<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
AMERICAN INDUSTRIAL PROPERTIES REIT
(Name of Registrant as Specified in its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
---------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 15, 1997
---------------
TO THE SHAREHOLDERS OF AMERICAN INDUSTRIAL PROPERTIES REIT:
You are cordially invited to attend the Annual Meeting of Shareholders
of American Industrial Properties REIT to be held at 2200 Ross Avenue, 39th
Floor, Dallas, Texas 75201, on October 15, 1997 at 9:00 a.m. (Dallas time), for
the following purposes:
1. To elect eight Trust Managers.
2. To approve a one for five reverse share split.
3. To approve an amendment of the Employee and Trust Manager
Incentive Share Plan to increase the number of Common Shares
authorized for issuance under the Plan to an amount equal to
10% of the Trust's outstanding Common Shares on a
fully-diluted basis.
4. To ratify the selection of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1997.
5. To approve the postponement or adjournment of the Annual
Meeting for the solicitation of additional votes, if
necessary.
6. To transact such other business as may properly come before
the Annual Meeting or any postponements or adjournments
thereof.
Only holders of record of Common Shares of the Trust on September 12,
1997 will be entitled to notice of, and to vote at, the Annual Meeting or any
postponements or adjournments thereof.
A copy of the Proxy Statement relating to the Annual Meeting
accompanies this Notice of Annual Meeting of Shareholders. Each shareholder is
urged to read the Proxy Statement in its entirety.
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING
REGARDLESS OF THE NUMBER OF COMMON SHARES YOU HOLD. YOU ARE INVITED TO ATTEND
THE ANNUAL MEETING IN PERSON, BUT WHETHER OR NOT YOU PLAN TO ATTEND, YOU MAY
ENSURE YOUR REPRESENTATION BY COMPLETING, SIGNING, DATING AND PROMPTLY
RETURNING THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE. IF YOU ATTEND
THE ANNUAL MEETING, YOU MAY, IF YOU PREFER, REVOKE YOUR PROXY AND VOTE YOUR
SHARES IN PERSON.
By Order of the Trust Managers,
Marc A. Simpson
Secretary and Chief Financial Officer
6210 N. Beltline Road
Suite 170
Irving, Texas 75063
(972) 756-6000
September 12, 1997
<PAGE> 3
AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. BELTLINE ROAD
SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
------------------
PROXY STATEMENT
------------------
ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 15, 1997
This Proxy Statement is furnished in connection with the solicitation
of Proxies by the Trust Managers of American Industrial Properties REIT, a
Texas real estate investment trust (the "Trust"), for use at the Annual Meeting
of Shareholders to be held at 2200 Ross Avenue, 39th Floor, Dallas, Texas 75201
at 9:00 a.m. Dallas time on October 15, 1997. Accompanying this Proxy Statement
is the Proxy for the Annual Meeting, which you may use to indicate your vote as
to each of the proposals described in this Proxy Statement. This Proxy
Statement and the accompanying Proxy are first being mailed to shareholders on
or about September 15, 1997. The Annual Report outlining the Trust's operations
for the fiscal year ended December 31, 1996 (the "1996 Fiscal Year") was mailed
to shareholders on or about March 13, 1997 (the "1996 Annual Report").
The close of business on September 12, 1997 has been fixed as the
record date for the determination of shareholders entitled to notice of and to
vote at the Annual Meeting. As of the record date, the Trust had outstanding
23,289,867 common shares of beneficial interest, $0.10 par value, the only
outstanding security of the Trust (the "Common Shares").
At the Annual Meeting, action will be taken to: (i) elect eight Trust
Managers to hold office until their successors, if any, are duly elected and
qualified at the next annual meeting of shareholders; (ii) approve a one for
five reverse share split (the "Reverse Share Split"); (iii) adopt an amendment
to the Employee and Trust Manager Incentive Share Plan (the "Plan") to increase
the number of Common Shares authorized for issuance under the Plan to an amount
equal to 10% of the Trust's outstanding Common Shares on a fully-diluted basis;
(iv) ratify the selection of Ernst & Young LLP as independent auditors for the
Trust for the fiscal year ending December 31, 1997 (the "1997 Fiscal Year");
(v) approve the postponement or adjournment of the Annual Meeting for the
solicitation of additional votes, if necessary; and (vi) transact such other
business as may properly come before the Annual Meeting or any postponements or
adjournments thereof.
Management of the Trust believes the approval of proposal two will
enhance the marketability and liquidity of the Common Shares by potentially
obtaining a higher price for the Common Shares that is more acceptable to the
investment community. If the shareholders authorize the Reverse Share Split,
the principal effect will be that the total number of Common Shares held by
each shareholder will be automatically converted into that number of whole
Common Shares equal to the number of Common Shares owned at the close of
business on October 15, 1997, the date of the Annual Meeting, divided by five.
Shareholders entitled to receive a fractional share will instead receive a cash
payment based upon the closing price of the Common Shares on the New York Stock
Exchange (the "NYSE") on the effective date of the Reverse Share Split. As a
result of the Reverse Share Split, any shareholder who owns less than five
Common Shares at the close of business on October 15, 1997 will cease to be a
shareholder of the Trust. There can be no assurance, however, that any of the
desired effects of the Reverse Share Split, including an increase in the market
price of Common Shares, will occur. The Reverse Share Split should not change
any shareholder's proportionate equity interest in the Trust, except for minor
differences due to the elimination of fractional shares and the redemption of
Common Shares held by shareholders who own less than 50 Common Shares after the
Reverse Share Split (as described below). See "Proposal Two -- Approval of
Reverse Share Split."
If the Reverse Share Split is approved by shareholders, the Board of
Trust Managers has authorized the redemption of all the Common Shares owned by
shareholders who own less than 50 Common Shares after the Reverse Share Split
(the "Odd Lot Redemption"). Consequently, shareholders who own less than 250
Common Shares at the close of business on October 15, 1997 will cease to be
shareholders of the Trust as of the effective date of the Odd Lot Redemption.
HOWEVER, SHAREHOLDERS WHO CURRENTLY OWN LESS THAN 250 COMMON SHARES
<PAGE> 4
MAY PURCHASE ADDITIONAL COMMON SHARES IN THE OPEN MARKET BEFORE THE CLOSE OF
BUSINESS ON OCTOBER 15, 1997 TO REACH THE THRESHOLD OF 250 COMMON SHARES AND
THEREBY NOT BE SUBJECT TO THE ODD LOT REDEMPTION. The Board of Trust Managers
believes that the Odd Lot Redemption will reduce the Trust's administrative
expenses and improve the Trust's administrative efficiency. The Odd Lot
Redemption will have the effect of increasing the proportionate equity interests
of the Trust's shareholders whose Common Shares are not redeemed; however, any
such increase in percentage ownership should be minimal. See "Proposal Two --
Approval of Reverse Share Split -- Odd Lot Redemption."
At the Trust's annual meeting held on June 30, 1997, the shareholders
approved the Plan which reserved 800,000 Common Shares for issuance under the
Plan. If shareholders approve the Reverse Share Split, the number of Common
Shares reserved for issuance under the Plan will be decreased to 160,000, only
21,000 of which will be available for future issuance under the Plan.
Management of the Trust believes the approval of proposal three will allow the
Trust to be more competitive in offering long-term incentives to key employees,
officers and Trust Managers. Increased availability of Common Shares for
issuance under the Plan will give the Trust greater flexibility in attracting
and retaining high-quality employees, officers and Trust Managers. The Board of
Trust Managers voted unanimously to amend the Plan, subject to shareholder
approval, to increase the number of Common Shares available for issuance under
the Plan to a maximum of 10% of the total number of Common Shares outstanding
at any time on a fully-diluted basis. The Board of Trust Managers believes this
additional flexibility is necessary in order to retain qualified employees,
officers and Trust Managers. See "Proposal Three -- Approval of Amendment to
the Employee and Trust Manager Incentive Share Plan."
A shareholder is entitled to cast one vote for each Common Share held
on the record date on all matters to be considered at the Annual Meeting.
Cumulative voting for the election of Trust Managers is not authorized by the
Trust's Third Amended and Restated Declaration of Trust (the "Declaration of
Trust").
Shareholders are urged to sign the accompanying Proxy, and after
reviewing the information contained in this Proxy Statement, to return the
Proxy in the envelope enclosed for that purpose. Valid Proxies will be voted at
the Annual Meeting and at any postponements or adjournments thereof in the
manner specified therein. If no direction is given, but the Proxy is validly
executed, such Proxy will be voted FOR proposals one through five. IN THEIR
DISCRETION, THE PERSONS AUTHORIZED UNDER THE PROXIES WILL VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
A shareholder may revoke his, her or its Proxy at any time before it
is voted either by filing with the Secretary of the Trust at its principal
executive office a written notice of revocation, by submitting a duly executed
Proxy bearing a later date, or by attending the Annual Meeting and expressing a
desire to vote his, her or its Common Shares in person.
The holders of a majority of the Common Shares issued and outstanding
and entitled to vote, present in person or represented by proxy (11,644,934
Common Shares), shall constitute a quorum for the transaction of business at
the Annual Meeting. If such quorum should not be present at the Annual Meeting,
the Annual Meeting may be adjourned from time to time without notice, other
than announcement at the Annual Meeting, until a quorum shall be present.
If necessary, and if proposal five is approved, the Annual Meeting may
be postponed or adjourned for the solicitation of additional votes. Adoption of
the proposal to adjourn or postpone the Annual Meeting for the solicitation of
additional votes requires approval by the holders of a majority of the Common
Shares present in person or represented by proxy, and entitled to vote at the
Annual Meeting.
Abstentions and broker non-votes (where a nominee holding Common
Shares for a beneficial owner has not received voting instructions from the
beneficial owner with respect to a particular matter and such nominee does not
possess or choose to exercise discretionary authority with respect thereto)
will be included in the determination of the number of Common Shares present at
the Annual Meeting for quorum purposes. Abstentions and broker non-votes will
have the same effect as a vote against the proposals. Failure to return the
Proxy or failure to vote at the Annual Meeting will have the same effect as a
vote against the proposals.
The Trust's principal executive offices are located at 6210 N.
Beltline Road, Suite 170, Irving, Texas 75063.
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<PAGE> 5
PROPOSAL ONE
ELECTION OF TRUST MANAGERS
The number of Trust Managers to be elected at the Annual Meeting is
eight. The election of Trust Managers requires the affirmative vote of a
majority of the outstanding Common Shares represented in person or by proxy at
the Annual Meeting. The term of each person elected as a Trust Manager will
continue until his successor is duly elected and qualified. Unless such
authority is withheld, it is the intention of the persons named in the enclosed
Proxy to vote such Proxy FOR the election of such eight nominees. All nominees
currently serve as Trust Managers of the Trust. Any current Trust Manager not
receiving the affirmative vote of a majority of the outstanding Common Shares
shall nevertheless remain a Trust Manager unless another proper nominee
receives the requisite vote. The following table sets forth the name, age and
year of election or appointment to the Board of Trust Managers of each person
who is a nominee for Trust Manager of the Trust.
<TABLE>
<CAPTION>
Name Age Trust Manager Since
---- --- -------------------
<S> <C> <C>
Theodore R. Bigman 34 July 1997
William H. Bricker 65 September 1985
T. Patrick Duncan 48 December 1996
Robert E. Giles 49 March 1996
Edward B. Kelley 56 December 1996
Stanley J. Kraska, Jr. 37 July 1997
Russell C. Platt 37 July 1997
Charles W. Wolcott 44 August 1993
</TABLE>
The following information with respect to the principal occupation or
employment, other affiliations and business experience of each nominee during
the last five years has been furnished to the Trust by each such nominee:
Theodore R. Bigman has served as a Trust Manager since July 8, 1997,
when he was appointed as an independent Trust Manager at the request of Morgan
Stanley Asset Management Inc. ("MSAM") pursuant to the terms of the Common
Share Purchase Agreement dated as of June 20, 1997 among the Trust, MS Real
Estate Special Situations Inc. and MSAM (as agent and attorney-in-fact on
behalf of certain clients listed on Exhibit A thereto) (the "MSAM Agreement").
Mr. Bigman is a Principal at MSAM. Having joined the company in 1995, Mr.
Bigman is the senior portfolio manager of the U.S. Real Estate Portfolio. Prior
to joining MSAM, he was a Director at CS First Boston, where he worked for
eight years in the real estate group. He is a member of the National
Association of Real Estate Investment Trusts ("NAREIT") and is a Trustee of
Grove Property Trust. He graduated from Brandeis University in 1983 and
received a Master of Business Administration from Harvard University in 1987.
William H. Bricker has served as a Trust Manager of the Trust since
September 1985. Mr. Bricker has served as President of DS Energy Services
Incorporated and has consulted in the energy field and on international trade
since 1987. In May 1987, Mr. Bricker retired as the Chairman and Chief
Executive Officer of Diamond Shamrock Corporation where he held various
management positions from 1969 through May 1987. Mr. Bricker is a director of
the LTV Corporation, the Eltech Systems Corporation and the National Paralysis
Foundation. He received his Bachelor of Science and Master of Science degrees
from Michigan State University.
T. Patrick Duncan has served as a Trust Manager since December 1996,
when he was appointed as an independent Trust Manager at the request of USAA
Real Estate Company ("Realco") pursuant to the terms of the Share Purchase
Agreement between the Trust and Realco dated as of December 13, 1996 (the
"Realco Share Purchase Agreement"). Mr. Duncan joined Realco in November 1986
as Chief Financial Officer. With over 24 years of experience, Mr. Duncan serves
as Senior Vice President of Real Estate Operations with responsibilities which
include the direction of all acquisitions, sales, management and leasing of
real estate for USAA-affiliated companies. Mr. Duncan received degrees from the
University of Arizona in Accounting and Finance. He is a Certified Public
Accountant, Certified Commercial Investment Manager, and holds a Texas Real
Estate Broker's License. Mr. Duncan is also a member of the Board of Directors
of Meridian Industrial Trust, and a member of the Board of Directors of the
general partner of USAA Real Estate Income Investments I, A California Limited
Partnership, USAA Real Estate
3
<PAGE> 6
Income Investments II Limited Partnership, USAA Income Properties III Limited
Partnership and USAA Income Properties IV Limited Partnership (collectively,
the "RELPs"), and a member of the Board of Directors of USAA Equity Advisors,
Inc.
Robert E. Giles has served as a Trust Manager since March 1996. Mr.
Giles is currently the owner and President of Robert E. Giles Interests, Inc.,
a real estate consulting and development firm based in Houston, Texas. Mr.
Giles also serves as President of Title Network, Ltd., a national title
insurance agency. Mr. Giles was a Vice President with the J.E. Roberts
Companies, Inc. from 1994 to 1995. From 1990 to 1994, Mr. Giles was President
and a Director of National Loan Bank, a publicly-held company created through
the merger of Chemical Bank and Texas Commerce Bank. Mr. Giles received his
Bachelor of Arts degree from University of Texas - Austin in 1970 and received
a Master of Arts degree from University of Texas - Arlington in 1973.
Edward B. Kelley has served as a Trust Manager since December 1996,
when he was appointed as an independent Trust Manager at the request of Realco
pursuant to the terms of the Realco Share Purchase Agreement. Mr. Kelley is
President of Realco. He joined Realco in April 1989 as Executive Vice President
and Chief Operating Officer before assuming his new title in August 1989. Mr.
Kelley received his Bachelor of Business Administration degree from St. Mary's
University in 1964 and a Masters in Business Administration from Southern
Methodist University in 1967, and is a Member of the Appraisal Institute (MAI).
Mr. Kelley is Chairman of the Board of Directors of the general partner of each
of the RELPs, and a member of the Board of Directors of USAA Equity Advisors,
Inc.
Stanley J. Kraska, Jr. has served as a Trust Manager since July 10,
1997, when he was appointed as an independent Trust Manager at the request of
ABKB/LaSalle Securities Limited Partnership ("ABKB") and LaSalle Advisors
Limited Partnership ("LaSalle Advisors") pursuant to the terms of the Common
Share Purchase Agreements between the Trust and ABKB (as agent for and for the
benefit of particular clients) dated as of July 3, 1997 and the Common Share
Purchase Agreement between the Trust and LaSalle Advisors (as agent for and for
the benefit of a particular client) dated as of July 3, 1997 (collectively, the
"ABKB Agreements"). Mr. Kraska has been employed by ABKB or its affiliates
since February 1988. He currently serves as Managing Director, with
responsibility for private placement investment. Mr. Kraska graduated from
Dartmouth College in 1982 with a Bachelor of Arts degree and received a Master
of Business Administration degree from Harvard University in 1986.
Russell C. Platt has served as a Trust Manager since July 8, 1997,
when he was appointed as an independent Trust Manager at the request of MSAM
pursuant to the terms of the MSAM Agreement. Mr. Platt joined Morgan Stanley in
1982. He is a Managing Director of the Firm and has primary responsibility for
managing the real estate securities investment business for MSAM. MSAM manages
approximately $1.3 billion in real estate securities worldwide for
institutional and individual investors. He also serves as a member of the
Investment Committee of The Morgan Stanley Real Estate Fund, a privately held
limited partnership engaged in the acquisition of real estate assets,
portfolios and real estate operating companies with gross assets of
approximately $4 billion. He graduated from Williams College in 1982 with a
Bachelor of Arts in Economics and received a Master of Business Administration
from Harvard University in 1986. He is a member of the advisory boards of the
National Multi-Housing Council, The Wharton Real Estate Center and the MIT
Center for Real Estate. He is also a member of The Urban Land Institute, NAREIT
and the Pension Real Estate Association.
Charles W. Wolcott currently serves as Trust Manager, President and
Chief Executive Officer. Mr. Wolcott was hired as the President and Chief
Executive Officer of the Trust in May 1993 and has served as a Trust Manager
since August 1993. Mr. Wolcott was President and Chief Executive Officer for
Trammell Crow Asset Services, a real estate asset and portfolio management
affiliate of Trammell Crow Company, from 1990 to 1992. He served as Vice
President and Chief Financial and Operating Officer of the Trust from 1988 to
1991. From 1988 to 1990, Mr. Wolcott was a partner in Trammell Crow Ventures
Operating Partnership. Prior to joining the Trammell Crow Company in 1984, Mr.
Wolcott was President of Wolcott Corporation, a firm engaged in the development
and management of commercial real estate properties. Mr. Wolcott graduated from
the University of Texas at Austin in 1975 with a Bachelor of Science degree and
received a Master of Business Administration degree from Harvard University in
1977.
The Trust Managers have no reason to believe that any of the nominees
will not serve if elected, but if any of them should become unavailable to
serve as a Trust Manager, and if the Trust Managers designate a substitute
nominee, the persons named in the accompanying Proxy will vote for the
substitute nominee designated by the Trust Managers, unless a contrary
instruction is given in the Proxy. The Trust Managers did not appoint a
nominating committee to nominate Trust Managers for election.
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<PAGE> 7
No family relationship exists among any of the Trust Managers or
executive officers of the Trust. The agreements between the Trust and each of
Realco, MSAM, LaSalle Advisors and ABKB are the only arrangements or
understandings that exist between any Trust Manager or executive officer or any
other person pursuant to which any Trust Manager or executive officer was
selected as a Trust Manager or executive officer of the Trust. Pursuant to the
terms of the Realco Share Purchase Agreement, Realco retains the right to
nominate an additional two Trust Managers to the Board of Trust Managers. See
"Management -- Election of Trust Managers and Executive Officers."
Twelve regularly scheduled or special Trust Manager meetings were held
during the 1996 Fiscal Year. Each Trust Manager attended 100% of all 1996
Fiscal Year Trust Manager and Trust Manager committee meetings held during his
1996 term as a Trust Manager.
PROPOSAL TWO
APPROVAL OF REVERSE SHARE SPLIT
GENERAL
The Board of Trust Managers has approved, subject to shareholder
approval, the Reverse Share Split of the presently issued and outstanding
Common Shares of the Trust. If this proposal is approved, the principal effect
of the Reverse Share Split on holders of Common Shares will be that the total
number of Common Shares held by each shareholder will be automatically
converted into that number of whole Common Shares equal to the number of Common
Shares owned immediately prior to the Reverse Share Split divided by five.
Shareholders entitled to receive a fractional share will instead receive a cash
payment as described below under "-- Exchange of Certificates and Settlement of
Fractional Shares." Consequently, as a result of the Reverse Share Split,
shareholders who own less than five Common Shares will cease to be shareholders
of the Trust. Additionally, as a result of the Reverse Share Split, some
shareholders will own less than 50 Common Shares (an "Odd Lot"). The Board of
Trust Managers, acting pursuant to the provisions of the Declaration of Trust,
has approved the Odd Lot Redemption, pursuant to which the Trust shall redeem
all the Common Shares owned by shareholders who own less than 50 Common Shares
after the Reverse Share Split ("Odd Lot Holders"). Odd Lot Holders will cease
to be shareholders of the Trust as of the effective date of the Odd Lot
Redemption. Shareholders who currently own less than 250 Common Shares may
purchase additional Common Shares in the open market to avoid being subject to
the Odd Lot Redemption. A shareholder who owns at least 250 Common Shares at
the close of business on October 15, 1997, the date of the Annual Meeting, will
not have his, her or its Common Shares redeemed by the Trust. See "-- Odd Lot
Redemption" below.
REASONS FOR REVERSE SHARE SPLIT
The Common Shares are traded on the NYSE under the symbol "IND."
Between January 1, 1996 and September 5, 1997, the high and low sales prices
for the Common Shares on the NYSE has ranged from a low of $1 3/8 to a high of
$3 3/16 per share. On September 5, 1997, the closing sales price of Common
Shares on the NYSE was $3 1/16. The Board of Trust Managers, after considering
the effects of the relatively low historical market price of the Common Shares
and other factors described below, believes that the Reverse Share Split is
advisable and in the best interests of the Trust and its shareholders.
The Reverse Share Split would decrease the number of Common Shares
outstanding and presumably increase the per share market price of the Common
Shares after the Reverse Share Split, although there can be no assurance that a
corresponding price increase would occur. The Board of Trust Managers believes
that the relatively low market price of the Common Shares may impair the
marketability of the Common Shares to institutional investors and other members
of the investing public. In theory, the number of shares outstanding should
not, alone, affect the marketability of the Common Shares, the type of investor
who acquires them, or the Trust's reputation in the financial community. In
practice this is often not the case, however, because many investors look upon
low-priced shares as speculative in nature, and as a matter of policy, avoid
investment in such stocks. Additionally, certain institutional investors have
internal policies preventing the purchase of stocks that trade below a certain
price. These factors may not only affect the liquidity of the Common Shares,
but also may impair the Trust's ability to raise additional capital through the
sale of equity securities.
The Board of Trust Managers also recognizes that many leading
brokerage firms are reluctant to recommend low-priced securities to their
clients or hold them in their own portfolios. Additionally, many brokerage
houses do not permit low-priced stocks to be used as collateral for margin
accounts or to be purchased on margin. Further, certain brokerage houses have
adopted time-consuming practices and procedures that act to discourage
individual brokers from dealing in low-priced stocks because such practices and
procedures make the handling of such stocks economically
5
<PAGE> 8
unattractive. A low stock price also has the effect of increasing the amount
and percentage of transaction costs paid by individual investors. Because
brokers' commissions on low-priced stocks generally represent a higher
percentage of the stock price than commissions on higher priced stocks, a low
stock price can result in individual shareholders paying transaction costs
(commissions, markups or markdowns) that are a higher percentage of their total
share value than would be the case with stock with a higher per share trading
price. Any reduction in brokerage commissions resulting from the Reverse Share
Split may be offset, however, by increased brokerage commissions required to be
paid by shareholders selling odd lots (blocks of Common Shares not evenly
divisible by 100) created by the Reverse Share Split. See "-- Effects of the
Reverse Share Split" below. The Board of Trust Managers believes that the
expected increase in per share price of the Common Shares resulting from the
Reverse Share Split should reduce the effect of these negative attributes
traditionally associated with a low per share price, thereby enhancing the
marketability of the Common Shares with the financial community and investing
public and resulting in a broader market for the Common Shares than currently
exists.
The Board of Trust Managers anticipates that the decrease in the
number of outstanding Common Shares resulting from the Reverse Share Split and
the anticipated corresponding increased price per share will stimulate greater
investor (both individual and institutional) interest in the Common Shares,
promote greater liquidity for the Trust's shareholders, and result in a price
level for the Common Shares that is more appropriate for a NYSE-listed
security. The Board of Trust Managers also anticipates that the Reverse Share
Split will result in a price level for the Common Shares that will mitigate the
present reluctance, policies and practices of brokerage firms, and diminish the
adverse impact of trading commissions, recommendation restrictions and margin
requirements on the potential market for the Common Shares. There is no
assurance, however, that the Reverse Share Split will achieve the desired
results, that any potentially favorable consequences of the Reverse Share Split
will occur, that the market price for the Common Shares will increase
proportionately, or at all, as a result of the Reverse Share Split, or that any
price increase of the Common Shares can be sustained for a prolonged period of
time. The Board of Trust Managers cannot predict what effect the Reverse Share
Split will have on the market price of the Common Shares. Additionally, it is
possible that the liquidity of the Common Shares may be adversely affected by
the reduced number of Common Shares outstanding if the Reverse Share Split is
effected.
EFFECTS OF THE REVERSE SHARE SPLIT
HOLDERS OF COMMON SHARES. If the shareholders approve this proposal,
the Reverse Share Split will be effective at 5:00 p.m., Dallas time, on October
15, 1997 (the "Effective Date"). On the Effective Date, every five Common
Shares then issued and outstanding shall automatically, without any further
action on the part of the shareholders of the Trust, become and be converted
into one Common Share, subject to adjustment to eliminate fractional shares. No
fractional shares will be issued and, in lieu thereof, shareholders owning a
number of Common Shares not evenly divisible by five will receive cash in lieu
of any fractional share to which they would otherwise be entitled upon
surrender of their share certificates. See "-- Exchange of Certificates and
Settlement of Fractional Shares" below.
All shareholders who own less than five Common Shares on the Effective
Date only shall be entitled to receive a cash payment in lieu of a fractional
share, and their interests as shareholders of the Trust shall immediately be
terminated. Each shareholder who owns more than five Common Shares will
continue to own Common Shares after the Reverse Share Split, but such interest
will be represented by 20% of the number of Common Shares that such shareholder
owned before the Reverse Share Split, except that no fractional shares will be
issued. All shareholders who own less than 250 Common Shares on the Effective
Date will own an Odd Lot after the Reverse Share Split. Pursuant to the Odd Lot
Redemption, Odd Lot Holders will have all their Common Shares redeemed by the
Trust as soon as practicable after the Effective Date. Shareholders who
currently own less than 250 Common Shares may purchase additional Common Shares
before the Effective Date so that their Common Shares will not be redeemed by
the Trust. Shareholders who own at least 250 Common Shares on the Effective
Date will not be subject to the Odd Lot Redemption and will continue to be
shareholders of the Trust. See "-- Odd Lot Redemption" below.
The post-Reverse Share Split Common Shares will be validly issued,
fully paid and nonassessable. Except for the elimination of fractional shares,
the Reverse Share Split will not affect or alter the voting or other rights and
privileges of holders of Common Shares. The Board of Trust Managers does not
anticipate that the Reverse Share Split will significantly reduce the number of
the Trust's shareholders. Based on the Trust's records as of September 5, 1997,
the Board of Trust Managers anticipates, however, that the Odd Lot Redemption
will reduce the number of the Trust's shareholders by approximately 40% and the
number of outstanding Common Shares by 1.2%. The Reverse Share Split should not
change any shareholder's proportionate equity interest in the Trust, except for
minor differences due to the elimination of fractional shares and the Odd Lot
Redemption. Although the Odd Lot Redemption will have the effect
6
<PAGE> 9
of increasing the proportionate equity interests of the Trust's shareholders
whose Common Shares are not redeemed, any such increase in percentage ownership
should be minimal.
The Reverse Share Split will result in some shareholders owning odd
lots of Common Shares (blocks of Common Shares not evenly divisible by 100).
Brokerage commissions and other costs of transactions in odd lots generally are
somewhat higher than the costs of transactions in "round lots" of even
multiples of 100 shares. Consequently, transaction costs may increase for those
shareholders who hold odd lots after the Reverse Share Split.
Under the Texas Real Estate Investment Trust Act, as amended (the
"Texas REIT Act"), shareholders of the Trust do not have dissenters' rights
with respect to the Reverse Share Split.
The Common Shares will continue to be listed and traded on the NYSE
after the Effective Date.
COMMON SHARES. The Declaration of Trust authorizes the Trust to issue
500,000,000 Common Shares. The Reverse Share Split will not change the number
of authorized Common Shares or the par value of the Common Shares. The
principal effect of the Reverse Share Split will be to reduce the number of
Common Shares outstanding from 23,289,867 as of September 12, 1997 to
approximately 4,657,973, subject to adjustment for the elimination of
fractional shares. Common Shares no longer outstanding as a result of the
fractional share settlement procedure will be reflected as authorized, but
unissued, Common Shares. The following table summarizes the effects of the
Reverse Share Split on the Trust's Common Shares:
<TABLE>
<CAPTION>
September 12, 1997
------------------
As Adjusted For
Actual Reverse Share Split
------ -------------------
<S> <C> <C>
Common Shares:
Authorized ................... 500,000,000 500,000,000
Issued and Outstanding ....... 23,289,867 4,657,973(1)
Reserved for Issuance ........ 4,520,656(2) 904,130(3)
Available for Issuance ....... 472,189,477 494,437,897(1)
Par value per Share .......... $0.10 $0.10
</TABLE>
(1) Subject to further adjustments due to settlement of fractional shares,
which adjustments are not expected to be material. Does not reflect
any adjustments for the Odd Lot Redemption.
(2) Includes (i) 2,724,809 Common Shares issuable upon conversion by
Realco of the Modified Notes (as defined below), (ii) 995,847 Common
Shares issuable pursuant to the MSAM Agreement, and (iii) 800,000
Common Shares issuable pursuant to the Plan.
(3) Includes (i) 544,961 Common Shares issuable upon conversion of the
Modified Notes by Realco, (ii) 199,169 Common Shares issuable pursuant
to the MSAM Agreement, and (iii) 160,000 Common Shares issuable
pursuant to the Plan.
PREFERRED SHARES. The Declaration of Trust authorizes the Trust to
issue 50,000,000 preferred shares, par value $0.10 per share (the "Preferred
Shares"). As of September 12, 1997, there were no Preferred Shares issued or
outstanding. The Reverse Share Split will not change the number of authorized
Preferred Shares or the par value of the Preferred Shares.
SHAREHOLDERS' EQUITY. As discussed above, the Reverse Share Split will
reduce the number of Common Shares outstanding, but will not change the par
value of the Common Shares. Consequently, the stated capital of the Trust will
be reduced by approximately 80% on the Effective Date, with the additional
paid-in capital account being credited with the amount by which the stated
capital of the Trust is reduced. The effects of the Reverse Share Split on the
shareholders' equity of the Trust as of June 30, 1997, as adjusted for
issuances of Common Shares in July 1997, are summarized as follows:
7
<PAGE> 10
<TABLE>
<CAPTION>
June 30, 1997 (as adjusted)
---------------------------
(in thousands)
As Adjusted for
Actual Reverse Share Split
------- -------------------
<S> <C> <C>
Stated Capital .......................... $ 2,329 $ 466
Additional paid-in capital .............. 156,985 158,848
Accumulated distributions ............... (58,456) (58,456)
Accumulated loss from operations
and extraordinary gains (losses) .... (47,495) (47,495)
Accumulated net realized gain on sales
of real estate ...................... 1,460 1,460
--------- ---------
Total Shareholders' Equity .............. $ 54,823 $ 54,823
========= =========
</TABLE>
CONVERSION OF MODIFIED NOTES. Pursuant to the Renewal, Extension,
Modification and Amendment Agreement dated as of February 26, 1997 between the
Trust and Realco, Realco has the right to convert the debt owed by the Trust
(the "Modified Notes") into Common Shares for $2.00 per share before December
31, 1997, and $2.25 per share after December 31, 1997 (but before December 31,
2000). The Modified Notes currently have a principal balance of $5,449,618 and
mature on December 31, 2000. The Modified Notes are not prepayable. The
Modified Notes accrue interest at a non-default rate of 8.8% per annum, with
accrued interest payable monthly in arrears. If Realco had converted the
Modified Notes into Common Shares on September 12, 1997, without giving effect
to the Reverse Share Split, and the aggregate principal balance of the Modified
Notes was $5,449,618, it would have received 2,724,809 Common Shares upon
conversion.
If Realco converts the Modified Notes prior to the Effective Date, the
Common Shares it receives upon conversion will be subject to the Reverse Share
Split as all other Common Shares. If Realco converts the Modified Notes after
the Effective Date and before December 31, 1997, it will receive 544,961 whole
Common Shares (at an effective conversion price of $10.00 per share) and cash
in lieu of any fractional share it would otherwise be entitled to receive. The
cash payment for any fractional share will equal the closing price of the
Common Shares on the NYSE on the date of conversion multiplied by the
fractional share that it would otherwise be entitled to receive.
MSAM AGREEMENT. Pursuant to the terms of the MSAM Agreement, the
Buyers (as defined in the MSAM Agreement) agreed to purchase, and the Trust
agreed to sell, 8,163,265 Common Shares. As of September 12, 1997, the Buyers
had purchased 7,167,418 of the 8,163,265 Common Shares in two tranches. The
remaining 995,847 Common Shares are to be purchased at such time as the Trust
issues additional Common Shares. If the remaining 995,847 Common Shares are
purchased prior to the Effective Date, such shares will be converted in the
Reverse Share Split as all other Common Shares. If the closing of the purchase
of the remaining Common Shares occurs after the Effective Date, the Buyers will
purchase 199,169 whole Common Shares.
EMPLOYEE AND TRUST MANAGER INCENTIVE SHARE PLAN. As of September
12, 1997, under the Plan, options to purchase an aggregate of 695,000 Common
Shares were outstanding at exercise prices ranging between $2 15/16 to $3 per
share. Pursuant to the provisions of the Plan, 800,000 Common Shares may be
issued under the Plan. As of September 12, 1997, 105,000 Common Shares remain
available for grant pursuant to the Plan. The Plan provides that if the number
of outstanding Common Shares is decreased by means of a reverse share split,
then, from and after the record date of such reverse share split, the number of
Common Shares subject to the Plan and each outstanding option award shall be
decreased in proportion to such decrease in outstanding Common Shares and the
then-applicable exercise price of each outstanding option award shall be
correspondingly increased.
If this proposal is approved, the total number of Common Shares that
may be granted under the Plan, the number of Common Shares issuable upon the
exercise of outstanding options and the number of Common Shares available for
grant under the Plan will be adjusted to 160,000, 139,000 and 21,000,
respectively, and the exercise prices of the outstanding options will be
adjusted to prices of $14 11/16 to $15 per share. However, if proposal three
amending the Plan is approved, the number of Common Shares authorized for
issuance under the Plan will be increased to 10% of the Common Shares issued
and outstanding on a fully-diluted basis. After effecting the Reverse Share
Split, the number of Common Shares available for issuance, assuming proposal
three is approved, would be approximately 540,210. See "Proposal Three --
Approval of Amendment to Employee and Trust Manager Incentive Share Plan."
8
<PAGE> 11
EXCHANGE OF CERTIFICATES AND SETTLEMENT OF FRACTIONAL SHARES
EXCHANGE OF CERTIFICATES. If this proposal is approved and the Reverse
Share Split is effected, shareholders will be required to exchange their share
certificates for new share certificates representing the post-Reverse Share
Split Common Shares. The Trust's transfer agent, Boston EquiServe, will act as
the Trust's exchange agent (the "Exchange Agent") for holders of Common Shares
in the exchange of their share certificates. The Exchange Agent will furnish
shareholders of record on the Effective Date the necessary materials and
instructions for the surrender and exchange of share certificates. Shareholders
will not have to pay a transfer fee or any other fee in connection with the
exchange of certificates. All such costs will be paid by the Trust.
As soon as practicable after the Effective Date, the Exchange Agent
will send a letter of transmittal to each shareholder of record on the
Effective Date advising such shareholder of the procedure for surrendering
share certificates in exchange for new share certificates representing the
ownership of the new number of whole Common Shares after the Reverse Share
Split. No certificates representing fractional shares shall be issued.
Shareholders who surrender certificates, other than Odd Lot Holders, will
receive a new share certificate reflecting ownership of the whole number of
post-Reverse Share Split Common Shares that he, she or it owns and a cash
payment in lieu of any fractional share (as described below). Odd Lot Holders
will receive a cash payment for (i) settlement of any fractional share
resulting from the Reverse Share Split and (ii) redemption of their Common
Shares in connection with the Odd Lot Redemption. See "-- Odd Lot Redemption"
below. SHARE CERTIFICATES SHOULD NOT BE SENT TO THE TRUST OR THE EXCHANGE AGENT
PRIOR TO RECEIPT OF SUCH LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
After the Effective Date, each share certificate representing
pre-Reverse Share Split Common Shares will be deemed to evidence ownership of
the whole number of post-Reverse Share Split Common Shares, and the right to
receive the amount of cash for any fractional share, into which the Common
Shares evidenced by such certificate have been converted. Holders of any such
unexchanged share certificates will not be entitled to receive, however, any
dividends or other distributions payable by the Trust to holders of record
after the Effective Date until the share certificates representing the
pre-Reverse Share Split Common Shares have been surrendered. Such dividends and
distributions, if any, will be accumulated, and at the time of surrender of the
old share certificates, all such unpaid dividends or distributions, as well as
cash payment for fractional shares, will be paid without interest.
SETTLEMENT OF FRACTIONAL SHARES. No certificates or scrip representing
fractional shares in the post-Reverse Share Split Common Shares will be issued,
and no such fractional share interest will entitle the holder thereof to any
rights (including, but not limited to, voting and dividend rights) as a
shareholder of the Trust. In lieu of any such fractional share, each
shareholder who would otherwise be entitled to receive a fractional share of a
post-Reverse Share Split Common Share (because such shareholder owned a number
of pre-Reverse Share Split Common Shares not evenly divisible by five) will be
paid cash in lieu of such fractional share. The amount of the cash payment
shall equal the closing price of the Common Shares as reported on the NYSE on
the Effective Date for each such Common Share held prior to the Effective Date.
For example, if a shareholder owns 504 Common Shares prior to the Reverse Share
Split, he, she or it will own 100 whole Common Shares after the Reverse Share
Split. Additionally, the shareholder will be entitled to a cash payment (in
lieu of a fractional share) equal to the closing price of the Common Shares on
the NYSE on the Effective Date multiplied by four. The Trust will deposit
sufficient cash from its cash reserves with the Exchange Agent for settlement
of all fractional shares.
ALL SHAREHOLDERS ARE ENCOURAGED TO SURRENDER THEIR OLD SHARE
CERTIFICATES TO THE EXCHANGE AGENT AS PROMPTLY AS POSSIBLE AFTER RECEIPT OF THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
ODD LOT REDEMPTION
Article Fifteen of the Declaration of Trust provides that upon
resolution adopted by the Board of Trust Managers, the Trust shall be entitled
to purchase or redeem, directly or indirectly, its own Common Shares, subject
to any limitations of the Texas REIT Act. Pursuant to this provision, the Board
of Trust Managers has unanimously approved the Odd Lot Redemption pursuant to
which the Trust shall redeem the Common Shares owned by all Odd Lot Holders of
record as of the Effective Date (after giving effect to the Reverse Share
Split). The Board of Trust Managers believes that the Odd Lot Redemption will
allow the Trust to reduce its administrative expenses and improve its
administrative efficiency. For these reasons, the Board of Trust Managers
believes that the Odd Lot Redemption is in the best interests of the Trust and
its shareholders.
Any shareholder who owns less than 250 Common Shares on the Effective
Date will be an Odd Lot Holder after the Reverse Share Split and, as a result
thereof, will have all his, her or its Common Shares redeemed by the Trust.
9
<PAGE> 12
All rights of an Odd Lot Holder as a shareholder of the Trust will terminate on
the effective date of the Odd Lot Redemption (the "Redemption Date"). The Odd
Lot Redemption will occur only if the Reverse Share Split is approved by the
shareholders. If this proposal is not approved, the Odd Lot Redemption will not
occur.
SHAREHOLDERS WHO CURRENTLY OWN LESS THAN 250 COMMON SHARES MAY
PURCHASE ADDITIONAL COMMON SHARES IN THE OPEN MARKET BEFORE THE CLOSE OF
BUSINESS ON OCTOBER 15, 1997. IF A SHAREHOLDER OWNS AT LEAST 250 COMMON SHARES
AT THE CLOSE OF BUSINESS ON OCTOBER 15, 1997, HE, SHE OR IT WILL NOT BE SUBJECT
TO THE ODD LOT REDEMPTION AND, THEREFORE, WILL CONTINUE TO BE A SHAREHOLDER OF
THE TRUST. A SHAREHOLDER WHO CURRENTLY OWNS LESS THAN 250 COMMON SHARES AND WHO
DOES NOT BUY SUFFICIENT ADDITIONAL COMMON SHARES TO REACH THE THRESHOLD OF 250
COMMON SHARES BEFORE THE CLOSE OF BUSINESS ON OCTOBER 15, 1997 WILL BE SUBJECT
TO THE ODD LOT REDEMPTION. SHAREHOLDERS WHO ARE SUBJECT TO THE ODD LOT
REDEMPTION WILL CEASE TO BE SHAREHOLDERS OF THE TRUST AS OF THE REDEMPTION
DATE.
The Trust will effect the Odd Lot Redemption in accordance with the
provisions of the Texas REIT Act and the rules and regulations of the NYSE. The
Redemption Date will be as soon as practicable after the Effective Date, but in
no event will the Redemption Date be less than 20 or more than 60 days after
the Effective Date. The redemptive price (the "Redemptive Price") to be paid by
the Trust to Odd Lot Holders will equal the closing price of the Common Shares
on the NYSE on October 16, 1997 (the day following the Effective Date). Prior
to the Redemption Date, each Odd Lot Holder as of the Effective Date will
receive written notice from the Trust that the Odd Lot Holder's Common Shares
are being redeemed by the Trust, the number of shares to be redeemed, the
Redemption Date, the Redemptive Price and other information relating to the
process of the Odd Lot Redemption. Odd Lot Holders should submit their share
certificates to the Exchange Agent upon receipt of the letter of transmittal
from the Exchange Agent. See "-- Exchange of Certificates and Settlement of
Fractional Shares." Instead of receiving a new share certificate, however, each
Odd Lot Holder shall receive a cash payment for (i) any fractional share he,
she or it would otherwise be entitled to receive in connection with the Reverse
Share Split and (ii) the Odd Lot of post-Reverse Share Split Common Shares
being redeemed by the Trust in connection with the Odd Lot Redemption.
Based on the Trust's records as of September 5, 1997, the Board of
Trust Managers anticipates that the Odd Lot Redemption will reduce the number
of shareholders of the Trust by approximately 40% and the number of outstanding
Common Shares by 1.2%. Although the Odd Lot Redemption will have the effect of
increasing the proportionate equity interests of the Trust's shareholders who
are not subject to the Odd Lot Redemption, any such increase in percentage
ownership should be minimal.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SHARE SPLIT AND THE ODD LOT
REDEMPTION
The Trust has not sought and will not seek an opinion of counsel or a
ruling from the Internal Revenue Service (the "IRS") regarding the federal
income tax consequences of the Reverse Share Split and the Odd Lot Redemption.
The following summary of the federal income tax consequences of the Reverse
Share Split and Odd Lot Redemption is based on current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing, temporary and
currently proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, existing administrative rulings and practices
of the IRS and judicial decisions. No assurance can be given that future
legislative, judicial or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of the statements in this
summary. This summary is for general information only, does not purport to
address all aspects of the possible federal income tax consequences of the
Reverse Share Split and Odd Lot Redemption, and should not be considered as tax
or investment advice. This summary does not discuss the federal income tax
consequences of the Reverse Share Split and Odd Lot Redemption to certain
shareholders that are subject to special tax rules, such as banks, insurance
companies, regulated investment companies, personal holding companies, foreign
entities, nonresident alien individuals, broker-dealers, tax-exempt entities
and persons who do not hold the Common Shares as a capital asset. Additionally,
this summary does not address any consequences of the Reverse Share Split and
Odd Lot Redemption under any state, local or foreign tax laws. ACCORDINGLY,
EACH SHAREHOLDER SHOULD CONSULT HIS, HER OR ITS TAX ADVISOR TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES OF THE REVERSE SHARE SPLIT AND THE ODD LOT
REDEMPTION, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL OR
FOREIGN INCOME TAX AND OTHER LAWS.
The Reverse Share Split is intended to qualify as a recapitalization
under Section 368(a)(1)(E) of the Code. Consequently, no gain or loss should be
recognized by the Trust. No gain or loss should be recognized by a shareholder
10
<PAGE> 13
who receives only Common Shares and who does not receive cash in lieu of a
fractional share. A shareholder's aggregate basis in the post-Reverse Share
Split Common Shares (including any fractional share deemed received) will be
the same as the aggregate basis of the Common Shares before the Reverse Share
Split. The holding period of the post-Reverse Share Split Common Shares
(including any fractional share deemed received) will include the holding
period of the Common Shares surrendered in exchange therefor.
The receipt by a shareholder of cash in lieu of a fractional share
will be a taxable transaction for federal income tax purposes. A shareholder
who receives cash in lieu of a fractional share will be treated as if the Trust
had issued a fractional share and immediately redeemed such fractional share
for cash. This transaction should be treated under Section 302 of the Code as a
redemption "not essentially equivalent to a dividend" inasmuch the fractional
share redemption is a non-pro rata distribution the purpose of which is the
mere mechanical rounding off of fractional interests and which does not
represent separately bargained-for consideration. Such shareholder generally
should recognize gain or loss, as the case may be, measured by the difference
between the amount of cash received and the shareholder's basis allocable to
the fractional share as if it had actually been issued (as described above).
Such gain or loss will be capital gain or loss as long as the shareholder held
the Common Shares as a capital asset and will be long-term capital gain or loss
if the shareholder's holding period (as described above) exceeds one year. The
applicable tax rate on such long-term capital gain will depend upon, among
other factors, the shareholder's holding period.
The Odd Lot Redemption should be a taxable transaction in which an Odd
Lot Holder generally will recognize gain or loss. The federal income tax
treatment of the Odd Lot Redemption with respect to an Odd Lot Holder will
depend upon the particular facts relating to that shareholder at the Redemption
Date. Under Section 302 of the Code, the Odd Lot Redemption should be treated
as a sale or exchange of Common Shares if the Odd Lot Redemption (i) is a
"substantially disproportionate" redemption with respect to the Odd Lot Holder,
(ii) is "not essentially equivalent to a dividend" with respect to the Odd Lot
Holder because there is a "meaningful reduction" in the Odd Lot Holder's equity
interest in the Trust, or (iii) results in a complete termination of the Odd
Lot Holder's equity interest in the Trust. In general, the Odd Lot Redemption
will be considered "substantially disproportionate" with respect to an Odd Lot
Holder if the percentage of Common Shares owned by the Odd Lot Holder
immediately after the Odd Lot Redemption is less than 80% of the percentage of
Common Shares owned by such Odd Lot Holder immediately before the Redemption
Date. Whether the Odd Lot Redemption will result in a "meaningful reduction"
with respect to an Odd Lot Holder depends upon the particular Odd Lot Holder's
facts and circumstances. In determining whether an Odd Lot Holder's interest in
the Trust has been reduced or terminated, the constructive ownership rules of
Section 318 of the Code shall apply.
If an Odd Lot Holder satisfies one of the tests under Section 302 of
the Code (discussed in the preceding paragraph) and as long as the Odd Lot
Holder held the Common Shares as a capital asset, he, she or it should
recognize capital gain or loss equal to the difference between the amount
realized upon the Odd Lot Redemption and his, her or its tax basis in the
Common Shares redeemed. If the Odd Lot Holder's holding period in the redeemed
Common Shares exceeds one year, any such capital gain or loss will be long-term
capital gain or loss. The applicable tax rate on such long-term capital gain
will depend upon, among other factors, the shareholder's holding period of the
redeemed Common Shares.
If the Odd Lot Holder does not satisfy one of the tests under Section
302, the Odd Lot Redemption will be treated as a distribution under Section 301
of the Code. The amount of such distribution will be equal to the amount of
cash received in the Odd Lot Redemption. The amount of such distribution will
be treated as a dividend for federal income tax purposes to the extent of the
Trust's current and accumulated "earnings and profits" (as determined for
federal income tax purposes). To the extent the cash received in the Odd Lot
Redemption exceeds such earnings and profits, the amount of such excess will be
applied against and reduce the Odd Lot Holder's basis in the Common Shares, and
to the extent of any excess over the amount of such basis, will be treated as
gain from the sale or exchange of the Common Shares.
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding
Common Shares (15,526,578 Common Shares) is required to approve the Reverse
Share Split. Abstentions and broker non-votes will have the same effect as a
vote against the proposal. The Trust Managers have unanimously approved the
proposal, subject to shareholder approval. Realco, MSAM, ABKB, LaSalle Advisors
and management of the Trust have advised the Trust that they intend to vote
their collective 16,589,323 Common Shares (71.2% of the outstanding Common
Shares) in favor of proposal two. See "Security Ownership of Certain Beneficial
Owners and Management."
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE
FOR PROPOSAL TWO.
11
<PAGE> 14
PROPOSAL THREE
APPROVAL OF AMENDMENT TO THE EMPLOYEE AND
TRUST MANAGER INCENTIVE SHARE PLAN
The Trust adopted the Plan on June 30, 1997 to retain and attract
Trust Managers, officers and other key employees of the Trust. In connection
with the adoption of the Plan, 800,000 Common Shares were reserved for issuance
under the Plan pursuant to the exercise of incentive and non-qualified share
options (collectively, "Options") and the grant of restricted share awards.
Through September 12, 1997, options for a total of 695,000 Common Shares had
been awarded under the Plan. Accordingly, there remain only 105,000 Common
Shares available for issuance under the Plan. If the Reverse Share Split is
approved by the shareholders, the number of Common Shares reserved for issuance
under the Plan shall be decreased to 160,000 and the number of Common Shares
available for issuance under the Plan shall be decreased to 21,000.
On July 30, 1997, the Board of Trust Managers unanimously voted to
amend the Plan, subject to the approval of shareholders, to increase the
maximum number of Common Shares available for issuance under the Plan to 10% of
the total number of Common Shares outstanding at any time on a fully-diluted
basis. Based upon the number of Common Shares outstanding on a fully-diluted
basis on September 12, 1997, the Plan would have a total of 2,701,052 Common
Shares authorized for issuance under the Plan, an increase of 1,901,052 Common
Shares over the number of Common Shares currently authorized by the Plan. If
the Reverse Share Split is approved, and before adjustments for the elimination
of fractional shares, 540,210 Common Shares would be authorized for issuance
under the Plan (of which 139,000 Common Shares would already be issued or
relate to options previously granted).
The Board of Trust Managers believes that providing an increased
availability of Common Shares for issuance under the Plan is important in order
for the Trust to provide long-term incentives to retain key employees, officers
and Trust Managers.
ADMINISTRATION AND ELIGIBILITY. The Plan is administered by the
Compensation Committee, which is comprised of Trust Managers who are not
employees of the Trust ("Non-Employee Trust Managers"). The Compensation
Committee has complete authority to interpret all provisions of the Plan, to
prescribe the form of agreements, to adopt, amend and rescind rules and
regulations pertaining to the administration of the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan. The
Plan may be amended or terminated by the Trust Managers, provided, however,
that the Trust Managers may choose to require that the Trust's shareholders
approve any amendment to this Plan in order to satisfy the requirements of
Section 422 of the Code or provisions and rules promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or for any
other reason. No amendment to the Plan may, without a participant's consent,
adversely affect any rights of such participant under any outstanding award
granted under the Plan.
Under the terms of the Plan, any person who is a full-time employee or
a Trust Manager of the Trust or of an Affiliate (as defined in the Plan) of the
Trust or a person designated by the Compensation Committee as eligible because
such person performs bona fide consulting or advisory services for the Trust or
an Affiliate of the Trust (other than services in connection with the offer or
sale of securities in a capital-raising transaction) and has a direct and
significant effect on the financial development of the Trust or an Affiliate of
the Trust, shall be eligible to receive awards under the Plan. As of September
12, 1997, approximately eleven persons (other than Non-Employee Trust Managers)
were eligible to receive benefits under the Plan.
OPTIONS. The exercise price of Common Shares covered by Options
granted under the Plan is determined by the Compensation Committee, but Options
must have an exercise price equal to not less than 100% of the fair market
value of a Common Share on the date of grant. In some instances, the exercise
price for Options granted to persons who directly or indirectly own 10% or more
of the outstanding shares of the Trust may be required to be 110% of the fair
market value of a Common Share on the date of grant. Options are not
transferable without the consent of the Compensation Committee or other than by
will or the laws of descent and distribution or pursuant to qualified domestic
relations orders, and are exercisable only by the optionee, Compensation
Committee-approved assignees, or his or her guardian, legal representative or
similar party, or executors, administrators or beneficiaries of the optionee.
The Compensation Committee selects the employees (and any consultants
or advisors) to whom Options will be granted, the number of shares subject to
each Option and the other terms and conditions of Options, but in all cases
consistent with the Plan. Each Option is evidenced by an option agreement. The
option agreement specifies whether
12
<PAGE> 15
the Option is intended to be an Incentive Share Option ("ISO") or a
Non-Qualified Share Option ("NQO"). The Compensation Committee may provide that
Options will be exercisable from time to time, in installments or otherwise, of
and for such periods (up to ten years from the date of grant) as the
Compensation Committee may determine in its discretion. The exercise price of
Options is payable in cash or, if the Compensation Committee permits, by
issuance of a full recourse promissory note by the optionee (other than
officers and Trust Managers) or the surrender of Common Shares owned by the
optionee.
SHARE APPRECIATION RIGHTS. The Compensation Committee also may grant
awards of Share Appreciation Rights ("SARs"). A SAR entitles the holder to
receive from the Trust, in cash or (if the Compensation Committee so permits)
Common Shares, at the time of exercise, the excess of the fair market value at
the date of exercise of a Common Share over a specified price fixed by the
Compensation Committee in the award, multiplied by the number of Common Shares
as to which the holder of the right is exercising the right.
RESTRICTED SHARES. The Compensation Committee also may grant awards of
Restricted Shares (as defined in the Plan). Each award of Restricted Shares
will specify the number of Common Shares to be issued to the recipient, the
date of issuance, any consideration for such Common Shares and the restrictions
imposed on the Common Shares (including the conditions of release or lapse of
such restrictions). Restricted Shares generally may not be sold, assigned,
transferred or pledged until the restrictions have lapsed and the rights to the
Common Shares have vested.
AWARDS TO NON-EMPLOYEE TRUST MANAGERS. After the shareholders approved
the Plan at the June 30, 1997 meeting, the Trust granted to each Non-Employee
Trust Manager an Option to purchase 10,000 Common Shares at the fair market
value of the Common Shares on June 30, 1997 ($3 per share). On an annual basis
beginning in 1997, each Non-Employee Trust Manager shall receive a NQO to
purchase 5,000 Common Shares. Each of these Non-Employee Trust Manager options
is fully exercisable upon the date of grant and generally terminates (unless
sooner terminated under the terms of the Plan) ten years after the date of
grant. If a Non-Employee Trust Manager ceases to be a member of the Board of
Trust Managers for any reason other than death or disability, these options
will terminate on the first anniversary of the date the Non-Employee Trust
Manager ceases to be a member of the Board of Trust Managers. If a Non-Employee
Trust Manager dies or becomes disabled while a member of the Board of Trust
Managers, these options will terminate on the second anniversary of the date
the Non-Employee Trust Manager dies or becomes disabled.
DIVIDEND EQUIVALENT RIGHTS. The Compensation Committee may grant
Dividend Equivalent Rights (as defined) under the Plan. Each right may, but
need not, be related to a specific option granted under the Plan and may be
granted simultaneously with or subsequent to the grant of the option. A right
will entitle the recipient to receive a cash payment from the Trust equal to
the dividend declared and paid on a Common Share for a period to be determined
by the Compensation Committee at the time of grant. The payment may, if the
Compensation Committee so provides, be made in Common Shares in lieu of cash.
If the right relates to an option, the payment period shall not extend beyond
the date of exercise of the option.
With respect to Dividend Equivalent Rights which do not relate to a
specific option, there are no limits on the number of such rights which may be
granted under the Plan or on the total amount of cash payments which may be
made with respect to such rights. The cash payment may be made as dividends on
Common Shares are paid or delayed until the occurrence of a date or event
specified by the Compensation Committee.
TERMS AND CONDITIONS TO WHICH ALL AWARDS ARE SUBJECT. If there is a
share dividend, share split, reverse share split or reclassification of Common
Shares or outstanding Common Shares are converted into or exchanged for other
securities as a result of a merger, consolidation or sale of substantially all
of the Trust's assets, appropriate adjustments will be made in: (i) the number
and class of Common Shares subject to the Plan, each outstanding award and the
entitlements of Non-Employee Trust Managers; and (ii) the exercise price of
each outstanding award. Further, new awards may be substituted for awards
previously granted, or the Trust's obligations respecting outstanding awards
may be assumed by an employer entity other than the Trust. In connection with
any merger, consolidation or sale of substantial assets in which the Trust is
involved (other than a merger, consolidation or sale in which the Trust is the
continuing entity and which does not result in any reclassification of the
Trust's then-outstanding shares), the Compensation Committee may decide to pay
cash to plan participants other than Non-Employee Trust Managers and other
persons then subject to Section 16(b) of the Exchange Act who hold awards that
have not been outstanding for at least six months. Any such cash award shall be
in an amount which, in the sole discretion of the Compensation Committee, is an
amount by which the fair market value (at the effective time of the
transaction) of the consideration
13
<PAGE> 16
the plan participant would have received if the award had been exercised before
the effective time of the merger or other transaction exceeds the exercise
price of the award. Further, upon the occurrence of such a transaction, the
Compensation Committee may provide that the vesting of any award shall be
automatically accelerated to a date prior to the consummation of such
transaction.
If a participant's employment with the Trust is terminated, generally
the participant will forfeit any award that has not vested on or before the
date of termination. The Compensation Committee will establish the effect of
employment termination on vested awards when awards are granted.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN. The grant or exercise of
an ISO will not be a taxable event for the employee or the Trust. If the
employee disposes of the Common Shares acquired upon the exercise of an ISO at
least two years after the date the ISO is granted and at least one year after
the Common Shares are transferred to him or her, the employee will realize
long-term capital gain in an amount equal to the excess, if any, of his or her
selling price for the Common Shares over the exercise price. The applicable tax
rate on such long-term capital gain will depend upon, among other factors, the
shareholder's holding period of the Common Shares. In such a case, the Trust
will not be entitled to any tax deduction resulting from the issuance or sale
of the Common Shares. If the employee disposes of the Common Shares acquired
upon the exercise of an ISO prior to the expiration of two years from the date
the ISO is granted, or one year from the date the Common Shares are transferred
to him or her, any gain realized by the employee will be taxable at such time
as (a) ordinary income to the extent of the difference between the exercise
price and the lesser of the fair market value of the Common Shares on the date
the ISO was exercised or the gross amount realized from such disposition, and
(b) capital gain to the extent of any excess, which gain shall be treated as
short-term or long-term capital gain depending upon the holding period of the
Common Shares. In such a case, and if the Trust satisfies the applicable
reporting requirements, the Trust may claim an income tax deduction (as
compensation) for the amount taxable to the employee as ordinary income.
For the exercise of an option to qualify for the foregoing tax
treatment as an ISO, the employee generally must be an employee of the Trust or
a subsidiary of the Trust from the date the option is granted through the date
that is three months prior to the date of exercise of the option. In the case
of an employee who is disabled, the three-month period for exercise following
termination of employment is extended to one year. In the case of an employee
who dies, both the time for exercising ISOs after termination of employment and
the holding period for Common Shares received pursuant to the exercise of the
option is waived.
Generally, the difference between the fair market value of the Common
Shares at the time the ISO is exercised and the exercise price will constitute
an item of adjustment for purposes of determining alternative minimum taxable
income and, under certain circumstances, may be subject, in the year in which
the ISO is exercised, to the alternative minimum tax.
If an employee uses Common Shares that he or she owns to pay, in whole
or in part, the exercise price for Common Shares acquired pursuant to an ISO,
(a) the holding period for the newly issued Common Shares equal in value to the
old Common Shares that were surrendered upon exercise shall include the period
during which the old Common Shares were held, (b) the individual's basis in
such newly issued Common Shares will be the same as his or her basis in the old
Common Shares surrendered and (c) no gain or loss will be recognized by the
individual on the old Common Shares surrendered. If an employee uses Common
Shares previously acquired pursuant to the exercise of an ISO to pay all or
part of the exercise price under an ISO, however, such tender will constitute a
disposition of such previously acquired Common Shares for purposes of the
one-year (or two-year) holding period requirement applicable to such ISO and
such tender, by violating the holding period requirements, may be treated as a
taxable disqualifying disposition of the exchanged Common Shares.
An individual will not realize any income at the time a NQO is
granted. Generally, an optionee will realize ordinary income at the time the
NQO is exercised in a total amount equal to the excess of the then fair market
value of the Common Shares acquired over the exercise price. Section 83 of the
Code provides, however, that if a Trust Manager, officer or principal
shareholder (i.e., an owner of more than 10% of the outstanding Common Shares)
receives Common Shares pursuant to the exercise of a NQO, he or she is not
required to recognize any income until the date on which such shares can be
sold at a profit without liability under Section 16(b) of the Exchange Act. At
such time, the Trust Manager, officer or principal shareholder will realize
income equal to the amount by which the then fair market value of the Common
Shares acquired pursuant to the exercise of such NQO exceeds the price paid for
such Common Shares. Alternatively, a Trust Manager, officer or principal
shareholder who would not otherwise be taxed at the time the Common Shares are
transferred may file a written election, within 30 days of such transfer, with
the IRS to be taxed
14
<PAGE> 17
as of the date of transfer, on the difference between the then fair market
value of the Common Shares and the price paid for such Common Shares.
All income realized by an optionee upon the exercise of a NQO will be
taxed as ordinary income. If the applicable reporting requirements are
satisfied, the Trust should be entitled to a tax deduction (as compensation)
for the amount taxable to an individual (including a Trust Manager, officer and
principal shareholder) upon the exercise of a NQO, as described above, in the
same year as those amounts are taxable to the individual.
Common Shares issued pursuant to the exercise of a NQO generally will
constitute a capital asset in the hands of an individual (including a Trust
Manager, officer or principal shareholder) and will be eligible for capital
gain or loss treatment upon any subsequent disposition. The holding period will
commence upon the date the optionee exercises the NQO. The basis in the Common
Shares generally will be equal to the exercise price plus the amount included
in income at exercise by the optionee. If an optionee uses Common Shares that
he or she owns to pay, in whole or in part, the exercise price for the Common
Shares acquired pursuant to the exercise of a NQO, (a) the holding period for
the newly issued Common Shares equal in value to the old Common Shares that
were surrendered upon exercise shall include the period during which the old
Common Shares were held, (b) the individual's basis in such newly issued Common
Shares will be the same as his or her basis in the surrendered Common Shares,
(c) no gain or loss will be realized by the individual on the old Common Shares
surrendered, (d) the individual will realize ordinary income in an amount equal
to the fair market value of the additional number of Common Shares received
over and above the number of old Common Shares surrendered, and (e) the
individual's basis in the additional Common Shares will be equal to the amount
included in the individual's income with respect to those Common Shares and the
individual's holding period will begin upon the individual's acquisition of
such Common Shares.
An award of Restricted Shares will create no immediate tax
consequences for the employee or the Trust, unless the employee makes an
election pursuant to Section 83(b) of the Code to be taxed as of the date of
transfer on the difference between the then fair market value of the underlying
Common Shares and the price he or she paid for such Common Shares.
Alternatively, the employee will realize ordinary income as and when the
Restricted Shares become vested and are no longer subject to a substantial risk
of forfeiture (which risk of forfeiture includes the restrictions imposed by
Section 16(b) of the Exchange Act), in an amount equal to the difference
between the fair market value of the underlying Common Shares as of such date
and the price paid for such Restricted Shares. Once the employee has realized
ordinary income with respect to the Common Shares, any subsequent increase in
the value of the Common Shares generally will be taxed when the Common Shares
are sold as long-term or short-term capital gain, depending upon how long the
Common Shares are held. The individual's holding period with respect to the
Common Shares will begin on the date he or she realized ordinary income with
respect to the Common Shares and his or her basis in the Common Shares will be
equal to their then fair market value. Assuming the Company satisfies the
applicable reporting requirements, the Trust will be entitled to a tax
deduction when, and to the extent, ordinary income is realized by the employee
with respect to such Common Shares. Any dividends or other distributions paid
on the Common Shares generally will be taxable when distributed to the
individual.
An individual will be subject to tax, at ordinary income rates, on the
amount of cash and the fair market value of any property received upon the
exercise of any SARs. The Trust should be entitled to a tax deduction equal to
the amount includible in the individual's income.
The employee will recognize taxable income for the amount of cash
received under a Dividend Equivalent Right for the year such amounts are paid.
The Trust is permitted a compensation deduction equal to such amount.
The foregoing provides only a general description of the federal
income tax consequences of transactions contemplated by the Plan. Participants
should consult a tax advisor as to their individual circumstances.
SHAREHOLDER VOTE
The affirmative vote of the holders of a majority of the Common Shares
present in person or represented by proxy, and entitled to vote at the Annual
Meeting is required to amend the Plan. The Trust Managers have unanimously
approved the proposal, subject to shareholder approval. Realco, MSAM, ABKB,
LaSalle Advisors and management of the Trust have advised the Trust that they
intend to vote their collective 16,589,323 Common Shares (71.2% of the
outstanding Common Shares) in favor of proposal three. See "Security Ownership
of Certain Beneficial Owners and Management."
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE
FOR PROPOSAL THREE.
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<PAGE> 18
PROPOSAL FOUR
RATIFICATION OF INDEPENDENT AUDITORS
The shareholders are asked to ratify the appointment by the Trust
Managers of Ernst & Young LLP as the Trust's independent auditors for the 1997
Fiscal Year. The selection was based upon the recommendation of the Audit
Committee.
Representatives of Ernst & Young LLP will be present at the Annual
Meeting to respond to appropriate questions from shareholders and to make a
statement if they desire.
SHAREHOLDER VOTE
The affirmative vote of the holders of a majority of the Common Shares
present in person or represented by proxy, and entitled to vote at the Annual
Meeting is required to adopt this proposal. The Trust Managers have unanimously
approved the proposal, subject to shareholder approval. Realco, MSAM, ABKB,
LaSalle Advisors and management of the Trust have advised the Trust that they
intend to vote their collective 16,589,323 Common Shares (71.2% of the
outstanding Common Shares) in favor of proposal four. See "Security Ownership
of Certain Beneficial Owners and Management."
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL FOUR.
MANAGEMENT
EXECUTIVE OFFICERS
Set forth below is information regarding the names and ages of the
executive officers of the Trust, all positions held with the Trust by each
individual, and a description of the business experience of each individual for
at least the past five years.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Charles W. Wolcott 44 Trust Manager, President and Chief
Executive Officer
Marc A. Simpson 43 Vice President and Chief Financial
Officer, Secretary and Treasurer
David B. Warner 38 Vice President - Real Estate
Operations
Lewis D. Friedland 38 Vice President and Chief
Investment Officer
</TABLE>
Information regarding the business experience of Mr. Wolcott is
provided under "Proposal One -- Election of Trust Managers."
Marc A. Simpson currently serves as Vice President and Chief Financial
Officer, Secretary and Treasurer. Mr. Simpson was hired as the Vice President
and Chief Financial Officer, Secretary and Treasurer of the Trust in March
1994. From November 1989 through March 1994, Mr. Simpson was a Manager in the
Financial Advisory Services Group of Coopers & Lybrand L.L.P. Prior to that
time, he served as Controller of Pacific Realty Corporation, a real estate
development company. Mr. Simpson graduated with a Bachelor of Business
Administration from Midwestern State University in 1978, and received a Master
of Business Administration from Southern Methodist University in 1990.
David B. Warner currently serves as Vice President - Real Estate
Operations. Mr. Warner was hired as Vice President - Real Estate Operations of
the Trust in May 1993. From 1989 through the date he accepted a position with
the Trust, Mr. Warner was a Trust Manager of the Equity Investment Group for
the Prudential Realty Group. From 1985 to 1989, he served in the Real Estate
Banking Group of NCNB Texas National Bank. Mr. Warner graduated from
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<PAGE> 19
the University of Texas at Austin in 1981 with a degree in finance and received
a Master of Business Administration from the same institution in 1984.
Lewis D. Friedland currently serves as Vice President and Chief
Investment Officer. He was hired as the President and Chief Investment Officer
of the Trust in 1997. Prior to joining the Trust, Mr. Friedland was a founding
partner of Crimson Partners, an investment firm formed in 1992 that engaged in
the acquisition and development of real estate assets. Prior to founding this
firm, he was a Division Partner and Managing Director of Trammell Crow Company
where he was responsible for that firm's development, leasing, and property
management activities in Richmond, Virginia. Mr. Friedland graduated from the
Wharton School of the University of Pennsylvania in 1981 with a Bachelor of
Science Degree in Economics and received a Master of Business Administration
degree from Harvard University in 1985.
COMMITTEES OF THE TRUST MANAGERS
AUDIT COMMITTEE. The Audit Committee of the Trust Managers met once
during the 1996 Fiscal Year. The Audit Committee reviews and approves the scope
and results of any outside audit of the Trust, and the fees therefor, and makes
recommendations to the Trust Managers or management concerning auditing and
accounting matters and the efficacy of the Trust's internal control systems.
The Audit Committee selects the Trust's independent auditors. During the 1996
Fiscal Year, Messrs. Bricker and Giles served on the Audit Committee. Current
members of the Audit Committee are Messrs. Bricker, Kelley and Giles.
COMPENSATION COMMITTEE. The Compensation Committee met two times
during the 1996 Fiscal Year. The Compensation Committee establishes guidelines
for compensation and benefits of the executive officers of the Trust based upon
achievement of objectives and other factors. The Compensation Committee is also
responsible for acting upon all matters concerning, and exercising such
authority as is delegated to it under the provisions of, any benefit,
retirement or pension plan. During the 1996 Fiscal Year, Messrs. Bricker and
Giles served on the Compensation Committee. Current members of the Compensation
Committee are Messrs. Bricker, Duncan and Giles.
INVESTMENT COMMITTEE. The Investment Committee was formed in 1997 and
consists of Messrs. Duncan, Giles, Kraska, Platt and Wolcott. The Investment
Committee reviews potential real property acquisitions and makes
recommendations to the Board of Trust Managers.
ELECTION OF TRUST MANAGERS AND EXECUTIVE OFFICERS
Trust Managers are elected at each annual meeting of the shareholders
of the Trust and remain in office until their successors have been duly elected
and qualified, or until their earlier death, retirement, resignation or
removal. Executive officers serve at the discretion of the Trust Managers.
Pursuant to the terms of the MSAM Agreement, MSAM has the right to
nominate for election two Trust Managers to the Board of Trust Managers until
the value of the Common Shares and Common Share equivalents based on ten days'
average closing prices on the NYSE (the "Equity Capitalization") equals $150
million, at which time MSAM shall cause one of its designees to not seek
re-election at the next annual meeting or, at the Trust's option, to
immediately resign. When the Equity Capitalization of the Trust reaches $250
million, MSAM shall cause its remaining designee to not seek re-election at the
next annual meeting or, at the Trust's option, to immediately resign. Pursuant
to the terms of the ABKB Agreements, ABKB and LaSalle Advisors collectively
have the right to nominate for election one Trust Manager to the Board of Trust
Managers until the Equity Capitalization of the Trust equals $250 million, at
which time ABKB and LaSalle Advisors shall cause their designee to not seek
re-election at the next annual meeting or, at the Trust's option, to
immediately resign.
EXECUTIVE AND TRUST MANAGER COMPENSATION
The following table summarizes the compensation paid by the Trust to
the executive officers of the Trust for the three years ended December 31,
1996:
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<PAGE> 20
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
- -------------------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles W. Wolcott 1996 $195,000 $100,000 (1) $8,039 (4)
President and CEO 1995 189,000 72,000 (2) 7,040 (5)
1994 180,000 62,100 (3) 7,222 (6)
Marc A. Simpson 1996 110,000 55,000 (1) 8,039 (4)
Vice President and 1995 105,000 40,000 (2) 6,838 (5)
CFO, Secretary and 1994 81,859 (7) 34,500 (3) 4,095 (6)
Treasurer
David B. Warner 1996 110,000 55,000 (1) 8,039 (4)
Vice President - 1995 100,000 43,000 (2) 6,312 (5)
Real Estate Operations 1994 92,000 34,500 (3) 4,429 (6)
</TABLE>
(1) Represents bonus payments for 1996 paid in January 1997.
(2) Represents bonus payments for 1995 paid in january 1996.
(3) Represents bonus payments for 1994 paid in february 1995.
(4) Represents the trust's contribution to the retirement and profit
sharing plan in January 1997.
(5) Represents the trust's contribution to the retirement and profit
sharing plan in January 1996.
(6) Represents the trust's contribution to the retirement and profit
sharing plan paid in February 1995.
(7) Mr. Simpson's annualized salary for 1994 was $100,000.
In March 1996, the Trust increased the annual fee paid its
Non-Employee Trust Managers to $40,000 plus $1,000 for each Trust Manager or
committee meeting attended in person. Additionally, the Trust Managers are
reimbursed for their expenses incurred in connection with their duties as Trust
Managers. In addition to the annual fee, Mr. Bricker received $16,000 and Mr.
Giles received $11,000 in 1996 for attendance at Trust Manager and committee
meetings. The Trust Managers voted to reduce their compensation effective July
1, 1997 to an annual retainer of $25,000 plus $1,000 for each Trust Manager
meeting attended in person, $500 for each Trust Manager meeting attended via
teleconference, $500 for each committee meeting attended in person and $250 for
each committee meeting attended via teleconference. Each Non-Employee Trust
Manager has the right to receive his annual retainer in cash and/or Common
Shares. Section 3.8 of the Fourth Amended and Restated Bylaws of the Trust has
been amended by the Trust Managers to limit the increase in cash compensation
paid to the Trust Managers to 20% over the prior year without the approval of
the holders of a majority of the shares cast at the annual meeting of
shareholders.
EMPLOYMENT AGREEMENTS
On March 13, 1996, the Trust entered into Bonus and Severance
Agreements with each of Messrs. Wolcott, Simpson and Warner. These agreements
are effective through March 13, 1999. Effective as of May 12, 1997, the Trust
entered into a Bonus and Severance Agreement with Lewis D. Friedland, which is
effective through May 12, 2000. These agreements formalized the Trust's policy
of providing an annual incentive bonus to each employee based upon the
achievement of certain objectives established by the Compensation Committee. In
addition, the agreements generally provide that if the employee is terminated
within one year after a Change in Control (as defined), the employee will be
entitled to receive an amount equal to one times the employee's annual base
salary, continuation of health and welfare benefits for up to one year and the
prorated amount of any annual incentive bonus earned through the date of
termination.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 7, 1997, the Trust signed definitive merger agreements dated
as of June 30, 1997 (the "Merger Agreements") with each of the RELPs, pursuant
to which the RELPs will be merged into the Trust (the "Merger"). As a result of
the Merger, the Trust will acquire nine real estate properties consisting of
three office buildings totaling 550,000 square feet, two industrial properties
totaling 320,000 square feet, three office/research and development properties
totaling 156,000 square feet, and one retail property totaling 77,000 square
feet. Additionally, the Trust will acquire a 55.84% joint venture interest in a
291,000 square foot office property. The agreed value of the interests in
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<PAGE> 21
these properties, including assumption of $31,704,000 in related debt, is
$89,622,000 (based on a price of $2.625 per Common Share).
Pursuant to the terms of the Merger Agreements, the Trust will issue
an aggregate 22,064,147 Common Shares at $2.625 per share (for a total value of
$57,918,385) in exchange for the limited partnership interests in the RELPs.
The number of Common Shares to be issued to each RELP will be equal to the net
asset value for each RELP (as agreed by the Trust and each RELP) divided by
$2.625. The number of Common Shares to be received by a limited partner in each
RELP will be computed in accordance with such partner's percentage interest in
the RELP. The general partner of each RELP (collectively, the "RELP General
Partners") has waived any right it may have to receive Common Shares in
exchange for its general partnership interest. The Merger, which has been
approved by the Trust's Board of Trust Managers and the Board of Directors of
each of the RELP General Partners, is subject to due diligence by both parties
and certain other conditions, including approval by the shareholders of the
Trust and the limited partners of each of the RELPs.
Messrs. Kelley and Duncan, who currently serve on the Trust's Board of
Trust Managers and as executive officers of Realco, also serve as directors and
officers of each of the RELP General Partners. Each RELP General Partner is a
wholly-owned subsidiary of Realco. Realco is one of the largest shareholders of
the Trust. See "Security Ownership of Certain Beneficial Owners and
Management." An affiliate of Realco will manage and lease the properties
formerly owned by the RELPs on behalf of the Trust after the Merger. Realco
appointed Messrs. Kelley and Duncan to the Trust's Board of Trust Managers
pursuant to the terms of the Realco Share Purchase Agreement. Additionally,
pursuant to the terms of the Realco Share Purchase Agreement, Realco retains
the right to nominate an additional two Trust Managers to the Trust's Board of
Trust Managers until December 1999.
As noted above, the RELP General Partners have waived their rights to
receive any Common Shares to which they may be entitled in connection with the
Merger. Any such Common Shares will instead be distributed to the limited
partners of the respective RELP. Neither Messrs. Kelley and Duncan nor Realco
shall receive any Common Shares or any other benefit (except as otherwise
discussed above) in connection with the Merger.
On August 20, 1997, a purported class action lawsuit (the "Merger
Lawsuit"), filed in the Superior Court of the State of Arizona, was served upon
Realco, the RELP General Partners, certain other affiliated entities and the
individual members of the Board of Directors of each of the RELP General
Partners. The Trust also was named as a defendant. The Merger Lawsuit alleges,
among other things, breaches of fiduciary duty in connection with the
transactions contemplated by the Merger Agreements. The Merger Lawsuit seeks,
among other things, to enjoin the consummation of the Merger and damages,
including attorneys' fees and expenses. The Trust believes that the plaintiffs'
claims are without merit and intends to defend vigorously against the Merger
Lawsuit.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No person who served as a member of the Trust's Compensation Committee
during the 1996 Fiscal Year (i) was an officer or employee of the Trust during
such year, (ii) was formerly an officer of the Trust, or (iii) was a party to
any material transaction set forth under "Certain Relationships and Related
Transactions" above.
No executive officer of the Trust served as a member of the
compensation or similar committee or board of directors of any other entity,
one of whose executive officers served on the Trust's Compensation Committee or
Board of Trust Managers.
NOTICE OF INDEMNIFICATION
Pursuant to the Texas REIT Act, the Trust hereby reports to its
shareholders that the Trust indemnified Messrs. Bricker and Wolcott in
connection with the litigation involving the Trust, Pure World, Inc. and Robert
Strougo (the "Shareholder Litigation"). The Trust previously acquired director
and officer liability insurance for its Trust Managers, which policy reimbursed
the Trust for sums in excess of $200,000 paid by the Trust to indemnify Trust
Managers for expenses incurred in connection with actions such as the
Shareholder Litigation. In connection with the Shareholder Litigation, the
Trust paid the $200,000 retention under the director and officer liability
insurance policy.
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<PAGE> 22
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Compensation for the executive officers of the Trust is administered
under the direction of the Compensation Committee of the Trust Managers. The
following is the Compensation Committee's report, in its role as reviewer of
the Trust's pay programs, on 1996 compensation practices for the executive
officers of the Trust. The report and the performance graph that appears
immediately after such report shall not be deemed to be soliciting material or
to be filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), or the
Exchange Act or incorporated by reference in any document so filed.
BASE SALARY. The Compensation Committee determines base salaries for
executive officers by evaluating the responsibilities of the position held and
the experience of the individual, and by reference to the competitive
marketplace for executive talent, including a comparison to base salaries for
comparable positions at other real estate investment trusts ("REITs"), to
historical levels of salary paid by the Trust, and to recommendations of
independent compensation consultants to the Trust. Salary adjustments are based
on a periodic evaluation of the performance of the Trust and of each executive
officer, and also take into account new responsibilities as well as changes in
the competitive marketplace. Mr. Wolcott, who has served as President and Chief
Executive Officer of the Trust since the commencement of his employment with
the Trust in May of 1993, received a base salary of $195,000 for the 1996
Fiscal Year. Mr. Warner, who has served as the Vice President - Real Estate
Operations of the Trust since May 1993, received a base salary of $110,000 for
the 1996 Fiscal Year. Mr. Simpson, who has served as Secretary, Treasurer and
Chief Financial Officer of the Trust since March 1994, received a base salary
of $110,000 for the 1996 Fiscal Year. The Compensation Committee determined
that base compensation levels for the Trust for the 1996 Fiscal Year were below
the REIT industry as a whole, which was consistent with the Trust's desire to
bring its operating performance up to the standards of the REIT industry and to
focus on the incentive portion of compensation during a period of repositioning
the Trust's operations.
PERFORMANCE-BASED BONUS PLAN. Each year, in order to encourage the
accomplishment of the short-term goals of the Trust, the Compensation Committee
reviews and approves a performance-based bonus plan for executive officers
based in part on increases in Funds From Operations ("FFO") per share as
defined by NAREIT and adjusted by the Compensation Committee as described
below. The NAREIT 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. Additionally, extraordinary items or significant nonrecurring
items that distort comparability are not considered in determining FFO. The
Compensation Committee also believes FFO, when used as a performance
measurement, should be adjusted to exclude certain nonrecurring costs such as
litigation and contested proxy costs, as well as effects from other
transactions which distort comparability between periods such as property sales
and acquisitions. The Compensation Committee noted that other REITs do not
adjust the NAREIT definition of FFO as adjusted by the Compensation Committee.
However, the Compensation Committee believes that in light of the large amount
of expenses incurred by the Trust due to litigation and proxy contests, an
adjustment to FFO was appropriate when determining bonuses. During 1996, each
executive officer was eligible to receive a bonus of 40% of base salary based
on realization of the first stage of principal discount provided for under the
settlement agreement executed with The Manufacturers Life Insurance Company and
The Manufacturers Life Insurance Company (U.S.A.) (collectively, "MLI"). In
addition, each executive officer was eligible to receive a bonus of 10% of base
salary based on achievement of $0.11 per share in adjusted FFO. With respect to
the 1996 Fiscal Year, the Compensation Committee awarded a $100,000 bonus to
Mr. Wolcott, a $55,000 bonus to Mr. Warner and a $55,000 bonus to Mr. Simpson.
OTHER COMPENSATION. Other compensation payable to the executives of
the Trust includes contributions to the Employee Retirement and Profit Sharing
Plan of the Trust and insurance premiums paid by the Trust under the Trust's
medical, dental, life and long-term disability plans.
1996 Compensation Committee,
William H. Bricker
Robert E. Giles
20
<PAGE> 23
PERFORMANCE GRAPH
The rules and regulations of the Commission require the presentation
of a line graph comparing, over a period of five years, the cumulative total
shareholder return to a performance indicator of a broad equity market index
and either a nationally recognized industry index or a peer group index
constructed by the Trust. The chart below compares the performance of the
Common Shares with the performance of the Standard & Poors 500 Index and the
NAREIT Equity REIT Index. The comparison assumes $100 was invested on December
31, 1991 in the Common Shares and in each of the foregoing indices and assumes
reinvestment of dividends.
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
DECEMBER
---------------------------------------------------
1991 1992 1993 1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S & P 500 100 107.67 118.43 119.97 164.88 202.74
EQUITY REIT 100 120.66 143.23 147.54 164.48 229.82
AIP REIT 100 117.66 141.68 86.58 128.31 147.43
</TABLE>
21
<PAGE> 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Shares by (i) each Trust Manager, (ii) the
Trust's Chief Executive Officer and each executive officer of the Trust, (iii)
all Trust Managers and executive officers of the Trust as a group, and (iv) to
the Trust's knowledge, by any person owning beneficially more than 5% of the
outstanding shares of such class, in each case at September 12, 1997. The
percentage ownership of each person assumes (i) the conversion of the Modified
Notes held by Realco into 2,724,809 Common Shares, (ii) the purchase of an
additional 995,847 Common Shares by clients and affiliates of MSAM and (iii)
the exercise of vested options to purchase an aggregate 195,000 Common Shares.
Except as otherwise noted, each person named in the table has sole voting and
investment power with respect to all Common Shares shown as beneficially owned
by such person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- ---------------- ----------------------- --------
<S> <C> <C>
Theodore R. Bigman .................................... 10,000(1) *
William H. Bricker .................................... 12,000(1) *
T. Patrick Duncan ..................................... 3,000 *
Robert E. Giles ....................................... 13,750(1) *
Edward B. Kelley ...................................... 5,000 *
Russell C. Platt ...................................... 10,000(1) *
Stanley J. Kraska, Jr ................................. 10,000(1)(2) *
Charles W. Wolcott .................................... 133,000(3) *
Marc A. Simpson ....................................... 34,500(4) *
David B. Warner ....................................... 26,000(4) *
Lewis D. Friedland .................................... 35,000(5) *
USAA Real Estate Company .............................. 5,927,015(6) 21.79%
8000 Robert F. McDermott Freeway
IH-10 West, Suite 600
San Antonio, Texas 78230-3884
ABKB/LaSalle Securities Limited Partnership
LaSalle Advisors Limited Partnership
William K. Morrill, Jr
Stanley J. Kraska, Jr
Keith R. Pauley ....................................... 6,122,449(7) 22.50%
200 East Randolph Drive
Chicago, Illinois 60603
Morgan Stanley, Dean Witter, Discover & Co.
The Morgan Stanley Real Estate Special
Situations Fund I, L.P.
The Morgan Stanley Real Estate Special
Situations Fund II, L.P.
Morgan Stanley Asset Management Inc. .................. 8,163,265(8)(9) 30.01%
1221 Avenue of the Americas
New York, New York 10020
All Trust Managers and executive officers as a
group
(11 persons) ....................................... 292,250 1.07%
</TABLE>
- --------------
* Ownership is less than 1% of outstanding Common Shares.
(1) Includes 10,000 Common Shares that may be purchased upon exercising
vested options.
(2) See footnote (7) below.
22
<PAGE> 25
(3) Includes 50,000 Common Shares that may be purchased upon exercising
vested options.
(4) Includes 20,000 Common Shares that may be purchased upon exercising
vested options.
(5) Includes 35,000 Common Shares that may be purchased upon exercising
vested options.
(6) Includes (i) 2,724,809 Common Shares into which the Modified Notes
held by Realco may be converted (assuming a $2.00 per share
conversion price) and (ii) 20,000 Common Shares that may be purchased
upon exercising vested options acquired from Messrs. Duncan and Kelley.
As Trust Managers of the Trust, Messrs. Duncan and Kelley each received
vested options to purchase 10,000 Common Shares, which they then
transferred to Realco pursuant to Realco's internal policies.
(7) Based upon the Schedule 13D filed jointly by the listed reporting
persons with the Commission on July 21, 1997, (i) ABKB has sole voting
and dispositive power over 3,912,245 Common Shares; (ii) LaSalle
Advisors has sole voting and dispositive power over 2,210,204 Common
Shares; and (iii) each of Messrs. Morrill, Kraska and Pauley, as a
managing director of both ABKB and LaSalle Advisors, has sole voting
and dispositive power over the 3,912,245 Common Shares controlled by
ABKB and the 2,210,204 Common Shares controlled by LaSalle Advisors
(an aggregate 6,122,449 Common Shares). Messrs. Morrill, Kraska and
Pauley disclaim, however, beneficial ownership of the 6,122,449 Common
Shares, but state that as a group, the reporting persons have the sole
power to vote and dispose of 6,122,449 Common Shares.
(8) Includes 995,847 Common Shares that may be acquired by certain clients
and affiliates of MSAM in connection with the MSAM Agreement.
(9) Based upon the Schedule 13D filed jointly by the listed reporting
persons with the Commission on July 18, 1997, (i) Morgan Stanley, Dean
Witter, Discover & Co. has sole voting and dispositive power over
627,943 Common Shares and shared voting and dispositive power over
6,539,476 Common Shares; (ii) MSAM has shared voting and dispositive
power over 6,539,476 Common Shares; (iii) The Morgan Stanley Real
Estate Special Situations Fund I, L.P. has shared voting and
dispositive power over 1,883,830 Common Shares; and (iv) The Morgan
Stanley Real Estate Special Situations Fund II, L.P. has shared voting
and dispositive power over 2,326,660 Common Shares. Pursuant to
separate investment management agreements between MSAM and certain
clients named in Exhibit A to the MSAM Agreement, MSAM has been
granted voting and dispositive power with respect to the Common Shares
held by each client.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4 and 5 (and any amendments
thereto) furnished to the Trust with respect to the 1996 Fiscal Year or written
representations from certain reporting persons that no Form 5 was required, no
person failed to disclose on a timely basis, as disclosed in such forms,
reports required by Section 16(a) of the Exchange Act.
PROPOSALS BY SHAREHOLDERS
A proper proposal submitted by a shareholder for presentation at the
Trust's 1997 Annual Meeting and received at the Trust's principal executive
office no later than January 12, 1998 will be included in the Proxy Statement
and Proxy related to the 1997 Annual Meeting.
OTHER MATTERS
The Trust Managers are aware of no other matter that will be presented
for action at the Annual Meeting. IF SUCH PROPOSALS OR ANY OTHER MATTERS
REQUIRING A VOTE OF THE SHAREHOLDERS PROPERLY COMES BEFORE THE ANNUAL MEETING,
THE PERSONS AUTHORIZED UNDER THE PROXIES WILL VOTE AND ACT ACCORDING TO THEIR
BEST JUDGMENT.
EXPENSES
The expense of preparing, printing and mailing proxy materials to the
Trust's shareholders will be borne by the Trust. The Trust has engaged The
Herman Group, Inc. to assist in the mailing of proxies to shareholders. Proxies
may be solicited personally or by telephone by officers and employees of the
Trust, none of whom will receive additional compensation therefor. In addition
to mailing this material to Trust shareholders, the Trust has asked banks and
brokers to forward copies to persons for whom they hold shares of the Trust and
to request authority for execution of the Proxies. The Trust will reimburse the
banks and brokers for their reasonable out-of-pocket expenses in doing so. The
expense of preparing, printing and mailing the Proxy Statement and all
supplemental materials, as well as the cost of the solicitors and attorneys,
are anticipated to be approximately $175,000 and will be borne by the Trust. Of
23
<PAGE> 26
these expenses, the estimated fees for The Herman Group, Inc. are $5,000.
The Herman Group, Inc. also will be reimbursed for reasonable out-of-pocket
expenses.
ANNUAL REPORT TO SHAREHOLDERS
The Trust's 1996 Annual Report (which does not form a part of the
proxy solicitation material) was mailed on or about March 13, 1997 to all
shareholders of record as of March 10, 1997. A COPY OF THE TRUST'S ANNUAL
REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, AS FILED WITH THE
COMMISSION, WILL BE FURNISHED TO SHAREHOLDERS, WITHOUT EXHIBITS AND WITHOUT
CHARGE, UPON WRITTEN REQUEST TO: MARC A. SIMPSON, INVESTOR RELATIONS, AMERICAN
INDUSTRIAL PROPERTIES REIT, 6210 N. BELTLINE ROAD, SUITE 170, IRVING, TEXAS
75063.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Trust
and its subsidiaries for the six months ended June 30, 1997 and 1996
(unaudited) and for each of the five years in the period ended December 31,
1996 (audited). 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>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- -----------------------
1997 1996 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ---- ----
(in thousands except share and per share data)
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues ................. $ 5,252 $ 5,985 $ 11,478 $ 11,779 $ 11,226 $ 10,641 $ 15,139
Loss from operations (a) ....... (2,073) (2,268) (4,732) (4,338) (4,311) (5,121) (18,719)
Net income (loss) (a) .......... 882 (901) 1,255 (4,584) (4,655) (7,867) (17,593)
Per share:
Loss from operations (a) ..... $ (0.20) $ (0.25) $ (0.52) $ (0.48) $ (0.47) $ (0.57) $ (2.06)
Net income (loss) (a) ...... 0.09 (0.10) 0.14 (0.51) (0.51) (0.87) (1.94)
Distributions paid ......... -- 0.04 0.04 0.04 -- 0.16 0.20
BALANCE SHEET DATA:
Total assets ................... $ 73,285 $ 83,158 $ 78,936 $ 89,382 $ 92,550 $ 88,297 $ 110,446
Total debt ..................... 49,720 65,174 53,216 62,815 65,613 57,078 68,578
Shareholders' equity ........... 23,565 17,984 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 Operations" 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,
and $2,643 and $1,367 for the six months ended June 30, 1997 and 1996,
respectively.
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.
24
<PAGE> 27
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 Trust's $45.2 million in 8.8% unsecured notes
payable (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.
25
<PAGE> 28
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.
Comparison of the Three Months Ended June 30, 1997 to the Three Months Ended
June 30, 1996
The overall occupancy of the Trust's portfolio on June 30, 1997 was
93.7%, compared to 93.9% on June 30, 1996 and 91.1% on March 31, 1997. Property
revenues decreased from $3,029,000 to $2,584,000 and property operating
expenses decreased from $967,000 to $905,000 when comparing the quarter ended
June 30, 1996 to the same quarter in 1997, primarily as a result of the sale of
two properties during the fourth quarter of 1996 and one property during the
first quarter of 1997. When comparing the quarter ended June 30, 1997 to the
same period in 1996 on a same property basis, revenue increased 4.7% and net
operating income increased 2.7% for the Trust's industrial properties whereas
revenue decreased 17.4% and net operating income decreased 28.3% for the
Trust's retail property. The decline in the performance of the Trust's retail
property was primarily related to collection of approximately $80,000 in lease
termination fees during the second quarter of 1996 and to a decline in average
occupancy from 85.5% for the quarter ended at June 30, 1996 to 83.8% for the
quarter ended June 30, 1997. The Trust is continuing its efforts to increase
leasing at this property.
The Trust had a net loss from operations of $1,054,000 for the quarter
ended June 30, 1997 compared to $758,000 for the same quarter in 1996. This
increased loss was primarily related to the decrease in property net operating
income of $383,000 explained above and an increase in administration and
overhead expenses of $62,000 (due primarily to the addition of two Trust
Managers in December 1996 and the use of compensation and computer consultants
during 1997), offset by a decrease in litigation and proxy costs of $199,000
(due to the settlement of litigation matters during 1996, offset by the costs
of the Trust's special shareholder meeting in June 1997).
Comparison of the Six Months Ended June 30, 1997 to the Six Months Ended June
30, 1996
When comparing the six months ended June 30, 1997 with the same period
in 1996, property revenues decreased from $5,846,000 in 1996 to $5,221,000 in
1997 and property operating expenses decreased from $1,907,000 in 1996 to
$1,841,000 in 1997, primarily as a result of the sale of two properties during
the fourth quarter of 1996 and one property during the first quarter of 1997.
When comparing the six months ended June 30, 1997 to the same period in 1996 on
a same property basis, revenue increased 6.7% and net operating income
increased 5.6% for the Trust's industrial properties whereas revenue decreased
14.3% and net operating income decreased 24.6% for the Trust's retail property.
The decline in the performance of the Trust's retail property was primarily
related to nonrecurring collections of approximately $80,000 in lease
termination fees and $76,000 in percentage rents in 1996, bad debt writeoffs of
approximately $20,000 in 1997 and a decline in average occupancy from 86.2% in
1996 to 84.8% in 1997. As noted above, the Trust is continuing its efforts to
increase leasing at this property.
The Trust had a net loss from operations of $2,073,000 for the six
months ended June 30, 1997 compared to $2,268,000 for the same period in 1996.
This change was primarily related to the decrease in property net operating
income of $559,000 explained above, a decrease in interest income of $108,000
(resulting from a decrease in investable funds due to the settlement of
litigation in 1996), a decrease in litigation and proxy costs of $451,000 (due
to the settlement of litigation matters during 1996, offset by the costs of the
Trust's special shareholder meeting in June 1997), a net decrease in interest
expense of $314,000 (due to the paydown/forgiveness of debt during 1996 and
1997, offset by the accrual of $647,000 in interest expense relating to the
expected future conversion of the Modified Notes held by Realco into Common
Shares), and a decrease in administration and overhead expenses of $79,000 (due
to $240,000 in incentive compensation expense in January 1996, offset by the
addition of two Trust Managers in December 1996 and the use of compensation and
computer consultants during 1997).
Analysis of Cash Flows - Year Ended December 31, 1996
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,
26
<PAGE> 29
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 Realco, and the first quarter distribution to
shareholders.
Analysis of Cash Flows - Six Months Ended June 30, 1997
Net cash used in operating activities was $515,000 for the six months
ended June 30, 1997. This is primarily the net result of the operational items
discussed above, a decrease in accounts payable, other liabilities and tenant
security deposits of $623,000 (due principally to the payment of property taxes
during the first quarter) and an offsetting increase in accrued interest of
$636,000 (due to the accrual of $647,000 in interest related to the conversion
of the Modified Notes by Realco). Included in net cash used in operating
activities is approximately $437,000 in litigation and proxy costs, which
management believes is of a nonrecurring nature. Management believes that, in
the future, cash flow provided by operations will increase due to the
elimination of such nonrecurring items and the Trust's plans to pursue a growth
strategy.
Net cash provided by investing activities was $1,599,000 for the six
months ended June 30, 1997 resulting from the expenditure of $430,000 for
capitalized leasing commissions and improvements to real estate properties and
$2,029,000 received from the sale of the Trust's Burnsville property in March
1997.
Net cash used in financing activities was $3,841,000, resulting from
the payment of principal on mortgage notes payable. Included in this amount is
approximately $1,924,000 related to the payment of the mortgage lien on the
Trust's Burnsville property which was sold in March 1997.
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 nonrecurring items that distort
comparability should not be considered in arriving at FFO. Accordingly, the
Trust does not include the interest expense accrued related to the expected
future conversion of the Modified Notes held by Realco into Common Shares or
the default rate interest accrued on the MLI Notes 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.
27
<PAGE> 30
FFO and FAD are calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
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 ("FFO") .............................. $(1,473) $ (243) $ (559)
======= ======= =======
Funds from Operations ("FFO") .............................. $(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 ("FAD") ................... $(2,652) $(1,105) $(1,879)
======= ======= =======
Weighted average Common 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 and 1995:
<TABLE>
<CAPTION>
FYE 12/31/96 FYE 12/31/95
--------------------- ---------------------
Amount PSF Amount PSF
------ --------- ------ --------
<S> <C> <C> <C> <C>
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>
28
<PAGE> 31
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
------------ ---------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C>
Net income (loss) ............................................. $ (1,054) $ 609 $ 882 $ (901)
Exclude effects of:
Gain on sales of real estate .................................. -- -- (312) --
Extraordinary gain on extinguishment of debt .................. -- (1,367) (2,643) (1,367)
Real estate depreciation and amortization ..................... 696 704 1,389 1,404
Additional interest accrual assuming future conversion of
Debt to equity ................................................ 375 -- 647 --
Default rate interest accrual ................................. -- 42 -- 369
-------
Funds from operation ("FFO") .................................. $ 17 $ (12) $ (37) $ (495)
======== ======= ======== =======
Funds from operation ("FFO") .................................. $ 17 $ (12) $ (37) $ (495)
Capitalized improvements and
leasing commissions ..................................... (254) (424) (430) (618)
Gaap straight line rent adjustment ............................ 1 71 45 109
-------
Funds available for distribution ("FAD") ...................... $ (236) $ (365) $ (422) $(1,004)
======== ======= ======== =======
Weighted average common shares outstanding ................... 10,000.0 9,075.4 10,000.0 9,075.4
</TABLE>
FFO for the Trust improved from $(12,000) to $17,000 when comparing
the quarter ended June 30, 1996 to the same quarter in 1997. This improvement
primarily results from the increased loss from operations explained above and
the offsetting elimination of $375,000 in accrued interest related to the
expected future conversion of the Modified Notes held by Realco into Common
Shares.
FFO for the Trust improved from $(495,000) to $(35,000) when comparing
the six months ended June 30, 1996 to the same period in 1997. This improvement
reflects the loss from operations explained above and adjustments to eliminate
$647,000 in accrued interest related to the expected future conversion of the
Modified Notes into Common Shares in 1997 and $369,000 in default rate interest
on the MLI Notes in 1996.
LIQUIDITY AND CAPITAL RESOURCES
On July 10, 1997 and July 17, 1997, the Trust sold a total of
7,167,418 Common Shares to clients and affiliates of MSAM. Pursuant to the MSAM
Agreement, the Common Shares were issued at $2.45 per share, generating total
proceeds of $17,560,176. On July 11, 1997, the Trust sold to certain clients
and affiliates of ABKB and LaSalle Advisors a total of 6,122,449 Common Shares
at $2.45 per share for total proceeds of $15,000,000. Pursuant to the MSAM
Agreement, clients and affiliates of MSAM may purchase an additional 995,847
Common Shares at $2.45 per share.
The Trust intends to utilize these funds to execute a growth strategy
which will emphasize the purchase of light industrial real estate properties.
The Trust believes that such properties represent a highly fragmented sector of
the industry and offer superior yields because of the general lack of pricing
pressure from institutional investors. The Trust also believes that the
management intensive nature of these properties offers opportunities for
enhancing returns through efficient customer-oriented operating systems.
Although the Trust believes that it can make reasonable and prudent purchases
of such real estate properties, there is no assurance that such investments
will be available to the Trust or that the yield on such investments will
result in an adequate return to shareholders. The Trust may make additional
private placements of equity or secondary public offerings or may issue
additional debt in the form of acquisition lines or mortgage financings in
order to raise additional capital to invest in real estate properties.
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 June 30, 1997, the Trust had $1,253,000 in
29
<PAGE> 32
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 MLI Notes, 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 settlement agreement, $4,220,000 in debt was forgiven, allowing the Trust
to record an extraordinary gain of $4,443,000 (including accrued interest
forgiven).
On February 26, 1997, Realco purchased the MLI Notes. Pursuant to an
earlier agreement with the Trust, the MLI Notes were then modified by Realco
to, among other things, reduce the principal amount of these notes from
$9,419,213 to $7,040,721, resulting in an extraordinary gain on extinguishment
of debt (including certain accrued interest) to the Trust of $2,643,000. At the
time the MLI Notes were modified, the Trust made a principal payment of
$1,591,103, reducing the outstanding principal amount to $5,449,618. According
to the modification terms, interest continues to accrue at 8.8%, payable
monthly, and the maturity of the Modified Notes is extended from March 31, 1997
to December 31, 2000. Pursuant to shareholder approval on June 30, 1997, Realco
has the option to convert the principal amount of the Modified 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). The Trust currently expects Realco to
elect this conversion in the fourth quarter of 1997. If conversion of this debt
were to occur in 1997, Realco would own approximately 21.87% of the outstanding
Common Shares (assuming the issuance of 995,847 Common Shares to certain
clients and affiliates of MSAM).
The Trust declared a distribution of $0.04 per Common Share in
February 1996. The MLI settlement 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 Realco provide that the Trust may not
pay distributions until the debt is paid in full; however, this restriction
terminated when the shareholders approved Realco's conversion right and
approved an increase in the authorized Common Shares of the Trust at the June
30, 1997 shareholder meeting. The Trust intends to evaluate future
distributions on a quarterly basis.
The Trust has not paid distributions on a regular basis since 1993.
The Trust intends to evaluate its distribution policy on a quarterly basis.
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 at such time.
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.
On July 7, 1997, the Trust signed the Merger Agreements with each of
the RELPs pursuant to which the RELPs will be merged into the Trust. If the
Merger is accomplished, the Trust will acquire nine real estate properties
consisting of three office buildings totaling 550,000 square feet, two
industrial properties totaling 320,000 square feet, three office/research and
development properties totaling 156,000 square feet, and one retail property
totaling 77,000 square feet. In addition, the Trust will acquire a 55.84% joint
venture interest in a 291,000 square foot office property. The agreed value of
the interests in these properties, including assumption of $31,704,000 in
related debt, is $89,622,000. Pursuant to the terms of the Merger Agreements,
the Trust will issue an aggregate of 22,064,147 Common Shares at
30
<PAGE> 33
$2.625 per share (for a total value of $57,918,385) to the limited partners in
the RELPs in exchange for their limited partnership interests in the RELPs. The
Merger, which has been approved by the Trust's Board of Trust Managers and the
Board of Directors of each of the RELP General Partners, is subject to due
diligence by both parties and certain other conditions, including approval by
the shareholders of the Trust and the limited partners of each of the RELPs.
At June 30, 1997, the Trust had $41,547,000 in mortgage debt
outstanding, all of which is comprised of fixed rate debt with a weighted
average interest rate of 8.61%. This debt represents a debt to total market
capitalization ratio of approximately 58%. The Trust intends to lower this
ratio in the future through additional equity placements and future purchases
of real estate properties with less leverage.
TRANSACTIONS WITH REALCO
During 1996 and 1997, there were a series of transactions involving
Realco. On November 25, 1996, 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 the
Shareholder Litigation, which the Trust had initiated, alleging that certain
significant shareholders of the Trust had made material misrepresentations in
their filings with the Commission. The $2.75 price per share was negotiated
between the selling shareholders and 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
Shareholder Litigation and Realco did not want to purchase Common Shares until
the settlement of the litigation. In order to facilitate the settlement of the
litigation, 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 Realco for $2.75 per share, the same price at
which 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, 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 Realco's current ownership of 3,182,206 Common Shares.
On December 18, 1996, the Trust entered into an agreement granting
Realco the right to commence negotiations to purchase the MLI Notes and, if
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, 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, 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). 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
the 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 shareholders of the Trust approved the conversion feature of the
Modified Notes and an increase in the authorized Common Shares of the Trust on
June 30, 1997. The Trust anticipates that Realco will convert the principal
amount of the Modified Notes into Common Shares in the fourth quarter of 1997.
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 September 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 has, or will,
result in additional interest expense of approximately $272,000 in the first
quarter of 1997, approximately $375,000 in the second quarter of 1997, and
approximately $375,000 in the third 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, $2.38 per share on February 26, 1997, and $3.00 per share on June 30,
1997.
31
<PAGE> 34
AMERICAN INDUSTRIAL PROPERTIES REIT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors.................................................................... F-2
Consolidated Financial Statements (audited):
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 (audited).......................................... F-7
Financial Statement Schedule:
Schedule III - Consolidated Real Estate and Accumulated Depreciation.......................... F-14
Notes to Schedule III........................................................................ F-15
Consolidated Financial Statements for the quarter ended June 30, 1997
(unaudited):
Consolidated Statements of Operations for the three months and six months ended
June 30, 1997 and 1996 (unaudited)................................................... F-16
Consolidated Balance Sheets as of June 30, 1997 (unaudited) and
December 31, 1996................................................................... F-17
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 (unaudited)................................................... F-18
Notes to Consolidated Financial Statements (unaudited)........................................ F-19
</TABLE>
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.
F-1
<PAGE> 35
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
F-2
<PAGE> 36
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
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) --
--------- --------- ---------
Loss before extraordinary items......................... (4,555) (4,529) (4,311)
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.
F-3
<PAGE> 37
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
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) (58,093)
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.
F-4
<PAGE> 38
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST ADDITIONAL RETAINED
--------------------- 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>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
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.
F-6
<PAGE> 40
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.
F-7
<PAGE> 41
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-8
<PAGE> 42
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
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.
F-9
<PAGE> 43
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-10
<PAGE> 44
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-11
<PAGE> 45
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
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
===========
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.
F-12
<PAGE> 46
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-13
<PAGE> 47
SCHEDULE III
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
($000'S)
<TABLE>
<CAPTION>
INITIAL COST
ENCUM- ---------------------- WRITEDOWNS
BRANCES BUILDINGS & CAPITALIZED AND
DESCRIPTION AT 12/31/96 LAND IMPROVEMENTS IMPROVEMENTS RETIREMENTS ALLOWANCES
----------- ----------- ------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 2,775 $ 1,303 $ 5,213 $ 424 ($ 5) ($ 3,516)
Commerce Park............ 2,100 1,108 4,431 542 (2,014)
Gateway 5 & 6............ 2,850 935 3,741 693 (1,861)
Northgate II............. 5,175 2,153 8,612 758 (4,122)
Northview................ 2,194 658 2,631 38
Plaza Southwest.......... 3,375 1,312 5,248 979
Westchase................ 1,327 697 2,787 322 (74) (1,158)
Meridian................. 1,163 262 1,047
CALIFORNIA --
Huntington Drive......... 4,575 1,559 6,237 731
MARYLAND --
Patapsco................. 3,112 1,147 4,588 371 (1,250)
MINNESOTA --
Burnsville............... 1,927 761 3,045 443 (18) (1,563)
WISCONSIN --
Northwest Business
Park................... 1,278 1,296 5,184 762 (131)
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 11,946 6,799 27,194 4,383 (241)
TRUST HOME OFFICE.......... 31
------- ------- ------- ------- ----- --------
TOTAL............. $43,797 $19,990 $79,958 $10,477 ($469) ($15,484)
======= ======= ======= ======= ===== ========
<CAPTION>
GROSS AMT. CARRIED
AT DECEMBER 31, 1996
-----------------------------------------------
BUILDINGS & ACCUMULATED DATE OF DATE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ------- ------------ ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 600 $ 2,819 $ 3,419 $ 1,320 1984 1985
Commerce Park............ 705 3,362 4,067 1,214 1984 1985
Gateway 5 & 6............ 563 2,945 3,508 1,208 1984-85 1985
Northgate II............. 1,329 6,072 7,401 2,365 1982-83 1985
Northview................ 658 2,669 3,327 215 980 1993
Plaza Southwest.......... 1,312 6,227 7,539 1,737 1970-74 1985
Westchase................ 465 2,109 2,574 773 1983 1985
Meridian................. 262 1,047 1,309 35 1981 1995
CALIFORNIA --
Huntington Drive......... 1,559 6,968 8,527 2,004 1984-85 1985
MARYLAND --
Patapsco................. 897 3,959 4,856 1,155 1980-84 1985
MINNESOTA --
Burnsville............... 432 2,236 2,668 941 1984 1986
WISCONSIN --
Northwest Business
Park................... 1,296 5,815 7,111 1,668 1983-86 1986
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 6,799 31,336 38,135 9,307 1976-79 1985
TRUST HOME OFFICE.......... 31 31 31 N/A various
------- ------- ------- -------
TOTAL............. $16,877 $77,595 $94,472 $23,973
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this schedule.
F-14
<PAGE> 48
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO SCHEDULE III
DECEMBER 31, 1996
($000)
RECONCILIATION OF REAL ESTATE:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.................... $ 101,897 $ 103,843 $ 103,710
Additions during period:
Improvements................................. 982 752 1,024
Acquisitions................................. - 1,309 -
------------- ------------- -------------
102,879 105,904 104,734
Deductions during period:
Dispositions................................. 8,407 3,402 -
Writedowns................................... - 600 650
Asset retirements............................ - 5 241
------------- ------------- -------------
Balance at end of year.......................... $ 94,472 $ 101,897 $ 103,843
============= ============= =============
</TABLE>
RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.................... $ 23,441 $ 21,859 $ 19,315
Additions during period:
Depreciation expense for period.............. 2,577 2,479 2,622
------------- ------------- -------------
26,018 24,338 21,937
Deductions during period:
Accumulated depreciation of real estate
sold........................................... 2,045 897 -
Asset retirements............................ - - 78
------------- ------------- -------------
Balance at end of year.......................... $ 23,973 $ 23,441 $ 21,859
============= ============= =============
</TABLE>
TAX BASIS:
The income tax basis of real estate, net of accumulated tax depreciation, is
approximately $89,033 at December 31, 1996.
DEPRECIABLE LIFE:
Depreciation is provided by the straight-line method over the estimated useful
lives which are as follows:
<TABLE>
<S> <C>
Buildings and capital improvements ....................... 40 years
Tenant improvements ...................................... 10 years
</TABLE>
F-15
<PAGE> 49
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES
Rents $ 1,925 $ 2,268 $ 3,895 $ 4,418
Tenant reimbursements 659 761 1,326 1,428
Interest income 2 52 31 139
------------ ----------- ------------ -----------
2,586 3,081 5,252 5,985
------------ ----------- ------------ -----------
EXPENSES
Property operating expenses:
Property taxes 332 366 687 742
Property management fees 96 111 194 217
Utilities 86 110 183 217
General operating 203 191 422 421
Repairs and maintenance 90 116 179 165
Other property operating expenses 98 73 176 145
Depreciation and amortization 697 707 1,390 1,408
Interest on 8.8% notes payable 495 1,029 885 2,349
Interest on mortgages payable 947 403 1,961 811
Administrative expenses:
Trust administration and overhead 395 333 811 890
Litigation and proxy costs 201 400 437 888
------------ ----------- ------------ -----------
3,640 3,839 7,325 8,253
------------ ----------- ------------ -----------
Loss from operations (1,054) (758) (2,073) (2,268)
Extraordinary gain on
extinguishment of debt -- 1,367 2,643 1,367
Gain on sale of real estate -- -- 312 --
------------ ----------- ------------ -----------
NET INCOME (LOSS) $ (1,054) $ 609 $ 882 $ (901)
============ =========== ============ ===========
PER SHARE DATA
Loss from operations $ (0.11) $ (0.08) $ (0.20) $ (0.25)
Extraordinary gain on
extinguishment of debt -- 0.15 0.26 0.15
Gain on sale of real estate -- -- 0.03 --
------------ ----------- ------------ -----------
Net Income (Loss) $ (0.11) $ 0.07 $ 0.09 $ (0.10)
============ =========== ============ ===========
Distributions Paid $ -- $ 0.04 $ -- $ 0.04
============ =========== ============ ===========
Weighted average number of
common shares outstanding 10,000,000 9,075,400 10,000,000 9,075,400
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 50
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1997 1996
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate:
Held for investment $ 92,074 $ 84,693
Held for sale -- 9,779
--------- ---------
92,074 94,472
Accumulated depreciation (24,249) (23,973)
--------- ---------
Net real estate 67,825 70,499
Cash and cash equivalents:
Unrestricted 1,253 4,010
Restricted 1,104 1,366
--------- ---------
Total cash and cash equivalents 2,357 5,376
Other assets, net 3,103 3,061
--------- ---------
Total Assets $ 73,285 $ 78,936
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 41,547 $ 43,797
8.8% notes payable 5,450 9,419
Accrued interest 973 602
Accounts payable, accrued expenses and other liabilities 1,286 1,964
Tenant security deposits 464 471
--------- ---------
Total Liabilities 49,720 56,253
--------- ---------
Shareholders' Equity:
Preferred shares, $0.10 par value; 50,000,000 shares
authorized; none issued or outstanding -- --
Shares of beneficial interest, $0.10 par value; 500,000,000 Shares
authorized; 10,000,000 Shares issued and outstanding 1,000 1,000
Additional paid-in capital 127,056 127,056
Accumulated distributions (58,456) (58,456)
Accumulated loss from operations and extraordinary
gains (losses) (47,495) (48,065)
Accumulated net realized gain on sales of real estate 1,460 1,148
--------- ---------
Total Shareholders' Equity 23,565 22,683
--------- ---------
Total Liabilities and Shareholders' Equity $ 73,285 $ 78,936
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 51
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 882 $ (901)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary gain on extinguishment of debt (2,643) (1,367)
Gain on sale of real estate (312) --
Depreciation 1,218 1,244
Amortization of deferred financing costs 98 36
Other amortization 172 164
Changes in operating assets and liabilities:
Decrease (increase) in other assets and restricted cash 57 (141)
Decrease in accounts payable, other
liabilities and tenant security deposits (623) (186)
Increase (decrease) in accrued interest 636 (3,294)
------- -------
Net Cash Used In Operating Activities (515) (4,445)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized improvements and leasing commissions (430) (618)
Net proceeds from sales of real estate 2,029 --
------- -------
Net Cash Provided By (Used In) Investing Activities 1,599 (618)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable (3,841) (113)
Distributions to shareholders -- (363)
------- -------
Net Cash Used In Financing Activities (3,841) (476)
------- -------
Net Decrease in Unrestricted Cash and Cash Equivalents (2,757) (5,539)
Unrestricted Cash and Cash Equivalents at Beginning of Period 4,010 7,694
------- -------
Unrestricted Cash and Cash Equivalents at End of Period $ 1,253 $ 2,155
======= =======
Cash Paid for Interest $ 2,112 $ 6,454
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 52
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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, 1996, 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 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, 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,
F-19
<PAGE> 53
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(unaudited)
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, is less than the carrying
value of the related asset. At June 30, 1997, all of the Trust's
properties were classified as held for investment. Should unforeseen
factors cause certain properties to be reclassified to 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.
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 $553,000 and $599,000 at June 30, 1997 and December 31,
1996, 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.
Earnings per share. Earnings per share is computed based upon the
weighted average number of common shares outstanding. The computation
of earnings per share does not include common share equivalents as the
inclusion of such does not result in dilution (based upon application
of the "treasury stock" method) or, in periods where there is a net
loss, is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("Statement 128"). Statement 128 specifies the computation,
presentation and disclosure requirements for basic earnings per share
and diluted earnings per share. Management believes that adoption of
Statement 128 will not have a material effect on the Trust's earnings
per share.
Share Compensation. The Trust accounts for its share compensation
arrangements under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25")
and intends to continue to do so. See Note 5 for a discussion of the
Trust's share compensation arrangements.
F-20
<PAGE> 54
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(unaudited)
NOTE 3 - ZERO COUPON NOTES
In December 1993 and November 1994, the Trust deposited United States
Government investment securities into an irrevocable trust to complete
in-substance defeasance of certain of its Zero Coupon Notes due
November 1997. The debt, which aggregated $15,606,000 at June 30,
1997, was accounted for as if extinguished in December 1993 and
November 1994. The funds in the trust, which will be used solely to
satisfy the principal and interest of the defeased debt, will be
sufficient to satisfy all future debt service requirements for the
defeased debt instruments.
NOTE 4 - SHAREHOLDER TRANSACTIONS
On February 26, 1997, USAA Real Estate Company ("REALCO"), the owner
at that time of approximately 31.8% of the Trust's outstanding Shares
of Beneficial Interest (the "Shares"), purchased outstanding
indebtedness of the Trust totaling $9,419,213. Pursuant to an earlier
agreement with the Trust, the notes were then modified by REALCO to,
among other things, reduce the principal amount of these notes from
$9,419,213 to $7,040,721, resulting in an extraordinary gain on
extinguishment of debt (including certain accrued interest) to the
Trust of $2,643,000. At the time the notes were modified, the Trust
made a principal payment of $1,591,103, reducing the outstanding
principal amount to $5,449,618. According to the modification terms,
interest continues to accrue at 8.8%, payable monthly, and the
maturity of the notes is extended from March 31, 1997 to December 31,
2000. Pursuant to shareholder approval on June 30, 1997, 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). The Trust currently expects
REALCO to elect this conversion in the fourth quarter of 1997. As a
result, the Trust will reflect approximately $1,022,000, based upon
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 September 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. Based upon these assumptions, the Trust
recorded additional interest expense of $375,000 in the second quarter
of 1997 ($647,000 for the six months ended June 30, 1997) and expects
to record the remaining $375,000 in interest expense in the third
quarter of 1997.
On June 30, 1997, the shareholders of the Trust approved an increase
in the authorized number of shares of beneficial interest from
10,000,000 to 500,000,000 and approved the authorization of 50,000,000
preferred shares. The preferences or rights of the preferred shares,
which have a par value per share of $0.10, will be set as such shares
are issued.
NOTE 5 - INCENTIVE COMPENSATION
On June 30, 1997, the shareholders of the Trust approved an Employee
and Trust Manager Incentive Share Plan (the "Plan"). The Plan, which
is to be administered by the Compensation Committee of the Board of
Trust Managers (the "Committee"), reserves a total of 800,000 common
shares for issuance under the Plan pursuant to the exercise of
incentive and non-qualified share options and the grant of restricted
share awards. On June 30, 1997, the Committee awarded a total of
625,000 options to management with an exercise price of $3.00 (the
closing trading price of common shares on June 30, 1997), an
expiration date of June 30, 2007, and vesting of 20% annually,
beginning on June 30, 1997. As provided in the Plan, the Committee
also awarded 10,000 options to each Trust Manager with an exercise
price of $3.00, an expiration date of June 30, 2007, and immediate
vesting.
F-21
<PAGE> 55
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(unaudited)
The Trust has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because the alternative fair
value accounting provided for under Statement 123 requires use of
option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of
the Trust's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
NOTE 6 - SUBSEQUENT EVENTS
In July 1997, the Trust sold a total of 7,167,418 Shares to clients
and affiliates of Morgan Stanley Asset Management, Inc. (collectively
"MSAM"). Pursuant to an earlier agreement, the Shares were issued at
$2.45 per Share, generating total proceeds of $17,560,176. Also in
July 1997, the Trust sold to certain clients of ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited
Partnership (collectively, "ABKB") a total of 6,122,449 Shares at
$2.45 per Share for total proceeds of $15,000,000. The agreement with
MSAM allows them to purchase an additional 995,847 Shares at $2.45 per
Share. In connection with these transactions, the Board of Trust
Managers was expanded from five to eight members, with two MSAM
representatives and one ABKB representative appointed as Trust
Managers.
On July 7, 1997, the Trust signed definitive merger agreements with
USAA Real Estate Income Investments I, A California Limited
Partnership, USAA Real Estate Income Investments II Limited
Partnership, a Texas limited partnership, USAA Income Properties III
Limited Partnership, a Delaware limited partnership, and USAA Income
Properties IV Limited Partnership, a Delaware limited partnership
(collectively, the "RELPs") pursuant to which the RELPs will be merged
into the Trust (the "Merger"). If the Merger is accomplished, the
Trust will acquire nine real estate properties consisting of three
office buildings totaling 550,000 square feet, two industrial
properties totaling 320,000 square feet, three office/research and
development properties totaling 156,000 square feet, and one retail
property totaling 77,000 square feet. In addition, the Trust will
acquire a 55.84% joint venture interest in a 291,000 square foot
office property. The agreed value of the interests in these
properties, including assumption of $31,704,000 in related debt, is
$89,622,000. Pursuant to the terms of the agreements, the Trust will
issue an aggregate of 22,064,147 shares of beneficial interest at
$2.625 per share (for a total value of $57,918,385) to the limited
partners in the RELPs in exchange for their limited partnership
interests in the RELPs. The Merger, which has been approved by the
Trust's Board of Trust Managers and the Board of Directors of each of
the general partners of the RELPs, is subject to due diligence by both
parties and certain other conditions, including approval by the
shareholders of the Trust and the limited partners of each of the
RELPs.
F-22
<PAGE> 56
P R O X Y
AMERICAN INDUSTRIAL PROPERTIES REIT
ANNUAL MEETING TO BE HELD OCTOBER 15, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUST MANAGERS OF
AMERICAN INDUSTRIAL PROPERTIES REIT
The undersigned hereby appoints Charles W. Wolcott and Marc A.
Simpson, and each of them, jointly and severally, as Proxies, each with full
power of substitution, to vote all of the undersigned's common shares of
beneficial interest in the Trust, held of record on September 12, 1997, at the
Annual Meeting of Shareholders or at any postponements or adjournments thereof,
on the proposals set forth on the reverse side, as directed.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE [SEE REVERSE SIDE]
|X| Please mark votes as in this example.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTION MADE BELOW. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE THROUGH FIVE. THE PROXIES WILL VOTE WITH RESPECT TO THE SIXTH
PROPOSAL ACCORDING TO THEIR BEST JUDGMENT.
1. Election of Trust Managers.
Nominees: Theodore R. Bigman, William H. Bricker, T. Patrick Duncan,
Robert E. Giles, Edward B. Kelley, Stanley J. Kraska, Jr., Russell C.
Platt, Charles W. Wolcott
|_| FOR all Nominees |_| WITHHELD
FROM ALL NOMINEES
----------------------------------------------------
For all nominees except as noted above
|_| MARK HERE FOR ADDRESS
CHANGE AND NOTE BELOW
2.Approval of a one for five reverse share split.
|_| FOR |_| AGAINST |_| ABSTAIN
3. Approval of the amendment to the Employee and Trust Manager Incentive
Share Plan increasing the number of Common Shares authorized for
issuance under the Plan to an amount equal to 10% of the Trust's
outstanding Common Shares on a fully-diluted basis.
|_| FOR |_| AGAINST |_| ABSTAIN
4. Ratification of selection of Ernst & Young LLP as independent
auditors.
|_| FOR |_| AGAINST |_| ABSTAIN
5. Postponement or adjournment of the Annual Meeting for the solicitation
of additional votes, if necessary.
|_| FOR |_| AGAINST |_| ABSTAIN
6. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY
POSTPONEMENTS OR ADJOURNMENTS THEREOF.
By signing and returning this Proxy, the undersigned acknowledges receipt of
the Notice of Annual Meeting and Proxy Statement delivered herewith.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE OR DELIVER TO: Boston EquiServe, Proxy Services, 150 Royall
Street, Canton, MA 02021-1031, M/S 45-01-02.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as an attorney, executor,
administrator, trustee or guardian, please give full title of such. If a
corporation, please sign in corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized
person.
Signature: Date:
------------------------------------ ---------------------
Signature: Date:
------------------------------------ ---------------------
