UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 of organization) (I.R.S.Employer
Identification Number)
6220 North Beltline, Suite 205 Irving, Texas 75063
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code:
(972) 550-6053
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Shares of Beneficial Interest New York Stock Exchange
Par Value $0.10 Per Share
Securities registered pursuant to Section 12(g) of the Act:
None
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
tosuch filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulations S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K/A Amendment No. 1 or any amendment to this Form 10-
K/A Amendment No. 1.
The aggregate market value of the voting stock held by non-
affiliates of the registrant was $23,750,000 as of February
27, 1997. The aggregate market value has been computed by
reference to the closing price at which the stock was sold
on the New York Stock Exchange on February 27, 1997.
10,000,000 Shares of Beneficial Interest were outstanding
as of February 27, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
EXPLANATORY NOTE:
THE REGISTRANT IS AMENDING THE FOLLOWING ITEMS TO ITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996 IN ORDER THAT SUCH ITEMS ARE IDENTICAL TO THE
CORRESPONDING TEXT SET FORTH IN THE REGISTRANT'S PROXY
STATEMENT FILED MAY 14, 1997 IN CONNECTION WITH THE ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD JUNE 30, 1997.
Item 6 SELECTED FINANCIAL DATA
The following table sets forth
selected financial data for the Trust and its subsidiaries for
each of the five years in the period ended December 31, 1996.
This information should be read in conjunction with the
discussion set forth below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Trust and
accompanying Notes included elsewhere in this Proxy Statement.
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1996 1995 1994 1993 1992
(in thousands except share and per share data)
Operating data:
Total revenues $ 11,478 $ 11,779 $11,226 $ 10,641 $ 15,139
Loss from real estate
operations (a) (4,732) (4,338) (4,311) (5,121) (18,719)
Net income (loss) (a) 1,255 (4,584) (4,655) (7,867) (17,593)
Per share:
Loss from real estate
operations (a) $(0.52) $(0.48) $(0.47) $(0.57) $(2.06)
Net income (loss) (a) 0.14 (0.51) (0.51) (0.87) (1.94)
Distributions paid 0.04 0.04 - 0.16 0.20
Balance sheet data:
Total assets $ 78,936 $ 89,382 $92,550 $ 88,297 $110,446
Total debt 53,216 62,815 65,613 57,078 68,578
Shareholders' equity 22,683 19,248 24,196 28,851 38,171
</TABLE>
(a)Loss from real estate operations and net loss for 1995, 1994,
and 1992 include provisions for possible losses on real
estate of $600,000, $650,000, and $14,094,000, respectively.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATOINS" for discussion of
extraordinary gains and losses of $5,810, ($55), ($344),
($2,530) and $1,910 in 1996, 1995, 1994, 1993 and 1992,
respectively.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction
with the Consolidated Financial Statements of the Trust and
accompanying Notes included elsewhere in this Proxy Statement.
The statements contained in this Proxy Statement that are not
historical facts are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act. Actual results may differ materially from
those included in the forward-looking statements. These forward-
looking statements involve risks and uncertainties including, but
not limited to, changes in general economic conditions in the
markets that could impact demand for the Trust's properties and
changes in financial markets and interest rates impacting the
Trust's ability to meet its financing needs and obligations.
Results of Operations
Comparison of 1996 to 1995
The sale of two properties in late 1996 and the purchase of a
property in August 1995 resulted in a net decrease in 1996
property revenue and net operating income of $67,000 and $51,000,
respectively, when compared to 1995. On a same property basis,
property revenues decreased from $10,209,000 in 1995 to
$10,186,000 in 1996, a decrease of 0.2%, comprised of a 2.9%
increase in revenue related to industrial properties and a 6.2%
decrease in revenue at the Trust's retail property. The decrease
in revenue at the Trust's retail property stemmed principally
from lower percentage rents ($115,000) and slower leasing of
vacancies and is partially attributable to the opening of a new
regional mall in Denver during the third quarter of 1996.
Overall leased occupancy of the Trust's portfolio was 94.2% at
December 31, 1996 compared to 93.7% at December 31, 1995.
On a same property basis, net operating income (which is
defined as property revenues less property operating expenses and
which does not include depreciation and amortization, interest
expense, Trust administration and overhead expenses or provision
for possible losses on real estate) decreased from $6,704,000 in
1995 to $6,494,000 in 1996, a decrease of 3.1%. This overall
decrease is comprised of a 0.5% increase related to industrial
properties and a 10.7% decrease related to the Trust's retail
property. The decrease in the Trust's retail property is a
result of the decrease in revenue explained above. Same property
operating expenses increased by 5.3%, reflecting an increase in
repairs and maintenance expenses and tenant refit costs of
$98,000 in 1996. On the same property basis, loss from
operations increased from $4,964,000 in 1995 to $5,351,000 in
1996 (see following explanation).
Loss from operations increased from $4,338,000 in 1995 to
$4,732,000 in 1996 as a result of the decrease in net operating
income explained above, a decrease in total interest expense of
$584,000 (due to the larger accrual of default rate interest on
the MLI Notes in 1995), the provision of $600,000 for possible
losses on real estate in 1995, an increase in litigation,
refinancing and proxy costs of $568,000 (due to the shareholder
litigation in 1996), an increase in Trust administration and
overhead expenses of $406,000 (due to the accrual of $240,000 in
incentive compensation, higher legal fees and increased Trust
Manager compensation in 1996) and a decrease in interest income
(due to higher invested balances in 1995 from the nonpayment of
interest to the Trust's unsecured lender).
During 1996, the Trust sold two industrial properties and
recognized a gain on sale of $177,000, compared to the sale of
one property in 1995 resulting in a loss on sale of $191,000.
In 1996, the Trust recognized an extraordinary gain on
extinguishment of debt of $5,810,000, or $0.64 per share,
pursuant to settlement of litigation with MLI.
Comparison of 1995 to 1994
Property revenues increased from $11,080,000 in 1994 to
$11,410,000 in 1995, resulting from the stabilization in
occupancy of the Trust's portfolio and improving rental rates in
selected markets. Property operating expenses decreased from
$3,952,000 in 1994 to $3,851,000 in 1995, primarily due to the
net effect of a sale of a property in February 1995 and the
purchase of a property in August 1995. Property net operating
income increased from $7,128,000 in 1994 to $7,559,000 in 1995,
an increase of 6.0%. On a same property basis, net operating
income increased from $6,927,000 in 1994 to $7,474,000 in 1995,
an increase of 7.9%. Overall leased occupancy of the portfolio
was 93.7% at December 31, 1995 compared to 93.2% at December 31,
1994.
Loss from operations increased from $4,311,000 in 1994 to
$4,338,000 in 1995 as a result of the increase in net operating
income and an increase in interest income of $223,000 (due to
higher invested balances resulting from the non-payment of
interest to the Trust's unsecured lender), a decrease in total
administrative expenses of $128,000 (as a result of two proxy
contests in 1994 versus one in 1995), a net increase in interest
expense of $1,215,000 (due to the November 1994 refinancing
transaction and the default rate interest accrued by the Trust in
1995 of $724,000), a decrease in depreciation and amortization of
$356,000 (due to the Trust's property transactions in 1995), and
a decrease in provision for possible losses on real estate of
$50,000 (due to the timing of writedowns related to properties
held for sale).
During 1995, the Trust recognized a loss of $191,000 on the
sale of its Quadrant property and an extraordinary loss of
$55,000 related to the prepayment of an outstanding mortgage
loan. In 1994, the Trust recognized an extraordinary loss of
$344,000 on the partial in-substance defeasance of Zero Coupon
Notes due 1997.
During 1995, the Trust incurred approximately $980,000 in
expenses related to litigation, a proxy contest in connection
with issues before the shareholders at the Trust's annual meeting
and attempted recapitalization costs, compared to approximately
$1,027,000 in 1994. During 1994, the Trust had no litigation
expenses but incurred costs related to two proxy contests.
The Trust recorded a provision for possible loss on real estate
related to its Patapsco property at December 31, 1995 of
$600,000. This provision follows a $650,000 provision made at
December 31, 1994. The Trust began marketing this property in
early 1995.
Analysis of Cash Flows
Cash flow used in operating activities in 1996 was $5,658,000.
This deficit reflects the results of property operations,
interest expense, administrative expenses and an increase in
restricted cash of $707,000 as a result of the Trust's property
financing in 1996. Interest expense reflects several items of
non-recurring nature, including a decrease in accrued interest of
$2,986,000 related to the settlement of the MLI litigation in
1996, the accrual of $369,000 of default rate interest which was
ultimately forgiven and approximately $535,000 related to
principal which was forgiven in November 1996 and February 1997.
In addition, administrative expenses includes $1,548,000 of
litigation, refinancing and proxy costs which relate to special
situations and should not be considered to be recurring expenses.
Management believes that, in the future, cash flow provided by
operations will increase due to the elimination of the non-
recurring items described above and the Trust's plans to attract
capital and pursue a growth strategy.
Cash flow provided by investing activities in 1996 was
$5,173,000, representing proceeds from the sale of two properties
and amounts expended on capitalized improvements and leasing
commissions. The sale of the two properties was necessary to
raise capital with which to make payments under the Trust's
option to retire certain indebtedness at a discount.
Cash flow used in financing activities in 1996 was $3,199,000.
This amount reflects proceeds from the mortgage financing on nine
properties, the payment of amounts on the option to retire
certain indebtedness at a discount, the sale of Common Shares to
USAA REALCO, and the first quarter distribution to shareholders.
Funds from Operations
In March 1995, NAREIT issued its White Paper on FFO which
clarified the treatment of certain items in determining FFO and
recommended additional supplemental disclosures. The Trust has
adopted the recommendations of NAREIT and restated its FFO
calculation for prior years. The changes promulgated by NAREIT
eliminate the add back of depreciation and amortization of non-
real estate items, including the amortization of deferred
financing costs, in determining FFO. The revised definition of
FFO 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. Accordingly, the Trust does not
include the default rate interest accrued on its $45.2 million in
unsecured notes payable in the determination of FFO. Funds
Available for Distribution ("FAD") is also presented as it more
accurately portrays the ability of the Trust to make
distributions because it reflects capital expenditures. The
Trust believes FFO and FAD are appropriate measures of
performance relative to other REITs. FFO provides investors with
an understanding of the ability of the Trust to incur and service
debt and make capital expenditures. There can be no assurance
that FFO and FAD presented by the Trust is comparable to
similarly titled measures of other REITs. While other REITs may
not always use a similar definition, this information does add
comparability to those which have adopted the NAREIT definitions.
FFO and FAD should not be considered as an alternative to net
income or other measurements under generally accepted accounting
principles as an indicator of the Trust's operating performance
or to cash flows from operating, investing or financing
activities as a measure of liquidity. FFO does not reflect
working capital changes, cash expenditures for capital
improvements or principal payments on indebtedness.
FFO and FAD are calculated as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1996 1995 1994
(in thousands)
Net income (loss) $1,255 $(4,584) $(4,655)
Exclude effects of:
Extraordinary (gain) loss on
extinguishment of debt (5,810) 55 -
(Gain) loss on sales of real estate (177) 191 -
Provision for possible losses on
real estate - 600 650
Real estate depreciation and
amortization 2,890 2,771 3,102
Default rate interest 369 724 -
Extraordinary loss on partial in-
substance defeasance of Zero Coupon
Notes - - 344
Funds from Operations $(1,473) $(243) $(559)
Funds from Operations $(1,473) $(243) $(559)
Capitalized improvements and leasing
commissions (a) (1,372) (1,023) (1,476)
Non-cash effect of straight-line
rents on FFO 193 161 156
Funds Available for Distribution $(2,652) $(1,105) $(1,879)
Weighted average Shares outstanding 9,108.2 9,075.4 9,075.4
</TABLE>
(a)The breakdown of capitalized improvements and leasing
commissions is as follows for each of the two years ending
December 31, 1996:
<TABLE>
FYE 12/31/96 FYE 12/31/95
<S> <C> <C> <C> <C>
Amount PSF Amount PSF
Tenant improvements - new tenants $287 $3.32 $343 $2.58
Tenant improvements - renewing
tenants 282 1.93 184 1.30
Leasing costs - new tenants 245 1.71 168 1.16
Leasing costs - renewing tenants 144 0.58 107 0.55
Expansions and major renovations 414 0.26 221 0.13
Total $1,372 $1,023
</TABLE>
Liquidity and Capital Resources
The principal sources of funds for the Trust's liquidity
requirements are funds generated from operations of the Trust's
real estate assets and unrestricted cash reserves. As of
December 31, 1996, the Trust had $4,010,000 in unrestricted cash
on hand. The Trust presently anticipates that these cash
reserves will provide sufficient funds for all currently known
liabilities and commitments relating to the Trust's operations
during 1997.
In May 1995, the Trust filed a lawsuit against The Manufacturers
Life Insurance Company, holder of the Trust's $45,239,000 8.8%
unsecured notes payable, alleging breach of the Note Purchase
Agreement between The Manufacturers Life Insurance Company and
the Trust and unlawful attempts to coerce the Trust into
relinquishing certain of its rights under that agreement. The
Trust settled its MLI litigation in May 1996 and paid $5,200,000
in settlement of all past due interest on the MLI Notes, thereby
allowing the Trust to record an extraordinary gain of $1,367,000.
The Trust was also granted an option to repay the approximate
$45,239,000 in principal amount outstanding on the MLI Notes for
$36,800,000 (the "Option Price"). In November 1996, the Trust
completed a mortgage financing on nine properties in the amount
of $26,453,000. Net proceeds of $24,805,000 were applied to the
Option Price. In addition, the Trust sold two properties during
the fourth quarter of 1996, generating net proceeds of $6,545,000
which were also applied to the Option Price. In accordance with
the MLI Agreement, $4,220,000 in debt was forgiven, allowing the
Trust to record an extraordinary gain of $4,443,000 (including
accrued interest forgiven). These notes were purchased by USAA
REALCO in February 1997. As discussed under "PROPOSAL FIVE --
CONVERSION OF USAA REALCO DEBT INTO COMMON SHARES," USAA REALCO
has the option to convert the principal amount of these notes
into Common Shares at the conversion rate of $2.00 per share (if
converted prior to December 31, 1997) or $2.25 per share (if
converted between December 31, 1997 and December 31, 2000),
assuming shareholder approval of this conversion right and
approval of an increase in the number of authorized Common Shares
of the Trust. If conversion of this debt were to occur in 1997,
USAA REALCO would own approximately 46.42% of the outstanding
Common Shares of the Trust (assuming no other issuances of Common
Shares).
The Trust declared a distribution of $0.04 per Common Share in
February 1996. The MLI Agreement related to the MLI litigation,
signed in May 1996, prohibited the payment of distributions while
the agreement is in effect. The Modified Notes owned by USAA
REALCO provide that the Trust may not pay distributions until the
debt is paid in full; however, this restriction terminates in the
event the shareholders approve USAA REALCO's conversion right and
approve an increase in the authorized Common Shares of the Trust
or if USAA REALCO, in its sole discretion, permits distributions
to be paid prior to the Modified Notes being fully paid. Should
the notes be converted into equity as described above, this
restriction will be removed. To the extent allowable, the Trust
intends to evaluate future distributions on a quarterly basis.
The Trust currently has borrowings secured by mortgages on the
Trust's properties totaling $43,797,000. Of this amount,
approximately $1,927,000 represents variable rate financing with
a weighted average interest rate of 10.25% and $41,870,000
represents fixed rate financing with a weighted average interest
rate of 8.61%. The overall weighted average interest rate on the
Trust's mortgage debt is 8.68%. Annual debt service on these
borrowings amounts to $4,452,000 and principal maturity during
1997 will approximate $675,000.
The nature of the Trust's operating properties, which generally
provide for leases with a term of between three and five years,
results in an approximate turnover rate of 20% to 25% of the
Trust's tenants and related revenue annually. Such turnover
requires capital outlays related to tenant improvements and
leasing commissions in order to maintain or improve the Trust's
occupancy levels. These costs amounted to $1,372,000 in the year
ended December 31, 1996 and $1,023,000 in the year ended December
31, 1995. These costs have historically been funded out of the
Trust's operating cash flow and cash reserves. The Trust has
made no commitments for additional capital expenditures beyond
those related to normal leasing and releasing activity and
related escrows. No capital improvements or renovations of
significance are anticipated in the near future for any of the
Trust's properties, with the possible exception of a large retail
lease at the Trust's retail property. Such a lease, if agreed
to, could result in expenditures for tenant improvements in
excess of $500,000.
Transactions with USAA REALCO
During 1996, there were a series of transactions involving USAA
REALCO. On November 25, 1996, USAA REALCO entered into
independently negotiated agreements to purchase an aggregate of
2,257,606 Common Shares from certain shareholders for $2.75 per
share, pending approval of the settlement of certain shareholder
litigation, which the Trust had initiated, alleging that certain
significant shareholders of the Trust had made material
misrepresentations in their filings with the SEC. The $2.75
price per share was negotiated between the selling shareholders
and USAA REALCO without any involvement by the Trust. The
majority of these Common Shares were purchased from two
shareholders, one of which was involved in the shareholder
litigation. The other selling shareholder was unwilling to wait
for the settlement of the litigation and USAA REALCO did not want
to purchase Common Shares until the settlement of the litigation.
In order to facilitate the settlement of the litigation, USAA
REALCO advanced approximately $2,770,000 to the Trust on November
25, 1996. The proceeds of this loan, which bore interest at 9%,
were used by a subsidiary of the Trust to acquire 998,100 Common
Shares from the selling shareholder not involved in the
shareholder litigation. On December 19, 1996, the Trust sold
924,600 Common Shares, representing the remainder of its
authorized Common Shares, to USAA REALCO for $2.75 per share, the
same price at which USAA REALCO had independently agreed to
purchase the Common Shares from the other shareholders. On
December 20, 1996, after approval of the settlement of the
shareholder litigation, USAA REALCO closed the purchase of the
2,257,606 Common Shares, including the acquisition of 998,100
Common Shares held by a subsidiary of the Trust in return for
cancellation of the related loan discussed above, resulting in
USAA REALCO's current ownership of 3,182,206 Common Shares, or
31.82% of the outstanding Common Shares of the Trust.
On December 18, 1996, the Trust entered into an agreement
granting USAA REALCO the right to commence negotiations to
purchase the MLI Notes and, if USAA REALCO was successful in
acquiring these notes, setting forth the terms of the
modifications to the MLI Notes, including the right to convert
the principal amount of these notes into Common Shares of the
Trust at $2.00 per share during 1997 and $2.25 per share
thereafter. On February 26, 1997, USAA REALCO acquired the MLI
Notes for $5,481,152. The MLI Notes were then modified to reduce
the outstanding principal balance from $9,419,213 to $7,040,721,
to release all security for the notes, to provide for monthly
payments of interest at 8.8% and to extend the maturity date from
March 31, 1997 to December 31, 2000. In addition, USAA REALCO
has the option to convert the principal amount of the notes into
Common Shares of the Trust at the conversion rate of $2.00 per
share (if converted prior to December 31, 1997) or $2.25 per
share (if converted between December 31, 1997 and December 31,
2000). In order for USAA REALCO to convert its debt into Common
Shares, the shareholders must approve an increase in the
authorized Common Shares of the Trust. An increase in the
authorized Common Shares of the Trust requires approval by
holders of two-thirds of the outstanding Common Shares. In
addition, the shareholders must approve the right of USAA REALCO
to convert its debt into Common Shares. The modified notes
provide that if shareholder approval of this conversion right is
not approved by June 30, 1997, interest on the debt will increase
to the lesser of 18% or the highest lawful rate effective July 1,
1997 and the full principal amount will become due and payable on
October 31, 1997. Management believes that the sale of one or
more properties would be required to satisfy this obligation in
the event the notes become due and payable. Subsequent to the
modification, the Trust made a principal payment of $1,591,103,
resulting in a current principal balance of $5,449,618. The
modification of this debt resulted in a reduction of
approximately $1,591,000 of the potential $3,969,000 discount
remaining under an option agreement on this debt. The Trust
Managers viewed this as a reasonable cost of this transaction as
it (i) removed the risk of losing the entire potential discount
if payment was not made by March 31, 1997, (ii) removed the
necessity to liquidate certain properties, (iii) allowed for
release of all collateral securing this obligation, (iv) allowed
the Trust to recognize an extraordinary gain of approximately
$2,643,000 or $0.26 per share in the first quarter of 1997, and
(v) allowed for the possibility of conversion of this obligation
into Common Shares, thereby improving the Trust's financial
position.
The Trust anticipates that shareholder approval for this
transaction will be received on or about June 30, 1997 and that
USAA REALCO will convert the principal amount of the debt into
Common Shares of the Trust soon thereafter. The Trust currently
anticipates it will reflect approximately $1,022,000,
representing the difference between the market trading price of
$2.38 per share on February 26, 1997 and the $2.00 conversion
price, as interest expense between February 26, 1997 and June 30,
1997. The date of February 26, 1997 is used to measure market
value as this is deemed to be the date of issuance of the
modified notes, which contain the convertibility option. This
will result in additional interest expense of approximately
$272,000 in the first quarter of 1997 and approximately $750,000
in the second quarter of 1997.
The closing sale price of the Trust's Common Shares on the NYSE
on the above dates was as follows: $2.13 per share on November
25, 1996, $2.00 per share on December 18 and December 19, 1996,
$1.88 per share on December 20, 1996, and $2.38 per share on
February 26, 1997.
Item 8. Financial Statements and Supplementary Data
The financial statement and supplementary data are listed in the
Index to Financial Statements and Financial Statement Schedule
appearing on page F-1 of this Form 10-K/A Amendment No. 1.
ITEM 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement
Schedule:
See Index to Consolidated Financial Statements and
Financial Statement Schedule appearing on page F-1 of this
Form 10-K
(3) Exhibits:
Exhibit No. Description
3.1 Second Amended and Restated Declaration of Trust
(incorporated herein by reference from Exhibit 4.1 to
the Trust's Form 10-Q for the quarter ended September
30, 1993; File No. 1-9016)
3.2 Fourth Amended and Restated Bylaws of the Trust
(incorporated herein by reference from Exhibit 3.1 to
Form 8-K of the Trust dated October 3, 1995; File No.
1-9016)
3.3 Amendment to Fourth Amended and Restated Bylaws of
the Trust (incorporated herein by reference from
Exhibit No. 99.1 to Form 8-K of the Trust dated
November 13, 1995; File No. 1-9016)
3.4 Amendment to the Bylaws of American Industrial
Properties REIT, dated September 20, 1996, adding
Article XIII to the Bylaws (incorporated herein by
reference from Exhibit No. 99.1 to Form 8-K of the
Trust dated September 20, 1996; File No. 1-9016)
3.5 Amendments to Fourth Amended and Restated Bylaws
(incorporated herein by reference from Exhibit No.
99.3 to Form 8-K of the Trust dated December 23,
1996; File No. 1-9016)
4.1 Indenture dated November 15, 1985 between the Trust
and IBJ Schroder Bank & Trust Company (incorporated
herein by reference from Exhibit 10.4 to Form S-4 of
American Industrial Properties REIT, Inc. dated March
16, 1994; File No. 33-74292)
10.1 401(k) Retirement and Profit Sharing Plan
(incorporated herein by reference from Exhibit 10.5
to Amendment No. 1 to Form S-4 of American Industrial
Properties REIT, Inc. dated March 4, 1994; File No.
33-74292)
10.2 Amendments to 401(k) Retirement and Profit Sharing
Plan (incorporated herein by reference from Exhibit
10.4 to Form 10-K of the Trust dated March 27, 1995)
10.3 Note Purchase Agreement dated February 27, 1992
between the Trust and Manufacturers Life Insurance
Company (incorporated herein by reference from
Exhibit 10.6 to Form S-4 of American Industrial
Properties REIT, Inc. dated January 31, 1994; File
No. 33-74292)
10.4 Addendum to $19,143,646.92 Unsecured Promissory Note
due November 27, 1997 (incorporated herein by
reference from Exhibit 10.6 to Form 10-K of the Trust
dated March 27, 1995)
10.5 Settlement Agreement by and between American
Industrial Properties REIT, Patapsco #1 Limited
Partnership, Patapsco #2 Limited Partnership, The
Manufacturers Life Insurance Company and The
Manufacturers Life Insurance Company (U.S.A.) dated
as of May 22, 1996 (incorporated herein by reference
from Exhibit 99.1 to Form 8-K of the Trust dated May
22, 1996; File No. 1-9016)
10.6 Agreement and Assignment of Partnership Interest,
Amended and Restated Agreement and Certificate of
Limited Partnership and Security Agreement for
Patapsco Center - Linthicum Heights, Maryland
(incorporated herein by reference from Exhibit 10.8
to Amendment No. 1 to Form S-4 of American Industrial
Properties REIT, Inc. dated March 4, 1994; File No.
33-74292)
10.7 Note dated November 15, 1994 in the original
principal amount of $12,250,000 with AIP Properties
#1 L.P. as Maker and AMRESCO Capital Corporation as
Payee (incorporated herein by reference from Exhibit
99.1 to Form 8-K of the Trust dated November 22,
1994; File No. 1-9016)
10.8 Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #1 L.P. and
AMRESCO Capital Corporation (incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.9 Loan Modification Agreement modifying the note dated
November 15, 1994 in the original principal amount of
$12,250,000 (incorporated herein by reference from
Exhibit 99.2 to Form 8-K of the Trust dated June 23,
1995; File No. 1-9016)
10.10 Note dated November 15, 1994 in the original
principal amount of $2,250,000 with AIP Properties #2
L.P. as Maker and AMRESCO Capital Corporation as
Payee (incorporated herein by reference from Exhibit
99.3 to Form 8-K of the Trust dated November 22,
1994; File No. 1-9016)
10.11 Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #2 L.P. and
AMRESCO Capital Corporation (incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.12 Loan Modification Agreement modifying the note dated
November 15, 1994 in the original principal amount of
$2,250,000 (incorporated herein by reference from
Exhibit 99.1 to Form 8-K of the Trust dated June 23,
1995; File No. 1-9016)
10.13 Share Purchase Agreement dated as of December 13,
1996, by and between American Industrial Properties
REIT and USAA Real Estate Company (incorporated
herein by reference from Exhibit No. 99.4 to Form 8-K
of the Trust dated December 23, 1996; File No. 1-
9016)
10.14 Promissory Note dated November 25, 1996, by and
between American Industrial Properties, Inc. and USAA
Real Estate Company (incorporated herein by reference
from Exhibit No. 99.5 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.15 Letter Agreement dated December 18, 1996, by and
between American Industrial Properties, Inc. and USAA
Real Estate Company (incorporated herein by reference
from Exhibit No. 99.6 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.16 Share Purchase Agreement dated as of December 20,
1996, by and between American Industrial Properties
REIT, American Industrial Properties REIT, Inc. and
USAA Real Estate Company (incorporated herein by
reference from Exhibit No. 99.7 to Form 8-K of the
Trust dated December 23, 1996; File No. 1-9016)
10.17 Registration Rights Agreement dated as of December
19, 1996, by and between American Industrial
Properties REIT and USAA Real Estate Company
(incorporated herein by reference from Exhibit No.
99.8 to Form 8-K of the Trust dated December 23,
1996; File No. 1-9016)
10.18 Registration Rights Agreement dated as of December
20, 1996, by and between American Industrial
Properties REIT and USAA Real Estate Company
(incorporated herein by reference from Exhibit No.
99.9 to Form 8-K of the Trust dated December 23,
1996; File No. 1-9016)
10.19 Deed of Trust and Security Agreement dated November
15, 1996 between AIP Properties #3, L.P. and Life
Investors Insurance Company of America (Huntington
Drive Center) (incorporated herein by reference from
Exhibit 99.1 to Form 8-K of the Trust dated November
20, 1996; File No. 1-9016)
10.20 Note dated November 15, 1996 in the original
principal amount of $4,575,000 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Huntington Drive Center)
(incorporated herein by reference from Exhibit 99.2
to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.21 Deed of Trust and Security Agreement dated November
15, 1996 between AIP Properties #3, L.P. and Life
Investors Insurance Company of America (Patapsco
Industrial Center) (incorporated herein by reference
from Exhibit 99.3 to Form 8-K of the Trust dated
November 20, 1996; File No. 1-9016)
10.22 Note dated November 15, 1996 in the original
principal amount of $3,112,500 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Patapsco Industrial Center)
(incorporated herein by reference from Exhibit 99.4
to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.23 Deed of Trust and Security Agreement dated November
15, 1996 between AIP Properties #3, L.P. and Life
Investors Insurance Company of America (Woodlake
Distribution Center) (incorporated herein by
reference from Exhibit 99.5 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.24 Note dated November 15, 1996 in the original
principal amount of $1,537,500 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Woodlake Distribution Center)
(incorporated herein by reference from Exhibit 99.6
to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.25 Deed of Trust and Security Agreement dated November
15, 1996 between AIP Properties #3, L.P. and Life
Investors Insurance Company of America (All Texas
properties except Woodlake) (incorporated herein by
reference from Exhibit 99.7 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.26 Note dated November 15, 1996 in the original
principal amount of $1,162,500 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Meridian Street Warehouse)
(incorporated herein by reference from Exhibit 99.8
to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.27 Note dated November 15, 1996 in the original
principal amount of $2,775,000 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Beltline Business Center)
(incorporated herein by reference from Exhibit 99.9
to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.28 Note dated November 15, 1996 in the original
principal amount $3,375,000 with AIP Properties #3,
L.P. as Maker and Life Investors Insurance Company as
Payee (Plaza Southwest) (incorporated herein by
reference from Exhibit 99.10 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.29 Note dated November 15, 1996 in the original
principal amount of $2,100,000 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Commerce Park North) (incorporated
herein by reference from Exhibit 99.11 to Form 8-K of
the Trust dated November 20, 1996; File No. 1-9016)
10.30 Note dated November 15, 1996 in the original
principal amount of $2,850,000 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Gateway 5 & 6) (incorporated herein
by reference from Exhibit 99.12 to Form 8-K of the
Trust dated November 20, 1996; File No. 1-9016)
10.31 Note dated November 15, 1996 in the original
principal amount of $5,175,000 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Northgate II) (incorporated herein
by reference from Exhibit 99.13 to Form 8-K of the
Trust dated November 20, 1996; File No. 1-9016)
10.32 Note dated November 15, 1996 in the original
principal amount of $1,327,500 with AIP Properties
#3, L.P. as Maker and Life Investors Insurance
Company as Payee (Westchase Park) (incorporated
herein by reference from Exhibit 99.14 to Form 8-K of
the Trust dated November 20, 1996; File No. 1-9016)
10.33 Bonus and Severance Agreement dated March 13, 1996,
between the Trust and Charles W. Wolcott
(incorporated herein by reference from Exhibit 10.12
to Form 10-K of the Trust dated March 29, 1996)
10.34 Bonus and Severance Agreement dated March 13, 1996,
between the Trust and Marc A. Simpson (incorporated
herein by reference from Exhibit 10.13 to Form 10-K
of the Trust dated March 29, 1996)
10.35 Bonus and Severance Agreement dated March 13, 1996,
between the Trust and David B. Warner (incorporated
herein by reference from Exhibit 10.14 to Form 10-K
of the Trust dated March 29, 1996)
10.36 Renewal, Extension, Modification and Amendment
Agreement dated as of February 26, 1997 between the
Trust and USAA Real Estate Company (incorporated
herein by reference from Exhibit 10.1 to Form 8-K of
the Trust dated March 4, 1997; File No. 1-9016)
10.37 Amendment No. 1 to Share Purchase Agreement dated as
of December 13, 1996 (incorporated herein by
reference from Exhibit 10.2 to Form 8-K of the Trust
dated March 4, 1997; File No. 1-9016)
21.1 * Listing of Subsidiaries
27.1 * Financial Data Schedule
__________
* Filed herewith
(b)Reports on Form 8-K:
The following information summarizes the events reported on
Form 8-K during the quarter ended December 31, 1996:
Date Filed Date of Earliest Event
with SEC Reported on Form 8-K Description
November 21, 1996 November 20, 1996 Item 5. Closing of
financing transaction
December 24, 1996 December 23, 1996 Item 5. Settlement of
litigation and
purchase of Shares by
USAA REALCO
American Industrial Properties REIT
Index to Consolidated Financial Statements and
Financial Statement Schedule
Page
Report of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995, and 1994 F-3
Consolidated Balance Sheets as of December 31, 1996
and 1995 F-4
Consolidated Statements of Changes in
Shareholders'Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
Schedule III - Consolidated Real Estate and Accumulated
Depreciation F-14
Notes to Schedule III F-15
All other financial statements and schedules not listed have
been omitted because the required information is either
included in the Financial Statements and the Notes thereto
as included herein or is not applicable or required.
REPORT OF INDEPENDENT AUDITORS
Trust Managers and Shareholders
American Industrial Properties REIT:
We have audited the accompanying consolidated balance sheets
of American Industrial Properties REIT (the "Trust") as of
December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended
December 31, 1996. Our audits also included the
consolidated financial statement schedule listed in the
Index at Item 14(a). These financial statements and
schedule are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of the Trust as of
December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects
the information set forth therein.
/s/Ernst & Young LLP
Dallas, Texas
February 13, 1997
except for Note 14, as to which
the date is February 26, 1997
American Industrial Properties REIT
Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
REVENUES
Rents $ 8,592 $ 8,676 $ 8,397
Tenant reimbursements 2,728 2,734 2,683
Interest income 158 369 146
11,478 11,779 11,226
EXPENSES
Property operating expenses:
Property taxes 1,421 1,397 1,421
Property management fees 430 428 442
Utilities 476 478 501
General operating 849 795 705
Repairs and maintenance 529 431 656
Other property operating
expenses 317 322 227
Depreciation and amortization 2,909 2,777 3,133
Interest on 8.8% notes payable 4,003 4,707 4,001
Interest on mortgages payable 1,898 1,778 850
Amortization of original issue
discount on Zero
Coupon Notes due 1997 - - 419
Administrative expenses:
Trust administration
and overhead 1,830 1,424 1,505
Litigation, refinancing
and proxy costs 1,548 980 1,027
Provision for possible losses
on real estate - 600 650
16,210 16,117 15,537
Loss from operations (4,732) (4,338) (4,311)
Gain (loss) on sales
of real estate 177 (191) -
Extraordinary gain (loss) on
extinguishment of debt 5,810 (55) -
Extraordinary loss on partial
in-substance defeasance of
Zero Coupon Notes due 1997 - - (344)
NET INCOME (LOSS) $ 1,255 $ (4,584) $ (4,655)
PER SHARE DATA
Loss from operations $ (0.52) $ (0.48) $ (0.47)
Gain (loss) on sales
of real estate 0.02 (0.02) -
Extraordinary gain (loss) on
extinguishment of debt 0.64 (0.01) -
Extraordinary loss on partial
in-substance defeasance of
Zero Coupon Notes due 1997 - - (0.04)
Net Income (Loss) $ 0.14 $ (0.51) $ (0.51)
Distributions Paid $ 0.04 $ 0.04 $ 0.00
Weighted average shares
outstanding 9,108,241 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>
December 31,December 31,
<S> <C> <C>
1996 1995
ASSETS
Real estate:
Held for investment $84,693 $97,091
Held for sale 9,779 4,806
Total real estate 94,472 101,897
Accumulated depreciation (23,973) (23,441)
Net real estate 70,499 78,456
Cash and cash equivalents:
Unrestricted 4,010 7,694
Restricted 1,366 659
Total cash and cash equivalents 5,376 8,353
Other assets, net 3,061 2,573
Total Assets $78,936 $89,382
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $43,797 $17,576
8.8% notes payable 9,419 45,239
Accrued interest 602 5,178
Accounts payable, accrued expenses
and other liabilities 1,964 1,620
Tenant security deposits 471 521
Total Liabilities 56,253 70,134
Shareholders' Equity:
Shares of beneficial interest,
$0.10 par value; authorized
10,000,000 Shares; issued and
outstanding 10,000,000 Shares at
1996 and 9,075,400 Shares at 1995 1,000 908
Additional paid-in capital 127,056 124,605
Accumulated distributions (58,456) (58,903)
Accumulated loss from operations
and extraordinary gains (losses) (48,065) (49,143)
Accumulated net realized gain
on sales of real estate 1,148 971
Total Shareholders' Equity 22,683 19,248
Total Liabilities
and Shareholders' Equity $78,936 $89,382
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except number of shares)
<TABLE>
Shares of Beneficial Addt'l Retained
Interest Paid-In Earnings
Number Amount Capital (Deficit) Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 9,075,400 $908 $124,605 ($96,662) $28,851
Net loss (4,655) (4,655)
Balance at December 31, 1994 9,075,400 908 124,605 (101,317) 24,196
Net loss (4,584) (4,584)
Distributions to shareholders (364) (364)
Balance at December 31, 1995 9,075,400 908 124,605 (106,265) 19,248
Issuance of additional shares 924,600 92 2,451 2,543
Net income 1,255 1,255
Distributions to shareholders (363) (363)
Balance at December 31, 1996 10,000,000 $1,000 $127,056 ($105,373) $22,683
</TABLE>
American Industrial Properties REIT
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,255 $(4,584) $(4,655)
Adjustments to reconcile net loss
to net cash (used in )
provided by operating activities:
Extraordinary (gains) losses (5,810) 55 344
(Gains) losses on real estate (177) 791 650
Depreciation 2,577 2,479 2,622
Amortization of deferred
financing costs 70 70 -
Other amortization 332 298 511
Amortization of original
issue discount - - 419
Changes in operating assets
and liabilities:
(Increase) decrease in other assets
and restricted cash (1,270) 126 (858)
Increase (decrease) in accounts
payable, other liabilities and
tenant security deposits 351 (61) 373
(Decrease)increase in
accrued interest (2,986) 4,674 -
Net Cash (Used In) Provided By
Operating Activities (5,658) 3,848 (594)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales
of real estate 6,545 2,476 -
Capitalized improvements
and leasing commissions (1,372) (1,023) (1,476)
Acquisition of real estate - (1,309) -
Net Cash Provided By (Used In)
Investing Activities 5,173 144 (1,476)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on
mortgage notes payable (31,832) (2,798) (1,283)
Proceeds from mortgage financing 26,453 - 14,500
Proceeds from sale of common shares 2,543 - -
Distributions to shareholders (363) (364) -
Prepayment penalty on
extinguishment of debt - (55) -
Partial in-substance defeasance
of Zero Coupon Notes - - (3,106)
Partial repurchase of
Zero Coupon Notes - - (2,241)
Net Cash (Used In) Provided By
Financing Activities (3,199) (3,217) 7,870
Net (Decrease) Increase in
Unrestricted Cash and
Cash Equivalents (3,684) 775 5,800
Unrestricted Cash and Cash
Equivalents at Beginning of Year 7,694 6,919 1,119
Unrestricted Cash and Cash
Equivalents at End of Year $ 4,010 $ 7,694 $ 6,919
Cash Paid for Interest $ 8,817 $ 1,741 $ 4,718
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Notes to Consolidated Financial Statements
December 31, 1996
Note 1 -- Significant Accounting Policies:
General.
American Industrial Properties REIT (the "Trust") is a
self-administered Texas real estate investment trust which,
as of December 31, 1996, owns and operates thirteen
commercial real estate properties consisting of twelve
industrial properties and one retail property. The Trust
was formed September 26, 1985 and commenced operations on
November 27, 1985. Pursuant to the Trust's 1993 Annual
Meeting of Shareholders, amendments to the Trust's
Declaration of Trust and Bylaws were approved which, among
other things, changed the name of the Trust to American
Industrial Properties REIT and converted the Trust from a
finite life entity to a perpetual life entity.
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 held for investment at
depreciated cost unless the asset is determined to be
impaired. Real estate classified as held for sale is
carried at the lower of depreciated cost or fair market
value less costs to sell. 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, issued in March 1995, 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 expected undiscounted cash flows
estimated to be generated by those assets are less than the
related carrying amounts. If an asset held for investment
is determined to be impaired, the impairment would be
measured based upon the excess of the asset's carrying value
over the fair value. In addition, the Trust records
impairment losses on assets held for sale when the estimated
sales proceeds, after estimated selling costs, are less than
the carrying value of the related asset (see Note 2).
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.
Cash and Cash Equivalents.
Cash equivalents include demand deposits and all highly
liquid instruments purchased with an original maturity of
three months or less. Restricted amounts reflect escrow
deposits held by third parties for the payment of taxes and
insurance and reserves held by third parties for property
repairs or tenant improvements.
Other Assets.
Other assets primarily consists of deferred rent
receivable, prepaid commissions and loan fees. 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.
Rents and Tenant Reimbursements.
Rental income, including contractual rent increases or
delayed rent starts, is recognized on a straight-line basis
over the lease term. The Trust has recorded deferred rent
receivable (representing the excess of rental revenue
recognized on a straight line basis over actual rents
received under the applicable lease provisions) of $599,000
and $810,000 at December 31, 1996 and 1995, respectively.
Several tenants in the Trust's retail property are also
required to pay as rent a percentage of their gross sales
volume, to the extent such percentage rent exceeds their
base rents. Such percentage rents amounted to $154,000,
$269,000 and $245,000 for the years ended December 31, 1996,
1995, and 1994, respectively. In addition to paying base
and percentage rents, most tenants are required to reimburse
the Trust for operating expenses in excess of a negotiated
base amount.
Tamarac Square, the Trust's only retail property, has
rental revenues in excess of 10% of the total revenues of
the Trust. Rental revenues and tenant reimbursements from
Tamarac totaled $3,308,000, $3,525,000, and $3,441,000 in
1996, 1995, and 1994, respectively.
Income Tax Matters.
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. The Trust had a taxable loss in each of
the years ending December 31, 1996, 1995, and 1994.
Accordingly, no provision for income taxes has been
reflected in the financial statements.
The Trust has a net operating loss carryforward from 1996
and prior years of approximately $34,800,000. Subject to
certain restrictions, the losses may be carried forward for
up to 15 years. The present losses will expire beginning
in the year 2004. Management intends to operate the Trust
in such a manner as to continue to qualify as a REIT and to
continue to distribute cash flow in excess of taxable
income.
Earnings and profits, which will determine the taxability
of distributions to shareholders, will differ from that
reported for financial reporting purposes due primarily to
differences in the basis of the assets and the estimated
useful lives used to compute depreciation.
Concentrations.
The Trust owns industrial properties in Baltimore, Dallas,
Houston, Los Angeles, Milwaukee, and Minneapolis, and one
retail property in Denver. The principal competitive factors
in these markets are price, location, quality of space, and
amenities. In each case, the Trust owns a small portion of
the total similar space in the market and competes with
owners of other space for tenants. Each of these markets is
highly competitive, and other owners of property may have
competitive advantages not available to the Trust. The
Trust's retail property, Tamarac Square, represents
approximately 29% of the rent and tenant reimbursement
revenues for the year ended December 31, 1996, and
approximately 41% of net real estate at December 31, 1996.
Reclassification.
Certain amounts in prior years financial statements have
been reclassified to conform with the current year
presentation.
Note 2 -- Real Estate and Provisions for Possible Losses
on Real Estate:
At December 31, 1996 and 1995, real estate was comprised
of the following:
<TABLE>
<S> <C> <C>
1996 1995
Held for investment:
Land $15,149,000 $17,526,000
Buildings and improvements 69,544,000 79,565,000
84,693,000 97,091,000
Held for sale:
Land 1,728,000 897,000
Buildings and improvements 8,051,000
3,909,000
9,779,000 4,806,000
Total $94,472,000 $101,897,000
</TABLE>
During 1996, the Trust reclassified four properties from
held for investment to held for sale in anticipation of the
need to raise capital to complete the discounted purchase of
certain indebtedness. Two of these properties were sold in
the fourth quarter of 1996 for net proceeds of $6,545,000,
resulting in a net gain of $177,000, and two remain
classified as held for sale at December 31, 1996. The net
operating income of the properties held for sale at December
31, 1996 was approximately $827,000 in 1996. During 1995,
the Trust sold one industrial property for net proceeds of
$2,476,000, resulting in a net loss of $191,000, and
acquired a 72,000 square foot industrial distribution
property in Arlington, Texas for total consideration of
approximately $1,309,000. One property was classified as
held for sale at December 31, 1995. This property, on which
provisions for possible losses on real estate were recorded
of $600,000 and $650,000 in 1995 and 1994, respectively, was
reclassified to held for investment in 1996.
If unforeseen factors should cause a reclassification of
the Trust's real estate from held for investment to held for
sale, significant adjustments to reduce the depreciated cost
of the real estate to net realizable value could be
required.
Note 3 -- Mortgages Payable:
At December 31, 1996, the Trust's properties were subject
to liens securing mortgage notes payable totaling
$43,797,000. Of this amount $1,927,000 represented a note
with a variable interest rate of prime plus 2% (at December
31, 1996, the prime rate was 8.25%) and $41,870,000
represented notes with fixed interest rates ranging from
8.40% to 11.0%.
Principal payments due during each of the next five years
are as follows: $675,000 in 1997, $2,632,000 in 1998,
$1,973,000 in 1999, $818,000 in 2000, $13,776,000 in 2001
and $23,923,000 thereafter.
The Bylaws of the Trust, the settlement agreement relating
to the 8.8% Notes Payable, and certain mortgages payable
contain various borrowing restrictions and operating
performance covenants. The Trust is in compliance with all
such restrictions and covenants as of December 31, 1996.
Note 4 -- 8.8% Notes Payable:
In February 1992, the Trust issued $53,234,000 of
unsecured notes payable due November 1997 (the "8.8% Notes
Payable"), proceeds of which were used to retire certain
other indebtedness. In May 1995, the Trust initiated
litigation against the holder of these notes and elected not
to make scheduled interest payments thereafter. In June
1995, the noteholder declared the entire principal amount
and all accrued interest on the notes due and payable and,
effective June 13, 1995, began accruing interest on the
principal amount at the 11.7% default rate provided for in
the Note Purchase Agreement.
In May 1996, the Trust settled this litigation and, as a
result, the notes became secured by first or second liens on
various properties and by pledges of ownership interests in
certain Trust entities owning properties. The Trust paid
$5,200,000 to satisfy all accrued interest payable through
April 12, 1996, allowing the Trust to recognize an
extraordinary gain of $1,367,000 in the second quarter of
1996.
As part of the settlement, the Trust obtained an option to
pay the remaining $45,239,000 in outstanding principal
indebtedness for $36,800,000 (the "Option Price"). As a
result of a mortgage financing on nine properties and the
sale of two other properties in the fourth quarter of 1996,
the Trust made payments of $31,350,000 during 1996 on the
Option Price, decreasing the remaining required payment
under the option to $5,450,000. The Trust paid $250,000 to
extend the date by which the Option Price must be paid to
March 31, 1997. This amount reduced the principal amount
outstanding on the 8.8% Notes Payable but did not reduce the
Option Price. The principal amount of indebtedness
outstanding on the 8.8% Notes Payable is $9,419,000. In
connection with the settlement of the litigation and the
terms of the option, the Trust recorded an extraordinary
gain on extinguishment of debt of $1,367,000 in the second
quarter of 1996 and $4,443,000 in the fourth quarter of
1996.
In February 1997, the notes were sold to a major
shareholder of the Trust (see Note 14).
Note 5 -- Zero Coupon Notes:
As part of its original capitalization in 1985, the Trust
issued $179,698,000 (face amount at maturity) of Zero Coupon
Notes due 1997 (the "Notes"). These Notes, which were
collateralized by first and second mortgage liens on each of
the Trust's real estate properties, accreted at 12%,
compounded semiannually. In 1991, the Trust began a program
to retire the outstanding Notes, resulting in a reduction of
the outstanding Notes to $19,491,000 (face amount at
maturity) at December 31, 1993. On December 31, 1993, the
Trust effected a partial in-substance defeasance on
$12,696,000 (face amount at maturity) of the Notes and
recorded an extraordinary loss of $2,530,000. In November
1994, the Trust completed a partial in-substance defeasance
on $3,669,000 (face amount at maturity) of Notes and
recorded an extraordinary loss of $344,000. In December
1994, the Trust purchased the remaining non-defeased Notes
outstanding in the open market and submitted the Notes to
the Trustee for cancellation. The legal defeasance of the
Notes resulted in the release of the Zero Coupon Note
mortgage liens which encumbered each of the Trust's
properties.
The accreted value of the Notes defeased at December 31,
1996 and 1995 was $14,725,000 and $13,104,000, respectively.
Note 6 -- Environmental Matters:
The Trust has been notified of the existence of limited
underground petroleum based contamination at a portion of
Tamarac Square, the Trust's Denver retail property. The
source of the contamination is apparently related to
underground storage tanks ("USTs") located on adjacent
property. The owner of the adjacent property has agreed to
remediate the property to comply with state standards and
has indemnified the Trust against costs related to its
sampling activity. The responsible party for the adjacent
USTs has submitted a corrective Action Plan to the Colorado
Department of Public Health and Environment. Implementation
of the plan is ongoing. The responsible party is
negotiating to obtain access agreements from impacted
landowners, including the Trust.
With the exception of Tamarac Square, the Trust has not
been notified, and is not otherwise aware, of any material
non-compliance, liability or claim relating to hazardous or
toxic substances in connection with any of its properties.
Note 7 -- Shareholder Transactions:
In January 1996, the Trust filed a lawsuit in federal
court in Dallas, Texas against a major shareholder of the
Trust, alleging violations of federal and state securities
laws. The defendants filed a counterclaim against the Trust
and its Trust Managers and, in February 1996, another
shareholder filed a claim against the Trust and its Trust
Managers. The litigation related to these claims was
consolidated in April 1996. In December 1996, a settlement
of this litigation was approved by the Court. This
settlement provided, among other things, that certain
amendments to the Trust's Bylaws be made and that the Trust
pay the shareholders a total of $955,000. Of this amount,
$625,000 was paid by the Trust's directors and officers
liability insurance.
On November 25, 1996, USAA Real Estate Company ("USAA
REALCO") entered into independently negotiated agreements to
purchase an aggregate of 2,257,606 shares from certain
shareholders for $2.75 per share, pending approval of the
settlement of the shareholder litigation discussed above. On
December 19, 1996, the Trust sold 924,600 shares,
representing the remainder of its authorized shares, to USAA
REALCO for $2.75 per share, the same price at which USAA
REALCO had independently agreed to purchase the shares from
other shareholders. On December 20, 1996, after approval of
the settlement of the shareholder litigation, USAA REALCO
closed the purchase of the 2,257,606 shares, resulting in
USAA REALCO's current ownership of 3,182,206 shares, or
31.82% of the outstanding shares of the Trust.
On December 18, 1996, the Trust entered into an agreement
with USAA REALCO contemplating the purchase by USAA REALCO
of certain outstanding indebtedness of the Trust. This
agreement set forth the modifications which would occur if
USAA REALCO acquired the indebtedness, including the right
to convert the principal amount of this indebtedness into
shares of the Trust at either $2.00 or $2.25 per share,
depending upon the date of conversion. On February 26,
1997, USAA REALCO acquired this debt (see Note 14).
The closing sale price of the Trust's shares on the New
York Stock Exchange on the above dates was as follows:
$2.13 per share on November 25, 1996, $2.00 per share on
December 18 and December 19, 1996, $1.88 per share on
December 20, 1996, and $2.38 per share on February 26, 1997.
Note 8 -- Litigation:
During 1996, the Trust concluded two significant
litigation matters (see Notes 4 and 7). Although the Trust
is not currently involved in any significant litigation, the
Trust may, on occasion and in the normal course of business,
be involved in legal actions relating to the ownership and
operations of its properties. In management's opinion, the
liabilities, if any, that may ultimately result from such
legal actions are not expected to have a materially adverse
effect on the consolidated financial position of the Trust.
Note 9 -- Retirement and Profit Sharing Plan:
During 1993, the Trust adopted a retirement and profit
sharing plan which qualifies under section 401(k) of the
Internal Revenue Code. All existing Trust employees at
adoption and subsequent employees who have completed six
months of service are eligible to participate in the plan.
Subject to certain limitations, employees may contribute up
to 15% of their salary. The Trust may make annual
discretionary contributions to the plan. Contributions by
the Trust related to the years ended December 31, 1996, 1995
and 1994 were $30,000, $25,000 and $20,000, respectively.
Note 10 -- Operating Leases:
The Trust's properties are leased to others under
operating leases with expiration dates ranging from 1997 to
2011. Future minimum rentals on noncancellable tenant
leases at December 31, 1996 are as follows:
<TABLE>
<C> <C>
Year Amount
1997 $ 7,592,000
1998 6,179,000
1999 4,328,000
2000 2,844,000
2001 2,091,000
Thereafter 2,217,000
$25,251,000
</TABLE>
Note 11 -- Distributions:
The Trust's distributions of $363,000 ($0.04 per share) in
1996 and $364,000 ($0.04 per share) in 1995 represent a
return of capital to shareholders (to the extent of the
shareholder's basis in the Shares.) The Trust did not pay
any distributions in 1994.
Note 12 -- Per Share Data:
Per share data is based on a weighted average number of
Shares outstanding of 9,108,241 for the year ending December
31, 1996 and 9,075,400 or the years ended December 31, 1995
and 1994.
Note 13 -- Fair Value of Financial Instruments:
Accounts receivable, accounts payable and accrued expenses
and other liabilities are carried at amounts that reasonably
approximate their fair values. The fair values of the
Trust's mortgage notes payable are estimated using
discounted cash flow analyses, based on the Trust's
incremental borrowing rates for similar types of borrowing
arrangements. The carrying values of such mortgage notes
payable reasonably approximate their fair values.
Note 14 -- Subsequent Event:
On February 26, 1997, USAA REALCO, a shareholder owning
31.8% of the outstanding Shares in the Trust, purchased
outstanding indebtedness of the Trust totaling $9,419,213
pursuant to an earlier agreement with the Trust (see Note
7). USAA REALCO and the Trust then entered into an
agreement modifying the terms of the indebtedness. The
amount of the outstanding debt was reduced from $9,419,213
to $7,040,721, allowing the Trust to recognize an
extraordinary gain on extinguishment of debt (including
accrued interest) of $2,643,000 in the first quarter of
1997. The Trust made an immediate principal reduction on
the modified notes of $1,591,103, leaving an outstanding
principal balance of $5,449,618.
The terms of the modified notes provide for monthly
payments of interest at 8.8% and an extension in the
maturity date from March 31, 1997 to December 31, 2000. In
addition, USAA REALCO has the option to convert the
principal amount of the notes into Shares of the Trust at
the conversion rate of $2.00 per share (if converted prior
to December 31, 1997) or $2.25 per share (if converted
between December 31, 1997 and December 31, 2000). In order
for USAA REALCO to convert its debt into Shares, the
shareholders must approve an increase in the authorized
Shares of the Trust. An increase in the authorized Shares
of the Trust requires approval by holders of two-thirds of
the outstanding Shares. In addition, the shareholders must
approve the right of USAA REALCO to convert its debt into
Shares. The notes provide that if shareholder approval of
this conversion right is not approved by June 30, 1997,
interest on the debt will increase to the lesser of 18% or
the highest lawful rate effective July 1, 1997 and the full
principal amount will become due and payable on October 31,
1997. Management believes that the sale of one or more
properties would be required to satisfy this obligation in
the event the notes become due and payable.
The Trust anticipates shareholder approval for this
transaction will be received on or about June 30, 1997 and
that USAA REALCO will convert the principal amount of the
debt into shares of the Trust soon thereafter. Therefore,
the Trust currently anticipates it will reflect
approximately $1,022,000, representing the difference
between the market trading price of $2.38 per share on
February 26, 1997 and the $2.00 conversion price, as
interest expense between February 26, 1997 and June 30,
1997. The date of February 26, 1997 is used to measure
market value as this is deemed to be the date of issuance of
the modified note, which contains the convertibility option.
This will result in additional interest expense of
approximately $272,000 in the first quarter of 1997 and
approximately $750,000 in the second quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on May 16, 1997.
AMERICAN INDUSTRIAL PROPERTIES REIT
/s/ Charles W. Wolcott
Charles W. Wolcott,
Trust Manager, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
and on the dates indicated:
Signatures Title Date
/s/ WILLIAM H. BRICKER Trust Manager May 16, 1997
William H. Bricker
/s/ T. PATRICK DUNCAN Trust Manager May 16, 1997
T. Patrick Duncan
/s/ CHARLES W. WOLCOTT Trust Manager, May 16, 1997
Charles W. Wolcott President and
Chief Executive
Officer (Principal
Executive Officer)
/s/ MARC A. SIMPSON Vice President May 16, 1997
Marc A. Simpson Chief Financial
Officer, Secretary
and Treasurer
(Principal Accounting
and Financial Officer)
