<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
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 Rule 14a-11(c) or Rule 14a-12
AMERICAN INDUSTRIAL PROPERTIES REIT
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
- --------------------------------------------------------------------------------
(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)(1) 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 previously paid 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:
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<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 12, 1997
------------------
TO THE SHAREHOLDERS OF AMERICAN INDUSTRIAL PROPERTIES REIT:
You are cordially invited to attend a special meeting of shareholders of
American Industrial Properties REIT (the "Trust") to be held at 2200 Ross
Avenue, 9th Floor, Dallas, Texas 75201, on Friday, December 12, 1997 at 9:00
a.m. Dallas time (the "Special Meeting"), for the following purposes:
1. To approve the issuance by the Trust of up to an aggregate of $75
million of Common Shares in a private placement of securities.
2. To transact such other business as may properly come before the
Special Meeting or any postponements or adjournments thereof.
Only holders of record of Common Shares of the Trust on November 20, 1997
will be entitled to notice of, and to vote at, the Special Meeting or any
postponements or adjournments thereof.
A copy of the Proxy Statement relating to the Special Meeting accompanies
this Notice of Special 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 SPECIAL MEETING
REGARDLESS OF THE NUMBER OF COMMON SHARES YOU HOLD. YOU ARE INVITED TO ATTEND
THE SPECIAL 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 OR BY FAXING IT TO (781)
575-2534. FAXED PROXIES WILL BE ACCEPTED THROUGH 5:00 P.M. DALLAS TIME ON
DECEMBER 11, 1997. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY, IF YOU PREFER,
REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.
By Order of the Trust Managers,
/s/ MARC A. SIMPSON
Marc A. Simpson
Secretary and Chief Financial
Officer
6210 N. Beltline Road
Suite 170
Irving, Texas 75063
(972) 756-6000
November 17, 1997
<PAGE> 3
AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. BELTLINE ROAD
SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
------------------
PROXY STATEMENT
------------------
SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 12, 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 special meeting of
shareholders to be held at 2200 Ross Avenue, 9th Floor, Dallas, Texas 75201 at
9:00 a.m. Dallas time on Friday, December 12, 1997 (the "Special Meeting").
Accompanying this Proxy Statement is the Proxy for the Special 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 November 22, 1997.
The close of business on November 20, 1997 has been fixed as the record
date for the determination of shareholders entitled to notice of and to vote at
the Special Meeting. As of the record date, the Trust had outstanding
approximately 4,640,016 common shares of beneficial interest, $0.10 par value
per share (the "Common Shares"), the only outstanding security of the Trust
entitled to vote at the Special Meeting.
At the Special Meeting, action will be taken: (i) to approve the issuance
by the Trust of up to an aggregate of $75 million of Common Shares in a private
placement (the "Private Placement"); and (ii) to transact such other business as
may properly come before the Special Meeting or any postponements or
adjournments thereof.
The rules and regulations (the "NYSE Rules") of the New York Stock Exchange
("NYSE") require the approval of the Trust's shareholders for the issuance of
Common Shares which have voting power equal to or in excess of 20% of the voting
power outstanding before such issuance if the price per Common Share is less
than the market value thereof. While the price per Common Share in the Private
Placement is subject to negotiation, it is possible that such price will be less
than $13.625, the closing price per Common Share as reported on the NYSE on
November 14, 1997, but in no event will such sale price be less than $13.50 per
Common Share. Because the Private Placement will result in the issuance of
greater than 20% of the voting power at a price potentially below the market
price, the Trust is soliciting approval of the Trust's shareholders for the
Private Placement.
The Private Placement offers the Trust the opportunity to obtain funds to
finance additional growth through property acquisitions and to enhance its
financial position. If the Private Placement is approved, the Trust will have
the flexibility to issue up to an aggregate of $75 million of Common Shares to
one or more accredited investors. The net proceeds of the Private Placement will
be used to purchase additional properties. The issuance of Common Shares in the
Private Placement will result in dilution to the Trust's current shareholders.
Certain clients and affiliates of Morgan Stanley Asset Management Inc. ("MSAM")
and MS Real Estate Special Situations, Inc. ("MSRE") (collectively, the "MSAM
Purchasers"), ABKB/LaSalle Securities Limited Partnership ("ABKB") (as agent for
and for the benefit of certain clients), and LaSalle Advisors Limited
Partnership ("LaSalle Advisors") (as agent for and for the benefit of certain
clients) shall have certain preemptive rights if the Private Placement is
consummated. There can be no assurance, however, that the Private Placement will
be consummated or if it is consummated that such parties will exercise their
preemptive rights. See "Proposal One -- Approval of Private Placement."
Pursuant to the NYSE Rules, proposal one requires the approval of the
holders of a majority of the Trust's Common Shares present in person or by proxy
at a meeting at which a quorum is present. A
<PAGE> 4
shareholder is entitled to cast one vote for each Common Share held on the
record date on all matters to be considered at the Special Meeting.
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 or to fax their proxies to (781) 575-2543.
Faxed proxies will be accepted through 5:00 P.M. Boston time on December 11,
1997. Valid Proxies will be voted at the Special 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 proposal one. IN THEIR DISCRETION, THE PERSONS AUTHORIZED UNDER THE PROXIES
WILL VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL
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 Special 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 (2,320,009 Common
Shares), shall constitute a quorum for the transaction of business at the
Special Meeting. If such quorum should not be present at the Special Meeting,
the Special Meeting may be adjourned from time to time without notice, other
than announcement at the Special Meeting, until a quorum shall be present. The
approval of the holders of a majority of the Common Shares present in person or
by proxy at the Special Meeting is required to approve proposal one. The members
of the Board of Trust Managers, management of the Trust and the Majority
Shareholders, who collectively own 71.51% of the Trust's outstanding Common
Shares, have advised the Trust that they intend to vote in favor of proposal
one.
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
Special 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 Special 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.
THE INFORMATION SET FORTH IN THIS PROXY STATEMENT (INCLUDING REFERENCES TO
THE NUMBER OF COMMON SHARES, PER SHARE AMOUNTS AND THE MARKET PRICES OF THE
COMMON SHARES) HAS BEEN ADJUSTED TO REFLECT THE TRUST'S ONE-FOR-FIVE REVERSE
SHARE SPLIT WHICH WAS APPROVED BY THE TRUST'S SHAREHOLDERS AND BECAME EFFECTIVE
ON OCTOBER 15, 1997.
2
<PAGE> 5
PROPOSAL ONE
APPROVAL OF PRIVATE PLACEMENT
INVESTMENT AGREEMENTS
The Trust is proposing to issue for cash up to $75 million of Common Shares
to one or more accredited investors (the "Investors") pursuant to one or more
Investment Agreements (the "Investment Agreements"). The sale price of the
Common Shares (the "Sales Price") provided in the Investment Agreement will be
based upon arm's length negotiations between management of the Trust, Prudential
Securities Incorporated (the placement agent for the Private Placement) and the
Investors. The Sale Price may be at a discount to the closing sale price of the
Common Shares on the NYSE on the date hereof or on the closing date of the
Private Placement; provided, however, the Trust will not issue any Common Shares
in the Private Placement for less than $13.50 per Common Share. On November 14,
1997, the closing price of the Common Shares on the NYSE was $13.625. The Trust
will use the net proceeds of the Private Placement for the acquisition of
additional real estate.
In order to protect the Trust's real estate investment trust ("REIT")
status under the Internal Revenue Code of 1986, as amended (the "Code"), and
pursuant to the requirements of the Trust's Third Amended and Restated
Declaration of Trust, the issuance of Common Shares to the Investors in the
Private Placement will be expressly conditioned on the representations and
warranties of the Investors that upon the issuance of Common Shares, and at all
times thereafter, the Investor will not own directly or indirectly more than
9.8% of the number or value of the outstanding Common Shares after applying the
applicable attribution provisions of the Code.
The Investors will not receive preemptive rights in connection with their
purchases.
Any Investor that purchases a significant portion of the Common Shares in
the Private Placement may require that the Trust Managers increase the size of
the Board and appoint the Investor's designee to fill the vacancy caused by the
increase in size of the Board. Smaller Investors may require that it be granted
observation rights with respect to the Trust's Board of Trust Managers,
including the right to obtain full and timely notice of all meetings of the
Trust Managers and to designate a person to attend in person or by telephone all
meetings of the Trust Managers or their committees. If an Investor receives such
observation rights, the Trust shall require the Investor and its designee to
execute a confidentiality agreement.
The Trust Managers contemplate that the Trust may be required to be
covenant that the Trust will not issue any additional debt or senior equity
securities prior to achieving a certain market capitalization threshold
(calculated in a similar manner to "Equity Capitalization" discussed below under
"-- Preemptive Rights") without the consent of the Investor, unless the proceeds
of such debt or senior equity securities will be used to acquire real estate.
The Trust Managers expect that as a condition to closing the Private
Placement, the Trust will be required to enter into a registration rights
agreement with the Investor granting the Investor the right to demand that the
Trust register the Common Shares acquired in the Private Placement or, if the
Trust is registering Common Shares for its own account or for the account of any
of its security holders, that the Trust also register the Common Shares issued
in the Private Placement.
Although the Trust Managers expect that the Trust will close the Private
Placement prior to December 31, 1997, there can be no assurance that the Private
Placement will, in fact, be consummated or if consummated, when it will be
consummated.
PREEMPTIVE RIGHTS
The Common Share Purchase Agreement dated as of June 20, 1997 between the
Trust and the MSAM Purchasers (the "MSAM Agreement") provides that if the Trust
issues additional Common Shares after the effective date of the MSAM Agreement
(specifically excluding any conversion by USAA Real Estate Company, Inc.
("Realco") of the Modified Notes (as defined below), any issuances to Realco or
its affiliates
3
<PAGE> 6
in connection with the merger of such affiliates with and into the Trust and any
issuance pursuant to the Trust's Employee and Trust Manager Incentive Share
Plan) (each such non-excluded issuance, a "Subsequent Offering"), the MSAM
Purchasers shall have the right to purchase, on the same terms and conditions as
the other purchasers in the Subsequent Offering, a proportionate number of
Common Shares so that the MSAM Purchasers maintain their same percentage
ownership of Common Shares (the "MSAM Preemptive Rights"). With respect to each
Subsequent Offering in the amount of $10 million or more, the MSAM Preemptive
Rights are limited so that the amount of Common Shares that the MSAM Purchasers
may acquire in the aggregate pursuant to the MSAM Preemptive Rights shall be
reduced by 5% of the total number of Common Shares outstanding (on a
fully-diluted basis) after each such Subsequent Offering. The MSAM Preemptive
Rights shall terminate when the value of the outstanding Common Shares and
Common Share equivalents based on ten days' average closing prices on the NYSE
(the "Equity Capitalization") equals $150 million.
The Common Share Purchase Agreements dated as of July 3, 1997 between the
Trust and ABKB (as agent for and for the benefit of particular clients) and the
Common Share Purchase Agreement dated as of July 3, 1997 between the Trust and
LaSalle Advisors (as agent for and for the benefit of a particular client)
(collectively, the "ABKB Agreements") provide ABKB and LaSalle Advisors with the
same preemptive rights as those held by the MSAM Purchasers (the "ABKB
Preemptive Rights").
If the Private Placement is consummated, the MSAM Purchasers, pursuant to
the MSAM Preemptive Rights, and ABKB and LaSalle Advisors, pursuant to the ABKB
Preemptive Rights, shall have the right to acquire additional Common Shares,
each as described above.
REASONS FOR THE PRIVATE PLACEMENT
The purpose of the Private Placement is to obtain funds to finance
additional growth through property acquisitions. The Private Placement should
also enhance the Trust's financial structure and should afford the Trust
additional flexibility to finance additional growth by taking advantage of the
lower prevailing interest rates in today's financial markets or by raising
additional equity capital in the capital markets due to the Trust's improved
capital structure.
The Trust Managers also considered certain potential negative factors
associated with the Private Placement. First, the Sale Price may be at a
discount to the closing price of the Common Shares on the NYSE on either the
date hereof or the closing date of the Private Placement, or both. Second, the
sale of Common Shares in the Private Placement will reduce the percentage
ownership of the Trust's existing shareholders. Third, the Investment Agreement
may contain certain restrictive covenants including potentially limiting the
Trust's ability to issue any additional debt or senior equity securities prior
to achieving a certain Equity Capitalization threshold without the consent of
the Investors, unless the proceeds of such debt or senior equity securities will
be used to acquire real estate.
After weighing the aforementioned factors, the Trust Managers determined
that the advantage of possible additional growth the Trust might achieve with
the proceeds of the Private Placement outweighs the negative factors and that
the Private Placement is in the best interests of the Trust and its
shareholders. The Trust Managers believe the additional growth that the Trust
may achieve upon completion of the Private Placement will provide the
shareholders with the best opportunity for long-term growth of their investment
in the Trust.
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 Special
Meeting, provided a quorum is present, is required to approve the Private
Placement. The Trust Managers have unanimously approved the proposal, subject to
shareholder approval. Realco, the MSAM Purchasers, ABKB, LaSalle Advisors and
management of the Trust have advised the Trust that they intend to vote their
collective 3,317,865 Common Shares (71.52% of the outstanding Common Shares) in
favor of proposal one. See "Security Ownership of Certain Beneficial Owners and
Management."
4
<PAGE> 7
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL ONE.
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 October 31, 1997. The percentage ownership
of each person assumes (i) the conversion of the Modified Notes held by Realco
into 544,962 Common Shares, (ii) the purchase of an additional 199,169 Common
Shares by clients and affiliates of MSAM pursuant to the MSAM Agreement, (iii)
the exercise of vested options to purchase an aggregate 39,000 Common Shares,
and (iv) the exercise of vested warrants to purchase 40,000 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................................ 2,000(1) *
William H. Bricker................................ 2,400(1) *
T. Patrick Duncan................................. 600 *
Robert E. Giles................................... 2,750(1) *
Edward B. Kelley.................................. 1,000 *
Russell C. Platt.................................. 2,000(1) *
Stanley J. Kraska, Jr............................. 2,000(1)(2) *
Charles W. Wolcott................................ 26,600(3) *
Marc A. Simpson................................... 6,900(4) *
David B. Warner................................... 5,200(4) *
Lewis D. Friedland................................ 7,000(5) *
USAA Real Estate Company.......................... 1,185,403(6) 21.70%
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................................... 1,224,489(7) 22.41%
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............... 1,632,653(8)(9) 29.88%
1221 Avenue of the Americas
New York, New York 10020
All Trust Managers and executive officers as a
group (11 persons).............................. 58,450 1.07%
</TABLE>
5
<PAGE> 8
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* Ownership is less than 1% of outstanding Common Shares.
(1) Includes 2,000 Common Shares that may be purchased upon exercising vested
options.
(2) See note (7) below.
(3) Includes 10,000 Common Shares that may be purchased upon exercise of vested
options.
(4) Includes 4,000 Common Shares that may be purchased upon exercise of vested
options.
(5) Includes 7,000 Common Shares that may be purchased upon exercise of vested
options.
(6) Includes (i) 544,962 Common Shares into which the Modified Notes held by
Realco may be converted (assuming a $10.00 per share conversion price) and
(ii) 4,000 Common Shares that may be purchased upon exercise of vested
options acquired from Messrs. Duncan and Kelley. As Trust Managers of the
Trust, Messrs. Duncan and Kelley each received vested options to purchase
2,000 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 782,449 Common Shares; (ii) LaSalle Advisors has sole
voting and dispositive power over 442,040 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 782,449
Common Shares controlled by ABKB and the 442,040 Common Shares controlled by
LaSalle Advisors (an aggregate 1,224,489 Common Shares). Messrs. Morrill,
Kraska and Pauley disclaim, however, beneficial ownership of the 1,224,489
Common Shares, but state that as a group, the reporting persons have the
sole power to vote and dispose of 1,224,489 Common Shares.
(8) Includes 199,169 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 125,588 Common
Shares and shared voting and dispositive power over 1,307,895 Common Shares;
(ii) MSAM has shared voting and dispositive power over 1,307,895 Common
Shares; (iii) The Morgan Stanley Real Estate Special Situations Fund I, L.P.
has shared voting and dispositive power over 376,766 Common Shares; and (iv)
The Morgan Stanley Real Estate Special Situations Fund II, L.P. has shared
voting and dispositive power over 465,332 Common Shares. Pursuant to
separate investment management agreements between MSAM and certain of its
clients, MSAM has been granted voting and dispositive power with respect to
the Common Shares held by each client.
PRINCIPAL ACCOUNTANTS
Representatives of Ernst & Young LLP, the Trust's principal accountants for
the fiscal year ended December 31, 1996 and for the fiscal year ending December
31, 1997, will be present at the Special Meeting to respond to appropriate
questions from shareholders and to make a statement if they desire.
PROPOSALS BY SHAREHOLDERS
A proper proposal submitted by a shareholder for presentation at the
Trust's Annual Meeting to be held in 1998 and received at the Trust's principal
executive office no later than January 12, 1998 will be included in the Proxy
Statement and Proxy relating to such Annual Meeting.
6
<PAGE> 9
OTHER MATTERS
The Trust Managers are aware of no other matter that will be presented for
action at the Special Meeting.
IF SUCH PROPOSALS OR ANY OTHER MATTERS REQUIRING A VOTE OF THE SHAREHOLDERS
PROPERLY COMES BEFORE THE SPECIAL 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 $75,000 and will be borne by the Trust. Of 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.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Trust and
its subsidiaries for the nine months ended September 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>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues............ $ 8,223 $ 8,785 $11,478 $11,779 $11,226 $10,641 $ 15,139
Loss from operations(a)... (2,414) (3,069) (4,732) (4,338) (4,311) (5,121) (18,719)
Net income (loss)(a)...... 541 (1,702) 1,255 (4,584) (4,655) (7,867) (17,593)
Per share:(b)
Loss from
operations(a)......... $ (0.86) $ (1.69) $ (2.60) $ (2.40) $ (2.35) $ (2.85) $ (10.30)
Net income (loss)(a).... 0.19 (0.94) 0.70 (2.55) (2.55) (4.35) (9.70)
Distributions paid...... -- 0.20 0.20 0.20 -- 0.80 1.00
BALANCE SHEET DATA:
Total assets.............. $105,089 $82,412 $78,936 $89,382 $92,550 $88,297 $110,446
Total debt................ 46,830 62,645 53,216 62,815 65,613 57,078 68,578
Shareholders' equity...... 54,540 17,183 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, $650 and
$14,094, 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 nine months ended September 30, 1997 and 1996, respectively.
(b) The share amounts have been restated to reflect the impact of the one for
five reverse Common Share split which was approved by the Trust's
shareholders and became effective on October 15, 1997.
7
<PAGE> 10
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 of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may differ materially from those included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including, but
not limited to, changes in general economic conditions in the markets that could
impact demand for the Trust's properties and changes in financial markets and
interest rates impacting the Trust's ability to meet its financing needs and
obligations.
RESULTS OF OPERATIONS
Comparison of 1996 to 1995
The sale of two properties in late 1996 and the purchase of a property in
August 1995 resulted in a net decrease in 1996 property revenue and net
operating income of $67,000 and $51,000, respectively, when compared to 1995. On
a same property basis, property revenues decreased from $10,209,000 in 1995 to
$10,186,000 in 1996, a decrease of 0.2%, comprised of a 2.9% increase in revenue
related to industrial properties and a 6.2% decrease in revenue at the Trust's
retail property. The decrease in revenue at the Trust's retail property stemmed
principally from lower percentage rents ($115,000) and slower leasing of
vacancies and is partially attributable to the opening of a new regional mall in
Denver during the third quarter of 1996. Overall leased occupancy of the Trust's
portfolio was 94.2% at December 31, 1996 compared to 93.7% at December 31, 1995.
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, Trust administration and
overhead expenses or provision for possible losses on real estate) decreased
from $6,704,000 in 1995 to $6,494,000 in 1996, a decrease of 3.1%. This overall
decrease is comprised of a 0.5% increase related to industrial properties and a
10.7% decrease related to the Trust's retail property. The decrease in the
Trust's retail property is a result of the decrease in revenue explained above.
Same property operating expenses increased by 5.3%, reflecting an increase in
repairs and maintenance expenses and tenant refit costs of $98,000 in 1996. On a
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 $3.20 per share, pursuant to settlement
of litigation with The Manufacturers Life Insurance Company and The
Manufacturers Life Insurance Company (U.S.A.) (collectively, "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
8
<PAGE> 11
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
nonpayment of interest to the Trust's unsecured lender), a decrease in total
administrative expenses of $128,000 (as a result of two proxy contests in 1994
versus one in 1995), a net increase in interest expense of $1,215,000 (due to
the November 1994 refinancing transaction and the default rate interest accrued
by the Trust in 1995 of $724,000), a decrease in depreciation and amortization
of $356,000 (due to the Trust's property transactions in 1995), and a decrease
in provision for possible losses on real estate of $50,000 (due to the timing of
writedowns related to properties held for sale).
During 1995, the Trust recognized a loss of $191,000 on the sale of its
Quadrant property and an extraordinary loss of $55,000 related to the prepayment
of an outstanding mortgage loan. In 1994, the Trust recognized an extraordinary
loss of $344,000 on the partial in-substance defeasance of Zero Coupon Notes due
1997.
During 1995, the Trust incurred approximately $980,000 in expenses related
to litigation, a proxy contest in connection with issues before the shareholders
at the Trust's annual meeting and attempted recapitalization costs, compared to
approximately $1,027,000 in 1994. During 1994, the Trust had no litigation
expenses but incurred costs related to two proxy contests.
The Trust recorded a provision for possible loss on real estate related to
its Patapsco property at December 31, 1995 of $600,000. This provision follows a
$650,000 provision made at December 31, 1994. The Trust began marketing this
property in early 1995.
Comparison of Nine Months Ended September 30, 1997 to September 30, 1996
The overall occupancy of the Trust's portfolio on September 30, 1997 was
92.7%, compared to 92.0% on September 30, 1996 and 93.7% on June 30, 1997. When
comparing the nine months ended September 30, 1997 with the same period in 1996,
property revenues decreased from $8,639,000 in 1996 to $7,787,000 in 1997 and
property operating expenses decreased from $2,917,000 in 1996 to $2,758,000 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 nine months ended September 30, 1997 to the same period in 1996 on
a same property basis, revenue increased 6.3% and net operating income increased
6.6% for the Trust's industrial properties whereas revenue decreased 9.1% and
net operating income decreased 18.0% 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 $85,000 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 85.0% in 1996 to 82.6%
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 $2,414,000 for the nine months
ended September 30, 1997 compared to $3,069,000 for the same period in 1996.
This improvement is related to an increase in interest income of $290,000 (due
to net proceeds of $31.3 million received from a private placement in July
1997), a decrease in litigation, proxy and reorganization expenses of $565,000
(due to the settlement of litigation and contested proxy contests in 1996), a
net decrease in interest expense of $551,000 (due to the paydown/ forgiveness of
certain debt in 1996, offset by the accrual of $835,000 in interest expense
related to the expected conversion of debt to equity), a decrease in net
operating income of $693,000 explained above and an increase in administration
and overhead of $130,000 (due to an increase in the number of employees from six
to eleven, the addition of five Trust Managers in 1997, higher legal and
consulting fees in 1997, expenses associated with the move of the Trust's
offices, and an offsetting $240,000 in incentive compensation in January 1996).
9
<PAGE> 12
Analysis of Cash Flows Comparison of 1996 to 1995
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
nonrecurring nature, including a decrease in accrued interest of $2,986,000
related to the settlement of the MLI litigation in 1996, the accrual of $369,000
of default rate interest which was ultimately forgiven and approximately
$535,000 related to principal which was forgiven in November 1996 and February
1997. In addition, administrative expenses includes $1,548,000 of litigation,
refinancing and proxy costs which relate to special situations and should not be
considered to be recurring expenses. Management believes that, in the future,
cash flow provided by operations will increase due to the elimination of the
nonrecurring 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.
Comparison of Nine Months Ended September 30, 1997 to September 30, 1996
Net cash used in operating activities was $517,000 for the nine months
ended September 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 $268,000 and an increase in accrued interest of
$741,000 (due to the accrual of $835,000 in interest related to the expected
conversion of debt to equity). Included in net cash used in operating activities
is approximately $439,000 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 $5,021,000 for the nine
months ended September 30, 1997 resulting from the purchase of two properties in
August 1997 for $6,404,000, the expenditure of $646,000 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 provided by financing activities was $27,308,000, resulting
primarily from a private placement of securities in July 1997 for net proceeds
of $31.3 million.
Funds from Operations
In March 1995, the National Association of Real Estate Investment Trusts
("NAREIT") issued its White Paper on Funds From Operations ("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 nonrecurring interest accrual 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
10
<PAGE> 13
capital expenditures. The Trust believes FFO and FAD are appropriate measures of
performance relative to other real estate investment trusts ("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.
The following table shows the Trust's cash flows from its operating,
investing and financing activities, prepared in accordance with generally
accepted accounting principles.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1996 1995 1994 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by
operating activities............... $(5,658) $ 3,848 $ (594) $ (517) $(4,656)
Net cash (used in) provided by
investing activities............... $ 5,173 $ 144 $(1,476) $(5,021) $ (925)
Net cash (used in) provided by
financing activities............... $(3,199) $(3,217) $ 7,870 $27,308 $ (533)
</TABLE>
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 accrual.......................... 369 724 --
Extraordinary loss on partial in-substance defeasance
of Zero Coupon Notes................................ -- -- 344
------- ------- -------
Funds from operations.................................... $(1,473) $ (243) $ (559)
======= ======= =======
Funds from operations.................................... $(1,473) (243) $ (559)
Capitalized improvements and leasing commissions(a)...... (1,372) (1,023) (1,476)
Non-cash effect of straight-line rents on FFO............ 193 161 156
------- ------- -------
Funds available for distribution......................... $(2,652) $(1,105) $(1,879)
======= ======= =======
</TABLE>
11
<PAGE> 14
- ---------------
(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>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Net income (loss)........................................... $ 541 $(1,702)
Exclude effects of:
Gain on sale of real estate............................... (312) --
Extraordinary gain on extinguishment of debt.............. (2,643) (1,367)
Real estate depreciation and amortization................. 2,102 2,165
Nonrecurring interest accrual assuming future conversion
of debt to equity...................................... 835 --
Default rate interest accrual............................. -- 369
------- -------
Funds from operations....................................... $ 523 $ 535
======= =======
Funds from operations....................................... $ (523) $ (535)
Capitalized improvements and leasing commissions............ (646) (925)
Non-cash effect of straight-line rents on FFO............... 73 128
------- -------
Funds available for distribution............................ $ (50) $(1,332)
======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Trust entered into the MSAM Transaction and in July 1997
entered into the LaSalle Transaction whereby the Trust agreed to sell up to $20
million and $15 million, respectively, of Shares at $12.25 per share. The MSAM
Transaction and the LaSalle Transaction originally contemplated the issuance of
convertible debt so as to allow the Trust to accept this capital in advance of
shareholder approval for the transactions and for an increase in the authorized
shares of the Trust at the June 30, 1997 annual meeting of shareholders.
Ultimately, a decision was made to fund the transactions after June 30, thereby
eliminating the expense associated with issuance and conversion of convertible
debt. The Trust has currently received proceeds totaling $17,560,176 and
$15,000,000 under the respective agreements. The Trust will utilize these
proceeds to purchase additional properties as part of its growth plans. Through
November 13, 1997, the Trust had expended approximately $27.3 million of such
proceeds in connection with the acquisition of properties. In addition, the
Trust may seek to raise other capital through private placements of equity or
acquisition debt or a combination of both during 1997 to fund purchases of
additional 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 September 30, 1997, the Trust had $25,780,000
in unrestricted cash on hand. The Trust presently anticipates that these cash
reserves will provide sufficient funds for all currently known liabilities and
commitments relating to the Trust's operations during 1997.
In May 1995, the Trust filed a lawsuit against MLI, holder of the Trust's
$45,239,000, 8.8% unsecured notes payable, alleging breach of the Note Purchase
Agreement between MLI and the Trust and unlawful attempts to coerce the Trust
into relinquishing certain of its rights under that agreement. The Trust settled
its
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<PAGE> 15
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
settlement agreement with MLI, $4,220,000 in debt was forgiven, allowing the
Trust to record an extraordinary gain of $4,443,000 (including accrued interest
forgiven). These notes were purchased by Realco in February 1997. Realco has the
option to convert the principal amount of these notes into Shares at the
conversion rate of $10.00 per Share (if converted prior to December 31, 1997) or
$11.25 per Share (if converted between January 1, 1998 and December 31, 2000).
If conversion of this debt were to occur in 1997, Realco would own approximately
17.39% of the outstanding Shares of the Trust (assuming no other issuances of
Shares other than the 199,169 Shares to be sold to MSAM).
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. In their filings, the defendants asked
that certain Bylaw amendments be stricken, that the court issue an injunction
until an additional Trust Manager could be appointed, that a receiver be
appointed for the assets and business of the Trust and that the Trust recover
certain funds from Messrs. Wolcott and Bricker. The Court did not issue the
injunction nor did it appoint a receiver. The Court struck down the 9.8% Share
ownership limitation contained in the Bylaws. The 9.8% limitation is now set
forth in the Declaration of Trust which was approved by the Trust's
shareholders. 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.
The Trust declared a distribution of $0.20 per Share in February 1996. The
settlement agreement with MLI prohibited the payment of distributions while the
agreement was in effect. The modified notes now owned by Realco provided that
the Trust could not pay distributions until the debt is paid in full; however,
this restriction terminated on June 30, 1997, when the shareholders approved
Realco's conversion right and approved an increase in the number of authorized
Shares. While the Trust may resume quarterly distributions in the near future,
any resumption of distributions will depend upon the continued ability of the
Trust to identify and consummate accretive property acquisitions, continued
improvements in the Trust's operations, cash available for distribution and the
Trust's financial condition.
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,
$1,023,000 in the year ended December 31, 1995 and $646,000 in the nine months
ended September 30, 1997. 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.
At September 30, 1997, the Trust had $41,380,000 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 37%. The Trust intends to lower this ratio
in the future through additional equity placements and future purchases of real
estate properties with less leverage.
13
<PAGE> 16
On a long term basis, the Trust expects to meet liquidity requirements
generated by property operating expenses, debt service and future distributions
with funds generated by the operations of its real properties. Should such funds
not cover these needs, the possibility of future distributions may be reduced or
eliminated. The Trust currently intends to maintain a debt to total market
capitalization ratio between 30% and 40%, thereby reducing the risk of financial
default. The Trust may increase this leverage in order to fund growth
opportunities in anticipation of reducing this leverage through future equity
offerings. Should the Trust be unable to complete anticipated equity offerings,
the risk of financial default would increase.
TRANSACTIONS WITH REALCO
During 1996, there were a series of transactions involving Realco. On
November 25, 1996, Realco entered into independently negotiated agreements to
purchase an aggregate of 451,521 Shares from certain shareholders for $13.75 per
Share, pending approval of the settlement of certain shareholder litigation,
which the Trust had initiated, alleging that certain significant shareholders of
the Trust had made material misrepresentations in their filings with the
Commission. The $13.75 price per Share was negotiated between the selling
shareholders and Realco without any involvement by the Trust. The majority of
these Shares were purchased from two shareholders, one of which was involved in
the shareholder litigation. The other selling shareholder was unwilling to wait
for the settlement of the litigation and Realco did not want to purchase 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 199,620 Shares from the selling
shareholder not involved in the shareholder litigation. On December 19, 1996,
the Trust sold 184,920 Shares, representing the remainder of its authorized
Shares, to Realco for $13.75 per share, the same price at which Realco had
independently agreed to purchase the Shares from the other shareholders. On
December 20, 1996, after approval of the settlement of the shareholder
litigation, Realco closed the purchase of the 451,521 Shares, including the
acquisition of 199,620 Shares held by a subsidiary of the Trust in return for
cancellation of the related loan discussed above, resulting in Realco's
ownership of 636,441 Shares, or 13.66% of the outstanding Shares of the Trust as
of July 18, 1997. Pursuant to internal policies at Realco, Messrs. Duncan and
Kelley transferred to Realco the 4,000 options they received as Trust Managers.
As of September 11, 1997, Realco owned 640,441 Shares (including the 4,000
Shares that may be purchased upon exercise of the vested options).
On December 18, 1996, the Trust entered into an agreement granting Realco
the right to commence negotiations to purchase the Trust's notes held by MLI
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 Shares of the Trust at $10.00 per Share
during 1997 and $11.25 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 Shares of the Trust at the conversion rate of $10.00 per Share (if
converted prior to December 31, 1997) or $11.25 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 an
option agreement on this debt. The Trust Managers viewed this as a reasonable
cost of this transaction as it (i) removed the risk of losing the entire
potential discount if payment was not made by March 31, 1997; (ii) removed the
necessity to liquidate certain properties; (iii) allowed for release of all
collateral securing this obligation; (iv) allowed the Trust to recognize an
extraordinary gain of approximately $2,643,000 or $1.30 per share in the first
quarter of 1997; and (v) allowed for the possibility of conversion of this
obligation into Shares, thereby improving the Trust's financial position.
The Trust currently anticipates it will reflect approximately $1,022,000,
representing the difference between the market trading price of $11.90 per Share
on February 26, 1997 and the $10.00 conversion price, as interest expense
between February 26, 1997 and December 31, 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
14
<PAGE> 17
convertibility option. Based upon these assumptions, the Trust recorded
additional interest expense of $188,000 in the third quarter of 1997 ($835,000
for the nine months ended September 30, 1997) and expects to record the
remaining $187,000 of interest in the fourth quarter of 1997.
The closing sale price of the Trust's Shares on the NYSE on the above dates
was as follows: $10.65 per Share on November 25, 1996, $10.00 per Share on
December 18 and December 19, 1996, $9.40 per Share on December 20, 1996, and
$11.90 per Share on February 26, 1997.
RECENT DEVELOPMENTS
On July 7, 1997, the Trust signed definitive merger agreements, dated as of
June 30, 1997 (the "Merger Agreements"), with USAA Real Estate Income
Investments I, A California Limited Partnership, USAA Real Estate Income
Investments II Limited Partnership, USAA Income Properties III Limited
Partnership, and USAA Income Properties IV Limited Partnership (collectively,
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. 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. If the Merger is consummated, the Trust will
increase its portfolio of net leasable square feet owned or controlled as of
November 14, 1997 from 2,609,877 to 4,012,234, an increase of 53.7%.
Pursuant to the terms of the Merger Agreements, the Trust will issue an
aggregate of 4,412,829 Common Shares at an agreed upon exchange price of $13.125
per share in exchange for the general and 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 $13.125. 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 (the "AIP Board") and the Board of Directors of
each of the RELP General Partners, is subject to certain conditions, including
approval by the shareholders of the Trust and the limited partners of each of
the RELPs.
On August 20, 1997, the Lawsuit, which was filed in the Superior Court of
the State of Arizona and which was removed to the United States District Court
for the District of Arizona, was served upon Realco, the General Partners,
certain other affiliated entities and the individual members of the boards of
directors of each of the General Partners. The Trust was also named as a
defendant. The Lawsuit was subsequently removed to federal court and has been
transferred to the Western District of Texas, San Antonio Division. The Lawsuit
alleges, among other things, breaches of fiduciary duty in connection with the
transactions contemplated by the Merger Agreement. The Lawsuit seeks, among
other things, to enjoin the consummation of the Merger and damages, including
attorneys' fees and expenses. The defendants in the Lawsuit believe that the
plaintiffs' claims are without merit and intend to defend vigorously against the
Lawsuit. However, no assurance can be given that the plaintiffs in the Lawsuit
will not be successful. If such plaintiffs were to successfully enjoin the
consummation of the Merger, a condition to the obligations of the Trust and the
RELPS to consummate the Merger would not be satisfied, which would entitle the
General Partner of any RELP or the Trust Managers to terminate the Merger
Agreement and abandon the Merger.
Pursuant to the terms of the Merger Agreement, for a period of six years
from and after the Effective Time, the Trust must indemnify the partners or
agents of any RELP who at any time prior to the Effective Time were entitled to
indemnification under the Partnership Agreement of the RELP. Such persons are
entitled to indemnification to the same extent as they would have been entitled
to indemnification under the Partnership Agreement. If the Merger occurs and if
the court were to determine that the General Partners, their affiliated entities
and/or the members of the boards of directors of the General Partners were
liable for damages in connection with the Lawsuit, to the extent the General
Partners and the directors would have been
15
<PAGE> 18
entitled to indemnification under the Partnership Agreements, the Trust would be
required to indemnify such parties for costs and expenses related to the
Lawsuit. Depending upon the amount of such costs and expenses, it could have a
material adverse effect on the Trust.
On August 29, 1997, the Trust purchased two light industrial properties
with a total of 137,265 net rentable square feet for $6.4 million. The
properties are located in suburban areas of Dallas, Texas.
On October 3, 1997, the Trust, as general partner in a limited partnership,
purchased a portfolio of eight properties with 783,780 net rentable square feet
located in Dallas and suburban areas of Dallas, Texas. The purchase price of the
portfolio was $36.8 million. The purchase price was partially financed by a
borrowing of approximately $20.7 million under the acquisition line (see below)
approximately $2.8 million of limited partnership units ("OP Units") issued to
the limited partners of the partnership and cash totaling approximately $13.3
million. Beginning on October 3, 1999, OP Units are redeemable for cash, or at
the election of the Trust (as general partner), Shares on a one-for-one basis
(subject to adjustments for mergers, reorganizations, recapitalizations, Share
dividends, Share splits and reverse Share splits). Pursuant to the terms of the
partnership agreement, the cash consideration to be paid upon redemption of OP
Units is based upon the average of the daily market price per Share on the NYSE
for the 10 consecutive trading days prior to the date the Trust receives the
redemption notice. In addition, the limited partners received warrants to
purchase 40,000 Shares at $17.50 per Share. The warrants expire on October 3,
2000. The limited partners received registration rights with respect to the
Shares they may acquire upon exercise of the warrants and upon redemption of the
OP Units.
Also on October 3, 1997, the Trust entered into a secured acquisition line
with Prudential Securities Capital Corporation in the amount of $35 million. The
credit line, which will be secured by properties acquired with proceeds from the
credit line, bears variable interest at a rate based on the 30 day LIBOR rate
plus 200 basis points. The maximum loan to value ratio for borrowings is 70%.
Unless extended, borrowings under the credit line mature on October 3, 1998 and,
if not repaid, allow the lender to move such borrowings into a securitized
mortgage pool. The Trust intends to refinance borrowings under this credit line
with proceeds from future permanent financing transactions or equity offerings.
On November 13, 1997, the Trust purchased one property consisting of nine
office/warehouse buildings with a total of 286,167 net rentable square footage
in Houston, Texas. The Trust borrowed $6,600,000 of the $10,700,000 purchase
price under the acquisition line discussed above.
16
<PAGE> 19
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
September 30, 1997 (unaudited):
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1997 and
1996 (unaudited)...................................... F-16
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996..................... F-17
Consolidated Statements of Cash Flows for the nine
months ended September 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> 20
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 October 15, 1997
F-2
<PAGE> 21
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(A)
Loss from operations................................... $ (2.60) $ (2.40) $ (2.35)
Gain (loss) on sales of real estate.................... 0.10 (0.10) --
Extraordinary gain (loss) on extinguishment of debt.... 3.20 (0.05) --
Extraordinary loss on partial in-substance defeasance
of Zero Coupon Notes due 1997....................... -- -- (0.20)
---------- ---------- ----------
Net Income (Loss)...................................... $ 0.70 $ (2.55) $ (2.55)
========== ========== ==========
Distributions Paid..................................... $ 0.20 $ 0.20 $ 0.00
========== ========== ==========
Weighted average shares outstanding.................... 1,821,648 1,815,080 1,815,080
========== ========== ==========
</TABLE>
- ---------------
(a) The Share amounts and number of Shares outstanding have been restated to
reflect the impact of the one for five reverse Share split which was
approved by the Trust's shareholders and became effective on October 15,
1997.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 22
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
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 2,000,000
Shares at 1996 and 1,815,080 Shares at 1995(a)......... 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>
- ---------------
(a) The number of Shares outstanding have been restated to reflect the impact of
the one for five reverse Share split which was approved by the Trust's
shareholders and became effective on October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 23
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(A) AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.............. 1,815,080 $ 908 $124,605 $ (96,662) $ 28,851
Net loss.............................. -- -- -- (4,655) (4,655)
--------- ------ -------- --------- --------
Balance at December 31, 1994............ 1,815,080 908 124,605 (101,317) 24,196
Net loss.............................. -- -- -- (4,584) (4,584)
Distributions to shareholders......... -- -- -- (364) (364)
--------- ------ -------- --------- --------
Balance at December 31, 1995............ 1,815,080 908 124,605 (106,265) 19,248
Issuance of additional shares......... 184,920 92 2,451 -- 2,543
Net income............................ -- -- -- 1,255 1,255
Distributions to shareholders......... -- -- -- (363) (363)
--------- ------ -------- --------- --------
Balance at December 31, 1996............ 2,000,000 $1,000 $127,056 $(105,373) $ 22,683
========= ====== ======== ========= ========
</TABLE>
- ---------------
(a) The number of Shares outstanding have been restated to reflect the impact of
the one for five reverse Share split which was approved by the Trust's
shareholders and became effective on October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 24
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 C
Other amortization..................................... 332 298 511
Amortization of original issue discount................ C C 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 C
------- ------- -------
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 C
Capitalized improvements and leasing commissions.......... (1,372) (1,023) (1,476)
Acquisition of real estate................................ C (1,309) C
------- ------- -------
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 C 14,500
Proceeds from sale of common shares....................... 2,543 C C
Distributions to shareholders............................. (363) (364) C
Prepayment penalty on extinguishment of debt.............. C (55) C
Partial in-substance defeasance of Zero Coupon Notes...... C C (3,106)
Partial repurchase of Zero Coupon Notes................... C C (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> 25
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
General.
American Industrial Properties REIT (the "Trust") is a self-administered
Texas real estate investment trust which, as of December 31, 1996, owns and
operates thirteen commercial real estate properties consisting of twelve
industrial properties and one retail property. The Trust was formed September
26, 1985 and commenced operations on November 27, 1985. Pursuant to the Trust's
1993 Annual Meeting of Shareholders, amendments to the Trust's Declaration of
Trust and Bylaws were approved which, among other things, changed the name of
the Trust to American Industrial Properties REIT and converted the Trust from a
finite life entity to a perpetual life entity.
Principles of Consolidation.
The consolidated financial statements of the Trust include the accounts of
American Industrial Properties REIT and its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly from such estimates
and assumptions.
Real Estate.
The Trust carries its real estate held for investment at depreciated cost
unless the asset is determined to be impaired. Real estate classified as held
for sale is carried at the lower of depreciated cost or fair market value less
costs to sell. In accordance with Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, issued in March 1995, the Trust records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the expected undiscounted cash
flows estimated to be generated by those assets are less than the related
carrying amounts. If an asset held for investment is determined to be impaired,
the impairment would be measured based upon the excess of the asset's carrying
value over the fair value. In addition, the Trust records impairment losses on
assets held for sale when the estimated sales proceeds, after estimated selling
costs, are less than the carrying value of the related asset (see Note 2).
Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital improvements is
computed using the straight-line method over forty years. Depreciation of tenant
improvements is computed using the straight-line method over ten years.
Cash and Cash Equivalents.
Cash equivalents include demand deposits and all highly liquid instruments
purchased with an original maturity of three months or less. Restricted amounts
reflect escrow deposits held by third parties for the payment of taxes and
insurance and reserves held by third parties for property repairs or tenant
improvements.
Other Assets.
Other assets primarily consists of deferred rent receivable, prepaid
commissions and loan fees. Leasing commissions are capitalized and amortized on
a straight line basis over the life of the lease. Loan fees are capitalized and
amortized to interest expense on a level yield basis over the term of the
related loan.
F-7
<PAGE> 26
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Reverse Share Split.
On October 15, 1997, the Trust's shareholders approved a one for five
reverse Share split. All references to the number of Shares, per Share amounts
and the market prices of the Shares have been restated to reflect the impact of
the reverse Share split.
F-8
<PAGE> 27
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> 28
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.
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
F-10
<PAGE> 29
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 451,521 Shares
from certain shareholders for $13.75 per share, pending approval of the
settlement of the shareholder litigation discussed above. On December 19, 1996,
the Trust sold 184,920 Shares, representing the remainder of its authorized
Shares, to USAA REALCO for $13.75 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 451,521 Shares, resulting in
USAA REALCO's current ownership of 636,441 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 $10.00 or $11.25
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: $10.65 per share on November 25, 1996, $10.00
per share on December 18 and December 19, 1996, $9.40 per share on December 20,
1996, and $11.90 per share on February 26, 1997.
NOTE 8 -- LITIGATION:
During 1996, the Trust concluded two significant litigation matters (see
Notes 4 and 7). Although the Trust is not currently involved in any significant
litigation, the Trust may, on occasion and in the normal course of business, be
involved in legal actions relating to the ownership and operations of its
properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a materially
adverse effect on the consolidated financial position of the Trust.
NOTE 9 -- RETIREMENT AND PROFIT SHARING PLAN:
During 1993, the Trust adopted a retirement and profit sharing plan which
qualifies under section 401(k) of the Internal Revenue Code. All existing Trust
employees at adoption and subsequent employees who have completed six months of
service are eligible to participate in the plan. Subject to certain limitations,
employees may contribute up to 15% of their salary. The Trust may make annual
discretionary contributions
F-11
<PAGE> 30
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the plan. Contributions by the Trust related to the years ended December 31,
1996, 1995 and 1994 were $30,000, $25,000 and $20,000, respectively.
NOTE 10 -- OPERATING LEASES:
The Trust's properties are leased to others under operating leases with
expiration dates ranging from 1997 to 2011. Future minimum rentals on
noncancellable tenant leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1997.................................................. $ 7,592,000
1998.................................................. 6,179,000
1999.................................................. 4,328,000
2000.................................................. 2,844,000
2001.................................................. 2,091,000
Thereafter............................................ 2,217,000
-----------
$25,251,000
===========
</TABLE>
NOTE 11 -- DISTRIBUTIONS:
The Trust's distributions of $363,000 ($0.20 per share) in 1996 and
$364,000 ($0.20 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 1,821,648 for the year ending December 31, 1996 and 1,815,080 or the years
ended December 31, 1995 and 1994.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
Accounts receivable, accounts payable and accrued expenses and other
liabilities are carried at amounts that reasonably approximate their fair
values. The fair values of the Trust's mortgage notes payable are estimated
using discounted cash flow analyses, based on the Trust's incremental borrowing
rates for similar types of borrowing arrangements. The carrying values of such
mortgage notes payable reasonably approximate their fair values.
NOTE 14 -- SUBSEQUENT EVENT:
On February 26, 1997, USAA REALCO, a shareholder owning 31.8% of the
outstanding Shares in the Trust, purchased outstanding indebtedness of the Trust
totaling $9,419,213 pursuant to an earlier agreement with the Trust (see Note
7). USAA REALCO and the Trust then entered into an agreement modifying the terms
of the indebtedness. The amount of the outstanding debt was reduced from
$9,419,213 to $7,040,721, allowing the Trust to recognize an extraordinary gain
on extinguishment of debt (including accrued interest) of $2,643,000 in the
first quarter of 1997. The Trust made an immediate principal reduction on the
modified notes of $1,591,103, leaving an outstanding principal balance of
$5,449,618.
The terms of the modified notes provide for monthly payments of interest at
8.8% and an extension in the maturity date from March 31, 1997 to December 31,
2000. In addition, USAA REALCO has the option to convert the principal amount of
the notes into Shares of the Trust at the conversion rate of $10.00 per share
(if converted prior to December 31, 1997) or $11.25 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
F-12
<PAGE> 31
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$11.90 per share on February 26, 1997 and the $10.00 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.
Reverse Share Split. On October 15, 1997, the Trust's shareholders approved
a one for five reverse Share split. All references to the number of Shares, per
Share amounts and the market prices of the Shares have been restated to reflect
the impact of the reverse Share split.
F-13
<PAGE> 32
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 C
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 C
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 1980 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> 33
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> 34
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Rents....................................... $ 2,007 $ 2,150 $ 5,902 $ 6,568
Tenant reimbursements....................... 559 643 1,885 2,071
Interest income............................. 405 7 436 146
---------- ---------- ---------- ----------
2,971 2,800 8,223 8,785
---------- ---------- ---------- ----------
EXPENSES
Property operating expenses:
Property taxes........................... 345 368 1,032 1,110
Property management fees................. 96 107 290 324
Utilities................................ 111 118 294 335
General operating........................ 194 189 616 610
Repairs and maintenance.................. 100 153 279 318
Other property operating expenses........ 71 75 247 220
Depreciation and amortization............... 715 769 2,105 2,177
Interest on 8.8% notes payable.............. 427 1,001 1,312 3,350
Interest on mortgages payable............... 742 405 2,703 1,216
Administrative expenses:
Trust administration and overhead........ 509 300 1,320 1,190
Litigation and proxy costs............... 2 116 439 1,004
---------- ---------- ---------- ----------
3,312 3,601 10,637 11,854
---------- ---------- ---------- ----------
Loss from operations........................ (341) (801) (2,414) (3,069)
Extraordinary gain on extinguishment of
debt..................................... -- -- 2,643 1,367
Gain on sale of real estate................. -- -- 312 --
---------- ---------- ---------- ----------
NET INCOME (LOSS)............................. $ (341) $ (801) $ 541 $ (1,702)
========== ========== ========== ==========
PER SHARE DATA(a)
Loss from operations........................ $ (0.08) $ (0.44) $ (0.86) $ (1.69)
Extraordinary gain on extinguishment of
debt..................................... -- -- 0.94 0.75
Gain on sale of real estate................. -- -- 0.11 --
---------- ---------- ---------- ----------
Net Income (Loss)........................... $ (0.08) $ (0.44) $ 0.19 $ (0.94)
========== ========== ========== ==========
Distributions Paid.......................... $ -- $ 0.20 $ -- $ 0.20
========== ========== ========== ==========
Weighted average number of common shares
outstanding.............................. 4,354,378 1,815,080 2,793,417 1,815,080
========== ========== ========== ==========
</TABLE>
- ---------------
(a) The per share amount and weighted average shares outstanding have been
restated to reflect a one for five reverse share split approved by the
Trust's shareholders on October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 35
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate:
Held for investment....................................... $ 98,634 $ 84,693
Held for sale............................................. -- 9,779
-------- --------
98,634 94,472
Accumulated depreciation.................................. (24,877) (23,973)
-------- --------
Net real estate........................................... 73,757 70,499
Cash and cash equivalents:
Unrestricted.............................................. 25,780 4,010
Restricted................................................ 1,401 1,366
-------- --------
Total cash and cash equivalents........................... 27,181 5,376
Other assets, net........................................... 4,151 3,061
-------- --------
Total Assets...................................... $105,089 $ 78,936
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 41,380 $ 43,797
8.8% notes payable........................................ 5,450 9,419
Accrued interest.......................................... 1,078 602
Accounts payable, accrued expenses and other
liabilities............................................ 2,108 1,964
Tenant security deposits.................................. 533 471
-------- --------
Total Liabilities................................. 50,549 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; 4,657,973 Shares issued
and outstanding(a)..................................... 466 200
Additional paid-in capital................................ 158,906 127,856
Accumulated distributions................................. (58,456) (58,456)
Accumulated loss from operations and extraordinary gains
(losses)............................................... (47,836) (48,065)
Accumulated net realized gain on sales of real estate..... 1,460 1,148
-------- --------
Total Shareholders' Equity........................ 54,540 22,683
-------- --------
Total Liabilities and Shareholders' Equity........ $105,089 $ 78,936
======== ========
</TABLE>
- ---------------
(a) Shares issued and outstanding have been restated to reflect a one for five
reverse share split approved by the Trust's shareholders on October 15,
1997.
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 36
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 541 $(1,702)
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........................................... 1,846 1,933
Amortization of deferred financing costs............... 146 54
Other amortization..................................... 259 244
Changes in operating assets and liabilities:
Decrease (increase) in other assets and restricted
cash................................................ (1,363) (450)
Decrease in accounts payable, other liabilities and
tenant security deposits............................ 268 (260)
Increase (decrease) in accrued interest.............. 741 (3,108)
------- -------
Net Cash Used In Operating Activities............. (517) (4,656)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate................................ (6,404) --
Capitalized improvements and leasing commissions.......... (646) (925)
Net proceeds from sales of real estate.................... 2,029 --
------- -------
Net Cash Provided By (Used In) Investing
Activities....................................... (5,021) (925)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (4,008) (170)
Proceeds from issuance of common shares................... 31,316 --
Distributions to shareholders............................. -- (363)
------- -------
Net Cash Used In Financing Activities............. 27,308 (533)
------- -------
Net Decrease in Unrestricted Cash and Cash
Equivalents...................................... 21,770 (6,114)
Unrestricted Cash and Cash Equivalents at
Beginning of Period.............................. 4,010 7,694
------- -------
Unrestricted Cash and Cash Equivalents at End of
Period........................................... $25,780 $ 1,580
======= =======
Cash Paid for Interest............................ $ 3,129 $ 7,674
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 37
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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, 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 September 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 $525,000 and $599,000 at September 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.
F-19
<PAGE> 38
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Reverse Share Split. On October 15, 1997, the Trust's shareholders approved
a one for five reverse Share split. All references to the number of Shares, per
Share amounts and the market prices of the Shares have been restated to reflect
the impact of the reverse Share split.
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.
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 $16,067,000 at September 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 $10.00 per share (if converted prior to December
31, 1997) or $11.25 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 $11.90
per share on February 26, 1997 and the $10.00 conversion price, as interest
expense between February 26, 1997 and December 31, 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
$188,000 in the third quarter of 1997 ($835,000 for the nine months ended
September 30, 1997) and expects to record the remaining $187,000 of interest
expense in the fourth quarter of 1997.
F-20
<PAGE> 39
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In July 1997, the Trust sold a total of 1,433,483 Shares to clients and
affiliates of Morgan Stanley Asset Management, Inc. (collectively "MSAM").
Pursuant to an earlier agreement, the Shares were issued at $12.25 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 1,224,489 Shares
at $12.25 per Share for total proceeds of $15,000,000. The agreement with MSAM
allows them to purchase an additional 199,169 Shares at $12.25 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 4,412,829
shares of beneficial interest at $13.125 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.
Pursuant to the terms of the agreements, the Trust will issue an aggregate
of 4,412,829 shares of beneficial interest at $13.125 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 and certain conditions, including approval by the
shareholders of the Trust and the limited partners of each of the RELPS.
On August 20, 1997, a lawsuit was filed in the Superior Court of the State
of Arizona against certain entities, including the Trust and the general
partners of each RELP, alleging, among other things, breaches of fiduciary duty
in connection with the transactions contemplated in the merger agreements. The
lawsuit was subsequently removed to federal court and has been transferred to
the Western District of Texas, San Antonio Division. The lawsuit seeks, among
other things, to enjoin the consummation of the merger and damages, including
attorneys' fees and expenses. The defendants in the lawsuit believe that the
plaintiffs' claims are without merit and intend to defend vigorously against the
lawsuit. However, no assurance can be given that the plaintiffs in the lawsuit
will not be successful.
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 160,000 common shares for issuance under
F-21
<PAGE> 40
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 125,000 options to management with an exercise price of
$15.00 (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 2,000 options to
each Trust Manager with an exercise price from $14.69 to $15.00, an expiration
date of June 30, 2007, and immediate vesting.
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 of Financial Accounting Standards No.
123 Accounting for Stock Based Compensation, 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
On October 15, 1997, the Trust's shareholders approved a one for five
reverse Share split. All references to the number of Shares, per Share amounts
and the market prices of the Shares have been restated to reflect the impact of
the reverse Share split.
On October 3, 1997, the Trust, as general partner in a limited partnership,
purchased a portfolio of eight properties with 783,780 net rentable square feet
located in Dallas and suburban areas of Dallas, Texas. The purchase price of the
portfolio was $36.8 million. The purchase price was partially financed by a
borrowings of approximately $20.7 million under a secured acquisition line (see
below), approximately $2.8 million of limited partnership units ("OP Units")
issued to the limited partners of the partnership and cash totaling
approximately $13.3 million. Beginning on October 3, 1999, the OP Units are
redeemable for cash or, at the election of the Trust (as general partner) common
shares on a one-for-one basis. In addition, the limited partners received
warrants, which expire on October 3, 2000, to purchase 40,000 common shares at
$17.50 per share.
On October 3, 1997, the Trust entered into a $35,000,000 secured
acquisition line with Prudential Securities Corporation. The credit line, which
will be secured by properties acquired with proceeds from the credit line, bears
variable interest at a rate based on the 30 day LIBOR rate plus 200 basis
points. The maximum loan to value ratio for borrowings is 70%. Unless extended,
borrowings under the credit line mature on October 3, 1998 and, if not repaid,
allow the lender to move such borrowings into a securitized mortgage pool. The
Trust intends to refinance borrowings under this credit line with proceeds from
future permanent financing transactions or equity offerings.
On October 20, 1997, the Trust filed preliminary proxy materials for a
special meeting of shareholders, to be held in December 1997, relating to a
proposed offering of up to $75 million of common shares in a private placement
transaction.
The Trust expects to close the purchase of a 286,000 square foot warehouse
and service center property in Houston, Texas in November 1997. The Trust
anticipates borrowing approximately $6,600,000 of the $10,700,000 purchase price
under the acquisition line discussed above.
F-22
<PAGE> 41
AMERICAN INDUSTRIAL PROPERTIES REIT
SPECIAL MEETING TO BE HELD DECEMBER 12, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUST MANAGERS OF
AMERICAN INDUSTRIAL PROPERTIES REIT (THE "TRUST")
PROXY
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 ("Shares"), held of record on November 20, 1997, at the
Special 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/
<PAGE> 42
/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
PROPOSAL ONE. THE PROXIES WILL VOTE WITH RESPECT TO THE SECOND PROPOSAL
ACCORDING TO THEIR BEST JUDGMENT.
1. Approval of the issuance by the Trust of up to an aggregate of $75 million
of Common Shares in a private placement.
FOR AGAINST ABSTAIN
/ / / / / /
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
POSTPONEMENTS OR ADJOURNMENTS THEREOF.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
By signing and returning this Proxy, the undersigned
acknowledges receipt of the Notice of Special 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.
FACSIMILE COPIES OF THE PROXY, PROPERLY COMPLETED AND
DULY EXECUTED, WILL BE ACCEPTED AT (781) 575-2534
UNTIL 5:00 P.M. BOSTON TIME ON DECEMBER 11, 1997.
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.
