements
have been or will be prior to the Closing, delivered or made available
to the Partnership and such documents will be listed in the REIT
Disclosure Letter and were or will be true and correct when delivered
or made available. For the purposes of this Section 5.1, the term
"Subsidiary" shall include the entities set forth in the REIT
Disclosure Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other equity interest of
the REIT or any of its Subsidiaries, except under any employee incentive plan
approved by the REIT's stockholders. There are no agreements or understandings
to which the REIT is a party with respect to the voting of any REIT Shares or
which restrict the transfer of any such shares, except in order to protect its
REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
B-12
<PAGE>
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will:
(a) conflict with or result in a breach of any provisions of the REIT's
Articles of Incorporation or Bylaws; (b) violate, or conflict with, or
result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination or in a right of termination
or cancellation of, or accelerate the performance required by, or result in
the creation of any lien, security interest, charge or encumbrance upon any
of the properties of the REIT or its Subsidiaries under, or result in being
declared void, voidable or without further binding effect, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust or any license, franchise, permit, lease, contract, agreement
or other instrument, commitment or obligation to which the REIT or any of
its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for
any of the foregoing matters which, individually or in the aggregate, would
not have a REIT Material Adverse Effect; or (c) other than the Regulatory
Filings require any consent, approval or authorization of, or declaration,
filing or registration with, any domestic governmental or regulatory
authority, except where the failure to obtain such consent, approval or
authorization of, or declaration, filing or registration with, any
governmental or regulatory authority would not have a REIT Material Adverse
Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the REIT included in or incorporated by reference into
the REIT Reports (including the related notes and schedules) fairly
presents the consolidated financial position of the REIT and the REIT
Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any related
notes and schedules) fairly presents the results of operations, retained
earnings or cash flows, as the case may be, of the REIT and the REIT
Subsidiaries for the periods set forth therein (subject, in the case of
unaided statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods
involved, except as may be noted therein and except, in the case of the
unaided statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
B-13
<PAGE>
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each
of its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports
required to be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such returns.
Neither the REIT nor any of its Subsidiaries has received notice that the
federal, state and local income and franchise tax returns of the REIT or
any such Subsidiary has been or will be examined by any taxing authority.
Neither the REIT nor any of its Subsidiaries has executed or filed with the
IRS or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made available to representatives of the Partnership or will be so
delivered or made available prior to the Closing. The REIT (i) has
qualified to be taxed as a REIT pursuant to Sections 856 through 859 of the
Code for its taxable years ended December 31, 1995 through 1998, inclusive;
(ii) has operated, and intends to continue to operate, in such a manner as
to qualify to be taxed as a REIT pursuant to Sections 856 through 859 of
the Code for its taxable year ended on the effective date of the Merger;
and (iii) has not taken or omitted to take any action which could result
in, and each of the executive officers of the REIT, each acting in his
respective capacity as such, has no actual knowledge of, a challenge to its
status as a REIT. The REIT represents that each of its Subsidiaries is a
Qualified REIT Subsidiary as defined in Section 856(i) of the Code. Neither
the REIT nor any of its Subsidiaries holds any asset (x) the disposition of
which could be subject to rules similar to Section 1374 of the Code as a
result of an election under IRS Notice 88-19 or (y) that is subject to a
consent filed pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 5.10, "taxes" includes any
interest, penalty or additional amount payable with respect to any tax.
B-14
<PAGE>
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such
policy. To the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or license from
any governmental authority having jurisdiction over any of the REIT
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the REIT Properties or which is necessary to permit the lawful use
and operation of all driveways, roads and other means of egress and ingress
to and from any of the REIT Properties that has not been obtained and is
not in full force and effect, or any pending threat of modification or
cancellation of any of same; (ii) neither the REIT nor its Subsidiaries has
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the REIT Properties issued by any governmental authority;
(iii) there are no structural defects relating to the REIT Properties and
no REIT Properties whose building systems are not in working order in any
material respect; and (iv) there is (A) no physical damage to any the REIT
Property in excess of $100,000 for which there is no insurance in effect
covering the cost of the restoration, (B) no current renovation to any the
REIT Property the cost of which exceeds $100,000 and (C) no current
restoration (excluding tenant improvements) of any the REIT Property the
cost of which exceeds $100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar
B-15
<PAGE>
laws, codes, ordinances, orders or regulations that are or will be violated
by the continued maintenance, operation or use of any buildings or other
improvements on any of the REIT Properties or by the continued maintenance,
operation or use of the parking areas in any material respect. All work to
be performed, payments to be made and actions to be taken by the REIT or
its Subsidiaries prior to the date hereof pursuant to any agreement entered
into with a governmental body or authority in connection with a site
approval, zoning reclassification or other similar action relating to the
REIT Properties (e.g., Local Improvement District, Road Improvement
District, Environmental Mitigation) has been performed, paid or taken, as
the case may be, and the REIT is not aware of any planned or proposed work,
payments or actions that may be required after the date hereof pursuant to
such agreements, except as set forth in the REIT Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the
B-16
<PAGE>
terms of this Agreement, will be validly issued, fully paid and nonassessable,
except that stockholders may be subject to further assessment with respect to
certain claims for tort, contract, taxes, statutory liability and otherwise in
some jurisdictions to the extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
B-17
<PAGE>
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
Covenants
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such party
determined in good faith was required to be executed in order for the General
Partner or the Board, as applicable, to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement informed of the
status (but not the terms) of any such discussions or negotiations; and (ii) to
the extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition
B-18
<PAGE>
Proposal (other than a confidentiality agreement in customary form)) or (z)
affect any other obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as
contemplated by this Agreement, unless the other party has consented in
writing thereto, the REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of
their respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more
representatives of the other to report operational matters of
materiality and, subject to Section 6.1, any proposals to engage in
material transactions;
(iii) Shall promptly notify the other of any material emergency or
other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant or agreement
contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as
the case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds
resulting from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent
not to be unreasonably withheld or delayed) in writing thereto, the
Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed pursuant to this Agreement, issue any
Units or other interests in the Partnership, make any distribution,
effect any recapitalization or other similar transaction, (B) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any Partnership Units, (C)
increase any compensation or enter into or amend any employment
agreement with the General Partner or any of the present or future
affiliates of the General Partner, or (D) adopt any new employee
benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans;
(iv) Shall not declare, set aside or make any distribution or
payment with respect to any Units or other interests in the Partnership
or directly or indirectly redeem, purchase or otherwise acquire any
Units or other interests in the Partnership, or make any commitment for
any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
B-19
<PAGE>
(vi) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent Partnership Financial
Statements (or the notes thereto) or incurred in the ordinary course of
business consistent with past practice;
(viii) Shall not enter into any commitment which individually may
result in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value, if
less) for all commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the Partnership or its general partner(s) except to the extent the same
occur in the ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except
as contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its
capital stock, share dividend, recapitalization or other similar
transaction, (B) grant, confer or award any option, warrant, conversion
right or other right not existing on the date hereof to acquire any
shares of its capital stock (except pursuant to any employee incentive
plan approved by shareholders), (C) amend any employment agreement with
any of its present or future officers or the Board or (D) adopt any new
employee benefit plan (including any share option, share benefit or
share purchase plan), except the employee incentive plan to be voted on
at its stockholder meeting for the fiscal year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make
any other distribution or payment with respect to any REIT Shares or
directly or indirectly redeem, purchase or otherwise acquire any
capital stock of any of its Subsidiaries, or make any commitment for
any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not,
and shall not permit any of its subsidiaries to, sell or otherwise
dispose of (A) any REIT Properties or any of its capital stock of or
other interests in subsidiaries or (B) except in the ordinary course of
business, any of its other assets which are material, individually or
in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to
(except in the ordinary course of business), make any loans, advances
or capital contributions to, or investments in, any other person other
than in connection with the sale of properties;
B-20
<PAGE>
(vii) Shall not, and shall not permit any of its subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
the notes thereto) of the REIT included in the REIT Reports or incurred
in the ordinary course of business consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case of
any one commitment or in excess of $250,000 for all commitments, except
for those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the REIT or any of its subsidiaries, except as herein or in the REIT
Disclosure Letter provided and except in the ordinary course of
business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any
consents required from third parties in form reasonably satisfactory to the
Partnership and the REIT necessary to effectuate the Merger; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such necessary
action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information
B-21
<PAGE>
relating to commitments, contracts, titles and financial position, or otherwise
pertaining to the business and affairs of the Partnership and the REIT and
their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall
B-22
<PAGE>
be the fraction the numerator of which is the number of votes cast "For" the
Merger and the denominator of which is the total number of votes cast on the
Merger. The General Partners' Proportionate Share of the Partnership Merger
Expenses, for purposes of this Merger Agreement, shall be the fraction the
numerator of which is the number of votes cast "Against" the Merger and
abstentions and the denominator of which is the total number of votes cast on
the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
B-23
<PAGE>
SECTION 7
Conditions
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice President of
the REIT, dated the Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
B-24
<PAGE>
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have
received a certificate of the General Partner or the corporate general
partner if applicable dated the Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of
the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or the independent directors of the
Board only for good reason. Only the following shall constitute termination for
"good reason" for the purposes of this Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
B-25
<PAGE>
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in the this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as
to its fiduciary duties as imposed by law, and as advised by counsel, the
General Partner determines that such termination is required by reason of
an Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of a Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into
an agreement to consummate a Partnership Acquisition Proposal to be
subsequently consummated, the Partnership shall pay as liquidated damages
(not as a penalty or forfeiture) to the REIT, provided that the REIT was
not in material breach of its obligations at the time of such termination,
an amount equal to the lesser of (x) the Partnership's Proportionate Share
of $500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter from its counsel indicating that it has received a ruling
from the IRS to the effect that the REIT Liquidated Damages Amount payment
constitutes Qualifying Income. In addition to the REIT Liquidated Damages
Amount, the REIT shall be entitled to receive from the Partnership (or its
successor in interest) all documented out-of-pocket costs and expenses
incurred by it, up to a maximum of the Partnership's Proportionate Share of
the REIT Expenses. The payments to which the REIT is entitled as described
above
B-26
<PAGE>
shall be its sole remedy with respect to the termination of this Agreement
under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the REIT Liquidated Damages
Amount), which payment of the REIT Expenses shall be the REIT's sole remedy
for termination of this Agreement in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
non-terminating party shall be entitled to receive from the terminating
party (or its successor in interest) all of its documented out-of-pocket
costs and expenses in connection with this Agreement and the transactions
contemplated thereby. The payments to which the non-terminating party is
entitled under this Section 8.3(g) shall be its sole remedy with respect to
the termination of the Agreement under the circumstances contemplated in
this Section 8.3(g).
B-27
<PAGE>
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6, 9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT
or the Partnership has received a Liquidated Damages Amount as provided in
this Section 8.3, such recipient shall not assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the other
party hereto or any of its officers, independent directors of the Board, or
General Partner, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination under
Section 8.2(g) or the exercise by the Partnership of its right to
termination under Section 8.2(f). Notwithstanding the foregoing, in the
event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it
shall be entitled to all expenses, including attorney's fees and expenses,
which it has incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
General Provisions
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
B-28
<PAGE>
If to the Partnership:
AAA Net Realty Fund IX, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or reflect such information. The term
"Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by
the public other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in violation of
this Agreement, (ii) at the time of disclosure was available on a
nonconfidential basis from a source other than the Providing Party or the
Providing Party Representatives, providing that such source is not and was
not bound by a confidentiality agreement with the Providing Party, (iii)
was known by the Receiving Party prior to receiving the Confidential
Material from the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its obligations
under this Agreement or (iv) is contained in any Partnership Reports or the
REIT Reports or Registration Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the
B-29
<PAGE>
Receiving Party or the Receiving Party Representatives, in whole or in
part, and will not be used by the Receiving Party or the Receiving Party
Representatives, directly or indirectly, for any purpose other than in
connection with this Agreement, the Merger or the evaluating, negotiating
or advising with respect to a transaction contemplated herein. Moreover,
each Receiving Party agrees to transmit Confidential Material to the
Receiving Party Representatives only if and to the extent that the
Receiving Party Representatives need to know the Confidential Material for
purposes of such transaction and are informed by such Receiving Party of
the confidential nature of the Confidential Material and of the terms of
this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legally available steps to resist or narrow such request and (iii)
if disclosure of such information is required, to furnish only that portion
of the Confidential Material which, in the opinion of such Receiving
Party's counsel, such Receiving Party is legally compelled to disclose and
to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that
confidential treatment will be accorded the Confidential Material (it being
agreed that the Providing Party shall reimburse the Receiving Party for all
reasonable out-of-pocket expenses incurred by the Receiving Party in
connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from the Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the
Providing Party or destroy all tangible Confidential Material and will not
retain any copies, extracts or other reproductions thereof in whole or in
part. Any such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising the same.
Notwithstanding the foregoing, each Receiving Party and one Receiving Party
Representative designated by each Receiving Party shall be permitted to
retain one permanent file copy of each document constituting Confidential
Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any director, officer of the other party or any stockholder or
partner of the other party or any other person with respect to, or (z) make
any public announcement (except as required by law in respect of actions
permitted hereby) or proposal or offer whatsoever (including, without
limitation, any solicitation of consents as such terms are defined or used
in Regulation 14A of the Exchange Act) with respect to, (1) any form of
business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or
B-30
<PAGE>
the board of directors of the General Partner(s), as applicable, or
policies of the other party or any affiliate thereof, (5) any request or
proposal to waive, terminate or amend the provisions of this Section 9.5,
or (6) any proposal or other statement inconsistent with the terms of this
Section 9.5 or (B) instigate, encourage, join, act in concert with or
assist (including, without limitation, providing or assisting in any way in
the obtaining of financing for, or acting as a joint or co-bidder for the
other party with) any third party to do any of the foregoing, unless and
until such party has received the prior written invitation or approval of a
majority of the Board or the General Partner(s), as applicable, to do any
of the foregoing; provided that, without such invitation or approval,
either party may at any time, on a confidential non-public basis, submit to
the Chief Executive Officer of the REIT or the General Partner(s), as
applicable, a proposal to (a) amend any of the provisions of this Section
9.5(e) or (b) effect a business combination or other extraordinary
transaction with the other party providing for the acquisition of all or
substantially all of the assets or the securities of the other party,
including, without limitation, a merger, tender offer or exchange offer.
Each party hereto agrees that it will not agree with any third party to
waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
B-31
<PAGE>
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
B-32
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and
Chief Executive Officer
AAA Net Realty Fund IX, Ltd.
By: American Asset Advisers
Management Corporation, IX
Its General Partner
By: _________________________________
H. Kerr Taylor, President
By: _________________________________
H. Kerr Taylor
Its General Partner
B-33
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
AAA Net Realty Fund X, Ltd.
If you are a limited partner of AAA Net Realty Fund X, Ltd., your vote is
very important:
AmREIT is seeking to merge with 10 partnerships, including AAA Net Realty
Fund X, Ltd. AmREIT is a Maryland corporation that has elected to be taxed as a
real estate investment trust under the Internal Revenue Code . Like AAA Net
Realty Fund X, Ltd., the primary business of AmREIT is the ownership of
properties leased to national and regional tenants. AmREIT's independent
directors and the general partners of AAA Net Realty Fund X, Ltd. seek your
approval of the merger. In the merger, AmREIT will issue shares of common stock
or, under specified situations more fully described in the accompanying proxy
statement, cash and % callable notes to the limited partners of the 10
partnerships. At the completion of the merger, the existing limited partners of
partnerships approving the merger will become stockholders (or noteholders as
the case may be) of AmREIT and will no longer be limited partners in their
respective partnerships. As a condition precedent to the merger the AmREIT
shares will be listed for trading on the Nasdaq Stock Market's National Market.
The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND X, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of AAA Net
Realty Fund X, Ltd., for the purpose of enabling you to evaluate the proposed
merger of your partnership with AmREIT, Inc. This supplement is designed to
summarize only the risks, effects, fairness and other considerations of the
proposed merger that are unique to you and the other limited partners of your
partnership. This supplement does not purport to provide an overall summary of
the proposed merger and should be read in conjunction with the accompanying
Joint Proxy and Consent Solicitation Statement/Prospectus, which includes
detailed discussions regarding AmREIT and the other partnerships being merged
with AmREIT. Accordingly, the discussions in this supplement are qualified by
the more expanded treatment of these matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 1,123,662 shares of AmREIT common stock, which
we estimate amounts to $916 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration
Offered Other Valuation Amounts
---------------------- -----------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Fund X........................... $10,495,000 $9,445,500 $10,088,000 $9,122,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a gain on the merger of approximately $23 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $51 of gain per average original
$1,000 investment at the 25% rate offset by a $28 loss per average original
$1,000 investment at long term capital gains rates of 20%.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $81.02 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Concentration of Investment. Your partnership has concentrated its
investments in eight properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns several of its
properties, Golden Corral Hwy 1960 (Houston, TX), Wherehouse
Entertainment (Independence, MO) and Just For Feet (Tucson, AZ), in co-
ownership with other funds. Your partnership owns 95.20%, 45.16% and
18.25%, respectively, of these properties and is dependent upon the
consent and cooperation of the majority co-owner to sell or re-lease the
property. No assurance can be given that the co-owner will agree to the
merger or to the sale or re-lease of the property at such time or under
the terms your partnership may desire. We are soliciting the other co-
owner's approval to merge with AmREIT. If your partnership approves the
merger but the other co-owners reject the merger, the AmREIT board must
approve owning this property jointly with the other co-owners.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$11,453,610 $1,000 1,123,662 $10,495,000 $916
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $11,453,610.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $79,147 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................ $ --
Accounting........................................................... 1,682
Fairness Opinions/Valuations......................................... 66,435
Printing............................................................. --
Appraisal Fees....................................................... 10,281
Listing Fees......................................................... --
Miscellaneous........................................................ 748
-------
Total.............................................................. $79,147
=======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Six Months Ended
December 31, 1996 December 31, 1997 December 31, 1998 June 30, 1999
----------------- ----------------- ----------------- -----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $65,883 $ -- $68,932 $ -- $74,734 $ -- $39,432 $ --
Cash Distributions(2)... 3,600 -- 4,450 -- 5,400 -- 2,900 --
General Partners'
Salary(3).............. -- 4,888 -- 4,888 -- 4,888 -- 2,933
General Partners'
Distributions(4)....... -- 92,871 -- 94,179 -- 95,487 -- 47,089
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a gain on the merger of
approximately $23 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $51 of gain per average original $1,000
S-11
<PAGE>
investment at the 25% rate offset by a $28 loss per average original $1,000
investment at long term capital gains rates of 20%. The actual amount of gain
recognized by the partnership and allocated to each limited partner will depend
upon the value ascribed to the shares of AmREIT common stock for federal income
tax purposes. Because the shares will not be publicly traded until immediately
after the merger, it is possible that the value of the shares used for purposes
of calculating the taxable income (or loss) and the taxable income (or loss)
per average original $1,000 investment will differ from the calculation stated
above. Your partnership's federal income tax returns are subject to review and
possible adjustment by the IRS. Under federal income tax laws, regulations and
administrative rulings, certain types of transactions may be accorded varying
interpretations. Accordingly, your partnership's financial statements, as well
as your individual tax return, may be changed to cause them to conform to the
tax treatment resulting from such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................. $44.99 $76.75 $80.05 $80.61 $81.02 $61.03
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund X, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and AAA Net
Realty Fund X, Ltd. (the "Partnership"). AmREIT is a real estate investment
trust that was organized as a Maryland corporation in 1993. AmREIT became
internally managed upon its acquisition of its external advisor in June 1998
(the "Adviser Acquisition"), as a result, AmREIT is a self-managed and self-
administered REIT. AmREIT acquires, develops, owns and manages a diversified
portfolio of freestanding and specialty retail properties leased to national
and regional retail tenants.
Mr. Kerr Taylor serves as the President of American Asset Advisors
Management Corporation X, the general partner of the Partnership ( the "General
Partner"). The Partnership owns interests in eight retail properties. Following
the Adviser Acquisition, Mr. Taylor and his affiliated corporation retained
their fiduciary responsibilities associated with such General Partner of the
Partnership. However, the Partnership's properties are currently managed by
AmREIT Realty Investment Corporation, an affiliate of AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 1,123,662 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
4. reviewed copies of the 1992 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared by
Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of AAA Net
Realty Fund X, Ltd. in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund X, LTD
June 25, 1999 -2-
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and AAA Net Realty Fund X,
Ltd., a Nebraska limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and American Asset Advisers
Management Corporation X, a Nebraska corporation, the General Partners of the
Partnership (referred to herein as the "General Partner"), is a party to this
Agreement solely for the purpose of binding itself to the provisions of Section
5 and Section 7.9, hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
The Merger
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Nebraska Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
Consideration For Partnership Assets
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
Partnership Interests
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in accordance
with the Partnership's Net Asset Value or Liquidation Value, respectively, as
set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$10,495,000 -- $10,495,000
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
-------------- --------------
<S> <C> <C>
To Limited Partners: 1,123,662 98.11
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Legal/ Marketing/ Liquidation
Value Expenses Discount Commission Closing Contingency Value
----------- ----------- ----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$10,483,870 $(51,827) $(524,194) $(314,516) $(282,097) $(209,677) $9,121,559
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Maximum Amount of Maximum Principal
Aggregate Cash Offered Principal Amount Amount of Note
Amount of Cash per Unit of Notes Offered Offered Per Unit
-------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
To Limited Partners: $446,978 $80 $4,022,802 $717
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share
B-3
<PAGE>
dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the
number of REIT Shares to be issued in the Merger shall be appropriately
adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be increased
(if greater) or decreased (if less) and the Merger Consideration issuable
to the Partnership in the Merger shall be increased or decreased, as the
case may be, by an amount equal to such difference divided by the Exchange
Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $10,495,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as
of the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the
Partnership's liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the transfer records of the Partnership, payment may be made to a person
other than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes have been paid or are not applicable. Upon surrender as
contemplated by this Section 3.4, each Unit
B-4
<PAGE>
Certificate shall be deemed at anytime after the Effective Time to
represent only the right to receive upon such surrender the Merger
Consideration, without interest, into which the Units previously
represented by such Unit Certificate shall have been converted pursuant to
Section 3.1 hereof, and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the Agreement of Limited
Partnership. No interest will be paid or will accrue on the Merger
Consideration upon the surrender of any Unit Certificate or on any cash
payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
Representations and Warranties
of the Partnership
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Nebraska. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all requisite
power and authority to own, operate, lease and encumber its properties and
carry on its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation
to which the Partnership or any of its properties or assets are subject,
where such violation
B-5
<PAGE>
would have a Partnership Material Adverse Effect. The Partnership has
obtained all licenses, permits and other authorizations and has taken all
actions required by applicable law or governmental regulations in
connection with its business as now conducted, where the failure to obtain
any such item or to take any such action would have a Partnership Material
Adverse Effect. A copy of the Partnership's Agreement of Limited
Partnership and Certificate of Limited Partnership (collectively, the
"Partnership Organizational Documents") have been delivered or made
available to the REIT and its counsel and such documents will be listed in
the Partnership Disclosure Letter and were or will be true and correct when
delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The audited financial statements of the Partnership for the fiscal
years ended December 31, 1998 and 1997 and the unaudited financial
statements for the fiscal quarter ended March 31, 1999 (collectively, the
"Partnership Financial Statements") present fairly, in conformity with
generally accepted accounting principles applied on a consisted basis
(except as may be indicated in the notes thereto), the financial position
of the Partnership as of the dates thereof and its results of operations
and cash flows for the periods then ended (subject to normal year-end
adjustments in the case of the interim financial statements). Copies of the
Partnership Financial Statements have been delivered or made available to
the REIT and its financial advisers and such documents will be listed in
the Partnership Disclosure Letter and were or will be true and correct when
delivered or made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the Partnership has no
material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected
on, or reserved against in, a balance sheet of the Partnership or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a Partnership
Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated
B-6
<PAGE>
hereby in accordance with the terms hereof will: (a) conflict with or result in
a breach of any provisions of the Agreement of Limited Partnership of the
Partnership; (b) except as contemplated by the Partnership Ancillary Agreements
or as set forth in the Partnership Disclosure Letter, violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of the Partnership under, or result in being declared void, voidable
or without further binding effect, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which the Partnership is a party, or by which the Partnership
or any of its properties is bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a Partnership
Material Adverse Effect; or (c) other than the filings provided for in this
Agreement to effect the Merger, any filings required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), or applicable state securities and
"Blue Sky" laws (collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing
or registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are accurate and
complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such
periods and periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and local
income and franchise tax returns of the Partnership have been or will be
examined by any taxing authority. The Partnership has not executed or filed
with the Internal Revenue Service (the "IRS") or any other taxing authority
any agreement now in effect extending the period for assessment or
collection of any income or other taxes.
B-7
<PAGE>
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT or made
available to representatives of the REIT or will be so delivered or made
available prior to the Closing. The Partnership does not hold any asset (i)
the disposition of which could be subject to rules similar to Section 1374
of the Internal Revenue Code of 1986, as amended (the "Code"), as a result
of an election under IRS Notice 88-19 or (ii) that is subject to a consent
filed pursuant to Section 341(f) of the Code and regulations thereunder.
For purposes of this Section 4.9, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose
B-8
<PAGE>
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any Partnership Property in excess of
$10,000 for which there is no insurance in effect covering the cost of the
restoration, (B) no current renovation to any Partnership Property the cost
of which exceeds $10,000 and (C) no current restoration (excluding tenant
improvements) of any Partnership Property, the cost of which exceeds
$10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
B-9
<PAGE>
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
4.21 SEC Documents.
(a) The Partnership has made available or will make available to the
REIT prior to , 1999, each registration statement, report, proxy
statement or information statement and all exhibits thereto prepared by it
or relating to its properties since January 1, 1995, each in the form
(including exhibits and any amendments thereto) filed with the U.S.
Securities and Exchange Commission (the "SEC") (collectively, the
"Partnership Reports"). The Partnership Reports, which were or will be
filed with the SEC in a timely manner, constitute all forms, reports and
documents required to be filed by the Partnership under the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder
(collectively the "Securities Laws") for the periods stated above.
B-10
<PAGE>
(b) To the General Partner's actual knowledge, as of their respective
dates, the Partnership Reports (i) complied as to form in all material
respects with the applicable requirements of the Securities Laws and (ii)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. To the General Partner's actual knowledge, each
of the balance sheets of the Partnership included in or incorporated by
reference into the Partnership Reports (including the related notes and
schedules) fairly presents the financial position of the Partnership as of
its date and each of the consolidated statements of income, retained
earnings and cash flows of the Partnership included in or incorporated by
reference into the Partnership Reports (including any related notes and
schedules) fairly presents the results of operations, retained earnings and
cash flows, as the case may be, of the Partnership for the periods set
forth therein (subject, in the case of unaided statements, to normal year-
end audit adjustments which would not be material in amount or effect), in
each case in accordance with generally accepted accounting principles
consistently applied during the periods involved, except as may be noted
therein and except, in the case of the unaided statements, as permitted by
the Securities Laws.
SECTION 5
Representations and Warranties of The Reit
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT Subsidiary or
any of their respective properties or assets are subject, where such
violation would have a REIT Material Adverse Effect. The REIT and its
Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
REIT Material Adverse Effect. Copies of the REIT's and its Subsidiaries'
Articles of Incorporation, Bylaws, organizational documents and partnership
and joint venture agreements have been or will be prior to the Closing,
delivered or made available to the Partnership and such documents will be
listed in the REIT
B-11
<PAGE>
Disclosure Letter and were or will be true and correct when delivered or
made available. For the purposes of this Section 5.1, the term "Subsidiary"
shall include the entities set forth in the REIT Disclosure Letter, which
are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other equity interest of
the REIT or any of its Subsidiaries, except under any employee incentive plan
approved by the REIT's stockholders. There are no agreements or understandings
to which the REIT is a party with respect to the voting of any REIT Shares or
which restrict the transfer of any such shares, except in order to protect its
REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected,
B-12
<PAGE>
except for any of the foregoing matters which, individually or in the
aggregate, would not have a REIT Material Adverse Effect; or (c) other than the
Regulatory Filings require any consent, approval or authorization of, or
declaration, filing or registration with, any domestic governmental or
regulatory authority, except where the failure to obtain such consent, approval
or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority would not have a REIT Material Adverse
Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the REIT included in or incorporated by reference into
the REIT Reports (including the related notes and schedules) fairly
presents the consolidated financial position of the REIT and the REIT
Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any related
notes and schedules) fairly presents the results of operations, retained
earnings or cash flows, as the case may be, of the REIT and the REIT
Subsidiaries for the periods set forth therein (subject, in the case of
unaided statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods
involved, except as may be noted therein and except, in the case of the
unaided statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
B-13
<PAGE>
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each
of its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports
required to be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such returns.
Neither the REIT nor any of its Subsidiaries has received notice that the
federal, state and local income and franchise tax returns of the REIT or
any such Subsidiary has been or will be examined by any taxing authority.
Neither the REIT nor any of its Subsidiaries has executed or filed with the
IRS or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made available to representatives of the Partnership or will be so
delivered or made available prior to the Closing. The REIT (i) has
qualified to be taxed as a REIT pursuant to Sections 856 through 859 of the
Code for its taxable years ended December 31, 1995 through 1998, inclusive;
(ii) has operated, and intends to continue to operate, in such a manner as
to qualify to be taxed as a REIT pursuant to Sections 856 through 859 of
the Code for its taxable year ended on the effective date of the Merger;
and (iii) has not taken or omitted to take any action which could result
in, and each of the executive officers of the REIT, each acting in his
respective capacity as such, has no actual knowledge of, a challenge to its
status as a REIT. The REIT represents that each of its Subsidiaries is a
Qualified REIT Subsidiary as defined in Section 856(i) of the Code. Neither
the REIT nor any of its Subsidiaries holds any asset (x) the disposition of
which could be subject to rules similar to Section 1374 of the Code as a
result of an election under IRS Notice 88-19 or (y) that is subject to a
consent filed pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 5.10, "taxes" includes any
interest, penalty or additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
B-14
<PAGE>
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such
policy. To the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or license from
any governmental authority having jurisdiction over any of the REIT
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the REIT Properties or which is necessary to permit the lawful use
and operation of all driveways, roads and other means of egress and ingress
to and from any of the REIT Properties that has not been obtained and is
not in full force and effect, or any pending threat of modification or
cancellation of any of same; (ii) neither the REIT nor its Subsidiaries has
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the REIT Properties issued by any governmental authority;
(iii) there are no structural defects relating to the REIT Properties and
no REIT Properties whose building systems are not in working order in any
material respect; and (iv) there is (A) no physical damage to any the REIT
Property in excess of $100,000 for which there is no insurance in effect
covering the cost of the restoration, (B) no current renovation to any the
REIT Property the cost of which exceeds $100,000 and (C) no current
restoration (excluding tenant improvements) of any the REIT Property the
cost of which exceeds $100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the REIT Properties or by the continued
maintenance, operation or use of the parking areas in any material respect.
All work to be performed, payments to be made and actions to be taken by
the REIT or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar action
relating to the REIT Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and the REIT is not aware of any planned or
proposed work, payments or actions that may be required after the date
hereof pursuant to such agreements, except as set forth in the REIT
Disclosure Letter.
B-15
<PAGE>
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
B-16
<PAGE>
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
B-17
<PAGE>
SECTION 6
Covenants
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such party
determined in good faith was required to be executed in order for the General
Partner or the Board, as applicable, to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement informed of the
status (but not the terms) of any such discussions or negotiations; and (ii) to
the extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as
contemplated by this Agreement, unless the other party has consented in
writing thereto, the REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of
their respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees;
B-18
<PAGE>
(ii) Shall confer on a regular basis with one or more
representatives of the other to report operational matters of
materiality and, subject to Section 6.1, any proposals to engage in
material transactions;
(iii) Shall promptly notify the other of any material emergency or
other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant or agreement
contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as
the case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds
resulting from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent
not to be unreasonably withheld or delayed) in writing thereto, the
Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed pursuant to this Agreement, issue any
Units or other interests in the Partnership, make any distribution,
effect any recapitalization or other similar transaction, (B) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any Partnership Units, (C)
increase any compensation or enter into or amend any employment
agreement with the General Partner or any of the present or future
affiliates of the General Partner, or (D) adopt any new employee
benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans;
(iv) Shall not declare, set aside or make any distribution or
payment with respect to any Units or other interests in the Partnership
or directly or indirectly redeem, purchase or otherwise acquire any
Units or other interests in the Partnership, or make any commitment for
any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent Partnership Financial
Statements (or the notes thereto) or incurred in the ordinary course of
business consistent with past practice;
(viii) Shall not enter into any commitment which individually may
result in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value, if
less) for all commitments;
B-19
<PAGE>
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the Partnership or its general partner(s) except to the extent the same
occur in the ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except
as contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its
capital stock, share dividend, recapitalization or other similar
transaction, ( B) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to
acquire any shares of its capital stock (except pursuant to any
employee incentive plan approved by shareholders), (C) amend any
employment agreement with any of its present or future officers or the
Board or (D) adopt any new employee benefit plan (including any share
option, share benefit or share purchase plan), except the employee
incentive plan to be voted on at its stockholder meeting for the fiscal
year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make
any other distribution or payment with respect to any REIT Shares or
directly or indirectly redeem, purchase or otherwise acquire any
capital stock of any of its Subsidiaries, or make any commitment for
any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not,
and shall not permit any of its subsidiaries to, sell or otherwise
dispose of (A) any REIT Properties or any of its capital stock of or
other interests in subsidiaries or (B) except in the ordinary course of
business, any of its other assets which are material, individually or
in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to
(except in the ordinary course of business), make any loans, advances
or capital contributions to, or investments in, any other person other
than in connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
the notes thereto) of the REIT included in the REIT Reports or incurred
in the ordinary course of business consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case of
any one commitment or in excess of $250,000 for all commitments, except
for those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure Letter; and
B-20
<PAGE>
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the REIT or any of its subsidiaries, except as herein or in the REIT
Disclosure Letter provided and except in the ordinary course of
business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any
consents required from third parties in form reasonably satisfactory to the
Partnership and the REIT necessary to effectuate the Merger; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such necessary
action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement").
B-21
<PAGE>
The respective parties will cause the Registration Statement and the Proxy
Statement to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and
regulations promulgated thereunder. The REIT shall use all reasonable efforts,
and the Partnership will cooperate with the REIT, to have the Registration
Statement declared effective by the SEC as promptly as practicable. The REIT
shall use its best efforts to obtain, prior to the effectiveness of the
Registration Statement, any necessary state securities law or "Blue Sky"
permits or approvals required to carry out the transactions contemplated by
this Agreement and will pay all expenses incident thereto. The REIT agrees that
the Registration Statement and the Proxy Statement and each amendment or
supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that the foregoing shall not apply to the extent that any
such untrue statement of a material fact or omission to state a material fact
was made by the REIT in reliance upon and in conformity with written
information concerning the Partnership furnished to the REIT by the Partnership
specifically for use in the Registration Statement. The Partnership agrees that
the written information provided by it specifically for inclusion in the
Registration Statement and each amendment or supplement thereto, at the time it
is filed or becomes effective, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The REIT will advise the Partnership,
promptly after it receives notice thereof, of the time when the Registration
Statement may be filed or any supplement or amendment has been filed or when
the Registration Statement will become effective, the issuance of any stop
order, the suspension of the qualification of the REIT Shares issuable in
connection with the Merger for offering or sale in any jurisdiction, or any
request by the SEC for amendment of the Proxy Statement or comments thereon and
responses thereto or requests by the SEC for additional information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing
B-22
<PAGE>
and shall not be merged therein. Upon the consummation of the Merger, such
obligations shall be assumed, automatically, by the REIT; provided, however,
that such assumption shall not impose upon or expose the REIT to any liability
for which the Partnership was not liable, and provided, further, that the REIT
shall be entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
SECTION 7
Conditions
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
B-23
<PAGE>
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice President of
the REIT, dated the Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have
received a certificate of the General Partner or the corporate general
partner if applicable dated the Closing Date, certifying to such effect.
B-24
<PAGE>
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of
the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or the independent directors of the
Board only for good reason. Only the following shall constitute termination for
"good reason" for the purposes of this Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as
to its fiduciary duties as imposed by law, and as advised by counsel, the
General Partner determines that such termination is required by reason of
an Acquisition Proposal relating to the Partnership being made;
B-25
<PAGE>
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of a Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into
an agreement to consummate a Partnership Acquisition Proposal to be
subsequently consummated, the Partnership shall pay as liquidated damages
(not as a penalty or forfeiture) to the REIT, provided that the REIT was
not in material breach of its obligations at the time of such termination,
an amount equal to the lesser of (x) the Partnership's Proportionate Share
of $500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter from its counsel indicating that it has received a ruling
from the IRS to the effect that the REIT Liquidated Damages Amount payment
constitutes Qualifying Income. In addition to the REIT Liquidated Damages
Amount, the REIT shall be entitled to receive from the Partnership (or its
successor in interest) all documented out-of-pocket costs and expenses
incurred by it, up to a maximum of the Partnership's Proportionate Share of
the REIT Expenses. The payments to which the REIT is entitled as described
above shall be its sole remedy with respect to the termination of this
Agreement under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the REIT Liquidated Damages
Amount), which payment of the REIT Expenses shall be the REIT's sole remedy
for termination of this Agreement in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
B-26
<PAGE>
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
non-terminating party shall be entitled to receive from the terminating
party (or its successor in interest) all of its documented out-of-pocket
costs and expenses in connection with this Agreement and the transactions
contemplated thereby. The payments to which the non-terminating party is
entitled under this Section 8.3(g) shall be its sole remedy with respect to
the termination of the Agreement under the circumstances contemplated in
this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6, 9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT
or the Partnership has received a Liquidated Damages Amount as provided in
this Section 8.3, such recipient shall not assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the other
party hereto or any of its officers, independent directors of the Board, or
General Partner, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination under
Section 8.2(g) or the exercise by the Partnership of its right to
termination under Section 8.2(f). Notwithstanding the foregoing, in the
event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it
shall be entitled to all expenses, including attorney's fees and expenses,
which it has incurred in enforcing its rights hereunder.
B-27
<PAGE>
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
General Provisions
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
AAA Net Realty Fund X, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit
B-28
<PAGE>
the persons identified therein, but the aggregate liability of the REIT with
respect thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or reflect such information. The term
"Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by
the public other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in violation of
this Agreement, (ii) at the time of disclosure was available on a
nonconfidential basis from a source other than the Providing Party or the
Providing Party Representatives, providing that such source is not and was
not bound by a confidentiality agreement with the Providing Party, (iii)
was known by the Receiving Party prior to receiving the Confidential
Material from the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its obligations
under this Agreement or (iv) is contained in any Partnership Reports or the
REIT Reports or Registration Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the Receiving
Party or the Receiving Party Representatives, in whole or in part, and will
not be used by the Receiving Party or the Receiving Party Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Merger or the evaluating, negotiating or advising with
respect to a transaction contemplated herein. Moreover, each Receiving
Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legally available steps to resist or narrow such request and (iii)
if disclosure of such information is required, to furnish only that portion
of the Confidential Material which, in the opinion of such Receiving
Party's counsel, such Receiving Party is legally compelled to disclose and
to cooperate with any action by
B-29
<PAGE>
the Providing Party to obtain an appropriate protective order or otherwise
reliable assurances that confidential treatment will be accorded the
Confidential Material (it being agreed that the Providing Party shall
reimburse the Receiving Party for all reasonable out-of-pocket expenses
incurred by the Receiving Party in connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from the Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the
Providing Party or destroy all tangible Confidential Material and will not
retain any copies, extracts or other reproductions thereof in whole or in
part. Any such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising the same.
Notwithstanding the foregoing, each Receiving Party and one Receiving Party
Representative designated by each Receiving Party shall be permitted to
retain one permanent file copy of each document constituting Confidential
Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any director, officer of the other party or any stockholder or
partner of the other party or any other person with respect to, or (z) make
any public announcement (except as required by law in respect of actions
permitted hereby) or proposal or offer whatsoever (including, without
limitation, any solicitation of consents as such terms are defined or used
in Regulation 14A of the Exchange Act) with respect to, (1) any form of
business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or the board of directors of the General
Partner(s), as applicable, or policies of the other party or any affiliate
thereof, (5) any request or proposal to waive, terminate or amend the
provisions of this Section 9.5, or (6) any proposal or other statement
inconsistent with the terms of this Section 9.5 or (B) instigate,
encourage, join, act in concert with or assist (including, without
limitation, providing or assisting in any way in the obtaining of financing
for, or acting as a joint or co-bidder for the other party with) any third
party to do any of the foregoing, unless and until such party has received
the prior written invitation or approval of a majority of the Board or the
General Partner(s), as applicable, to do any of the foregoing; provided
that, without such invitation or approval, either party may at any time, on
a confidential non-public basis, submit to the Chief Executive Officer of
the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party
providing for the acquisition of all or substantially all of the assets or
the securities of the other party, including, without limitation, a merger,
tender offer or exchange offer. Each party hereto agrees that it will not
agree with any third party to waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires
B-30
<PAGE>
the further approval of stockholders or partners, as applicable, without
obtaining such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
B-31
<PAGE>
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and
Chief Executive Officer
AAA Net Realty Fund X, Ltd.
By: American Asset Advisers
Management Corporation X
Its General Partner
By: _________________________________
H. Kerr Taylor, President
By: _________________________________
H. Kerr Taylor
Its General Partner
B-32
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 31, 1999
JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS
AAA Net Realty Fund XI, Ltd.
If you are a limited partner of AAA Net Realty Fund XI, Ltd., your vote is
very important:
AmREIT is seeking to merge with 10 partnerships, including AAA Net Realty
Fund XI, Ltd. AmREIT is a Maryland corporation that has elected to be taxed as
a real estate investment trust under the Internal Revenue Code . Like AAA Net
Realty Fund XI, Ltd., the primary business of AmREIT is the ownership of
properties leased to national and regional tenants. AmREIT's independent
directors and the general partners of AAA Net Realty Fund XI, Ltd. seek your
approval of the merger. In the merger, AmREIT will issue shares of common stock
or, under specified situations more fully described in the accompanying proxy
statement, cash and % callable notes to the limited partners of the 10
partnerships. At the completion of the merger, the existing limited partners of
partnerships approving the merger will become stockholders (or noteholders as
the case may be) of AmREIT and will no longer be limited partners in their
respective partnerships. As a condition precedent to the merger the AmREIT
shares will be listed for trading on the Nasdaq Stock Market's National Market.
The notes will not be listed on an exchange .
There are a number of risks and potential disadvantages associated with the
merger. In particular, you should consider the following:
. We are uncertain as to the value at which the AmREIT shares of common
stock will trade following the merger. AmREIT has fixed the exchange
price at $9.34 per share as described in the accompanying proxy
statement.
. We have material conflicts in light of Kerr Taylor being the chief
executive officer, a director and a significant stockholder of AmREIT
and being a general partner of the partnerships.
Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
The merger is a taxable transaction to limited partners.
. The merger involves a fundamental change in the limited partners'
investment.
A majority vote of limited partners binds the partnership.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these Securities or passed upon the
accuracy of this proxy statement. Any representation to the contrary is a
criminal offense.
The date of this Joint Consent and Proxy Solicitation Statement/Prospectus
is , 1999.
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT PROXY AND CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND XI, LTD.
DATED , 1999
This supplement is being furnished to you, as a limited partner of AAA Net
Realty Fund XI, for the purpose of enabling you to evaluate the proposed merger
of your partnership with AmREIT, Inc. This supplement is designed to summarize
only the risks, effects, fairness and other considerations of the proposed
merger that are unique to you and the other limited partners of your
partnership. This supplement does not purport to provide an overall summary of
the proposed merger and should be read in conjunction with the accompanying
Joint Proxy and Consent Solicitation Statement/Prospectus, which includes
detailed discussions regarding AmREIT and the other partnerships being merged
with AmREIT. Accordingly, the discussions in this supplement are qualified by
the more expanded treatment of these matters appearing in the proxy statement.
OVERVIEW
Pursuant to the proxy statement and this supplement, you are being asked to
approve the merger of your partnership into AmREIT. Your partnership is one of
10 limited partnerships with which AmREIT is seeking to merge. Supplements
comparable to this one have also been prepared for each of the other
partnerships. Copies of those other supplements may be obtained without charge
by you or your representative upon written request delivered to Larry Mangum,
Chief Financial Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite
824, Houston, Texas 77046.
The effects of the merger of these 10 limited partnerships with AmREIT may
be different for the limited partners in each of these limited partnerships.
What is AmREIT?
AmREIT is a Maryland corporation based in Houston, Texas that has elected to
be taxed as a real estate investment trust (REIT). AmREIT is an affiliate of
the general partners of your limited partnership. AmREIT acquires, develops,
owns and manages a diversified portfolio of freestanding and specialty retail
properties leased to national and regional retail tenants. If AmREIT acquires
all 10 partnerships in the merger, AmREIT expects to have total assets of
approximately $61 million, consisting of 42 properties, upon the effectiveness
of the merger.
How many shares of AmREIT common stock will I receive if my partnership merges
with AmREIT?
Your partnership will receive 677,322 shares of AmREIT common stock, which
we estimate amounts to $896 of AmREIT common stock per average original $1,000
investment. You will receive your proportion of these shares in accordance with
the terms of your partnership's partnership agreement. We have agreed with
AmREIT upon an exchange price of $9.34 per share for the shares of AmREIT
common stock. Because the shares of AmREIT common stock are not listed on an
exchange at this time, the price at which these shares may trade is uncertain
because there is no established trading market. Upon the consummation of the
merger, the shares of AmREIT common stock will be listed for trading on the
NASDAQ Stock Market's National Market. We do not know the price at which these
shares will trade on this exchange upon listing. It is possible that the shares
of AmREIT common stock will trade at prices substantially below the exchange
price.
S-1
<PAGE>
What do partners who vote against the merger receive?
Limited partners who vote against the merger, but if the partnership
nevertheless merges into AmREIT, will receive shares of AmREIT common stock in
exchange for their units, unless they expressly elect to receive a payment that
is 10% in cash and 90% in % callable notes due , 2006. The amount of
the cash and notes will be equal to 90% of the transaction value of the
partnership described below. Limited partners may only receive cash and
callable notes if they vote against the merger and expressly elect the
cash/callable note option on their consent form.
How does the consideration that I would receive in the merger compare to other
valuation amounts?
Below is a table that compares the value of the AmREIT common stock and the
cash/note option to alternative valuations that we considered.
<TABLE>
<CAPTION>
AmREIT Consideration Other Valuation
Offered Amounts
---------------------- ----------------------
Going
Transaction Cash/Note Concern Liquidation
Value(1) Value(2) Value(3) Value(3)
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Fund XI........................... $6,323,192 $5,690,873 $6,001,000 $5,422,000
</TABLE>
- --------
(1) The transaction value is equal to the negotiated price of your partnership
properties plus the net cash available at June 30, 1999. The transaction
value will be the basis for AmREIT common stock issued in conjunction with
the merger of your partnership at an exchange rate of $9.34 per share.
(2) The cash/note value is calculated based on a 10% discount from the
transaction value. This cash/note value will be the basis for cash/notes
issued in conjunction with the merger of your partnership to the limited
partners who vote "No" and specifically request the cash/notes option. The
discount from transaction value is based on a 5% discount for a reduced
marketing period, a 3% brokerage commission, and 2% for marketing and other
which are the amounts established by Valuation Associates in determining
the liquidation value.
(3) The going concern value and liquidation values are based on the Valuation
Associates appraisals and were the other two valuation methods considered
by your general partners and the independent directors of AmREIT.
What material risks and considerations should I consider in determining whether
to vote "For" or "Against" the merger?
There are a number of material risks that you should consider:
. We are uncertain as to the value at which the AmREIT common stock will
trade following the merger.
. We have material conflicts of interest because Mr. Kerr Taylor is both
the chief executive officer, a director and a significant stockholder of
AmREIT and the chief executive officer, director and significant
shareholder of your general partner.
. Unlike your partnership, AmREIT will not be prohibited from incurring
indebtedness.
. The merger is a taxable transaction.
. The merger involves a fundamental change in your investment.
What was the original time frame for liquidating the partnership?
While the disclosure documents, pursuant to which the limited partnership
units were offered to the public, disclosed the intentions of the partnership
to liquidate its assets after a maximum of ten to twelve years from
acquisition, the general partner is not under a legal obligation to liquidate
assets within that time frame. To the contrary, the partnership has an original
intended operating life of ten or more years, and the limited partners were
advised that the liquidation of the partnership would be in the control of the
general partners.
S-2
<PAGE>
What is the vote required to approve the merger?
Your partnership's partnership agreement requires more than 50% of the
outstanding limited partnership interests to approve AmREIT's merger with your
partnership. Approval by more than 50% of a partnership's limited partners will
be binding on you even if you vote against the merger.
Did you receive a fairness opinion in connection with AmREIT's merger with my
partnership?
Yes. Houlihan Lokey rendered an opinion stating that the merger
consideration to be received by the limited partners in connection with the
merger was fair, from a financial point of view, to those limited partners.
Do you, as the general partner of my partnership, recommend that I vote in
favor of the proposed merger?
Yes. Your general partner recommends that you vote "For" the proposed
merger. Your general partner believes that the merger is the best means to
maximize the value of your investment in your partnership as opposed to
liquidating your partnership's portfolio or continuing unchanged the investment
in your partnership.
How do I vote?
Just indicate on the enclosed consent form how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the special meeting of limited partners, your limited partnership
interests may be voted "For" or "Against" your partnership's merger with
AmREIT. If you sign and send in your consent form and do not indicate how you
want to vote, your consent form will be counted as a vote "For" the merger. If
you do not vote or you abstain from voting, it will count as a vote "Against"
the merger.
What are the tax consequences of the merger to me?
The merger is a taxable transaction to all limited partners, except those
that are tax-exempt entities. We estimate that the limited partners will
realize a loss on the merger of approximately $35 per average original $1,000
investment. This amount equals the limited partner's allocable share of the
difference between the fair market value of the merger consideration that your
partnership receives and your partnership's adjusted tax basis of its assets.
In general, you can expect to pay tax on $36 of gain per average original
$1,000 investment at the 25% rate offset by a $71 loss per average original
$1,000 investment at long term capital gains rates of 20%.
Your general partner urges you to consult with your tax advisor to evaluate
the taxes that will be incurred by you as a result of your participation in the
merger.
To review the tax consequences to the limited partners of the partnerships
in greater detail, see pages through of the proxy statement and
"Federal Income Tax Considerations" in this supplement.
RISK FACTORS
As a result of the merger, you will assume the risks associated with the
assets of AmREIT and the other partnerships acquired by AmREIT. Although the
majority of AmREIT's assets are substantially similar to those of your
partnership, the properties owned by AmREIT and the other partnerships acquired
by AmREIT may be differently constructed or located in a different geographic
area than the properties owned by your partnership. Because the market for real
estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
to which you are presently exposed. You can find geographic information
regarding AmREIT's and the other partnerships' properties in the proxy
statement.
S-3
<PAGE>
The following list summarizes the potential disadvantages, adverse
consequences and risks of the merger that are applicable to you. This
description is qualified in its entirety by the more detailed discussion in
the section entitled "Risk Factors" contained in the proxy statement beginning
on page .
. There can be no assurance that the Houlihan Lokey fairness opinion and
the independent appraisal by Valuation Associates properly reflect the
value of your partnership's assets. Therefore, your partnership may not
have received sufficient consideration consistent with its actual asset
value.
. We have significant conflicts of interest because H. Kerr Taylor, the
chief executive officer, a director and a significant stockholder of
AmREIT and the individual general partner or significant stockholder is
the corporate general partner of the partnerships, will receive
significant financial and other benefits from and/or as a result of the
merger.
The value of the AmREIT common stock may be less than the exchange price
after the merger because:
(1) the exchange price was fixed at $9.34 per share several months
before the anticipated effective time of the merger;
(2) the exchange price is not based on a known market value for the
shares since the AmREIT common stock is not traded on an established
market; and
(3) the trading volume or price of the AmREIT common stock may decrease
after the merger.
. While your partnership did receive a fairness opinion from Houlihan Lokey
and an independent appraisal by Valuation Associates, your general
partner did not retain an unaffiliated representative to represent you or
your partnership, or to represent all of the partnerships as a group, in
the merger. Had independent representation been arranged for your
partnership, the terms of the merger might have been more favorable to
you.
. The merger will be a taxable transaction for the limited partners, except
those investors that are tax-exempt entities.
. Limited partners who become stockholders of AmREIT may not receive the
same level of distributions as previously received from their respective
partnership interests as set forth on page of this supplement.
AmREIT's current rate of distributions (approximately $0.73 per share per
annum or approximately $71.22 per $1,000 original investment) is less
than the annual rate of distributions paid to the limited partners
(approximately $74.12 per $1,000 original investment).
. As a result of the merger, the nature of each limited partner's
investment will change from holding an interest in a specified portfolio
of properties in a finite life entity to holding an equity investment in
an ongoing REIT, whose portfolio of properties may be changed from time
to time without the approval of its stockholders and which does not plan
to liquidate such assets within a fixed period.
These risks and possible adverse consequences of the merger to the limited
partners are discussed in greater detail in the proxy statement.
S-4
<PAGE>
CONSEQUENCES OF FAILURE TO APPROVE MERGER
If the merger is not approved, your general partner will continue your
partnership in accordance with its current investment strategies and
objectives. Your partnership's strategy is to continue to hold its properties
with a view towards liquidating them at such times as the general partner deems
beneficial and appropriate in a manner consistent with your partnership's
investment objectives. The principal investment objectives of your partnership
are to:
. preserve and protect the limited partners' capital;
. provide the limited partners with quarterly cash distributions from
operations;
. obtain long-term appreciation in the value of its properties; and
. provide increased cash distributions to the limited partners as the cash
flow from its investments increases over the life of the partnership.
Your partnership acquired each of its properties for cash and without the
use of borrowed funds (leverage). Liquidation of your partnership, and your
partnership's ability to achieve its goals will be influenced by the following
factors.
. Concentration of Investment. Your partnership has concentrated its
investments in seven properties. If a vacancy or other interruption of
rents occur in one or more of these properties, the distributions of your
partnership may be significantly reduced. Your partnership has also
concentrated its investments in a limited geographic area. If conditions
in this area deteriorate, your partnership may experience more difficulty
in re-leasing its properties than it would experience if the properties
were more geographically diversified.
. Co-ownership of Property. Your partnership owns several of its
properties, Wherehouse Entertainment (Wichita, KS), Just For Feet
(Tucson, AZ), Bank United (The Woodlands, TX), Just For Feet (Baton
Rouge, LA) and Hollywood Video (Lafayette, LA), in co-ownership with
other funds. Your partnership owns 49%, 29.85%, 49%, 49% and 25.42%,
respectively, of these properties and is dependent upon the consent and
cooperation of the majority co-owner to sell or re-lease the property. No
assurance can be given that the co-owners will agree to the merger or to
the sale or re-lease of the property at such time or under the terms your
partnership may desire. We are soliciting the other co-owner's approval
to merge with AmREIT. If your partnership approves the merger but the
other co-owners reject the merger, the AmREIT board must approve owning
this property jointly with the other co-owners.
. Possible Need for Additional Capital. Although not required now or in the
past, you may be requested in the future to contribute additional capital
and/or approve partnership borrowings in order to finance future lease
renewal or re-leasing costs as described above.
. Management Compensation. Your partnership has no employees as its
operations are managed by AmREIT or one of its affiliates. Under the
services agreement, pursuant to which AmREIT manages the operations of
your partnership, AmREIT is entitled to annual property management fees
equal to 3% of gross rental revenues. Also, the services agreement
provides for payment of reimbursement fees of up to 7.5% of your
partnership's gross rental revenues. This relationship will terminate
after the merger if your partnership merges into AmREIT. If your
partnership participates in the merger, neither AmREIT nor the general
partner or any of their affiliates will receive any compensation for
services rendered in connection with the merger. AmREIT will expense
costs related to managing the properties of your partnership and these
costs will not be fixed.
S-5
<PAGE>
. Offers From Third Parties. No offers on the partnership's properties have
been received during the past twelve months by the general partner from
unaffiliated third parties except as noted in "THE MERGER--Offers from
Third Parties" beginning on page of the proxy statement. There can
be no assurance that your partnership will receive future offers to
purchase its properties on commercially attractive terms.
CONSIDERATION PAID TO PARTNERSHIP
The following table sets forth, for your partnership:
. the aggregate amount of original limited partner investments in your
partnership less any return of capital;
. the limited partner's adjusted capital per average $1,000 original
investment;
. the number of shares of AmREIT common stock to be paid to your
partnership;
. the estimated value of the shares of AmREIT common stock paid to your
partnership based on the exchange price of $9.34 per share;
. the estimated value, based on the exchange price, of shares of AmREIT
common stock you will receive for each $1,000 of your original
investment:
<TABLE>
<CAPTION>
Estimated Value
of
AmREIT Shares per
Original Limited Limited Partner Number of AmREIT Estimated Value of Average $1,000
Partner Investments Adjusted Capital per Shares Offered AmREIT Shares Limited Partner
Less any Return of Average $1,000 to Limited Payable to Limited Adjusted
Capital(1) Original Investment(1) Partners(2) Partners(3) Capital(3)
------------------- ---------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
$7,061,209 $1,000 677,322 $6,326,192 $896
</TABLE>
- --------
(1) The original limited partner investment in the partnership was $7,061,209.
These columns reflect, as of June 30, 1999, an adjustment to the limited
partners' original investments based on return of capital, resulting in the
adjusted capital balance.
(2) The shares of AmREIT common stock payable to the limited partners of your
partnership as set forth in this chart will not change if AmREIT acquires
fewer than all of the partnerships in the merger. This number assumes that
none of the limited partners of the partnership has elected the cash/notes
option.
(3) Values are based on the exchange price of $9.34 established by AmREIT and
your general partners. Upon listing the shares of AmREIT common stock on an
exchange, the actual values at which the shares of AmREIT common stock will
trade on the exchange may be significantly below the exchange price.
Upon completion of the merger with your partnership, the operations and
existence of your partnership will cease. For more detailed information about
the effects of the merger, see the tax information provided under the caption
"The Merger" beginning on page of the proxy statement. In the event the
merger is not consummated for any reason, your partnership will continue to
pursue its business objectives of maximizing the value of its properties, in
addition to the possible liquidation of its portfolio, another strategic
combination or another attractive alternative that may become available.
S-6
<PAGE>
EXPENSES OF THE MERGER
If your partnership approves the merger, AmREIT will bear all costs of the
merger. If your partnership rejects the merger, then your partnership will bear
the portion of its merger expenses based upon the percentage of "For" votes
cast for the merger, and we, as general partner will bear the portion of those
merger expenses based upon the percentage of "Against" votes and abstentions.
The amount of the merger expenses borne by all partnerships is estimated to be
$211,700, and of this amount approximately $47,698 will be allocated to your
partnership based on its proportionate share of the combined net asset values
of all 10 partnerships. In addition to the partnership's proportional share of
these partnership expenses, the partnership will bear its own direct expenses
for partner communications and correspondence.
The following table sets forth the estimated merger expenses allocable to
your partnership:
<TABLE>
<S> <C>
Pre-closing Transaction Costs:
Legal................................................................ $ --
Accounting........................................................... 1,014
Fairness Opinions/Valuations......................................... 40,038
Printing............................................................. --
Appraisal Fees....................................................... 6,196
Listing Fees......................................................... --
Miscellaneous........................................................ 451
-------
Total.............................................................. $47,698
=======
</TABLE>
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
You are being asked to vote in favor of the merger of your partnership with
AmREIT and the amendment of your partnership's agreement of limited partnership
to permit the merger to occur. For your partnership to be acquired by AmREIT,
limited partners holding partnership interests constituting greater than 50% of
the outstanding partnership interests of your partnership must approve the
merger and the amendment to your partnership agreement. The affirmative vote of
greater than 50% of your partnership's limited partners will bind all partners
of your partnership.
Consequence of Failure to Approve the Merger
If limited partners of your partnership representing greater than 50% of the
outstanding partnership interests do not vote "For" the merger, the merger may
not be consummated under the terms of the partnership agreement. In that event,
we plan to continue to operate your partnership as a going concern and to
eventually dispose of your partnership's properties, as contemplated by the
terms of the partnership agreement.
Special Meeting to Discuss the Merger
We have scheduled a special meeting of the limited partners of your
partnership to discuss the solicitation materials, which include the proxy
statement, this supplement and the other materials distributed to you, and the
terms of the merger with you. At the conclusion of these discussions we will
vote on the merger. The special meeting will be held at [time], Houston time,
on, 1999, at . We and members of AmREIT's
management intend to solicit actively your support for the merger and would
like to use the special meeting to answer questions about the merger and the
solicitation materials (as defined below) and to explain in person our reasons
for recommending that you vote "For" the merger.
S-7
<PAGE>
VOTING PROCEDURE
The proxy statement, this supplement, the accompanying transmittal letter,
the power of attorney and the consent form constitute the solicitation
materials are being distributed to you and the other limited partners to
obtain your votes "For" or "Against" the merger of your partnership with
AmREIT.
In order for AmREIT to acquire your partnership, the limited partners
holding greater than 50% of the outstanding partnership interests of your
partnership must approve the merger. Your partnership will be acquired by a
merger with AmREIT, in the manner described in the proxy statement. A copy of
the Amended and Restated Agreement and Plan of Merger dated June 25, 1999, by
and between AmREIT and your partnership is attached hereto as Appendix B. Your
general partner encourages you to read the merger agreement in its entirety
because it is the legal document governing the merger.
If you are not planning on attending the special meeting of the limited
partners of your partnership and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the merger with your partnership. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a)
,1999 (a date not more than 60 calendar days from the initial
delivery of the solicitation materials), or (b) any later date as we may
select and as to which we give you notice. At our discretion, we may elect to
extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by
prior to [time], Houston time, on the last day of the
solicitation period will be effective provided that such consent form has been
properly completed and signed. If you fail to return a signed consent form by
the end of the solicitation period, your partnership interests will be counted
as voting "Against" the merger and you will receive shares of AmREIT common
stock if your partnership is acquired.
The consent form consists of two parts. Part A seeks your consent to your
partnership's merger with AmREIT and an amendment to your partnership's
partnership agreement authorizing the merger. If you have interests in more
than one partnership, you will receive multiple consent forms which will
provide for separate votes for each partnership in which you own an interest.
If you return a signed consent form but fail to indicate whether you are
voting "For" or "Against" any matter (including the merger), you will be
deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints Mr. H. Kerr Taylor as your
attorney-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the merger. The power of
attorney is intended solely to ease the administrative burden of completing
the merger without requiring your signatures on multiple documents.
FAIRNESS OF THE MERGER
Based upon your general partner's analysis of the merger, your general
partner reasonably believes that:
. The terms of the merger, when considered as a whole, are fair to the
limited partners;
. The transaction value (and the value of the cash/note option) offered in
exchange for the partnership interests constitute fair consideration for
the partnership interests of the limited partners; and
. After comparing the potential benefits and detriments of the merger with
those of several alternatives, the merger is more attractive to the
limited partners than such alternatives.
YOUR GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS. ACCORDINGLY, YOUR GENERAL PARTNER HAS APPROVED THE MERGER
S-8
<PAGE>
AGREEMENT AND RECOMMEND THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
Your general partner's determination is based upon the transaction as a
whole, as well as the combination of less than all partnerships, because your
partnership's value for the purposes of the merger is its net asset value. Your
general partner believes that net asset value is a reasonable estimate of the
value of your partnership for the merger as it is directly derived from the
value of your partnership's net assets at the effective date, independent of
the valuations of the assets of the other partnerships. Your general partner
also believes the exchange price, the value on which shares of AmREIT common
stock will be issued to your partnership in the merger, is a reasonable
estimate of the value of the shares based on the last public offering price of
the shares and within the overall context of the merger.
Fairness Opinion. Your general partner, on behalf of the partnership,
retained Houlihan Lokey to render an opinion as to whether the consideration to
be received by the limited partners in connection with the merger was fair,
from a financial point of view, to the limited partners. A copy of the fairness
opinion is attached as Appendix A. Your general partner encourages you to read
the Houlihan Lokey opinion in its entirety. Houlihan was not requested to, and
did not make, any recommendation to your partnership as to the consideration to
be received by you in connection with the merger, which consideration was
determined through negotiations between the common management of the
partnerships and AmREIT. Your general partner retained Houlihan Lokey to render
its fairness opinion based upon Houlihan Lokey's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
and valuations for corporate purposes especially with respect to REITs and
other real estate companies. Houlihan delivered its written opinion, dated June
25, 1999, to the general partners, to the effect that, as of the date of such
opinion, based on Houlihan Lokey's review and subject to the limitations
described in the proxy statement, the consideration to be received by the
limited partners in connection with the merger is fair, from a financial point
of view, to the limited partners. The Houlihan Lokey fairness opinion does not
constitute a recommendation to any limited partner as to how any of you should
vote on the merger.
Independent Appraisal. Your general partner received an appraisal of your
partnership and its properties prepared by Valuation Associates, an independent
real estate appraisal firm. Your general partner compared the value of the
shares of AmREIT common stock payable to the partnership, based on the exchange
price, with the appraised value of the partnership. Based on this comparison,
your general partner determined that the number of shares payable to the
partnership was reasonable.
Comparison of Benefits and Detriments. Your general partner's assessment of
the fairness of the proposed merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included a strategic combination with AmREIT under the caption "The Merger--
Alternatives to the Merger" beginning on page of the proxy statement to take
advantage of the potential growth of the REIT industry and real estate markets
in general, completely liquidating the partnership and continuing the
partnership. In order to determine whether the merger or one of its
alternatives would be more attractive to you, your general partner compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of these alternatives. A detailed discussion of the potential
benefits and detriments of each of these alternatives is provided in the proxy
statement.
In the event the merger is not consummated for any reason, your partnership
will continue to pursue its business objectives of maximizing the value of its
properties, in addition to the possible liquidation of its portfolio, another
strategic combination or another attractive alternative that may become
available.
S-9
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide you with a brief comparison of the
compensation, fees and distributions paid to your general partner and its
affiliates under your partnership's current arrangements with those that would
have been paid had the merger been in place. The following table sets forth the
compensation, fees and distributions paid by your partnership to your general
partner and its affiliates during the most recent fiscal year and the six-month
period ended June 30, 1999 and compares those payments against the amount that
would have been paid assuming the merger had occurred on January 1, 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Six Months Ended
December 31, 1996 December 31, 1997 December 31, 1998 June 30, 1999
----------------- ----------------- ----------------- -----------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma Actual Pro Forma
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administrative
Reimb.(1).............. $17,832 $ -- $25,350 $ -- $43,442 $ -- $23,316 $ --
Cash Distributions(2)... 2,040 -- 2,820 -- 3,120 -- 1,410 --
General Partners'
Salary(3).............. -- 2,946 -- 2,946 -- 2,946 -- 1,768
General Partners'
Distributions(4)....... -- 55,981 -- 56,769 -- 57,558 -- 28,385
</TABLE>
- --------
(1) An AmREIT subsidiary receives administrative reimbursements of up to 7.5%
of gross rental revenues from the properties. No other fees, salaries or
other compensation were paid by the partnership to its general partners or
their affiliates during these periods.
(2) Includes all cash distributions made to Mr. H. Kerr Taylor, chairman of the
board and chief executive officer of AmREIT and his affiliates resulting
from ownership of Units and general partner interests. Mr. Taylor's
employment agreement with AmREIT provides for a fixed base salary of
$25,000 until June 1999 and $30,000 through June 2000, which amount will
not increase as a result of the merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor is
currently entitled to receive as an officer and director of AmREIT
allocated to the partnership based on the percentage of shares of AmREIT to
be owned by the limited partners immediately after the merger. No other
affiliate of the general partner of the partnership will receive
compensation from AmREIT upon completion of the merger.
(4) Mr. Taylor's distributions represent that portion of dividends which would
have been paid to him based on the pro-rata portion of the shares issued
under the deferred adviser agreement. Upon the sale of his advisor
(American Asset Advisers Realty Corporation) on June 5, 1998, Mr. Taylor
elected to defer payment of these fees to a future date, contingent upon
the issuance of additional stock and the growth of the company's net worth.
New Compensation
AmREIT will internally manage and lease the properties obtained by AmREIT
from the partnership pursuant to the merger. The terms of this engagement will
be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
CONFLICTS OF INTEREST
Affiliated General Partner
Your general partner has an independent obligation to assess whether the
terms of the merger are fair and equitable to the limited partners of your
partnership without regard to whether the merger is fair and equitable to any
of the other participants (including the limited partners in other
partnerships). Mr. Taylor is the chief executive officer and director of
AmREIT, currently holds 262,061 shares or 11% of AmREIT common stock and is the
chief executive officer, sole director and significant stockholder in each of
the corporate general partners of all of the partnerships.
Benefits to Mr. Taylor
Mr. Taylor will receive up to 3,992 shares of AmREIT common stock should
these partnerships participate in the merger. In addition, Mr. Taylor may
purchase up to an additional 6,784 shares with the disposition fees payable by
Fund III, Fund IV, Fund V and Fund VI should they participate in the merger.
S-10
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. We urge you to consult your
tax advisor for a full understanding of the tax consequences of the merger and
the reorganization to you.
Certain Tax Differences between the Partnership Interests and Shares of AmREIT
Common Stock
Because your partnership is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a limited partner, you are required
to take into account your share of the income or loss of your partnership,
regardless of whether any cash is distributed to you. If your partnership is
acquired by AmREIT, and you have voted "For" the merger, you will receive
shares of AmREIT common stock. If you have voted "Against" the merger but your
partnership is acquired by AmREIT, you will receive shares of AmREIT common
stock unless you elect the cash/notes option, in which case you will receive
cash and notes.
If your partnership is acquired by AmREIT and you receive shares of AmREIT
common stock, your ownership of shares of AmREIT common stock will affect the
character and amount of income reportable by you in the future. Your
partnership is a partnership for federal income tax purposes and is not subject
to taxation. Currently, as the owner of partnership interests, you must take
into account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to
you. Your partnership supplies that information to you annually on a Schedule
K-1. The character of the income that you recognize depends upon the assets and
activities of your partnership and may, in some circumstances, be treated as
income which may be offset by any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your partnership is
acquired by AmREIT and you receive shares of AmREIT common stock, as a
stockholder of AmREIT you will be taxed based on the amount of distributions
you receive from AmREIT. Each year AmREIT will send you a Form 1099-DIV
reporting the amount of taxable and nontaxable distributions paid to you during
the preceding year. The taxable portion of these distributions depends on the
amount of AmREIT's earnings and profits. Because the merger is a taxable
transaction, AmREIT's tax basis in the acquired properties will be higher than
your partnership's tax basis had been in the same properties. At the same time,
however, AmREIT may be required to utilize a slower method of depreciation with
respect to certain properties than that used by your partnership. As a result,
AmREIT's tax depreciation from the acquired properties will differ from your
partnership's tax depreciation. Accordingly, under certain circumstances, even
if AmREIT were to make the same level of distributions as your partnership, a
larger portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of AmREIT does
not depend on its character to AmREIT. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends.
Furthermore, if AmREIT incurs a taxable loss, the loss will not be passed
through to you.
Tax Consequences of the Merger
In connection with the merger and for federal income tax purposes, the
assets (and any liabilities) of your partnership (if your partnership is
acquired by AmREIT) will be transferred to AmREIT in return for shares of
AmREIT common stock and/or cash and notes. Your partnership will then
immediately liquidate and distribute such property to you. The IRS requires
that you recognize a share of the income or loss, subject to the limits
described below, recognized by your partnership, including gain or loss
recognized as a result of the transfer of properties pursuant to the merger.
We estimate that the limited partners will realize a loss on the merger of
approximately $35 per average original $1,000 investment. This amount equals
the limited partner's allocable share of the difference between the fair market
value of the merger consideration that your partnership receives and your
partnership's adjusted tax basis of its assets. In general, you can expect to
pay tax on $36 of gain per average original $1,000
S-11
<PAGE>
investment at the 25% rate offset by a $71 loss per average original $1,000
investment at long term capital gains rates of 20%. The actual amount of gain
recognized by the partnership and allocated to each limited partner will depend
upon the value ascribed to the shares of AmREIT common stock for federal income
tax purposes. Because the shares will not be publicly traded until immediately
after the merger, it is possible that the value of the shares used for purposes
of calculating the taxable income (or loss) and the taxable income (or loss)
per average original $1,000 investment will differ from the calculation stated
above. Your partnership's federal income tax returns are subject to review and
possible adjustment by the IRS. Under federal income tax laws, regulations and
administrative rulings, certain types of transactions may be accorded varying
interpretations. Accordingly, your partnership's financial statements, as well
as your individual tax return, may be changed to cause them to conform to the
tax treatment resulting from such review, if any.
As a general rule, an actual or deemed transfer of assets of a partnership
such as your partnership to a corporation such as AmREIT in exchange for stock
is a taxable transaction. However, as an exception to this general rule, under
section 351(a) of the Code, no gain or loss is recognized if (1) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation, and (2) immediately after the exchange, such
individuals or entities are in control of the corporation. For purposes of
section 351(a), control is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation. Following the merger, even if all
partnerships participate in the merger transaction, the limited partners of the
partnerships will not own stock possessing at least 80 percent of the total
combined voting power of all classes of AmREIT stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of AmREIT
stock. Therefore, the merger will not result in the acquisition of control of
AmREIT by the limited partners for purposes of section 351(a). Even if the
merger resulted in the acquisition of control of AmREIT by the limited
partners, section 351(a) does not apply to a transfer of property to an
investment company in exchange for stock. A transfer is considered made to an
investment company if the transfer results in the diversification of the
transferor's interests and the transferee is a REIT. Accordingly, the transfer
of assets will result in recognition of gain or loss by each partnership that
is acquired by AmREIT.
If your partnership is acquired by AmREIT and no limited partners elect the
cash/notes option, your partnership will receive solely shares of AmREIT common
stock in exchange for your partnership's assets. As a result, your partnership
will recognize an amount of gain equal to the difference between (1) the sum of
(a) the fair market value of the shares of AmREIT common stock received by your
partnership and (b) the amount of your partnership's liabilities, if any,
assumed by AmREIT and (2) the adjusted tax basis of the assets transferred by
your partnership to AmREIT.
If your partnership is acquired by AmREIT and you or another limited partner
in your partnership elect the cash/notes option, your partnership will receive
shares of AmREIT common stock, cash and notes in exchange for your
partnership's assets. Because the principal portion of the notes will not be
due until , 2006, the merger of your partnership's assets, in part, in
exchange for notes will be reported under the installment sales method and a
portion of your partnership's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the merger, the amount of gain
recognized by your partnership in the year of the merger will be at least equal
to the value of the shares of AmREIT common stock and cash received by your
partnership multiplied by the ratio that the gross profit realized by your
partnership in the merger bears to the total contract price for your
partnership's assets. To the extent your partnership realizes depreciation
recapture income under section 1245 or section 1250 of the Code, the recapture
income will also be recognized by your partnership in the year of the merger.
The gross profit that your partnership realizes from the merger will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) for your partnership's assets over the adjusted tax basis
of those assets. The contract price will equal the selling price reduced by
certain qualified indebtedness
S-12
<PAGE>
encumbering your partnership's assets, if any, that are assumed or taken
subject to by AmREIT. The exact amount of the gain to be recognized by your
partnership in the year of the merger will also vary depending upon the
decisions of the limited partners to receive shares of AmREIT common stock,
cash and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the merger are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your partnership
would be combined with any other section 1231 gains and losses that you
recognize in that year. If the result is a net loss, such loss is characterized
as an ordinary loss. If the result is a net gain, it is characterized as a
capital gain, except that the gain will be treated as ordinary income to the
extent that you have "non-recaptured net section 1231 losses." For these
purposes, the term "non-recaptured net section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have
not been previously recaptured. However, gain recognized on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions taken by your partnership prior to sale. In general,
you may only use up to $3,000 of capital losses in excess of capital gains to
offset ordinary income in any taxable year. Any excess loss is carried forward
to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your partnership recognizes will be allocated to you and the other
limited partners in accordance with the terms of your partnership's partnership
agreement. Each limited partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the limited
partner's decision to receive cash and notes rather than shares of AmREIT
common stock. Even though a limited partner's election of the cash/notes option
may decrease the amount of gain your partnership recognizes, the electing
limited partner still will be required to take into account its share of your
partnership's gain as determined under the partnership agreement of your
partnership. Therefore, limited partners who elect the cash/notes option may
recognize gain in the year of the merger despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments with
which to pay the tax on the gain. Such limited partners will adjust the basis
of the notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
limited partners electing the cash/notes option.
Tax Consequences of the Liquidation and Termination of Your Partnership. If
your partnership is acquired by AmREIT, your partnership will be deemed to have
liquidated and distributed shares of AmREIT common stock and/or cash and notes,
as the case may be, to you. The shares of AmREIT common stock or cash and notes
will be distributed among you and the other limited partners in a manner that
we, as the general partners of your partnership, determine to be pro rata based
on your respective capital account balances. The taxable year of your
partnership will end at this time, and you must report in your taxable year
that includes the date of the merger, your share of all income, gain, loss,
deduction and credit for your partnership through the date of the merger
(including gain or loss resulting from the merger described above). If your
taxable year is not the calendar year, you could be required to recognize as
income in a single taxable year your share of your partnership's income
attributable to more than one of its taxable years.
If you receive only shares of AmREIT common stock in the merger, in addition
to your share of the gain or loss described above that you recognized as a
result of the deemed sale of your partnership's assets, you will recognize gain
or loss equal to the difference between the fair market value of the shares of
AmREIT common stock that you receive (determined on the closing date of the
merger) and your adjusted tax basis in your partnership interests (adjusted by
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your partnership (including any such items recognized by
your partnership as a result of the merger) as well as any distributions you
receive in such final taxable year (other than the distribution of the shares
of AmREIT common stock)). Your basis in the shares of AmREIT common stock will
then equal the fair market value of the shares of AmREIT common stock on the
closing date of the merger and your holding period for the shares of AmREIT
common stock for purposes of determining capital gain or loss will begin on the
closing date of the merger.
S-13
<PAGE>
If you receive cash and notes in the merger, in addition to your share of
the gain or loss described above that you recognized as a result of the deemed
sale of your partnership's assets, you will recognize gain to the extent that
the amount of cash you receive in the merger exceeds your adjusted basis in
your partnership interests (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your partnership
(including any such items recognized by your partnership as a result of the
merger) as well as any distributions you receive in such final taxable year
(other than the distributions of the cash and notes)). Your basis in the notes
distributed to you will equal your adjusted basis in your partnership
interests, reduced (but not below zero) by the amount of any cash distributed
to you and your holding period for the notes for purposes of determining
capital gain or loss from the disposition of the notes will include your
holding period for your partnership interests.
Because the assets of your partnership are held for investment and not for
resale, the merger will not result in the recognition of material unrelated
business taxable income by you if you are a tax-exempt investor that does not
hold partnership interests either as a "dealer" or as debt-financed property
within the meaning of section 514, and you are not an organization described in
section 501(c)(7) (social clubs), section 501(c)(9) (voluntary employees'
beneficiary associations), section 501(c)(17) (supplemental unemployment
benefit trusts)or section 501(c)(20) (qualified group legal services plans) of
the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the merger.
Treatment of Noteholders. If you receive cash and notes in the merger, under
general principles of the Code, you must include stated interest in income in
accordance with your method of tax accounting. Accordingly, if you use the
accrual method of tax accounting, you must include stated interest in income as
it accrues and, if you use the cash method of tax accounting, you must include
stated interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions (including
investment expenses) to the extent such deductions exceed two percent of your
adjusted gross income.
Noteholders will recognize gain or loss when AmREIT makes payments of
principal under the notes. The amount of gain or loss recognized at the time
the principal payments are made will be equal to the difference between the
amount of the principal payments and the noteholder's basis in the notes. If,
however, the notes are redeemed in part prior to the maturity date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
In general, if you are a holder of notes, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (1) the amount of cash and the fair market
value of property received (except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest) and (2) your tax basis in the
note. Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable year
(together with any other installment obligations that you receive during the
year) exceeds $5,000,000, you may be required to pay to the IRS interest at the
federal underpayment rate based on a portion of the tax liability that you have
deferred.
S-14
<PAGE>
Tax Consequences of the Merger to AmREIT. AmREIT will not recognize gain or
loss as a result of the merger. AmREIT will have a holding period in the
properties that begins on the closing date. The basis of the properties
received by AmREIT from the partnerships that are acquired by AmREIT will equal
the fair market value of the shares of AmREIT common stock plus the cash and
the issue price of the notes issued in the merger, plus the amount of any
liabilities of the partnerships assumed by AmREIT.
The aggregate basis of AmREIT's assets will be allocated among such assets
in accordance with their relative fair market values as described in section
1060 of the Code. As a result, AmREIT's basis in each acquired property may
differ from the partnership's basis therein, and the properties may be subject
to different depreciable periods and methods as a result of the merger. These
factors could result in an overall change, following the merger, in the
depreciation deductions attributable to the properties acquired from the
partnerships following the merger.
Tax Consequences of the Reorganization. AmREIT desires to reorganize as a
Texas REIT following the merger. AmREIT will not recognize gain or loss as a
result of the reorganization. The reorganization will not change AmREIT's
holding period or tax basis of its properties.
No gain or loss will be recognized by the holders of AmREIT common stock
pursuant to the reorganization. The aggregate tax basis of AmREIT common stock
received in the reorganization will be the same for holders of such stock as
the basis of the AmREIT common stock before the reorganization. In addition,
the holding period of such AmREIT common stock received in the reorganization
shall remain the same.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per average original $1,000 investment
during the most recent five fiscal years and the most recently completed
interim period. Also see "THE PARTNERSHIPS--Partnership Distributions" on page
of the proxy statement.
<TABLE>
<CAPTION>
Six
Months
Ended
June 30,
1994 1995 1996 1997 1998 1999
---- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Distributions................... $-- $18.05 $39.01 $68.43 $74.12 $58.63
</TABLE>
Financial Information
Rental income statements for the properties of the partnership for the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997 and
certain pro forma financial statements with respect to the partnership are set
forth in the proxy statement under the caption "Index to Financial Statements"
beginning on page .
List of Investors
Under the partnership agreement and Texas law, a limited partner may obtain
a list of the names, addresses and number of partnership interests owned by the
other limited partners entitled to so vote on the merger by making written
request therefor from the general partners, c/o Larry Mangum, Chief Financial
Officer and Treasurer, AmREIT, Inc., 8 Greenway Plaza, Suite 824, Houston,
Texas 77046. At the time of making the request, the requesting limited partner
must submit $10.00 in payment for the costs of copying and mailing the list
and, if the partnership interests are held through a nominee, provide the
partnership with a statement from the nominee or other independent third party
confirming such limited partner's beneficial ownership. A limited partner is
only entitled to the foregoing information with respect to the partnership in
which the limited partner holds partnership interests.
S-15
<PAGE>
June 25, 1999
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund XI, Ltd.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding AmREIT, Inc. ("AmREIT") and AAA Net
Realty Fund XI, Ltd. (the "Partnership"). AmREIT is a real estate investment
trust that was organized as a Maryland corporation in 1993. AmREIT became
internally managed upon its acquisition of its external advisor in June 1998
(the "Adviser Acquisition"), as a result, AmREIT is a self-managed and self-
administered REIT. AmREIT acquires, develops, owns and manages a diversified
portfolio of freestanding and specialty retail properties leased to national
and regional retail tenants.
Mr. Kerr Taylor serves as the President of American Asset Advisors
Management Corporation XI, the general partner of the Partnership ( the
"General Partner"). The Partnership owns interests in seven retail properties.
Following the Adviser Acquisition, Mr. Taylor and his affiliated corporation
retained their fiduciary responsibilities associated with such General Partner
of the Partnership. However, the Partnership's properties are currently managed
by AmREIT Realty Investment Corporation, an affiliate of AmREIT.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Merger") through a merger transaction.
Specifically, we understand that pursuant to the Partnership Merger, AmREIT
will provide a total of 677,185 shares of AmREIT common stock in exchange for
the aggregate limited partnership interests in the Partnership. The Partnership
Merger and other related transactions disclosed to Houlihan Lokey are referred
to collectively herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey render
an opinion (the "Opinion") as to the matters set forth below. The Opinion does
not address AmREIT's, the General Partner's or the Partnership's underlying
business decision to effect the Transaction. We have also not been asked to
opine on and are not expressing any opinion as to: (i) the tax consequences of
the Transaction; (ii) the public market values or realizable value of AmREIT's
common shares given as consideration in the Transaction or the prices at which
AmREIT's common shares may trade in the future following the Transaction, or
(iii) the fairness of any aspect of the Transaction not expressly addressed in
this Opinion. Moreover, we have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of AmREIT, or
the Partnership. Furthermore, at your request, we have not negotiated the
Transaction or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with the General Partner and certain members of its
senior management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General
Partner and AmREIT;
3. reviewed the Partnership's annual reports to partners for the fiscal
years ended December 31, 1998, 1997 and 1996 and interim financial
statements for the three month period ended March 31, 1999 which the
General Partner has identified as being the most current financial
statements available and has indicated that there has been no material
change in the financial position of the Partnership since such financial
statements;
A-1
<PAGE>
4. reviewed copies of the 1994 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the two fiscal years ended 1998 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1999;
6. reviewed forecasts and projections prepared by the General Partner
with respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management with
respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for AmREIT, Inc. and the Partnership;
8. reviewed a draft of the Amended and Restated Agreement and Plan of
Merger to be entered into by and between AmREIT and the Partnership;
9. reviewed the appraisal of the Partnership's real property prepared by
Valuation Associated dated May 31, 1999;
10. reviewed the historical market prices for the AmREIT's publicly
traded securities;
11. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of AmREIT and the Partnership and that there
has been no material change in the assets, financial condition, business or
prospects of AmREIT or the Partnership since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
AmREIT or the Partnership. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate consideration to be received by the limited partners of AAA Net
Realty Fund XI, Ltd. in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
AAA Net Realty Fund XI, LTD
June 25, 1999 -2-
A-2
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of June 25, 1999, is entered into by and between AmREIT, Inc., a
Maryland real estate investment trust (the "REIT"), and AAA Net Realty Fund XI,
Ltd., a Texas limited partnership (the "Partnership"). H. Kerr Taylor, on
behalf of himself as the individual General Partner and American Asset Advisers
Management Corporation XI, a Texas corporation, the General Partners of the
Partnership (referred to herein as the "General Partner"), is a party to this
Agreement solely for the purpose of binding itself to the provisions of Section
5 and Section 7.9, hereunder.
RECITALS
A. Effective July 1, 1998, the parties hereto entered into that certain
Agreement and Plan of Merger (the "Original Agreement"); and
B. The parties now desire to amend and restate the Original Agreement to
reflect the current agreement between the parties.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
REIT and the Partnership hereby agree as follows:
SECTION 1
The Merger
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), and in accordance with the
Maryland General Corporation Law (the "Maryland Law") and the Texas Revised
Uniform Limited Partnership Act (the "LP Act") the Partnership shall be merged
with and into the REIT in accordance with this Agreement (the "Merger").
Following the Merger, the separate existence of the Partnership shall cease and
the REIT shall continue as the surviving entity (the "Surviving Corporation")
and shall succeed to and assume all the rights and obligations of the
Partnership. The Merger shall have the effects specified in the Maryland Act,
and Section 2.11 of the LP Act.
1.2 The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of the
REIT, located at Eight Greenway Plaza, Suite 824, Houston, Texas 77046 at
10:00, a.m., local time, within five business days after receipt of approval of
the Merger by the REIT's shareholders and the Partnership's partners (the
"Partners"), or at such other time, date or place as the REIT and the
Partnership may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Section
8 hereof shall have been fulfilled or waived (and this Agreement shall not have
been terminated as provided in Section 9 hereof), the REIT and the Partnership
shall cause Articles of Merger satisfying the requirements of the Maryland Act
and Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Maryland Act on the Closing Date. The Merger shall become effective upon
the later of (i) the issuance of a certificate of merger by the State
Department of Assessments and Taxation of the State of Maryland and (ii) the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, or such other date as may be agreed to by the parties, but not later
than the Closing Date.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation and
Bylaws of the REIT as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation at the
Effective Time.
B-1
<PAGE>
1.5 Officers and Directors. The officers of the REIT immediately prior to
the Effective Time shall continue as officers of the Surviving Corporation and
remain officers until their successors are duly appointed or their prior
resignation, removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving Corporation and
shall remain directors until their successors are duly elected and qualified or
their prior resignation, removal or death.
SECTION 2
Consideration For Partnership Assets
2.1 Consideration Paid by the REIT. At or as of the Effective Time, the
assets and the liabilities of the Partnership shall be the assets and
liabilities of Company.
2.2 Consideration to the Partnership in the Merger.
(a) REIT Shares. Except as provided in Section 2.2(b), as of the
Effective Time, each unit of limited partner interest of the Partnership
(the "Units") and the interest of the General Partner entitled to receive
consideration, if any, shall, in the Merger, be converted into the number
of shares of the REIT's common stock, $0.01 par value per share (the "REIT
Shares"), as provided in Section 4 hereof. No fractional REIT Shares shall
be issued. Any Partner who would be entitled to a fractional REIT Share
will receive cash based on the price of $9.34 per REIT Share (the "Exchange
Price").
(b) Cash/Notes Option. As of the Effective Time, if the Partnership
approves the Merger each Unit held of record by a Partner who votes against
the Merger (a "Dissenting Limited Partner") will receive REIT Shares unless
he or she affirmatively elects to receive consideration in the form of 10%
cash and 90% notes (the "Cash/Notes Option") based on the liquidation value
of the Partnership, as determined by Valuation Associates (the "Liquidation
Value"). The Liquidation Value will be lower than the value of the REIT
Shares offered to the Partnership in the merger, based on the Exchange
Price. The notes (the "Notes") shall be in the form described in the Note
and Loan Agreement attached hereto as Exhibit A and incorporated herein by
reference. In the event the principal amount of Notes issuable to
Dissenting Limited Partners electing the Cash/Notes Option, when aggregated
with the principal amounts of the Notes to be issued to electing dissenting
limited partners (the "Other Dissenting Partners") in all other
partnerships to whom offers are being made by the REIT that approve the
merger with the REIT (the "Other Partnerships"), exceeds $10,000,000,
Dissenting Limited Partners electing the Cash/Notes Option shall receive
their pro rata portion of the $10,000,000 aggregate principal amount of the
Notes (based on the total number of the Units of the Dissenting Limited
Partners and the Other Dissenting Partners), with the remaining value of
the Dissenting Limited Partners' Note consideration to be paid in REIT
Shares. The cash component of the Cash/Notes Option will not be affected by
any such pro ration.
2.3 Issuance of Certificates for REIT Shares and Notes. Upon or as soon as
practicable after the Effective Time, the REIT shall distribute in accordance
with Section 3.4 hereof to the holders of the Units of the Partnership
certificates representing the REIT Shares (the "Share Certificates") and the
Cash/Notes to which they are entitled pursuant hereto.
SECTION 3
Partnership Interests
3.1 Conversion of the Units.
(a) REIT Shares. At the Effective Time, each REIT Share outstanding
immediately prior to the Effective Time shall remain outstanding and shall
represent one REIT Share.
B-2
<PAGE>
(b) Partnership Interests. At the Effective Time, the Units of the
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of holder
thereof, be converted into REIT Shares or Cash/Notes determined in
accordance with the Partnership's Net Asset Value or Liquidation Value,
respectively, as set forth below.
Calculation of Partnership
Net Asset Value
<TABLE>
<CAPTION>
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1999 Net Asset Value
---------------------- -------------- ---------------
<S> <C> <C>
$6,243,000 $81,904 $6,324,904
</TABLE>
REIT Shares
Payable to Partnership
<TABLE>
<CAPTION>
No. of REIT
No. of REIT Shares Offered
Shares Offered per Unit
-------------- --------------
<S> <C> <C>
To Limited Partners: 677,185 95.90
</TABLE>
Calculation of Liquidation Value
<TABLE>
<CAPTION>
Leased Fee
Original Share of
Partnership Partnership Liquidation Brokers' Legal/ Marketing/ Liquidation
Value Expenses Discount Commission Closing Contingency Value
----------- ----------- ----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$6,231,994 $(30,808) $(311,600) $(186,960) $(155,800) $(124,640) $5,422,187
</TABLE>
Cash/Notes
Payable to Partnership(1)
<TABLE>
<CAPTION>
Maximum Amount of Maximum Principal
Aggregate Cash Offered Principal Amount Amount of Note
Amount of Cash per Unit of Notes Offered Offered Per Unit
-------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
To Limited Partners: $265,678 $77 $2,391,102 $691
</TABLE>
- --------
(1) The notes portion of consideration granted to the limited partners in the
merger has been limited to $10,000,000. As such, should the total notes to
be issued to all limited partners in all partnerships exceed $10,000,000,
then each partner will get their pro-rata share of notes, the balance to be
issued in REIT Shares.
As a result of the Merger and without any action on the part of the holder
thereof, at the Effective Time, all of the Units and the general partner
interests of the Partnership shall cease to be outstanding and shall be
canceled and retired, and each holder of such Units or interests shall
thereafter cease to have any rights with respect to the Units or interests,
except the right to receive, without interest, the REIT Shares and/or the
Cash/Notes, as applicable, in accordance with this Section 3.1 and, in either
case, cash in lieu of fractional REIT Shares in accordance with Section 3.4(e)
hereof (the "Merger Consideration").
3.2 Adjustment to the Merger Consideration. The number of REIT Shares and
amount of Cash/Notes, as applicable, to be received in the Merger by the
Partnership shall be adjusted as of the Effective Time as follows:
(a) If, during the period from March 31, 1999 to and including the
Effective Time, the outstanding REIT Shares shall have been changed to a
different number of shares or securities by reason of any share
B-3
<PAGE>
dividend, subdivision, reclassification, recapitalization, share split,
reverse share split, combination, exchange of shares or the like, the
number of REIT Shares to be issued in the Merger shall be appropriately
adjusted;
(b) If, as of the Effective Time, the Net Cash of the Partnership, as
defined in Section 3.3 below, is different than its Net Cash amount shown
in Section 3.1 above, the Net Cash of the Partnership shall be increased
(if greater) or decreased (if less) and the Merger Consideration issuable
to the Partnership in the Merger shall be increased or decreased, as the
case may be, by an amount equal to such difference divided by the Exchange
Price; and
(c) Anything in the foregoing to the contrary notwithstanding, the Net
Asset Value of the Partnership as of the Effective Time shall not be
adjusted below an amount equal to $6,243,000.
3.3 Definitions. For the purposes of this Section 3:
(a) "Net Asset Value" means the sum of the negotiated prices of the
Partnership's properties set forth under Section 3.1 plus its Net Cash as
of the Effective Time.
(b) "Net Cash" means, as of the date determined, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the sum of the
Partnership's liabilities, as determined on an accrual accounting basis.
3.4 Exchange of Partnership Interests.
(a) As of the Effective Time, the REIT shall deposit, or shall cause to
be deposited, with an exchange agent selected by the REIT, which shall be
the REIT's transfer agent, or such other party reasonably satisfactory to
the Partnership (the "Exchange Agent"), for the benefit of the Partners,
for exchange in accordance with this Section 3, Share Certificates
representing the total number of REIT Shares issuable to Partners (other
than Dissenting Limited Partners electing the Cash/Notes Option) and the
aggregate amount of Cash and Notes issuable to Dissenting Limited Partners
electing the Cash/Notes Option (such cash, Share Certificates and Notes,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Sections 3.1 and 3.2 and paid pursuant to this Section 3.4 in exchange for
the outstanding Units and interests.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Units (the "Unit Certificates") whose Units were converted into
the right to receive the Merger Consideration pursuant to Section 3.1
hereof (i) a letter of transmittal (which shall specify that delivery shall
be effected, and the risk of loss and title to the Unit Certificates shall
pass, only upon delivery of the Unit Certificates to the Exchange Agent and
shall be in a form and have such other provisions as the REIT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Unit Certificates in exchange for the Merger
Consideration. Upon surrender of a Unit Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by the
REIT together with such letter of transmittal, duly executed, and such
other documents as may be reasonably requested by the Exchange Agent, the
holder of such Unit Certificate shall be entitled to receive in exchange
therefor the Merger Consideration into which the Units previously
represented by the Unit Certificate shall have been converted pursuant to
Section 3.1 hereto and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the agreement of limited
partnership of the Partnership (the "Agreement of Limited Partnership"),
and the Unit Certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of a Unit which is not registered in
the transfer records of the Partnership, payment may be made to a person
other than the person in whose name the Unit Certificate so surrendered is
registered if such Unit Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such
payment being made to a person other than the registered holder of such
Unit Certificate or establish to the satisfaction of the REIT that such tax
or taxes have been paid or are not applicable. Upon surrender as
contemplated by this Section 3.4, each Unit
B-4
<PAGE>
Certificate shall be deemed at anytime after the Effective Time to
represent only the right to receive upon such surrender the Merger
Consideration, without interest, into which the Units previously
represented by such Unit Certificate shall have been converted pursuant to
Section 3.1 hereof, and any dividends or other distributions to which such
holder is entitled pursuant to the terms of the Agreement of Limited
Partnership. No interest will be paid or will accrue on the Merger
Consideration upon the surrender of any Unit Certificate or on any cash
payable pursuant to Section 3.1 or Section 3.4(d) hereof.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time.
(d) Notwithstanding any other provision of this Agreement to the
contrary, no fractional REIT Shares shall be issued in connection with the
Merger. All REIT Shares to which a holder of Units is entitled immediately
prior to the Effective Time shall be aggregated. If a fractional share
results from such aggregation, in lieu of any such fractional share, each
holder of Units who would otherwise have been entitled to receive a
fraction of a REIT Share upon surrender of Unit Certificates for exchange
pursuant to Section 3.4(b) hereof shall be entitled to receive from the
Exchange Agent a cash payment equal to such fraction multiplied by the
Exchange Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof, any REIT Shares, and any Notes or interest thereon)
that remains unclaimed by the former Partners of the Partnership one year
after the Effective Time shall be delivered to the REIT. Any former
Partners of the Partnership who have not theretofore complied with this
Section 3.4 shall thereafter look only to the REIT for delivery of their
REIT Shares and/or Cash/Notes, and payment of cash in lieu of fractional
shares and/or dividends on such REIT Shares, in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each case,
without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange Agent or any other
person shall be liable to any former holder of the Partner's interest or
with respect to the Units for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar
laws.
SECTION 4
Representations And Warranties
of the Partnership
The Partnership represents and warrants to the REIT as set forth below. As
contemplated below, the "Partnership Disclosure Letter" will be delivered to
the REIT on or before the Closing. The Partnership Disclosure Letter shall
provide the information or exceptions described below. The Partnership
Disclosure Letter shall be amended prior to Closing to cause such
representations and warranties to be materially true and correct on the Closing
Date.
4.1 Existence; Authority; Compliance with Law.
(a) The Partnership is a limited partnership, duly formed and validly
existing under the laws of the State of Texas. To the General Partner's
actual knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing under the
laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
results of operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all requisite
power and authority to own, operate, lease and encumber its properties and
carry on its business as now conducted.
(b) To the General Partner's actual knowledge, the Partnership is not in
violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation
to which the Partnership or any of its properties or assets are subject,
where such violation
B-5
<PAGE>
would have a Partnership Material Adverse Effect. The Partnership has
obtained all licenses, permits and other authorizations and has taken all
actions required by applicable law or governmental regulations in
connection with its business as now conducted, where the failure to obtain
any such item or to take any such action would have a Partnership Material
Adverse Effect. A copy of the Partnership's Agreement of Limited
Partnership and Certificate of Limited Partnership (collectively, the
"Partnership Organizational Documents") have been delivered or made
available to the REIT and its counsel and such documents will be listed in
the Partnership Disclosure Letter and were or will be true and correct when
delivered or made available.
4.2 Authorization, Validity and Effect of Agreements. The Partnership has
the requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby by the
Partners as contemplated by this Agreement, the consummation by the Partnership
of this Agreement, the Partnership Ancillary Agreements and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Partnership. In reliance upon the legal opinion
described in Section 7.2(e), this Agreement constitutes, and the Partnership
Ancillary Agreements (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity (collectively, "Equitable Remedies").
4.3 Future Issuances. To the General Partner's actual knowledge, there are
not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Partnership to issue, transfer or sell any of
its Units or other Partnership interests. After the Effective Time, the REIT
will have no obligation to issue, transfer or sell any Partnership interest.
4.4 Other Interests. Except as set forth in the Partnership Disclosure
Letter, the Partnership does not own, directly or indirectly, any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities).
4.5 Financial Statements.
(a) The financial statements of the Partnership for the fiscal years
ended December 31, 1998 and 1997 and the financial statements for the
fiscal quarter ended March 31, 1999 (collectively, the "Partnership
Financial Statements") present fairly, in conformity with generally
accepted accounting principles applied on a consisted basis (except as may
be indicated in the notes thereto), the financial position of the
Partnership as of the dates thereof and its results of operations and cash
flows for the periods then ended (subject to normal year-end adjustments in
the case of the interim financial statements). Copies of the Partnership
Financial Statements have been delivered or made available to the REIT and
its financial advisers and such documents will be listed in the Partnership
Disclosure Letter and were or will be true and correct when delivered or
made available.
(b) Except as and to the extent set forth on the balance sheet of the
Partnership at March 31, 1999, including all notes thereto, or as otherwise
set forth in the Partnership Financial Statements, the Partnership has no
material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected
on, or reserved against in, a balance sheet of the Partnership or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a Partnership
Material Adverse Effect.
4.6 No Violation. To General Partner's actual knowledge, neither the
execution and delivery by the Partnership of this Agreement nor the
consummation by the Partnership of the transactions contemplated
B-6
<PAGE>
hereby in accordance with the terms hereof will: (a) conflict with or result in
a breach of any provisions of the Agreement of Limited Partnership of the
Partnership; (b) except as contemplated by the Partnership Ancillary Agreements
or as set forth in the Partnership Disclosure Letter, violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of the Partnership under, or result in being declared void, voidable
or without further binding effect, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which the Partnership is a party, or by which the Partnership
or any of its properties is bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a Partnership
Material Adverse Effect; or (c) other than the filings provided for in this
Agreement to effect the Merger, any filings required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of
1933, as amended (the "Securities Act"), or applicable state securities and
"Blue Sky" laws (collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing
or registration with, any governmental or regulatory authority would not have a
Partnership Material Adverse Effect.
4.7 Litigation. To the General Partner's actual knowledge, there are (a) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which the Partnership is a party or by which any of
its properties or assets are bound or to which the General Partner is a party
or by which any of his/its properties or assets are bound and (b) except as set
forth in the Partnership Disclosure Letter, no actions, suits or proceedings
pending against the Partnership or against the General Partner or, to the
actual knowledge of the General Partner, threatened against the Partnership or
against the General Partner, at law or in equity, or before or by any federal
or state commission, board, bureau, agency or instrumentality that in the case
of clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a Partnership Material Adverse Effect.
4.8 Absence of Certain Changes. Except as disclosed in the Partnership
Reports, since December 31, 1998, (a) the Partnership conducted its business
only in the ordinary course of such business (which for purposes of this
Section 4.8 only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith); (b) there has not been
any Partnership Material Adverse Effect; (c) there has not been any
distribution, setting aside or payment of any distribution with respect to any
Partner interest in the Partnership; and (d) there has not been any material
change in the Partnership's accounting principles, practices or methods.
4.9 Taxes.
(a) Except as set forth in the Partnership Disclosure Letter, the
Partnership (i) has timely filed all federal, state and foreign tax returns
including, without limitation, information returns and reports required to
be filed by it for tax periods ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request has
been granted and has not expired and all such returns are accurate and
complete in all material respects, (ii) has paid or accrued all taxes shown
to be due and payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such
periods and periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and local
income and franchise tax returns of the Partnership have been or will be
examined by any taxing authority. The Partnership has not executed or filed
with the Internal Revenue Service (the "IRS") or any other taxing authority
any agreement now in effect extending the period for assessment or
collection of any income or other taxes.
B-7
<PAGE>
(b) Except as set forth in the Partnership Disclosure Letter, the
Partnership is not a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or
franchise tax returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT or made
available to representatives of the REIT or will be so delivered or made
available prior to the Closing. The Partnership does not hold any asset (i)
the disposition of which could be subject to rules similar to Section 1374
of the Internal Revenue Code of 1986, as amended (the "Code"), as a result
of an election under IRS Notice 88-19 or (ii) that is subject to a consent
filed pursuant to Section 341(f) of the Code and regulations thereunder.
For purposes of this Section 4.9, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
4.10 Books and Records. The books of account and other financial records of
the Partnership are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are accurately
reflected in all material respects in the Partnership Financial Statements.
4.11 Properties.
(a) The Partnership owns fee simple title to, or an interest in a joint
venture which owns fee title to, each of the real properties reflected on
the most recent balance sheet of the Partnership included in the
Partnership Reports or as identified in the Partnership Disclosure Letter
(the "Partnership Properties"), which are all of the real estate properties
owned by it, free and clear of liens, mortgages or deeds of trust, claims
against title, charges which are liens or security interests
("Encumbrances"), except as set forth in the Partnership Disclosure Letter.
To the General Partner's actual knowledge, the Partnership Properties are
not subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions set forth in the Partnership
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law
or any governmental body or authority with respect to real property,
including zoning regulations that do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property Restrictions
disclosed on existing title reports or current surveys (in either case
copies of which title reports and surveys have been or will be delivered or
made available to the REIT prior to the Closing) and/or (iv) mechanics',
carriers', workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which have
heretofore been bonded (and that are listed in the Partnership Disclosure
Letter) or which individually or in the aggregate do not exceed $10,000, do
not materially detract from the value of or materially interfere with the
present use of any of the Partnership Properties subject thereto or
affected thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or been
incurred only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued insuring the
Partnership's fee simple title to the Partnership Properties subject only
to the matters disclosed above and as may be set forth in the Partnership
Disclosure Letter, and such policies are, at the date hereof, in full force
and effect and no claim has been made against any such policy. To the
General Partner's actual knowledge, except as set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license from any
governmental authority having jurisdiction over any of the Partnership
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the Partnership Properties or which is necessary to permit the
lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Partnership Properties that has not been
obtained and is not in full force and effect, or any pending threat of
modification or cancellation of any of same; (ii) the Partnership has not
received written notice of any material violation of any federal, state or
municipal law, ordinance, order, regulation or requirement affecting any
portion of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose
B-8
<PAGE>
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any Partnership Property in excess of
$10,000 for which there is no insurance in effect covering the cost of the
restoration, (B) no current renovation to any Partnership Property the cost
of which exceeds $10,000 and (C) no current restoration (excluding tenant
improvements) of any Partnership Property, the cost of which exceeds
$10,000.
(c) Except as set forth in the Partnership Disclosure Letter, the
Partnership has not received notice to the effect that and there are no (i)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Partnership Properties or (ii) zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Partnership Properties or by the continued
maintenance, operation or use of the parking areas. All work to be
performed, payments to be made and actions to be taken by the Partnership
pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or
other similar action relating to the Partnership Properties (e.g., Local
Improvement District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or actions
that may be required pursuant to such agreements, except as set forth in
the Partnership Disclosure Letter.
4.12 Environmental Matters. To the General Partner's actual knowledge,
neither the Partnership nor any other person has caused (a) the unlawful
presence of any hazardous substances, hazardous materials, toxic substances or
waste materials (collectively, "Hazardous Materials") on any of the Partnership
Properties, or (b) any unlawful spills, releases, discharges or disposal of
Hazardous Materials to have occurred or be presently occurring on or from the
Partnership Properties as a result of any construction on or operation and use
of such properties, which presence or occurrence would, individually or in the
aggregate, have a Partnership Material Adverse Effect; and in connection with
the construction on or operation and use of the Partnership Properties, the
Partnership has not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
4.13 Subsidiaries and Joint Ventures. Each subsidiary of the Partnership and
joint venture in which the Partnership is an owner, together with the ownership
interest of the Partnership and the jurisdiction in which such subsidiary or
joint venture is incorporated or otherwise organized is identified in the
Partnership Disclosure Letter. Other than its investments in its subsidiaries
and joint ventures, the Partnership does not own, directly or indirectly, any
outstanding capital stock or equity interest in any corporation, partnership,
joint venture or other entity. For purposes of this Agreement, (a) "subsidiary"
means, with respect to any entity, any corporation of which securities or other
ownership interests have an ordinary voting power to elect a majority of the
board of directors of other persons performing similar functions are directly
or indirectly owned by such entity and (b) "joint venture" means, with respect
to any entity, any corporation or organization (other than such entity and any
subsidiary thereof) of which such entity or any subsidiary thereof is, directly
or indirectly, the beneficial owner of 40% or more of any class of equity
securities or equivalent profit participation interest.
4.14 Labor Matters. The Partnership is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the actual knowledge of
the General Partner, threatened against the Partnership relating to its
business, except for any such proceeding which would not have a Partnership
Material Adverse Effect. To the actual knowledge of the General Partner, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of the
Partnership.
4.15 No Brokers. Except the fee that may be payable to Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. ("Houlihan") by the Partnership as described
in Section 6.9 below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
B-9
<PAGE>
obligation of the Partnership or the REIT to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.16 Opinion of Financial Advisor. The General Partner, on behalf of the
Partnership, has retained Houlihan to issue an opinion to the effect that, as
of the date of such opinion, the Merger Consideration is fair to the holders of
the Units of the Partnership from a financial point of view (the "Fairness
Opinion").
4.17 Related Party Transactions. Except as set forth in the Partnership
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by the Partnership with (a) any consultant, (b) any person who is an
officer, director or affiliate of the Partnership or the General Partner, any
relative of any of the foregoing or any entity of which any of the foregoing is
an affiliate, or (c) any person who acquired the Units of the Partnership in a
private placement.
4.18 Contracts and Commitments. The Partnership Disclosure Letter sets forth
(a) all unsecured notes or other obligations of the Partnership which
individually may result in total payments in excess of $10,000, (b) all notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
Partnership Properties or personal property of the Partnership, and (c) each
commitment entered into by the Partnership which may result in total payments
or liability in excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to the Closing, will be listed on the
Partnership Disclosure Letter and will be materially true and correct when
delivered or made available. The Partnership has not received any notice of a
default that has not been cured under any of the documents described in clause
(a) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the Partnership to purchase real
property are set forth in the Partnership Disclosure Letter and such options
and the Partnership's rights thereunder are in full force and effect. All joint
venture agreements to which the Partnership is a party are set forth in the
Partnership Disclosure Letter and the Partnership is not in default with
respect to any obligations, which individually or in the aggregate are
material, thereunder.
4.19 Development Rights. Set forth in the Partnership Disclosure Letter is a
list of all material agreements entered into by the Partnership relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which is
delivered or made available to the REIT prior to the Closing, are listed in the
Partnership Disclosure Letter, have not been modified and are valid and binding
in accordance with their respective terms.
4.20 Convertible Securities. To the General Partner's actual knowledge, the
Partnership has no outstanding options, warrants or other securities
exercisable for, or convertible into, Units or other interests of the
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
SECTION 5
Representations and Warranties of The REIT
The REIT represents and warrants to the Partnership as set forth below. As
contemplated below, the "REIT Disclosure Letter" will be delivered to the
Partnership on or before the Closing. The REIT Disclosure Letter shall provide
the information or exceptions described below. The REIT Disclosure Letter shall
be amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date.
B-10
<PAGE>
5.1 Existence; Good Standing; Authority; Compliance with Law.
(a) The REIT is a corporation duly organized and validly existing under
the laws of the State of Maryland. To the REIT's actual knowledge, the REIT
is duly licensed or qualified to do business and is in good standing under
the laws of any other state of the United States in which the character of
the properties owned or leased by it therein or in which the transaction of
its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the REIT and its
subsidiaries taken as a whole (a "REIT Material Adverse Effect"). The REIT
has all requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each of the
REIT's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the requisite power and authority to own
its properties and to carry on its business as it is now being conducted,
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not have a
REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT nor any REIT
Subsidiary is in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law, ordinance,
governmental rule or regulation to which the REIT or any REIT Subsidiary or
any of their respective properties or assets are subject, where such
violation would have a REIT Material Adverse Effect. The REIT and its
Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have a
REIT Material Adverse Effect. Copies of the REIT's and its Subsidiaries'
Articles of Incorporation, Bylaws, organizational documents and partnership
and joint venture agreements have been or will be prior to the Closing,
delivered or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and correct
when delivered or made available. For the purposes of this Section 5.1, the
term "Subsidiary" shall include the entities set forth in the REIT
Disclosure Letter, which are all of the REIT's Subsidiaries.
5.2 Authorization, Validity and Effect of Agreements. The REIT has the
requisite power and authority to enter into the transactions contemplated
hereby and to execute and deliver this Agreement and all other documents,
agreements and instruments related to the transactions contemplated by this
Agreement to which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the Merger contemplated hereby by the holders of a
majority of the outstanding REIT Shares, present and voting thereon, the
consummation by the REIT of this Agreement, the REIT Ancillary Agreements and
the transactions contemplated hereby and thereby have been duly authorized by
all requisite action on the part of the REIT. This Agreement constitutes, and
the REIT Ancillary Agreements (when executed and delivered pursuant hereto for
value received) will constitute, the valid and legally binding obligations of
the REIT enforceable against the REIT in accordance with their respective
terms, subject to Equitable Remedies.
5.3 Capitalization. On March 31, 1999, the authorized capital stock of the
REIT consisted of 100,010,000 shares of common stock, par value $0.01 per share
(the "Common Shares") and 10,001,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). As of March 31, 1999, 2,384,117 REIT Common
Shares were outstanding and no shares of Preferred Stock were outstanding. The
REIT has no outstanding bonds, debentures, notes or other obligations, the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the REIT on any matter. All such issued and outstanding REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in the REIT Disclosure Letter, there are not any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate the REIT or any of its
Subsidiaries to issue, transfer or sell any shares or other equity interest of
the REIT or any of its Subsidiaries, except under any employee incentive plan
approved by
B-11
<PAGE>
the REIT's stockholders. There are no agreements or understandings to which the
REIT is a party with respect to the voting of any REIT Shares or which restrict
the transfer of any such shares, except in order to protect its REIT status.
5.4 Subsidiaries. Except as set forth in the REIT Disclosure Letter, the
REIT owns directly or indirectly each of the outstanding shares of capital
stock or all of the partnership or other equity interests of each of the REIT's
Subsidiaries (except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and clear of all
liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material.
5.5 Other Interests. Except as disclosed in the REIT Disclosure Letter and
except for interests in the REIT Subsidiaries, neither the REIT nor any REIT
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.6 No Violation. Neither the execution and delivery by the REIT of this
Agreement nor the consummation by the REIT of the transactions contemplated
hereby in accordance with the terms hereof, will: (a) conflict with or result
in a breach of any provisions of the REIT's Articles of Incorporation or
Bylaws; (b) violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination or in a
right of termination or cancellation of, or accelerate the performance required
by, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties of the REIT or its Subsidiaries under,
or result in being declared void, voidable or without further binding effect,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which the REIT or
any of its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have a
REIT Material Adverse Effect; or (c) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have a REIT Material Adverse Effect.
5.7 SEC Documents.
(a) The REIT has made available or will make available to the
Partnership prior to the Closing, the registration statements of the REIT
filed with the SEC in connection with public offerings of REIT securities
since its inception and all exhibits, amendments and supplements thereto
(the "REIT Registration Statements"), and each report, proxy statement or
information statement and all exhibits thereto prepared by it or relating
to its properties since the effective date of the latest REIT Registration
Statement, each in the form (including exhibits and any amendments thereto)
filed with the SEC (collectively, the "REIT Reports"). The REIT Reports,
which were or will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the REIT under the
Securities Laws.
(b) To the REIT's actual knowledge, as of their respective dates, the
REIT Reports (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the consolidated
balance sheets of the REIT included in or incorporated by reference into
the REIT Reports (including the related notes and schedules) fairly
presents the consolidated financial position of the REIT and the REIT
Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any related
notes and schedules)
B-12
<PAGE>
fairly presents the results of operations, retained earnings or cash flows,
as the case may be, of the REIT and the REIT Subsidiaries for the periods
set forth therein (subject, in the case of unaided statements, to normal
year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may
be noted therein and except, in the case of the unaided statements, as
permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance
sheet of the REIT and its Subsidiaries at March 31, 1999, including all
notes thereto, or as set forth in the REIT Reports, neither the REIT nor
any of the REIT Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) that would
be required to be reflected on, or reserved against in, a balance sheet of
the REIT or in the notes thereto, prepared in accordance with generally
accepted accounting principles consistently applied, except liabilities
arising in the ordinary course of business since such date which would not
have a REIT Material Adverse Effect.
5.8 Litigation. To the REIT's actual knowledge, there are (a) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which the REIT or any REIT Subsidiary is a party or by which any
of its properties or assets are bound or, to which any of its directors,
officers, or affiliates is a party or by which any of their properties or
assets are bound and (b) except as will be set forth in the REIT Disclosure
Letter, no actions, suits or proceedings pending against the REIT or any REIT
Subsidiary or, to the knowledge of the REIT, against any of its Directors,
officers or affiliates or, to the knowledge of the REIT, threatened against the
REIT or any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality, that in the case of
clauses (a) or (b) above are reasonably likely, individually or in the
aggregate, to have a REIT Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the REIT Reports
filed with the SEC prior to the date hereof, (a) the REIT and its Subsidiaries
have conducted their business only in the ordinary course of such business
(which, for purposes of this section only, shall include all acquisitions of
real estate properties and financing arrangements made in connection
therewith); (b) there has not been any REIT Material Adverse Effect; (c) there
has not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the REIT Shares; and (d) there has not been any
material change in the REIT's accounting principles, practices or methods.
5.10 Taxes.
(a) Except as disclosed in the REIT Disclosure Letter, the REIT and each
of its Subsidiaries (i) has timely filed all federal, state and foreign tax
returns including, without limitation, information returns and reports
required to be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued
all taxes shown to be due and payable on such returns or which have become
due and payable pursuant to any assessment, deficiency notice, 30-day
letter or other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such returns.
Neither the REIT nor any of its Subsidiaries has received notice that the
federal, state and local income and franchise tax returns of the REIT or
any such Subsidiary has been or will be examined by any taxing authority.
Neither the REIT nor any of its Subsidiaries has executed or filed with the
IRS or any other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as disclosed in the REIT Disclosure Letter, neither the REIT
nor any of its Subsidiaries is a party to any pending action or proceeding
by any governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local income or
franchise tax returns filed by the REIT and each of its Subsidiaries and
all communications relating thereto have been delivered to the Partnership
or made
B-13
<PAGE>
available to representatives of the Partnership or will be so delivered or
made available prior to the Closing. The REIT (i) has qualified to be taxed
as a REIT pursuant to Sections 856 through 859 of the Code for its taxable
years ended December 31, 1995 through 1998, inclusive; (ii) has operated,
and intends to continue to operate, in such a manner as to qualify to be
taxed as a REIT pursuant to Sections 856 through 859 of the Code for its
taxable year ended on the effective date of the Merger; and (iii) has not
taken or omitted to take any action which could result in, and each of the
executive officers of the REIT, each acting in his respective capacity as
such, has no actual knowledge of, a challenge to its status as a REIT. The
REIT represents that each of its Subsidiaries is a Qualified REIT
Subsidiary as defined in Section 856(i) of the Code. Neither the REIT nor
any of its Subsidiaries holds any asset (x) the disposition of which could
be subject to rules similar to Section 1374 of the Code as a result of an
election under IRS Notice 88-19 or (y) that is subject to a consent filed
pursuant to Section 341(f) of the Code and regulations thereunder. For
purposes of this Section 5.10, "taxes" includes any interest, penalty or
additional amount payable with respect to any tax.
5.11 Books and Records.
(a) The books of account and other financial records of the REIT and its
Subsidiaries are in all material respects true, complete and correct, have
been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the REIT Reports.
(b) The minute books and other records of the REIT and its Subsidiaries
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action of
the shareholders and the Board and any committees of the Board and its
Subsidiaries.
5.12 Properties.
(a) The REIT and its Subsidiaries own, and each joint venture to which
the REIT or any of its Subsidiaries is a party owns, fee simple title to
each of the real properties reflected on the most recent balance sheet of
the REIT included in the REIT Reports or as identified in the REIT
Disclosure Letter (the "REIT Properties"), which are all of the real estate
properties owned by them, free and clear of Encumbrances, except as set
forth in the REIT Disclosures Letter. To the REIT's actual knowledge, the
REIT Properties are not subject to any Property Restrictions, except for
(i) Encumbrances and Property Restrictions set forth in the REIT Disclosure
Letter, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including
zoning regulations that do not materially adversely affect the current use
of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title
reports and surveys have been or will be delivered or made available to the
Partnership prior to the Closing and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded (and
that are listed in the REIT Disclosure Letter) or which individually or in
the aggregate, do not exceed $100,000, do not materially detract from the
value of or materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not otherwise
materially impair business operations conducted by the REIT and its
Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring the
REIT's or any of its Subsidiaries' fee simple title to the REIT Properties,
subject only to the matters disclosed above and as may be set forth in the
REIT Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no material claim has been made against any such
policy. To the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or license from
any governmental authority having jurisdiction over any of the REIT
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on
any of the REIT Properties or which is necessary to permit the lawful use
and operation of all driveways, roads and
B-14
<PAGE>
other means of egress and ingress to and from any of the REIT Properties
that has not been obtained and is not in full force and effect, or any
pending threat of modification or cancellation of any of same; (ii) neither
the REIT nor its Subsidiaries has received written notice of any material
violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any portion of any of the REIT
Properties issued by any governmental authority; (iii) there are no
structural defects relating to the REIT Properties and no REIT Properties
whose building systems are not in working order in any material respect;
and (iv) there is (A) no physical damage to any the REIT Property in excess
of $100,000 for which there is no insurance in effect covering the cost of
the restoration, (B) no current renovation to any the REIT Property the
cost of which exceeds $100,000 and (C) no current restoration (excluding
tenant improvements) of any the REIT Property the cost of which exceeds
$100,000.
(c) Except as set forth in the REIT Disclosure Letter, neither the REIT
nor its Subsidiaries have received notice to the effect that and there are
no (i) condemnation or rezoning proceedings that are pending or threatened
with respect to any of the REIT Properties or (ii) any zoning, building or
similar laws, codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the REIT Properties or by the continued
maintenance, operation or use of the parking areas in any material respect.
All work to be performed, payments to be made and actions to be taken by
the REIT or its Subsidiaries prior to the date hereof pursuant to any
agreement entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar action
relating to the REIT Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and the REIT is not aware of any planned or
proposed work, payments or actions that may be required after the date
hereof pursuant to such agreements, except as set forth in the REIT
Disclosure Letter.
5.13 Environmental Matters. To the actual knowledge of the REIT, none of the
REIT, any of its Subsidiaries or any other person, has caused or permitted (a)
the unlawful presence of any Hazardous Materials on any of the REIT Properties,
or (b) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the REIT
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have a REIT Material Adverse Effect; and in connection with the
construction on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.14 Labor Matters. Neither the REIT nor any of its Subsidiaries is a party
to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding pending or,
to the knowledge of the executive officers of the REIT, threatened against the
REIT or its Subsidiaries relating to their business, except for any such
proceeding which would not have the REIT Material Adverse Effect. To the
knowledge of the REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the REIT or any of its Subsidiaries.
5.15 No Brokers. Except for the fee payable to Morgan Keegan & Company, Inc.
("Morgan Keegan"), as described in Section 5.16 below, the REIT has not entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of the REIT or the Partnership to pay any finder's
fees, brokerage or agent's commissions or other like payments in connection
with the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby. The REIT is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
B-15
<PAGE>
5.16 Opinion of Financial Advisor. The REIT has retained Morgan Keegan to
review the transaction contemplated by this Agreement and to issue an opinion
as to the fairness to the REIT, from a financial point of view, of the
aggregate Merger Consideration to be paid by the REIT pursuant to the Merger
and the mergers with the Other Partnerships.
5.17 Partnership Share Ownership. Except as set forth in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries owns any Units or other
partner interests of the Partnership or other securities convertible into
Partnership interests.
5.18 The REIT Shares. The issuance and delivery by the REIT of the REIT
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of the REIT, except for
the approval of its stockholders of the merger as contemplated by this
Agreement. The REIT Shares to be issued in connection with the Merger and this
Agreement, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that stockholders may be
subject to further assessment with respect to certain claims for tort,
contract, taxes, statutory liability and otherwise in some jurisdictions to the
extent such claims are not satisfied by the REIT.
5.19 The Notes. The issuance and delivery by the REIT of the Notes in
connection with the Merger and this Agreement have been duly and validly
authorized by all necessary action on the part of the REIT, except for the
approval of its stockholders of the Merger as contemplated by this Agreement.
The Notes to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will constitute binding
obligations of the REIT enforceable in accordance with these terms, subject to
the laws respecting debtor rights generally.
5.20 Convertible Securities. Except as disclosed in the REIT Disclosure
Letter, the REIT has no outstanding options, warrants or other securities
exercisable for, or convertible into, shares of the REIT Shares, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the transactions contemplated hereby.
5.21 Related Party Transactions. Set forth in the REIT Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by
the REIT or any of its Subsidiaries with (a) any person who is an officer,
director or affiliate of the REIT or any of its Subsidiaries, any relative of
any of the foregoing or any entity of which any of the foregoing is an
affiliate or (b) any person who acquired the REIT Shares in a private
placement. The copies of such documents, all of which have been or will be
delivered or made available to the Partnership prior to the Closing, are or
will be true, complete and correct when delivered or made available.
5.22 Contracts and Commitments. The REIT Disclosure Letter sets forth (a)
all unsecured notes or other obligations of the REIT and the REIT Subsidiaries
which individually may result in total payments in excess of $100,000, (b)
notes, debentures, bonds and other evidence of indebtedness which are secured
or collateralized by mortgages, deeds of trust or other security interests in
the REIT Properties or personal property of the REIT and its Subsidiaries and
(c) each commitment entered into by the REIT or any of its Subsidiaries which
individually may result in total payments or liability in excess of $100,000.
Copies of the foregoing have been or will be delivered or made available to the
Partnership prior to the Closing, will be listed on the REIT Disclosure Letter
and will be materially true and correct when delivered or made available. None
of the REIT or any of its Subsidiaries has received any notice of a default
that has not been cured under any of the documents described in clauses (a) or
(b) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of the REIT or any of its
Subsidiaries to purchase real property are set forth in the REIT Disclosure
Letter and such options and the REIT's or its Subsidiaries' rights thereunder
are in full force and effect. All joint venture agreements to which the REIT or
any of its Subsidiaries is a party are set forth in the REIT Disclosure Letter
and the REIT or its Subsidiaries are not in default with respect to any
obligations, which individually or in the aggregate are material, thereunder.
B-16
<PAGE>
5.23 Development Rights. Set forth in the REIT Disclosure Letter is a list
of all material agreements entered into by the REIT or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or
construction of office buildings, industrial facilities or other real estate
properties which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true, complete and
correct copies of all of which have been or are delivered or made available to
the Partnership prior to the Closing, will be listed in the REIT Disclosure
Letter.
5.24 Certain Payments Resulting From Transactions. Except as disclosed in
the REIT Disclosure Letter, the execution of, and performance of the
transactions contemplated by, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (a) constitute an event
under any the REIT Benefit Plan, policy, practice, agreement or other
arrangement or any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, director or
consultant of the REIT or any of its Subsidiaries unless such rights have been
waived by any such person or (b) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the Partnership to
amend or terminate any Employee Arrangement and receive the full amount of any
excess assets remaining or resulting from such amendment or termination,
subject to applicable taxes. No payment or benefit which will be required to be
made pursuant to the terms of any agreement, commitment or the REIT Benefit
Plan, as a result of the transactions contemplated by this Agreement, to any
officer, director or employee of the REIT or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 6
Covenants
6.1 Acquisition Proposals. Prior to the Effective Time, the Partnership and
the REIT each agrees (a) that neither of them nor any of their subsidiaries
shall, and each of them shall direct and use its best efforts to cause its
respective officers, general partner(s), limited partners, directors,
employees, agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its subsidiaries), as applicable, not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders or limited partners) with respect to a merger, acquisition, tender
offer, exchange offer, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities (or any debt securities convertible into equity securities) of, such
party or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), other than the transactions
contemplated by this Agreement, or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal; (b) that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing and each will take the necessary steps to inform the
individuals or entities referred to above of the obligations undertaken in this
Section 6.1; and (c) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner or the Board of Directors of this REIT
(the "Board") from (i) furnishing information to or entering into discussions
or negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the General Partner
or the Board, as applicable, determines in good faith that such action is
required for it to comply with its fiduciary duties to limited partners or
stockholders, as applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
party to this Agreement to the effect that it is furnishing information to, or
entering into discussions with, such person or entity, and
B-17
<PAGE>
(C) subject to any confidentiality agreement with such person or entity (which
such party determined in good faith was required to be executed in order for
the General Partner or the Board, as applicable, to comply with its fiduciary
duties to limited partners or shareholders, as applicable, imposed by law as
advised by counsel), such party keeps the other party to this Agreement
informed of the status (but not the terms) of any such discussions or
negotiations; and (ii) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
Nothing in this Section 6.1 shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8 hereof), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)) or (z) affect any other
obligation of any party under this Agreement.
6.2 Conduct of Businesses.
(a) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter or the REIT Disclosure Letter or as
contemplated by this Agreement, unless the other party has consented in
writing thereto, the REIT and the Partnership:
(i) Shall use their reasonable efforts, and shall cause each of
their respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more
representatives of the other to report operational matters of
materiality and, subject to Section 6.1, any proposals to engage in
material transactions;
(iii) Shall promptly notify the other of any material emergency or
other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant or agreement
contained herein;
(iv) Shall continue to pay quarterly dividends or distributions, as
the case may be, at the current rates but shall not make any other
distributions payable with respect to the REIT Shares and Partnership
interests, respectively, except for any distributions of proceeds
resulting from the sale of properties; and
(v) Shall promptly deliver to the other true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
(b) Prior to the Effective Time, except as may be set forth in the
Partnership Disclosure Letter, unless the REIT has consented (such consent
not to be unreasonably withheld or delayed) in writing thereto, the
Partnership:
(i) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(ii) Shall not amend the Partnership Organizational Documents;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed pursuant to this Agreement, issue any
Units or other interests in the Partnership, make any distribution,
effect any recapitalization or other similar transaction, (B) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any Partnership Units, (C)
increase any compensation or enter into or amend any employment
agreement with the General Partner or any of the present or
B-18
<PAGE>
future affiliates of the General Partner, or (D) adopt any new employee
benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans;
(iv) Shall not declare, set aside or make any distribution or
payment with respect to any Units or other interests in the Partnership
or directly or indirectly redeem, purchase or otherwise acquire any
Units or other interests in the Partnership, or make any commitment for
any such action;
(v) Shall not sell or otherwise dispose of (A) any Partnership
Properties, or (B) except in the ordinary course of business, any of
its other assets which are material, individually or in the aggregate;
(vi) Shall not make any loans, advances or capital contributions to,
or investments in, any other person;
(vii) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent Partnership Financial
Statements (or the notes thereto) or incurred in the ordinary course of
business consistent with past practice;
(viii) Shall not enter into any commitment which individually may
result in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value, if
less) for all commitments;
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the Partnership or its general partner(s) except to the extent the same
occur in the ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect; and
(x) Shall not enter into or terminate any lease representing annual
revenues of $10,000 or more (or 5% of its Net Asset Value, if less).
(c) Prior to the Effective Time, except as may be set forth in the REIT
Disclosure Letter, unless the Partnership has consented (such consent not
to be unreasonably withheld or delayed) in writing thereto, the REIT:
(i) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall not amend its Articles of Incorporation or Bylaws except
as contemplated by this Agreement;
(iii) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
REIT's existing dividend reinvestment plan) existing on the date hereof
and disclosed pursuant to this Agreement, issue any shares of its
capital stock, share dividend, recapitalization or other similar
transaction, ( B) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to
acquire any shares of its capital stock (except pursuant to any
employee incentive plan approved by shareholders), (C) amend any
employment agreement with any of its present or future officers or the
Board or (D) adopt any new employee benefit plan (including any share
option, share benefit or share purchase plan), except the employee
incentive plan to be voted on at its stockholder meeting for the fiscal
year ended December 31, 1998;
(iv) Shall not declare (except as provided above for the continuing
payment of quarterly dividends), set aside or pay any dividend or make
any other distribution or payment with respect to
B-19
<PAGE>
any REIT Shares or directly or indirectly redeem, purchase or otherwise
acquire any capital stock of any of its Subsidiaries, or make any
commitment for any such action;
(v) Except as set forth in the REIT Disclosure Letter, shall not,
and shall not permit any of its subsidiaries to, sell or otherwise
dispose of (A) any REIT Properties or any of its capital stock of or
other interests in subsidiaries or (B) except in the ordinary course of
business, any of its other assets which are material, individually or
in the aggregate;
(vi) Shall not, and shall not permit any of its subsidiaries to
(except in the ordinary course of business), make any loans, advances
or capital contributions to, or investments in, any other person other
than in connection with the sale of properties;
(vii) Shall not, and shall not permit any of its subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary
course of business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
the notes thereto) of the REIT included in the REIT Reports or incurred
in the ordinary course of business consistent with past practice;
(viii) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case of
any one commitment or in excess of $250,000 for all commitments, except
for those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure Letter; and
(ix) Shall not, and shall not permit any of its subsidiaries to,
enter into any commitment with any officer, director or affiliate of
the REIT or any of its subsidiaries, except as herein or in the REIT
Disclosure Letter provided and except in the ordinary course of
business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
6.3 Meetings of Stockholders and Partners. Each of the REIT and the
Partnership will take all action necessary in accordance with applicable law
and its organizational documents to convene a meeting of its stockholders or
partners, as applicable, as promptly as practicable to consider and vote upon
or otherwise to obtain the consent of its stockholders or partners, as
applicable, to approve this Agreement and the transactions contemplated hereby.
The Board and the General Partner shall each recommend such approval and the
REIT and the Partnership shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement (as
defined in Section 6.7 hereof); provided, however, that such recommendation or
solicitation is subject to any action taken by, or upon authority of, the Board
and the General Partner, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders or partners, as
applicable, imposed by law as advised by counsel. The REIT and the Partnership
shall coordinate and cooperate with respect to the timing of such meetings and
shall use their best efforts to hold such meetings on the same day.
6.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Partnership and the REIT shall: (a) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in
B-20
<PAGE>
writing any consents required from third parties in form reasonably
satisfactory to the Partnership and the REIT necessary to effectuate the
Merger; and (c) use all reasonable efforts to take, or cause to be taken, all
other action and do, or cause to be done, all other things necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of the REIT and the General Partner shall take all such
necessary action.
6.5 Inspection of Records. From the date hereof to the Effective Time, the
Partnership and the REIT shall allow all designated officers, attorneys,
accountants and other representatives of the other access at all reasonable
times to the records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the
Partnership and the REIT and their respective subsidiaries.
6.6 Publicity. The Partnership and the REIT shall, subject to their
respective legal obligations (including requirements of stock exchanges and
other similar regulatory bodies), consult with each other, and use reasonable
efforts to agree upon the text of any press release before issuing any such
press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities
exchange with respect thereto.
6.7 Regulatory Filings. The REIT and Partnership shall cooperate and
promptly prepare and the REIT shall file with the SEC under the Security Act as
soon as practicable a Registration Statement on Form S-4 (the "Registration
Statement"), which will include this Joint Proxy and Consent Solicitation
Statement and Prospectus, with respect to the REIT Shares issuable in
connection with the Merger (the "Proxy Statement"). The respective parties will
cause the Registration Statement and the Proxy Statement to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations promulgated thereunder. The REIT
shall use all reasonable efforts, and the Partnership will cooperate with the
REIT, to have the Registration Statement declared effective by the SEC as
promptly as practicable. The REIT shall use its best efforts to obtain, prior
to the effectiveness of the Registration Statement, any necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. The REIT agrees that the Registration Statement and the Proxy
Statement and each amendment or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing shall not
apply to the extent that any such untrue statement of a material fact or
omission to state a material fact was made by the REIT in reliance upon and in
conformity with written information concerning the Partnership furnished to the
REIT by the Partnership specifically for use in the Registration Statement. The
Partnership agrees that the written information provided by it specifically for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The REIT will
advise the Partnership, promptly after it receives notice thereof, of the time
when the Registration Statement may be filed or any supplement or amendment has
been filed or when the Registration Statement will become effective, the
issuance of any stop order, the suspension of the qualification of the REIT
Shares issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
6.8 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
B-21
<PAGE>
6.9 Expenses. Subject to Section 8.3 hereof, all costs and expenses of the
Partnership incurred in connection with the Merger shall be paid by the REIT if
the Partnership approves the Merger. In the event the Partnership does not
approve the Merger, the Partnership shall pay its Proportionate Share (the
"Partnership Proportionate Share") of the costs of the valuations and the
Fairness Opinion delivered to the General Partner by Houlihan Lokey, the
accounting costs for the partnerships, and 50% of the costs of the appraisals
of the partnership properties and the costs of partner communications (and any
other costs incurred for the benefit of such partnerships or their partners)
(the "Partnership Merger Expenses"). The General Partners shall pay their
proportionate share (the "General Partners Proportionate Share") of the
Partnership Merger Expenses. The Partnership Proportionate Share of the
Partnership Merger Expenses, for the purposes of this Agreement, shall be the
fraction the numerator of which is the number of votes cast "For" the Merger
and the denominator of which is the total number of votes cast on the Merger.
The General Partners' Proportionate Share of the Partnership Merger Expenses,
for purposes of this Merger Agreement, shall be the fraction the numerator of
which is the number of votes cast "Against" the Merger and abstentions and the
denominator of which is the total number of votes cast on the Merger.
6.10 Indemnification. For a period of six years from and after the Effective
Time, the REIT shall indemnify the partners or agents of the Partnership who at
any time prior to the Effective Time were entitled to indemnification under the
Agreement of Limited Partnership existing on the date hereof to the same extent
as such partners or agents are entitled to indemnification under such Agreement
of Limited Partnership in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
6.11 Survival of the Partnership Obligations; Assumption of the Partnership
Liabilities by the REIT. All of the obligations of the Partnership that are
outstanding at the Closing shall survive the Closing and shall not be merged
therein. Upon the consummation of the Merger, such obligations shall be
assumed, automatically, by the REIT; provided, however, that such assumption
shall not impose upon or expose the REIT to any liability for which the
Partnership was not liable, and provided, further, that the REIT shall be
entitled to the same defenses, offsets and counterclaims to which the
Partnership would have been entitled, but for the Merger.
6.12 The REIT Status. From and after the date and until the Effective Time,
neither the REIT nor the Partnership nor any of their respective subsidiaries
or other affiliates shall (a) knowingly take any action, or knowingly fail to
take any action, that would jeopardize qualification of the REIT as a REIT
within the meaning of Sections 856 through 859 of the Code; or (b) enter into
any contract, agreement, commitment or arrangement with respect to the
foregoing.
6.13 Third Party Consents. The REIT and the Partnership each shall take all
necessary corporate and other action and will use its commercially reasonable
efforts to obtain the consents and applicable approvals from third parties that
may be required to enable it to carry out the transactions contemplated by this
Agreement.
6.14 Efforts to Fulfill Conditions. The REIT and the Partnership each shall
use commercially reasonable efforts to insure that all conditions precedent to
its obligations hereunder are fulfilled at or prior to the Closing.
6.15 Representations, Warranties and Conditions Prior to Closing. The REIT
and the Partnership each shall use its commercially reasonable efforts to cause
its representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify the other in
writing (a) if any representation or warranty contained in this Agreement is
discovered to be or becomes untrue or (b) if the REIT or the Partnership fails
to perform or comply with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to perform or
comply with any of its covenants or agreements contained in this Agreement.
B-22
<PAGE>
6.16 Cooperation of the Parties. The REIT and the Partnership each will
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to
the transactions contemplated by this Agreement.
SECTION 7
Conditions
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the charter and bylaws and
Agreement of Limited Partnership of the REIT and the Partnership,
respectively, and by the holders of the REIT Shares and Partnership
interests and no stockholder or partner shall have appraisal or dissenter's
rights as a result of the Merger under applicable law or the charter,
bylaws or Agreement of Limited Partnership, as the case may be.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for filings in connection with the Merger and any other documents required
to be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business,
results of operations or financial condition of the REIT and the
Partnership (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(d) The REIT Shares shall have been listed on an exchange.
7.2 Conditions to Obligations of the Partnership to Effect the Merger. The
obligation of the Partnership to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Partnership:
(a) The REIT shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Effective Time and
the representations and warranties of the REIT contained in this Agreement
shall be true and correct in all material respects as of the Closing Date
as if made on the Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice President of
the REIT, dated the Closing Date, certifying to such effect.
(b) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, to the
effect that the REIT met the requirements for qualification and taxation as
a REIT for its taxable years 1995 through 1998; the REIT's diversity of
equity ownership, operations through the Closing Date and proposed method
of operation as described in the Proxy Statement should allow it to qualify
as a REIT for its taxable year ending December 31, 1999; and the discussion
contained under the caption "Material Federal Income Tax Aspects" in the
Proxy Statement accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. In rendering its
opinion, said counsel shall be entitled to rely as to any factual matter
upon certificates given by executive officers and other duly authorized
representatives of the Partnership and the REIT and shall be entitled to
assume that the covenants set forth in Section 6 shall be fully complied
with.
B-23
<PAGE>
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the REIT and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a REIT Material Adverse Effect
other than any such change that affects both the Partnership and the REIT
in a substantially similar manner.
(d) The Houlihan Fairness Opinion addressed to the Partnership that the
Merger is fair, from a financial point of view, to the partners of the
Partnership shall not have been withdrawn or materially modified.
(e) The Partnership shall have received the opinion of legal counsel to
the REIT, as approved by the Partnership, dated the Closing Date, as to
such customary matters as the General Partner may reasonably request, such
opinion to be reasonably satisfactory to the Partnership.
7.3 Conditions to Obligation of the REIT to Effect the Merger. The
obligations of the REIT to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the REIT:
(a) The Partnership shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Effective Time
and the representations and warranties of the Partnership contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date, and the REIT shall have
received a certificate of the General Partner or the corporate general
partner if applicable dated the Closing Date, certifying to such effect.
(b) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, to the effect
that the consummation of the Merger will not result in the REIT's failure
to continue to satisfy the requirements for qualification as a REIT for
federal income tax purposes. In rendering its opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of the REIT
and the Partnership and shall be entitled to assume that the covenants of
Section 6 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the Partnership and its subsidiaries, taken as a whole, that
would have or would be reasonably likely to have a Partnership Material
Adverse Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Morgan Keegan, addressed to the Board of Directors of
the REIT, that the consideration to be paid by the REIT pursuant to the
Merger is fair, from a financial point of view, to the REIT and its
stockholders shall not have been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal counsel to the
Partnership, as approved by the REIT, dated the Closing Date, as to such
customary matters as the REIT may reasonably request, such opinion to be
reasonably satisfactory to the REIT.
SECTION 8
Termination
8.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the partners of the Partnership or the
shareholders of the REIT by the mutual written consent of the REIT and the
Partnership.
8.2 Termination By Either the REIT or the Partnership for Good Reason. The
Merger Agreement may be terminated and the Merger may be abandoned by action of
the General Partner for the Partnership or
B-24
<PAGE>
the independent directors of the Board only for good reason. Only the following
shall constitute termination for "good reason" for the purposes of this
Agreement.
(a) By either the REIT or the Partnership if the Merger shall not have
been consummated by March 31, 2000;
(b) By the REIT if the approval of the Limited Partners of the
Partnership shall not have been obtained as required under this Agreement;
(c) By the Partnership if the approval of the stockholders of the REIT
shall not have been obtained as required under the Agreement;
(d) By either the REIT or the Partnership if there has been a breach by
the other of any representation or warranty contained in the this Agreement
which would have or would be reasonably likely to have a REIT Material
Adverse Effect or a Partnership Material Adverse Effect, as the case may
be, which breach is not cured within 30 days after written notice of such
breach is given to the breaching party by the non-breaching party;
(e) By either the REIT or the Partnership if there has been a material
breach of any of the covenants or agreements set forth in the Merger
Agreement by the other, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given to the
breaching party by the non breaching party;
(f) By the Partnership if, in the exercise of its good faith judgment as
to its fiduciary duties as imposed by law, and as advised by counsel, the
General Partner determines that such termination is required by reason of
an Acquisition Proposal relating to the Partnership being made;
(g) By the REIT if, in the exercise of their good faith judgment as to
fiduciary duties as imposed by law, and as advised by counsel, the
independent directors of the Board determine that such termination is
required by reason of a Acquisition Proposal relating to the REIT being
made; or
(h) By either the REIT or the Partnership if a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided that the party
seeking to terminate this Agreement shall have used all reasonable efforts
to remove such order, decree, ruling or injunction; provided, however, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure.
8.3 Effect of Termination and Abandonment.
(a) If an election to terminate this Agreement is made by the
Partnership (i) other than for good reason or (ii) for good reason pursuant
to Section 8.2(f) hereof, and a Partnership Acquisition Proposal shall have
been made and, within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or enters into
an agreement to consummate a Partnership Acquisition Proposal to be
subsequently consummated, the Partnership shall pay as liquidated damages
(not as a penalty or forfeiture) to the REIT, provided that the REIT was
not in material breach of its obligations at the time of such termination,
an amount equal to the lesser of (x) the Partnership's Proportionate Share
of $500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of (1) the
maximum amount that can be paid to the REIT without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income
described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code
("Qualifying Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT
receives a letter
B-25
<PAGE>
from its counsel indicating that it has received a ruling from the IRS to
the effect that the REIT Liquidated Damages Amount payment constitutes
Qualifying Income. In addition to the REIT Liquidated Damages Amount, the
REIT shall be entitled to receive from the Partnership (or its successor in
interest) all documented out-of-pocket costs and expenses incurred by it,
up to a maximum of the Partnership's Proportionate Share of the REIT
Expenses. The payments to which the REIT is entitled as described above
shall be its sole remedy with respect to the termination of this Agreement
under the circumstances contemplated above.
(b) If an election to terminate this Agreement is made by the REIT
because of a Partnership Material Adverse Effect under Section 8.2(d), the
Partnership shall, provided that the REIT was not in material breach of its
obligations at the time of such termination, pay the REIT for the REIT
Expenses, up to a maximum of the Partnership's Proportionate Share thereof
(although it shall not be required to pay the REIT Liquidated Damages
Amount), which payment of the REIT Expenses shall be the REIT's sole remedy
for termination of this Agreement in such circumstances.
(c) If an election to terminate this Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to Section
8.2(g) and, within one year from the date of such termination, the REIT
consummates a REIT Acquisition Proposal or enters into an agreement to
consummate a REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or forfeiture) to the
Partnership, provided that the Partnership was not in material breach of
its obligations at the time of such termination. Such liquidated damages
shall be in an amount equal to 120% of the Partnership's Proportionate
Share of the Partnership Merger Expenses (the "Partnership Liquidated
Damages Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the termination of
this Agreement under the circumstances contemplated above.
(d) If an election to terminate this Agreement is made by the
Partnership pursuant to Section 8.2(d) because of REIT Material Adverse
Effect, the REIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the
Partnership for the Partnership's Proportionate Share of the Partnership
Merger Expenses (although it shall not be required to pay the Partnership
Liquidated Damages Amount), which payment shall be the Partnership's sole
remedy for termination of this Agreement in such circumstances.
(e) If this Agreement is terminated by either party pursuant to Section
8.2(e), the non-terminating party shall, provided that the terminating
party was not in material breach of its obligations at the time of such
termination, pay the terminating party (i) in the case of termination by
the Partnership the Partnership Liquidated Damages Amount, and in the case
of termination by the REIT, the REIT Liquidated Damages Amount, plus (ii)
an amount equal to the terminating parties' Proportionate Share of the
Merger Expenses and (iii) the non-terminating party shall remain liable to
the terminating party for its breach.
(f) If this Agreement is terminated pursuant to Section 8.2(a) (as a
result of the condition set forth in Section 7.2(c) or Section 8.2(h) not
being satisfied), the REIT shall, provided that the Partnership was not in
material breach of its obligations hereunder at the time of such
termination, pay the Partnership an amount equal to the Partnership's
Proportionate Share of the Partnership Merger Expenses, which payment shall
be the Partnership's sole remedy for termination of the Agreement in such
circumstances.
(g) If an election to terminate this Agreement is made pursuant to
Section 8.2(a), (b) or (c), and a Partnership Acquisition Proposal or a
REIT Acquisition Proposal shall have been made and, within one year from
the date of such termination, the terminating party consummates such
Acquisition Proposal or enters into an agreement to consummate such
Acquisition Proposal which is subsequently consummated, the terminating
party shall pay to the non-terminating party, provided that the non-
terminating party was not in material breach of its obligations hereunder
at the time of such termination, as liquidated damages and not as a penalty
or forfeiture, an amount equal to (x) in the case of termination by the
Partnership, the Partnership Liquidated Damages Amount, and in the case of
termination by the REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such amount, the
non-terminating party shall be entitled to receive from the terminating
party (or its successor
B-26
<PAGE>
in interest) all of its documented out-of-pocket costs and expenses in
connection with this Agreement and the transactions contemplated thereby.
The payments to which the non-terminating party is entitled under this
Section 8.3(g) shall be its sole remedy with respect to the termination of
the Agreement under the circumstances contemplated in this Section 8.3(g).
(h) The REIT and the Partnership agree to amend this Section 8.3 at the
request of the REIT in order to (i) maximize the portion of the Liquidated
Damages Amount that may be distributed to the REIT hereunder without
causing the REIT to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code or (ii) improve the REIT's chances of securing a favorable
ruling described in this Section 8.3, provided that no such amendment may
result in any additional cost or expense to such other party.
(i) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Section 8, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.3 and Section 6.9 and except for the provisions of Sections
9.3, 9.4, 9.5, 9.6, 9.7, 9.10, 9.13, 9.14 and 9.16. In the event the REIT
or the Partnership has received a Liquidated Damages Amount as provided in
this Section 8.3, such recipient shall not assert or pursue in any manner,
directly or indirectly, any claim or cause of action against the other
party hereto or any of its officers, independent directors of the Board, or
General Partner, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination under
Section 8.2(g) or the exercise by the Partnership of its right to
termination under Section 8.2(f). Notwithstanding the foregoing, in the
event the REIT or the Partnership is required to file suit to seek all or a
portion of such Liquidated Damages Amount, and it ultimately succeeds, it
shall be entitled to all expenses, including attorney's fees and expenses,
which it has incurred in enforcing its rights hereunder.
(j) If either party willfully fails to perform its duties and
obligations under this Agreement, the non-breaching party is additionally
entitled to all remedies available to it at law or in equity and to recover
its expenses from the breaching party.
8.4 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by the General Partner or the Board, as applicable,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9
General Provisions
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Section 3, the last
sentence of Section 6.4 and Sections 6.9, 6.10, 6.11, 6.12, 6.13, 6.14 and 6.16
and this Section 9 shall survive the Merger.
9.2 Notices. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
B-27
<PAGE>
If to the REIT:
AmREIT, Inc.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: President
Telecopy: (713) 850-0498
If to the Partnership:
AAA Net Realty Fund XI, Ltd.
8 Greenway Plaza, Suite 824
Houston, TX 77046
Attention: General Partner
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
9.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the
following sentence, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement. The
provisions of Section 3 and Sections 6.10, 6.12, 6.13, 6.14 and 6.16
(collectively, the "Third Party Provisions") shall benefit the persons
identified therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 8.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the Partnership
Ancillary Agreements, the REIT Ancillary Agreements and any documents delivered
by the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
9.5 Confidentiality.
(a) As used herein, "Confidential Material" means, with respect to
either party hereto (the "Providing Party"), all information (written or
oral) furnished (whether before or after the date hereof) by the Providing
Party and its directors, partners, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial
advisors (collectively, the "Providing Party Representatives") to the other
party hereto (the "Receiving Party") or such Receiving Party's directors,
partners, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the Receiving Party's
potential sources of financing for the transactions contemplated by this
Agreement (collectively "the Receiving Party Representatives") and all
analyses, compilations, forecasts and other studies or other documents
prepared by the Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions contemplated by
this Agreement which contain or reflect such information. The term
"Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by
the public other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in violation of
this Agreement, (ii) at the time of disclosure was available on a
nonconfidential basis from a source other than the Providing Party or the
Providing Party Representatives, providing that such source
B-28
<PAGE>
is not and was not bound by a confidentiality agreement with the Providing
Party, (iii) was known by the Receiving Party prior to receiving the
Confidential Material from the Providing Party or has been independently
acquired or developed by the Receiving Party without violating any of its
obligations under this Agreement or (iv) is contained in the REIT Reports
or Registration Statement.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the
prior written consent of the Providing Party, be disclosed by the Receiving
Party or the Receiving Party Representatives, in whole or in part, and will
not be used by the Receiving Party or the Receiving Party Representatives,
directly or indirectly, for any purpose other than in connection with this
Agreement, the Merger or the evaluating, negotiating or advising with
respect to a transaction contemplated herein. Moreover, each Receiving
Party agrees to transmit Confidential Material to the Receiving Party
Representatives only if and to the extent that the Receiving Party
Representatives need to know the Confidential Material for purposes of such
transaction and are informed by such Receiving Party of the confidential
nature of the Confidential Material and of the terms of this Section 9.5.
(c) In the event that either Receiving Party, the Receiving Party
Representatives or anyone to whom such Receiving Party or the Receiving
Party Representatives supply the Confidential Material, are requested or
required (by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigative demand, any informal or formal
investigation by any government or governmental agency or authority or
otherwise in connection with legal processes) to disclose any Confidential
Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the advisability of
taking legally available steps to resist or narrow such request and (iii)
if disclosure of such information is required, to furnish only that portion
of the Confidential Material which, in the opinion of such Receiving
Party's counsel, such Receiving Party is legally compelled to disclose and
to cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances that
confidential treatment will be accorded the Confidential Material (it being
agreed that the Providing Party shall reimburse the Receiving Party for all
reasonable out-of-pocket expenses incurred by the Receiving Party in
connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from the Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the
Providing Party or destroy all tangible Confidential Material and will not
retain any copies, extracts or other reproductions thereof in whole or in
part. Any such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising the same.
Notwithstanding the foregoing, each Receiving Party and one Receiving Party
Representative designated by each Receiving Party shall be permitted to
retain one permanent file copy of each document constituting Confidential
Material.
(e) Each party hereto further agrees that if this Agreement is
terminated in accordance with its terms, until one year from the date of
termination, (i) it will not offer to hire or hire any person currently or
formerly employed by the other party with whom such party has had contact
prior hereto other than persons whose employment shall have been terminated
by such other party prior to the date of such offer to hire or hiring and
(ii) neither it nor its affiliates shall directly or indirectly, (A)(w)
solicit, seek or offer to effect or effect, (x) negotiate with or provide
any information to the Board or General Partner(s), as applicable, of the
other party, or officer of the other party or any stockholder or partner,
as applicable, of the other party with respect to, (y) make any statement
or proposal, whether written or oral, either alone or in concert with
others, to the Board or board of directors of the General Partner(s) of the
other party, any director, officer of the other party or any stockholder or
partner of the other party or any other person with respect to, or (z) make
any public announcement (except as required by law in respect of actions
permitted hereby) or proposal or offer whatsoever (including, without
limitation, any solicitation of consents as such terms are defined or used
in Regulation 14A of the Exchange Act) with respect to, (1) any form of
business combination or similar or other extraordinary transaction
involving the other party or any affiliate thereof, including, without
limitation, a merger, tender or exchange offer or liquidation of the other
party's
B-29
<PAGE>
assets, (2) any form of restructuring, recapitalization or similar
transaction with respect to the other party or any affiliate thereto, (3)
any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or
otherwise), of the other party or any affiliate thereof, (4) any proposal
to seek representation on the Board or the board of directors of the
General Partner(s), as applicable, or otherwise to seek to control or
influence the management, Board or the board of directors of the General
Partner(s), as applicable, or policies of the other party or any affiliate
thereof, (5) any request or proposal to waive, terminate or amend the
provisions of this Section 9.5, or (6) any proposal or other statement
inconsistent with the terms of this Section 9.5 or (B) instigate,
encourage, join, act in concert with or assist (including, without
limitation, providing or assisting in any way in the obtaining of financing
for, or acting as a joint or co-bidder for the other party with) any third
party to do any of the foregoing, unless and until such party has received
the prior written invitation or approval of a majority of the Board or the
General Partner(s), as applicable, to do any of the foregoing; provided
that, without such invitation or approval, either party may at any time, on
a confidential non-public basis, submit to the Chief Executive Officer of
the REIT or the General Partner(s), as applicable, a proposal to (a) amend
any of the provisions of this Section 9.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party
providing for the acquisition of all or substantially all of the assets or
the securities of the other party, including, without limitation, a merger,
tender offer or exchange offer. Each party hereto agrees that it will not
agree with any third party to waive its rights under this Section 9.5.
9.6 Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board or the board of directors of the General Partner(s),
as applicable, at any time before or after approval of this Agreement or any
other matter presented in connection with the Merger by the stockholders of the
REIT and partners of the Partnership, but after any such approval, no amendment
shall be made which by law requires the further approval of stockholders or
partners, as applicable, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of the REIT and the Partnership hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Texas and of the United States District Court, Southern
District of Texas (the "Texas Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Texas Courts
and agrees not to plead or claim in any Texas Court that such litigation
brought therein has been brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.9 Headings. Headings of the Sections of this Agreement are for the
convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
9.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.11 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision
B-30
<PAGE>
hereunder shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provision hereunder.
9.12 Incorporation. The Partnership Disclosure Letter and the REIT
Disclosure Letter and all Exhibits and Schedules attached hereto and thereto
and referred to herein and therein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
9.13 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any current or future law, and if the rights or
obligations of the parties under this Agreement would not be materially and
adversely affected thereby, such provision shall be fully separable, and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement, a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible, and the parties hereto
request the court or any arbitrator to whom disputes relating to this Agreement
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 9.13.
9.14 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Texas Court, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.15 Non-Recourse. Neither the officers, directors nor stockholders of the
REIT shall be personally bound or have any personal liability hereunder. The
Partnership shall look solely to the assets of the REIT for satisfaction of any
liability of the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek recourse or
commence any action against any of the stockholders of the REIT or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
REIT hereunder or thereunder. The partners of the Partnership shall not be
personally bound or have any personal liability hereunder. The REIT shall look
solely to the assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary Agreements to
which it is a party. The REIT will not seek recourse or commence any action
against any of the partners of the Partnership or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the
Partnership hereunder or thereunder.
B-31
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AmREIT, Inc.
_____________________________________
H. Kerr Taylor, President and
Chief Executive Officer
AAA Net Realty Fund XI, Ltd.
By: American Asset Advisers
Management Corporation XI
Its General Partner
By: _____________________________
H. Kerr Taylor, President
By: _________________________________
H. Kerr Taylor
Its General Partner
B-32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 2-418 of the Maryland General Corporation Law (MGCL) provides that,
in general, a corporation may indemnify each director to the corporation or its
stockholders for judgments, penalties, fines, settlements and reasonable
expenses actually incurred by the director in connection with the proceeding,
except for liability (1) where the act or omission of the director was material
to the matter giving rise to the proceeding and was committed in bad faith or
involved active and deliberate dishonesty; (2) for any transaction from which
the director derived an improper personal benefit; and (3) in the case of a
criminal proceeding, the director had reasonable cause to believe that the act
or omission was unlawful. The AmREIT charter provides for the elimination and
limitation of the personal liability of directors and officers of AmREIT for
monetary damages to the fullest extent permitted by the MGCL. AmREIT's charter
also provides for indemnification of the its directors, officers, employees and
agents under certain circumstances to the fullest extent permitted by the MGCL.
These provisions do not limit or eliminate the rights of AmREIT or any
stockholder to seek non-monetary relief such as an injunction or recission in
the event of a breach of a director's duty of care.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling AmREIT pursuant to the foregoing provisions, it has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
2.1 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement for Taylor Income Investors, Ltd., constituting a part
of this registration statement).
2.2 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors IV, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement for Taylor Income Investors IV, Ltd., constituting a
part of this registration statement).
2.3 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors V, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement for Taylor Investors V, Ltd., constituting a part of
this registration statement).
2.4 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors VI, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement Taylor Income Investors VI, Ltd., constituting a part
of this registration statement).
2.5 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and AAA Net Realty Fund VII, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement AAA Net Realty Fund VII, Ltd., constituting a part of
this registration statement).
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
2.6 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund VIII, Ltd., dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund VIII, Ltd., constituting a part of this registration
statement).
2.7 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund Goodyear, Ltd. dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund Goodyear, Ltd., constituting a part of this
registration statement).
2.8 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund IX, Ltd., dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund IX, Ltd., constituting a part of this registration
statement).
2.9 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund X, Ltd., dated June 25, 1999 (filed
as Appendix B to the prospectus supplement AAA Net Realty Fund X,
Ltd., constituting a part of this registration statement).
2.10 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund XI, Ltd., dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund XI, Ltd., constituting a part of this registration
statement).
3.1 Articles of Incorporation (included as Exhibit 3.1 of the Exhibits
to Registration Statement No. 33-70654 of the Company and
incorporated herein by reference).
3.2 Articles of Amendment to the Articles of Incorporation (included
as Exhibit 3 (ii) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference).
3.3 Articles of Amendment to the Articles of Incorporation dated
December 16, 1997 (included as Exhibit 3 (v) of the Exhibits to
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 and incorporated herein by reference).
3.4 Amended and Restated by-laws, dated November 12, 1997 (included as
Exhibit 3 (vi) of the Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 and incorporated
herein by reference).
4.1 Forms of Note and Loan Agreement (filed as Annex 3 to this
registration statement).
**5.1 Opinion and consent of Locke Liddell & Sapp LLP as to the legality
of the AmREIT common stock.
**8.1 Opinion of Locke Liddell & Sapp LLP, special tax counsel, as to
certain federal income tax matters.
10.1 Lease between Ironwood Development Corporation, as landlord and
Tandy Corporation, a Delaware corporation, dated August, 1991
(included as Exhibit 10 (b) (2) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.2 Assignment and Assumption of the Lease between Ironwood
Development Corporation and American Asset Advisers Trust, Inc.,
dated June 14, 1994 (included as Exhibit 10 (b) (1) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, and incorporated herein by reference).
10.3 Assignment of Guaranties and Warranties from Ironwood Development
Corporation to American Asset Advisers Trust, Inc., dated June 14,
1994 (included as Exhibit 10 (b) (4) of the Exhibits to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.4 Real Estate Sales Agreement between America's Favorite Chicken
Company and AAA Net Realty Fund X, Ltd., dated June 13, 1994
(included as Exhibit 10 (b) (5) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.5 Lease (the "AFCC Lease") between AAA Net Realty Fund X, Ltd., as
landlord and America's Favorite Chicken Company, as tenant, dated
June 13, 1994 (included as Exhibit 10 (b) (6) of the Exhibits to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).
10.6 Assignment of the Agreement and the Lease form AAA Net Realty Fund
X, Ltd. to American Asset Advisers Trust, Inc. (included as
Exhibit 10 (b) (7) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.7 First Amendment to AFCC Lease, dated July 22, 1994 (included as
Exhibit 10 (b) (8) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.8 Agreement for Purchase and Sale of Real Estate (the "KCBB
Contract") between KCBB, Inc. and AAA Net Realty Fund X, Ltd.,
dated October 12, 1994 (included as Exhibit 10 (b) (9) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.9 Lease (the "KCBB Lease") between KCBB, Inc., as landlord and Sound
Warehouse, Inc., as tenant, dated November 19, 1993 (included as
Exhibit 10 (b) (10) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.10 Guaranty of KCBB Lease by Blockbuster Entertainment Corporation
(included as Exhibit 10 (b) (11) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.11 Amendment to the KCBB Contract (included as Exhibit 10 (b) (12) of
the Exhibits to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference).
10.12 Joint Venture Agreement between the Company and AAA Net Realty
Fund X, Ltd., dated October 27, 1994 (included as Exhibit 10 (b)
(3) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, and incorporated herein by
reference).
10.13 Assignment and Assumption of the Lease between KCBB, Inc. and AAA
Joint Venture 94-1, dated November 11, 1994 (included as Exhibit
10 (b) (4) of the Exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, and incorporated herein
by reference).
10.14 Assignment from KCBB, Inc. to AAA Joint Venture 94-1, dated
November 11, 1994 (included as Exhibit 10 (b) (15) of the Exhibits
to the Company's Annual Report on Form 10-K for the year ended
December31, 1995 and incorporated herein by reference).
10.15 Assignment from KCBB, Inc., to AAA Joint Venture 94-1 of
warranties, dated November 11, 1994 (included as Exhibit 10 (b)
(16) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).
10.16 Agreement for Purchase and Sale of Real Estate (the "KCBB Contract
II") between KCBB, Inc. and the Company, dated August 9, 1995
(included as Exhibit 10 (b) (17) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.17 Lease (the "KCBB Lease II") between KCBB, Inc., as landlord and
Blockbuster Music Retail, Inc., as tenant, dated August 9, 1995
(included as Exhibit 10 (b) (18) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.18 Amendment to Agreement for Purchase and Sale of Real Estate
Assigning Agreement to AAA Joint Venture 95-2 (included as Exhibit
10 (b) (19) of the Exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein
by reference).
10.19 Joint Venture Agreement between the Company and AAA net Realty
Fund XI, Ltd., dated August 24, 1995 (included as Exhibit 10 (b)
(20) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).
10.20 Assignment and Assumption of the KCBB Lease II between KCBB, Inc.
and AAA Joint Venture 95-2, dated September 12, 1995 (included as
Exhibit 10 (b) (21) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.21 Assignment from KCBB, Inc. to AAA Joint Venture 95-2 of Contracts
and Warranties, dated September 12, 1995 (included as Exhibit 10
(b) (22) of the Exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein
by reference).
10.22 Agreement for the Purchase and Sale of Real Estate between Turner
Adreac, L.C. and the Company, dated March 31, 1995 (included as
Exhibit 10 (b) (23) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.23 Assignment of Rents, Leases and Profits from Turner Adreac, L.C.
to American Asset Advisers Trust, Inc., dated March 31, 1995
(included as Exhibit 10 (b) (24) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.24 Lease (the "OneCare Lease") between Turner Adreac, L.C. and
OneCare Health Industries, Inc., a Texas non-profit corporation,
dated February 17, 1995 (included as Exhibit 10 (b) (25) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.25 Assignment and Assumption of the OneCare Lease between Turner
Adreac, L.C. and American Asset Advisers Trust, Inc., dated
September 26, 1995 (included as Exhibit 10 (b) (26) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.26 Assignment of Warranties from Turner Adreac, L.C. to the Company,
dated September 26, 1995 (included as Exhibit 10 (b) (27) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.27 Agreement for Purchase and Sale of Real Estate between Company and
Tucson Oracle Limited Partnership (the "AZ LP"), dated January 19,
1996 (included as Exhibit 10 (b) (28) of the Exhibits to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference).
10.28 First Amendment to Agreement for the Purchase and Sale of Real
Estate between Company and the AZ LP, dated June 10, 1996
(included as Exhibit 10 (b) (29) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.29 Lease (the "Just For Feet Lease") between Cumberland America
Development Company, Inc. and Just for Feet, Inc., dated August
10, 1995 (included as Exhibit 10 (b) (30) of the Exhibits to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference).
10.30 First Amendment to Just For Feet Lease, dated February 29, 1996
(included as Exhibit 10 (b) (31) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.31 Second Amendment to Just For Feet Lease, dated May 29, 1996
(included as Exhibit 10 (b) (32) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.32 Third Amendment to Just For Feet Lease, dated January, 1997
(included as Exhibit 10 (b) (33) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.33 Joint Venture Agreement between the Company and AAA Net Realty
Fund X, Ltd. and AAA Net Realty Fund XI, Ltd., dated April 5, 1996
(included as Exhibit 10 (b) (34) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.34 Bill of Sale and Assignment between Tucson Oracle Limited
Partnership and AAA Joint Venture 96-1, dated September 6, 1996
(included as Exhibit 10 (b) (35) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.35 Joint Venture Agreement between the Company and AAA Net Realty
Fund XI, Ltd., dated August 8, 1996 (included as Exhibit 10 (b)
(36) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference).
10.36 Revolving Credit Agreement, dated November 6, 1998, by and among
AmREIT, Inc., certain lenders and Wells Fargo Bank, as the Agent,
relating to a $30,000,000 loan (included as Exhibit 10.1 of the
Exhibits to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1998 and incorporated herein by
reference).
10.37 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors, Ltd., constituting a part of this registration
statement).
10.38 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors IV, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors IV, Ltd., constituting a part of this registration
statement).
10.39 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors V, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors V, Ltd., constituting a part of this registration
statement).
10.40 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors VI, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors VI, Ltd., constituting a part of this registration
statement).
10.41 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund VII, Ltd., dated June 25, 1999 (filed as Appendix
A to the prospectus supplement for AAA Net Realty Fund VII, Ltd.,
constituting a part of this registration statement).
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.42 Fairness Opinion prepared by Houlihan Lokey, incorporated AAA Net
Realty Fund VIII, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund VIII, Ltd.,
constituting a part of this registration statement).
10.43 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund Goodyear, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for AAA Net Realty Fund
Goodyear, Ltd., constituting a part of this registration
statement).
10.44 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund IX, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund IX, Ltd.,
constituting a part of this registration statement).
10.45 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund X, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund X, Ltd.,
constituting a part of this registration statement).
10.46 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund XI, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund XI, Ltd.,
constituting a part of this registration statement).
*10.47 Appraisal prepared by Valuation Associates of Taylor Income
Investors, Ltd., dated May 31, 1999, including Supplement to
Appraisal.
*10.48 Appraisal prepared by Valuation Associates of Taylor Income
Investors IV, Ltd., dated May 31, 1999, including Supplement to
Appraisal.
*10.49 Appraisal prepared by Valuation Associates of Taylor Investors V,
Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.50 Appraisal prepared by Valuation Associates of Taylor Investors VI,
Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.51 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
VII, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.52 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
VIII, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.53 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
Goodyear, Ltd., dated May 31, 1999, including Supplement to
Appraisal.
*10.54 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
IX, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.55 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
X, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.56 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
XI, Ltd., dated May 31, 1999, including Supplement to Appraisal.
10.57 Fairness Opinion prepared by Morgan Keegan, incorporated for
AmREIT, dated June 23, 1999 (filed as Annex 1 to this Registration
Statement).
*11.1 Computation of earnings per common share, twelve months ended
December 31, 1998 and 1997.
*11.2 Computation of earnings per common share, three months ended March
31, 1998 and 1998.
*21.1 Subsidiaries of the Company.
23.1 Consent of Locke Liddell & Sapp LLP (included as part of Exhibit
5.1).
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
*23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of Morgan Keegan & Company
*24.1 Power of Attorney (included on the signature page of the
registration statement).
*27.1 Financial Data Schedule.
**99.1 Consent form with power of attorney and cash/notes option
election.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules
Reference is made to [describe financial statements]
(c) Reports, Opinions and Appraisals
The opinion of Morgan Keegan as to the fairness, from a financial point of
view, of the consideration to be paid to the partnerships by AmREIT is attached
as Annex 1 to this registration statement. The opinions of Houlihan Lokey as to
the fairness, from a financial point of view, of (1) the consideration offered
by AMREIT with respect to each of the individual partnerships and their limited
partners; (2) the aggregate consideration offered with respect to all of the
partnerships; and (3) the method of allocating the consideration among the
partnerships are attached to the supplements of the partnerships as Appendix A.
The appraisals prepared by Valuation Associates with respect to the
partnerships are attached hereto as Exhibits 10.47 through 10.56. The opinion
of Locke Liddell & Sapp LLP as to the federal income tax consequences of the
proposed acquisition of the partnerships by AmREIT is attached hereto as
Exhibit 8.1.
Item 22. Undertakings
AmREIT hereby undertakes:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), AmREIT undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(2) that every prospectus (a) that is filed pursuant to paragraph (1)
above, or (b) that purports to meet the requirements of Section 10(a)(3) of
the Securities Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide
offering thereof;
(3) for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(4) for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Harris County, State
of Texas, on this 31st day of August, 1999.
AmREIT, Inc.
By: /s/ H. Kerr Taylor
----------------------------------
H. Kerr Taylor
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<S> <C>
</TABLE>
Signature Position Date
/s/ H. Kerr Taylor Chairman of the
- ----------------------------------- Board, Chief August 31, 1999
H. Kerr Taylor Executive Officer
and President
/s/ L. Larry Mangum Chief Financial
- ----------------------------------- Officer and August 31, 1999
L. Larry Mangum Treasurer
Director
* August 31, 1999
- -----------------------------------
Robert S. Cartwright, Jr.
Director
* August 31, 1999
- -----------------------------------
George A. McCanse, Jr.
By: /s/ H. KERR TAYLOR
- -----------------------------------
H. Kerr Taylor
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
2.1 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement for Taylor Income Investors, Ltd., constituting a part
of this registration statement).
2.2 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors IV, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement for Taylor Income Investors IV, Ltd., constituting a
part of this registration statement).
2.3 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors V, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement for Taylor Investors V, Ltd., constituting a part of
this registration statement).
2.4 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and Taylor Income Investors VI, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement Taylor Income Investors VI, Ltd., constituting a part
of this registration statement).
2.5 Amended and Restated Amended and Restated Agreement and Plan of
Merger by and between AmREIT and AAA Net Realty Fund VII, Ltd.,
dated June 25, 1999 (filed as Appendix B to the prospectus
supplement AAA Net Realty Fund VII, Ltd., constituting a part of
this registration statement).
2.6 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund VIII, Ltd., dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund VIII, Ltd., constituting a part of this registration
statement).
2.7 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund Goodyear, Ltd. dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund Goodyear, Ltd., constituting a part of this
registration statement).
2.8 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund IX, Ltd., dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund IX, Ltd., constituting a part of this registration
statement).
2.9 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund X, Ltd., dated June 25, 1999 (filed
as Appendix B to the prospectus supplement AAA Net Realty Fund X,
Ltd., constituting a part of this registration statement).
2.10 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund XI, Ltd., dated June 25, 1999
(filed as Appendix B to the prospectus supplement for AAA Net
Realty Fund XI, Ltd., constituting a part of this registration
statement).
3.1 Articles of Incorporation (included as Exhibit 3.1 of the Exhibits
to Registration Statement No. 33-70654 of the Company and
incorporated herein by reference).
3.2 Articles of Amendment to the Articles of Incorporation (included
as Exhibit 3 (ii) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
3.3 Articles of Amendment to the Articles of Incorporation dated
December 16, 1997 (included as Exhibit 3 (v) of the Exhibits to
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 and incorporated herein by reference).
3.4 Amended and Restated by-laws, dated November 12, 1997 (included as
Exhibit 3 (vi) of the Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 and incorporated
herein by reference).
4.1 Forms of Note and Loan Agreement (filed as Annex 3 to this
registration statement).
**5.1 Opinion and consent of Locke Liddell & Sapp LLP as to the legality
of the AmREIT common stock.
**8.1 Opinion of Locke Liddell & Sapp LLP, special tax counsel, as to
certain federal income tax matters.
10.1 Lease between Ironwood Development Corporation, as landlord and
Tandy Corporation, a Delaware corporation, dated August, 1991
(included as Exhibit 10 (b) (2) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.2 Assignment and Assumption of the Lease between Ironwood
Development Corporation and American Asset Advisers Trust, Inc.,
dated June 14, 1994 (included as Exhibit 10 (b) (1) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, and incorporated herein by reference).
10.3 Assignment of Guaranties and Warranties from Ironwood Development
Corporation to American Asset Advisers Trust, Inc., dated June 14,
1994 (included as Exhibit 10 (b) (4) of the Exhibits to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference).
10.4 Real Estate Sales Agreement between America's Favorite Chicken
Company and AAA Net Realty Fund X, Ltd., dated June 13, 1994
(included as Exhibit 10 (b) (5) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.5 Lease (the "AFCC Lease") between AAA Net Realty Fund X, Ltd., as
landlord and America's Favorite Chicken Company, as tenant, dated
June 13, 1994 (included as Exhibit 10 (b) (6) of the Exhibits to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).
10.6 Assignment of the Agreement and the Lease form AAA Net Realty Fund
X, Ltd. to American Asset Advisers Trust, Inc. (included as
Exhibit 10 (b) (7) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.7 First Amendment to AFCC Lease, dated July 22, 1994 (included as
Exhibit 10 (b) (8) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.8 Agreement for Purchase and Sale of Real Estate (the "KCBB
Contract") between KCBB, Inc. and AAA Net Realty Fund X, Ltd.,
dated October 12, 1994 (included as Exhibit 10 (b) (9) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.9 Lease (the "KCBB Lease") between KCBB, Inc., as landlord and Sound
Warehouse, Inc., as tenant, dated November 19, 1993 (included as
Exhibit 10 (b) (10) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.10 Guaranty of KCBB Lease by Blockbuster Entertainment Corporation
(included as Exhibit 10 (b) (11) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.11 Amendment to the KCBB Contract (included as Exhibit 10 (b) (12) of
the Exhibits to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference).
10.12 Joint Venture Agreement between the Company and AAA Net Realty
Fund X, Ltd., dated October 27, 1994 (included as Exhibit 10 (b)
(3) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, and incorporated herein by
reference).
10.13 Assignment and Assumption of the Lease between KCBB, Inc. and AAA
Joint Venture 94-1, dated November 11, 1994 (included as Exhibit
10 (b) (4) of the Exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, and incorporated herein
by reference).
10.14 Assignment from KCBB, Inc. to AAA Joint Venture 94-1, dated
November 11, 1994 (included as Exhibit 10 (b) (15) of the Exhibits
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).
10.15 Assignment from KCBB, Inc., to AAA Joint Venture 94-1 of
warranties, dated November 11, 1994 (included as Exhibit 10 (b)
(16) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).
10.16 Agreement for Purchase and Sale of Real Estate (the "KCBB Contract
II") between KCBB, Inc. and the Company, dated August 9, 1995
(included as Exhibit 10 (b) (17) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.17 Lease (the "KCBB Lease II") between KCBB, Inc., as landlord and
Blockbuster Music Retail, Inc., as tenant, dated August 9, 1995
(included as Exhibit 10 (b) (18) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.18 Amendment to Agreement for Purchase and Sale of Real Estate
Assigning Agreement to AAA Joint Venture 95-2 (included as Exhibit
10 (b) (19) of the Exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein
by reference).
10.19 Joint Venture Agreement between the Company and AAA net Realty
Fund XI, Ltd., dated August 24, 1995 (included as Exhibit 10 (b)
(20) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).
10.20 Assignment and Assumption of the KCBB Lease II between KCBB, Inc.
and AAA Joint Venture 95-2, dated September 12, 1995 (included as
Exhibit 10 (b) (21) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.21 Assignment from KCBB, Inc. to AAA Joint Venture 95-2 of Contracts
and Warranties, dated September 12, 1995 (included as Exhibit 10
(b) (22) of the Exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein
by reference).
10.22 Agreement for the Purchase and Sale of Real Estate between Turner
Adreac, L.C. and the Company, dated March 31, 1995 (included as
Exhibit 10 (b) (23) of the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.23 Assignment of Rents, Leases and Profits from Turner Adreac, L.C.
to American Asset Advisers Trust, Inc., dated March 31, 1995
(included as Exhibit 10 (b) (24) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference).
10.24 Lease (the "OneCare Lease") between Turner Adreac, L.C. and
OneCare Health Industries, Inc., a Texas non-profit corporation,
dated February 17, 1995 (included as Exhibit 10 (b) (25) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.25 Assignment and Assumption of the OneCare Lease between Turner
Adreac, L.C. and American Asset Advisers Trust, Inc., dated
September 26, 1995 (included as Exhibit 10 (b) (26) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.26 Assignment of Warranties from Turner Adreac, L.C. to the Company,
dated September 26, 1995 (included as Exhibit 10 (b) (27) of the
Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.27 Agreement for Purchase and Sale of Real Estate between Company and
Tucson Oracle Limited Partnership (the "AZ LP"), dated January 19,
1996 (included as Exhibit 10 (b) (28) of the Exhibits to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference).
10.28 First Amendment to Agreement for the Purchase and Sale of Real
Estate between Company and the AZ LP, dated June 10, 1996
(included as Exhibit 10 (b) (29) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.29 Lease (the "Just For Feet Lease") between Cumberland America
Development Company, Inc. and Just for Feet, Inc., dated August
10, 1995 (included as Exhibit 10 (b) (30) of the Exhibits to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference).
10.30 First Amendment to Just For Feet Lease, dated February 29, 1996
(included as Exhibit 10 (b) (31) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.31 Second Amendment to Just For Feet Lease, dated May 29, 1996
(included as Exhibit 10 (b) (32) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.32 Third Amendment to Just For Feet Lease, dated January, 1997
(included as Exhibit 10 (b) (33) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.33 Joint Venture Agreement between the Company and AAA Net Realty
Fund X, Ltd. and AAA Net Realty Fund XI, Ltd., dated April 5, 1996
(included as Exhibit 10 (b) (34) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.34 Bill of Sale and Assignment between Tucson Oracle Limited
Partnership and AAA Joint Venture 96-1, dated September 6, 1996
(included as Exhibit 10 (b) (35) of the Exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
10.35 Joint Venture Agreement between the Company and AAA Net Realty
Fund XI, Ltd., dated August 8, 1996 (included as Exhibit 10 (b)
(36) of the Exhibits to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference).
10.36 Revolving Credit Agreement, dated November 6, 1998, by and among
AmREIT, Inc., certain lenders and Wells Fargo Bank, as the Agent,
relating to a $30,000,000 loan (included as Exhibit 10.1 of the
Exhibits to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1998 and incorporated herein by
reference).
10.37 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors, Ltd., constituting a part of this registration
statement).
10.38 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors IV, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors IV, Ltd., constituting a part of this registration
statement).
10.39 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors V, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors V, Ltd., constituting a part of this registration
statement).
10.40 Fairness Opinion prepared by Houlihan Lokey, incorporated for
Taylor Income Investors VI, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for Taylor Income
Investors VI, Ltd., constituting a part of this registration
statement).
10.41 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund VII, Ltd., dated June 25, 1999 (filed as Appendix
A to the prospectus supplement for AAA Net Realty Fund VII, Ltd.,
constituting a part of this registration statement).
10.42 Fairness Opinion prepared by Houlihan Lokey, incorporated AAA Net
Realty Fund VIII, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund VIII, Ltd.,
constituting a part of this registration statement).
10.43 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund Goodyear, Ltd., dated June 25, 1999 (filed as
Appendix A to the prospectus supplement for AAA Net Realty Fund
Goodyear, Ltd., constituting a part of this registration
statement).
10.44 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund IX, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund IX, Ltd.,
constituting a part of this registration statement).
10.45 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund X, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund X, Ltd.,
constituting a part of this registration statement).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
Exhibit No. Exhibit
----------- -------
10.46 Fairness Opinion prepared by Houlihan Lokey, incorporated for AAA
Net Realty Fund XI, Ltd., dated June 25, 1999 (filed as Appendix A
to the prospectus supplement for AAA Net Realty Fund XI, Ltd.,
constituting a part of this registration statement).
*10.47 Appraisal prepared by Valuation Associates of Taylor Income
Investors, Ltd., dated May 31, 1999, including Supplement to
Appraisal.
*10.48 Appraisal prepared by Valuation Associates of Taylor Income
Investors IV, Ltd., dated May 31, 1999, including Supplement to
Appraisal.
*10.49 Appraisal prepared by Valuation Associates of Taylor Investors V,
Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.50 Appraisal prepared by Valuation Associates of Taylor Investors VI,
Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.51 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
VII, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.52 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
VIII, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.53 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
Goodyear, Ltd., dated May 31, 1999, including Supplement to
Appraisal.
*10.54 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
IX, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.55 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
X, Ltd., dated May 31, 1999, including Supplement to Appraisal.
*10.56 Appraisal prepared by Valuation Associates of AAA Net Realty Fund
XI, Ltd., dated May 31, 1999, including Supplement to Appraisal.
10.57 Fairness Opinion prepared by Morgan Keegan, incorporated for
AmREIT, dated June 23, 1999 (filed as Annex 1 to this Registration
Statement).
*11.1 Computation of earnings per common share, twelve months ended
December 31, 1998 and 1997.
*11.2 Computation of earnings per common shares, three months ended
March 31, 1999 and 1998.
*21.1 Subsidiaries of the Company.
23.1 Consent of Locke Liddell & Sapp LLP (included as part of Exhibit
5.1).
*23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of Morgan Keegan & Company
*24.1 Power of Attorney (included on the signature page of the
registration statement).
*27.1 Financial Data Schedule.
**99.1 Consent form with power of attorney and cash/notes option
election.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
