UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to_____________
Commission file number 1-9016
___________________________
AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)
Texas 75-6335572
(State or other (I.R.S.
jurisdiction of Employer
incorporation or Identification
organization) No.)
6220 North Beltline Road,
Suite 205 75063-2656
Irving, Texas
(Address of principal (Zip Code)
executive offices)
(972) 550-6053
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
9,075,400 Shares of Beneficial Interest were outstanding as
of November 12, 1996.
American Industrial Properties REIT
Form 10-Q
For the Quarter Ended September 30, 1996
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the quarter
and nine months ended September 30, 1996 and 1995 3
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Item 1. Legal Proceedings 12
Item 3. Defaults Upon Senior Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
American Industrial Properties REIT
Consolidated Statements of Operations
(unaudited, in thousands except share and per share data)
<TABLE>
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1,995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Rents $ 2,150 2,164 $ 6,568 $ 6,467
Tenant reimbursements 643 634 2,071 2,080
Interest income 7 94 146 284
2,800 2,892 8,785 8,831
REAL ESTATE EXPENSES
Property operating expenses:
Property taxes 368 355 1,110 1,056
Property management fees 107 100 324 315
Utilities 118 127 335 345
General operating 189 192 610 531
Repairs and maintenance 153 69 318 293
Other property operating expenses 75 87 220 221
Depreciation and amortization 769 663 2,177 2,109
Interest on 8.8% notes payable 1,001 1,334 3,350 3,373
Interest on mortgages payable 405 394 1,216 1,317
Administrative expenses:
Trust administration and overhead 300 323 1,190 1,100
Litigation and proxy costs 116 146 1,004 521
3,601 3,790 11,854 11,181
Loss from real estate operations (801) (898) (3,069) (2,350)
Loss on sales of real estate - - - (191)
Extraordinary loss on
extinguishment of debt - - - (55)
Extraordinary gain on
forgiveness of debt - - 1,367 -
NET LOSS $ (801) (898) $(1,702) $ (2,596)
PER SHARE DATA
Loss from real estate operations $ (0.09) (0.10) $ (0.34) $ (0.26)
Loss on sales of real estate - - - (0.02)
Extraordinary loss on
extinguishment of debt - - - (0.01)
Extraordinary gain on
forgiveness of debt - - 0.15 -
Net Loss $ (0.09) (0.10) $ (0.19) $ (0.29)
Distributions Paid - - $ 0.04 -
Number of shares outstanding 9,075,400 9,075,400 9,075,400 9,075,400
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
September 30, December 31,
1996 1995
(unaudited)
<S> <C> <C>
Real estate:
Held for investment $81,181 $97,091
Held for sale 21,476 4,806
102,657 101,897
Accumulated depreciation (25,374) (23,441)
Net real estate 77,283 78,456
Cash and cash equivalents:
Unrestricted 1,580 7,694
Restricted 604 659
Total cash
and cash equivalents 2,184 8,353
Other assets, net 2,945 2,573
Total Assets $82,412 $89,382
Liabilities:
8.8% notes payable $45,239 $45,239
Mortgage notes payable 17,406 17,576
Accrued interest 703 5,178
Accounts payable, accrued
expenses and other
liabilities 1,374 1,620
Tenant security deposits 507 521
Total Liabilities 65,229 70,134
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value authorized
10,000,000 Shares; issued and outstanding
9,075,400 Shares 908 908
Additional paid-in capital 124,605 124,605
Retained earnings (deficit) (108,330) (106,265)
Total Shareholders' Equity 17,183 19,248
Total Liabilities and
Shareholders' Equity $82,412 $89,382
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Consolidated Statements of Cash Flows
(unaudited, in thousands)
<TABLE>
Nine Months Ended
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,702) $(2,596)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,177 2,109
Loss on sales of real estate - 191
Extraordinary loss on
extinguishment of debt - 55
Extraordinary loss on
forgiveness of debt (1,367) -
Changes in operating assets
and liabilities:
(Increase) decrease in other assets (451) 15
Decrease in accounts payable,
accrued expenses and other liabilities
and tenant security deposits (260) (295)
Net Cash Used In
Operating Activities (1,603) (521)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of industrial
distribution property - (1,309)
Capitalized improvements
and leasing commissions (925) (793)
Net proceeds from sales
of real estate - 2,476
Net Cash (Used In) Provided By
Investing Activities (925) 374
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (363) -
Principal repayments on
mortgage notes payable (170) (2,742)
Prepayment penalty on
extinguishment of debt - (55)
Increase (decrease)
in accrued interest (3,108) 3,341
Net Cash Used In
Financing Activities (3,641) 544
Net (Decrease) Increase in
Cash and Cash Equivalents (6,169) 397
Cash and Cash Equivalents
at Beginning of Period 8,353 7,521
Cash and Cash Equivalents
at End of Period $ 2,184 $ 7,918
Cash Paid for Interest $ 7,674 $ 1,349
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Notes to Consolidated Financial Statements
September 30, 1996
(unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements are
presented in accordance with the requirements of Form 10-Q
and consequently do not include all of the disclosures
required by generally accepted accounting principles or
those contained in the Trust's Annual Report on Form 10-K.
Accordingly, these financial statements should be read in
conjunction with the audited financial statements of the
Trust for the year ended December 31, 1995, included in the
Trust's Annual Report on Form 10-K.
The financial information included herein has been prepared
in accordance with the Trust's customary accounting
practices and has not been audited. In the opinion of
management, the information presented reflects all
adjustments necessary for a fair presentation of interim
results. All such adjustments are of a normal and recurring
nature.
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
Note 2 - Significant Accounting Policies
Principles of Consolidation. The consolidated financial
statements of the Trust include the accounts of American
Industrial Properties REIT and its wholly-owned
subsidiaries. Significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly
from such estimates and assumptions.
Real Estate. The Trust carries its real estate at the lower
of depreciated cost or net realizable value. In accordance
with Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, the Trust records impairment
losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired
and the undiscounted cash flows estimated to be generated by
those assets are less than the related carrying amounts. In
addition, the Trust records impairment losses on assets held
for sale when the estimated sales proceeds, after estimated
selling costs, is less than the carrying value of the
related asset. At September 30, 1996, ten properties were
classified as held for investment and five properties were
classified as held for sale, reflecting the Trust's intent
to raise the capital necessary to purchase mortgage debt at
a discount (see Note 4). Should unforeseen factors cause
additional properties to be classified as held for sale,
significant adjustments to reduce the net book value of such
properties could be required.
Property improvements are capitalized while maintenance and
repairs are expensed as incurred. Depreciation of buildings
and capital improvements is computed using the straight-line
method over forty years. Depreciation of tenant
improvements is computed using the straight-line method over
ten years.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
September 30, 1996
(unaudited)
Other Assets. Other assets consists primarily of deferred
rent receivable, prepaid leasing commissions and loan fees.
Deferred rent receivable arises as the Trust recognizes
rental income, including contractual rent increases or
delayed rent starts, on a straight-line basis over the lease
term. The Trust has recorded deferred rent receivable of
$682,000 and $810,000 at September 30, 1996 and December 31,
1995, respectively. Leasing commissions are capitalized and
amortized on a straight-line basis over the life of the
lease. Loan fees are capitalized and amortized to interest
expense on a level yield basis over the term of the related
loan.
Income Taxes. The Trust operates as a real estate
investment trust ("REIT") for federal income tax purposes.
Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a
deduction for dividends paid during the year. No provisions
for Federal income taxes have been required or recorded to
date.
Note 3 - Zero Coupon Notes
In December 1993 and November 1994, the Trust partially in-
substance defeased certain of its Zero Coupon Notes due 1997
totaling $16,365,000 (face amount at maturity). At
September 30, 1996, the accreted value of these Zero Coupon
Notes was $14,300,000.
Note 4 - Litigation
MLI Litigation. On May 1, 1995, the Trust initiated a
lawsuit against the holder of its 8.8% unsecured notes
payable ("MLI"), alleging, among other things, that MLI and
others had engaged in acts of bad faith and conspiracy.
This suit was subsequently amended to name additional
defendants and to specify damages. Based on the facts
surrounding this lawsuit, the Trust elected not to make a
scheduled semi-annual interest payment on May 27, 1995. MLI
thereafter declared the entire principal amount due and
payable and began accruing interest, effective June 13,
1995, at the 11.7% default rate specified in the Note
Purchase Agreement. The Trust entered into an agreement on
May 22, 1996 (the "Settlement Agreement") whereby the Trust
settled this litigation and obtained an option to repay the
$45,239,000 principal amount due and owing on these notes
for $36,800,000 (the "Option Price"). The Trust also paid
$5,200,000 to MLI in satisfaction of $6,567,000 in
outstanding accrued and unpaid interest (which included
default rate interest of $1,095,000) through April 12, 1996,
resulting in an extraordinary gain of $1,367,000.
In order to achieve the discount on the principal balance of
the notes, the Trust will be required to pay at least
$25,000,000 by November 23, 1996, to be applied pro rata to
the outstanding principal balance of the notes and dollar-
for-dollar to the Option Price. The Trust must pay the
remaining amount of the Option Price during extended option
periods ending on March 31, 1997 or June 30, 1997, subject
to the payment of additional principal payments in the
amount of $250,000 and $150,000, respectively (which will be
applied pro rata to the outstanding principal balance of the
notes but not the Option Price). Interest also continues to
accrue at the non-default rate of 8.8% per annum (and at the
default rate upon an event of default), and monthly interest
payments beginning June 3, 1996 must be made in order to
receive the discount. Although interest will accrue against
the outstanding principal balance of the notes, the interest
payments will be calculated against the balance of the
Option Price; the portion of the accrued interest which is
not satisfied by the required monthly payments will be
deferred and due only upon an event of default and will not
be payable if the Trust performs its obligations pursuant to
the Settlement Agreement.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
September 30, 1996
(unaudited)
The notes remain fully matured, due and payable, subject to
a moratorium on any collection efforts by MLI through
November 23, 1996, with possible extensions through June 30,
1997 as described above, as long as the Trust remains
current in its obligations under the Settlement Agreement.
If the Trust is unable to perform under the Settlement
Agreement, it will be required to pay the outstanding
principal balance of the notes plus the 8.8% interest
thereon, net of interest payments paid on the Option Price
as described above. If the Trust successfully completes the
discounted payment of the notes, this transaction will
result in a total gain to the Trust of approximately
$9,806,000, or $1.08 per share (comprised of approximately
$8,439,000 of reduced principal payments and approximately
$1,367,000 of accrued and unpaid interest).
The Settlement Agreement also provides that the notes will
now be secured by liens on twelve of the Trust's properties
and by the Trust's interests in the partnerships which own
two of the Trust's other properties. The Trust has agreed
not to sell or encumber any of these properties or otherwise
transfer its interests therein except in compliance with the
Settlement Agreement, which requires application of certain
proceeds to the Trust's obligations to MLI.
The Trust has received a financing commitment from the
lending affiliate of an insurance company in the amount of
$27,990,000. This financing, which the Trust expects to
close on or about November 15, 1996, will be secured by
first liens on nine existing Trust properties and a tenth
property which the Trust will acquire subsequent to the
financing. The Trust anticipates that the net proceeds from
this proposed financing will exceed the $25,000,000 required
to be paid to MLI on or before November 23, 1996.
Although management believes that the payment of these notes
at a discount can be achieved, there can be no assurance
that the Trust will be successful in its financing efforts
(including the consummation of the financing described
above) or property sale efforts and will ultimately be able
to pay the Option Price required under the Settlement
Agreement to achieve the discount.
Other Litigation. On January 8, 1996, the Trust filed a
lawsuit in federal court in Dallas, Texas against a major
shareholder of the Trust, alleging, among other things,
violations of federal and state securities laws. On January
30, 1996, the defendants filed a counterclaim against the
Trust, requesting that certain Bylaw amendments be stricken,
that a receiver be appointed for the assets and business of
the Trust and that the Trust recover certain funds from the
Trust Managers. On March 26, 1996, the United States
District Court for the Northern District of Texas denied the
defendants' motion to appoint a receiver for the Trust. On
September 9, 1996, the court granted defendants' motion for
partial summary judgment, ruling that the provisions of
Article IX of the Trust's bylaws limiting share ownership to
9.8% of the Trust's shares is invalid under the Texas REIT
Act. The court denied the Trust's motion for
reconsideration of its September 9, 1996 ruling on October
28, 1996. Defendants also filed an application to
preliminarily enjoin the Trust from enforcing Article IX and
another bylaw provision (Article XIII) adopted by the Trust
following the court's September 9, 1996 ruling. Article
XIII also provides for share ownership limitations to ensure
continued compliance with REIT requirements under the
federal income tax laws and becomes effective if certain
events occur that prevent the Trust from enforcing Article
IX. On November 12, 1996, the court granted defendants'
application for preliminary injunction. The Trust believes
that the Court's ruling misconstrues the Texas REIT Act.
Accordingly, the Trust intends to appeal this ruling. This
counterclaim was joined with a class action and derivative
complaint against the Trust and its Trust Managers filed by
another shareholder on February 22, 1996. Although
management believes the Trust will ultimately prevail in
these suits, no assurance can be given regarding the
ultimate outcome of this litigation.
The parties have entered into settlement discussions regarding
the litigation described above. Although there can be no
assurance that a settlement of the litigation will occur,
due to the anticipated settlement of this litigation, the
Trust Managers have determined that it is in the best interests
of the Trust and its shareholders to cancel the Annual Meeting
of Shareholders which was originally scheduled to be held on
December 18, 1996. The new record date and date of the Annual
Meeting of Shareholders will be announced at a later date.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The table below provides a reconciliation of net loss, funds
from operations ("FFO") and funds available for distribution
("FAD") for the quarter and nine months ended September 30, 1996
and 1995. Management believes that the presentation of FFO and
FAD will enhance the reader's understanding of the Trust's
financial condition as well as provide comparability to other
real estate investment trusts. The determination of FFO is based
on the definition adopted by the National Association of Real
Estate Investment Trusts ("NAREIT") which is net income (loss)
computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and
sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated
partnerships and joint ventures. In addition, NAREIT recommends
that extraordinary items or significant non-recurring items that
distort comparability should not be considered in arriving at
FFO. FAD is generally more indicative of the Trust's ability to
make distributions as it includes the effect of the Trust's
capital expenditures. Neither FFO or FAD should be considered an
alternative to net income as an indicator of the Trust's
operating performance or to cash flows from operations as a
measure of liquidity.
<TABLE>
(000) (000)
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net loss $(801) $(898) $(1,702) $(2,596)
Loss on sales of real estate - - - 191
Extraordinary loss -
extinguishment of debt - - - 55
Extraordinary gain -
forgiveness of debt - - (1,367) -
Real estate depreciation and
amortization 761 644 2,165 2,052
Default rate interest accrual - 331 369 393
Funds from operation ("FFO") (40) 77 (535) 95
Capitalized improvements and
leasing commissions (307) (300) (925) (796)
GAAP straight line rent
adjustment 19 24 128 116
Funds available for
distribution ("FAD") $ (328) $(199) $(1,332) $(585)
</TABLE>
Quarter Ended September 30, 1996 and 1995
The Trust had a net loss of $801,000 for the quarter ended
September 30, 1996 compared to a net loss of $898,000 for the
same quarter in 1995. This change was primarily related to a
decrease in interest expense (due to the default rate interest
accrued on the MLI notes in 1995), an increase in depreciation
and amortization (due to higher depreciable balances in 1996), a
decrease in interest income (due to the $5.2 million paid to MLI
in May 1996 in settlement of accrued interest) and a decrease in
net operating income (due to a decrease in leased occupancy from
94.9% at September 30, 1995 to 92.0% at September 30, 1996).
The Trust's FFO, which excludes the effect of extraordinary
gains or losses and the default rate interest accrued on the MLI
notes, decreased by $117,000 when comparing the quarter ended
September 30, 1996 to the same quarter in 1995. This decrease is
attributable to the aforementioned decrease in interest income
and decrease in net operating income. FAD decreased by $129,000
due primarily to the same factors affecting FFO.
Nine Months Ended September 30, 1996 and 1995
When comparing the nine months ended September 30, 1996 to
the same period in 1995, the net loss of the Trust decreased from
$2,596,000 in 1995 to $1,702,000 in 1996. This resulted
primarily from an extraordinary gain on forgiveness of debt of
$1,367,000 recorded in the second quarter of 1996 as a result of
the settlement of the MLI litigation, an increase of $483,000 in
litigation, refinancing and proxy costs (primarily due to the
costs of defending against two shareholder lawsuits filed in
1996), a $191,000 loss on the sale of the Trust's Quadrant
property in February 1995, a $138,000 decrease in interest income
(due to the $5.2 million paid to MLI in May 1996 in settlement of
accrued interest), and a $124,000 decrease in interest expense
(due to the retirement of the Patapsco and Quadrant mortgage
loans in 1995 and a decrease in the interest rate on the Tamarac
and Northview mortgage loans in July 1995).
The Trust's FFO, which excludes the effect of extraordinary
gains or losses and default rate interest, decreased by $630,000
when comparing the nine months ended September 30, 1996 to the
same period in 1995. This is primarily attributable to the
aforementioned increase in litigation, refinancing and proxy
costs and the decrease in interest income.
FAD decreased by $747,000 due to these same factors
affecting FFO and the higher level of tenant improvements and
leasing commissions in 1996. These expenditures are indicative
of the Trust's higher level of leasing activity in 1996. During
the first nine months of 1996, the Trust executed 411,000 square
feet of new leases compared to 287,000 in 1995.
The overall occupancy of the Trust's portfolio on September
30, 1996 was 92.0%, compared to 94.9% on September 30, 1995.
When comparing the nine months ended September 30, 1996 to the
same period in 1995 on a same property basis, revenue was up 3.4%
and net operating income was up 1.9% for the Trust's industrial
properties whereas revenue was down 6.2% and net operating income
was down 10.3% for the Trust's retail property. Occupancy at the
Trust's retail property slipped from 88.3% at September 30, 1995
to 84.1% at September 30, 1996. The Trust is currently working
toward the repositioning of the property and its tenants as a
means of increasing occupancy.
Liquidity and Capital Resources
On May 22, 1996, the Trust entered into an agreement (the
"Settlement Agreement") to repay the Trust's 8.8% unsecured notes
to The Manufacturers Life Insurance Company ("MLI") and The
Manufacturers Life Insurance Company (U.S.A.) ("MLI-USA") at a
substantial discount in connection with the settlement of the
Trust's litigation with MLI, MLI- USA, and Fidelity Management
and Research Company, Fidelity Galileo Fund, L.P., Belmont
Capital Partners II, L.P., Fidelity Puritan Trust and Fidelity
Management Trust Co. (together, the "Fidelity Entities").
Pursuant to the Settlement Agreement and related documents,
the Trust has been granted the option to repay the approximately
$45,239,000 principal amount due and owing on its outstanding
notes for $36,800,000 (the "Option Price"). As a condition to
entering the Settlement Agreement, the Trust paid $5,200,000 to
MLI in satisfaction of $6,567,000 in outstanding accrued and
unpaid interest (which included default rate interest of
$1,095,000) through April 12, 1996, allowing the Trust to
recognize an immediate gain of $1,367,000. The Trust further
paid approximately $168,000 to MLI in satisfaction of accrued and
unpaid interest through May 1, 1996.
In order to achieve the discount on the principal balance of
the notes, the Trust will be required to pay at least $25,000,000
to MLI and MLI-USA by November 23, 1996, to be applied pro rata
to the outstanding principal balance of the notes and dollar-for-
dollar to the Option Price. The Trust must pay the remaining
amount of the Option Price during extended option periods ending
on March 31, 1997 or June 30, 1997, subject to the payment of
additional principal payments in the amount of $250,000 and
$150,000, respectively (which will be applied pro rata to the
outstanding principal balance of the notes but not the Option
Price). Interest also continues to accrue at the non-default
rate of 8.8% per annum (and at the default rate upon an event of
default), and monthly interest payments beginning June 3, 1996
must be made in order to receive the discount. Although interest
will accrue against the outstanding principal balance of the
notes, the interest payments will be calculated against the
balance of the Option Price. The portion of the accrued interest
which is not satisfied by the required monthly payments will be
deferred and due only upon an event of default; such interest
will be forgiven if the Trust performs its obligations pursuant
to the Settlement Agreement.
The notes remain fully matured, due and payable, subject to
a moratorium on any collection efforts by MLI and MLI-USA through
November 23, 1996, with possible extensions through June 30, 1997
as described above, as long as the Trust remains current in its
obligations under the Settlement Agreement. If the Trust is
unable to perform under the Settlement Agreement, it will be
required to pay the outstanding principal balance of the notes
plus the 8.8% interest thereon, net of interest payments paid on
the Option Price as described above. If the Trust successfully
completes the discounted payment of the notes, this transaction
will result in a total gain to the Trust of approximately
$9,806,000, or $1.08 per share (comprised of approximately
$8,439,000 of reduced principal payments and approximately
$1,367,000 of accrued and unpaid interest). The Trust will also
recognize a gain on the accrued interest which will be forgiven
if the Trust performs its obligations under the Settlement
Agreement (see above).
In addition, the Settlement Agreement provides that the
notes will now be secured by liens on twelve of the Trust's
properties and by the Trust's interests in the partnerships which
own two other of the Trust's properties. The Trust has agreed
not to sell or encumber any of its properties or otherwise
transfer its interests therein except in compliance with the
Settlement Agreement, which requires application of certain
proceeds to the Trust's obligations to MLI and MLI-USA.
The Trust has received a financing commitment from the
lending affiliate of an insurance company in the amount of
$27,990,000. This financing, which the Trust expects to close on
or about November 15, 1996, will be secured by first liens on
nine existing Trust properties and a tenth property which the
Trust will acquire subsequent to the financing. The Trust
anticipates that the net proceeds from this proposed financing
will exceed the $25,000,000 required to be paid to MLI on or
before November 23, 1996. In addition, the Trust is currently
marketing four properties for sale, and anticipates another
transaction wherein the Trust will sell a property while
purchasing another property from the buyer, as a means of raising
capital to fund the remaining amount of the Option Price.
The Trust believes it can raise the funds necessary to
complete the discounted payment of the MLI debt through property
financing proceeds and the sale of real estate properties.
However, the ultimate success of this transaction is dependent
upon the financial and real estate markets existing at the time
of such financing or property sales. Accordingly, there can be
no assurance that the Trust will ultimately be able to pay the
Option Price as required under the Settlement Agreement to
achieve the discount on the notes. Should the Trust be unable to
perform under the Settlement Agreement, the lender has the right
to immediately begin foreclosure proceedings against the
collateral, which constitutes substantially all of the Trust's
assets.
The Settlement Agreement also requires that the Trust not
pay distributions to shareholders until the Trust has paid the
Option Price in full. For this reason, the Trust Managers have
determined that it is in the best interests of the Trust and its
shareholders to suspend distributions to shareholders until such
time as the Option Price has been paid and the discount on the
notes fully achieved. Any future distributions to shareholders
will be evaluated by the Trust Managers based on the liquidity of
the Trust, performance of the Trust's portfolio, cash flow of the
Trust and other circumstances existing upon payment of the Option
Price.
The initial capitalization of the Trust in 1985 included
$179,698,000 (face amount at maturity) of Zero Coupon Notes due
1997. Pursuant to the retirement of these Zero Coupon Notes, the
Trust partially in-substance defeased certain Zero Coupon Notes
in December 1993 and November 1994. At September 30, 1996, the
face amount at maturity and the accreted value of the defeased
Notes were $16,365,000 and $14,300,000, respectively.
At September 30, 1996, the Trust had $62,645,000 in mortgage
debt outstanding, including the MLI debt of $45,239,000. Of this
amount, $1,931,000 represented variable rate financing (with a
weighted average interest rate of 10.25%) and $60,714,000
represented fixed rate financing (with a weighted average
interest rate of 8.80%).
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Manufacturers Life Insurance Company. As more fully
described in Part I, Liquidity and Capital Resources, the Trust
settled its litigation with The Manufacturers Life Insurance
Company ("MLI") on May 22, 1996 and entered into a Settlement
Agreement with respect to payment of the MLI notes.
Paul O. Koether and Pure World, Inc. On January 8, 1996,
the Trust filed a lawsuit in federal court in Dallas, Texas,
against Pure World, Inc. and Paul O. Koether. The suit alleges,
among other things, violations under federal and state securities
law for material misrepresentations and omissions made by the
defendants in filings made with the Securities and Exchange
Commission including the failure to disclose meetings and
correspondence between the defendants and representatives of MLI,
the Trust's largest unsecured creditor, regarding the proposed
purchase at a discount of the Trust's unsecured notes held by
MLI. The Trust seeks injunctive relief preventing future
discussions with MLI regarding the purchase of the MLI notes,
further attempts to gain control of the Trust by the defendants
and any further purchases of shares in the Trust by the
defendants until proper disclosures are made. In addition, the
Trust seeks a declaratory judgment regarding enforcement of the
share ownership restrictions contained in the Trust's Bylaws and
injunctive relief preventing the voting of shares accumulated in
excess of the share ownership limitations contained in the
Bylaws. The Trust also seeks recovery of distributions paid on
shares accumulated in excess of these share ownership
limitations.
On January 30, 1996, the defendants filed an answer,
counterclaims and a third party complaint. The third party
complaint was filed against the Trust Managers of the Trust. In
their counterclaim and third party claims, the defendants are
requesting that certain Bylaw amendments be stricken, that the
court issue an injunction until an additional independent Trust
Manager is appointed, that a receiver be appointed for the assets
and business of the Trust, that the Trust recover certain funds
from the Trust Managers, and that the defendants recover an
unspecified amount of damages and attorneys' fees. The Trust
filed a Motion to Dismiss, which the court granted in part,
requiring the defendants to replead their counterclaim. On March
26, 1996, the court denied Pure World's motion for partial
summary judgment to appoint a receiver for the Trust. The court
ruled that the failure to elect new Trust Managers or re-elect
the current Trust Managers at the last two annual shareholder
meetings has not resulted in a shareholder deadlock and is
insufficient grounds for the appointment of a receiver. On
September 9, 1996, the court granted defendants' motion for
partial summary judgment, ruling that the provisions of Article
IX of the Trust's bylaws limiting share ownership to 9.8% of the
Trust's shares is invalid under the Texas REIT Act. The court
denied the Trust's motion for its reconsideration of its
September 9, 1996 ruling on October 28, 1996. Defendants also
filed an application to preliminarily enjoin the Trust from
enforcing Article IX and another bylaw provision (Article XIII)
adopted by the Trust following the court's September 9, 1996
ruling. Article XIII also limits share ownership to ensure the
Trust continues to comply with REIT requirements under the
federal income tax laws and becomes effective in the event that
Article IX is finally adjudicated to be unenforceable or
otherwise invalid, including any and all appeals or other
appellate review, or the Trust is enjoined from enforcing Article
IX. On November 12, 1996, the court granted defendants'
application for preliminary injunction.
The Trust believes that the Court's ruling misconstrues the
Texas REIT Act. Accordingly, the Trust intends to appeal the
ruling. Although management believes the Trust will ultimately
prevail in this suit, no assurance can be given regarding the
ultimate outcome of this litigation and its financial effect upon
the Trust.
Robert Strougo. On February 22, 1996, a class action and
derivative complaint was filed against the Trust and its Trust
Managers by an alleged shareholder of the Trust, Robert Strougo.
The suit alleges, among other claims, interference with
shareholders' franchise rights and breach of fiduciary duty and
seeks recovery of unspecified damages and attorneys' fees. The
court has since granted the Trust's and the Trust Managers'
motion to dismiss the class action claim, ruling that such claim
was improper. In April 1996, this suit was consolidated with the
Trust's litigation described in "Paul O. Koether and Pure World,
Inc." above. Although management believes the Trust will
ultimately prevail in this suit, no assurance can be given
regarding the ultimate outcome of this litigation and its
financial effect upon the Trust.
The costs of pursuing the above-described litigation and
defending against the actions of the defendants are expected to
be significant and could adversely affect the Trust's resources
and liquidity.
The parties have entered into settlement discussions regarding
the litigation described above. Although there can be no assurance
that a settlement of the litigation will occur, due to the anticipated
settlement of the litigation, the Trust Managers have determined that
it is in the best interests of the Trust and its shareholders to
cancel the Annual Meeting of Shareholders which was originally scheduled
to be held on December 18, 1996. The new record date and date of the
Annual Meeting of Shareholders will be announced at a later date.
Item 3.Defaults Upon Senior Securities.
As more fully described in Part I, Liquidity and Capital
Resources, the Trust settled its litigation with The
Manufacturers Life Insurance Company ("MLI") on May 22, 1996 and
entered into a Settlement Agreement with respect to payment of
the MLI notes.
Item 6.Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
27.1(filed herewith) Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 24, 1996, reporting Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN INDUSTRIAL PROPERTIES REIT
(Registrant)
Date:November 14, 1996 /s/ MARC A. SIMPSON
Marc A. Simpson,
Vice President and Chief Financial Officer
(principal accounting and financial
officer)
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