Document:

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                                                                   EXHIBIT 10.5b

                    EMPLOYMENT AND NONCOMPETITION AGREEMENT

     This EMPLOYMENT AND NONCOMPETITION AGREEMENT is made and entered into as of
June 14, 1999, by and between HOME ASSET MANAGEMENT CORP., a Delaware
corporation ("Employer"), and Judith Berry ("Employee").

                              W I T N E S S E T H:

     WHEREAS, Employer desires to employ Employee as an executive officer of
Employer and Employee wishes to accept such employment on the terms and
conditions set forth herein.

     NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties, conditions, acknowledgments and agreements contained herein,
Employer and Employee hereby agree as follows:

     1.   Employment. Employer hereby employs Employee and Employee hereby
accepts employment, upon the terms and conditions hereinafter set forth.
Employee warrants that she is free to enter into and fully perform this
Agreement. Upon execution of this Agreement, Employee shall execute and deliver
Employer's standard confidentiality and trade secrets agreement attached to this
Agreement as Exhibit A.

     2.   Term. The term of this Agreement (subject to the provisions of Section
6) shall begin on June 14, 1999 ("Date of Hire") and shall continue for a period
of thirty (30) months thereafter from the date hereof (the "Term"). Employee
shall be deemed employed by Employer so long as she continues to provide
services to Employer or American Residential Investment Trust, Inc., a Maryland
corporation ("AMREIT").

     3.   Compensation.

          (a)  Salary. For all Employee's services under this Agreement,
Employer shall pay Employee, or cause to be paid, a base salary, subject to
periodic review, at the rate of not less than $18,750 per month, less payroll
and withholding deductions required by law, payable in accordance with
Employer's payroll policy as constituted from time to time. If there is a
material increase in Employee's responsibilities as a result of either material
growth of the Employer's business or an acquisition of an additional business
for which Employee is given responsibility, the Compensation Committee of
Employer shall give consideration to increasing Employee's salary. If requested
by Employee, Employer shall consider the adoption of a plan to defer all or a
portion of Employee's cash compensation hereunder.

          (b)  Other Duties. If Employee is elected or appointed a director or
an officer of Employer or of any parent, subsidiary or affiliate of Employer or
AMREIT, but excluding other portfolio companies of McCown De Leeuw & Co.
(collectively, "Affiliates"),

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for any periods during her employment by Employer, Employee will serve in such
capacities without compensation in addition to that specified in this Section 3.

          (c)  Fringe Benefits. Employee shall have the right, on the same
basis as other employees of Employer occupying positions with responsibility and
salary comparable to that of Employee, to participate in and receive benefits
under and in accordance with the provisions of any future annual or long-term
incentive or bonus plan. In addition, Employee shall be entitled to such health,
dental, life and long-term disability insurance and benefits and to participate
in such 401K, deferred compensation and employee stock purchase plans which are
made available to employees of Employer ("Benefits"). In addition, Employee
shall be entitled to four weeks paid vacation, reimbursement of up to $2,000
annually for a physical examination and reimbursement for travel and
entertainment expenses incurred in connection with her duties hereunder upon
presentation of proper evidence thereof.

          (d)  Bonus. Bonuses will be subject to achievement of targeted goals
and objectives, including net income, established by management and approved by
the Board of Directors of Employer. Employee shall be able to earn up to 100% of
her annual salary as a bonus.

          (e)  AMREIT Equity Ownership. Employer shall cause AMREIT to provide
the following equity ownership to Employee:

               (i)  Employee shall be granted options to purchase up to 100,000
shares of Common Stock of AMREIT at an exercise price per share equal to the
fair market value of AMREIT's Common Stock on Employee's Date of Hire under
AMREIT 's 1997 Stock Incentive Plan and pursuant to AMREIT's standard form of
stock option agreement.

               (ii) Options granted pursuant to the terms of this Section 3(e)
shall be incentive stock options to the extent permitted by law. The balance of
the options shall be non-qualified stock options. To the extent the terms of the
option agreements conflict with the provisions of this Section 3, the option
agreements shall control.

          (f)  Golden Parachute Limitations. Notwithstanding anything contained
herein to the contrary, in the event that the payments to Employee contemplated
by this Agreement or the agreements referred to herein, either alone or together
with other payments Employee has a right to receive from Employer or AMREIT,
would not be deductible (in whole or in part) by Employer or AMREIT as a result
of such payments constituting a "parachute payment" (as defined in Section 280G
of the Internal Revenue Code, as amended (the "Code,")), such payments shall be
reduced to the largest amount as will result in no portion of such payments not
being fully deductible by Employer or AMREIT as the result of Section 280G of
the Code. The determination of a valuation for purposes of Section 280G of
consulting, noncompetition or other agreements resulting in a reduction in the
payments pursuant to the foregoing sentence shall be made exclusively by
independent public accountants selected by mutual agreement of Employee and
Employer. if Employee and Employer are unable to agree upon a single firm to
make such determination, Employee and Employer shall each select one firm and
the firms selected shall appoint a third firm to make the determination. The
fees and

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expenses of any firm mutually agreed upon by Employee and Employer shall be
borne by Employer. The fees and expenses of firms selected by Employee and
Employer if no agreement is reached shall be borne by the party selecting such
firm, with the fees and expenses of the third firm selected being shared equally
by Employee and Employer. The determination of the accounting firm or firms
shall be conclusive and binding on Employer and Employee.

          (g)  Adjustments to Compensation. Employer shall be entitled to reduce
any payments due to Employee under this Paragraph 3 by an amount equal to the
total compensation paid to Employee by AMREIT.

     4.   Position.

          (a)  Responsibilities. Subject to the provisions of Section 2 hereof
and in accordance with the By-laws of Employer, Employee is engaged as Executive
Vice President and Chief Financial Officer of Employer and, subject to
appointment by the Board of Directors of AMREIT, Executive Vice President and
Chief Financial Officer of AMREIT. Employee promises to perform and discharge
well and faithfully all duties which may be assigned to her in her capacities
described above by the Board of Directors of Employer or AMREIT from time to
time in accordance with this Agreement, and Employee shall devote her best
talents, efforts and abilities to the performance of her duties hereunder.
Employee shall perform her duties subject to the direction and control of the
Board of Directors of Employer or AMREIT .

          (b)  Place of employment. Employee's place of employment during the
term of this Agreement shall be in the San Diego metropolitan area, with such
business travel outside the San Diego area as shall be necessary to the
performance of Employee's duties.

     5.   Exclusive Services. During the period in which Employee is an employee
of Employer, her services shall be completely exclusive to Employer and its
Affiliates and she shall devote substantially her entire time, attention and
energies to the business of Employer and its Affiliates and the duties to which
Employer shall assign her from time to time. Employee agrees to perform her
services to the best of her ability and to carry out the reasonable policies and
directives of Employer. Notwithstanding the above, Employee may continue to
provide serves to NorWest Mortgage, Inc. for a period of up to 3 months as
approved by the Chief Operating Officer of Employer.

     6.   Termination. Employee's employment hereunder may be terminated prior
to the expiration of the Term specified in Section 2 above as described below.
Employee shall be entitled to the compensation provided in Section 7 hereof in
the event her employment is terminated as provided in this Section 6.

          (a)  Death. Employee's employment hereunder shall terminate upon her
death.

          (b)  Disability. If, as a result of the Employee's incapacity due to
physical or mental illness, Employee shall have been absent from her duties
hereunder on a full-time basis for 180 consecutive calendar days, and within 30
days after written Notice of

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Termination (as defined below) is given (which may occur no earlier than 30 days
before, but at any time after, the end of such 180-day period), Employee shall
not have returned to the performance of her duties hereunder on a full-time
basis, Employer may terminate the Employee's employment hereunder.

          (c)  Without Cause. Employer, by appropriate action of the Board of
Directors, may terminate Employee's employment hereunder at any time without
Cause; provided, however, that Employer may terminate the Employee's employment
without Cause (as defined below) during any disability period only as provided
in Section 6(b). A Resignation for Good Reason shall be deemed a termination
without Cause for purposes of this Agreement. Resignation for Good Reason shall
mean Employee's resignation within six months of the occurrence of any of the
following: (i) material diminution of responsibilities with Employer or AMREIT
without the consent of Employee; (ii) relocation of her principal office outside
the San Diego area; (iii) material reduction in the compensation provided in
this Agreement or (iv) termination as Executive Vice President and Chief
Financial officer of Employer and AMREIT.

          (d)  Cause. Employer may terminate the Employee's employment hereunder
for Cause. For purposes of this Agreement, "Cause" shall mean Employee's (i)
embezzlement, theft or other misappropriation of any property of Employer; (ii)
gross or willful misconduct resulting in substantial loss to Employer or
substantial damage to the reputation of Employer; (iii) any act involving moral
turpitude which if the subject of a criminal proceeding could reasonably result
in a convection for a felony involving moral turpitude; (iv) gross or willful
neglect of her assigned duties to Employer or AMREIT; provided that actions
taken or not taken in good faith shall not be deemed to constitute gross or
willful neglect; (v) breach of her fiduciary obligations to Employer or AMREIT
or (vi) any chemical dependence certified by a licensed physician resulting in
impairment of Employee's abilities to perform her duties hereunder or
substantial damage to the reputation of Employer.

          (e)  Notice of Termination. Any termination, during the Term of this
Agreement, of the Employee's employment hereunder (other than termination
pursuant to Subsection 6(a) above on account of death) shall be communicated by
a written Notice of Termination to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and, if
applicable, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated. In the case of a Notice of Termination for Cause,
Employee shall have 30 days following receipt of such notice to correct or cure
(if possible) any of the matters referred to in the notice as the basis for such
termination and during such period, Employee shall be afforded the opportunity
to make a presentation to the Board of Directors regarding the matters referred
to in such notice. Upon such correction or cure, Employer's right to terminate
this Agreement for Cause as specified in such Notice of Termination shall cease
as to such matters. Only one such notice need be given.

          (f)  Date of Termination. The "Date of Termination" shall, during the
Term of this Agreement, mean: (i) if Employee's employment is terminated by her
death, the date of her death; (ii) if Employee's employment is terminated on
account of disability pursuant

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to Subsection 6(b) above, 30 days after Notice of Termination is given (provided
that Employee shall not, during such 30-day period, have returned to the
performance of her duties on a full-time basis); (iii) if Employee's employment
is terminated by Employer without Cause pursuant to subsection 6(c) above, the
date upon which Notice of Termination is given; and (iv) if Employee's
employment is terminated by Employer for Cause pursuant to Subsection 6(d)
above, the date specified in the Notice of Termination.

          (g)  Resignation. Notwithstanding any other provision hereof to the
contrary, Employee may, at any time during the term of this Agreement, effective
immediately upon the giving of a Notice of Termination, terminate her employment
hereunder. For purposes of this Agreement, a Resignation For Good Reason shall
be deemed to be a termination without Cause.

     7.   Compensation Upon Termination or During Disability.

          (a)  Death. If Employee's employment shall be terminated by reason of
her death, Employer shall, within 90 days of death, pay a lump sum death benefit
to such person as she shall designate in a notice filed with Employer or, if no
such person shall be designated, to her estate. The amount of such death benefit
shall be equal to any unpaid salary accrued through the Date of Termination,
plus a bonus equal to the bonus paid to Employee for the previous year
multiplied by a fraction, the numerator of which is the number of days in the
current year prior to Employee's death and the denominator is 365 and any
amounts payable pursuant to Section 3(c) to the date of her death which, at the
date of death, are accrued and unpaid.

          (b)  Disability. During any period that Employee fails to perform her
duties hereunder as a result of incapacity due to physical or mental illness,
Employee shall continue to receive her salary and any amounts payable pursuant
to Section 3(c) until Employee's employment is terminated due to disability
pursuant to Subsection 6(b) hereof. Upon termination due to death prior to a
termination as specified in the preceding sentence, Subsection 7(a) above shall
apply. For periods of time after termination pursuant to Subsection 6(b) hereof,
any disability payments which Employee may be entitled to receive pursuant to
any employee benefit plan or arrangement provided by Employer shall be paid
pursuant to the terms of such plan or arrangement.

          (c)  Without Cause. If Employee's employment shall be terminated by
Employer without Cause, (i) Employer shall, through the Date of Termination,
continue to pay Employee her salary and amounts payable or accrued pursuant to
Section 3(c) and (ii) Employer shall, after the date of Termination, pay to
Employee for the longer of (x) a period of one year from the Date of Termination
and (y) the Term, her salary in effect on the Date of Termination, such payments
to be made in installments substantially similar to those made to Employee prior
to the Date of Termination. Employee shall also be entitled to receive a lump
sum payment equal to her bonus for the immediately preceding year to be paid
within three months of the Date of Termination. Employee shall also continue to
participate in the Health Benefits programs of Employer during the one-year
period following the Date of Termination. Payments or other benefits received by
Employee after the Date of Termination but during the period in which

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Employer is obligated to continue to make payments to Employee as provided above
which result from or are in connection with any prior or future employment or
business activities of the Employee shall not reduce Employer's liability
hereunder. Failure to renew this Agreement upon expiration of the Term shall not
be deemed to constitute a termination without Cause.

          (d)  Cause. If Employee's employment shall be terminated for Cause,
Employer shall, through the Date of Termination, continue to pay Employee her
salary and amounts payable pursuant to Section 3(c), provided, however, that
Employee shall not be entitled to receive any bonus upon a termination for Cause
and shall not be entitled to receive any amounts payable with respect to the
period following the Date of Termination.

          (e)  Resignation. If Employee's employment shall be terminated by
reason of resignation pursuant to Subsection 6(g) hereof, Employer shall
continue to pay Employee her base salary through the Date of Termination, but
Employee shall not be entitled to receive any bonus if she resigns and shall not
be entitled to receive any amounts payable with respect to the period following
the Date of Termination. If Employee's employment is terminated by reason of
Resignation For Good Reason, the provisions of Subsection 7(c) shall apply.

          (f)  Effect of Payments. The payments provided hereunder shall fully
discharge Employer's obligations under this Agreement. Employee acknowledges and
agrees that the provisions of this Agreement state her entire and exclusive
rights, entitlements and remedies against Employer and its successors, assigns,
affiliates and representatives for any termination of this Agreement. As a
material inducement to Employer to enter into this Agreement, Employee
represents to Employer that she will make no other claims in any such event.

     8.   Noncompetition.

          (a)  During the period (the "Noncompetition Period") commencing on the
date hereof and ending on the earlier of (i) the last day of the Term; (ii) the
termination of employment of Employee without Cause or (iii) the consummation of
a Change of Control Transaction, Employee shall not, directly or indirectly,
own, manage, operate, join, advise, control or otherwise engage or participate
in or be connected as an officer, employee, partner, creditor, guarantor,
advisor of, or consultant to, any business which may compete against the
business (the "Business") of Employer and/or its Affiliates, including, without
limitation, the businesses of operating and managing a mortgage real estate
investment trust in the United States (the "Market Area"). Notwithstanding the
foregoing, (x) Employee may work or perform services for Employer and its
Affiliates, (y) Employee may work or perform services for a financial
institution or similar entity which is involved in the mortgage business so long
as such entity is not engaged primarily in managing a real estate investment
trust or originating and selling mortgages and (z) Employee may own securities
in any publicly held corporation, but only to the extent Employee does not own
of record or beneficially more than 1% of the outstanding beneficial ownership
of such corporation. For purposes of the non-competition covenants set forth in
Section 8 hereof, Affiliates of Employer shall not include McCown

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De Leeuw & Co. or Crescent or their portfolio companies other than Employer,
AMREIT and their subsidiary companies.

          (b)  Non-Solicitation of Employees. During the Noncompetition Period,
Employee shall not, either on her own account or for any person, firm or
company, solicit, interfere with, or endeavor to cause any employee of the
Business, Employer or any Affiliate to leave his employment or induce or attempt
to induce any such employee to terminate or breach his employment agreement.

          (c)  Non-Solicitation of Customers. During the Noncompetition Period,
Employee shall not induce or attempt to induce any customer of the Business,
Employer or any Affiliate, to cease doing business in whole or in part with
Employer or any Affiliate.

          (d)  Payments for Noncompetition Covenants. In consideration of the
noncompetition and non-solicitation covenants contained in Sections 8(a) of this
Agreement, Employer shall pay to Employee an amount equal to 25% of Employee's
monthly salary in effect on the Date of Termination (the "Noncompetition
Payment") for each month during the Noncompetition Period following the Date of
Termination. Each Noncompetition Payment shall be made in arrears on or before
the last day of each month of the Noncompetition Period following the Date of
Termination. Each Noncompetition Payment shall be paid by Employer by delivery
of a check to Employee, or as may otherwise be agreed to by Employer and
Employee. All payments due to Employee under this Section 8(d) shall be in
addition to any payments due to Employee under Section 7 above. Notwithstanding
the forgoing, if Employer notifies Employee in writing in a Notice of
Termination or within ten business days of Employee's resignation that it elects
not to make the payments provided in this Section 8(d), then the provisions of
Section 8(a) shall cease to be enforceable against Employee following the Date
of Termination, subject, however, to Employee's fiduciary obligations as an
officer of Employer and the provisions of any Confidentiality and Non-Disclosure
Agreements between Employee and Employer. If Employer does not notify Employee
as provided in the immediately proceeding sentence, then Employer shall be
obligated to continue to make monthly payments hereunder for a minimum of six
months. Employer may elect to terminate monthly payments hereunder upon six
months' written notice to Employee and upon termination of such payments, the
provisions of Section 8(a) shall cease be enforceable against Employee, subject,
however, to Employee's fiduciary obligations as an officer of Employer and the
provisions of Employee's Confidentiality Agreement previously executed and
delivered.

     9.   Stay of Time. In the event Employee violates the provisions of
Section 8 of this Agreement, the running of the time period of such provisions
so violated shall be automatically suspended upon the date of such violation and
shall resume on the date such violation permanently ceases.

     10.  Injunctive Relief. The remedy at law for any breach of this Agreement
is and will be inadequate, and in the event of a breach or threatened breach by
Employee of the provisions of this Agreement, Employer or its Affiliates shall
be entitled to seek an injunction restraining Employee from violating the
provisions of this Agreement. Nothing herein contained shall be construed as
prohibiting Employer or its Affiliates from pursuing any other remedies

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available to it or them for such breach or threatened breach, including without
limitation, the recovery of damages from Employee.

     11.  Separate Covenants. The non-solicitation provisions of this Agreement
shall be deemed to consist of a series of separate covenants, one for each line
of business carried on by Employer and its Affiliates. The parties expressly
agree that the character and duration of such provisions in this Agreement are
reasonable in light of the circumstances as they exist on the date upon which
this Agreement has been executed. However, should a determination nonetheless be
made by a court of competent jurisdiction at a later date that the character or
duration of such provisions is unreasonable in light of the circumstances as
they then exist, then it is the intention and the agreement of Employee and
Employer that such non-solicitation provisions of this Agreement shall be
construed by the court in such a manner as to impose only those restrictions on
the conduct of Employee which are reasonable in light of the circumstances as
they then exist and as are necessary to assure Employer and its Affiliates of
the intended benefits of this Agreement. If, in any judicial proceeding, a court
shall refuse to enforce all of the separate covenants deemed included herein
because, taken together they are more extensive than necessary to assure
Employer, its Parent and Affiliates of the intended benefit of such
non-solicitation provisions, it is expressly understood and agreed between the
parties hereto that those of such covenants which, if eliminated, would permit
the remaining separate covenants to be enforced in such proceeding shall, for
the purpose of such proceeding, be deemed eliminated from the provisions hereof.

     12.  Employer's and Employee's Rights, Indemnification. This Agreement
shall not limit or prejudice in any manner whatsoever the rights which Employer
or Employee would have, in the absence of this Agreement, with respect to any
and all matters arising out of Employee's employment, except for such matters
that are specifically covered by the terms of this Agreement or are mentioned
herein. Employee shall be entitled to indemnification as an officer and employee
of Employer in accordance with the provisions of the Certificate of
Incorporation and Bylaws of Employer and its Affiliates and applicable Delaware
law.

     13.  Assignment/Sale. The rights and obligations of Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer and any subsequent assignee. No assignment of this
Agreement by Employer shall relieve Employer of its obligations hereunder. This
Section shall be deemed to apply to any assignment by sale, merger,
consolidation, liquidation or otherwise.

     14.  Assignment by Employee. Employee may not assign this Agreement or any
of her rights hereunder except with the prior written consent of Employer. This
Agreement shall be binding upon Employee's heirs, executors, administrators or
other legal representatives and their legal assigns.

     15.  Benefits. If, in the sole and absolute discretion of the Board of
Directors of Employer, Employee is permitted to participate in any other plan or
agreement for eligible employees of Employer which is not specifically referred
to herein, or to receive any other employment benefits, it is agreed that
nothing contained in this Agreement shall affect the right

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of Employer to terminate or modify any such plan or agreement, or other benefit
in whole or in part at any time and from time to time.

     16.  Entire Agreement; Modifications. This instrument, together with the
exhibits hereto, contains the entire agreement of the parties with regard to
matters covered herein. Standard policies of Employer applicable to employees
shall govern matters not set forth in this Agreement to the extent they do not
conflict with this Agreement. This Agreement may not be changed or modified, or
released, discharged, abandoned or otherwise terminated, in whole or in part,
except by an instrument in writing approved by the Board of Directors of
Employer, and signed by an officer of Employer and by Employee.

     17.  Applicable Law. This Agreement and all matters or issues collateral
hereto shall be governed by the laws of the State of California applicable to
contracts made and to be performed entirely within such State.

     18.  Waiver. A waiver by either party of any of the terms or conditions of
this Agreement in any one instance shall not be deemed or construed to be a
waiver of such term or condition for the future, or of any subsequent breach
thereof. All remedies, rights, undertakings, obligations and agreements
contained in this Agreement shall be cumulative, and none of them shall be in
limitation of any other remedy, right, undertaking, obligation or agreement of
either party.

     19.  Notices. All notices required to be given hereunder shall be given in
writing, and may be personally delivered (including by facsimile), sent by
overnight courier or deposited with the U.S. postal authorities, return receipt
requested, addressed as follows:

     If to Employer: Home Asset Management Corp.
                     445 Marine View Avenue
                     Suite 130
                     Del Mar, CA 92014
                     Attn: Chairman of the Board

     If to Employee  Judith Berry
                     1355 Cassins
                     Carlsbad, CA 92009

or to such other address as the parties may from time to time designate in
writing. Notices shall be deemed delivered on the day personally delivered or
sent by facsimile (with appropriate confirmation of transmission), or on the
fourth business day following deposit in the U.S. mail, return receipt
requested.

     20.  Compliance with Laws and Policies. Employee agrees that she will at
all times comply strictly with all applicable laws and all current and future
policies of Employer and its Affiliates.

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     21.  Employer Property. Upon termination or expiration of her employment
hereunder, Employee agrees to return to Employer all property of Employer and
any Affiliate of which Employee has had custody and to deliver to Employer all
correspondence, management studies and other materials and data relating to or
connected with her employment hereunder.

     22.  Paragraph Headings. The paragraph headings in this Agreement are for
convenience only and shall not in any manner affect the interpretation or
construction of this Agreement or any of its provisions.

     23.  Attorneys Fees. If legal proceedings are required to enforce this
Agreement, the prevailing party shall be entitled to reasonable attorneys fees.

     24.  Survival of Certain Provisions. The rights and obligations of the
parties under Sections 8 through 10, 21, 23 and 27 shall survive the termination
of this Agreement.

     25.  Enforcement. Employer shall have the right to separately enforce the
terms of this Agreement against Employee with respect to any breach or
threatened breach by Employee of the provisions hereof as provided herein.

     26.  Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original and both of which, taken together, shall constitute
one and the same instrument.

     27.  Arbitration. Any dispute or claim arising out of or relating to this
Agreement which cannot be settled by negotiation between the parties shall first
be submitted to mediation, conducted in San Diego, California, by a single,
neutral mediator in accordance with the Commercial Mediation Rules of the
American Arbitration Association. In the event such dispute or claim is not
resolved by mediation within 30 days from the inception thereof, then such
dispute or claim shall be submitted to and settled exclusively by final and
binding arbitration, conducted in San Diego, California in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, as
modified by any other instruments or agreements that the parties hereto may
execute at the time of or prior to the arbitration. The arbitration shall be
conducted by a single neutral arbitrator chosen by mutual agreement between the
parties; provided, however, that if the parties are unable to agree upon an
arbitrator, then the arbitration shall be conducted by a panel of three
arbitrators, Employer and Employee each shall choose one arbitrator, and the
third arbitrator shall be selected by the two arbitrators so chosen. The fees of
the American Arbitration Association and of the arbitrator or arbitrators shall
be borne by Employer.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

                                                  HOME ASSET MANAGEMENT CORP.

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                                     By:
                                        -----------------------------
                                                Jay M. Fuller
                                                President and
                                          Chief Operating Officer

-----------------------------
Judith Berry, Employee

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              SUPPLEMENT TO EMPLOYMENT AND NONCOMPETITION AGREEMENT

        This Agreement is made and entered into as of June 14, 1999, by and
between American Residential Investment Trust, Inc. a Maryland Corporation
("AMREIT") and Judith Berry ("EMPLOYEE").

                                    RECITALS

A. Employee and Home Asset Management Corp., a Delaware corporation ("HAMCO"),
are entering into an Employment and Noncompetition Agreement ("EMPLOYMENT
AGREEMENT") as of the date hereof that sets forth the terms of Employee's
employment by Hamco.

B. Employee will also be an employee of AMREIT.

C. In order to induce Employee to accept employment with Hamco and AMREIT,
AMREIT has agreed to enter into this Supplement to the Employment Agreement
("AGREEMENT").

                                    AGREEMENT

The parties agree as follows:

1.  Compensation.

        (a) Salary. AMREIT agrees to pay all amounts due to Employee under
Section 3(a) of the Employment Agreement to the extent not paid by Hamco.

        (b) Bonus. AMREIT agrees to pay a cash bonus to Employee of $112,500
with respect to 1999 and $125,000 with respect to 2000. These bonus amounts
shall be decreased by any cash amounts actually paid by Hamco pursuant to
Section 3(d) of the Employment Agreement. The bonus amounts shall be paid to
Employee at the same time that bonuses are paid to other executive officers of
AMREIT, but in all events no later than March 31 of the following year.

        (c) Severance Payments. AMREIT agrees to pay all amounts specified in
Sections (a) and (b) above to the extent that Hamco is required to make salary
or bonus payments pursuant to Section 7 of the Employment Agreement and to the
extent not paid by Hamco.

2.  Equity Reimbursement.

        In the event that Employee does not contractually vest 8,000 shares of
Wells Fargo & Company Common Stock ("Option Shares") on July 23, 1999 under
Employee's option agreement with her current employer, Norwest Mortgage, Inc.,
AMREIT agrees to pay to Employee on or before August 1, 1999, an amount equal to
the greater of (i) the difference between the closing sales price of the Wells
Fargo Common Stock on June 1, 1999 and the exercise price of the Option Shares,
multiplied by the number of Option Shares and multiplied by

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seventy five percent (75%), and (ii) $50,000. Employee will use reasonable
efforts to cause the Option Shares to vest.

3.  Miscellaneous

        (a) Assignment. The rights and obligations of AMREIT under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of AMREIT and any subsequent assignee. Employee may not assign this
Agreement or any of her rights hereunder except with the prior written consent
of AMREIT. This Agreement shall be binding upon Employee's heirs, executors,
administrators or other legal representatives and their legal assigns.

        (b) Entire Agreement; Modifications. This instrument, together with the
exhibits hereto, contains the entire agreement of the parties with regard to
matters covered herein. This Agreement may not be changed or modified, or
released, discharged, abandoned or otherwise terminated, in whole or in part,
except by an instrument in writing approved by the Board of Directors of AMREIT,
and signed by an officer of AMREIT and by Employee.

        (c) Applicable Law. This Agreement and all matters or issues collateral
hereto shall be governed by the laws of the State of California applicable to
contracts made and to be performed entirely within such State.

        (d) Counterparts. This Agreement may be executed in counterparts, each
of which shall be an original and both of which, taken together, shall
constitute one and the same instrument.

               IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.

                                       AMERICAN RESIDENTIAL
                                       INVESTMENT TRUST, INC.

                                       By:
                                           -------------------------------------
                                           Jay M. Fuller
                                           President and Chief Operating Officer

-----------------------------------
Judith Berry, Employee

                                      -2-<PAGE>   1

Exhibit 4.2

                    CERTIFICATE OF DESIGNATIONS, PREFERENCES
                    AND RELATIVE, PARTICIPATING, OPTIONAL AND
                        OTHER SPECIAL RIGHTS OF PREFERRED
                      STOCK AND QUALIFICATIONS, LIMITATIONS
                            AND RESTRICTIONS THEREOF

                                       OF

                   SERIES B LIQUIDATING PREFERENCE CONVERTIBLE
                            PREFERRED STOCK DUE 2005

                                       OF

                            EXCEL LEGACY CORPORATION

                            -------------------------

                         Pursuant to Section 151 of the
                General Corporation Law of the State of Delaware
                            -------------------------

        Excel Legacy Corporation, a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in Article Fourth of its
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Corporation by unanimous written consent dated March 2. 1999, adopted the
following resolution which resolution remains in full force and effect on the
date hereof:

        RESOLVED, that there is hereby established a series of authorized
preferred stock having a par value of $.01 per share, which series shall be
designated as "Series B Liquidating Preference Convertible Preferred Stock due
2005" (the "Series B Preferred Stock"), shall consist of 25,000,000 shares and
shall have the following voting powers, preferences and relative, participating,
optional and other special rights, and qualifications, limitations and
restrictions thereof as follows:

        1. CERTAIN DEFINITIONS.

        Unless the context otherwise requires, the terms defined in this
paragraph 1 shall have, for all purposes of this resolution, the meanings herein
specified (with terms defined in the singular having comparable meanings when
used in the plural).

        BUSINESS DAY. The term "Business Day" shall mean a day other than a
Saturday or Sunday or any federal holiday.

        COMMON STOCK. The term "Common Stock" shall mean the common stock, par
value $.01 per share, of the Corporation.

        CONVERSION RATE. The term "Conversion Rate" shall initially mean $5.00
and thereafter shall be subject to adjustment from time to time pursuant to the
terms of paragraph 4 below.

<PAGE>   2

        DIVIDEND PAYMENT DATE. The term "Dividend Payment Date" shall have the
meaning set forth in subparagraph 2(a) below.

        DIVIDEND PERIOD. The term "Dividend Period" shall mean the period from,
and including, the Initial Issue Date to, but not including, the first Dividend
Payment Date and thereafter, each quarterly period from, and including, the
Dividend Payment Date to, but not including the next Dividend Payment Date.

        INITIAL ISSUE DATE. The term "Initial Issue Date" shall mean, with
respect to shares of Series B Preferred Stock, the earlier of (a) the date that
such shares were first issued by the Corporation or (b) if such shares were
issued in exchange for shares of Series A Liquidating Preference Convertible
Preferred Stock due 2005 of the Corporation (the "Series A Preferred Stock"),
the date that the exchanged shares of Series A Preferred Stock were first issued
by the Corporation.

        JUNIOR STOCK. The term "Junior Stock" shall mean, for purposes of
paragraph 2 below, Common Stock and any class or series of stock of the
Corporation authorized after the Initial Issue Date which is not entitled to
receive any dividends in any Dividend Period unless all dividends required to
have been paid or declared and set apart for payment on the Series B Preferred
Stock shall have been so paid or declared and set apart for payment, and for
purposes of paragraph 3 below, shall mean Common Stock and any class or series
of stock of the Corporation authorized after the Initial Issue Date which is not
entitled to receive any assets upon liquidation, dissolution or winding up of
the affairs of the Corporation until the Series B Preferred Stock shall have
received the entire amount to which such stock is entitled upon such
liquidation, dissolution or winding up.

        LIQUIDATION PREFERENCE. With respect to each share of Series B Preferred
Stock, the term "Liquidation Preference" shall mean $5.00 per share, plus a
premium in an amount equal to a seven percent (7%) annual total return on a
share of Series B Preferred Stock from the Initial Issue Date until the date
such Liquidation Preference is paid by the Corporation.

        PARITY STOCK. The term "Parity Stock" shall mean, for purposes of
paragraph 2 below, any class or series of stock of the Corporation authorized
after the Initial Issue Date which is entitled to receive payment of dividends
on a parity with the Series B Preferred Stock, and for purposes of paragraph 3
below, shall mean any class or series of stock of the Corporation authorized
after the Initial Issue Date which is entitled to receive assets upon
liquidation, dissolution or winding up of the affairs of the Corporation on a
parity with the Series B Preferred Stock.

        QUOTED PRICE. The term "Quoted Price" with respect to either the Common
Stock or Series B Preferred Stock, shall mean the average of the closing bid and
ask prices of the applicable security as reported by the National Association of
Securities Dealers, Inc. Automated Quotations System (Nasdaq), or, if the
applicable security is listed or admitted for trading on a securities exchange,
the average of the closing bid and ask prices of the applicable security on the
principal exchange on which the applicable security is listed or admitted for
trading (which shall be for consolidated trading if applicable to such
exchange), or if neither so reported or listed or admitted for trading, the
average of the closing bid and ask prices of the applicable security in the
over-the-counter market. In the event that the Quoted Price cannot be determined
as aforesaid, the Board of Directors of the Corporation shall determine the
Quoted Price on the basis of such quotations as it in good faith considers
appropriate.

        RECORD DATE. The term "Record Date" shall mean the date designated by
the Board of Directors of the Corporation at the time a dividend is declared;
provided, however, that such Record Date shall not be more than thirty (30) days
nor less than ten (10) days prior to the respective Dividend Payment Date or
such other date designated by the Board of Directors for the payment of
dividends.

                                       2
<PAGE>   3

        REDEMPTION DATE. The term "Redemption Date" shall have the meaning set
forth in subparagraph 5(a) below.

        SENIOR STOCK. The term "Senior Stock" shall mean, for purposes of
paragraph 2 below, any class or series of stock of the Corporation authorized
after the Initial Issue Date ranking senior to the Series B Preferred Stock in
respect of the right to receive dividends, and for purposes of paragraph 3
below, shall mean any class or series of stock of the Corporation authorized
after the Initial Issue Date ranking senior to the Series B Preferred Stock in
respect of the right to participate in any distribution upon liquidation,
dissolution or winding up of the affairs of the Corporation.

        STATED VALUE. The term "Stated Value" shall have the meaning set forth
in subparagraph 4(a) below.

        TRADING DAY. The term "Trading Day" with respect to either the Common
Stock or Series B Preferred Stock, shall mean any day on which any market in
which the applicable security is then traded and in which a Quoted Price may be
ascertained is open for business.

        2. DIVIDENDS.

        (a) Holders of shares of Series B Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the payment of dividends, cumulative quarterly cash dividends
equal to the per share Common Stock Dividend Amount, payable in arrears on
January 15, April 15, July 15 and October 15 of each year, commencing on the
first such day after the Initial Issue Date (each a "Dividend Payment Date").
The "Common Stock Dividend Amount" applicable as of any Dividend Payment Date
shall mean the amount which is the product of (i) the dollar amount of the
dividend paid per share of Common Stock on the dividend payment date with
respect to the shares of Common Stock (other than a distribution payable solely
in shares of Common Stock) which occurs on such Dividend Payment Date or, if no
such dividend payment date occurs on such Dividend Payment Date, the dividend
payment date with respect to the shares of Common Stock next preceding such
Dividend Payment Date, and (ii) the number of shares of Common Stock into which
each share of Series B Preferred Stock is entitled to be converted, at the
Conversion Price then in effect and otherwise as set forth in this Certificate
of Designation, as of the Record Date established for such Dividend Payment Date
(determined, for purposes of this computation, to the fourth decimal place). The
dividend payable to a holder of a share of Series B Preferred Stock on the first
Dividend Payment Date after the share is issued will be the accrued dividend
calculated from the day the share is issued to such Dividend Payment Date. If
any Dividend Payment Date is not a Business Day, the dividend due on that
Dividend Payment Date will be paid on the Business Day immediately succeeding
that Dividend Payment Date. Each Dividend Payment Date will be on a date which
is the date fixed for payment of dividends with respect to the shares of Common
Stock or is not more than five Business Days after the date fixed for payment of
dividends with respect to the shares of Common Stock.

        (b) Each dividend will be payable to holders of record of the Series B
Preferred Stock on the Record Date selected by the Board of Directors with
respect to the relevant Dividend Payment Date. Dividends shall be paid to the
holders of record of the Series B Preferred Stock as their names shall appear on
the share register of the Corporation on the Record Date for such dividend.
Dividends payable in any Dividend Period which is less than a full Dividend
Period in length will be computed on the basis of a ninety (90) day quarterly
period and actual days elapsed in such Dividend Period. Dividends on account of
arrears for any past Dividend Periods may be declared and paid at any time to
holders of record on the Record Date therefor.

        (c) So long as any shares of Series B Preferred Stock shall be
outstanding, the Corporation shall not declare, pay or set apart for payment on
any Junior Stock any dividends whatsoever,

                                       3
<PAGE>   4

whether in cash, property or otherwise (other than dividends payable in shares
of the class or series upon which such dividends are declared or paid, or
payable in shares of Common Stock with respect to Junior Stock other than Common
Stock, together with cash in lieu of fractional shares), nor shall the
Corporation make any distribution on any Junior Stock, nor shall any Junior
Stock be purchased, redeemed or otherwise acquired by the Corporation or any of
its subsidiaries of which it owns not less than a majority of the outstanding
voting power, nor shall any monies be paid or made available for a sinking fund
for the purchase or redemption of any Junior Stock, unless all dividends to
which the holders of Series B Preferred Stock shall have been entitled for all
previous Dividend Periods shall have been paid or declared and a sum of money
sufficient for the payment thereof has been set apart.

        (d) In the event that full dividends are not paid or made available to
the holders of all outstanding shares of Series B Preferred Stock and of any
Parity Stock and funds available for payment of dividends shall be insufficient
to permit payment in full to holders of all such stock of the full preferential
amounts to which they are then entitled, then the entire amount available for
payment of dividends shall be distributed ratably among all such holders of
Series B Preferred Stock and of any Parity Stock in proportion to the full
amount to which they would otherwise be respectively entitled.

        (e) Notwithstanding anything contained herein to the contrary, no
dividends on shares of Series B Preferred Stock shall be declared by the Board
of Directors of the Corporation or paid or set apart for payment by the
Corporation if such declaration or payment shall be restricted or prohibited by
law.

        (f) Any dividend paid with regard to shares of Series B Preferred Stock
will be paid equally with regard to each outstanding share of Series B Preferred
Stock, except to the extent that shares of Series B Preferred Stock are
outstanding for differing amounts of time during the relevant dividend period.

        3. DISTRIBUTIONS UPON LIQUIDATION, DISSOLUTION OR WINDING UP.

        (a) In the event of any voluntary or involuntary liquidation,
dissolution or other winding up of the affairs of the Corporation, subject to
the prior preferences and other rights of any Senior Stock as to liquidation
preferences, but before any payment or distribution shall be made to the holders
of Junior Stock, the holders of Series B Preferred Stock shall be entitled to be
paid out of the assets of the Corporation in cash or property at its fair market
value as determined by the Board of Directors of the Corporation the Liquidation
Preference per share plus an amount equal to all dividends accrued and unpaid
thereon to the date of such liquidation or dissolution or such other winding up.
Except as provided in this paragraph, holders of Series B Preferred Stock shall
not be entitled to any distribution in the event of liquidation, dissolution or
winding up of the affairs of the Corporation.

        (b) If, upon any such liquidation, dissolution or other winding up of
the affairs of the Corporation the assets of the Corporation shall be
insufficient to permit the payment in full of the Liquidation Preference per
share plus an amount equal to all dividends accrued and unpaid on the Series B
Preferred Stock and the full liquidating payments on all Parity Stock, then the
assets of the Corporation remaining after the distributions to holders of any
Senior Stock of the full amounts to which they may be entitled shall be ratably
distributed among the holders of Series B Preferred Stock and of any Parity
Stock in proportion to the full amounts to which they would otherwise be
respectively entitled if all amounts thereon were paid in full.

        (c) A sale, conveyance or disposition of all or substantially all of the
assets of the Corporation shall be deemed to be a liquidation, dissolution or
winding up within the meaning of this paragraph 3.

                                       4
<PAGE>   5

        4. CONVERSION RIGHTS.

        (a) (i) A holder of shares of Series B Preferred Stock may convert such
shares into Common Stock at any time in whole or from time to time in part
before such shares are redeemed by giving notice to such effect (a "Notice of
Election to Convert") to the Corporation. For the purposes of conversion, each
share of Series B Preferred Stock shall be valued at $5.00 per share (the
"Stated Value"), which shall be divided by the Conversion Rate in effect on the
Conversion Date to determine the number of shares issuable upon conversion.
Immediately following such conversion, the rights of the holders of converted
Series B Preferred Stock shall cease and the persons entitled to receive the
Common Stock upon the conversion of Series B Preferred Stock shall be treated
for all purposes as having become the owners of such Common Stock.

        (ii) To convert Series B Preferred Stock, a holder must (A) surrender
the certificate or certificates evidencing the shares of Series B Preferred
Stock to be converted, duly endorsed in a form satisfactory to the Corporation,
at the office of the Corporation or transfer agent for the Series B Preferred
Stock, (B) provide a Notice of Election to Convert to the Corporation at such
office and include therein the number of shares such holder wishes to convert,
(C) state in writing the name or names in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued, and (D) pay
any transfer or similar tax if required. In the event that a holder fails to
notify the Corporation of the number of shares of Series B Preferred Stock which
such holder wishes to convert in the Notice of Election to Convert delivered to
the Corporation, such holder shall be deemed to have elected to convert all
shares represented by the certificate or certificates surrendered for
conversion.

        (b) (i) At the option of the Corporation, the Corporation may convert
outstanding shares of Series B Preferred Stock into Common Stock at any time in
whole or from time to time in part after the earlier to occur of the following
dates: (A) the date which is six (6) months following the date on which the
Common Stock becomes listed or admitted for trading on a national securities
exchange (including the New York Stock Exchange, American Stock Exchange or
Nasdaq), or (B) March 31, 2000. The number of shares of Common Stock issuable
upon conversion shall equal the product of (1) the number of shares of Series B
Preferred Stock to be converted, multiplied by (2) the Stated Value divided by
the Conversion Rate then in effect. Immediately following such conversion, the
rights of the holders of converted Series B Preferred Stock shall cease and the
persons entitled to receive the Common Stock upon the conversion of Series B
Preferred Stock shall be treated for all purposes as having become the owners of
such Common Stock.

        (ii) In order to elect to effect the mandatory conversion of Series B
Preferred Stock, the Corporation shall issue a notice as to the date of the
intended conversion and number of shares of Series B Preferred Stock which are
to be converted into shares of Common Stock (the "Notice of Mandatory
Conversion") to all holders of outstanding shares of Series B Preferred Stock on
a date (the "Mandatory Conversion Notice Date") at least ten (10) days prior to
the conversion date specified in the Notice of Mandatory Conversion (the
"Mandatory Conversion Date"), which Notice of Mandatory Conversion specifies a
record date (the "Mandatory Conversion Record Date") selected by the Board of
Directors in accordance with applicable law. If the Corporation gives a Notice
of Mandatory Conversion, then, provided that the computation set forth in the
Notice of Mandatory Conversion is not clearly erroneous, the number of the
outstanding shares of Series B Preferred Stock which are the subject of such
Notice of Mandatory Conversion will be automatically converted into shares of
Common Stock at the close of business on the Mandatory Conversion Date
regardless of whether the holders of such shares of Series B

                                       5
<PAGE>   6

Preferred Stock actually surrender the certificates representing their shares of
Series B Preferred Stock for conversion. At the close of business on the
Mandatory Conversion Date, (A) the certificates representing the shares of
Series B Preferred Stock will cease to represent anything other than the shares
of Common Stock into which the shares of Series B Preferred Stock were
automatically converted and (B) the Corporation shall, at its option (the
exercise of which will be described in the Notice of Mandatory Conversion),
either (1) deliver certificates representing the shares of Common Stock to which
the holders of the Series B Preferred Stock are entitled without requiring the
surrender of the certificates which formerly represented shares of Series B
Preferred Stock, or (2) deliver certificates representing the shares of Common
Stock to which the holders of Series B Preferred Stock are entitled when the
holder surrenders the certificates representing Series B Preferred Stock issued
before the Mandatory Conversion Date and complies with the other requirements of
subparagraph 4(a)(ii) (excluding the completion of the Notice of Election to
Convert).

        (c) The effective time of the conversion under subparagraph 4(a) shall
be immediately prior to the close of business on the day when all the conditions
in subparagraph 4(a)(ii) have been satisfied. The effective time of the
conversion under subparagraph 4(b) shall be the close of business on the
Mandatory Conversion Date. Except as otherwise permitted in clause (ii)(B) of
the last sentence of subparagraph 4(b), as soon as practical after the effective
time for conversion of shares of Series B Preferred Stock, the Corporation shall
deliver through the transfer agent a certificate for the number of full shares
of Common Stock issuable upon the conversion, a check for any fractional share
and a new certificate representing the unconverted portion, if any, of the
shares of Series B Preferred Stock represented by the certificate or
certificates surrendered for conversion. Except in the case of a conversion
pursuant to subparagraph 4(b) above, no payment or adjustment will be made for
accrued and unpaid dividends on converted shares of Series B Preferred Stock or
dividends on any Common Stock issued. However, dividends will be paid on any
Dividend Payment Date with respect to Series B Preferred Stock surrendered for
conversion after a record date for the payment of a dividend to the registered
holder of Series B Preferred Stock on such record date. If a holder of Series B
Preferred Stock converts more than one share at a time the number of full shares
of Common Stock issuable upon conversion shall be based on the total value of
all shares of Series B Preferred Stock converted. If the last day on which
Series B Preferred Stock may be converted is not a Business Day in a place where
the Corporation or the transfer agent is located, Series B Preferred Stock may
be surrendered for conversion on the next succeeding day that is a Business Day.
Each conversion will be deemed to have been effected at the effective time
provided above, and the person in whose name a certificate for shares of Common
Stock is to be issued upon a conversion will be deemed to have become the holder
of record of the shares of Common Stock represented by that certificate at such
effective time.

        (d) The Corporation will not issue a fractional share of Common Stock
upon conversion of Series B Preferred Stock. Instead the Corporation will
deliver its check for the current market value of the fractional share. The
current market value of a fraction of a share is determined as follows: Multiply
the current market price of a full share by the fraction. Round the result to
the nearest cent. The current market price of a share of Common Stock is the
Quoted Price of the Common Stock on the last Trading Day prior to the date of
conversion.

        (e) If a holder converts shares of Series B Preferred Stock, the
Corporation shall pay any documentary, stamp or similar issue or transfer tax
due on the issue of shares of Common Stock upon the conversion. However, the
holder shall pay any such tax which is due because the shares are issued in name
other than the holder's name.

        (f) The Corporation has reserved and shall continue to reserve out of
its authorized but unissued Common Stock or its Common Stock held in treasury
enough shares of Common Stock to permit the conversion of the Series B Preferred
Stock in full. All shares of Common Stock which may be

                                       6
<PAGE>   7

issued upon conversion of Series B Preferred Stock shall be fully paid and
nonassessable. The Corporation will use its best efforts to comply with all
securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of Series B Preferred Stock and will use its best efforts to list
such shares on each national securities exchange on which the Common Stock is
listed.

             (g) If the Corporation:

                (i) pays a dividend or makes a distribution on any shares of its
        capital stock in shares of its Common Stock;

                (ii) subdivides its outstanding shares of Common Stock into a
        greater number of shares;

                (iii) combines its outstanding shares of Common Stock into a
        smaller number of shares; or

                (iv) issues by reclassification of its Common Stock any shares
        of its capital stock;

then the Conversion Rate in effect immediately prior to such action shall be
adjusted so that the holder of Series B Preferred Stock thereafter converted may
receive the number of shares of capital stock of the Corporation which he would
have owned immediately following such action if he had converted Series B
Preferred Stock immediately prior to such action. The adjustment shall become
effective immediately after the record date in the case of dividend or
distribution and immediately after the effective date of a subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur. If, after an adjustment referred to
in clauses (i) through (iv) above, a holder of Series B Preferred Stock upon
conversion of it may receive shares of two or more classes of capital stock of
the Corporation, the Corporation shall determine the allocation of the adjusted
Conversion Rate between the classes of capital stock. After such allocation, the
Conversion Rate of each class of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Stock in this
subparagraph (g).

        (h) If the Corporation distributes any rights or warrants to all holders
of its Common Stock entitling them for a period expiring within sixty (60) days
after the record date mentioned below to purchase shares of Common Stock at a
price per share less than the current market price per share on that record
date, the Conversion Rate shall be adjusted in accordance with the following
formula:

                               N X P
                              -------
                           O + M
                          -------
                  C'= C x  O + N

where:

             C'   =    the adjusted Conversion Rate.

             C    =    the then current Conversion Rate.

             O    =    the number of shares of Common Stock outstanding on the
                       record date.

             N    =    the number of additional shares of Common Stock offered.

                                       7
<PAGE>   8

             P    =    the offering price per share of the additional shares of
                       Common Stock.

             M    =    the current market price per share of Common Stock on the
                       record date.

The adjustment shall be made successively whenever any such rights or warrants
are issued and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the rights or warrants. If at
the end of the period during which such warrants or rights are exercisable, not
all warrants or rights shall have been exercised, the Conversion Rate shall be
immediately readjusted to what it would have been if "N" in the above formula
had been the number of shares actually issued.

        (i) If the Corporation distributes to all holders of shares of its
Common Stock (i) any shares of any class of capital stock of the Corporation
other than its Common Stock, (ii) any evidence of indebtedness of the
Corporation or any subsidiary of the Corporation, (iii) any other assets of the
Corporation, or (iv) any rights, options or warrants to acquire any of the
foregoing (other than rights, options or warrants referred to in subparagraph
4(h) above), which shares, evidences of indebtedness, other assets or rights,
options or warrants have an aggregate fair market value on the date of such
distribution in excess of the permitted dividend amount (as defined below), the
Conversion Rate shall be adjusted in accordance with the following formula:

                        M - F
                        -----
                  C'= C x M

where:

             C'   =    the adjusted Conversion Rate.

             C    =    the then current Conversion Rate.

             M    =    the current market price per share of Common Stock on the
                       record date mentioned below.

             F    =    the fair market value on the record date of the capital
                       stock, indebtedness, rights, options or warrants
                       applicable to one share of Common Stock. The Board of
                       Directors of the Corporation shall determine the fair
                       market value.

The adjustment shall be made successively whenever any such distribution is made
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution. The
permitted dividend amount on any date shall be an amount equal to or less than
(x) five percent (5%) of the product of the current market price of the Common
Stock on the date of declaration by the Board of Directors of the Corporation of
such dividend or distribution times the number of shares of Common Stock
outstanding on such date, minus (y) the aggregate of the value of all dividends
or distributions (other than dividends or distributions referred to in
subparagraphs 4(g) and 4(h) above) paid to holders of Common Stock during the
twelve-month period ending on such date. Notwithstanding the foregoing, the
permitted dividend amount shall be zero with respect to any dividends or
distributions not paid out of consolidated current earnings as shown on the
books of the Corporation.

                                       8
<PAGE>   9

        (j) If the Corporation issues shares of Common Stock for a consideration
per share less than the current market price per share on the date the
Corporation fixes the offering price of such additional shares, the Conversion
Rate shall be adjusted in accordance with the following formula:

                         O + P
                          ---
                           M
                         -----
                  C'=  C x A

where:

             C'   =    the adjusted Conversion Rate.

             C    =    the then current Conversion Rate.

             O    =    the number of shares outstanding immediately prior to the
                       issuance of such additional shares.

             P    =    the aggregate consideration received for the issuance of
                       such additional shares.

             M    =    the current market price per share on the date of
                       issuance of such additional shares.

             A    =    the number of shares outstanding immediately after the
                       issuance of such additional shares.

The adjustment shall be made successively whenever any such issuance is made,
and shall become effective immediately after such issuance. This subparagraph
4(j) does not apply to (i) any transaction or issuance described in subparagraph
4(h) or 4(i) above or subparagraph 4(k) below, (ii) the conversion of Series B
Preferred Stock, or the conversion, exchange or exercise of other securities
convertible into or exchangeable or exercisable for Common Stock, (iii) Common
Stock issued to the Corporation's employees under bona fide employee benefit
plans adopted by the Board of Directors of the Corporation and approved by the
holders of Common Stock when required by law, if such Common Stock would
otherwise by covered by this subparagraph 4(j), (iv) Common Stock issued to
acquire, or in the acquisition of, all or any portion of a business as a going
concern, in an arm's-length transaction between the Corporation and an
unaffiliated third party, whether such acquisition shall be effected by purchase
of assets, exchange of securities, merger, consolidation or otherwise, or (v)
Common Stock issued in a bona fide public offering pursuant to a firm commitment
underwriting.

        (k) If the Corporation issues any options, warrants or other securities
convertible into or exchangeable or exercisable for Common Stock (other than
Series B Preferred Stock or securities issued in transactions described in
subparagraph 4(h) or 4(i) above) and for a consideration per share of Common
Stock initially deliverable upon conversion, exchange or exercise of such
securities less than the current market price per share on the date of issuance
of such securities, the Conversion Rate shall be adjusted in accordance with the
following formula:

                                       9
<PAGE>   10

                             O + P
                              ---
                               M
                             -----
                  C'=  C x O + D

where:

             C'   =    the adjusted Conversion Rate.

             C    =    the then current Conversion Rate.

             O    =    the number of shares outstanding immediately prior to the
                       issuance of such securities.

             P    =    the aggregate consideration received for the issuance of
                       such securities.

             M    =    the current market price per share on the date of
                       issuance of such securities.

             D    =    the maximum number of shares deliverable upon conversion
                       or in exchange for or upon exercise of such securities at
                       the initial conversion, exchange or exercise rate.

The adjustment shall be made successively whenever any such issuance is made,
and shall become effective immediately after such issuance. If all of the Common
Stock deliverable upon conversion, exchange or exercise of such securities has
not been issued when such securities are no longer outstanding, then the
Conversion Rate shall promptly be readjusted to the Conversion Rate which would
then be in effect had the adjustment upon the issuance of such securities been
made on the basis of the actual number of shares of Common Stock issued upon
conversion, exchange or exercise of such securities. This subparagraph 4(k) does
not apply to (i) the issuance of any such securities to acquire, or in the
acquisition of, all or any portion of a business as a going concern, in an
arm's-length transaction between the Corporation and an unaffiliated third
party, whether such acquisition shall be effected by purchase of assets,
exchange of securities, merger, consolidation or otherwise, (ii) the issuance of
any such securities in a bona fide public offering pursuant to a firm commitment
underwriting, or (iii) the issuance of any such securities to the Corporation's
employees under bona fide employee benefit plans adopted by the Board of
Directors of the Corporation and approved by the holders of Common Stock when
required by law, if such securities would otherwise by covered by this
subparagraph 4(k).

        (l) In subparagraphs 4(h), 4(i), 4(j) and 4(k) above, the current market
price per share of Common Stock on any date is the average of the Quoted Prices
for thirty (30) consecutive Trading Days commencing forty-five (45) Trading Days
before the date in question.

        (m) For purposes of any computation respecting consideration received
pursuant to subparagraphs 4(j) and 4(k) above, the following shall apply:

                (i) in case of the issuance of shares of Common Stock for cash,
        the consideration shall be the amount of such cash, provided that in no
        case shall any deduction be made for any commissions, discounts or other
        expenses incurred by the Corporation for any underwriting of the issue
        or otherwise in connection therewith;

                                       10
<PAGE>   11

                (ii) in the case of the issuance of shares of Common Stock for a
        consideration in whole or in part other than cash, the consideration
        other than cash shall be deemed to be the fair market value thereof as
        determined by the Board of Directors of the Corporation (irrespective of
        the accounting treatment thereof); and

                (iii) in the case of the issuance of options, warrants or other
        securities convertible into or exchangeable or exercisable for shares,
        the aggregate consideration received therefor shall be deemed to be the
        consideration received by the Corporation for the issuance of such
        options, warrants or other securities plus the additional minimum
        consideration, if any, to be received by the Corporation upon the
        conversion or exchange or exercise thereof (the consideration in each
        case to be determined in the same manner as provided in clauses (i) and
        (ii) of this subparagraph 4(m)).

        (n) No adjustment in the Conversion Rate need be made unless the
adjustment would require an increase or decrease of at least one percent (1%) in
the Conversion Rate. Any adjustments that are not made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
paragraph 4 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be.

        (o) No adjustment in the Conversion Rate need be made under this
paragraph 4 for (i) rights to purchase Common Stock pursuant to a Corporation
plan for reinvestment of dividends or interest, or (ii) any change in the par
value or no par value of the Common Stock, and in no event shall any adjustment
made under this paragraph 4 reduce the Conversion Rate below the par value of
the Common Stock. If an adjustment is made to the Conversion Rate upon the
establishment of a record date for a distribution subject to subparagraphs 4(h)
or 4(i) above and if such distribution is subsequently canceled, the Conversion
Rate then in effect shall be readjusted, effective as of the date when the Board
of Directors of the Corporation determines to cancel such distribution, to the
Conversion Rate which would have been in effect if such record date had not been
fixed. No adjustment in the Conversion Rate need be made under subparagraphs
4(h) and 4(i) above if the Corporation issues or distributes to each holder of
Series B Preferred Stock the shares of Common Stock, evidences of indebtedness,
assets, rights, options or warrants referred to in those subparagraphs which
each holder would have been entitled to receive had Series B Preferred Stock
been converted into Common Stock prior to the happening of such event or the
record date with respect thereto.

        (p) Whenever the Conversion Rate is adjusted, the Corporation shall
promptly mail to holders of Series B Preferred Stock, first class, postage
prepaid, a notice of the adjustment. The Corporation shall file with the
transfer agent, if any, for Series B Preferred Stock a certificate from the
Corporation's independent public accountants briefly stating the facts requiring
the adjustment and the manner of computing it. Subject to subparagraph 4(u)
below, the certificate shall be conclusive evidence that the adjustment is
correct.

        (q) The Corporation from time to time may reduce the Conversion Rate by
any amount for any period of time if the period is at least twenty (20) Business
Days and if the reduction is irrevocable during the period, but in no event may
the Conversion Rate be less than the par value of a share of Common Stock.
Whenever the Conversion Rate is reduced, the Corporation shall mail to holders
of Series B Preferred Stock a notice of the reduction. The Corporation shall
mail, first class, postage prepaid, the notice at least 15 days before the date
the reduced conversion price takes effect. The notice shall state the reduced
conversion price and the period it will be in effect. A reduction of the
Conversion Rate does not change or adjust the Conversion Rate otherwise in
effect for purposes of subparagraphs 4(g), 4(h), 4(i), 4(j) and 4(k) above.

        (r) If:

                                       11
<PAGE>   12

                (i) the Corporation takes any action which would require an
        adjustment in the Conversion Rate pursuant to subparagraph 4(h) or 4(i)
        above, or clause (iv) of subparagraph 4(g) above;

                (ii) the Corporation consolidates or merges with, or transfers
        all or substantially all of its assets to, another corporation, and
        stockholders of the Corporation must approve the transaction; or

                (iii) there is a dissolution or liquidation of the Corporation;
        a holder of Series B Preferred Stock may want to convert such stock into
        shares of Common Stock prior to the record date for or the effective
        date of the transaction so that he may receive the rights, warrants,
        securities or assets which a holder of shares of Common Stock on that
        date may receive. Therefore, the Corporation shall mail to such holders,
        first class, postage prepaid, a notice stating the proposed record or
        effective date, as the case may be. The Corporation shall mail the
        notice at least ten (10) days before such date. Failure to mail the
        notice or any defect in it shall not affect the validity of any
        transaction referred to in clause (i), (ii) or (iii) of this
        subparagraph 4(r). If a conversion of any shares of Series B Preferred
        Stock is to be made in connection with any transaction referred to in
        clause (i), (ii) or (iii) of this subparagraph 4(r), such conversion may
        at the election of the holder be conditioned upon the consummation of
        such transaction, in which case such conversion shall not be deemed to
        be effective until immediately prior to the consummation of such
        transaction.

        (s) If the Corporation is party to a consolidation, merger, transfer or
lease which reclassifies or changes its Common Stock, upon consummation of such
transaction Series B Preferred Stock shall automatically become convertible into
the kind and amount of securities, cash or other assets which the holder of
Series B Preferred Stock would have owned immediately after the consolidation,
merger, transfer or lease if such holder had converted Series B Preferred Stock
immediately before the effective date of the transaction, appropriate adjustment
(as determined by the Board of Directors of the Corporation) shall be made in
the application of the provisions herein set forth with respect to the rights
and interests thereafter of the holders of Series B Preferred Stock, to the end
that the provisions set forth herein (including provisions with respect to
changes in and other adjustment of the Conversion Rate) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the conversion of
Series B Preferred Stock. If this subparagraph 4(s) applies, subparagraph 4(g)
does not apply.

        (t) In any case in which this paragraph 4 shall require that an
adjustment as a result of any event become effective from and after a record
date, the Corporation may elect to defer until after the occurrence of such
event (i) the issuance to the holder of any shares of Series B Preferred Stock
converted after such record date and before the occurrence of such event of the
additional shares of Common Stock issuable upon such conversion over and above
the shares issuable on the basis of the Conversion Rate in effect immediately
prior to adjustment and (ii) a check for any remaining fractional shares of
Common Stock as provided in subparagraph 4(d) above.

        (u) Except as provided in the immediately following sentence, any
determination that the Corporation or its Board of Directors must make pursuant
to this paragraph 4 shall be conclusive. Whenever the Corporation or its Board
of Directors shall be required to make a determination under this paragraph 4,
such determination shall be made in good faith and may be challenged in good
faith by a majority of the holders of Series B Preferred Stock, and any dispute
shall be resolved, at the Corporation's expense, by an investment banking firm
of recognized national standing selected by the Corporation and acceptable to
such holders of Series B Preferred Stock.

                                       12
<PAGE>   13

        (v) All shares of Series B Preferred Stock converted pursuant to this
paragraph 4 shall be retired and shall be restored to the status of authorized
and unissued shares of preferred stock, without designation as to series and may
thereafter be reissued as shares of any series of preferred stock.

        5. REDEMPTION BY THE CORPORATION.

        (a) On March 31, 2005 (the "Redemption Date"), the Corporation shall be
required to redeem (subject to the legal availability of funds therefor) all
outstanding shares of Series B Preferred Stock at a price in cash equal to the
Stated Value, plus accumulated and unpaid dividends, if any, to the date of
redemption (such amount, the "Redemption Price"). The Series B Preferred Stock
may not be redeemed at the option of the Corporation on or prior to the
Redemption Date. The Corporation shall take all actions required or permitted
under the General Corporation Law of the State of Delaware to permit such
redemption.

        (b) Notice of any redemption shall be sent by or on behalf of the
Corporation not more than sixty (60) days nor less than thirty (30) days prior
to the Redemption Date, by first class mail, postage prepaid, to all holders of
record of the Series B Preferred Stock at their respective last addresses as
they shall appear on the books of the Corporation; provided, however, that no
failure to give such notice or any defect therein or in the mailing thereof
shall affect the validity of the proceedings for the redemption of any shares of
Series B Preferred Stock except as to the holder to whom the Corporation has
failed to give notice or except as to the holder to whom notice was defective.
In addition to any information required by law or by the applicable rules of any
exchange upon which Series B Preferred Stock may be listed or admitted to
trading, such notice shall state: (i) the Redemption Date; (ii) the Redemption
Price; (iii) the place or places where certificates for such shares are to be
surrendered for payment of the Redemption Price; (iv) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (v) the
Conversion Rate; (vi) that Series B Preferred Stock called for redemption may be
converted at any time before the close of business on the Redemption Date; and
(vii) that holders of Series B Preferred Stock must satisfy the requirements of
subparagraph 4(a) above if such holders desire to convert such shares.

        (c) If notice has been mailed in accordance with subparagraph 5(b) above
and provided that on or before the Redemption Date specified in such notice, all
funds necessary for such redemption shall have been set aside by the
Corporation, separate and apart from its other funds in trust for the pro rata
benefit of the holders of the shares so called for redemption, so as to be, and
to continue to be available therefor, then, from and after the Redemption Date,
dividends on the shares of the Series B Preferred Stock so called for redemption
shall cease to accrue, and said shares shall no longer be deemed to be
outstanding and shall not have the status of shares of Series B Preferred Stock,
and all rights of the holders thereof as stockholders of the Corporation (except
the right to receive from the Corporation the Redemption Price) shall cease.
Upon surrender, in accordance with said notice, of the certificates for any
shares so redeemed (properly endorsed or assigned for transfer, if the
Corporation shall so require and the notice shall so state), such shares shall
be redeemed by the Corporation at the Redemption Price.

        (d) Any funds deposited with a bank or trust company for the purpose of
redeeming Series B Preferred Stock shall be irrevocable except that:

                (i) the Corporation shall be entitled to receive from such bank
        or trust company the interest or other earnings, if any, earned on any
        money so deposited in trust, and the holders of any shares redeemed
        shall have no claim to such interest or other earnings; and

                (ii) any balance of monies so deposited by the Corporation and
        unclaimed by the holders of the Series B Preferred Stock entitled
        thereto at the expiration of two (2) years from the applicable
        Redemption Date shall be repaid, together with any interest or other
        earnings

                                       13
<PAGE>   14

        earned thereon, to the Corporation, and after any such repayment, the
        holders of the shares entitled to the funds so repaid to the Corporation
        shall look only to the Corporation for payment without interest or other
        earnings.

        (e) No Series B Preferred Stock may be redeemed except with funds
legally available for the payment of the Redemption Price.

        (f) All shares of Series B Preferred Stock redeemed pursuant to this
paragraph 5 shall be retired and shall be restored to the status of authorized
and unissued shares of preferred stock, without designation as to series and may
thereafter be reissued as shares of any series of preferred stock other than
shares of Series B Preferred Stock.

        6. VOTING RIGHTS.

        (a) The holders of shares of Series B Preferred Stock will have the
right to vote on all matters on which the holders of shares of the Common Stock
are entitled to vote, or give written consent in lieu of a vote, on an "as
converted" basis with holders of shares of the Common Stock, as though part of
the same class as holders of Common Stock. Each person in whose name shares of
Series B Preferred Stock shall be registered on the record date for determining
the holders of the Series B Preferred Stock entitled to vote at any meeting of
stockholders (or adjournment thereof) or to consent to corporate action in
writing without a meeting shall be entitled to, at such meeting or with respect
to such action, one vote for each share of Common Stock of the Corporation into
which each share of Series B Preferred Stock registered in the name of such
person on such record date could be converted (with any fractional share
determined on an aggregate conversion basis being rounded to the nearest whole
share) on such record date. The holders of shares of Series B Preferred Stock
shall receive all notices of meetings of the holders of shares of Common Stock,
and all other notices and correspondence to the holders of shares of Common
Stock provided by the Corporation, and shall be entitled to take such actions,
and shall have such rights, as are set forth in this Certificate of Designation
or are otherwise available to the holders of shares of Common Stock in the
Certificate of Incorporation and in the Bylaws of the Corporation as are in
effect on the date hereof, in each case with the same effect as would be taken
by holders of Series B Preferred Stock if deemed to be holders of such number of
shares of Common Stock as determined aforesaid. The foregoing shall apply
whether or not such holder actually converts such securities.

        (b) In addition to any vote or consent of stockholders required by law
or the Certificate of Incorporation, the consent of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the shares of Series B Preferred
Stock at the time outstanding, given in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose, shall be
necessary for effecting or validating:

                (i) Any amendment, alteration or repeal of any of the provisions
        of the Certificate of Incorporation, or of the by-laws of the
        Corporation, which affects adversely the voting powers, preferences and
        relative, participating, optional and other special rights of the
        holders of shares of Series B Preferred Stock; provided, however, that
        the amendment of the provisions of the Certificate of Incorporation so
        as to authorize or create, or to increase the authorized amount of, or
        to issue any class or any security convertible into any shares ranking
        on a parity with or junior to the Series B Preferred Stock in the
        distribution of assets on any liquidation, dissolution, or winding up of
        the Corporation or in the payment of dividends, shall not be deemed to
        affect adversely the voting powers, preferences and relative,
        participating, optional and other special rights of the holders of
        shares of Series B Preferred Stock; or

                                       14
<PAGE>   15

                (ii) Any authorization or creation of, or increase in the
        authorized amount of, or issuance of, any shares of any class or any
        security convertible into shares of any class ranking senior to shares
        of Series B Preferred Stock in the distribution of assets on any
        liquidation, dissolution, or winding up of the Corporation or in the
        payment of dividends or otherwise.

        7. EXCLUSION OF OTHER RIGHTS.

        Except as may otherwise be required by law, the shares of Series B
Preferred Stock shall not have any voting powers, preferences and relative,
participating, optional or other special rights, other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) and in the Certificate of Incorporation.

        8. HEADINGS OF SUBDIVISIONS.

        The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.

        9. SEVERABILITY OF PROVISIONS.

        If any voting powers, preferences and relative, participating, optional
and other special rights of the Series B Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as such
resolution may be amended from time to time) is invalid, unlawful or incapable
of being enforced by reason of any rule of law or public policy, all other
voting powers, preferences and relative, participating, optional and other
special rights of Series B Preferred Stock and qualifications, limitations and
restrictions thereof set forth in this resolution (as so amended) which can be
given effect without the invalid, unlawful or unenforceable voting powers,
preferences and relative, participating, optional and other special rights of
Series B Preferred Stock and qualifications, limitations and restrictions
thereof shall, nevertheless, remain in full force and effect, and no voting
powers, preferences and relative, participating, optional or other special
rights of Series B Preferred Stock and qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of Series B Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.

        IN WITNESS WHEREOF, the Corporation has caused this certificate to be
duly executed by Gary B. Sabin, its President and Chief Executive Officer, and
attested by Richard B. Muir, its Secretary, this 4th day of March, 1999.

                                       EXCEL LEGACY CORPORATION

                                       By:         /s/ Gary B. Sabin
                                          --------------------------------------
                                          Gary B. Sabin, President and
                                          Chief Executive Officer

ATTEST:

By: /s/ Richard B. Muir
   -----------------------------------
    Richard B. Muir, Secretary

                                       15

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