<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 6798 75-6335572
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
6210 N. BELTLINE ROAD, SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
CHARLES W. WOLCOTT
CHIEF EXECUTIVE OFFICER
AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. BELTLINE ROAD, SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
BRYAN L. GOOLSBY
GINA E. BETTS
STEPHEN L. SAPP
LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P.
2200 ROSS AVENUE, SUITE 900
DALLAS, TEXAS 75201
(214) 220-4800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(2) PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest,
$0.10 par value................ 22,064,147 $2.969 $65,508,452 $19,850
==================================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of Common Shares of
the registrant that are expected to be issued in connection with the
transactions described herein.
(2) Determined pursuant to Rule 457(f)(1). (Based on the average high/low sales
price on July 16, 1997).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
Cross-Reference Sheet
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION IN REGISTRATION STATEMENT OR PROSPECTUS
---------------- ------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Facing page of Registration Statement; Cross
Reference Sheet; outside front cover page of
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside front cover page of Prospectus; Table of
Contents; Available Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.............. Summary; Equivalent Per Share Data; Summary
Historical and Unaudited Pro Forma Combined
Financial Data; Risk Factors; American
Industrial Properties REIT -- Unaudited Pro
Forma Combined Financial Statements
4. Terms of the Transaction................... Summary; The Merger; Comparison of Units and
Shares; Comparison of the RELPS and the Trust;
Annex I
5. Pro Forma Financial Information............ Unaudited Pro Forma Combined Financial
Statements
6. Material Contacts With the Company Being
Acquired................................... Summary; The Merger
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
be Underwriters............................ Not applicable
8. Interests of Named Experts and Counsel..... Not applicable
9. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities................................ Not applicable
10. Information With Respect to S-3
Registrants................................ Not applicable
11. Incorporation of Certain Information by
Reference.................................. Not applicable
12. Information With Respect to S-2 or S-3
Registrants................................ Not applicable
13. Incorporation of Certain Information by
Reference.................................. Not applicable
14. Information With Respect to Registrants
Other Than S-2 or S-3 Registrants.......... Available Information; Summary; Business of the
Trust; Business of the RELPS
15. Information With Respect to S-3
Companies.................................. Not applicable
16. Information With Respect to S-2 or S-3
Companies.................................. Not applicable
17. Information with Respect to Companies Other
Than S-2 or S-3 Companies.................. Not applicable
18. Information if Proxies, Consents or
Authorizations Are to be Solicited......... Summary; The Special Meetings; The Merger;
Dissenters' Rights
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited, or
in an Exchange Offer....................... Not applicable
</TABLE>
<PAGE> 3
[AIP LETTERHEAD]
, 199
Fellow Shareholders:
We cordially invite you to attend a special meeting of shareholders (the
"Special Meeting") of American Industrial Properties REIT (the "Trust") to be
held at 2200 Ross Avenue, 40th Floor, Dallas, Texas, on ,
, 199 at 9:00 a.m., Dallas time.
At this meeting, you will have an opportunity to consider and vote on the
proposed merger of the following four public partnerships (collectively, the
"RELPS") with and into the Trust pursuant to the terms of Agreements and Plans
of Merger between the Trust and each of the RELPS (collectively, the "Merger
Agreement"): USAA Real Estate Income Investments I, A California Limited
Partnership ("RELP I"); USAA Real Estate Income Investments II Limited
Partnership, a Texas limited partnership ("RELP II"); USAA Income Properties III
Limited Partnership, a Delaware limited partnership ("RELP III"); and USAA
Income Properties IV Limited Partnership, a Delaware limited partnership ("RELP
IV") (collectively, the "RELPS").
Pursuant to the Merger Agreement, the Trust is offering to issue in the
aggregate up to 22,064,147 of its Common Shares of Beneficial Interest, par
value $.10 per share ("Shares"), which will be allocated among the RELPS which
approve and participate in the proposed merger in exchange for limited
partnership units ("Units") in the RELPS in accordance with the respective Net
Asset Value (as defined in the Merger Agreement) of each RELP. Based upon Net
Asset Value, each Unit in RELP I will be converted into the right to receive
79.52 Shares, each Unit in RELP II will be converted into the right to receive
143.17 Shares, each Unit in RELP III will be converted into the right to receive
82.99 Shares and each Unit in RELP IV will be converted into the right to
receive 75.68 Shares (collectively, the "Exchange Ratios"). The currently
outstanding Shares of the Trust will remain outstanding. Cash will be issued in
lieu of fractional Shares (based on $2.625 per Share). Upon consummation of the
merger, substantially all of the properties owned by the RELPS will be owned by
the Trust, and such properties will continue to be managed by an affiliate of
USAA Real Estate Company. The officers and Trust Managers of the Trust prior to
the merger will continue to serve after the merger. The terms of the proposed
merger, including the methods for valuing the Units and the Shares and
determining the Exchange Ratios, are explained in detail in the accompanying
Joint Proxy Statement/Prospectus. I urge you to read it carefully.
The Board of Trust Managers of the Trust is unanimously of the opinion that
the proposed merger will be beneficial to the Trust's shareholders. The Board
has received a written opinion from Prudential Securities Incorporated that the
consideration to be paid by the Trust in the Merger is fair to the Trust from a
financial point of view.
The proposed merger will be approved if it receives the affirmative vote of
two-thirds of the Shares entitled to vote at the Special Meeting. It is
especially important that your Shares be represented at the Special Meeting and
voted FOR the proposal. Even if you plan to attend the Special Meeting in
person, please complete, date, sign and promptly return the proxy in the
envelope provided or vote via facsimile at (972) 756-0704. Your vote is
important, regardless of the number of Shares that you own. Your promptly
completing, signing and returning the proxy saves our Trust the expense of
costly proxy solicitation. Should you have any questions, please contact
at ( ) .
<PAGE> 4
On behalf of the Board of Trust Managers, I urge you to vote FOR approval
of the Merger Agreement and the issuance of Shares thereunder.
Sincerely,
Charles W. Wolcott
President and Chief Executive
Officer
<PAGE> 5
AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. Beltline Road, Suite 170
Irving, Texas 75063
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , , 199
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of American
Industrial Properties REIT (the "Trust") will be held at 2200 Ross Avenue, 40th
Floor, Dallas, Texas, on , , 1997 at 9:00 a.m., Dallas time
(the "Special Meeting"), for the following purposes:
1. To approve and adopt Agreements and Plans of Merger, each dated as
of June 30, 1997 (the "Merger Agreement"), by and between the Trust and
each of (collectively, the "RELPS"): USAA Real Estate Income Investments I,
A California Limited Partnership ("RELP I"), USAA Real Estate Income
Investments II Limited Partnership ("RELP II"), USAA Income Properties III
Limited Partnership ("RELP III") and USAA Income Properties IV Limited
Partnership ("RELP IV"), pursuant to which: (i) the RELPS would merge with
and into the Trust; and (ii) the Trust would issue in the aggregate up to
22,064,147 of its Common Shares of Beneficial Interest, par value $.10 per
share ("Shares"), which will be allocated among the RELPS which approve and
participate in the proposed merger in exchange for limited partnership
units in the RELPS (collectively, "Units") as follows: each Unit in RELP I
will be converted into the right to receive 79.52 Shares, each Unit in RELP
II will be converted into the right to receive 143.17 Shares, each Unit in
RELP III will be converted into the right to receive 82.99 Shares and each
Unit in RELP IV will be converted into the right to receive 75.68 Shares,
with cash in lieu of the issuance of any fractional share interest.
2. To approve the postponement or adjournment of the Special Meeting
for the solicitation of additional votes, if necessary.
3. To transact such other business as properly may come before such
meeting or any adjournments thereof.
Only those shareholders of the Trust of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The Merger Agreement and the issuance of
Shares thereunder will be approved if it receives the affirmative vote of the
holders of two-thirds of the votes entitled to be cast at the Special Meeting.
By Order of the Board of Trust
Managers
Marc A. Simpson
Vice President, Chief Financial
Officer,
Treasurer and Secretary
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE OR VOTE VIA FACSIMILE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE
MEETING. SHAREHOLDERS ATTENDING THE MEETING MAY VOTE PERSONALLY ON ALL MATTERS
THAT ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.
Dallas, Texas
, 199
<PAGE> 6
[RELP I LETTERHEAD]
, 199
Fellow Partners:
We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Real Estate Income Investments I, A California
Limited Partnership (the "Partnership") to be held at the Four Seasons Resort at
Las Colinas, Irving, Texas, on , , 199 at 9:00 a.m., Dallas
time.
At the Special Meeting, you will have an opportunity to consider and vote
on the proposed merger of the Partnership with and into American Industrial
Properties REIT (the "Trust") pursuant to the terms of an Agreement and Plan of
Merger between the Trust and the Partnership (the "Merger Agreement"). The
limited partners of USAA Real Estate Income Investments II Limited Partnership,
USAA Income Properties III Limited Partnership, and USAA Income Properties IV
Limited Partnership are being asked to vote on similar proposals to merge with
and into the Trust.
Pursuant to the Merger Agreement, the Trust is offering to issue 79.52
Common Shares of Beneficial Interest, $0.10 par value (the "Shares"), of the
Trust in exchange for each Unit you hold in the Partnership. The currently
outstanding Shares of the Trust will remain outstanding. Cash will be issued in
lieu of fractional Shares (based on $2.625 per Share). Upon consummation of the
merger, all of the properties owned by the Partnership will be owned by the
Trust, and such properties will continue to be managed by an affiliate of USAA
Real Estate Company. The officers and Trust Managers of the Trust prior to the
merger will continue to serve after the merger. The terms of the proposed merger
are explained in detail in the accompanying Joint Proxy Statement/Prospectus. I
urge you to read it carefully.
The General Partner of the Partnership is of the opinion that the proposed
merger will be beneficial to the limited partners. The General Partner has
received a written opinion from Houlihan Lokey Howard & Zukin as to the fairness
to the limited partners, from a financial point of view, of the consideration to
be received by the limited partners.
The proposed merger will be approved if it receives the affirmative vote of
the holders of a majority of the Units entitled to vote at the Special Meeting.
It is especially important that your Units be represented at the Special Meeting
and voted FOR the proposal. Even if you plan to attend the Special Meeting in
person, please complete, date, sign and promptly return the proxy in the
envelope provided or vote via facsimile at (210) 498-6214. Your vote is
important, regardless of the number of Units that you own. Should you have any
questions, please contact at ( ) .
On behalf of the General Partner, I urge you to vote FOR approval of the
proposals.
Sincerely,
Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Investors I, Inc.
<PAGE> 7
USAA REAL ESTATE INCOME INVESTMENTS I,
A CALIFORNIA LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD , , 199
NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Real Estate Income Investments I, A California Limited Partnership (the
"Partnership") will be held at the Four Seasons Resort at Las Colinas, Irving,
Texas, on , , 199 at 9:00 a.m., Dallas time (the
"Special Meeting"), for the following purposes:
1. To (i) approve and adopt an Agreement and Plan of Merger dated as
of June 30, 1997 (the "Merger Agreement"), by and between American
Industrial Properties REIT (the "Trust") and the Partnership pursuant to
which the Partnership would merge with and into the Trust and each Unit in
the Partnership would be converted into the right to receive 79.52 Common
Shares of Beneficial Interest, $0.10 par value, of the Trust, with cash in
lieu of fractional shares; and (ii) amend the Agreement of Limited
Partnership of the Partnership to authorize the following: (a) the merger
of the Partnership with and into the Trust, whether or not the Trust would
be regarded as an affiliate of the General Partner; and (b) all
understandings between the Trust and the General Partner contemplated by
the Joint Proxy Statement/Prospectus, irrespective of any provisions in the
Agreement of Limited Partnership of the Partnership which might otherwise
prohibit such transactions.
2. To approve the postponement or adjournment of the Special Meeting
for the solicitation of additional votes, if necessary.
3. To transact such other business as properly may come before such
meeting or any adjournments thereof.
Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and the Merger
Agreement, will be approved if they receive the affirmative vote of the holders
of a majority of the votes entitled to be cast at the Special Meeting.
By Order of the General Partner
Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Investors I,
Inc.
IT IS IMPORTANT THAT YOUR UNITS BE REPRESENTED AT THE MEETING. PLEASE SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE OR VOTE VIA FACSIMILE SO THAT YOUR UNITS WILL BE REPRESENTED AT THE
MEETING. LIMITED PARTNERS ATTENDING THE MEETING MAY VOTE PERSONALLY ON ALL
MATTERS THAT ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.
San Antonio, Texas
, 199
<PAGE> 8
[RELP II LETTERHEAD]
, 199
Fellow Partners:
We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Real Estate Income Investments II Limited
Partnership (the "Partnership") to be held at the Four Seasons Resort at Las
Colinas, Irving, Texas, on , , 199 at 9:00 a.m., Dallas
time.
At the Special Meeting, you will have an opportunity to consider and vote
on the proposed merger of the Partnership with and into American Industrial
Properties REIT (the "Trust") pursuant to the terms of an Agreement and Plan of
Merger between the Trust and the Partnership (the "Merger Agreement") and to
amend the Partnership's Agreement of Limited Partnership to authorize the merger
and to allow the sale of the Partnership's interest in the joint venture which
owns Sequoia Plaza I Building to Realco or an affiliate of Realco. The limited
partners of USAA Real Estate Income Investments I, A California Limited
Partnership, USAA Income Properties III Limited Partnership and USAA Income
Properties IV Limited Partnership are being asked to vote on similar proposals
to merge with and into the Trust.
Pursuant to the Merger Agreement, the Trust is offering to issue 143.17
Common Shares of Beneficial Interest, $0.10 par value ("Shares"), of the Trust
in exchange for each Unit you hold in the Partnership. The currently outstanding
Shares of the Trust will remain outstanding. Cash will be issued in lieu of
fractional Shares (based on $2.625 per Share). Upon consummation of the merger,
substantially all of the properties owned by the Partnership will be owned by
the Trust, and such properties will continue to be managed by an affiliate of
USAA Real Estate Company ("Realco"). The officers and Trust Managers of the
Trust prior to the merger will continue to serve after the merger. The terms of
the proposed merger are explained in detail in the accompanying Joint Proxy
Statement/Prospectus. I urge you to read it carefully.
The General Partner of the Partnership is of the opinion that the proposed
merger will be beneficial to the limited partners. The General Partner has
received a written opinion from Houlihan Lokey Howard & Zukin as to the fairness
to the limited partners, from a financial point of view, of the consideration to
be received by the limited partners.
The proposal will be approved if it receives the affirmative vote of the
holders of a majority of the Units entitled to vote at the Special Meeting. It
is especially important that your Units be represented at the Special Meeting
and voted FOR the proposals. Even if you plan to attend the Special Meeting in
person, please complete, date, sign and promptly return the proxy in the
envelope provided or vote via facsimile at (210) 498-6214. Your vote is
important, regardless of the number of Units that you own. Should you have any
questions, please contact Randal R. Seewald at (800) 531-8876.
On behalf of the General Partner, I urge you to vote FOR approval of the
proposal.
Sincerely,
Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Investors II, Inc.
<PAGE> 9
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD , , 1997
NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Real Estate Income Investments II Limited Partnership (the "Partnership") will
be held at the Four Seasons Resort at Las Colinas, Irving, Texas, on ,
, 1997 at 9:00 a.m., Dallas time (the "Special Meeting"), for the
following purposes:
1. To (i) approve and adopt an Agreement and Plan of Merger dated as
of June 30, 1997 (the "Merger Agreement"), by and between American
Industrial Properties REIT (the "Trust") and the Partnership pursuant to
which the Partnership would merge with and into the Trust and each Unit in
the Partnership would be converted into the right to receive 143.17 Common
Shares of Beneficial Interest, $0.10 par value, of the Trust, with cash in
lieu of fractional shares; and (ii) amend the Agreement of Limited
Partnership of the Partnership to authorize the following: (a) the merger
of the Partnership with and into the Trust, whether or not the Trust would
be regarded as an affiliate of the General Partner; (b) the sale to USAA
Real Estate Company, or to an affiliate of the same, of the Partnership's
interest in the joint venture which owns the Sequoia Plaza I Building; and
(c) all understandings between the Trust and the General Partner
contemplated by the Joint Proxy Statement/Prospectus, irrespective of any
provisions in the Agreement of Limited Partnership of the Partnership which
might otherwise prohibit such transactions.
2. To approve the postponement or adjournment of the Special Meeting
for the solicitation of additional votes, if necessary.
3. To transact such other business as properly may come before such
meeting or any adjournments thereof.
Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and consequently
the Merger Agreement will be approved if they receive the affirmative vote of
the holders of a majority of the votes entitled to be cast at the Special
Meeting.
By Order of the General Partner
Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Investors II,
Inc.
IT IS IMPORTANT THAT YOUR UNITS BE REPRESENTED AT THE MEETING. PLEASE SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE OR VOTE VIA FACSIMILE SO THAT YOUR UNITS WILL BE REPRESENTED AT THE
MEETING. LIMITED PARTNERS ATTENDING THE MEETING MAY VOTE PERSONALLY ON ALL
MATTERS THAT ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.
San Antonio, Texas
, 199
<PAGE> 10
[RELP III LETTERHEAD]
, 199
Fellow Partners:
We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Income Properties III Limited Partnership (the
"Partnership") to be held at the Four Seasons Resort at Las Colinas, Irving,
Texas, on , , 199 at 9:00 a.m., Dallas time.
At the Special Meeting, you will have an opportunity to consider and vote
on the proposed merger of the Partnership with and into American Industrial
Properties REIT (the "Trust") pursuant to the terms of an Agreement and Plan of
Merger between the Trust and the Partnership (the "Merger Agreement") and to
amend the Partnership's Agreement of Limited Partnership to authorize the merger
and the sale of the Curlew Crossing property by the Partnership to USAA Real
Estate Company ("Realco") or an affiliate of Realco. The limited partners of
USAA Real Estate Income Investments I, A California Limited Partnership, USAA
Real Estate Income Investments II Limited Partnership and USAA Income Properties
IV Limited Partnership are being asked to vote on similar proposals to merge
with and into the Trust.
Pursuant to the Merger Agreement, the Trust is offering to issue 82.99
Common Shares of Beneficial Interest, $0.10 par value ("Shares"), of the Trust
in exchange for each Unit you hold in the Partnership. The currently outstanding
Shares of the Trust will remain outstanding. Cash will be issued in lieu of
fractional Shares (based on $2.625 per Share). Upon consummation of the merger,
substantially all of the properties owned by the Partnership will be owned by
the Trust, and such properties will continue to be managed by an affiliate of
Realco. The officers and Trust Managers of the Trust prior to the merger will
continue to serve after the merger. The terms of the proposed merger are
explained in detail in the accompanying Joint Proxy Statement/Prospectus. I urge
you to read it carefully.
The General Partner of the Partnership is of the opinion that the proposed
merger will be beneficial to the limited partners. The General Partner has
received a written opinion from Houlihan Lokey Howard & Zukin as to the fairness
to the limited partners, from a financial point of view, of the consideration to
be received by the limited partners.
The proposal will be approved if it receives the affirmative vote of a
majority of the Units entitled to vote at the Special Meeting. It is especially
important that your Units be represented at the Special Meeting and voted FOR
the proposals. Even if you plan to attend the Special Meeting in person, please
complete, date, sign and promptly return the proxy in the envelope provided or
vote via facsimile at (210) 498-6214. Your vote is important, regardless of the
number of Units that you own. Should you have any questions, please contact
Randal R. Seewald at (800) 531-8876.
<PAGE> 11
On behalf of the General Partner, I urge you to vote FOR approval of the
proposal.
Sincerely,
Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Income Properties III, Inc.
<PAGE> 12
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD , , 1997
NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Income Properties III Limited Partnership (the "Partnership") will be held at
the Four Seasons Resort at Las Colinas, Irving, Texas, on ,
, 199 at 9:00 a.m., Dallas time (the "Special Meeting"), for the
following purposes:
1. To (i) approve and adopt an Agreement and Plan of Merger dated as
of June 30, 1997 (the "Merger Agreement"), by and between American
Industrial Properties REIT and the Partnership pursuant to which the
Partnership would merge with and into the Trust and each Unit in the
Partnership will be converted into the right to receive 82.99 Common Shares
of Beneficial Interest, $0.10 par value, of the Trust, with cash in lieu of
fractional shares; and (ii) amend the Agreement of Limited Partnership of
the Partnership to authorize the following: (a) the merger of the
Partnership with and into the Trust, whether or not the Trust would be
regarded as an affiliate of the General Partner; (b) the sale of the Curlew
Crossing property by the Partnership to USAA Real Estate Company; and (c)
all understandings between the Trust and the General Partner contemplated
by the Joint Proxy Statement/Prospectus, irrespective of any provisions in
the Agreement of Limited Partnership of the Partnership which might
otherwise prohibit such transactions.
2. To approve the postponement or adjournment of the Special Meeting
for the solicitation of additional votes, if necessary.
3. To transact such other business as properly may come before such
meeting or any adjournments thereof.
Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and the Merger
Agreement will be approved if they receive the affirmative vote of the holders
of a majority of the votes entitled to be cast at the Special Meeting.
By Order of the General Partner
Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Income
Properties III, Inc.
IT IS IMPORTANT THAT YOUR UNITS BE REPRESENTED AT THE MEETING. PLEASE SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE OR VOTE VIA FACSIMILE SO THAT YOUR UNITS WILL BE REPRESENTED AT THE
MEETING. LIMITED PARTNERS ATTENDING THE MEETING MAY VOTE PERSONALLY ON ALL
MATTERS THAT ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.
San Antonio, Texas
, 199
<PAGE> 13
[RELP IV LETTERHEAD]
, 199
Fellow Partners:
We cordially invite you to attend a special meeting of limited partners
(the "Special Meeting") of USAA Income Properties IV Limited Partnership (the
"Partnership") to be held at the Four Seasons Resort at Las Colinas, Irving,
Texas, on , , 199 at 9:00 a.m., Dallas time.
At the Special Meeting, you will have an opportunity to consider and vote
on the proposed merger of the Partnership with and into American Industrial
Properties REIT (the "Trust") pursuant to the terms of the Agreement and Plan of
Merger between the Trust and the Partnership (the "Merger Agreement"). The
limited partners of USAA Real Estate Income Investments I, A California Limited
Partnership; USAA Real Estate Income Investments II Limited Partnership and USAA
Income Properties III Limited Partnership are being asked to vote on similar
proposals to merge with and into the Trust.
Pursuant to the Merger Agreement, the Trust is offering to issue 75.68
Common Shares of Beneficial Interest, $0.10 par value ("Shares"), of the Trust
in exchange for each Unit you hold in the Partnership. The currently outstanding
Shares of the Trust will remain outstanding. Cash will be issued in lieu of
fractional Shares (based on $2.625 per Share). Upon consummation of the merger,
all of the properties owned by the Partnership will be owned by the Trust, and
such properties will continue to be managed by an affiliate of USAA Real Estate
Company. The officers and Trust Managers of the Trust prior to the merger will
continue to serve after the merger. The terms of the proposed merger are
explained in detail in the accompanying Joint Proxy Statement/Prospectus. I urge
you to read it carefully.
The General Partner of the Partnership is of the opinion that the proposed
merger will be beneficial to the limited partners. The General Partner has
received a written opinion from Houlihan Lokey Howard & Zukin as to the fairness
to the limited partners, from a financial point of view, of the consideration to
be received by the limited partners.
The proposed merger will be approved if it receives the affirmative vote of
the holders of a majority of the Units entitled to vote at the Special Meeting.
It is especially important that your Units be represented at the Special Meeting
and voted FOR the proposal. Even if you plan to attend the Special Meeting in
person, please complete, date, sign and promptly return the proxy in the
envelope provided or vote via facsimile at (210) 498-6214. Your vote is
important, regardless of the number of Units that you own. Should you have any
questions, please contact Randal R. Seewald at (800) 531-8876.
On behalf of the General Partner, I urge you to vote FOR approval of the
proposals.
Sincerely,
Edward B. Kelley
Chairman of the Board, President and
Chief Executive Officer of
USAA Income Properties IV, Inc.
<PAGE> 14
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
8000 Robert F. McDermott Fwy.
IH 10 West, Suite 600
San Antonio, Texas 78230-3884
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD , , 1997
NOTICE IS HEREBY GIVEN that a special meeting of limited partners of USAA
Income Properties IV Limited Partnership (the "Partnership") will be held at the
Four Seasons Resort at Las Colinas, Irving, Texas, on , ,
199 at 9:00 a.m., Dallas time (the "Special Meeting"), for the following
purposes:
1. To (i) approve and adopt an Agreement and Plan of Merger dated as
of June 30, 1997 (the "Merger Agreement"), by and between American
Industrial Properties REIT (the "Trust") and the Partnership pursuant to
which each Unit in the Partnership will be converted into the right to
receive 75.68 Common Shares of Beneficial Interest, $0.10 par value
("Shares") of the Trust, with cash in lieu of fractional shares; and (ii)
amend the Agreement of Limited Partnership of the Partnership to authorize
the following: (a) the merger of the Partnership with and into the Trust,
whether or not the Trust would be regarded as an affiliate of the General
Partner; and (b) all understandings between the Trust and the General
Partner contemplated by the Joint Proxy Statement/Prospectus, irrespective
of any provisions in the Agreement of Limited Partnership of the
Partnership which might otherwise prohibit such transactions.
2. To approve the postponement or adjournment of the Special Meeting
for the solicitation of additional votes, if necessary.
3. To transact such other business as properly may come before such
meeting or any adjournments thereof.
Only those limited partners of record at the close of business on
, 199 will be entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. The proposed amendments and the Merger
Agreement will be approved if they receive the affirmative vote of the holders
of a majority of the votes entitled to be cast at the Special Meeting.
By Order of the General Partner
Randal R. Seewald
Vice President, Secretary and
Legal Counsel of USAA Income
Properties IV, Inc.
IT IS IMPORTANT THAT YOUR UNITS BE REPRESENTED AT THE MEETING. PLEASE SIGN,
DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE OR VOTE VIA FACSIMILE SO THAT YOUR UNITS WILL BE REPRESENTED AT THE
MEETING. LIMITED PARTNERS ATTENDING THE MEETING MAY VOTE PERSONALLY ON ALL
MATTERS THAT ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.
San Antonio, Texas
, 199
<PAGE> 15
JOINT PROXY STATEMENT/PROSPECTUS
AMERICAN INDUSTRIAL PROPERTIES REIT
22,064,147 Shares of Beneficial Interest
This Joint Proxy Statement/Prospectus is being furnished to shareholders of
American Industrial Properties REIT, a Texas real estate investment trust (the
"Trust"), and to the limited partners (collectively, "Limited Partners") holding
Units of Limited Partnership Interests ("Units") in any of the following four
public limited partnerships: USAA Real Estate Income Investments I, A California
Limited Partnership ("RELP I"); USAA Real Estate Income Investments II Limited
Partnership, a Texas limited partnership, ("RELP II"); USAA Income Properties
III Limited Partnership, a Delaware limited partnership ("RELP III"); and USAA
Income Properties IV Limited Partnership, a Delaware limited partnership ("RELP
IV," together with RELP I, RELP II and RELP III, the "RELPS" and each a "RELP").
This Joint Proxy Statement/ Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trust Managers of the Trust for use at
the Special Meeting of shareholders of the Trust (including any adjournments or
postponements thereof) (the "Trust Special Meeting") and by the General Partner
of each RELP (collectively, the "General Partners") for use at the Joint Special
Meeting of Limited Partners (including any adjournments or postponements
thereof) each a "RELP Special Meeting" and, together with the Trust Special
Meeting, the "Special Meetings"), each to be held on , 199 at the
time and place set forth in the accompanying notices.
The purpose of the Special Meetings is to consider and vote upon each
Agreement and Plan of Merger, dated as of June 30, 1997 (collectively, the
"Merger Agreement"), between the Trust and each RELP pursuant to which each RELP
will merge with and into the Trust (collectively, the "Merger"). The form of
Merger Agreement between the Trust and each RELP is attached to this Joint Proxy
Statement/Prospectus as Annex I.
As consideration for the merger of the RELPS into the Trust, the Trust is
offering to issue in the aggregate up to 22,064,147 of its Common Shares of
Beneficial Interest, par value $.10 per share (the "Shares"), which will be
allocated to the RELPS which approve and participate in the Merger (the
"Participating RELPS") in accordance with their respective Net Asset Values (as
defined herein). Based upon Net Asset Value, each Unit in RELP I will be
converted into the right to receive 79.52 Shares, each Unit in RELP II will be
converted into the right to receive 143.17 Shares, each Unit in RELP III will be
converted into the right to receive 82.99 Shares and each Unit in RELP IV will
be converted into the right to receive 75.68 Shares. Cash will be issued in lieu
of fractional Shares (based on $2.625 per Share). Upon consummation of the
Merger, substantially all of the properties owned by the Participating RELPS
will be owned by the Trust, and such properties will continue to be managed by
an affiliate of USAA Real Estate Company ("Realco"). The officers and Trust
Managers of the Trust prior to the Merger will continue to serve after the
Merger.
Based on the closing price of the Shares on the New York Stock Exchange
(the "NYSE") of $ per Share on , 199 , if the Merger
Agreement is approved and the Merger is consummated, the total market value of
the Trust would be approximately $ . Assuming all the RELPS participate
in the Merger, based on 45,354,014 outstanding Shares, approximately 48.65% of
the Shares of the Trust expected to be outstanding after the Merger would be
held by the Limited Partners. For a description of the Merger Agreement, see
"The Merger."
This Joint Proxy Statement/Prospectus also constitutes a prospectus of the
Trust in respect of the Shares to be issued to the Limited Partners in
connection with the Merger. The outstanding Shares are, and the Shares offered
hereby will be, listed and traded on the NYSE under the symbol "IND."
This Joint Proxy Statement/Prospectus and the accompanying proxy cards are
first being mailed to shareholders of the Trust and the Limited Partners on or
about , 199 .
<PAGE> 16
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR CERTAIN RISKS RELATING TO
PARTICIPATION IN THE MERGER. These risks include:
- The Trust has generated losses from operations every year since 1988.
- Participating Limited Partners who become shareholders of the Trust may
not receive the same level of distributions as previously received from
the applicable RELP and may initially receive no distributions because
the Trust currently is not paying distributions.
- Uncertainties relating to the capital structure of the Trust following
consummation of the Merger as a result of the possibility that some of
the RELPS may not participate in the Merger.
- The change in the nature of each Limited Partner's investment from
holding an interest in a specified portfolio of properties in a finite
life entity to holding an equity investment in an ongoing real estate
investment trust ("REIT") whose portfolio of properties may be changed
from time to time without the approval of its shareholders and which does
not plan to liquidate such assets within a fixed period.
- The possibility that the Net Asset Values assigned to each of the RELPS
may not reflect the actual value of such RELP'S assets.
- The common management of the RELPS, who are also Affiliates of Realco,
has negotiated the terms of the Merger on behalf of all the RELPS. As a
result, the terms of the Merger may be less favorable to each individual
RELP than if each RELP had a representative independent of Realco
negotiating on its behalf. Realco is subject to various conflicts of
interest, including the following:
- It is the sole shareholder of each General Partner.
- It is a significant shareholder of the Trust.
- Two of the eight members of the Board of Trust Managers are Affiliates of
and were designated by Realco.
- An Affiliate will receive benefits from the Trust in connection with the
management and leasing of the properties formerly owned by the RELPS.
- The Merger will be a taxable transaction for each participating Limited
Partner.
- The Trust will be assuming all liabilities of the Participating RELPS,
including undisclosed liabilities.
- The possibility that the Shares may initially trade at prices
substantially below prices as of the date of execution of the Merger
Agreement, the date hereof or the date of the Special Meetings.
- The Trust's policy that the proceeds of future asset sales or
refinancings generally will be reinvested rather than distributed to
shareholders to the extent not required to be distributed to maintain
REIT status.
- A majority vote of Limited Partners binds each RELP; if the Merger is
approved, Limited Partners who vote against the Merger will have their
Units converted into Shares unless they properly exercise dissenters'
rights.
- The ability of the Board of Trust Managers of the Trust to change the
investment, acquisition and financing policies of the Trust (including
policies regarding the level of indebtedness) without a vote of the
shareholders, which could result in policies which do not reflect the
interests of all shareholders.
- Taxation of the Trust as a corporation if it fails to qualify as a REIT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is , 1997.
<PAGE> 17
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................... iv
SUMMARY..................................................... 1
Parties to the Merger..................................... 1
The Special Meetings...................................... 1
Record Date; Votes Required............................... 2
The Merger................................................ 2
Risk Factors.............................................. 3
Conflicts of Interest..................................... 5
Expected Benefits and Detriments of the Merger............ 6
Fairness Opinions......................................... 7
Federal Income Tax Consequences........................... 7
Comparison of the RELPS and the Trust..................... 8
Effective Time of the Merger.............................. 9
Management, Operations and Headquarters After the
Merger................................................. 9
Conditions to Consummation................................ 9
Anticipated Accounting Treatment.......................... 9
Conduct of Business Pending the Merger.................... 10
Resales of Shares......................................... 10
Termination............................................... 10
Termination Fees.......................................... 10
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA............................................ 11
RISK FACTORS................................................ 18
History of Losses......................................... 18
Potential Changes in Distribution Levels.................. 18
Uncertainties at the Time of Voting....................... 18
Fundamental Change in Nature of Investment................ 18
Potential Taxable Income without Cash Distribution........ 19
Potential Challenges to Partnership Valuations............ 19
Lack of Independent Representation........................ 19
Conflicts of Interest..................................... 19
The Merger as a Taxable Event............................. 19
Undisclosed Liabilities................................... 20
Future Dilution of Shareholders........................... 20
Distributions Subordinate to Payments on Debt............. 20
Expenses of the Merger.................................... 20
Majority Vote Binds Each RELP............................. 20
The Merger Will Require Limited Partners to Forego the
Alternatives to the Merger............................. 21
Trust Objectives.......................................... 21
Stock Price Fluctuations.................................. 21
Effect of Market Interest Rates on Price of the Shares.... 21
Loss of Rights by Limited Partners........................ 21
Termination Payments if Merger Fails to Occur............. 22
Real Estate Investment Risks.............................. 22
No Limitation on Debt..................................... 23
Changes in Policies....................................... 23
Possible Environmental Liabilities........................ 23
Risks of Development and Acquisition Activities........... 24
Growth Risks.............................................. 24
Uninsured and Underinsured Losses Could Result in Loss of
Value of Property...................................... 24
</TABLE>
i
<PAGE> 18
<TABLE>
<S> <C>
Costs of Compliance with Federal Laws..................... 25
Adverse Consequences of Failure to Qualify as a REIT...... 25
Ownership Limits.......................................... 25
THE SPECIAL MEETINGS........................................ 26
Trust Special Meeting..................................... 26
RELP Special Meeting...................................... 27
THE MERGER.................................................. 30
Background of and Reasons for the Merger.................. 30
Fairness Opinions......................................... 38
Exchange Ratio and Exchange for the Trust's Shares........ 45
Management and Operations After the Merger................ 45
Effective Time of the Merger.............................. 48
Headquarters.............................................. 48
Conditions to Consummation of the Merger.................. 48
Conduct of Business Pending the Merger.................... 49
Acquisition Proposals..................................... 51
Extension, Waiver and Amendment; Termination.............. 51
Effect of Termination and Abandonment..................... 52
Extension; Waiver......................................... 54
Proposed Amendments to Partnership Agreements............. 54
The Merger Expenses....................................... 55
Anticipated Accounting Treatment.......................... 55
Material Federal Income Tax Consequences.................. 55
Resales of the Trust's Shares............................. 64
DISSENTERS' RIGHTS.......................................... 65
THE TRUST'S UNAUDITED PRO FORMA COMBINED BALANCE SHEETS..... 69
THE TRUST'S UNAUDITED PRO FORMA COMBINED STATEMENTS OF
OPERATIONS................................................ 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 77
ALLOCATION OF CONSIDERATION................................. 83
CONFLICTS OF INTEREST....................................... 84
Affiliated General Partners............................... 84
Benefits to Realco, General Partners and Affiliates....... 84
Trust Managers and Officers............................... 84
Features Discouraging Potential Takeovers................. 84
FIDUCIARY RESPONSIBILITY.................................... 85
Trust Managers and Officers of the Trust.................. 85
General Partners of the RELPS............................. 85
MARKET PRICES AND DISTRIBUTIONS............................. 86
The Market Price of the Shares............................ 86
Distributions............................................. 87
Market Price of Units..................................... 87
Partnership Distributions................................. 88
INVESTMENT POLICIES AND RESTRICTIONS........................ 89
Disposition............................................... 89
Conflict of Interest Policy............................... 89
Affiliate Transaction Policy.............................. 89
Policies With Respect to Other Activities................. 90
</TABLE>
ii
<PAGE> 19
BUSINESS OF THE TRUST....................................... 90
General................................................... 90
Business Objectives and Strategy.......................... 91
Geographic Analysis of Revenue............................ 92
Employees................................................. 92
Properties................................................ 92
Portfolio Summary......................................... 94
Lease Expiration.......................................... 94
Mortgage Indebtedness..................................... 95
Legal Proceedings......................................... 95
BUSINESS OF THE RELPS....................................... 96
RELP I.................................................... 96
RELP II................................................... 98
RELP III.................................................. 101
RELP IV................................................... 104
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP I....................... 107
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP II...................... 111
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP III..................... 114
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RELP IV...................... 119
COMPARISON OF OWNERSHIP OF UNITS AND SHARES................. 123
EXECUTIVE AND TRUST MANAGER COMPENSATION.................... 132
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 134
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 135
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR
AFFILIATES................................................ 136
RELP I.................................................... 136
RELP II................................................... 137
RELP III.................................................. 138
RELP IV................................................... 139
EXPERTS..................................................... 140
LEGAL OPINIONS.............................................. 140
SHAREHOLDER PROPOSALS....................................... 140
OTHER MATTERS............................................... 140
GLOSSARY.................................................... 141
INDEX TO FINANCIAL STATEMENTS............................... F-1
iii
<PAGE> 20
AVAILABLE INFORMATION
The Trust and each of the RELPS are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Trust and each of
the RELPS with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices at Suite 1400,
500 West Madison Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the prescribed fees. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding the Trust and each of the RELPS and other
registrants that have been filed electronically with the Commission. The address
of such site is http://www.sec.gov. The Trust's reports, proxy statements and
other information may and can also be inspected and copied at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
This Joint Proxy Statement/Prospectus is part of a registration statement
on Form S-4 (together with all amendments and exhibits, the "Registration
Statement") filed by the Trust with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). This Joint Proxy Statement/Prospectus
does not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules of the
Commission. For further information, reference is made to the Registration
Statement.
All information contained in this Joint Proxy Statement/Prospectus with
respect to the Trust has been supplied by the Trust, and all information with
respect to each RELP has been supplied by such RELP.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Joint Proxy Statement/Prospectus, and if given or made, such
information or representation must not be relied upon. This Joint Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any securities other than the securities to which it relates,
nor does it constitute an offer to or solicitation of any person in any
jurisdiction to whom it would be unlawful to make such an offer or solicitation.
The delivery of this Joint Proxy Statement/Prospectus at any time does not imply
that the information herein is correct as of any time subsequent to the date
hereof.
iv
<PAGE> 21
SUMMARY
The following summary is not intended to be a complete description of all
material facts regarding the Trust and the RELPS and the matters to be
considered at the Special Meetings and is qualified in all respects by the
information appearing elsewhere in this Joint Proxy Statement/Prospectus, the
Annexes hereto and the documents referred to herein. All initial capitalized
terms shall have the meanings set forth in the Glossary.
PARTIES TO THE MERGER
The Trust. The Trust is a self-administered Texas REIT primarily engaged in
the acquisition, renovation, development and operation of industrial properties.
As of June 30, 1997, the Trust owned and operated 11 industrial properties
containing 1,206,212 net rentable square feet, located in Baltimore, Dallas,
Houston, Los Angeles and Milwaukee (the "Trust Industrial Properties"), and one
retail property containing 196,453 net rentable square feet (the "Trust Retail
Property") located in Denver (collectively, the "Trust Properties"). The Trust
Industrial Properties had an average occupancy rate of 93.8% and the Trust
Retail Property had an average occupancy rate of 83.8% for the quarter ended
June 30, 1997.
The principal executive offices of the Trust are located at 6210 N.
Beltline Road, Suite 170, Irving, Texas 75063 and its phone number is (972)
756-6000. For more information concerning the Trust, see "Business of the
Trust."
The RELPS. The RELPS were initially organized to acquire income producing
real properties, primarily office buildings. Each RELP is a finite life entity
and, pursuant to the terms of any Agreements of Limited Partnership of the RELPS
(collectively, the "Partnership Agreements"), no additional properties may be
acquired by any RELP and upon the sale of any property, the net proceeds are to
be distributed to the partners.
The RELPS own, either directly or through a joint venture, interests in
properties containing in the aggregate 1,394,000 net rentable square feet.
Excluding any properties that will not be transferred in connection with the
Merger, on June 30, 1997, each of the RELPS held the following properties: (i)
RELP I held one office building in San Diego with an average occupancy rate of
100% as of June 30, 1997, and one retail shopping center in Daytona Beach,
Florida with an average occupancy rate of 90%; (ii) RELP II held a manufacturing
and distribution facility located in Elk Grove Village, Illinois with an average
occupancy rate of 100%, and one industrial warehouse building in Lakeland,
Florida with an average occupancy rate of 100%; (iii) RELP III held one office
building complex in Manhattan Beach, California with an average occupancy rate
of 74% and one office building complex in Phoenix, Arizona with an average
occupancy rate of 80%; and (iv) RELP IV held one industrial building in
Milpitas, California with an average occupancy rate of 100%, one industrial
building in San Diego, California with an average occupancy rate of 81%, one
office building in St. Louis, Missouri with an average occupancy rate of 87%,
and a joint venture interest in the sole beneficiary of a trust which owns an
office/research and development facility in Chelmsford, Massachusetts with an
average occupancy rate of 100%.
The properties of RELP II are currently managed solely by its General
Partner. The remaining three RELPS' properties are managed by an Affiliate of
Realco.
The address of the principal executive offices of each of the RELPS and the
General Partners is 8000 Robert F. McDermott Fwy., IH 10 West, Suite 600, San
Antonio, Texas 78230-3884.
THE SPECIAL MEETINGS
The Trust. The Trust Special Meeting will be held on , 199 at
9:00 a.m., Dallas time at 2200 Ross Avenue, 40th Floor, Dallas, Texas 75201. The
purpose of the Trust Special Meeting is to consider and vote upon the proposal
to approve the Merger Agreement and the issuance of Shares pursuant thereto.
The RELPS. The RELP Special Meeting will be held on , 199 at
9:00 a.m., time at . The purpose of the RELP Special
Meeting is to vote upon a proposal to approve the Merger
1
<PAGE> 22
Agreement and to amend the Partnership Agreements as necessary to allow the
consummation of the Merger. See "The Special Meetings."
RECORD DATE; VOTES REQUIRED
The Trust. Only holders of Shares of record at the close of business on
(the "Record Date") will be entitled to notice of and to vote at
the Trust Special Meeting. The Merger Agreement and the issuance of Shares
thereunder will be approved if it receives the affirmative vote of two-thirds of
the outstanding Shares entitled to vote at the Trust Special Meeting. The
holders of a majority of the Shares entitled to vote, present in person or
proxy, will constitute a quorum for purposes of the Trust Special Meeting. As of
the Record Date, there were Shares outstanding and entitled to vote.
The members of the Trust's Board of Trust Managers (the "Trust Managers" or the
"Trust Board") and executive officers of the Trust and their affiliates
beneficially owned, as of the Record Date, shares, which is
approximately % of the outstanding Shares. As of the Record Date, Realco
held of record Shares ( % of the outstanding Shares). Management
of the Trust, Realco, MSAM, LaSalle Advisors and ABKB, representing % of
the Trusts' outstanding Shares, have agreed to vote their Shares in favor of the
Merger.
The RELPS. Only Limited Partners of record at the close of business on the
Record Date will be entitled to notice of and to vote at the RELP Special
Meeting. For each RELP, the affirmative vote of (i) the holders of a majority of
the outstanding Units; and (ii) the General Partner is required for approval of
the Merger. The General Partner of each RELP has approved the Merger. As of the
Record Date, RELP I had 54,610 Units issued and outstanding, of which 6,039
Units were held by its General Partner and its Affiliates; RELP II had 27,141
Units issued and outstanding of which 6,681 Units were held by its General
Partner and its Affiliates; RELP III had 111,549 Units issued and outstanding,
of which 6,428 Units were held by its General Partner and its Affiliates; and
RELP IV had 60,495 Units issued and outstanding, of which 6,130 Units were held
by its General Partner and its Affiliates. In accordance with the terms of the
Partnership Agreements of RELP II, RELP III and RELP IV, Units held by the
General Partner and its Affiliates in each respective RELP will not be entitled
to vote at the RELP Special Meeting. The Units held by the RELP I General
Partner and its Affiliates in RELP I are entitled to vote at the RELP Special
Meeting and the holders of such Units will vote their 6,039 Units (11% of the
outstanding Units in RELP I) in favor of the Merger Agreement and the amendment
of the Partnership Agreement.
THE MERGER
If the Merger is approved, the RELPS shall cease to exist and the Limited
Partners will receive Shares based upon on the relative values of each RELP's
real estate and other assets (if any), as adjusted for the RELP's known
liabilities ("Net Asset Value"). The Shares received by the Limited Partners
will be listed for trading on the NYSE. If the requisite number of Limited
Partners of only one of the RELPS approves the Merger, the Trust has the right,
but not the obligation, to consummate the Merger with the one Participating
RELP.
Any Limited Partner may abstain from or vote against the Merger, and if the
Merger is approved, the Limited Partner can still participate in the Merger, so
long as the Limited Partner does not exercise dissenters' rights. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "Dissenters' Rights" and "The Special Meetings -- RELP Special
Meeting."
The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger. Limited
Partners voting in favor of the Merger will be deemed to have voted in favor of
each of these proposed amendments. Since a majority vote of Limited Partners is
required to approve the proposed amendments, a majority vote is required to
approve the Merger. The proposed amendments authorize the following: (i) the
Merger of each RELP with and into the Trust, whether or not the Trust would be
regarded as an Affiliate of the General Partner; and (ii) all understandings
between the Trust and the General Partner contemplated by this Joint Proxy
Statement/Prospectus, irrespective of any provisions in the Partnership
Agreement which might otherwise prohibit such transactions. In addition to the
proposed amendments outlined above relating the Merger, the General Partner of
RELP II is proposing an
2
<PAGE> 23
amendment to the Partnership Agreement of RELP II authorizing the sale of RELP
II's interest in the joint venture which owns the Sequoia Plaza I Building to
Realco or to an Affiliate of Realco, notwithstanding the fact that Realco is an
Affiliate of the General Partner. Also, in addition to the proposed amendments
outlined above relating to the Merger, the General Partner of RELP III is
proposing an amendment to the Partnership Agreement of RELP III authorizing the
sale of the Curlew Crossing property by RELP III to Realco, notwithstanding the
fact that Realco is an Affiliate of the General Partner. These sales are
referred to herein as the "Related Transactions." See "The Merger -- Proposed
Amendments to Partnership Agreements."
Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares it might have otherwise be entitled to receive in exchange for
its General Partner Interests in the RELPS.
RISK FACTORS
The Trust's shareholders and the Limited Partners should carefully consider
the risks discussed under "Risk Factors" prior to voting on the matters being
submitted to them in connection with the Merger. These risks include:
Risks Related to the Merger
- The Trust has generated losses from operations every year since 1988.
- Participating Limited Partners who become shareholders of the Trust may
not receive the same level of distributions as previously received from
the applicable RELP. Limited Partners may initially receive no
distributions because the Trust currently is not paying distributions.
- Uncertainties at the time of voting regarding the potential assets and
leverage of the Trust because of the uncertainty as to which RELPS will
participate in the Merger, making it difficult for Limited Partners to
make an informed decision regarding the Trust's potential financial
strength.
- The change in the nature of each Limited Partner's investment from
holding an interest in a specific portfolio of properties in a finite
life entity to holding an interest in an ongoing real estate investment
trust, whose real estate portfolio may be changed from time to time by
the Trust's Board without the approval of the shareholders and which does
not plan to liquidate such assets within a fixed period.
- The possibility that the Net Asset Values assigned to each of the RELPS
may not reflect the true value of such RELP's assets.
- The common management of the RELPS, who are also affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. As a
result, the terms of the Merger may be less favorable to each individual
RELP than if each RELP had a representative independent of Realco
negotiating on its behalf. Realco is subject to various conflicts of
interest, including the following:
- It is the sole shareholder of each General Partner.
- It is a significant shareholder of the Trust.
- Two of the eight members of the Board of Trust Managers are Affiliates of
and were designated by Realco.
- An Affiliate will receive benefits from the Trust in connection with the
management of the properties formerly owned by the RELPS.
- Taxable income or loss will be recognized by each taxable Limited Partner
of participating RELPS attributable to the Merger in an amount equal to
the Limited Partner's allocable share of the income or loss recognized by
their respective RELP from the Trust's acquisition of the RELPS' assets
and Limited Partners will receive no cash from the Merger (other than
cash received in lieu of fractional Shares) to pay taxes arising from any
taxable income (see "The Merger -- Material Federal Income Tax
Consequences").
3
<PAGE> 24
- Potential liability of the Trust for unknown, undisclosed or contingent
liabilities of the Participating RELPS including claims against the Trust
for indemnification, environmental liabilities, and title defects, which
could adversely affect the cash liquidity of the Trust and its future
ability to make distributions to shareholders.
- Potential dilution to shareholders of the Trust from the issuance of
additional equity securities at what may be less than their fair market
value.
- Any declaration of distributions to shareholders is subordinate to the
payment of the Trust's debts and obligations, which could adversely
affect the ability of the Trust to make expected distributions to
shareholders in the future.
- Expenses of the Merger will be borne by the Trust exclusively, unless (i)
three or more of the RELPS do not approve the Merger, in which event
Realco will reimburse the Trust for up to $250,000 of the Trust's
expenses, or (ii) the Merger Agreement is terminated under certain
circumstances.
- The majority vote of the Limited Partners binds each RELP; if the Merger
is approved, Limited Partners who voted against the Merger will have
their Units converted into Shares unless they properly exercise their
dissenters' rights.
- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating the RELPS or
continuing to operate the RELPS as limited partnerships.
- The Trust has different business objectives than the RELPS, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.
- The Shares may initially trade at prices substantially below prices as of
the date of execution of the Merger Agreement, the date hereof or the
date of the Special Meetings.
- Increases in market interest rates may adversely affect the price of the
Shares.
- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the applicable Partnership Agreement and
the partnership law of the applicable jurisdiction of organization of
each RELP.
- If the Merger Agreement is terminated prior to consummation, under
certain circumstances, each RELP and the Trust may have to pay their
Proportionate Share of a termination fee or of the expenses of the
Merger.
- The Trust's organizational documents do not restrict the Trust's ability
to incur additional indebtedness. As a result, the Trust could increase
its debt service requirements to a level that may adversely affect the
Trust's ability to make future distributions and may increase the risk of
default.
- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.
- Possible claims against the Trust for the remediation of environmental
conditions, which could result in substantial expenditures for
remediation and in a loss of revenues during remediation efforts.
- Risks associated with the acquisition and development of commercial and
industrial properties, including lease-up and financing risks and the
risk that such properties may not perform as expected.
- Risks associated with increased portfolio size and geographic
diversification as a result of the Merger, including the adequacy of the
number of personnel and the available resources to manage the new
portfolio.
- The occurrences of uninsured liability or casualty, reducing the Trust's
capital and adversely affecting anticipated profits.
4
<PAGE> 25
- The potential expense of compliance with the Americans With Disabilities
Act, fire and safety, and other regulatory requirements applicable to the
operation of the Trust's properties.
- Taxation of the Trust as a corporation if it fails to qualify as a REIT
and the Trust's liability for increased federal, state and local income
taxes in such event.
- Certain provisions in the Trust's governing documents, including the
right to redeem Shares from a shareholder if he owns, directly or
indirectly, more than 9.8% of the Trust's outstanding Shares or to
restrict voting and distribution rights with respect to Shares owned in
excess of such limit, and the Trust Managers' right to issue other
classes of equity securities could delay or prevent changes in control of
the Trust, even if such changes in control were in the shareholders' best
interest.
General Real Estate Investment Risks
- Risks normally incidental to the ownership and operation of industrial
and commercial properties, including, among others, changes in general
national economic or local market conditions, competition for tenants,
changes in market rental rates, inability to collect rents from tenants
due to bankruptcy or insolvency of tenants or otherwise, and the need to
periodically make capital improvements.
- Risks associated with leveraged real estate investments, such as the
Trust's inability to meet required principal and interest payments, the
risk that existing indebtedness will not be refinanced or that the terms
of such refinancing will not be favorable, and the risk that necessary
capital expenditures will not be able to be financed on favorable terms
or at all.
- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.
- Competition from competing properties which could decrease the occupancy
levels and rental rates of the Trust's investments.
- The Trust's assets are subject to general operating risks common to all
real estate developments, including increases in operating costs not
offset by rental increases. In addition, the Trust's assets are primarily
industrial or commercial properties, making the Trust's profitability
dependent upon general trends affecting that type of real estate
investment.
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the RELPS, the General Partners, Realco, the Trust and its Trust Managers.
Certain of these conflicts of interest (to the extent not discussed above) are
summarized below:
- United Services Automobile Association ("USAA"), through indirect
wholly-owned subsidiaries, ultimately owns and therefore controls Realco
and each of the General Partners, and each of the officers and directors
of the General Partners are also officers or directors of Realco. Realco,
a wholly-owned indirect subsidiary of USAA, is also one of the largest
shareholders of the Trust, owning on July 18, 1997, 3,182,206 Shares or
approximately 13.66% of the issued and outstanding Shares. Realco has the
right, pursuant to a certain Share Purchase Agreement, dated December 13,
1996 (the "Realco Share Purchase Agreement") to appoint two members to
the Trust Board until December 19, 1999. See "The Merger -- Management
and Operations After the Merger." The relationships among USAA, Realco,
the General Partners and the Trust involve an inherent conflict of
interest in their structuring the terms and conditions of the Merger.
- Since each of the General Partners is ultimately owned and controlled by
USAA, and thus is affiliated with each other, each General Partner is not
in a position to independently view the Merger proposal solely from the
perspective of a single RELP, and may advocate positions which would be
in the interest of one of the RELPS at the expense of other RELPS.
5
<PAGE> 26
EXPECTED BENEFITS AND DETRIMENTS OF THE MERGER
In determining to recommend the Merger, the General Partners considered the
following expected benefits from the Merger: (i) its potential for accretion to
the Trust's funds from operations per share ("FFO"); (ii) increased size and
increased liquidity in the Trust's Shares; (iii) access to equity and debt
capital to pursue real estate acquisition opportunities; (iv) growth potential
by becoming an infinite life entity rather than a finite life partnership; (v)
simplified administration; (vi) organization as a single entity to pursue
business opportunities; (vii) asset diversification; (viii) simplified tax
reporting; (ix) the economic terms of the Merger, including the Exchange Ratio
and the 48.65% equity interest in the combined entity on a fully diluted basis
to be received by the Limited Partners; (x) the determination that the Merger
with the Trust represented the best available alternative for enhancing
long-term value for the Limited Partners; (xi) the expected operating
efficiencies and cost savings from the Merger; (xii) the other terms and
conditions of each Merger Agreement, including the ability of the General
Partner to pursue an unsolicited superior competing transaction should its
fiduciary duties so require; and (xiii) the opinion of Houlihan Lokey Howard &
Zukin ("Houlihan") that the consideration to be received by the Limited Partners
in connection with the Merger is fair to the Limited Partners of each RELP from
a financial point of view.
The General Partners also considered the following potential adverse
consequences of the Merger: (i) because the Exchange Ratio is fixed, a decline
in the value of the Trust's Shares would reduce the value of the consideration
to be received by the Limited Partners in the Merger; (ii) the Trust has not
consistently (four straight quarters) paid a dividend on its Shares since 1993;
(iii) the various conditions to the Trust's obligation to consummate the Merger;
(iv) the risk that the anticipated benefits of the Merger may not be realized;
(v) the fact that under the terms of the Merger Agreements, the General Partners
and their directors, officers, employees, agents and representatives are
prohibited from initiating, soliciting or encouraging any inquires or the making
of any proposal that constitutes, or that may reasonably be expected to lead to,
a transaction which would compete with the Merger, except if the General Partner
determines in good faith after consultation with outside legal counsel that it
is required by its fiduciary obligations to do so; (vi) the leverage of the
combined entity would be greater than any RELP's existing leverage; and (vii)
the taxable nature of the Merger and the fact that the Limited Partners will not
receive cash from the Merger (other than cash in lieu of fractional Shares) to
pay any taxes due on any taxable gain. In the view of the General Partners, the
potentially negative factors considered by them were not sufficient, either
individually or collectively, to outweigh the possible benefits considered by
the General Partners in their respective deliberations relating to the Merger.
In determining to recommend the Merger, the Trust Managers considered the
following expected benefits from the Merger: (i) its potential for accretion to
the Trust's FFO; (ii) increased size and increased liquidity in the Shares and
related improvement in access to equity and debt capital; (iii) limitation of
redundant activities in the combined organization and the resulting savings of
costs and expenses; (iv) entry provided by the RELP properties into new growth
markets; (v) increased geographic diversification of the Trust's portfolio; (vi)
favorable positioning for future portfolio acquisitions; and (vii) the opinion
of Prudential Securities Incorporated ("Prudential") that the consideration to
be paid by the Trust pursuant to the Merger is fair to the Trust from a
financial point of view.
The Trust Managers also considered the following potential adverse
consequences of the Merger: (i) because the Exchange Ratio is fixed, an increase
in the value of the Shares would increase the value of the consideration to be
received by the Limited Partners in the Merger; (ii) expansion into new regions
and new markets with which the Trust has little prior experience; (iii) the
significant cost involved in connection with consummating the Merger; (iv) the
substantial time and effort of the Trust's management required to effectuate the
Merger, integrate the business of the RELPS into the Trust, and manage the
increased and more diversified property portfolio; and (v) the risk that the
anticipated benefits of the Merger might not be fully realized. The Trust
Managers believe that the benefits and advantages of the Merger far outweigh the
negative factors and risks.
If the Merger is not consummated for any reason, the Trust will return to
executing its strategic objective of acquiring high-finish, light industrial
properties, including office show room, service center, flex space and
6
<PAGE> 27
research and development properties. To the extent such opportunities are
available, it would likely consider other possible potential combinations with
public or private light industrial property owners that the Trust Managers and
management believe add value and enhance the future earnings of the Trust and is
otherwise in the best interest of the Trust's shareholders.
If the Merger is not consummated for any reason, the RELPS will continue to
pursue their business objectives of maximizing the value of their properties and
liquidating such properties prior to the expiration of their respective finite
lives. In addition, the RELPS may seek another strategic combination or pursue
other alternatives which may become available.
FAIRNESS OPINIONS
The Trust. The Trust received the written opinion of Prudential at the
telephonic meeting of the Board of Trust Managers on July 10, 1997, that, as of
the date of such opinion, the consideration to be paid by the Trust pursuant to
the Merger was fair to the Trust from a financial point of view.
Prudential is an investment banking and financial advisory firm and is
continually engaged in the valuation of businesses and their securities in
connection with private placements, mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, and valuations for
corporate purposes, especially with respect to REITs and other real estate
companies. The Trust selected Prudential to render the fairness opinion with
respect to the Merger because of its reputation and substantial experience in
transactions such as the Merger and Prudential's familiarity with the Trust and
its operations.
The Trust has agreed to pay Prudential a fee of $250,000, which is payable
regardless of whether the Merger is consummated, and to indemnify Prudential
against certain liabilities, including liabilities under federal securities
laws. For additional information concerning Prudential and its opinion, see "The
Merger -- Fairness Opinions" and Prudential's opinion dated as of July 10, 1997,
attached hereto as Annex II-A. The opinion of Prudential should be read in its
entirety with respect to the assumptions made, matters considered and limits of
the reviews undertaken by Prudential in rendering its opinion.
RELPS. The RELPS received the written opinion of Houlihan at the joint
meeting of the Boards of Directors of each of the General Partners held on June
30, 1997, that, as of the date of such opinion, the consideration to be received
by the Limited Partners in connection with the Merger is fair to the Limited
Partners of each RELP from a financial point of view. Houlihan is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, and valuations for estate, corporate and other
purposes. The RELPS selected Houlihan to render the fairness opinion because of
its reputation and substantial experience in transactions such as the Merger.
The RELPS have collectively agreed to pay Houlihan $125,000 and to reimburse
Houlihan for certain of its out-of-pocket expenses, regardless of whether the
Merger is consummated and to indemnify Houlihan against certain liabilities,
including liabilities under the federal securities laws. For additional
information concerning Houlihan and its opinions, see the "The
Merger -- Fairness Opinions" and Houlihan's opinions, dated as of June 30, 1997,
attached hereto as Annex II-B.
FEDERAL INCOME TAX CONSEQUENCES
The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Consequences." The material federal income tax consequences of the Merger
include the following:
- The taxable Limited Partners will realize taxable gain or loss in the
Merger (which may be ordinary or capital in nature) and the Limited
Partners will not receive cash from the Merger (other than cash received
in lieu of fractional Shares) to pay any taxes due on any taxable gain.
Any gain or loss will be recognized in the year the Merger is
consummated.
7
<PAGE> 28
- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by the respective RELP and, as
applicable, the extent to which the fair market value of the Shares
distributed to the Limited Partner exceeds the Limited Partner's adjusted
basis in its Units.
- As a REIT, the Trust will be entitled to a tax deduction for
distributions made to its shareholders. To continue to qualify as a REIT,
however, the Trust must satisfy income, asset and ownership tests imposed
by the Code. Failure to so qualify will result in the loss of such
deduction for distributions paid as well as additional tax on Trust
income and reduced or no distributions to shareholders.
- Trust distributions received by taxable shareholders should be treated as
portfolio income. Such distributions should not be treated as UBTI to
certain tax-exempt shareholders (subject to certain exceptions which may
be applicable to pension-trusts).
COMPARISON OF THE RELPS AND THE TRUST
The information below highlights a number of significant differences
between the RELPS and the Trust. This discussion is qualified in its entirety by
the more detailed discussion contained under "Comparison of Ownership of Units
and Shares."
Form of Organization. Limited Partnerships and REITs are each vehicles
generally recognized as appropriate for the holding of real estate investments
and afford passive investors, such as Limited Partners and shareholders, certain
benefits, including limited liability, a professionally managed portfolio and
the avoidance of double-level taxation on distributed income. The RELPS are
under the control of their General Partners, while the Trust is governed by its
Trust Managers. In addition, there are significant differences in the tax
treatment of the RELPS as partnerships and the Trust as a REIT.
Length of Investment. Limited Partners in each of the RELPS expect
liquidation of their investment when the assets of the RELP are liquidated. In
contrast, the Trust does not dispose of its investments within any prescribed
period and, in any event, plans to retain the net sale proceeds for future
investments unless distribution of such proceeds is required to maintain REIT
status. Shareholders are expected to achieve liquidity for their investments by
trading the Shares on the NYSE, and not through the liquidation of the Trust's
assets. The Shares may trade at a discount from, or a premium to, their pro rata
interest in the liquidation value of the Trust's properties.
Properties and Diversification. The investment portfolio for each RELP is
limited to the assets acquired with the initial equity and limited debt
financing. The Trust currently has an investment portfolio that is larger than
the portfolio of any of the RELPS. An investment in the Trust is subject to the
risks normally attendant to ongoing real estate ownership and, if the Trust
develops property, to the risks related to property development.
Additional Equity. Unlike the RELPS, the Trust has substantial flexibility
to raise equity to finance its business and affairs. The Trust, through the
issuance of new equity securities, may substantially expand its asset base to
make new real estate investments. An investment in the Trust should not be
viewed as an investment in a specified pool of assets, but instead as an
investment in an ongoing real estate investment business, subject to the risks
associated with a real estate portfolio that is expected to change from time to
time. The issuance of additional equity securities by the Trust will dilute the
interests of shareholders if sold at prices below their fair market value.
Borrowing Policies. In conducting its business, the Trust may borrow funds
to the extent it believes appropriate. It is expected that the Trust will be
more leveraged than any of the RELPS, which have not incurred significant
borrowings in comparison to the overall value of their assets. Borrowing funds
may allow the Trust to expand its asset base, but will likewise increase the
Trust's risks due to leverage.
Restrictions Upon Related Party Transactions. Except to the extent
otherwise expressly provided in the Partnership Agreements, the RELPS are not
authorized to enter into transactions with the General Partners and their
Affiliates, unless such transactions are disclosed to and approved by a vote of
the Limited Partners. Neither the Declaration of Trust nor the Bylaws of the
Trust contains similar restrictions upon the Trust's
8
<PAGE> 29
right to enter into transactions with interested parties, such as Trust
Managers, officers, significant shareholders and Affiliates thereof, but such
transactions must be approved by a majority of the Trust Managers not interested
in the proposed transaction. Since neither the Declaration of Trust nor the
Bylaws requires the approval of shareholders for entering into transactions with
interested parties, it may be easier for the Trust to enter into such
transactions than it would be for the RELPS where Limited Partner approval for
such transactions is required.
Management Liability and Indemnification. The General Partners of each of
the RELPS have limited liability to the RELPS for acts or omissions undertaken
by them when performed in good faith, in a manner reasonably believed to be
within the scope of their authority and in the best interests of the RELPS. The
General Partners also have, under specified circumstances, a right to be
reimbursed for liability, loss, damage, costs and expenses incurred by them by
virtue of serving as General Partners. Although the standards are expressed
somewhat differently, there are similar limitations upon the liability of the
Trust Managers and officers of the Trust when acting on behalf of the Trust and
upon the rights of such persons to seek indemnification from the Trust. Through
the Merger, the Trust will be assuming all of the existing and contingent
liabilities of Participating RELPS, including their obligations to indemnify the
General Partners and other persons.
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction of all conditions to consummation
of the Merger (see "The Merger -- Conditions to Consummation of the Merger"),
the parties will file articles of merger with the Clerk of Dallas County and
articles of merger with the respective secretaries of state of the state of
organization of the respective RELPS. For state law purposes, the Merger will
become effective upon the later of the filing of articles of merger described
above, or at such later time which the Trust and the General Partners shall have
agreed upon and designated in such filings in accordance with applicable law
(the "Effective Time"). For all other purposes, the Merger will be effective as
of , 199 . The Trust and the RELPS each has the right, acting
unilaterally so long as it has not willfully and materially breached the Merger
Agreement, to terminate the Merger Agreement should the Merger not be
consummated by the close of business on March 31, 1998. See "The
Merger -- Extension, Waiver and Amendment; Termination."
MANAGEMENT, OPERATIONS AND HEADQUARTERS AFTER THE MERGER
Following the Merger, the Trust Managers prior to the Merger will continue
to serve as Trust Managers of the Trust. The executive officers of the Trust
prior to the Merger will continue to serve as the executive officers of the
Trust after the Merger.
Upon consummation of the Merger, an Affiliate of Realco will manage the
properties formerly owned by the RELPS. The Management Agreement between the
Trust and such party (the "Management Agreement") is terminable at will by
either party upon 30 days prior notice.
Following the Merger, the headquarters of the Trust will continue to be
located in Irving, Texas at the current headquarters of the Trust.
CONDITIONS TO CONSUMMATION
Consummation of the Merger is subject to satisfaction or waiver of certain
conditions, including, among other things, obtaining the requisite approval of
the shareholders of the Trust and the Limited Partners. If three of the four
RELPS do not approve the Merger, the Trust has the right, but not the
obligation, to consummate the Merger with the one Participating RELP. See "The
Merger -- Conditions to Consummation of the Merger."
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method in accordance
with Accounting Principles Board Opinion No. 16. See "The Merger -- Anticipated
Accounting Treatment."
9
<PAGE> 30
CONDUCT OF BUSINESS PENDING THE MERGER
Each of the Trust and the RELPS has agreed in the Merger Agreement to
operate its business in the ordinary course and to refrain from taking certain
actions relating to the operation of its business pending consummation of the
Merger without the prior approval of the other party, except as otherwise
permitted by the Merger Agreement. See "The Merger -- Conduct of Business
Pending the Merger."
RESALES OF SHARES
Shares received in the Merger will be freely transferable by the holders
thereof except for those shares held by holders who may be deemed to be
"Affiliates" of the RELPS (generally including Limited Partners holding more
than 10% of the Units in a RELP) under applicable federal securities laws. The
General Partners have agreed to use their best efforts to cause each of their
officers and directors and Realco to execute "lock-up" agreements for a period
of 90 days following the consummation of the Merger. The Trust has agreed to use
its best efforts to cause each of its Trust Managers and officers to likewise
sign 90-day lock-up agreements.
TERMINATION
The Merger Agreement provides that it may be terminated at any time prior
to the Effective Time, whether before or after the approval of the Merger
Agreement by the shareholders of the Trust and the Limited Partners, under
certain circumstances. See "The Merger -- Extension, Waiver and Amendment;
Termination."
TERMINATION FEES
The Merger Agreement provides for the payment by the RELPS or AIP of a
termination fee up to $2,000,000 (allocated among the RELPS based upon the
relative net book values of the RELPS as of March 31, 1997 ("Proportionate
Share")) if the Merger is terminated by such party under certain circumstances,
or reimbursement of expenses of up to $1,000,000 (allocated among the RELPS
based upon its Proportionate Share) if the Merger is terminated by such party
under certain circumstances. See "The Merger -- Extension, Waiver and Amendment;
Termination."
10
<PAGE> 31
SUMMARY HISTORICAL FINANCIAL INFORMATION OF THE TRUST
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary historical financial information for
the Trust. The summary historical financial information as of December 31, 1996
and 1995 and for the three years ended December 31, 1996 are based on the
audited financial statements of the Trust included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of the Trust. The summary historical
financial information as of March 31, 1997 and for the three months ended March
31, 1997 are based on the unaudited financial statements of the Trust included
elsewhere in this Joint Proxy Statement/Prospectus. In the opinion of management
of the Trust, the operating data for the three months ended March 31, 1997
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results for
the three months ended March 31, 1997 are not necessarily indicative of the
results to be obtained for the year ending December 31, 1997. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Trust" and the
historical financial statements of the Trust and notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------ MARCH 31,
1992 1993 1994 1995 1996 1997
-------- ------- ------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues.................... $ 15,139 $10,641 $11,226 $11,779 $11,478 $ 2,666
Loss from real estate
operations(a).................. (18,719) (5,121) (4,311) (4,338) (4,732) (1,019)
Net income (loss)(a).............. (17,593) (7,867) (4,655) (4,584) 1,255 1,936
Per share:
Loss from real estate
operations(a)................ (2.06) (0.57) (0.47) (0.48) (0.52) (0.10)
Net income (loss)(a)........... (1.94) (0.87) (0.51) (0.51) 0.14 0.19
Distributions paid............. 0.20 0.16 -- 0.04 0.04 --
BALANCE SHEET DATA:
Total assets...................... 110,446 88,297 92,550 89,382 78,936 74,245
Total debt........................ 68,578 57,078 65,613 62,815 53,216 47,160
Shareholders' equity.............. 38,171 28,851 24,196 19,248 22,683 24,619
</TABLE>
- ---------------
(a) Loss from real estate operations and net loss for 1992, 1994 and 1995
include provisions for possible losses on real estate of $14,094, $650, and
$600, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Trust" for a discussion of
extraordinary gains and losses of $1,910, $(2,530), $(344), $(55) and $5,810
in 1992, 1993, 1994, 1995 and 1996, respectively, and $2,643 for the three
months ended March 31, 1997.
11
<PAGE> 32
SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP I
(IN THOUSANDS, EXCEPT PER UNIT DATA)
The following table sets forth summary historical financial information for
RELP I. The summary historical financial information as of December 31, 1996 and
1995 and for the three years ended December 31, 1996 are based on the audited
financial statements of RELP I included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of RELP I. The summary historical
financial information as of March 31, 1997 and for the three months ended March
31, 1997 are based on the unaudited financial statements of RELP I included
elsewhere in this Joint Proxy Statement/Prospectus. In the opinion of management
of the RELP I General Partner, the operating data for the three months ended
March 31, 1997 include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
results for the three months ended March 31, 1997 are not necessarily indicative
of the results to be obtained for the year ending December 31, 1997. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of RELP
I" and the historical financial statements of RELP I and notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental income...................... $ 2,038 $ 1,605 $ 849 $ 1,200 $ 1,397 $ 471
Interest income.................... 644 653 656 639 141 13
Net income (loss).................. 1,562 (5,375) 436 647 356 102
Net income (loss) per Limited
Partnership Unit (1)............ 28.31 (97.44) 7.90 11.73 6.46 1.85
Taxable income (loss).............. 1,603 747 (116) (1) (46)
Taxable income (loss) per Limited
Partnership Unit (1)............ 29.05 13.55 (2.10) (0.02) (0.84)
Cash distributions................. 1,820 1,103 883 883 5,717 221
Cash distributions per Limited
Partnership Unit (2)............ 33.00 20.00 16.00 16.00 104.56 4.0
BALANCE SHEET DATA:
Total assets....................... 24,083 17,380 16,969 16,701 11,396 11,296
Partners' equity................... 23,732 17,253 16,807 16,571 11,210 11,092
</TABLE>
- ---------------
(1) Based on Units issued at period end and net income (loss)/taxable income
(loss) allocated to Limited Partners.
(2) Based on Units issued at quarter end and cash distributions allocated to
Limited Partners with the exception of the special distribution of $91.56
per limited partnership unit that was paid in March 1996 which was based on
the Units outstanding at January 31, 1996, the date of the mortgage loan
payoff.
12
<PAGE> 33
SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP II
(IN THOUSANDS, EXCEPT PER UNIT DATA)
The following table sets forth summary historical financial information for
RELP II. The summary historical financial information as of June 30, 1996 and
1995 and for the three years ended June 30, 1996 are based on the audited
financial statements of RELP II included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of June
30, 1994, 1993 and 1992 and for the two years ended June 30, 1993 are based on
audited financial statements of RELP II. The summary historical financial
information as of March 31, 1997 and for the nine months ended March 31, 1997
are based on the unaudited financial statements of RELP II included elsewhere in
this Joint Proxy Statement/Prospectus. In the opinion of management of the RELP
II General Partner, the operating data for the nine months ended March 31, 1997
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results for
the nine months ended March 31, 1997 are not necessarily indicative of the
results to be obtained for the year ending June 30, 1997. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of RELP II" and the
historical financial statements of RELP II and notes thereto included elsewhere
in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental income.............. $ 995 $ 1,005 $ 1,019 $ 1,029 $ 1,125 $ 1,054
Equity in earnings of joint
venture................. 119 145 149 154 147 112
Interest income............ 80 54 57 98 75 28
Net income................. 834 836 848 872 946 756
Net income per Limited
Partnership Unit (1).... 27.66 27.74 28.13 28.90 31.38 25.06
Cash distributions......... 1,055 1,055 1,055 1,003 844 792
Cash distributions per
Limited Partnership Unit
(2)..................... 35.00 35.00 35.00 33.25 28.00 26.25
BALANCE SHEET DATA:
Total assets............... 12,987 12,779 12,578 12,494 12,708 12,601
Partners' equity........... 12,878 12,659 12,451 12,320 12,422 12,386
</TABLE>
- ---------------
(1) Based on Units issued at period end.
(2) Based on Units issued at quarter end and cash distributions allocated to
Limited Partners.
13
<PAGE> 34
SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP III
(IN THOUSANDS, EXCEPT PER UNIT DATA)
The following table sets forth summary historical financial information for
RELP III. The summary historical financial information as of December 31, 1996
and 1995 and for the three years ended December 31, 1996 are based on the
audited financial statements of RELP III included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of RELP III. The summary historical
financial information as of March 31, 1997 and for the three months ended March
31, 1997 are based on the unaudited financial statements of RELP III included
elsewhere in this Joint Proxy Statement/Prospectus. In the opinion of management
of the RELP III General Partner, the operating data for the three months ended
March 31, 1997 include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
results for the three months ended March 31, 1997 are not necessarily indicative
of the results to be obtained for the year ending December 31, 1997. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of RELP
III" and the historical financial statements of RELP III and notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental income...................... $ 8,838 $ 9,174 $ 9,249 $ 9,694 $ 7,930 $ 1,178
Interest income.................... 198 177 343 648 592 106
Net income (loss).................. (182) (9,269) 1,742 5,299 3,280 (619)
Net income (loss) per Limited
Partnership Unit(1)............. (1.62) (82,27) 15.46 47.03 29.11 (5.49)
Taxable income (loss).............. (5,712) 414 20,549 3,642 (379)
Taxable income (loss) per Limited
Partnership Unit(1)............. (50.70) 3.67 182.37 32.32 (3.37)
Cash distributions................. 2,811 2,231 1,690 1,690 1,099 225
Cash distributions per Limited
Partnership Unit (2)............ 24.95 19.80 15.00 15.00 9.75 2.00
BALANCE SHEET DATA:
Total assets....................... 86,531 75,038 51,924 56,381 53,766 53,260
Total debt......................... 51,800 51,800 30,545 27,818 26,000 26,000
Partners' equity................... 32,665 21,165 21,217 24,826 27,007 26,163
</TABLE>
- ---------------
(1) Based on Units issued at period end and net income (loss)/taxable income
(loss) allocated to Limited Partners.
(2) Based on Units issued at quarter end and cash distributions allocated to
Limited Partners.
14
<PAGE> 35
SUMMARY HISTORICAL FINANCIAL INFORMATION OF RELP IV
(IN THOUSANDS, EXCEPT PER UNIT DATA)
The following table sets forth summary historical financial information for
RELP IV. The summary historical financial information as of December 31, 1996
and 1995 and for the three years ended December 31, 1996 are based on the
audited financial statements of RELP IV included elsewhere in this Joint Proxy
Statement/Prospectus. The summary historical financial information as of
December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993
are based on audited financial statements of RELP IV. The summary historical
financial information as of March 31, 1997 and for the three months ended March
31, 1997 are based on the unaudited financial statements of RELP IV included
elsewhere in this Joint Proxy Statement/Prospectus. In the opinion of management
of the RELP IV General Partner, the operating data for the three months ended
March 31, 1997 include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
results for the three months ended March 31, 1997 are not necessarily indicative
of the results to be obtained for the year ending December 31, 1997. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of RELP
IV" and the historical financial statements of RELP IV and notes thereto
included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental income...................... $ 5,261 $ 5,126 $ 5,119 $ 4,277 $ 3,815 $ 1,006
Interest income.................... 44 36 73 144 110 12
Net income (loss).................. 732 622 557 (268) (887) (309)
Net income (loss) per Limited
Partnership Unit(1)............. 11.97 10.18 9.12 (4.38) (14.52) (5.05)
Taxable income (loss).............. 979 921 1,053 122 (497)
Taxable income (loss) per Limited
Partnership Unit(1)............. 16.02 15.07 17.23 2.00 (8.14)
Cash distributions................. 1,650 1,192 917 916 596 122
Cash distributions per Limited
Partnership Unit(2)............. 27.00 19.50 15.00 15.00 9.75 2.00
BALANCE SHEET DATA:
Total assets....................... 52,386 51,238 50,430 48,773 46,907 47,737
Total debt......................... 23,189 23,022 22,839 22,639 22,419 23,561
Partners' equity................... 23,627 23,057 22,698 21,514 20,031 19,600
</TABLE>
- ---------------
(1) Based on Units issued at period end and net income (loss)/taxable income
(loss) allocated to Limited Partners.
(2) Based on Units issued at quarter end and cash distributions allocated to
Limited Partners.
15
<PAGE> 36
SUMMARY PRO FORMA FINANCIAL INFORMATION OF THE TRUST (MERGER)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The following table sets forth summary pro forma financial information for
the Trust (Merger) for the year ended December 31, 1996 and the three months
ended March 31, 1997. The pro forma financial information gives effect to the
Private Placement (as defined in "Pro Forma Financial Information") and the
Merger and the Related Transactions. The pro forma financial information set
forth below should be read in conjunction with, and is qualified in its entirety
by, the historical and pro forma financial statements and notes thereto of the
Trust, RELP I, RELP II, RELP III and RELP IV, which are included elsewhere in
this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1996 1997
------------ ---------------
<S> <C> <C>
OPERATING DATA:
Total revenues............................................ $24,662 $ 5,354
Income (loss) from operations............................. 281 (1,076)
Per share:
Income (loss) from operations............................. $ 0.01 $ (0.02)
BALANCE SHEET DATA:
Total assets.............................................. $209,198
Total debt................................................ 87,270
Shareholders' equity...................................... 113,469
</TABLE>
16
<PAGE> 37
COMPARATIVE PER SHARE DATA
Set forth below are historical and pro forma earnings per Share, cash
distributions per Share and book value per Share data of the Trust, and
historical and equivalent pro forma earnings per Unit, cash distributions per
Unit and book value per Unit data of RELP I, RELP II, RELP III and RELP IV. The
data set forth below should be read in conjunction with the Trust, RELP I, RELP
II, RELP III and RELP IV audited financial statements and unaudited interim
financial statements, including the notes thereto, which are included elsewhere
in this Joint Proxy Statement/Prospectus. The data should also be read in
conjunction with the unaudited pro forma financial statements, including the
notes thereto, included elsewhere herein. The pro forma data are not necessarily
indicative of the actual financial position that would have occurred, or future
operating results that will occur, upon consummation of the Merger.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1996 MARCH 31, 1997 (UNAUDITED)
---------------------------------------- -------------------------------------
PRO PRO FORMA PRO PRO FORMA
HISTORICAL FORMA(A) EQUIVALENT(B) HISTORICAL FORMA(A) EQUIVALENT(B)
---------- ----------- ------------- ---------- -------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS)
The Trust..................... $ (0.52) $0.01 $(0.10) $(0.02)
RELP I........................ 6.46 $0.80 1.85 $ (1.59)
RELP II....................... 31.38 1.43 25.06 (2.86)
RELP III...................... 29.11 0.83 (5.49) (1.66)
RELP IV....................... (14.52) 0.76 (5.05) (1.51)
CASH DIVIDENDS/DISTRIBUTIONS
The Trust $ -- $ -- $ -- $ --
RELP I 104.56 $ -- $ --
RELP II 28.00 -- --
RELP III 9.75 -- --
RELP IV 9.75 -- --
BOOK VALUE
The Trust $ 2.27 $2.46 $ 2.46 $ 2.50
RELP I 0.21 195.62 0.20 $198.80
RELP II 0.46 352.20 0.46 357.93
RELP III 0.24 204.16 0.23 207.48
RELP IV 0.33 186.17 0.32 189.20
</TABLE>
- ---------------
(a) The pro forma per share data for the Trust for the year ended December 31,
1996 and the three months ended March 31, 1997 have been prepared as if the
Merger and the Private Placement had occurred on January 1, 1996, resulting
in weighted average Shares outstanding of 44,462,255 and 45,354,014 for the
year ended December 31, 1996 and the three months ended March 31, 1997,
respectively.
(b) The equivalent pro forma per Unit amounts are calculated by multiplying pro
forma earnings per Share, cash distributions per Share and book value per
Share by the Exchange Ratios of 79.52 for RELP I, 143.17 for RELP II, 82.99
for RELP III and 75.68 for RELP IV.
17
<PAGE> 38
RISK FACTORS
Information contained or incorporated by reference in this Joint Proxy
Statement/Prospectus may include forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "project" or "continue" or the negative
thereof or other comparable terminology. The following matters and certain other
factors noted throughout this Joint Proxy Statement/ Prospectus and any
documents incorporated by reference herein or therein and exhibits hereto and
thereto constitute cautionary statements identifying important factors with
respect to any such forward-looking statements, including certain risks and
uncertainties, that could cause the Trust's actual results to differ materially
from those predicted in any such forward-looking statements.
In considering whether to approve the Merger Agreement, the Trust's
shareholders and the Limited Partners should carefully consider, in addition to
the other information in this Joint Proxy Statement/Prospectus, the following
matters:
HISTORY OF LOSSES
The Trust has generated losses from operations every year since 1988.
During the five years ended December 31, 1996, loss from operations ranged from
$4,311,000 in 1994 to $18,719,000 in 1992, with an average loss from operations
of $7,444,000 annually. Although the Trust anticipates that it will generate
income from operations in the future based on current growth plans, there can be
no assurance to the Limited Partners as to when, or if, such a change will
occur. Furthermore, a significant part of the losses from operations during the
five years ended December 31, 1996 resulted from writedowns on real estate
reflecting permanent impairments in value. Although additional writedowns are
not currently necessary, there can be no assurance that such writedowns will not
be required in the future.
POTENTIAL CHANGES IN DISTRIBUTION LEVELS
Limited Partners becoming shareholders of the Trust may not continue to
receive cash distributions at the same levels that distributions were received
from the RELPS. The Trust has not consistently made (four straight quarters)
regular cash distributions since 1993. Although the Trust anticipates paying
quarterly cash distributions in the future, given the uncertainties related to
the Merger and the Trust's business, it is impossible to predict with certainty
the impact of the Merger upon the distributions to Limited Partners who become
shareholders.
UNCERTAINTIES AT THE TIME OF VOTING
Limited Partners are being asked to decide whether to participate in the
Merger without knowing the capital structure of the Trust that will emerge from
the Merger. At the time the Limited Partners must cast their votes, they will
not know which RELPS will participate in the Merger, and therefore they will not
know what assets the Trust will acquire through the Merger. This uncertainty
makes it difficult for Limited Partners to make an informed decision regarding
the potential financial strength of the Trust and the financial and operating
risks to which its business will be subject.
FUNDAMENTAL CHANGE IN NATURE OF INVESTMENT
Limited Partners who become shareholders will have fundamentally changed
the nature of their initial investment. While each of the RELPS was formed as a
finite-life investment, with Limited Partners to receive regular cash
distributions from the RELP's net operating income and special distributions
upon liquidation of the RELP's real estate investments, the Trust intends to
operate for an indefinite period of time and has no specific plans for the sale
of its investments. Further, the Trust is not expected to make any special
distributions of liquidation proceeds, unless it is required to make such a
distribution to maintain its REIT status. Instead of having investments
liquidated through the liquidation of the Trust's assets, shareholders should
expect to be able to liquidate their investment in the Trust only through the
sale in the public market of the Shares and the amount realized through the sale
of the Shares may not be equal to the amount that would
18
<PAGE> 39
have been realized by the shareholders through the sale of the Trust's assets.
Shareholders will thus be subject to the market risks of all public companies,
particularly in that the value of their equity securities may fluctuate from
time to time depending upon general market conditions and the Trust's future
performance.
POTENTIAL TAXABLE INCOME WITHOUT CASH DISTRIBUTION
The Merger will result in taxable income or loss to each Limited Partner.
Because the Merger results in an exchange of stock for units, no cash (other
than cash received in lieu of fractional Shares) will be received in the merger
to pay any taxes due on any taxable income arising to a Limited Partner as a
result of the Merger. Thus, a Limited Partner may be required to sell Shares or
liquidate other investments in order to pay the taxes arising from such taxable
income.
POTENTIAL CHALLENGES TO PARTNERSHIP VALUATIONS
Limited Partners are subject to the risk that the Net Asset Values of the
RELPS, which were negotiated by the common management of the RELPS and the
Trust, do not properly reflect the value of each RELP's assets and, accordingly,
the RELPS in the aggregate may not have received sufficient Shares consistent
with the actual value of their assets. The allocation of the Net Asset Values
among the RELPS may result in certain of the RELPS receiving more than their
fair allocation of the Shares and the other RELPS receiving less then their fair
allocation of the Shares.
LACK OF INDEPENDENT REPRESENTATION
The terms of the Merger have been negotiated by the common management of
the RELPS, who are also affiliates of Realco, and by the Trust, and each RELP
was not separately represented by parties independent of Realco in structuring
and negotiating the terms of the Merger. The General Partners are ultimately
owned and controlled by Realco, which owns approximately 13.66% of the Trust.
Realco's two designees to the Board of Trust Managers also serve as officers and
directors of the General Partners. Had separate representation been arranged for
each RELP, the terms of the Merger might have been different and possibly more
favorable to each RELP. See "Conflicts of Interest." In addition, if separate
representation had been arranged for each of the RELPS, issues unique to the
value of such RELP might have resulted in adjustments to the Net Asset Value
assigned to such RELP thereby increasing the number of Shares allocable to such
RELP if participating in the Merger.
CONFLICTS OF INTEREST
The General Partners, through wholly-owned subsidiaries, are owned and
controlled by Realco. Realco is a significant shareholder of the Trust, owning
approximately 13.66% of the Trust's issued and outstanding Shares. Realco's two
designees to the Trust Board also serve as officers and directors of the General
Partners. Although the General Partners believe the terms of the Merger are fair
to the Limited Partners, the ownership and management relationships, as well as
the fact that an Affiliate of Realco will manage and lease the former RELP
properties on behalf of the Trust after the Merger, may have influenced the
General Partners in recommending that the Limited Partners approve the Merger.
THE MERGER AS A TAXABLE EVENT
All taxable Limited Partners who participate in the Merger will be involved
in a taxable transaction resulting in either taxable income or loss for the
Limited Partner. The Merger will result in realization of gain or loss to the
RELP based on the difference between (i) the sum of the fair market value of
Shares deemed received by the RELP and the RELP liabilities assumed by the
Trust; and (ii) the RELP's adjusted tax basis in its assets. Each Limited
Partner (except, as discussed below, certain tax-exempt Limited Partners)
generally will recognize his allocable share of such gain or loss based upon the
value of the Shares received by him in the Merger. Gain or loss recognized by
the Limited Partners will be treated as passive income or loss. Although Limited
Partners should be treated as having disposed of their entire interest in the
RELP's activity
19
<PAGE> 40
for purposes of "freeing up" suspended passive losses from such activity, such
results are uncertain. See "The Merger -- Material Federal Income Tax
Consequences."
Based on the Trust's representation that the RELPS do not hold their
properties for resale in the ordinary course of business, the Merger should not
result in recognition of UBTI by certain tax-exempt Limited Partners that do not
hold their Units as a "dealer" or acquired such interests with debt-financed
proceeds. Certain tax-exempt organizations, however, do not qualify for such
treatment. See "The Merger -- Material Federal Income Tax Consequences."
UNDISCLOSED LIABILITIES
At closing, the Trust will assume the liabilities of the Participating
RELPS. These liabilities are to be disclosed in the balance sheets prepared for
closing and used by the RELPS to determine the cash distributions to the Limited
Partners immediately prior to the closing which are designed to equalize the Net
Asset Values as of the closing date with the Net Asset Values used to allocate
the Shares. Such balance sheets may, however, not disclose all liabilities of
the RELPS and, in the case of known but contingent liabilities, not provide for
adequate reserves to satisfy such obligations when fixed in amount. Undisclosed
and/or contingent liabilities might include, among others, claims for cleanup or
remediation of unknown environmental conditions, tenant or vendor claims for
pre-Merger activities, unpaid liabilities unintentionally omitted from the
closing balance sheets, claims for indemnification by the General Partners and
other indemnified parties for pre-Merger events, and claims for undisclosed
title defects.
FUTURE DILUTION OF SHAREHOLDERS
Shareholders will be subject to the risk that their equity interests may be
diluted through the issuance of additional equity securities if such securities
are issued for less than their fair market value. The Trust has the right to
issue, at the discretion of its Trust Managers, Shares other than those to be
issued in the Merger, upon such terms and conditions and at such prices, as the
Trust Managers may establish. In addition, the Trust may in the future issue
Preferred Shares that might have priority over the Shares as to distributions
and liquidation proceeds.
DISTRIBUTIONS SUBORDINATE TO PAYMENTS ON DEBT
Distributions to shareholders of the Trust will be subordinate to the prior
payment of the Trust's current debts and obligations. If, for any reason, the
Trust did not have sufficient funds to pay its current debts and obligations,
distributions to shareholders would be suspended pending the payment of such
obligations.
EXPENSES OF THE MERGER
Expenses associated with a successful Merger are expected to be
approximately $1,550,000. If the Merger is consummated, all such expenses will
be borne by the Trust. If three of the four RELPS do not approve the Merger
Agreement, Realco will reimburse the Trust for the Trust's expenses only up to
$250,000. As to any RELP which fails to approve the Merger Agreement, Realco
will reimburse the Trust for the RELP's expenses (to the extent such amounts
were previously paid by the Trust) as follows: such RELP's fairness opinion,
legal fees up to $80,000, and the Proportionate Share of accounting fees,
engineering and environmental reports, printing and solicitation expenses. If
all RELPS approve the Merger Agreement, but the Trust's shareholders do not
approve the Merger Agreement, and if Realco voted its Shares in favor of the
Merger, the Trust must reimburse the RELPS and Realco for all of their expenses.
MAJORITY VOTE BINDS EACH RELP
All RELPS must approve the Merger by a vote of the holders of a majority of
the Units of each RELP. If the Merger is approved, Limited Partners who do not
properly exercise dissenters' rights, even if they abstained or voted against
the Merger, will have their Units converted into Shares. Units held by the
General Partner and its Affiliates in RELP II, RELP III and RELP IV will not be
entitled to vote at the RELP Special Meeting. The Units held by the RELP I
General Partner and its Affiliates in RELP I are entitled to
20
<PAGE> 41
vote at the RELP Special Meeting. The General Partner and its Affiliates will
vote their 6,039 Units (11% of the outstanding Units in RELP I) in favor of the
Merger Agreement and the proposed amendments to the Partnership Agreement.
THE MERGER WILL REQUIRE LIMITED PARTNERS TO FOREGO THE ALTERNATIVES TO THE
MERGER
There are alternatives to the Merger, such as continuing the RELPS as they
are, liquidating the RELPS or merging them into a newly-formed entity. The
benefits of these alternatives are avoiding certain of the expenses of the
Merger and avoiding the risks associated with the Merger of the RELPS. Retaining
the finite-life feature of the RELPS would allow investors eventually to receive
liquidation proceeds from the sale of the RELPS' properties, and a Limited
Partner's share of these sale proceeds could be higher than the amount realized
from a sale of an equivalent number of the Shares.
TRUST OBJECTIVES
The Trust has different business objectives than the RELPS. While the RELPS
had an objective of capital appreciation, the Trust intends to grow not only
through capital appreciation, but also through a continuous program of owning
and operating real properties, which may include the selling of existing
properties and the acquisition of additional properties. The Trust intends to
invest in additional real properties by raising additional capital, borrowing
and reinvesting sales proceeds. Raising additional capital involves the risk of
diluting the existing shareholders' percentage interest in the Trust, while
borrowing involves the risks associated with leverage. While the Trust has no
specific plans to finance any real property or to acquire new property using
borrowed funds, it may do so at some time in the future. Although the Trust
intends to maintain a conservative leverage policy, it has borrowed, and is
likely to continue to borrow, more money than the RELPS.
STOCK PRICE FLUCTUATIONS
The trading price of the Shares at the Effective Time of the Merger may
vary significantly from the prices as of the date of execution of the Agreement,
the date hereof or the date on which shareholders vote on the Merger Agreement,
due to changes in the business, operations and prospects of the Trust, market
assessments of the likelihood that the Merger will be consummated and the timing
thereof, general market and economic conditions and other factors.
Further, there can be no assurances as to the trading volume or price of
the Shares after the Merger. Events outside the control of the Trust which would
adversely affect the market value of the Trust's assets, as well as the market
value of the Shares, may occur during the period from the date of this Joint
Proxy Statement/Prospectus to the date the Merger is consummated or thereafter.
All of the Shares to be issued to Limited Partners other than certain Affiliates
(Limited Partners holding more than 10% of the Units in the RELP) in connection
with the Merger will be freely tradeable. Sales of a substantial number of the
Shares by Limited Partners following the consummation of the Merger, or the
perception that such sales could occur, could adversely affect the market price
for the Shares after the Merger.
EFFECT OF MARKET INTEREST RATES ON PRICE OF THE SHARES
An increase in market interest rates may lead prospective purchasers of the
Shares to demand a higher anticipated annual yield from future dividends. Such
an increase in the required anticipated dividend yield may adversely affect the
market price of the Shares.
LOSS OF RIGHTS BY LIMITED PARTNERS
The rights of the Limited Partners are presently governed by California,
Delaware and Texas law and the Partnership Agreement of each respective RELP.
After consummation of the Merger, the rights of the holders of Units that are
converted into Shares will be governed by Texas law, the Trust's Declaration of
Trust and the Trust's Bylaws. Certain differences may reduce certain existing
rights of Limited Partners. See "Comparison of Ownership of Units and Shares."
21
<PAGE> 42
TERMINATION PAYMENTS IF MERGER FAILS TO OCCUR
No assurance can be given that the Merger will be consummated. The Merger
Agreement provides for the payment by a RELP or by the Trust of the
Proportionate Share of a termination fee of up to $2,000,000 if the Merger is
terminated by the RELP or the Trust under certain circumstances, or
reimbursement of the Proportionate Share of expenses up to $1,000,000 if the
Merger is terminated by a party under other circumstances. The obligation to
make such payment may adversely affect the ability of any of the RELPS or the
Trust to engage in another transaction in the event the Merger is not
consummated and may have an adverse impact on the financial condition of the
Trust or the RELPS incurring such obligation.
REAL ESTATE INVESTMENT RISKS
Effect of Economic and Real Estate Conditions. Investments in real estate
typically involve a high level of risk. One of the risks of investing in real
estate is the possibility that the Trust's properties will not generate income
sufficient to meet operating expenses or will generate income and capital
appreciation, if any, at rates lower than those anticipated or available through
investment in comparable real estate or other investments. Income from
properties and yields from investments in properties may be affected by many
factors, including the type of property involved, the form of investment,
conditions in financial markets, over-building, a reduction in rental income as
the result of the inability to maintain occupancy levels, adverse changes in
applicable tax laws, changes in general economic conditions, adverse local
conditions (such as changes in real estate zoning laws that may reduce the
desirability of real estate in the area) and acts of God, such as earthquakes or
floods. Some or all of the foregoing conditions may affect the properties.
Renewal of Leases and Reletting of Space. The Trust will be subject to the
risks that, upon expiration of leases on its properties, the leases may not be
renewed, the space may not be relet or the terms of renewal or reletting
(including the costs of required renovation or concessions to tenants) may be
less favorable than current lease terms. If the Trust were unable to promptly
relet or renew the leases for all or a substantial portion of the space, if the
rental rate upon such renewal or reletting were significantly lower than
expected or if its reserves proved inadequate, then the Trust's FFO and ability
to make expected distributions to its shareholders may be adversely affected.
Leases on approximately 19.7% of the total net leasable area of the properties
owned by the Trust (prior to the Merger) will expire in 1998. The expiring
leases represent approximately 25.2% of the total property annualized base rent
received by the Trust. Management will attempt to negotiate renewals with
certain of the tenants with expiring leases; however, no assurance can be given
that such negotiations will be successful.
Market Illiquidity. Real estate investments are relatively illiquid. Such
illiquidity will tend to limit the ability of the Trust to vary its portfolio
promptly in response to changes in economic or other conditions. In addition,
federal income tax provisions applicable to REITs limit the Trust's ability to
sell properties held for fewer than four years, which may affect the Trust's
ability to sell properties at a time which would be in the best interest of its
Shareholders.
Operating Risks. The Trust's properties will be subject to all operating
risks common to real estate developments in general, any or all of which might
adversely affect occupancy or rental rates. In addition, increases in operating
costs due to inflation and other factors may not necessarily be offset by
increased rents. If operating expenses increase, the local rental market for
properties similar to the Trust may limit the extent to which rents may be
increased to meet increased expenses without decreasing occupancy rates. If any
of the above occur, the Trust's ability to make distributions to shareholders
could be adversely affected.
Competition. All of the Trust's properties are located in areas that
include competing properties. The number of competitive properties in a
particular area could have a material effect on both the Trust's ability to
lease space at any of its properties or at any newly developed or acquired
properties and the rents charged. The Trust may be competing with other owners
that have greater resources than the Trust.
22
<PAGE> 43
NO LIMITATION ON DEBT
The Trust's organizational documents do not contain any limitation on the
amount or percentage of indebtedness the Trust can incur. The Trust could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect the Trust's ability to make distributions to its shareholders
and would result in an increased risk of default on its obligations.
Subject to other existing loan documents, the Trust may borrow funds in the
future and secure such loans with mortgages on its properties. In the event such
mortgage loans require balloon payments, the ability of the Trust to make such
payments will depend upon its ability to sell or refinance its properties for
amounts sufficient to repay such loans. In addition, the payment of debt service
in connection with any borrowings may adversely affect cash flow and the value
of the Shares.
CHANGES IN POLICIES
The investment and financing policies of the Trust and its policies with
respect to all other activities, including its growth, debt, capitalization,
distribution and operating policies, will be determined by its Trust Managers.
Although the Trust Managers have no present intention to do so, these policies
may be amended or revised at any time and from time to time at the discretion of
the Trust Managers without a vote of the shareholders of the Trust. See
"Investment Policies and Restrictions." A change in these policies could
adversely affect the Trust's financial condition or results of operations or the
market price of its Shares.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, an owner or operator of real estate may become liable for the costs
of removal or remediation of certain hazardous substances released on or in its
property. Such laws typically impose cleanup responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of the contaminants. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not such
facility is owned or operated by such person. Finally, the owner of a site may
be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site.
The Trust has been notified of the possible existence of underground
contamination at Tamarac Square, a retail property owned by the Trust in Denver,
Colorado. The source of the possible contamination is apparently related to
underground storage tanks located on an adjacent property. This adjacent
property was placed on Colorado's list of leaking underground storage tanks. A
second potential source of contamination is a nearby tract on which a service
station was formerly operated. The owner of the adjacent property is currently
conducting studies under the direction of the Colorado Department of Health in
an attempt to define the contamination and institute an appropriate plan to
address the situation. At this time, management does not anticipate any exposure
to the Trust relative to this issue.
Certain federal, state and local laws, regulation and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials ("ACMs")
when such materials are in poor condition or in the event of building
remodeling, renovation or demolition. Such laws may impose liability for release
of ACMs and may provide for third parties to seek recovery from owners or
operators of real estate for personal injuries associated with ACMs. In
connection with its ownership, management and operation of its properties, the
Trust may be potentially liable for such costs. Except as described above, the
Trust has not been notified by any governmental authority or any other third
party of any noncompliance, liability or other claim in connection with any of
its properties.
The Trust's management believes that its properties are in compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum
23
<PAGE> 44
products. The Trust has not been notified (except with respect to Tamarac
Square), and is not otherwise aware, of any material noncompliance, liability or
claim relating to hazardous or toxic substances in connection with any of its
properties.
RISKS OF DEVELOPMENT AND ACQUISITION ACTIVITIES
The Trust will incur risks associated with any development activities it
undertakes, including the risks that (i) occupancy rates and rents at a newly
completed project may not be sufficient to make the project profitable; (ii)
financing may not be available on favorable terms for the project; (iii)
construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs; (iv) construction costs
of a project may exceed original estimates, possibly making the project
uneconomical; (v) zoning, occupancy and other required governmental approvals or
authorizations may not be granted and development costs associated therewith may
not be recovered; and (vi) development opportunities explored by the Trust may
be abandoned. Acquisitions of properties entail risks that investments will fail
to perform in accordance with expectations and that judgments with respect to
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property will prove
inaccurate, as well as general investment risks associated with any new real
estate investment.
The Trust anticipates that its new developments and acquisitions will be
financed under lines of credit or other interim forms of secured or unsecured
financing. There is no assurance that permanent financing for such newly
developed or acquired projects will be available or might be available only on
disadvantageous terms. In addition, the fact that the Trust must distribute 95%
of its taxable income in order to maintain its qualification as a REIT will
limit the ability of the Trust to rely upon income from operations or cash flow
from operations to finance new development or acquisitions. As a result, if
permanent debt or equity financing is not available on acceptable terms to
refinance new developments or acquisitions undertaken without permanent
financing, further development activities or acquisitions might be curtailed or
cash available for distribution might be adversely affected. In the case of an
unsuccessful development or acquisition, the Trust's loss could exceed its
investment in the project.
GROWTH RISKS
Assuming consummation of the Merger, the Trust will have increased its
portfolio of net leasable square feet owned or controlled as of June 30, 1997
from 1,402,665 to 2,796,997 at the Effective Time, an increase of 99.4%. Several
of the properties acquired by the Trust from the Participating RELPS are in
markets where the Trust has not historically leased properties. Due primarily to
the number and relative geographic diversity of its properties after the Merger,
the Trust may not have adequate management or other personnel or adequate
systems or other resources to manage its portfolio or its properties to the same
level of efficiency after the Merger, which could adversely affect operations
and result in less cash available for distribution to shareholders.
Additionally, one of the anticipated benefits of the Merger is the elimination
of redundant activities in the combined organization and the resulting savings
in costs and expenses. An inability to achieve these savings could adversely
affect the operating results and financial performance of the Trust after the
Merger.
UNINSURED AND UNDERINSURED LOSSES COULD RESULT IN LOSS OF VALUE OF PROPERTY
The Trust carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to its properties and its management
believes such coverage is of the type and amount customarily obtained for or by
an owner of real property assets similar to the Trust's real property assets.
Similar coverage will be obtained for properties acquired in the future.
However, there are certain types of losses, generally of a catastrophic nature,
such as losses from floods or earthquakes, that may be uninsurable or not
economically insurable. The Trust's management exercises its discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to maintaining appropriate insurance on the Trust's investments at a
reasonable cost and on suitable terms. This may result in insurance coverage
that in the event of a substantial loss would not be sufficient to pay the full
current market value or current replacement cost of the Trust's lost investment.
Inflation, changes in building codes and ordinances, environmental
considerations
24
<PAGE> 45
and other factors also might make it infeasible to use insurance proceeds to
replace the property after such property has been damaged or destroyed.
COSTS OF COMPLIANCE WITH FEDERAL LAWS
The Americans with Disabilities Act of 1990 (the "ADA") requires public
accommodations to meet certain federal requirements related to access and use by
disabled persons. These requirements became effective in 1992. Compliance with
the ADA could require removal of structural barriers to handicapped access in
certain public areas of properties owned by the Trust where such removal is
readily achievable. Failure to comply with the ADA could result in an imposition
of fines or the award of damages to private litigants. If required changes
involve greater expenditures than the Trust currently anticipates, or if the
changes must be made on a more accelerated basis than it anticipates, the
Trust's ability to make distributions to its shareholders could be adversely
affected. The Trust believes that its competitors face similar costs in
complying with the requirements of the ADA.
Additional and future legislation may impose other burdens or restrictions
on owners with respect to access by disabled persons. The ultimate costs of
complying with the ADA and other similar legislation are not currently
ascertainable and, while such costs are not expected to have a material adverse
effect on the Trust, such costs could be substantial. Limitations or
restrictions on the completion of certain renovations may limit application of
the Trust's investment strategy in certain instances or reduce overall returns
on the Trust's investments.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Trust believes that it has operated so as to qualify as a REIT under
the Code since its formation. Although management of the Trust believes that the
Trust is organized and is operating in such a manner, no assurance can be given
that the Trust will be able to continue to operate in a manner so as to qualify
or remain so qualified. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretations and the determination of various
factual matters and circumstances not entirely within the Trust's control. For
example, in order to qualify as a REIT, at least 95% of the Trust's gross income
in any year must be derived from qualifying sources and the Trust must make
distributions to shareholders aggregating annually at least 95% of its REIT
taxable income (excluding net capital gains). In addition, no assurance can be
given that new legislation, regulations, administrative interpretations or court
decisions will not change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of such qualification. The Trust is not
aware, however, of any currently pending tax legislation that would adversely
affect its ability to continue to qualify as a REIT.
For any taxable year that the Trust fails to qualify as a REIT, the Trust
will be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at corporate rates. In addition, unless
entitled to relief under certain statutory provisions, the Trust also will be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification is lost. This treatment would reduce the net
earnings of the Trust available for investment or distribution to shareholders
because of the additional tax liability to the Trust for the year or years
involved. In addition, distributions no longer would be required to be made. To
the extent that distributions to shareholders would have been made in
anticipation of the Trust's qualifying as a REIT, the Trust might be required to
borrow funds or to liquidate certain of its investments to pay the applicable
tax.
OWNERSHIP LIMITS
In order to maintain the Trust's qualification as a REIT, not more than 50%
in value of its outstanding shares may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities). To
minimize the possibility that the Trust will fail to qualify as a REIT under
this test, the Declaration of Trust authorizes the Trust Managers to take such
action as may be required to preserve its qualification as a REIT. Moreover, the
Declaration of Trust, subject to certain exceptions, provides that no holder may
own, or be deemed to own, more than 9.8% of the total outstanding capital stock
of the Trust.
25
<PAGE> 46
These ownership limits, as well as the ability of the Trust to issue other
classes of equity securities, may delay, defer or prevent a change in control of
the Trust and may also deter tender offers for the Shares, which offers may be
attractive to the shareholders, or limit the opportunity of shareholders to
receive a premium for their Shares that might otherwise exist if an investor
were attempting to effect a change in control of the Trust.
THE SPECIAL MEETINGS
TRUST SPECIAL MEETING
General. Each copy of this Joint Proxy Statement/Prospectus mailed to
holders of Shares is accompanied by a form of proxy furnished in connection with
the solicitation of proxies by the Trust Managers for use at the Trust Special
Meeting and any adjournments or postponements thereof. The Trust Special Meeting
is scheduled to be held on , 199 at 9:00 a.m., Dallas time, at 2200
Ross Avenue, 40th Floor, Dallas, Texas. Only holders of record of Shares on the
Record Date are entitled to receive notice of and to vote at the Trust Special
Meeting. At the Trust Special Meeting, shareholders will consider and vote upon
a proposal to approve the Merger Agreement and the issuance of Shares
thereunder. See "The Merger."
EACH HOLDER OF SHARES IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO THE TRUST IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE OR BY FACSIMILE. THE MERGER WILL BE APPROVED IF IT
RECEIVES THE AFFIRMATIVE VOTE OF TWO-THIRDS OF THE SHARES ENTITLED TO VOTE AT
THE TRUST SPECIAL MEETING.
Voting and Revocation of Proxies. Any holder of Shares who has executed and
delivered a proxy may revoke it at any time before it is voted by attending and
voting in person at the Trust Special Meeting or by giving written notice of
revocation or submitting a signed proxy bearing a later date to the Trust,
Attention: Secretary, provided such notice or proxy is actually received by the
Trust prior to the vote of shareholders. Shareholders may vote via facsimile by
sending the executed proxy to (972)756-0704 prior to 5:00 p.m. Dallas time on
the last business day immediately preceding the date of the Trust Special
Meeting. A proxy will not be revoked by the death or incapacity of the
shareholder executing it unless, before the Shares are voted, notice of such
death or supervening incapacity is filed with the Secretary or other person
authorized to tabulate the votes on behalf of the Trust. The Shares represented
by properly executed proxies received at or before the Trust Special Meeting and
not subsequently revoked will be voted as directed by the shareholders
submitting such proxies. IF INSTRUCTIONS ARE NOT GIVEN, PROXIES WILL BE VOTED
FOR APPROVAL OF THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES THEREUNDER AND
WILL BE VOTED IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTERS
PROPERLY PRESENTED FOR CONSIDERATION AT THE TRUST SPECIAL MEETING OR ANY
ADJOURNMENT THEREOF. The Bylaws of the Trust permit the holders of a majority of
the Shares represented at the Trust Special Meeting, whether or not constituting
a quorum, to adjourn the Trust Special Meeting or any adjournment thereof. If
necessary, unless authority to do so is withheld, the proxy holders also may
vote in favor of a proposal to adjourn the Trust Special Meeting to permit
further solicitation of proxies in order to obtain sufficient votes to approve
any of the matters being considered at the Trust Special Meeting. The Trust
shareholders who wish to withhold from the persons named as proxies in the
enclosed Trust proxy authority to vote such shareholders' Shares to adjourn the
Trust Special Meeting should so indicate by appropriately marking Item 2 on the
proxy.
Solicitation of Proxies. The Trust will bear the costs of soliciting
proxies from its shareholders, including the $20,000 fee payable to the Herman
Group, Inc. for soliciting proxies on behalf of the Trust. In addition to use of
the mails, proxies may be solicited personally or by telephone or facsimile by
Trust Managers, officers and other employees of the Trust, who will not be
specially compensated for such solicitation activities. Arrangements also will
be made with brokerage firms and other custodians, nominees and fiduciaries for
the forwarding of solicitation materials to the beneficial owners of Shares held
of record by such persons, and such persons will be reimbursed for their
reasonable expenses incurred in that effort by the Trust.
Vote Required. The Merger will be approved if it receives the affirmative
vote of two-thirds of Shares entitled to vote at the Trust Special Meeting. The
holders of a majority of the Shares entitled to vote, present in person or by
proxy, constitute a quorum for purposes of the Trust Special Meeting. A holder
of a Share will
26
<PAGE> 47
be treated as being present at the Trust Special Meeting if the holder of such
Share is (i) present in person at the meeting, or (ii) represented at the
meeting by a valid proxy, whether the instrument granting such proxy is marked
as casting a vote or abstaining, is left blank or does not empower such proxy to
vote with respect to some or all matters to be voted upon at the Trust Special
Meeting. The proposal allowing the Trust to postpone or adjourn the Trust
Special Meeting to solicit additional votes will be approved if it receives the
affirmative vote of a majority of the votes cast at the Trust Special Meeting,
whether or not a quorum is present. Abstentions and "broker non-votes" (where a
nominee holding 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 Shares
present at the Trust 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 Trust Special Meeting will have the
same effect as a vote against the proposals.
As of the Record Date, there were Shares outstanding and entitled
to vote at the Trust Special Meeting, with each Share being entitled to one
vote. As of the Record Date, the Trust Managers and executive officers of the
Trust and their Affiliates are deemed to beneficially own a total of
shares (representing approximately % of the outstanding Shares), all of
which are expected to be voted in favor of the Merger Agreement. Realco
beneficially owns, as of the Record Date, a total of Shares,
representing approximately % of the outstanding Shares, all of which will
be voted in favor of the Merger Agreement. MSAM, ABKB and LaSalle Advisors have
advised the Trust that they intend to vote the Shares they
control (representing % of the outstanding Shares on the Record Date) in
favor of the Merger Agreement.
Recommendation. For the reasons described herein, the disinterested Trust
Managers unanimously approved the Merger Agreement and the issuance of Shares
thereunder. For this purpose, T. Patrick Duncan and Edward B. Kelley were deemed
"interested" due to their affiliation with Realco and thus abstained from voting
on the proposal. The Trust Managers believe the Merger is fair to and in the
best interests of the Trust and its shareholders and unanimously recommend that
the shareholders of the Trust vote FOR approval of the Merger Agreement and the
issuance of Shares pursuant thereto. In making its recommendation, the
disinterested Trust Managers considered, among other things, the opinion of
Prudential that the consideration to be paid by the Trust pursuant to the Merger
is fair to the Trust from a financial point of view. See "The
Merger -- Background of and Reasons for the Merger" and "-- Fairness Opinions."
Other Matters. The Trust is unaware of any matter to be presented at the
Trust Special Meeting other than the proposal to approve the Merger and the
issuance of Shares thereunder and the proposal to permit the postponement or
adjournment of the Trust Special Meeting to solicit additional votes.
RELP SPECIAL MEETING
General. Each copy of this Joint Proxy Statement/Prospectus mailed to the
Limited Partners is accompanied by a form of proxy furnished in connection with
the solicitation of proxies by the General Partners for use at the RELP Special
Meeting and any adjournments or postponements thereof. The RELP Special Meeting
is scheduled to be held on , 199 at 9:00 a.m., Dallas time, at the
Four Seasons Resort at Las Colinas, Irving, Texas. Only holders of Units on the
Record Date are entitled to notice of and to vote at the RELP Special Meeting.
At the RELP Special Meeting, holders of Units will consider and vote on a
proposal to approve the Merger Agreement and certain amendments to the
Partnership Agreements, as described below.
EACH HOLDER OF UNITS IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO REALCO IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE OR BY FACSIMILE. AS TO EACH RELP, THE MERGER WILL BE
APPROVED IF IT RECEIVES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE UNITS ENTITLED
TO VOTE AT THE RELP SPECIAL MEETING.
Voting and Revocation of Proxies. Any holder of Units who has executed and
delivered a proxy may revoke it at any time before it is voted by attending and
voting in person at the RELP Special Meeting or by
27
<PAGE> 48
giving written notice of revocation or submitting a signed proxy bearing a later
date to Realco, Attention: Secretary, provided such notice or proxy is actually
received by the Realco prior to the vote of holders of Units. Limited Partners
may vote via facsimile by sending the executed proxy to (210) 498-6214 prior to
5:00 p.m. San Antonio time on the last business day immediately preceding the
date of the RELP Special Meeting. A proxy will not be revoked by the death or
incapacity of the Limited Partner executing it unless, before the Units are
voted, notice of such death or supervening incapacity is filed with the
Secretary or other person authorized to tabulate the votes on behalf of the
RELP. The Units represented by properly executed proxies received at or before
the RELP Special Meeting and not subsequently revoked will be voted as directed
by the Limited Partners submitting such proxies. IF INSTRUCTIONS ARE NOT GIVEN,
PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT AND THE PARTNERSHIP
AGREEMENT AMENDMENTS NECESSARY TO PERMIT THE CONSUMMATION OF THE MERGER AND WILL
BE VOTED IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTERS PROPERLY
PRESENTED FOR CONSIDERATION AT THE RELP SPECIAL MEETING OR ANY ADJOURNMENT
THEREOF. Unless authority to do so is withheld, the proxy holders also may vote
in favor of a proposal to adjourn the RELP Special Meeting to permit further
solicitation of proxies in order to obtain sufficient votes to approve any of
the matters being considered at the RELP Special Meeting. The Limited Partners
who wish to withhold from the persons named as proxies in the enclosed RELP
proxy authority to vote such Limited Partners' Units to adjourn the RELP Special
Meeting should so indicate by appropriately marking Item 3 on the proxy.
Solicitation of Proxies. The Trust will initially bear the costs of
soliciting proxies from the Limited Partners. In addition to use of the mails,
proxies may be solicited personally or by telephone or facsimile by officers and
other employees of Realco or its Affiliates who will not be specially
compensated for such solicitation activities. Arrangements also will be made
with brokerage firms and other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of Units held of
record by such persons, and such persons will be reimbursed for their reasonable
expenses incurred in that effort by the Trust.
Vote Required. The Merger will be approved by any RELP if it receives the
affirmative vote of the holders of a majority of the Units entitled to vote at
the RELP Special Meeting. The holders of a majority of the Units entitled to
vote, present in person or by proxy, constitute a quorum for purposes of the
RELP Special Meeting. A holder of a Unit will be treated as being present at the
RELP Special Meeting if the holder of such Unit is (i) present in person at the
meeting, or (ii) represented at the meeting by a valid proxy, whether the
instrument granting such proxy is marked as casting a vote or abstaining, is
left blank or does not empower such proxy to vote with respect to some or all
matters to be voted upon at the RELP Special Meeting. The proposal allowing the
RELP to postpone or adjourn the RELP Special Meeting to solicit additional votes
will be approved if it receives the affirmative vote of a majority of the votes
cast at the RELP Special Meeting, whether or not a quorum is present.
Abstentions and "broker non-votes" (where a nominee holding Units 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 Units present at the RELP 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 RELP Special Meeting will have the same effect as a vote against the
proposals.
In accordance with the terms of the Partnership Agreements of RELP II, RELP
III and RELP IV, Units held by the General Partner and its Affiliates in each
respective RELP will not be entitled to vote at the RELP Special Meeting and,
consequently, will be treated as abstentions. As of the Record Date, the General
Partner of each of RELP II, RELP III and RELP IV held Units totaling 6.0%, 5.8%
and 10.1% of the issued and outstanding Units of each respective RELP. The Units
held by the RELP I General Partner and its Affiliates in RELP I are entitled to
vote at the RELP Special Meeting and such Units will be voted to approve the
Merger. As of the Record Date, the RELP I General Partner held 6,039 Units
totaling 11.0% of the issued and outstanding Units in RELP I.
Recommendation. FOR THE REASONS DESCRIBED HEREIN, THE GENERAL PARTNER OF
EACH RELP APPROVED THE MERGER AGREEMENT. EACH GENERAL PARTNER AND REALCO
BELIEVES THE MERGER IS FAIR TO AND IN THE BEST INTEREST OF THE RELP AND ITS
PARTNERS AND RECOMMENDS THAT THE LIMITED PARTNERS OF THE RELP VOTE FOR APPROVAL
OF
28
<PAGE> 49
THE MERGER AGREEMENT. In making its recommendation, the General Partners
considered, among other things, the opinion of Houlihan that the consideration
to be received by the Limited Partners in connection with the Merger is fair to
the Limited Partners from a financial point of view. See "The
Merger -- Background of and Reasons for the Merger" and "-- Fairness Opinions."
Other Matters. The General Partners are unaware of any matter to be
presented at the RELP Special Meeting other than the proposal to approve the
Merger Agreement and the Partnership Agreement amendments necessary to permit
the consummation of the Merger and the proposal to permit the postponement or
adjournment of the RELP Special Meeting to solicit additional votes.
29
<PAGE> 50
THE MERGER
The detailed terms of the Merger are contained in the form of Merger
Agreement attached as Annex I to this Joint Proxy Statement/Prospectus. The
following discussion describes the material aspects of the Merger and the terms
of the Merger Agreement. This description is qualified in its entirety by
reference to the Merger Agreement, which is incorporated by reference herein and
which the Trust's shareholders and the Limited Partners are urged to read
carefully.
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger. On September 3, 1996, a meeting was held at
Realco's offices in San Antonio, Texas to discuss a potential strategic
investment by Realco in the Trust. Attending this meeting were Messrs. T.
Patrick Duncan and Edward B. Kelley for Realco and Messrs. Bricker, Giles,
Wolcott, Simpson and Warner for the Trust. Among the issues discussed was the
need for the Trust to increase its critical mass of properties. In response to
this issue, Realco stated that it was willing to consider the contribution of
properties or capital in exchange for Trust Shares to augment the existing
properties of the Trust. The discussion was reduced to a memorandum of
understanding between Realco and the Trust dated September 16, 1996.
On December 23, 1996, the Trust announced that Realco had acquired
3,182,206 of the Trust's outstanding Shares, making Realco the Trust's largest
shareholder at that time. With this transaction, the number of Trust Managers
was increased to five members and Messrs. Kelley and Duncan were appointed to
the Trust Board. Subsequently, on February 27, 1997, the Trust announced that
Realco had acquired the Trust's 8.8% notes pursuant to an agreement in which the
outstanding principal balance of the notes was reduced to $5,449,618 and an
option was granted to convert these notes into Shares of the Trust at $2.00 per
Share until December 31, 1997, and at $2.25 per Share between December 31, 1997
and December 31, 2000.
On January 8, 1997, a meeting was held at the Trust's offices in Irving,
Texas. Attending the meeting were Mr. Duncan of, Mr. Wolcott of the Trust and
representatives of Prudential. The purpose of the meeting was to interview
Prudential as a potential financial advisor to the Trust. During this meeting, a
number of potential capital raising transactions were discussed, including the
possible contribution of Realco sponsored assets to the Trust in exchange for
Shares.
On March 27, 1997, a meeting was held at the Trust's offices in Irving,
Texas. Attending the meeting were Mr. Duncan and Mr. Wolcott. During the
meeting, Mr. Duncan described a potential transaction involving the Trust and
the RELPS. Mr. Wolcott then provided suggestions on the possible structure of a
transaction. Mr. Duncan then agreed to present the transaction on a preliminary
basis to the senior leadership of Realco, and if there was an interest in moving
forward, he would then present the transaction on a preliminary basis to the
Trust Managers at their next quarterly Trust Managers' meeting scheduled for
April 29, 1997.
On April 26, 1997, Mr. Duncan called Mr. Wolcott and stated that he had
received preliminary approval from senior leadership within Realco to pursue
discussions with the Trust. Following that call, Realco sent the Trust initial
information on the properties comprising the RELPS' portfolios.
On April 29, 1997, the Trust Managers were presented with the concept of
merging the Trust with four real estate limited partnerships sponsored by
Realco. Following a discussion of the benefits and detriments to the Trust of
the proposed transaction and the estimated costs and expenses, the disinterested
Trust Managers, including Messrs. Bricker, Giles and Wolcott, approved further
investigation of the transaction including preparation of pro forma financial
information.
On May 5, 1997, the Trust began its analysis of the RELPS' portfolio and
requested copies of comprehensive business plans on each of the RELPS' assets.
Then on May 6, 1997, Mr. Duncan met with Mr. Wolcott of the Trust at the Trust's
offices in Irving, Texas to discuss the terms of the transaction to be included
in a letter agreement to be presented to the Trust Managers.
30
<PAGE> 51
On May 21, 1997, Realco provided the Trust with copies of Form 10-Ks,
annual reports and business plans for each of the RELPS. Representatives of the
Trust then met with representatives of Realco on May 22, 1997, at Realco's
office in San Antonio, Texas to begin detailed reviews of each of the RELP
properties. Also on that date, Mr. Wolcott of the Trust met with Mr. Duncan at
Realco's offices in San Antonio, Texas to discuss the initial draft of the
letter agreement.
On May 27, 1997, Mr. Duncan of Realco and Mr. Wolcott of the Trust spoke by
telephone to coordinate the process of obtaining fairness opinions for the RELPS
and the Trust.
During the period May 27 through May 29, 1997, representatives of the Trust
traveled to and performed preliminary property inspections on each of the RELP
properties, with the exception of the one RELP property located in Milpitas,
California.
On June 6, 1997, the Trust Managers of the Trust, including the
disinterested Trust Managers, approved the execution of a letter agreement with
the RELPS regarding a merger of the RELPS into the Trust. Furthermore, the Trust
was authorized to negotiate definitive merger agreements with the RELPS. On June
10, 1997, the Trust announced that the letter agreement had been signed. Among
other things, the agreement was subject to negotiation of the financial terms of
the merger including the respective exchange ratios for each of the RELPS,
obtaining fairness opinions with respect to the transactions, completion of
definitive merger agreements, approval by the Board of Directors of each of the
General Partners of the RELPS and the Trust Managers, and completion of
satisfactory due diligence.
On June 10, 1997, representatives of Realco and representatives of the
Trust discussed by telephonic conference call to discuss various issues related
to the RELP properties including leases, contracts and other obligations.
On June 18, 1997, representatives of Realco and representatives of the
Trust discussed by telephonic conference call to coordinate the various issues
associated with the proposed transaction.
On June 19, 1997, Mr. Duncan and Mr. Wolcott met on related business at
O'Hare airport in Chicago, Illinois and discussed various issues related to the
setting of the Exchange Ratios in the proposed transaction.
On June 20, 1997, Mr. Duncan and representatives of Realco met with Messrs.
Wolcott, Friedland and Warner of the Trust at Realco's offices in San Antonio,
Texas and negotiated the financial terms of the proposed transaction. This
information was then distributed on June 23, 1997 to the Trust Managers and to
Prudential and Houlihan. The Trust then entered into a process of underwriting
the values of the real estate and other assets held by the RELPS leading to a
negotiation of Exchange Ratios for each of the RELPS.
On June 30, 1997, the Board of Directors of the General Partners met to
discuss the execution of the Merger Agreement. The proposed terms of the
transaction were discussed with Houlihan who delivered its opinion that the
consideration to be received by the Limited Partners was fair from a financial
point of view.
On June 30, 1997, the disinterested Trust Managers met to discuss the
proposed transaction. The Trust's management presented a detailed overview of
each property subject to the merger and proposed Exchange Ratios negotiated with
Realco. The disinterested Trust Managers then discussed the pricing of the
transaction with a representative of Prudential. Based on this discussion, the
meeting was adjourned until July 7, 1997, at which time the disinterested Trust
Managers approved a resolution to sign definitive merger agreements with the
RELPS, contingent upon due diligence investigation and receipt of a satisfactory
fairness opinion from Prudential. On July 10, 1997, the disinterested Trust
Managers received the report from Prudential stating that the consideration to
be paid by the Trust was fair from a financial point of view.
The Trust's Reasons for the Merger. The Trust Board believes that the terms
of the Merger Agreement and the Merger are fair from a financial point of view
and are in the best interests of the Trust and its shareholders. Accordingly,
the disinterested Trust Managers have unanimously approved the Merger Agreement
and the issuance of Shares thereunder, and recommend approval of the Merger
Agreement and the issuance of Shares thereunder, by the shareholders of the
Trust. In reaching its decision, the disinterested Trust Managers considered
several factors, and consulted with the Trust's management and advisors. The
principal reasons, to which relative weights were not assigned, for the
disinterested Trust Managers' approval
31
<PAGE> 52
of the Merger Agreement and the issuance of Shares thereunder and its
recommendation to the shareholders are as follows:
(1) Analyses by management show that the Merger should be accretive to
the Trust's FFO per Share in 1998. FFO is a widely accepted measure of an
equity REIT's operating performance. Higher FFO per Share will likely
result in distributions being made to shareholders.
(2) The Merger substantially increases the Trust's total
capitalization and increases its market equity from $ million to
approximately $ million (based on $ per Share, the closing price of
Shares on , 1997). This increased size affords several
benefits. First, the increased number of Shares in the market should result
in greater liquidity for holders of the Shares. The Trust Board believes
that institutional investors prefer larger capitalization companies when
making investment decisions due to greater liquidity which allows the
purchase and sale of larger volumes of Shares without disrupting the market
for such Shares. The Trust Board also believes that the credit rating
agencies generally favor larger capitalization companies and view them as
being more stable for unsecured debt investors. Management believes all of
these factors increase the attractiveness of the Trust to potential
investors, and ultimately should result in an improved ability to access
favorably priced equity and debt capital.
(3) The Trust Board believes that the Merger will allow the Trust to
realize economies of scale by spreading costs over a larger number of
properties, thereby improving the Trust's profit margin.
(4) The Trust currently has properties in Texas, California, Colorado,
Maryland and Wisconsin. The Merger adds five additional states: Arizona,
Florida, Illinois, Massachusetts and Missouri. Management considers each of
these to be attractive markets. Based on internally generated estimates of
value, approximately 76% of the Trust's investment in properties is
currently in Denver, Dallas and Houston. Following the Merger, the Trust's
investment in properties will be spread among 10 states, with California
representing 30.0%, Texas representing 20.2% and Colorado representing
13.4%. The Trust Board believes that this type of geographic
diversification is preferred by investors, thereby improving the Trust's
access to attractively priced alternative sources of capital.
(5) Geographic diversification also reduces the vulnerability to
recessions in any particular region. The last recession was a "rolling
recession," because it affected the economies of different regions at
different times. For example, the Southwestern United States went into and
emerged from the recession earlier than the Southeast. This expansion
reduces the risk that a regional economic downturn affects all of the
properties simultaneously. Thus, the geographic diversification as a result
of the Merger may smooth the Trust's performance through the economic
cycles.
(6) The written opinion of Prudential on July 10, 1997, that the
consideration to be paid by the Trust pursuant to the Merger was fair from
a financial point of view to the Trust as of the date of such opinion, and
based upon and subject to certain matters stated therein.
(7) Presentations from, and discussions with, certain executive
officers of the Trust and outside advisors regarding the business, real
estate assets, financial, accounting and legal due diligence with respect
to the RELPS and the terms and conditions of the Merger Agreement.
The disinterested Trust Managers and management also discussed certain
potential negative factors and risks that could arise or do arise from the
Merger. These included, among others, the potential increase in the trading
price of the Shares with no corresponding adjustment to the Exchange Ratios
(this factor was mitigated, in the Trust Managers' view, by the fact that
because of the fixed Exchange Ratios, the Trust would not suffer from any
decrease in the price of the Shares), the expansion into a new region and new
markets with which the Trust has little prior experience, potential current
imbalance between supply of, and demand for, industrial and other commercial
properties in certain of these new markets, the potential difficulties of
integrating each of the RELP's properties into the Trust, the significant costs
involved in connection with consummating the Merger, the substantial time and
effort of the Trust's management required to effectuate the Merger, integrate
the business of the RELPS into the Trust, and manage the increased and more
diverse
32
<PAGE> 53
property portfolio and the risk that the expected benefits of the Merger might
not be fully realized. The Trust Board believes that the benefits and advantages
of the Merger far outweigh the negative factors and risks.
THE DISINTERESTED TRUST MANAGERS BELIEVE THAT THE MERGER, INCLUDING THE
CONSIDERATION TO BE PAID PURSUANT TO THE MERGER, IS FAIR FROM A FINANCIAL POINT
OF VIEW AND IN THE BEST INTERESTS OF THE SHAREHOLDERS OF THE TRUST AND HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES THEREUNDER
AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND THE ISSUANCE OF SHARES THEREUNDER.
In the event the Merger is not consummated for any reason, the Trust will
return to executing its current strategic objectives. To the extent such
opportunities are available, it would likely consider other potential
combinations with private or public industrial or commercial owners that the
Trust Board and management believe add value and enhance the future earnings of
the Trust and otherwise are in the best interests of its shareholders.
The RELPS' Reason for the Merger. Each of the General Partners determined
that the terms of the Merger Agreement and the transactions contemplated
thereby, including the consideration to be received by the Limited Partners in
connection with the Merger, are fair to its respective Limited Partners from a
financial point of view and are in the best interests of each RELP's Limited
Partners. Accordingly, the Boards of Directors of the General Partners approved
and adopted the Merger Agreement and the transactions contemplated thereby and
resolved to recommend that the Limited Partners approve and adopt the Merger
Agreement and the transactions contemplated thereby.
In reaching their determinations that the Merger Agreement and the
transactions contemplated thereby are fair to the Limited Partners from a
financial point of view and in their best interests, the General Partners
consulted with Realco and the RELPS' advisors, and considered the long-term
interests of the Limited Partners based on several factors as to which relative
weights were not assigned. The Board of Directors of each of the General
Partners considered the following factors which were material to their
respective decisions to approve the Merger:
(1) Information and analyses relating to the financial performance,
condition, business operations and prospects of each RELP and the Trust,
and current industry, economic and market conditions. In this regard, the
General Partners placed special emphasis on, and viewed as favorable to its
determination, the fairness opinion rendered by Houlihan. Houlihan was not
engaged to represent the interests of the General Partners or any specific
group of Limited Partners, but was engaged to determine the fairness of the
consideration to be received by the Limited Partners from a financial point
of view without taking into account the specific financial interest of any
person or group of investors.
(2) Prior to concluding that the Merger should be proposed to Limited
Partners, the General Partners considered several alternatives to the
Merger. The alternatives considered by the General Partners were
liquidation of the RELPS, continuation of the RELPS, and reorganization of
the RELPS into one REIT or as separate REITs. In order to determine whether
the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partners compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. See "-- Alternatives to Merger" below for a detailed
discussion of the potential benefits and detriments of each of these
alternatives. Each of the Merger and its alternatives offers potential
benefits and suffers from potential detriments not possessed by the other
alternatives. Set forth below are the General Partners' conclusions
regarding the comparisons of the Merger to its alternatives.
(a) The General Partners favor the Merger over liquidation of the
RELPS' assets based upon the General Partners' conclusion that the
Merger permits Limited Partners to take advantage of the currently
favorable market valuations of publicly traded REITs relative to the
private market valuations of the underlying real estate assets.
33
<PAGE> 54
(b) The General Partners have concluded that continuation of the
Partnerships is not as attractive an alternative as the Merger based on
the benefits of the Merger which Limited Partners would forgo in the
event of the RELPS' continuation. Specifically, the Limited Partners
would not realize the liquidity afforded by the Merger, would not
benefit from the currently favorable markets for the equity securities
of REITs, which markets today may value real estate assets more
favorably than such assets are valued in the real estate markets, and
would not be able to participate in new real estate investment
opportunities.
(c) Reorganization of the RELPS into one REIT or as separate REITs
presents the potential detriments of the Merger without providing many
of its potential benefits, such as creation of an active and broad-based
market for the REIT's securities, elimination of conflicts of interest
among the various RELPS, increased diversification, access to an
existing publicly-traded vehicle such as the Trust and more immediate
growth potential and improved access to the capital markets. In
addition, the General Partners believe that the cost of pursuing the
reorganization would be significantly greater than each RELP's pro rata
share of the Merger expenses, which expenses will be paid by the Trust
if the Merger is approved or paid by Realco if the Merger is not
approved.
(3) The Merger will result in simplified tax administration for many
Limited Partners. Shareholders will receive Form 1099-DIV to report their
distributions from the Trust. Forms 1099-DIV are substantially easier to
understand than the more complicated Schedule K-1 prepared for the
reporting of the financial results of the RELPS.
(4) The economic terms of the Merger Agreement, including the Exchange
Ratio for each RELP and the 48.65% equity interest in the combined entity
to be received by the Limited Partners, assuming all RELPS participate in
the Merger.
(5) The General Partners' belief that the Net Asset Value of the RELPS
represent fair estimates of the value of the RELP assets, net of
liabilities, as of June 30, 1997, and constitute a reasonable basis for
allocating the consideration offered by the Trust among all RELPS that may
be combined through the Merger.
(6) The other terms and conditions of the Merger Agreement, including
the mutuality of the representations and warranties and covenants, the
requirement that each party consult with the other on significant business
and financial matters prior to consummation of the Merger and the ability
of each of the General Partners to pursue an unsolicited superior competing
transaction should its fiduciary duties so require.
(7) Benefits for the Limited Partners from owning Shares in a
NYSE-traded REIT with strong sponsorship and substantial equity ownership
of Realco, affiliates of MSAM, ABKB and LaSalle Advisors and the
expectation that, in the future, the combined entity will have improved
access to capital markets for future growth and Limited Partners will have
enhanced liquidity as a result of the larger total equity market
capitalization of the combined entity.
(8) As separate legal entities with different investors, each of the
RELPS must segregate its assets and liabilities (to avoid commingling
assets), conduct operations independently, and maintain separate books and
records for the preparation of financial statements, tax returns, investor
information and reports and filings to be made to the Commission. The
assets of one RELP cannot be employed for the benefit of one or more of the
other RELPS and the General Partners' fiduciary duties prevent them from
pursuing activities favoring some RELPS to the disadvantage of other RELPS.
Due to the separate nature of the RELPS, with their different groups of
investors, the General Partners must always be mindful of the separate
programs, and treat them separately, even if other courses of action would
benefit most if not all of the RELPS. Potential conflicts of interest arise
in the allocation of management resources and efforts to refinance or
dispose of properties. In contrast, the Merger places substantially all of
the assets of the Participating RELPS into the Trust, and allows such
assets to be used to achieve a common set of investment objectives without
taking into account the differences among the RELPS. Through the Merger,
the Trust is intended to secure advantages that cannot be fully pursued by
the RELPS acting on
34
<PAGE> 55
their own. Such advantages include, but are not limited to, the opportunity
of making new investments, the availability of financing and taking
advantage of certain business opportunities (which may not be profitably
pursued by any of the RELPS). Certain of these benefits are described in
more detail in the following paragraphs.
(9) Each year the RELPS must prepare four separate sets of financial
statements, annual and quarterly filings for the Commission, tax returns
and investor communications. The accurate preparation of this material
requires substantial management time and effort. Furthermore, to the extent
other service providers, such as legal counsel, accountants, appraisers,
land use consultants and other professionals, render services benefiting
two or more of the RELPS, relative to the benefits afforded the RELPS,
costs and expenses associated with and services must be fairly and
equitably allocated among the RELPS. By combining the Participating RELPS
into a single ownership entity, the Merger eliminates much of the
duplication in reporting, filing, and other administrative services,
simplifying administration of the consolidated entities including tax
administration as described below. It is difficult to quantify to what
extent, if any, this merger of functions will reduce the overall cost of
administrative services. While the Merger reduces the number of entities
for which administrative services are required, the Merger will not reduce
the number of investors or the assets under management. But whether or not
the Merger reduces the overall costs, it eliminates the risk of
misallocating expenses benefiting one or more of the programs, and the
problems of determining a fair method of allocating common costs and
expenses, and simplifies the preparation of financial statements, tax
returns, investor information and reports and filings otherwise required.
(10) In recent years a number of significant changes have taken place
in the financial and real estate markets. These factors create attractive
investment opportunities for investors which have access to capital. These
same factors create attractive investment opportunities for investors which
have access to capital. The RELPS are not in a position to take advantage
of these opportunities since they have already committed their capital and
are not authorized to raise additional funds. In contrast, the Trust can
take advantage of investment opportunities that may be available in current
real estate markets. Not only will the Trust have the right to reinvest net
sale or refinancing proceeds but also the authority to raise additional
capital, through the sale of debt and/or equity securities, to finance
investments. This ability will allow those Limited Partners who become
shareholders in the Trust to participate in the investment opportunities in
the current real estate market.
Even if the RELPS were able to raise additional funds through debt or
equity offerings, the Trust is able to issue additional debt and equity
securities with greater ease and on more attractive terms than would be
available to any of the RELPS due to its larger base of assets and
shareholders' equity. If all of the RELPS participate in the Merger, the
Trust will control assets having a value of approximately $200 million. The
Trust's capital base may make it a more attractive candidate for the
services of investment banking firms, financial institutions, institutional
lenders and others interested in placing large amounts of capital.
Generally speaking, all other conditions being equal, the cost of money for
large borrowers is less than the cost of money for borrowers having a
smaller capital base.
(11) By combining the RELPS with the Trust, the Merger will create an
investment portfolio substantially larger and more geographically
diversified than the portfolio of any of the RELPS. This increased size and
the resulting consolidation of operations spread the risk of an investment
in the Trust over a broader group of assets and reduces the dependence of
the investment upon the performance of any particular asset or group of
assets, such as assets in the same geographical area.
Each General Partner also considered the following potentially negative
factors in its deliberations concerning the Merger: (1) the fact that, because
the Exchange Ratio for each RELP is fixed, a decline in the value of the Shares
would reduce the value of the consideration to be received by Limited Partners
in the Merger (this factor was mitigated, in each of the General Partner's view,
by the fact that because of the fixed Exchange Ratio, Limited Partners would
benefit from any appreciation in the price of the Shares); (2) the fact that the
Trust has not paid consistent annual distributions since 1993 and the Limited
Partners currently receive quarterly distributions from each respective RELP;
(3) the various conditions to the Trust's obligation
35
<PAGE> 56
to consummate the Merger; (4) the risk that the anticipated benefits of the
Merger may not be realized; and (5) the fact that under the terms of the Merger
Agreement, each of the General Partners is prohibited from initiating,
soliciting or encouraging any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, a transaction which would
compete with the Merger except that if the General Partner determines in good
faith after consultation with outside legal counsel that it is required by its
fiduciary obligations to do so, the General Partner may, among other things,
respond to and engage in discussions and negotiations with persons making
unsolicited proposals or inquiries and may approve or recommend such a
transaction, and the possibility that a RELP may be required, if the Merger
Agreement is terminated under certain circumstances, to pay the Trust its
Proportionate Share of a termination fee of $2,000,000 or to reimburse the Trust
for its Proportionate Share of up to $1,000,000 of the Trust's out-of-pocket
expenses incurred in connection with the Merger. The General Partners recognized
that the inclusion of such provisions in the Agreement would render it unlikely
that a more attractive offer would be presented to each RELP and their Limited
Partners; however, each of the General Partners believe that the Merger
represents the best opportunity to enhance Unit value.
In light of the wide variety of factors considered by each General Partner,
each General Partner did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in making its determination. However,
in the view of each General Partner, the potentially negative factors considered
by it were not sufficient, either individually or collectively, to outweigh the
positive factors considered by the General Partner in its deliberations relating
to the Merger.
The following is a brief discussion of the benefits and disadvantages of
alternatives to the Merger that could have been pursued by the General Partners.
Liquidation
Benefits of Liquidation. An alternative to the Merger would be liquidating
the assets of each of the RELPS, distributing the net liquidation proceeds to
the General and Limited Partners in accordance with the Partnership Agreements,
and thereafter dissolving the RELPS. Through such liquidations, the General
Partners would provide for a final disposition of the investors' interest in the
RELPS. Any net liquidation proceeds would be utilized by Limited Partners for
investment, business, personal or other purposes. Liquidating the RELPS within
one year would result in concluding the investors' investments in RELP III and
RELP I approximately three years after the outside date expected for the holding
of such investments and the investments in RELP IV and RELP II within a few
months of the time frame originally expected. If the RELPS liquidated their
assets, the assets but such assets would be valued through arm's length
negotiations between the RELPS and the prospective purchasers.
Disadvantages of Liquidation. Since the RELPS were organized, significant
changes have taken place in the financial and real estate markets that have had
a material adverse impact upon the value of commercial real estate. In the 1980s
and early 1990s, the United States real estate market experienced one of the
worst real estate cycles in recent history. Undisciplined flows of capital into
the real estate market resulted in a large increase in supply of product, while
simultaneously there occurred an economic downturn which affected every area of
the United States, constraining a corresponding increase in demand. One of the
capital sources, the savings and loan industry, experienced a crisis which
sharply curtailed lending as well as prompted a large number of property sales,
contributing to the oversupply. In addition, a significant change in tax laws
made investment in real estate less attractive and reduced the pool of
prospective real estate buyers. Other sources of capital such as life insurance
companies and pension funds reduced their investment in real estate as the
market became less favorable. All of these factors, as well as other less
apparent ones, contributed to reductions in the revenue streams and a loss in
value in all types of real estate located across the nation. Many real estate
markets have begun to strengthen, and some value has been regained. However,
even in improving markets, liquidation of an entire portfolio within a short
period of time typically produces substandard valuations and may prevent all
RELPS from maximizing the net proceeds from a sale of a property which may
otherwise be achievable. The General Partners favor the Merger as a means for
permitting Limited Partners to take advantage of the currently favorable market
valuations of publicly traded REITs relative to the private market valuations of
the underlying real estate assets.
36
<PAGE> 57
Liquidation Procedures. The process for liquidating the RELPS' assets is in
large measure within the control of the Limited Partners. The General Partners
are not authorized, without notice to or the approval of the Limited Partners,
to sell, refinance or otherwise dispose of all or substantially all of the
RELPS' assets. Liquidation may be accomplished through a series of separate
transactions with the same or different purchasers or as a part of a
multi-property transaction that might also involve properties owned by other
RELPS. The General Partners may engage real estate brokers, investment bankers,
financial consultants and others to assist with the disposition of the RELPS'
assets. These persons may assist with the identification of prospective
purchasers, arrangements for asset financing, and assistance with the structure
of the transaction. The General Partners, as fiduciaries to the Limited
Partners, remain responsible for determining the terms and conditions of the
transaction. One of the more significant considerations for the General Partners
will be the decision whether to insist upon payment in full upon sale of a RELP
property or to accept a portion of the sale price at closing and the balance
through installment payments. Acceptance of a sale proposal providing for
deferred payments would extend the life of a RELP until receipt of those amounts
by the RELP and their distribution in accordance with the Partnership Agreement.
Such arrangements would also expose a RELP to the risk that deferred payments
might not be collected in full and that the RELP might be forced to foreclose on
any collateral given to secure payment of the deferred obligations.
Continuation of RELPS
Benefits of Continuation. A second alternative to the Merger would be to
continue each of the RELPS in accordance with its existing business plan, with
the RELP remaining as a separate legal entity, with its own assets and
liabilities, and continuing to be governed by its existing Partnership
Agreement. Nothing in the RELPS' organizational documents requires the General
Partners to proceed with liquidating the RELP's assets in today's real estate
markets. While the disclosure documents, pursuant to which the Units were
offered to the public, disclosed the intentions of the RELPS to liquidate their
assets within a four to ten-year period, depending upon the program, the General
Partners are not under a legal obligation to liquidate assets within that time
frame. To the contrary, each of the RELPS has a stated life of 40 to 64 years,
and the Limited Partners were advised that the liquidation of the RELPS would be
in the control of the General Partners.
Although there is no established public trading market for the Units, upon
request, Realco has historically assisted Limited Partners desiring to transfer
Units by providing to them the names of persons who have indicated a desire to
buy Units. The purchase price for the Units in the secondary market are subject
to negotiation between the buyer and seller. The General Partners of RELP I,
RELP III and RELP IV have also received and responded to offers from investors
to purchase up to 4.9% of their outstanding Units. RELP I has received two such
offers, RELP III has received two such offers and RELP IV has received one such
offer.
A number of advantages would be expected to arise from the continued
operation of the RELPS. Limited Partners should continue to receive regular
quarterly distributions of net cash flow, arising from operations and the sale
or refinancing of partnership assets. Since the RELPS are not obligated to
dispose of their assets at any particular point in time, continuing the RELPS
allows the General Partners to select the most opportune time for disposing of
the RELPS' assets, irrespective of the expected holding period set forth in the
original disclosure documents. In addition, the decision to continue the RELPS,
if selected, means that there would be no change in the nature of the Limited
Partners' investment. This option avoids most disadvantages that might be deemed
inherent in the Merger.
Disadvantages of Continuation. The primary disadvantage with continuing the
RELPS is the failure of that strategy to secure the benefits that the General
Partners expect to result from consolidating the RELPS' assets in the Trust.
These benefits are highlighted under "Background and Reasons for Merger." The
Limited Partners of a RELP which does not participate in the Merger should be
prepared to continue holding their investments in such RELPS for the foreseeable
future. For investments in all the RELPS, Limited Partners' investments will be
held beyond the time period originally contemplated for the length of those
investments. Limited Partners also will not have the opportunity for liquidity
that will be afforded through listing the Shares on the NYSE. By not
participating in the Merger, Limited Partners will miss the opportunity of
taking advantage of the currently favorable markets for the equity securities of
REITs, which markets today may
37
<PAGE> 58
value real estate assets more favorably than such assets are valued in the real
estate markets themselves. The Trust is expected to have a substantially larger,
more diversified, investment portfolio than any particular RELP which reduces
the risks associated with any particular assets or group of assets, increases
the Trust's ability to access capital markets for new capital investments and
eliminates duplication in administrative services, reporting and filing. Another
disadvantage of continuation as a limited partnership is that Limited Partners
would continue to be burdened by the more complicated Schedule K-1 for the
reporting of the financial results of the RELPS.
Reorganization of RELPS as One REIT or as Separate REITs
The General Partners considered the advisability of reorganizing the RELPS
into one or separate corporations taxed as a REIT. If approved, such action
would have provided some of the advantages contemplated by the Merger. Such
reorganization would be expected to (i) provide investors in the reorganized
entities with some liquidity; (ii) permit distribution to investors of a simpler
federal income tax Form 1099-DIV (compared to the Schedule K-1); and (iii)
potentially be formed tax-free to the Limited Partners. The General Partners
believe that the reorganization of the RELPS into separate REITs has a number of
significant disadvantages. Substantial costs and expenses would be incurred by
each of the RELPS were they to separately pursue reorganization into separate
REITs. It is believed that such costs in the aggregate would be substantially
greater than the costs expected for the Merger. Because of the size of the
RELPS, the General Partners believe such reorganization would result in a
limited market for the shares of the newly formed REITs. The General Partners
also believe that reorganization of all the RELPS into one REIT would not
provide the critical mass of properties or property diversification necessary to
attract growth capital to the new entity. One of the benefits of the Merger is
that the Shares will be listed on the NYSE and that a public market for the
Shares currently exists. It is unlikely that the RELPS, if organized into one or
separate REITs, would in the near term permit a market as broad based and as
active as the market that should develop from the merger of the RELPS into the
Trust.
EACH OF THE GENERAL PARTNERS AND REALCO BELIEVES THAT THE MERGER, INCLUDING
THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, IS FAIR AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS AND EACH
GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE
LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
In the event the Merger is not consummated for any reason, each RELP will
continue to pursue its business objectives of maximizing the value of its
properties.
FAIRNESS OPINIONS
The Trust. The Trust retained Prudential on June 26, 1997, to render an
opinion as to whether the consideration to be paid by the Trust pursuant to the
Merger was fair from a financial point of view to the Trust. Prudential was not
requested to, and did not make, any recommendation to the Board of Trust
Managers as to the Exchange Ratio to be provided for in the Merger, which
Exchange Ratio was determined through negotiations between the Trust, Realco and
the General Partner.
Prudential was retained to render the fairness opinion based upon its
prominence as an investment banking and financial advisory firm with experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and valuations for corporate purposes especially
with respect to REITs and other real estate companies and because of
Prudential's familiarity with the Trust and its operations. On July 10, 1997,
Prudential delivered its written opinion to the Board of Trust Managers (the
"Prudential Opinion"), to the effect that, as of the date of such opinion, based
on Prudential's review and subject to the limitations described below, the
consideration to be paid by the Trust pursuant to the Merger was fair from a
financial point of view to the Trust. The Prudential Opinion does not constitute
a recommendation to any shareholder of the Trust as to how any such shareholder
should vote on the Merger.
38
<PAGE> 59
THE FULL TEXT OF THE PRUDENTIAL OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THEIR REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX II-A TO THIS JOINT PROXY STATEMENT/ PROSPECTUS.
THE TRUST'S SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
On July 10, 1997, Prudential delivered its written opinion (the "Prudential
Opinion") to the Trust Managers that, as of such date, the consideration to be
paid by the Trust pursuant to the Merger is fair to the Trust from a financial
point of view. Prudential made a presentation of the Prudential Opinion and the
underlying financial analysis to the Trust Managers on July 10, 1997 and, in
addition, provided to the Trust Managers, prior to the meeting, a report setting
forth the analysis underlying the Prudential Opinion. This analysis, as
presented to the Board, is summarized herein. Members of the Trust Board present
at the meeting (either in person or via teleconference) had an opportunity to
ask questions of Prudential. Prudential discussed the information in the report,
and the financial data and other factors considered by Prudential, in conducting
its analysis, all of which are summarized herein.
In requesting the Prudential Opinion, the Board did not give any special
instructions to Prudential or impose any limitations upon the scope of the
investigation that Prudential deemed necessary to enable it to deliver its
opinion. A copy of the Prudential Opinion, which sets forth the assumptions
made, matters considered and limits on the review undertaken, is attached hereto
as Annex II-A and is incorporated herein by reference. The summary of the
opinion set forth below is qualified in its entirety by reference to the full
text of the Prudential Opinion. Shareholders are urged to read the opinion in
its entirety. The opinion is directed only to the fairness of the consideration
to be paid by the Trust from a financial point of view and does not constitute a
recommendation to any shareholder as to how such shareholder should vote at the
Trust Special Meeting.
The Trust selected Prudential to provide a fairness opinion because it is
an internationally recognized investment banking firm engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions
and for other purposes and has substantial experience in transactions similar to
the Merger. The engagement letter with Prudential provides that the Trust will
pay Prudential a fee equal to $250,000 upon the delivery of the opinion. In
addition, the engagement letter with Prudential provides that the Trust will
reimburse Prudential for its reasonable out-of-pocket expenses and will
indemnify Prudential and certain related persons against certain liabilities,
including liabilities under securities laws, arising out of the Merger or its
engagement.
In conducting its analysis and arriving at the opinion, Prudential reviewed
such information and considered such financial data and other factors as
Prudential deemed relevant under the circumstances, including:
(i) a draft, dated July 3, 1997, of the Merger Agreement;
(ii) the Trust's Annual Report on Form 10-K and the related financial
information for the fiscal year ended December 31, 1996 and the Trust's
Quarterly Report on Form 10-Q and the related unaudited financial
information for the quarterly period ended March 31, 1997;
(iii) each RELP's Annual Report on Form 10-K and the related financial
information for the fiscal year ended December 31, 1996 or, in the case of
RELP II, for the fiscal year ended June 30, 1996, and each RELP's Quarterly
Report on Form 10-Q and the related unaudited financial information for the
quarterly period ended March 31, 1997;
(iv) certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of the Trust
furnished to Prudential by the Trust's management;
(v) certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects regarding the
properties of each RELP furnished to Prudential by such RELP's management;
39
<PAGE> 60
(vi) certain information provided by the Trust's management relating
to the properties of the RELPS including projections of net operating
income for years 1998 and 1999 based on the Trust management's review of
the properties and lease profiles of the RELPS;
(vii) the historical market prices and trading activity for the Shares
and certain publicly traded companies which Prudential deemed to be
reasonably similar to the Trust;
(viii) the historical and projected results of operations of the Trust
and historical and certain future earnings estimate of selected companies
which Prudential deemed to be reasonably similar to the Trust;
(ix) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses Prudential deemed
comparable to the Trust or otherwise relevant to Prudential's inquiry;
(x) the financial terms of certain recent transactions Prudential
deemed relevant; and
(xi) such other financial studies, analyses and investigations as
Prudential deemed relevant.
Prudential discussed with senior management of the Trust: (a) the prospects for
the Trust's business, (b) management's estimate of such business' future
financial performance, (c) the potential financial impact of the Merger on the
Trust, including management's estimate of the Trust's expenses related to the
Merger, and (d) such other matters as Prudential deemed relevant. Prudential
also visited selected properties owned by the RELPS.
In connection with its review and analyses and in arriving at the opinion,
Prudential assumed and relied upon the accuracy and completeness of the
financial and other information provided to Prudential by the Trust and the
RELPS or which was publicly available, and did not undertake to verify
independently any such information. Prudential neither made nor obtained any
independent valuations or appraisals of any of the Trust's assets or the assets
of the RELPS. With respect to certain financial projections provided to
Prudential for the Trust and for each of the properties owned by the RELPS,
Prudential assumed that the information was reasonably prepared and that the
projections represented managements' best currently available estimate as to the
future financial performance of the Trust and of the properties owned by the
RELPS. This opinion is necessarily based on economic, financial and market
conditions as they existed and can only be evaluated as of the date of the
Prudential Opinion.
Prudential assumed that the draft Merger Agreement reviewed by it will
conform in all material respects to those documents when in final form, that the
disclosure letters and due diligence contemplated by that agreement will not
identify any adverse condition, and that the Merger will be consummated
substantially as contemplated by the draft Merger Agreement.
Prudential expressed no opinion as to what the market value of the Trust's
Shares will be when issued in the Merger or the prices at which the Shares will
trade after the Merger. In addition, the opinion does not evaluate the relative
merits of the Merger as compared to any other business plan or opportunity which
might be presented to the Trust or the effect of any other arrangement which the
Trust might pursue.
Prudential concluded that the Merger would increase the Trust's shareholder
base, public float and equity market capitalization at an effective price per
Share which was reasonable relative to Trust management's estimated net asset
value per Share and the net proceeds per Share received by the Trust in recent
private equity placements with unaffiliated third parties, and should increase
the Trust's FFO.
In arriving at the opinion, Prudential performed a variety of financial
analyses, including those summarized herein. The summary set forth herein of the
analyses presented to the Trust Board at the July 10, 1997 meeting does not
purport to be a complete description of the analyses performed. The preparation
of a fairness opinion is a complex process that involves various determinations
as to the most appropriate and relevant methods of financial analyses and the
application of these methods as to the particular circumstances and, therefore,
such an opinion is not necessarily susceptible to partial analysis or summary
description. Prudential believes that its analysis must be considered as a whole
and that selecting portions thereof or portions of the factors considered by it,
without considering all the analyses and factors, could create an
40
<PAGE> 61
incomplete view of the evaluation process underlying the opinion. Prudential
made numerous assumptions with respect to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of the Trust. Any estimates contained in
Prudential's analyses are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the values of businesses and
securities do not purport to be appraisals or necessarily reflect the prices at
which securities actually may be sold. Accordingly, such analyses and estimates
are inherently subject to substantial uncertainty.
Subject to the foregoing, the following is a summary of the material
financial analyses performed by Prudential in arriving at the opinion.
In its analysis, Prudential assumed the purchase price paid in the Merger
to be $57.918 million (the "equity purchase price"). Prudential arrived at this
amount by multiplying $2.625, the agreed upon Merger value per Share, by the
number of Shares (approximately 22,064,000) to be issued in the Merger.
Prudential assumed the unleveraged purchase price for the Merger (exclusive of
estimated Merger expenses) to be $89.622 million. Prudential arrived at this
amount by adding $31.704 million principal amount of total indebtedness of the
RELPS to the equity purchase price. The amount of the RELPS' indebtedness was
measured as of June 30, 1997. Prudential also analyzed the Merger from the
perspective of an equity issuance to determine the implied price range per Share
issued in the Merger for the consideration received in exchange for such shares.
Comparable Company Analysis. A comparable company analysis was used by
Prudential to establish an implied range of equity market values for the RELPS.
Prudential analyzed publicly available historical and projected financial
results, including multiples of current stock price to projected 1998 FFO on a
per share basis of certain companies considered by Prudential to be reasonably
similar (although greater in size) to the RELPS.
The comparable companies were found to have an equity market value range
estimated to be between 10.0x and 13.2x projected 1998 FFO. Applying such
multiples to the RELPS' 1998 projected FFO resulted in an implied equity
valuation range of $63.120 million to $83.457 million. The equity purchase price
for the RELPS is below the mean and median of the equity market valuation ranges
implied by Prudential comparable companies analysis. Thus, in Prudential's view,
such analysis supports Prudential's conclusion that the consideration to be paid
by the Trust pursuant to the Merger is fair to the Trust from a financial point
of view.
Comparable Transaction Analysis. Prudential analyzed the consideration paid
in several recent combination or acquisition transactions deemed by Prudential
to be reasonably similar to the transaction, and considered the multiple of the
total purchase price to the acquired entity's net operating income ("NOI").
Prudential served as financial advisor in several of the comparable
transactions. Such transactions were found to have an implied purchase price for
the acquired entity or portfolio equal to 9.5x to 12.2x NOI. Applying such
multiples to the RELPS' projected 1998 NOI resulted in an implied enterprise
valuation of the RELPS in the range of $87.599 million to $113.276 million. The
total purchase price for the RELPS is below the mean and median of the
enterprise valuation ranges implied by Prudential's comparable transaction
analysis. Thus, in Prudential's view, such analysis supports Prudential's
conclusion that the consideration to be paid by the Trust is fair to the Trust
from a financial point of view.
Pro Forma Funds From Operations Per Share Analysis. Prudential also
analyzed the pro forma effect of the Merger on the Trust's FFO. An analysis of
anticipated future results based on projections provided by management of the
Trust indicated that as a result of the Merger, pro forma FFO per Share would
increase.
Projected financial and other information concerning the Trust and the
impact of the Merger upon holders of Shares is not necessarily indicative of
future results. All projected financial information is subject to numerous
contingencies beyond the control of the management of the Trust.
Prudential was retained by the Trust to render the opinion and other
financial advisory services in connection with the Merger and received a fee for
such services, which fee was contingent upon the delivery of the opinion. In the
past, Prudential has provided financing services to the Trust and has received
compensation
41
<PAGE> 62
for rendering such services. In the ordinary course of business, Prudential may
actively trade Shares for its own account and for the accounts of customers,
and, accordingly, may at any time hold a long or short position in such
securities.
RELPS. On June 16, 1997, the General Partners, on behalf of each RELP,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair from a
financial point of view to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the RELPS as to the consideration to be
received by the Limited partners in connection with the Merger, which
consideration was determined through negotiations between the Trust, Realco and
the General Partners. The RELPS retained Houlihan to render fairness opinions
based upon Houlihan's experience in the valuation of businesses and their
securities in connection with mergers and acquisitions and valuation for
corporate purposes especially with respect to REITs and other real estate
companies. On June 30, 1997, Houlihan delivered its written opinions to the
Boards of Directors of the General Partners (collectively, the "Houlihan
Opinion"), to the effect that, as of the date of such opinion, based on
Houlihan's review and subject to the limitations described below, the
consideration to be received by the Limited Partners in connection with the
Merger was fair, from a financial point of view, to the RELP's respective
Limited Partners. The Houlihan Opinion does not constitute a recommendation to
any Limited Partner as to how any such Limited Partner should vote on the
Merger.
THE FULL TEXT OF THE HOULIHAN OPINIONS, WHICH SET FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THEIR REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX II-B TO THIS JOINT PROXY STATEMENT/ PROSPECTUS.
THE LIMITED PARTNERS ARE URGED TO READ THE OPINIONS IN THEIR ENTIRETY.
Each of the General Partners engaged Houlihan on behalf of each RELP to
render an opinion on behalf of the Limited Partners of each RELP that the
consideration to be received by the Limited Partners in connection with the
Merger is fair to them from a financial point of view. Houlihan is a nationally
recognized investment banking firm that is continually engaged in providing
financial advisory services in connection with mergers and acquisitions,
leveraged buyouts, business valuations for a variety of regulatory and planning
purposes, recapitalizations, financial restructuring, and private placements of
debt and equity securities. Houlihan has no material prior relationship with the
General Partners or their Affiliates.
As compensation to Houlihan for its services in connection with the Merger,
the General Partners have agreed to pay Houlihan an aggregate fee of $115,000 to
$125,000. No portion of Houlihan's fees were contingent upon the successful
completion of the Merger. Each General Partner and each RELP has also agreed to
indemnify Houlihan and related persons against certain liabilities, including
liabilities under federal securities laws, arising out of the engagement of
Houlihan, and to reimburse Houlihan for certain expenses.
Houlihan did not, and was not requested by any General Partner, to make any
recommendations as to the form or amount of consideration to be paid to the
Limited Partners in connection with the Merger. Houlihan was not asked to opine
on and did not express any opinion as to (i) tax consequences of the Merger,
including but not limited to tax consequences to the Limited Partners; (ii) the
public market values or realizable value of the Shares or the prices at which
the Shares may trade in the future following the Merger; (iii) alternatives to
the Merger; or (iv) the fairness of any aspect of the Merger not expressly
addressed in its Opinions.
In arriving at its opinion, Houlihan made its determination as to the
fairness, from a financial point of view, of the consideration to be given to
the Limited Partners on the basis of the analyses described below. No
restrictions or limitations were imposed by any General Partner upon Houlihan
with respect to its investigation made or the procedures followed by Houlihan in
rendering its opinion. Houlihan's opinion is not intended to be and does not
constitute a recommendation to any Limited Partner as to whether to accept the
consideration to be received by such Limited Partner in connection with the
offers.
In arriving at its opinion, Houlihan
42
<PAGE> 63
(i) reviewed the annual reports to partners for RELP I, RELP III and
RELP IV for each of the five fiscal years ended December 31, 1996 and the
annual report to partners for RELP II for each of the five fiscal years
ended June 30, 1997;
(ii) reviewed the Trust's annual reports to shareholders and Form 10-K
for the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;
(iii) reviewed the draft Merger Agreement, dated June 17, 1997;
(iv) met with certain members of the senior management of Realco to
discuss Realco's, the RELPS', and the Trust's operations, financial
condition, future prospects, projected operations and performance, and the
Merger;
(v) held discussions with senior management of the Trust to discuss
the history and nature of the Trust's business, the Trust's operations,
financial condition, future prospects, projected operations and
performance, Realco Share acquisition, the MSAM Transaction, the LaSalle
Transaction, and the Merger;
(vi) visited certain facilities and business offices of Realco and the
RELPS, and visited certain real property owned by the RELPS;
(vii) reviewed forecasts and projections prepared by Realco's
management with respect to the RELPS' properties for the years ended 1997
through 2007;
(viii) reviewed the historical market prices and trading volume for
the Trust's publicly-traded securities;
(ix) reviewed certain other publicly available financial data for
certain companies that Houlihan deemed comparable to the RELPS and the
Trust and publicly available prices and premiums paid in other transactions
that it considered similar to the Merger; and
(x) conducted such other studies, analyses and inquiries as it deemed
appropriate.
Houlihan used several methodologies to assess the fairness of the Merger
from a financial point of view. Each methodology provided an estimate as to the
value of the Limited Partners' aggregate interests in each RELP (the "LP Value")
or the value of the consideration to be received by the Limited Partners and
thus provided a basis of comparison to the consideration offered in the Merger.
Moreover, several of the analyses conducted by Houlihan provided an estimate as
to the value of the General Partners' interests in the RELP (the "GP Value").
With respect to arriving at the LP Value, Houlihan performed the following
analyses:
(i) One methodology was a "NET ASSET SALE" analysis which utilized
capitalization rates of Net Operating Income and Price per Square Foot
statistics from the National Real Estate Index, an independent organization
which compiles data from real estate transactions. In order to arrive at an
estimate of the LP Value and the GP Value, an appropriate capitalization
rate and price per square foot was multiplied by the corresponding
statistics for the RELPS' owned properties. This provided an estimate of
the value of each RELP's underlying real properties. Then, adjustments were
made to reflect the capital structure of the relevant assets, the General
Partner's contractual rights and privileges (in the context of a sale)
based on the Partnership Agreement, and normal and customary costs
associated with a sale. The net proceeds were then divided among the
Limited Partners and General Partner of each RELP based upon the rights and
privileges of the Partnership Agreement.
(ii) An alternative methodology, a "GOING CONCERN VALUE" analysis,
which, like the Net Asset Sale analysis considered the capitalization
multiples to arrive at the estimated value of the RELP's underlying real
properties. In order to arrive at an estimate of the LP Value and the GP
Value, the resulting aggregate value for the RELP's real properties was
adjusted, as appropriate, to reflect the capital structure of the relevant
assets and the General Partner's contractual rights and privileges (in the
context of a going concern) based on the Partnership Agreement.
43
<PAGE> 64
(iii) Yet another analysis was a "UNIT YIELD" analysis, whereby the LP
Value was estimated by calculating capitalization multiples for alternative
investments and then applying a selected capitalization rate to the RELP's
limited partner distributions based on a comparative risk analysis of the
RELP and the alternative investments.
(iv) Finally, a "COMPARABLE TRANSACTION" analysis, which considered
the terms and conditions of transactions which Houlihan deemed similar to
the Merger, was considered.
Based on all of the aforementioned analyses, Houlihan reached a conclusion
as to the LP Value.
With respect to arriving at the value of the consideration to be received
by the Limited Partners, Houlihan performed the following analysis.
(i) One methodology was consideration of transactions involving the
Trust's publicly-traded securities, or a "MARKET PRICE" analysis. This
analysis considered the price and trading history of the Trust's Shares.
Moreover, this analysis also considered both the MSAM Transaction and the
LaSalle Transaction and assumed that the indicated price per Share
resulting from these transactions of $2.45 is the result of arms length
negotiations involving sophisticated, institutional investors who are
willing buyers and the Trust who is a willing seller, with all parties
having reasonable knowledge of all relevant facts, with no parties having
compulsion to act, and with equity to all parties.
(ii) An alternative methodology was a "NET ASSET SALE" analysis which
utilized capitalization rates of Net Operating Income statistics exhibited
by publicly-traded companies which are similar to the Trust as well as
capitalization rates provided from the National Real Estate Index. In order
to arrive at an estimate of the value of the Trust, and thus its Shares, an
appropriate capitalization rate was multiplied by the Trust's properties'
net operating income. This provided an estimated value of the Trust's
underlying real properties. Then, adjustments were made to reflect the
capital structure of the Trust, and normal and customary costs associated
with a sale. The net proceeds provided an indication of the value of the
Trust's Shares.
(iii) An alternative methodology, a "GOING CONCERN VALUE" analysis,
which, like the Net Asset Sale analysis considered the capitalization
multiples to arrive at the estimated value of the Trust's underlying real
properties. In order to arrive at an estimate of the Trust, normal and
customary expenses for corporate overhead were deducted from the implied
value of the Trust's properties. The resulting aggregate value for the
Trust was the adjusted, as appropriate, to reflect the Trust's capital
structure. This net amount provided an indication of the value of the
Trust's Shares.
Based on all of the aforementioned analyses, Houlihan reached a conclusion
as to the value of the Trust and its Shares.
The conclusions resulting from the aforementioned analyses indicated an LP
value which was lower than the value of the Shares to be received as
consideration by the Limited Partners in connection with the Merger, leading
Houlihan to conclude that the consideration to be paid to the Limited Partners
of each RELP in connection with the Merger is fair to the Limited Partners from
a financial point of view.
The aforementioned analyses required studies of the overall market,
economic and industry conditions in which the RELPS and the Trust operate, the
RELPS' and the Trust's operating results, and the RELPS' distributions to the
Limited Partners. Research into, and consideration of, these conditions were
incorporated into the analyses.
Houlihan's opinion is based on the business, economic, market and other
conditions as they existed as of June 30, 1997. In rendering its opinion,
Houlihan relied upon and assumed, without independent verification, that the
financial information provided to Houlihan by the General Partners and the Trust
was reasonably prepared and reflect the best current available estimates of the
financial results and condition of the RELPS and the Trust. Houlihan did not
independently verify the accuracy or completeness of the information supplied to
it with respect to the RELPS or the Trust and does not assume responsibility to
do it. Except as set forth above, Houlihan did not make any physical inspection
or independent appraisal of the specific properties or assets of the RELPS or
the Trust.
44
<PAGE> 65
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan in arriving at its fairness opinions. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is, therefore, not readily susceptible to summary description.
In arriving at its opinion, Houlihan did not attribute any particular weight to
any analysis and factor. Accordingly, Houlihan believes that its analyses and
the summary set forth herein must be considered as a whole and that selecting
portions of its analyses could create an incomplete view of the processes
underlying the analyses set forth in the Houlihan opinions. In its analysis,
Houlihan made numerous assumptions with respect to the RELPS, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the RELPS. The estimates
contained in such analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be more or less favorable than
suggested by such analyses. Additionally, analyses relating to the value of
businesses or securities are not appraisals. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
EXCHANGE RATIO AND EXCHANGE FOR THE TRUST'S SHARES
The Exchange Ratio was arrived at through negotiations between the Trust
and the common management of the General Partners. Each Unit issued and
outstanding at the Effective Time of the Merger would cease to be outstanding
and would be converted into the right to receive with respect to each RELP:
79.52 Shares per Unit in RELP I, 143.17 Shares per Unit in RELP II, 82.99 Shares
per Unit in RELP III and 75.68 Shares per Unit in RELP IV. The General Partners
of each of the RELPS have agreed to waive any right to any Shares to which they
may be entitled in exchange for their general partnership interest.
Notwithstanding any other provision of the Merger Agreement, each holder of
Units exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a Share (after taking into account all Units exchanged by
such holder) shall receive, in lieu thereof, cash (without interest)
representing such holder's proportionate interest, if any, and the net proceeds
from the sale by Boston EquiServe Limited Partnership (the "Exchange Agent") in
one or more transactions which sale transaction shall be made at such times, in
such manner and on such terms as the Exchange Agent shall determine in its
reasonable discretion on behalf of all such holders of the aggregate of the
fractional Shares, as applicable, which would otherwise have been issued. The
sale of such Shares by the Exchange Agent shall be executed on the NYSE through
one or more member firms on the NYSE and shall be executed in round lots to the
extent practicable.
As soon as reasonably practicable after the Effective Time, the Trust will
cause the Exchange Agent to send each holder of Units in a Participating RELP, a
certificate or certificates representing Shares and a check for any fractional
Share interest, as applicable.
Any distributions made by the Trust after the Effective Time will include
distributions on all Shares issued in the Merger. After the Effective Time of
the Merger, the transfer books of any Participating RELP will be closed and
there will be no transfers on the transfer books of the Participating RELP of
the Units that were outstanding immediately prior to the Effective Time of the
Merger.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
From and after the Effective Time of the Merger, the Trust Board will
continue to consist of the eight current members of the Trust Board and the
executive officers of the Trust will continue to serve in their capacities
following the Merger. Set forth below is information regarding the Trust
Managers and executive officers of the Trust.
45
<PAGE> 66
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Charles W. Wolcott.......................... 44 Trust Manager, President and Chief
Executive Officer
Marc A. Simpson............................. 42 Vice President and Chief Financial
Officer, Secretary and Treasurer
David B. Warner............................. 38 Vice President -- Operations
Lewis D. Friedland.......................... 37 Vice President and
Chief Investment Officer
Theodore R. Bigman.......................... 34 Trust Manager
William H. Bricker.......................... 65 Trust Manager
T. Patrick Duncan........................... 48 Trust Manager
Robert E. Giles............................. 49 Trust Manager
Edward B. Kelley............................ 56 Trust Manager
Stanley J. Kraska, Jr....................... 37 Trust Manager
Russell C. Platt............................ 37 Trust Manager
</TABLE>
CHARLES W. WOLCOTT currently serves as Trust Manager, President and Chief
Executive Officer. Mr. Wolcott was hired as the President and Chief Executive
Officer of the Trust in May 1993 and has served as a Trust Manager since August
1993. Mr. Wolcott was President and Chief Executive Officer for Trammell Crow
Asset Services, a real estate asset and portfolio management affiliate of
Trammell Crow Company, from 1990 to 1992. He served as Vice President and Chief
Financial and Operating Officer of the Trust from 1988 to 1991. From 1988 to
1990, Mr. Wolcott was a partner in Trammell Crow Ventures Operating Partnership.
Prior to joining the Trammell Crow Company in 1984, Mr. Wolcott was President of
Wolcott Corporation, a firm engaged in the development and management of
commercial real estate properties. Mr. Wolcott graduated from the University of
Texas at Austin in 1975 with a Bachelor of Science degree and received a Master
of Business Administration degree from Harvard University in 1977.
MARC A. SIMPSON currently serves as Vice President and Chief Financial
Officer, Secretary and Treasurer. Mr. Simpson was hired as the Vice President
and Chief Financial Officer, Secretary and Treasurer of the Trust in March 1994.
From November 1989 to March 1994, Mr. Simpson was a Manager in the Financial
Advisory Services group of Coopers & Lybrand L.L.P. Prior to that time, he
served as Controller of Pacific Realty Corporation, a real estate development
company. Mr. Simpson graduated with a Bachelor of Business Administration degree
from Midwestern State University in 1978, and received a Master of Business
Administration degree from Southern Methodist University in 1990.
DAVID B. WARNER currently serves as Vice President -- Operations. Mr.
Warner was hired as Vice President and Chief Operating Officer of the Trust in
May 1993. From 1989 through the date of his accepting a position with the Trust,
Mr. Warner was a Trust Manager of the Equity Investment Group for The Prudential
Realty Group. From 1985 to 1989, he served in the Real Estate Banking Group of
NCNB Texas National Bank. Mr. Warner graduated from the University of Texas at
Austin in 1981 with a degree in Finance and received a Master of Business
Administration from the same institution in 1984.
LEWIS D. FRIEDLAND currently serves as Vice President and Chief Investment
Officer. He was hired as Vice President and Chief Investment Officer of the
Trust in 1997. Prior to joining the Trust, Mr. Friedland was a founding partner
of Crimson Partners, an investment firm formed in 1992 that engaged in the
acquisition and development real estate assets. Prior to founding this firm he
was a Division Partner and Managing Director of Trammell Crow Company where he
was responsible for that firm's development, leasing, and property management
activities in Richmond, Va. Mr. Friedland graduated from the Wharton School of
the University of Pennsylvania in 1981 with a Bachelor of Science Degree in
Economics and received a Master of Business Administration degree from Harvard
University in 1985.
46
<PAGE> 67
THEODORE R. BIGMAN has served as a Trust Manager since July 8, 1997, when
he was appointed as an independent Trust Manager at the request of MSAM pursuant
to the terms of the MSAM Transaction. Mr. Bigman is a Principal at MSAM. Having
joined the company in 1995, Mr. Bigman is the senior portfolio manager of the
U.S. Real Estate Portfolio. Prior to joining MSAM, he was a Director at CS First
Boston, where he worked for eight years in the real estate group. He is a member
of NAREIT and is a Trustee of Grove Property Trust. He graduated from Brandeis
University in 1983 and received a Master of Business Administration from Harvard
University in 1987.
WILLIAM H. BRICKER has served as a Trust Manager since September 1985. Mr.
Bricker has served as President of DS Energy Services Incorporated and has
consulted in the energy field and international trade since 1987. In May 1987,
Mr. Bricker retired as the Chairman and Chief Executive Officer of Diamond
Shamrock Corporation where he held various management positions from 1969
through May 1987. Mr. Bricker is a Trust Manager of the LTV Corporation, the
Eltech Systems Corporation and the National Paralysis Foundation. He received
his Bachelor of Science and Master of Science degrees from Michigan State
University.
T. PATRICK DUNCAN has served as a Trust Manager since December 1996, when
he was appointed as an independent Trust Manager at the request of Realco
pursuant to the terms of the Realco Share Purchase Agreement. Mr. Duncan joined
Realco in November 1986 as Chief Financial Officer. With over 24 years of
experience, Mr. Duncan serves as Senior Vice President of Real Estate Operations
with responsibilities which include the direction of all acquisitions, sales,
management and leasing of real estate for USAA-affiliated companies. Mr. Duncan
received degrees from the University of Arizona in Accounting and Finance. He is
a Certified Public Accountant, Certified Commercial Investment Manager, and
holds a Texas Real Estate Broker's License. Mr. Duncan is also a member of the
Board of Directors of Meridian Industrial Trust, and a member of the Board of
Directors of the general partner of RELP I, RELP II, RELP III and RELP IV and a
member of the Board of Directors of USAA Equity Advisors, Inc..
ROBERT E. GILES has served as a Trust Manager since March 1996. Mr. Giles
is currently the owner and President of Robert E. Giles Interests, Inc., a real
estate consulting and development firm based in Houston, Texas. Mr. Giles also
serves as President of Title Network, Ltd., a national title insurance agency.
Mr. Giles was a Vice President with the J.E. Roberts Companies, Inc. from 1994
to 1995. From 1990 to 1994, Mr. Giles was President and a Director of National
Loan Bank, a publicly-held company created through the merger of Chemical Bank
and Texas Commerce Bank. Mr. Giles received his Bachelor of Arts degree from
University of Texas -- Austin in 1970 and received a Master of Arts degree from
University of Texas -- Arlington in 1973.
EDWARD B. KELLEY has served as a Trust Manager since December 1996, when he
was appointed as an independent Trust Manager at the request of Realco pursuant
to the terms of Realco Share Purchase Agreement. Mr. Kelley is President of
Realco. He joined Realco in April 1989 as Executive Vice President and Chief
Operating Officer before assuming his new title in August 1989. Mr. Kelley
received his Bachelor of Business Administration degree from St. Mary's
University in 1964 and a Masters in Business Administration from Southern
Methodist University in 1967, and is a Member of the Appraisal Institute (MAI).
Mr. Kelley is Chairman of the Board of Directors of the general partner of RELP
I, RELP II, RELP III and RELP IV, and a member of the Board of Directors of USAA
Equity Advisors, Inc.
STANLEY J. KRASKA, JR. as served as Trust Manager since July 10, 1997, when
he was appointed as an independent Trust Manager at the request of ABKB/LaSalle
Securities Limited Partnership ("ABKB") and LaSalle Advisors Limited Partnership
("LaSalle Advisors") pursuant to the terms of the LaSalle Transaction. Mr.
Kraska has been employed by ABKB or its Affiliates since February 1988. He
currently serves as Managing Director, with responsibility for private placement
investment. Mr. Kraska graduated from Dartmouth College in 1982 with a Bachelor
of Arts degree and received a Master of Business Administration degree from
Harvard University in 1986.
RUSSELL C. PLATT has served as a Trust Manager since July 8, 1997 when he
was appointed as an independent Trust Manager at the request of MSAM pursuant to
the terms of the MSAM Transaction. Mr. Platt joined Morgan Stanley in 1982. He
is a Managing Director of the Firm and has primary
47
<PAGE> 68
responsibility for managing the real estate securities investment business for
MSAM. MSAM manages approximately $1.3 billion in real estate securities
worldwide for institutional and individual investors. He also serves as a member
of the Investment Committee of The Morgan Stanley Real Estate Fund, a privately
held limited partnership engaged in the acquisition of real estate assets,
portfolios and real estate operating companies with gross assets of
approximately $4 billion. He graduated from Williams College in 1982 with a
Bachelor of Arts in Economics and received a Master of Business Administration
from Harvard Business School in 1986. He is a member of the advisory boards of
the National Multi Housing Council, The Wharton Real Estate Center and the MIT
Center for Real Estate. He is also a member of The Urban Land Institute, NAREIT
and the Pension Real Estate Association.
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction of all conditions to consummation
of the Merger, the parties will file articles of merger with the Clerk of Dallas
County and articles of merger with the secretary of state of the state of
organization of each RELP. For state law purposes, the Merger will become
effective upon the later of the filing of articles of merger with the
appropriate state officials or such later time which the Trust and the RELPS
shall have agreed upon and designated in such filings in accordance with
applicable law. For all other purposes, the Merger will be effective as of
, 199 . The Trust and the RELPS each have the right, acting
unilaterally as long as it has not willfully and materially breached the Merger
Agreement, to terminate the Merger Agreement should the Merger not be
consummated by the close of business on March 31, 1998. Until the Effective Time
of the Merger, the Limited Partners will retain their rights as Limited Partners
of their respective RELPS to vote on matters submitted to them.
HEADQUARTERS
After the Merger, the headquarters of the Trust will continue to be located
at 6210 N. Beltline Road, Suite 170, Irving, Texas 75063, the current
headquarters of the Trust.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of the Trust and the RELPS to effect the Merger
are subject to the satisfaction of certain conditions, including the following:
(i) the Merger Agreement and the transactions contemplated thereby shall have
been approved by the shareholders of the Trust and the Limited Partners of the
Participating RELPS; (ii) the Trust shall have obtained the approval for the
listing of the Shares issuable in the Merger on the NYSE, subject to official
notice of issuance; (iii) the Registration Statement on Form S-4 of which this
Joint Proxy Statement/Prospectus constitutes a part, shall have become effective
and all necessary state securities law or "Blue Sky" permits or approvals
required to carry out the transactions contemplated by the Merger Agreement
shall have been obtained and no stop order with respect to any of the foregoing
shall be in effect; (iv) none of the parties shall be subject to any order or
injunction of a court of competent jurisdiction or other legal prohibition which
prohibits the consummation of the transactions contemplated by the Merger
Agreement; and (v) all material actions by or in respect of or filings with any
governmental entity required for the consummation of the Merger and related
transactions shall have been obtained or made.
Consummation of the Merger also is subject to the satisfaction or waiver of
various other conditions specified in the Merger Agreement, including, among
others: (i) the representations and warranties of each party contained in the
Merger Agreement shall be true and correct in all material respects as of the
closing date; (ii) each party shall have performed its obligations contained in
the Merger Agreement at or prior to the Effective Time; (iii) from the date of
the Merger Agreement there shall not have occurred any change in the financial
condition, business or operations of either party that would have or would be
reasonably likely to have a material adverse effect on the business, results of
operations or financial condition of such party; (iv) each party shall have
received an opinion of counsel; and (v) each party shall have obtained all
consents and waivers from third parties necessary in connection with the
consummation of the Merger and related transactions.
48
<PAGE> 69
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the date of the Merger Agreement to the Effective
Time, the parties agreed to carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as previously
conducted and, to the extent consistent therewith, use commercially reasonable
efforts to preserve in tact their respective current business organizations,
goodwill and ongoing business. The parties also agreed, except as disclosed to
the other party or in certain limited circumstances specified therein, they
shall:
(1) Use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to preserve intact
their business organizations and goodwill and keep available the services
of their respective officers and employees.
(2) Confer on a regular basis with one or more representatives of the
other to report operational matters of materiality and any proposals to
engage in material transactions.
(3) Promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the business,
properties, assets or liabilities, or any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated), or the breach in any material respect of any
representation, warranty, covenant or agreement contained therein.
(4) Except for regular quarterly distributions and the special
distribution to be made by each of the RELPS immediately prior to the
closing of the Merger, no party to the Merger shall make quarterly
distributions or make distributions payable with respect to the Shares and
Units.
(5) Promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the Commission.
Prior to the Effective Time, except as otherwise disclosed pursuant to the
Merger Agreement, unless the Trust has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, each RELP:
(1) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as conducted.
(2) Shall not amend its Partnership Agreement.
(3) Shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
Merger Agreement hereof and disclosed pursuant to the Merger Agreement,
issue any Units, make any distribution, effect any recapitalization or
other similar transaction; (ii) grant, confer or award any option, warrant,
conversion right or other right not existing on the date of the Merger
Agreement to acquire any Units; (iii) increase any compensation or enter
into or amend any employment agreement with any of its present or future
officers or directors of the General Partner; or (iv) adopt any new
employee benefit plan or amend any existing employee benefit plan in any
material respect, except for changes which are less favorable to
participants in such plans.
(4) Shall not directly or indirectly redeem, purchase or otherwise
acquire any Units or make any commitment for any such action.
(5) Shall not sell or otherwise dispose of (i) any RELP properties; or
(ii) except in the ordinary course of business, any of its other assets
which are material, individually or in the aggregate.
(6) Shall not make any loans, advances or capital contributions to, or
investments in, any other person.
(7) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or
49
<PAGE> 70
the notes thereto) of each RELP included in the RELP's filings with the
Commission or incurred in the ordinary course of business consistent with
past practice.
(8) Shall not enter into any commitment which individually may result
in total payments or liability by or to it in excess of $250,000 in the
case of any one commitment or in excess of $500,000 for all commitments.
(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or Affiliate of the RELP or
its General Partner except to the extent the same occur in the ordinary
course of business consistent with past practice and would not have a RELP
Material Adverse Effect (as defined in the Merger Agreement).
(10) Shall not enter into or terminate any lease representing annual
revenues of $100,000 or more.
Prior to the Effective Time, except as may be otherwise disclosed pursuant
to the Merger Agreement, unless each RELP has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, the Trust:
(1) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted.
(2) Shall not amend its Declaration of Trust or Bylaws.
(3) Shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including the
Trust's existing dividend reinvestment plan) existing on the date of the
Merger Agreement and disclosed pursuant to the Merger Agreement, issue any
shares of its capital stock, effect any share split, reverse share split,
share dividend, recapitalization or other similar transaction; (ii) grant,
confer or award any option, warrant, conversion right or other right not
existing on the date hereof to acquire any shares of its capital shares
(except pursuant to any employee incentive plan approved by shareholders);
(iii) amend any employment agreement with any of its present or future
officers or Trust Managers; or (iv) adopt any new employee benefit plan
(including any share option, share benefit or share purchase plan) except
the employee incentive plan approved by the shareholders at its shareholder
meeting for the fiscal year ended December 31, 1995.
(4) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any Shares or directly or
indirectly redeem, purchase or otherwise acquire any Shares or capital
stock of any of its subsidiaries, or make any commitment for any such
action.
(5) Shall not, and shall not permit any of its subsidiaries to, sell
or otherwise dispose of (i) any properties or any of its capital stock of
or other interests in subsidiaries or (ii) except in the ordinary course of
business, any of its other assets which are material, individually or in
the aggregate.
(6) Shall not, and shall not permit any of its subsidiaries to, make
any loans, advances or capital contributions to, or investments in, any
other person other than in connection with the sale of properties.
(7) Shall not, and shall not permit any of its subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the most
recent consolidated financial statements (or the notes thereto) of the
Trust included in the Trust's reports filed with the Commission or incurred
in the ordinary course of business consistent with past practice.
(8) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment which individually may result in total payments or
liability by or to it in excess of $250,000 in the case of any one
commitment or in excess of $500,000 for all commitments; and
(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, Trust Manager or Affiliate of the
Trust or any of its subsidiaries, except as provided in the Merger
Agreement or except in the ordinary course of business.
50
<PAGE> 71
For purposes of the Merger Agreement, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
ACQUISITION PROPOSALS
Prior to the Effective Time, each RELP and the Trust agreed (i) that
neither of them nor any of their subsidiaries shall, and each of them shall
direct and use its best efforts to cause its respective officers, General
Partner, Limited Partners, Trust Managers, employees, agents, affiliates and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its subsidiaries), as applicable, not to,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders or limited partners) with
respect to a merger, acquisition, tender offer, exchange offer, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities (or any debt securities convertible into
equity securities) of, such party or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; (ii) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and each will take the necessary
steps to inform the individuals or entities referred to above of the undertaken
obligations; and (iii) that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in the Merger
Agreement prohibits the Board of Directors of the General Partner of each RELP
(collectively, the "Board of Directors") or the Trust Board from (x) furnishing
information to or entering into discussions or negotiations with, any person or
entity that makes an unsolicited bona fide Acquisition Proposal, if, and only to
the extent that, (A) the Board of Directors or Trust Board, as applicable,
determines in good faith that such action is required for it to comply with its
fiduciary duties to Limited Partners or shareholders, as applicable, imposed by
law as advised by counsel, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity, such
party provides written notice to the other party to the Merger Agreement to the
effect that it is furnishing information to, or entering into discussions with,
such person or entity, and (C) subject to any confidentiality agreement with
such person or entity (which such party determined in good faith was required to
be executed in order for the Board of Directors or Trust Board, as applicable,
to comply with its fiduciary duties to Limited Partners or shareholders, as
applicable, imposed by law as advised by counsel), such party keeps the other
party to the Merger Agreement informed of the status (but not the terms) of any
such discussions or negotiations; and (y) to the extent applicable, complying
with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal.
EXTENSION, WAIVER AND AMENDMENT; TERMINATION
Termination by Either the Trust or any RELP. The Merger Agreement may be
terminated and the Merger may be abandoned by action of the General Partner of
any RELP or the Trust Managers if (i) the Merger shall not have been consummated
by March 31, 1998; (ii) a meeting of RELP's partners shall have been duly
convened and held and the approval of RELP's partners shall not have been
obtained at such meeting or at any adjournment thereof; (iii) a meeting of the
Trust's shareholders shall have been duly convened and held and the approval of
the Trust's shareholders shall not have been obtained at such meeting or at any
adjournment thereof; (iv) as a result of due diligence investigation by one of
the parties, it is determined in good faith by such party that certain facts or
circumstances not previously known by such party constitute a Material Adverse
Effect on the business, results of operations or financial condition of the
other party; (v) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
51
<PAGE> 72
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable, provided that the party seeking to terminate the Merger
Agreement pursuant to clause (v) shall have used all reasonable efforts to
remove such order, decree, ruling or injunction; or (vi) any of the conditions
described above shall not have been satisfied, and provided, in the case of a
termination pursuant to clause (i) or (iv) above, that the terminating party
shall not have breached in any material respect its obligations under the Merger
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause. The Trust and each RELP
shall (i) deliver its disclosure letter to one another not later than 5:00 P.M.,
Central Time, August 11, 1997; and (ii) shall complete its due diligence
investigations not later than 5:00 P.M., Central Time, on July 31, 1997 (the
period from the date of the Merger Agreement through July 31, 1997 being
hereinafter referred to as the "Due Diligence Period"). Until the expiration of
the Due Diligence Period, either party may terminate the Merger Agreement
without liability or penalty due to (i) the discovery of a fact or circumstance
that reasonably could be expected to constitute a Material Adverse Effect on the
business, results of operations or financial condition of the other party, or
(ii) the party's failure to receive a written fairness opinion as described
herein within seven business days from the date of execution of the Merger
Agreement.
Termination by any RELP. The Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the adoption and approval by the Limited Partners, by action of the General
Partner, if (i) in the exercise of its good faith judgment as to its fiduciary
duties to its partners imposed by law, as advised by counsel, the General
Partner determines that such termination is required by reason of a RELP
Acquisition Proposal being made; (ii) the Trust Board withdraws, materially
modifies or changes in a manner materially adverse to RELP its recommendations
to the Trust's shareholders of the Merger, other than as a result of the
occurrence of an event that in the good faith judgment of the Board of Trust
Managers has or is reasonably likely to have a RELP Material Adverse Effect;
(iii) the Trust Board postpones the date scheduled for the meeting of
shareholders of the Trust to approve the Merger Agreement and the transactions
contemplated thereby beyond March 31, 1998 or fails to set a date for such
meeting by such date, except with the written consent of RELP; (iv) there has
been a breach by the Trust of any representation or warranty contained in this
Agreement which would have or would be reasonably likely to have an AIP Material
Adverse Effect, which breach is not curable by March 31, 1998; or (v) there has
been a material breach of any of the covenants or agreements set forth in the
Merger Agreement on the part of the Trust, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by RELP to the Trust.
Termination by the Trust. The Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval by the shareholders of the Trust, by action of the Trust Board, if
(i) in the exercise of its good faith judgment as to its fiduciary duties to its
shareholders imposed by law, as advised by counsel, the Trust Board determines
that such termination is required by reason of an AIP Acquisition Proposal being
made; (ii) the General Partner withdraws, materially modifies or changes in a
manner materially adverse to the Trust its recommendation to Limited Partners of
the Merger Agreement or the Merger, other than as a result of the occurrence of
an event that in the good faith judgment of the General Partner has or is
reasonably likely to have an AIP Material Adverse Effect; (iii) the General
Partner postpones the date scheduled for the RELP Special Meeting beyond March
31, 1998, or fails to set a date for such meeting by such date, except with the
written consent of the Trust; (iv) there has been a breach by the RELP of any
representation or warranty contained in the Merger Agreement which would have or
would be reasonably likely to have a RELP Material Adverse Effect, which breach
is not curable by March 31, 1998; or (v) there has been a material breach of any
of the covenants or agreements set forth in the Merger Agreement on the part of
the RELP, which breach is not curable or, if curable, is not cured within 30
days after written notice of such breach is given by the Trust to the RELP.
EFFECT OF TERMINATION AND ABANDONMENT
If an election to terminate the Merger Agreement is made because (i) the
Merger is not consummated by March 31, 1998 or the RELP Special Meeting shall
have been duly held and convened and approval of a
52
<PAGE> 73
RELP's Limited Partners shall not have been obtained, or a RELP Acquisition
Proposal relating to RELP shall have been made and, within one year from the
date of such termination, the RELP consummates a RELP Acquisition Proposal or
enters into an agreement to consummate a RELP Acquisition Proposal which is
subsequently consummated; or (ii) in the exercise of its good faith judgment as
to its fiduciary duties to its partners imposed by law, as advised by counsel,
the General Partner determines that such termination is required by reason of a
RELP Acquisition Proposal being made, the RELP shall pay to the Trust, provided
that the Trust was not in material breach of its obligations at the time of such
termination, as liquidated damages and not as a penalty or forfeiture, an amount
equal to the lesser of (m) RELP's Proportionate Share of $2,000,000 (the
"Liquidated Damages Amount") and (n) the sum of (1) the maximum amount that can
be paid to the Trust without causing the Trust to fail to meet the requirements
of Sections 856(c)(2) and (3) of the Code determined as if the payment of such
amount did not constitute income described in Sections 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by the Trust's
certified public accountants, plus (2) an amount equal to the Liquidated Damages
Amount less the amount payable under clause (1) above in the event the Trust
receives a letter from the Trust's counsel indicating that the Trust has
received a ruling from the IRS to the effect that Liquidated Damages Amount
payments constitute Qualifying Income. In addition to the Liquidated Damages
Amount, the Trust shall be entitled to receive from RELP (or its successor in
interest) all documented out-of-pocket costs and expenses, up to a maximum of
the RELP's Proportionate Share of $1,000,000 in connection with the Merger
Agreement and the transactions contemplated thereby (the "AIP Expenses")
incurred by the Trust. The payments to which the Trust is entitled as described
above shall be its sole remedy with respect to the termination of the Merger
Agreement under the circumstances contemplated above.
If an election to terminate the Merger Agreement is made because of a RELP
Material Adverse Effect, the RELP shall, provided that the Trust was not in
material breach of its obligations at the time of such termination, pay the
Trust for the AIP Expenses, up to a maximum of RELP's Proportionate Share of
$1,000,000, although it shall not be required to pay the Liquidated Damages
Amount, which payment of the AIP Expenses shall be the Trust's sole remedy for
termination of the Merger Agreement in such circumstances.
If an election to terminate the Merger Agreement is made because (i) the
Merger is not consummated by March 31, 1998 or the Trust Special Meeting shall
have been duly held and convened and approval of the Trust's shareholders shall
not have been obtained, or an AIP Acquisition Proposal relating to the Trust
shall have been made and, within one year from the date of such termination, AIP
consummates an AIP Acquisition Proposal or enters into an agreement to
consummate an AIP Acquisition Proposal which is subsequently consummated; or
(ii) in the exercise of its good faith judgment as to its fiduciary duties to
its shareholders imposed by law, as advised by counsel, the Trust Board
determines that such termination is required by reason of an AIP Acquisition
Proposal being made, the Trust shall pay to the RELP, provided that the RELP was
not in material breach of its obligations hereunder at the time of such
termination, as liquidated damages and not as a penalty or forfeiture, an amount
equal to the Proportionate Share of the Liquidated Damages Amount. In addition
to the Proportionate Share of the Liquidated Damages Amount, the RELP shall be
entitled to receive from the Trust (or its successor in interest) all documented
out-of-pocket costs and expenses, up to a maximum amount equal to the
Proportionate Share of $1,000,000, in connection with the Merger Agreement and
the transactions contemplated thereby (the "RELP Expenses" and, together with
the AIP Expenses, the "Expenses") incurred by the RELP. The payments to which
the RELP is entitled as described above shall be its sole remedy with respect to
the termination of the Merger Agreement under the circumstances contemplated
above.
If an election to terminate the Merger Agreement is made because of an AIP
Material Adverse Effect, the Trust shall, provided that the RELP was not in
material breach of its obligations at the time of such termination, pay the RELP
for the Proportionate Share of the RELP Expenses, up to a maximum amount equal
to the amount of RELP's Proportionate Share of $1,000,000, although it shall not
be required to pay the Liquidated Damages Amount, which payment of the RELP
Expenses shall be the RELP's sole remedy for termination of the Merger Agreement
in such circumstances.
53
<PAGE> 74
If the Merger Agreement is terminated because of a breach of
representations and warranties or breach of covenants, the non-terminating party
shall, provided that the terminating party was not in material breach of its
obligations at the time of such termination, pay the terminating party all
Expenses, up to a maximum amount equal to the amount of the RELP's Proportionate
Share of $1,000,000, incurred by it and the non-terminating party shall remain
liable to the terminating party for its breach.
If either party terminates the Merger Agreement during the Due Diligence
Period other than for a due diligence related reason, the non-terminating party
shall be entitled to receive the Proportionate Share of the Liquidated Damages
Amount and the Proportionate Share of the Expenses.
EXTENSION; WAIVER
At any time prior to the Effective Time, either party, by action taken by
its Trust Board or General Partner, as applicable, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto; (ii) waive any inaccuracies in the
representations and warranties made to such party contained in the Merger
Agreement or in any document delivered pursuant hereto; and (iii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
PROPOSED AMENDMENTS TO PARTNERSHIP AGREEMENTS
The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger. The
Partnership Agreements of the RELPS do not explicitly provide that the RELPS can
merge with and into another entity. The General Partners are proposing to amend
the Partnership Agreements to empower and expressly permit each General Partner,
for the benefit and on behalf of each respective RELP, to consummate the Merger.
Also, the Partnership Agreements each place certain prohibitions on the General
Partners from entering into various agreements, contracts or arrangements for
and on behalf of the RELPS with the General Partners or their Affiliates. As
discussed herein, Realco is an Affiliate of both the General Partners and the
Trust. See "Conflicts of Interest." Consequently, the Merger Agreement cannot be
effected unless and until the proposed amendments are adopted which approve the
Merger whether or not the Trust would be regarded as an Affiliate of the General
Partners.
Accordingly, for each of the RELPS, the Limited Partners are being asked to
consider and vote upon proposed amendments which authorize the following: (i)
the Merger of each RELP with and into the Trust, whether or not the Trust would
be regarded as an Affiliate of the General Partners; and (ii) all understandings
between the RELPS and the General Partners contemplated by this Joint Proxy
Statement/Prospectus, irrespective of any provisions in the Partnership
Agreements which might otherwise prohibit such transactions.
In addition to the proposed amendments outlined above relating the Merger,
the General Partner of RELP II is proposing an amendment to the Partnership
Agreement of RELP II authorizing the sale of RELP II's interest in the joint
venture which owns the Sequoia Plaza I Building to Realco, or an Affiliate of
Realco, notwithstanding the fact that Realco is an Affiliate of the General
Partner. See "Supplement to Prospectus" relating to RELP II. Also, in addition
to the proposed amendments outlined above relating to the Merger, the General
Partner of RELP III is proposing an amendment to the Partnership Agreement of
RELP III authorizing the sale of the Curlew Crossing property by RELP III to
Realco, notwithstanding the fact that Realco is an Affiliate of the General
Partners. See "Supplement to Prospectus" relating to RELP III.
Limited Partners voting in favor of the Merger will be deemed to have voted
in favor of each of these proposed amendments. Since a majority vote of the
Limited Partners is required to approve the proposed amendments, a majority vote
is required to approve the Merger. Similarly, the amendments will not be
effective as to each RELP that does not participate in the Merger. In accordance
with the terms of the Partnership Agreements of RELP II, RELP III and RELP IV,
Units held by the General Partner and its Affiliates in each respective RELP
will not be entitled to vote at the RELP Special Meeting. However, the Units
held by the RELP I General Partner and its Affiliates in RELP I are entitled to
vote at the RELP
54
<PAGE> 75
Special Meeting and 6,039 such Units (representing 11% of the outstanding RELP I
Units) will be voted to approve the proposed amendments, and the Merger
Agreement.
THE MERGER EXPENSES
If the Merger is approved by each RELP's Limited Partners, all transaction
costs of the Merger shall be paid by the Trust. If three or more of the four
RELPS do not approve the Merger, Realco must reimburse the Trust for the Trust's
expenses relating to the proposed Merger up to $250,000. If the RELPS approve
the Merger, but the shareholders of the Trust do not approve the Merger, and if
Realco voted its Shares in favor of the Merger, the Trust will reimburse each
RELP for all expenses it incurred in connection with the proposed Merger. Any
expenses to be reimbursed shall include, but not be limited to, costs of
fairness opinions, property appraisals, engineering and environmental reports,
title policies, accounting fees, legal fees, printing and solicitation expenses.
Each RELP will bear the costs of preparing its initial fairness opinion, with
later reimbursement by the Trust in the event the Merger is approved by the
Limited Partners. If the Limited Partners of a RELP fail to approve the proposed
Merger, then Realco will reimburse the Trust for the RELP's expenses (to the
extent paid by the Trust) or reimburse the RELP as follows: the actual cost of
such RELP's fairness opinion, legal fees up to $80,000, and the actual cost or
the Proportionate Share (if the actual cost is not separately determined), of
RELP's accounting fees, engineering and environmental reports, printing and
solicitation expenses.
ANTICIPATED ACCOUNTING TREATMENT
The Trust will account for the Merger as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The fair market value of the
consideration given by the Trust in the Merger and the market value of
liabilities assumed will be used as the basis of the purchase price. The assets
and liabilities of the Participating RELPS will be revalued to their respective
fair market values at the Effective Time of the Merger. The financial statements
of the Trust will reflect the combined operations of the Trust and the
Participating RELPS from the Effective Time of the Merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion summarizes those United States federal income tax
consequences that materially affect Limited Partners participating in the
Merger. The discussion is general in nature and does not discuss all aspects of
federal income tax law that may be relevant to a particular Limited Partner
based on such Limited Partner's tax situation. Specifically, this discussion
does not address state, local or foreign tax consequences to any Limited Partner
and the subsequent ownership and disposition of the Shares. ACCORDINGLY, THIS
DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND EACH
LIMITED PARTNER IS URGED TO CONSULT HIS OWN TAX ADVISORS WITH SPECIFIC REFERENCE
TO ITS OWN TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL
AND OTHER TAX LAWS.
Tax Treatment of the Merger for Participating RELPS and Taxable Limited
Partners
Overview. For RELPS electing to participate in the Merger, the Merger will
be structured as a merger of the Participating RELPS into the Trust. The Merger
should be treated as a taxable acquisition of RELP assets by the Trust in
exchange for Shares and a subsequent distribution of such Shares by the RELPS to
the Limited Partners.
Tax Consequences of Acquisition. In the Merger, RELP assets should be
deemed to be transferred to the Trust in return for Shares. Such deemed transfer
should result in recognition of gain or loss by each RELP and, therefore, should
result in recognition of gain or loss by the Limited Partners (other than
certain tax-exempt Limited Partners who have not financed their acquisition of
Units). See "-- Consequences of Merger on Tax-Exempt Limited Partners" below.
The overall amount of gain or loss recognition by a RELP will be the difference
between the fair market value of the Shares deemed to be received by the RELP at
the
55
<PAGE> 76
Effective Time of the Merger (plus any RELP liabilities assumed by the Trust in
connection with the Merger) and the adjusted tax basis of the RELP assets
exchanged therefor.
Allocation of Gain or Loss Among Limited Partners. The amount of gain or
loss recognized by the various RELPS in the year of the Merger will be allocated
among their respective Limited Partners in accordance with the terms of their
respective Partnership Agreements as amended as of the date of Merger.
Generally, gain or loss arising from the deemed sale of RELP assets will be
shared by each Limited Partner based upon the relative number of Shares
distributed to each Limited Partner in the RELP. A pro rata allocation of such
gain or loss may result in Partner capital accounts not reflective of their
liquidating value.
Characterization of Gain or Loss. In general, gains or losses recognized
with respect to the transfer of each of the RELP properties in the Merger should
be treated as gains or losses, respectively, from the sale of "Section 1231"
assets (i.e., real property and depreciable assets used in a trade or business
and held for more than one year). Gains or losses from the sale of Section 1231
assets of any RELP would be combined with any other Section 1231 gains and
losses recognized by a Limited Partner in that year. If the result is a net
loss, such loss will be characterized as an ordinary loss. If the result is a
net gain, such gain will be characterized as a capital gain; provided, however,
that such gain will be treated as ordinary income to the extent of the Limited
Partner's "non-recaptured" Section 1231 losses. For these purposes,
"non-recaptured" Section 1231 losses means a Limited Partner's aggregate Section
1231 losses for the five most recent prior years that have not previously been
recaptured. Although the Trust does not anticipate any of its assets being
considered inventory for federal income tax purposes, to the extent that any
such assets were determined to be inventory, gain resulting from the deemed sale
of RELP assets would result in ordinary income to the Limited Partners.
Passive Activity Losses. For purposes of the passive activity loss
limitation rules of Section 469 of the Code, gains or losses recognized from the
transfers of the RELPS' properties generally will be treated as passive activity
income or loss. In general, a taxpayer who disposes of his entire interest in a
passive activity during a taxable year may avoid the passive activity loss
limitations on the excess of passive losses from such activity (including such
activity's suspended passive losses from prior periods and any loss recognized
on the disposition) over passive income or gains in the year of disposition from
all of the taxpayer's activities. For this provision to apply, however, the
taxpayer must dispose of its entire interest in the passive activity to an
unrelated taxpayer. Although each Limited Partner should be treated as having
disposed of its entire interest in its respective RELP, because a Limited
Partner receiving Shares in the Trust has a continuing indirect interest in the
RELP's activities following the Merger (through its ownership of Shares), it is
uncertain whether the Merger will result in a disposition of a Limited Partner's
entire interest in the passive activity of a RELP. Furthermore, if the Trust is
treated as a related party to a Limited Partner receiving Shares, the Limited
Partner will be precluded from applying this provision to avoid the passive
activity loss limitations.
Nonrecognition Transfers. A RELP under certain unanticipated circumstances
may not be entitled to recognize losses realized with respect to assets
transferred by such RELP in the Merger. Under Section 267(a) of the Code, a loss
may not be recognized in connection with a sale or exchange between related
parties even though the loss is realized for tax purposes. A RELP could be
treated as a related party to the Trust if the Limited Partners of such RELP own
more than 50% of the Shares after the Merger. In addition, if an individual (as
opposed to a corporation or trust) Limited Partner owns interests in more than
one RELP and if those RELPS collectively receive more than 50% of the Shares in
the Merger, such Limited Partner may not be entitled to deduct his share of any
losses realized by those RELPS in the Merger. If Section 267(a) of the Code were
to apply, any disallowed loss generally would be available to the Trust to
offset gains with respect to the RELP properties if and when such RELP
properties are ultimately disposed of by the Trust at a gain. A Limited
Partner's basis in his Shares in the Trust may be reduced by losses disallowed
under Section 267(a) of the Code in the same manner as recognized losses. The
Trust's basis in the properties acquired in the Merger, however, is not affected
by the application of Section 267(a) of the Code.
Termination of RELPS. For federal income tax purposes, upon the Effective
Time of the Merger and the receipt of Shares in the Merger by the Limited
Partners of a RELP, such RELP will be treated as if it liquidated and
distributed to its Limited Partners the Shares received in the Merger. The
taxable year of each
56
<PAGE> 77
such RELP will end at such time. Assuming the closing date occurs by December
31, 1997, each Limited Partner in a Participating RELP must report, in his
taxable year that includes the Merger, his share of all income, gain, loss,
deduction and credit for such RELP for the fiscal period ending on the date of
the Merger (including his allocable share of the gain or loss resulting from the
Merger described above). Accordingly, an individual Limited Partner would report
on his tax return for 1997 his share of all income, gain, loss, deduction and
credit for such RELP including any gain or loss from the Merger. A Limited
Partner whose taxable year differs from that of the RELP's could have "bunching"
of income from the RELP and the Trust because of the short taxable year of the
RELP. However, a Limited Partner whose taxable year is the calendar year will
not experience any "bunching" of income.
Consequences of Merger on Tax-Exempt Limited Partners. Based on the RELPS'
representations that RELP assets are held by the RELPS for trade or business
purposes and not for resale, the Merger should not result in recognition of
unrelated business taxable income by a tax-exempt Limited Partner that does not
hold Units in the RELP as a "dealer," did not acquire such Units with debt
financed proceeds, or is not an organization described in Code Section 501(c)(7)
(social clubs), 501(c)(9) (voluntary employee beneficiary associations),
501(c)(17) (supplementary unemployment benefit trusts), or 501(c)(20) (qualified
group legal services plans).
Taxable Distribution of Shares. Section 731(c) of the Code provides that
the distribution by a partnership of marketable securities shall be treated in
the same manner as a cash distribution, and thus, the Limited Partners of each
RELP should recognize gain to the extent that the fair value of the marketable
securities received in the deemed distribution of Shares exceed their adjusted
basis in the partnership. However, the allocation of gain to the Limited
Partners of each RELP described in "Allocation of Gain or Loss Among Limited
Partners," above, should minimize the amount of gain recognized by such Partners
upon the subsequent deemed distribution of Shares pursuant to the Merger. If the
fair market value of the Shares received by a Limited Partner exceeds the
Limited Partner's adjusted basis in its Units, the gain equal to such excess
recognized by the Limited Partners should be long-term capital gain as long as
the Limited Partner holds its Units as a capital asset and has held such Units
for at least one year. In the event that a Limited Partner's basis in its Units
exceeds the fair market value of the Shares received by the Limited Partner,
such Limited Partner should recognize a capital loss (as long as such Limited
Partner holds its RELP Units as a capital asset.)
Taxation of the Trust. The Trust currently has in effect an election to be
taxed as a REIT under Sections 856 through 860 of the Code. The Trust believes
that it has, since its inception, been organized and operated in such a manner
so as to qualify for taxation as a REIT under the Code. The Trust intends to
continue to operate in a manner so as to qualify as a REIT following the
Effective Time of the Merger, but no assurance can be given that the Trust will
qualify or remain qualified as a REIT. As a result of the Merger, each RELP's
separate existence will cease as of the Effective Time of the Merger.
Accordingly, the following discussion summarizes only the taxation of the Trust.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth certain
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, all of which
are subject to change prospectively or retroactively.
So long as the Trust continues to qualify for taxation as a REIT, it
generally will not be subject to federal corporate income tax on its net income
that is distributed currently to its shareholders. Such treatment substantially
eliminates the "double taxation" (i.e., taxation at both the corporate and
shareholder levels) that generally results from investment in a corporation.
However, the Trust will be subject to federal income tax in the following
circumstances. First, the Trust will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Trust may be subject to the
"alternative minimum tax" on its items of tax preference, if any. Third, if the
Trust has (i) net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying income from foreclosure
57
<PAGE> 78
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Trust has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property (other than
foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Trust should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), and nonetheless has maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on the net income attributable to the greater of the amount by which it
fails the 75% or 95% gross income test. Sixth, if the Trust should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, it
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Trust acquires any asset
from a C corporation (i.e., a corporation generally subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Trust's hands is determined by reference to the basis of the asset (or any other
asset) in the hands of the C corporation and the Trust recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by the Trust, then to the extent of such asset's
"built-in-gain" (i.e., the excess of the fair market value of such asset at the
time of acquisition by the Trust over the adjusted basis in such asset at such
time), such gain will be subject to tax at the highest regular corporate rate
applicable. The results described above with respect to the recognition of
"built-in-gain" assume that the Trust will timely make an election pursuant to
IRS Notice 88-19 following any such acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year which has not been revoked or terminated) and satisfies
all relevant filing and other administrative requirements established by the
Service that must be met in order to elect and maintain REIT status; (viii) that
uses a calendar year for federal income tax purposes and complies with the
record keeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (i) to
(iv), inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. For
purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is treated as an individual. A trust that is a qualified trust under
Code section 401(a), however, generally is not considered an individual and
beneficiaries of such a trust are treated as holding shares of a REIT in
proportion to their actuarial interests in the trust for purposes of the 5/50
Rule.
The Trust's Declaration of Trust contains restrictions regarding the
transfer of Shares that are intended to assist the Trust in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above.
The Trust currently has wholly-owned corporate subsidiaries (the "Corporate
Subsidiaries"). The Trust may form or acquire additional Corporate Subsidiaries
in the future. Code section 856(i) provides that a corporation that is a
"qualified REIT subsidiary" shall not be treated as a separate corporation, and
all assets, liabilities and items of income, deduction and credit of a
"qualified REIT subsidiary" shall be treated as assets, liabilities and items of
income, deduction and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at all
times during the period such
58
<PAGE> 79
corporation was in existence. In applying the income and asset tests described
below, any Corporate Subsidiaries of the Trust that are "qualified REIT
subsidiaries" will be ignored, and all assets, liabilities and items of income,
deduction and credit of such Corporate Subsidiaries will be treated as assets,
liabilities and items of income, deduction and credit of the Trust. Because each
of the current Corporate Subsidiaries will continue to be a "qualified REIT
subsidiary" of the Trust after the Merger, no such Corporate Subsidiary will be
subject to federal corporate income taxation, although it may be subject to
state and local taxation.
Income Tests. In order for the Trust to qualify and maintain its
qualification as a REIT, three requirements relating to gross income must be
satisfied annually. First, at least 75% of its gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property or temporary investments, and from dividends, other types of interest
and gain from the sale or disposition of stock or securities, or from any
combination of the foregoing. Third, not more than 30% of its gross income
(including gross income from prohibited transactions) for each taxable year may
be gain from the sale or other disposition of (i) stock or securities held for
less than one year, (ii) dealer property that is not foreclosure property and
(iii) certain real property held for less than four years (other than from
involuntary conversions and sales of foreclosure property).
The rent received by the Trust from its tenants ("Rent") will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code provides
that rents received from a tenant of the Trust will not qualify as "rents from
real property" in satisfying the gross income tests if the Trust, or a direct or
indirect owner of 10% or more of the Trust, directly or constructively owns 10%
or more of such tenant (a "Related Party Tenant"). Third, if rent attributable
to personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for the Rent to qualify as "rents from real property," the
Trust generally must not operate or manage its properties or furnish or render
services to the tenants of such properties, other than through an "independent
contractor" who is adequately compensated and from whom the Trust derives no
revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Trust are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant."
If any portion of the Rent does not qualify as "rents from real property"
because the Rent attributable to personal property leased in connection with any
lease of real property exceeds 15% of the total Rent received under the lease
for a taxable year, the portion of the Rent that is attributable to personal
property will not be qualifying income for purposes of either the 75% or 95%
gross income test. Thus, if the Rent attributable to personal property, plus any
other income received by the Trust during a taxable year that is not qualifying
income for purposes of the 95% gross income test, exceeds 5% of its gross income
during such year, the Trust likely would lose its REIT status. If, however, any
portion of the Rent received under a lease does not qualify as "rents from real
property" because either (i) the Rent is considered based on the income or
profits of any person or (ii) the tenant is a Related Party Tenant, none of the
Rent received by the Trust under such lease would qualify as "rents from real
property." In that case, if the Rent received by the Trust under such lease,
plus any other income received by it during the taxable year that is not
qualifying income for purposes of the 95% gross income test, exceeds 5% of its
gross income for such year, the Trust likely would lose its REIT status.
Finally, if any portion of the Rent does not qualify as "rents from real
property" because the Trust furnishes noncustomary services with respect to a
property other than through a qualifying independent contractor, none of the
Rent received by it with respect to the such property would qualify as "rents
from real property." In that case, if the Rent received by the Trust with
respect to such property, plus any other income
59
<PAGE> 80
received by it during the taxable year that is not qualifying income for
purposes of the 95% gross income test, exceeds 5% of its gross income for such
year, the Trust likely would lose its REIT status.
If the Trust fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the failure to meet such tests is due
to reasonable cause and not due to willful neglect, the Trust attaches a
schedule of the sources of its income to its return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances the Trust would be
entitled to the benefit of those relief provisions. As discussed above in
"Taxation of the Trust" even if those relief provisions apply, a 100% tax would
be imposed on the net income attributable to the greater of the amount by which
the Trust fails the 75% and 95% gross income tests. No such relief is available
for the failure to satisfy the 30% income test.
Asset Tests. The Trust, at the close of each quarter of each taxable year,
also must satisfy two tests relating to the nature of its assets. First, at
least 75% of the value of its total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets" or, in cases where it raises new capital through stock or long-term (at
least five-year) debt offerings, temporary investments in stock or debt
instruments during the one-year period following its receipt of such capital.
The term "real estate assets" includes interests in real property, interests in
mortgages on real property to the extent the principal balance of a mortgage
does not exceed the value of the associated real property and shares of other
REITs. For purposes of the 75% asset test, the term "interest in real property"
includes an interest in land and improvements thereon, such as buildings or
other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of real property and an
option to acquire real property (or a leasehold of real property). Second, of
the investments not included in the 75% asset class, the value of any one
issuer's securities owned by the Trust may not exceed 5% of the value of the
Trust's total assets and the Trust may not own more than 10% of any one issuer's
outstanding voting securities other than any qualified REIT subsidiary.
If the Trust should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of its assets and the asset tests
either did not exist immediately after the acquisition of any particular asset
or was not wholly or partly caused by such an acquisition (i.e., the discrepancy
arose from changes in the market values of its assets). If the condition
described in clause (ii) of the preceding sentence were not satisfied, the Trust
still could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose.
Distribution Requirements. The Trust, in order to qualify as a REIT, is
required to distribute with respect to each taxable year dividends (other than
capital gain dividends) to its shareholders in an aggregate amount at least
equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and its net capital gain) and (B) 95% of
the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of non-cash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Trust timely files its federal income tax return for such year and if
paid on or before the first regular dividend payment date after such
declaration. To the extent that the Trust does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Furthermore, if the Trust should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, it would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed.
Under certain circumstances, the Trust may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in its deduction for
dividends paid for the earlier year. Although the Trust may be able to avoid
being taxed on amounts distributed as deficiency dividends, it will be required
to pay to the Service interest based upon the amount of any deduction taken for
deficiency dividends.
60
<PAGE> 81
Recordkeeping Requirements. Pursuant to applicable Treasury Regulations, in
order to be able to elect to be taxed as a REIT, the Trust must maintain certain
records and request on an annual basis certain information from its shareholders
designed to disclose the actual ownership of its outstanding shares.
Failure to Qualify
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, it will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to shareholders in any year in which the Trust fails to
qualify will not be deductible nor will they be required to be made. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Trust also will be disqualified from taxation as a REIT for the
four taxable years following the year during which it ceased to qualify as a
REIT. It is not possible to predict whether in all circumstances the Trust would
be entitled to such statutory relief.
Taxation of Taxable U.S. Shareholders
As long as the Trust qualifies as a REIT, distributions made to taxable
U.S. Shareholders (as hereinafter defined) out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by such taxable U.S. Shareholders as ordinary income and will
not be eligible for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. Shareholder" means a holder of
Shares that for United States federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed the payor's actual net
capital gain for the taxable year) without regard to the period for which the
U.S. Shareholder has held his shares. However, corporate U.S. Shareholders may
be required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a U.S. Shareholder to the extent that they do not exceed
the adjusted basis of the U.S. Shareholder's Shares, but rather will reduce the
adjusted basis of such Shares. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
U.S. Shareholder's Shares, such distributions will be included in income as
long-term capital gain (or short-term capital gain if such shares have been held
for one year or less), assuming that such Shares are capital assets in the hands
of the U.S. Shareholder. In addition, any distribution declared by the Trust in
October, November or December of any year and payable to a U.S. Shareholder of
record on a specified date in any such month shall be treated as both paid by
the payor and received by the U.S. Shareholder on December 31 of such year,
provided that the distribution is actually paid by the payor during January of
the following calendar year.
U.S. Shareholders may not include in their individual income tax returns
any net operating losses or capital losses of the Trust. Instead, such losses
would be carried over by the Trust for potential offset against its future
income (subject to certain limitations). Taxable distributions from the Trust
and gain from the disposition of Shares will not be treated as passive activity
income and, therefore, U.S. Shareholders generally will not be able to apply any
"passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Trust generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of the Shares (and distributions treated as such),
however, will be treated as investment income only if the U.S. Shareholder so
elects, in which case such capital gains will be taxed at ordinary income rates.
The Trust will notify shareholders after the close of the Trust's taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
61
<PAGE> 82
Taxation of U.S. Shareholders on the Disposition of Shares
In general, any gain or loss realized upon a taxable disposition of Shares
by a U.S. Shareholder who is not a dealer in securities will be treated as
long-term capital gain or loss if the Shares have been held for more than one
year and otherwise as short-term capital gain or loss. However, any loss upon a
sale or exchange by a U.S. Shareholder who has held such Shares for six months
or less (after applying certain holding period rules), will be treated as a
longterm capital loss to the extent of distributions from the Trust required to
be treated by such U.S. Shareholder as longterm capital gain. All or a portion
of any loss realized upon a taxable disposition of shares of Shares may be
disallowed if other Shares are purchased within 30 days before or after the
disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on net capital gains applicable to individuals is 28%. Thus,
the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Information Reporting Requirements and Backup Withholding
The Trust will report to its U.S. Shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a U.S. Shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number to the Trust, certifies as to no loss of
exemption from backup withholding and otherwise complies with the applicable
requirements of the backup withholding rules. A U.S. Shareholder who does not
provide the Trust with his correct taxpayer identification number also may be
subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the U.S. Shareholder's income tax
liability. In addition, the Trust may be required to withhold a portion of
capital gain distributions to any U.S. Shareholders who fail to certify their
nonforeign status to the Trust. The Service issued proposed regulations in April
1996 regarding the backup withholding rules as applied to Non-U.S. Shareholders
(as hereinafter defined). Those proposed regulations would alter the current
system of backup withholding compliance. See " -- Taxation of Non-U.S.
Shareholders" below.
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Trust to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of Shares with debt, a portion of its
income from distributions on such shares will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17) and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Trust as UBTI. In addition, in certain circumstances, a
pension trust that owns more than 10% of the Shares of the Trust is required to
treat a percentage of the dividends on its Shares as UBTI
62
<PAGE> 83
(the "UBTI Percentage"). The UBTI Percentage is the gross income derived by the
Trust from an unrelated trade or business (determined as if the Trust were a
pension trust) divided by the gross income of the Trust for the year in which
the dividends are paid. The UBTI rule applies to a pension trust holding more
than 10% of the Shares only if (i) the UBTI Percentage is at least 5%; (ii) the
Trust qualifies as a REIT by reason of the modification of the 5/50 Rule that
allows the beneficiaries of the pension trust to be treated as holding shares of
the Trust in proportion to their actuarial interests in the pension trust; and
(iii) the Trust is a "pension" held REIT" (i.e., either (A) one pension trust
owns more than 25% of the value of the Shares or (B) a group of pension trusts
individually holding more than 10% of the value of the Trust's shares
collectively owns more than 50% of the value of the Trust's shares).
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
holders of Shares (collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to provide more than a brief summary of such rules.
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges of United States real property interests and are not
designated by the payor as capital gains dividends will be treated as dividends
of ordinary income to the extent that they are made out of the payor's current
or accumulated earnings and profits. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in Shares is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a United States trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. Shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a corporate Non-U.S.
Shareholder). The Trust expects to withhold United States income tax at the rate
of 30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Trust or (ii) the
Non-U.S. Shareholder files an IRS Form 4224 with the Trust claiming that the
distribution is effectively connected income. The Service issued proposed
regulations in April 1996 that would modify the manner in which the Trust
complies with the withholding requirements.
Distributions in excess of current and accumulated earnings and profits of
the Trust will not be taxable to a Non-U.S. Shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Shares but
rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a Non-U.S. Shareholder's Shares, such distributions will
give rise to tax liability if the Non-U.S. Shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his Shares as
described below. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of the
payor's current and accumulated earnings and profits.
In August 1996, the President signed into law the Small Business Job
Protection Act of 1996, which requires the Trust to withhold 10% of any
distribution in excess of its current and accumulated earnings and profits. That
statute is effective for distributions made after August 20, 1996. Consequently,
to the extent that the Trust otherwise would not have withheld tax at a rate
greater than 10% on any distribution (or portion thereof), such distribution (or
portion thereof) will be subject to withholding at a rate of 10%.
63
<PAGE> 84
For any year in which the Trust qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges of U.S. real property interests
will be taxed to a Non-U.S. Shareholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of United States real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a United States business. Non-U.S. Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S. Shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief or exemption. The payor is
required to withhold 35% of any distribution that is designated by it as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Shares
generally will not be taxed under FIRPTA if the Trust is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Trust is currently a
"domestically-controlled REIT" and, therefore, the sale of Shares will not be
subject to taxation under FIRPTA. However, no assurance can be given that the
Trust will continue to be a "domestically-controlled REIT." Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i)
investment in Shares is effectively connected with the Non-U.S. Shareholder's
United States trade or business, in which case the Non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with respect to such gain, or
(ii) the Non-U.S. Shareholder is a nonresident alien individual who was present
in the United States for 183 days or more during the taxable year and certain
other conditions apply, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the gain on the sale
of Shares were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder
would be subject to the same treatment as U.S. Shareholders with respect to such
gain (subject to applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals, and the possible
application of the 30% branch profits tax in the case of corporate Non-U.S.
Shareholders).
Other Tax Consequences. The Trust, the Corporate Subsidiaries or the
Trust's shareholders may be subject to state or local taxation in various state
or local jurisdictions, including those in which it or they own property,
transact business or reside. The state and local tax treatment of the Trust and
its shareholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, LIMITED PARTNERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
THE TRUST.
EACH LIMITED PARTNER IS URGED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE MERGER, THE ACQUISITION, OWNERSHIP AND
SALE OF THE SHARES AND OF THE TRUST'S ELECTION TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE MERGER,
SUCH ACQUISITION, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
RESALES OF THE TRUST'S SHARES
The Trust's Shares issuable to holders of Units in Participating RELPS upon
consummation of the Merger have been registered under the Securities Act, and
will be transferrable freely and without restrictions by those holders of Units
in Participating RELPS who receive such Shares following consummation of the
Merger and who are not deemed to be "affiliates" (as defined under the
Securities Act, and generally including holders of 10% or more of each RELP) of
the Trust or each RELP. This Joint Proxy Statement/Prospectus does not cover any
resales of shares received by affiliates of any RELP. Each of the executive
officers of the Trust, and each officer and director of the General Partners and
Realco have signed 90-day lock-up agreements.
64
<PAGE> 85
THE TRUST MANAGERS AND THE GENERAL PARTNERS EACH UNANIMOUSLY RECOMMEND A
VOTE FOR THE MERGER AGREEMENT AND THE ISSUANCE OF SHARES THEREUNDER.
DISSENTERS' RIGHTS
None of the Limited Partners are entitled to statutory dissenters' or
appraisal rights in connection with the Merger under applicable state law.
Further, none of the Partnership Agreements provide Limited Partners with
dissenters' or appraisal rights in connection with the Merger. However, the
Trust has granted appraisal rights to Limited Partners who believe that the
applicable Exchange Ratio does not provide such Limited Partners a number of
Shares equal to the fair market value of their Units. Limited Partners who
follow the procedure outlined below and exercise appraisal rights are only
entitled to receive Shares for their Units. The Trust is not offering cash or
any other consideration other than Shares for those Limited Partners who
exercise their appraisal rights.
If the Merger is completed, Limited Partners who object to the Merger and
who have fully complied with the procedures outlined herein may have the right
to require the Trust to issue them the number of Shares equal to the value of
their Units as appraised by an independent appraiser unaffiliated with the
General Partners (an "Independent Appraiser"). Units that are outstanding
immediately prior to the Effective Time and which are held by Limited Partners
who (i) do not vote such Units in favor of the Merger; and (ii) have delivered
to the Trust a written demand for appraisal of such Units prior to the RELP
Special Meeting, in the manner provided herein (the "Dissenting Units"); and
(iii) have continuously held such Units from the date of the written demand for
appraisal through the Effective Time, shall not be exchanged into or represent
the right to receive the number of Shares as determined according to the
applicable Exchange Ratio (the "Merger Consideration"). Instead, the holders
thereof shall be entitled to the number of Shares equal to the appraised value
of such Dissenting Units in accordance with these provisions. If, however, any
holder of Dissenting Units (i) shall subsequently deliver a written withdrawal
of such holder's demand for appraisal of such Dissenting Units within 60 days
after the Effective Time (or thereafter, with the written approval of the
Trust); or (ii) if any holder fails to establish such holders' entitlement to
appraisal rights as provided herein; or (iii) if neither any holder of
Dissenting Units nor the Trust has filed a petition with the applicable court
demanding a determination of the value of all Dissenting Units within the time
provided below, such Limited Partner or Limited Partners shall forfeit the right
to appraisal of such Dissenting Units, and such Dissenting Units may thereupon
be deemed to have been converted into the right to receive, and to have become
exchangeable for, as of the Effective Time, the Merger Consideration. If no
instructions are indicated on proxies received by the RELPS, such proxies will
be voted for the proposal to approve and adopt the Merger Agreement at the RELP
Special Meeting. Those Limited Partners who return their proxies without
instructions, resulting in a vote for the approval and adoption of the Merger
Agreement, will therefore not be entitled to appraisal rights.
FAILURE TO TAKE ANY NECESSARY STEPS WILL RESULT IN A TERMINATION OR WAIVER
OF THE RIGHTS OF THE LIMITED PARTNERS GRANTED BY THE TRUST. A HOLDER OF A UNIT
THAT IS HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A TRUSTEE OR
NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE REQUIREMENTS
SET FORTH HEREIN IN A TIMELY MANNER IF SUCH PERSON ELECTS TO DEMAND APPRAISAL OF
SUCH UNITS.
Any Limited Partner electing to demand the appraisal of such Units must (i)
deliver to the applicable RELP, prior to the RELP Special Meeting, a written
demand for appraisal of such Units; and (ii) not vote in favor of adoption of
the Merger Agreement. A proxy or vote against adoption of the Merger Agreement
does not constitute such a demand. A Limited Partner electing to take such
action must do so by a separate written demand that reasonably informs the RELP
of such Limited Partner's identity and of such holder's intention thereby to
demand the appraisal of such Limited Partner's Units.
Only the Limited Partner of record of Units is entitled to assert appraisal
rights for the Units registered in that holder's name. The demand should be
executed by or for the Limited Partner of record, fully and correctly, as the
Limited Partner's name appears on the applicable RELP's records. If the Unit is
owned of
65
<PAGE> 86
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in that capacity, and if the Unit is
owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be executed by or for all owners. An authorized agent,
including one of two or more joint owners, may execute the demand for appraisal
for a Limited Partner of record; however, the agent must identify the record
owner or owners and expressly disclose the fact that, in executing the demand,
the agent is acting as agent for the Limited Partner or Limited Partners. A
record Limited Partner, such as a broker, who holds Units as nominee for the
beneficial owners may exercise the Limited Partner's right of appraisal with
respect to the Units held for all or less than all of such beneficial owners. In
such case, the written demand should set forth the number of Units covered by
the written demand. Where no number of Units is expressly mentioned, the demand
will be presumed to cover all Units standing in the name of the record owner.
Within 10 days after the Effective Time, the Trust will send notice as to
the effectiveness of the Merger to each person who has satisfied the foregoing
conditions. Thereafter, the Trust shall appoint an Independent Appraiser to
appraise the value of the assets of the applicable RELP as if sold in an orderly
manner in a reasonable time period, plus or minus other balance sheet items, and
less the cost of sale or refinancing and in a manner consistent with the
appropriate industry practice. The value so determined for Dissenting Units
could be more or less than the Merger Consideration to be paid pursuant to the
Merger. Upon final determination of the fair market value of the Dissenting
Units, the holder of the Dissenting Units shall receive the number of Shares
equal to the fair market value of the Dissenting Units (based on the then
current fair market value of the Shares).
If the Trust has not appointed an Independent Appraiser within 120 days
after the Effective Time, any Limited Partner who has satisfied the foregoing
conditions and is otherwise entitled to appraisal rights may file a petition in
the applicable court listed below:
(i) For Limited Partners of RELP I: a California Superior Court;
(ii) For Limited Partners of RELP II: any court of competent
jurisdiction in Dallas County; and
(iii) For Limited Partners of RELP III and RELP IV: the Delaware Court
of Chancery.
Such petition shall demand a determination of the value of the Units of such
Limited Partner by an Independent Appraiser as set forth above. Limited Partners
seeking to exercise appraisal rights should not assume that the Trust will
initiate any negotiations with respect to the "fair value" of such Dissenting
Units. Accordingly, Limited Partners seeking to assert appraisal rights should
regard it as their obligation to initiate all necessary action with respect to
the perfection of their appraisal rights within the time periods prescribed.
Within 120 days after the Effective Time, any Limited Partner who has
complied with the requirements for exercise of appraisal rights, as discussed
above, is entitled, upon written request, to receive from the Trust a statement
setting forth the aggregate number of Units not voted in favor of the Merger and
with respect to which demands for appraisal have been received and the aggregate
number of Limited Partners demanding appraisal. The Trust is required to mail
such statement within 10 days after it receives a written request therefor or
within 10 days after expiration of the period for delivery of demands for
appraisal, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the applicable court will determine which Limited Partners are
entitled to appraisal rights and will appoint an Independent Appraiser to
appraise the Dissenting Units owned by such Limited Partners to determine their
"fair value" exclusive of any element of value arising from the accomplishment
or expectation of the Merger, to be paid upon the amount determined to be the
"fair value." The Independent Appraiser shall appraise the value of the assets
of the RELP as if sold in an orderly manner in a reasonable period of time, plus
or minus other balance sheet items, and less the cost of sale or refinancing and
in a manner consistent with the appropriate industry practice. The value so
determined for Dissenting Units could be more or less than the Merger
Consideration to be paid pursuant to the Merger. Upon final determination of the
fair market value of the Dissenting Units, the holder of the Dissenting Units
shall receive the number of Shares equal to the fair market value of the
Dissenting
66
<PAGE> 87
Units (based on the then current fair market value of the Shares). The costs of
the appraisal proceeding may be determined by the court and imposed upon the
parties as the court deems equitable under the circumstances. Upon application
of a Limited Partner, the court may order all or a portion of the expenses
incurred by any such Limited Partner in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of the
Units entitled to an appraisal.
Any Limited Partner who has duly demanded an appraisal in compliance with
these provisions will not, after the Effective Time, be entitled to vote the
Dissenting Units subject to such demand for any purpose or be entitled to the
payment of distributions on those Dissenting Units (other than those payable or
deemed to be payable to Limited Partners of record as of a date prior to the
Effective Time).
A Limited Partner will fail to perfect, or effectively lose, such Limited
Partner's right to appraisal if no petition for appraisal is filed with the
applicable court set forth above within 120 days after the Effective Time, or if
after the Effective Time such Limited Partner delivers to the Trust a written
withdrawal of such Limited Partner's demand for an appraisal and an acceptance
of the Merger, except that any such attempt to withdraw made more than 60 days
after the Effective Time will require the written approval of the Trust.
In the event an appraisal proceeding is instituted in a timely manner, such
proceeding may not be dismissed as to any Limited Partner who has perfected such
Limited Partner's right of appraisal without the approval of the court.
Any demands, notices, certificates or other documents to be delivered to
the RELPS prior to the Merger may be sent to: Mr. Randal R. Seewald, USAA Real
Estate Company, 8000 Robert F. McDermott Fwy., IH 10 West, Suite 600, San
Antonio, Texas 78230-3884.
67
<PAGE> 88
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA FINANCIAL INFORMATION (MERGER)
The following Pro Forma Condensed Consolidated Balance Sheet (Merger) of
the Trust as of March 31, 1997 has been prepared as if each of the following
transactions had occurred as of March 31, 1997: (i) the issuance of 13,289,867
Shares of the Trust at $2.45 per share in July 1997 (the "Private Placement");
and (ii) the Merger and the Related Transactions. The following Pro Forma
Condensed Consolidated Statements of Operations (Merger) of the Trust for the
year ended December 31, 1996 and the three months ended March 31, 1997 have been
prepared as if each of the following transactions had occurred as of January 1,
1996: (i) the Private Placement; and (ii) the Merger and the Related
Transactions.
The Pro Forma Financial Information (Merger) of the Trust has been prepared
using the purchase method of accounting whereby the assets and liabilities of
the RELPS are adjusted to estimated fair market value, based upon preliminary
estimates, which are subject to change as additional information is obtained.
The allocations of purchase costs are subject to final determination based upon
estimates and other evaluations of fair market value. Therefore, the allocations
reflected in the following Pro Forma Financial Information (Merger) may differ
from the amounts ultimately determined.
The Pro Forma Financial Information (Merger) is presented for informational
purposes only and is not necessarily indicative of the financial position or
results of operations of the Trust that would have occurred if such transactions
had been completed on the dates indicated, nor does it purport to be indicative
of future financial position or results of operations. In the opinion of the
Trust management, all material adjustments necessary to reflect the effect of
these transactions have been made. The Pro Forma Condensed Consolidated
Statement of Operations (Merger) for the three months ended March 31, 1997 is
not necessarily indicative of the results of operations to be expected for the
year ended December 31, 1997.
68
<PAGE> 89
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (MERGER)
AS OF MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
TRUST PRIVATE RELPS RELPS MERGER PRO FORMA
HISTORICAL PLACEMENT HISTORICAL ADJUSTMENTS ADJUSTMENTS TOTAL
---------- --------- ---------- ----------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C> <C> <C>
Real estate, net................. $68,303 $ -- $104,752 $ (7,521)(C) $ 4,592(G) $170,126
Investment in joint venture...... -- -- 2,144 (2,144)(D) -- --
Cash -- unrestricted............. 1,725 30,932 11,524 (10,263)(E) -- 33,918
Cash -- restricted............... 1,138 -- -- -- -- 1,138
Other assets, net................ 3,079 -- 6,474 (1,478)(C) (4,059)(H) 4,016
------- ------- -------- -------- -------- --------
$74,245 $30,932 $124,894 $(21,406) $ 533 $209,198
======= ======= ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' AND PARTNERS' EQUITY
Mortgage notes payable........... $41,710 $ -- $ 16,360 $ -- $ -- $ 58,070
Notes payable to affiliates...... 5,450 -- 33,200 (11,000)(C) 1,550(I) 29,200
Accrued interest payable......... 600 -- -- -- -- 600
Accounts payable, accrued
expenses and other............. 1,866 -- 2,088 (100)(C) -- 3,854
------- ------- -------- -------- -------- --------
49,626 -- 51,648 (11,100) 1,550 91,724
Minority interest in joint
venture........................ -- -- 4,005 -- -- 4,005
Shareholders' and partners'
equity:
Shares of beneficial interest
($0.10 par value)........... 1,000 1,329 -- -- 2,206(J) 4,535
Additional paid-in capital..... 127,056 29,603 -- -- 55,712(J) 212,371
Accumulated distributions...... (58,456) -- -- -- -- (58,456)
Accumulated loss from
operations and extraordinary
gains
(losses).................... (46,441) -- -- -- -- (46,441)
Accumulated net realized gain
on sales of real estate..... 1,460 -- -- -- -- 1,460
Partners' equity............... -- -- 69,241 (10,306)(F) (58,935)(K) --
------- ------- -------- -------- -------- --------
$74,245 $30,932 $124,894 $(21,406) $ 533 $209,198
======= ======= ======== ======== ======== ========
</TABLE>
69
<PAGE> 90
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (MERGER)
AS OF MARCH 31, 1997
(IN THOUSANDS EXCEPT SHARE AND UNIT DATA)
(UNAUDITED)
(A) Represents adjustments to reflect the Private Placement.
(B) Combined historical balance sheets of the RELPS at March 31, 1997 are as
follows (certain reclassifications have been made to conform to the balance
sheet presentation of the Trust):
ASSETS
<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Real estate, net....................... $ 9,822 $ 9,258 $40,077 $45,595 $104,752
Investment in joint venture............ -- 2,144 -- -- 2,144
Cash -- unrestricted................... 1,046 889 7,982 1,607 11,524
Other assets, net...................... 428 310 5,201 535 6,474
------- ------- ------- ------- --------
$11,296 $12,601 $53,260 $47,737 $124,894
======= ======= ======= ======= ========
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable................. $ -- $ -- $ -- $16,360 $ 16,360
Notes payable to affiliates............ -- -- 26,000 7,200 33,200
Accounts payable, accrued expenses and
other................................ 204 215 1,097 572 2,088
------- ------- ------- ------- --------
204 215 27,097 24,132 51,648
Minority interest in joint venture..... -- -- -- 4,005 4,005
Partners' equity....................... 11,092 12,386 26,163 19,600 69,241
------- ------- ------- ------- --------
$11,296 $12,601 $53,260 $47,737 $124,894
======= ======= ======= ======= ========
</TABLE>
(C) Represents adjustments to eliminate the assets and liabilities of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to an
Affiliate in conjunction with the Merger.
(D) Represents adjustments to eliminate joint venture interest in the Sequoia
Plaza I Building (RELP II), which will be sold by the RELP to an Affiliate
in conjunction with the Merger.
(E) Represents adjustments to reflect the distribution of cash to the RELP
partners for the excess of estimated working capital assets over
liabilities at the Effective Time of the Merger, as follows: RELP I --
$903; RELP II -- $680; RELP III -- $7,512; and RELP IV -- $1,168.
(F) Represents adjustments to eliminate partners' equity of (i) $2,144 related
to the joint venture interest in the Sequoia Plaza I Building; (ii) $10,263
related to cash; offset by (iii) $2,101 deficit related to Curlew Crossing
shopping center, all of which will be sold or distributed to the partners
in conjunction with the Merger.
70
<PAGE> 91
(G) Represents adjustments for the purchase method of accounting whereby the
real estate owned by the RELPS is adjusted to estimated fair market value as
follows:
<TABLE>
<CAPTION>
NET BOOK
VALUE FAIR VALUE ADJUSTMENT
-------- ---------- ----------
<S> <C> <C> <C>
RELP I................................................. $ 9,822 $11,597 $ 1,775
RELP II................................................ 9,258 10,376 1,118
RELP III............................................... 32,556 39,980 7,424
RELP IV................................................ 34,944 29,219 (5,725)
------- ------- -------
Total........................................ $86,580 $91,172 $ 4,592
------- ------- -------
</TABLE>
(H) Represents adjustments to record deferred financing and other intangible
costs of the RELPS at their estimated fair market values as follows:
<TABLE>
<S> <C>
RELP I.............................................. $ 366
RELP II............................................. 305
RELP III............................................ 3,196
RELP IV............................................. 192
------
$4,059
------
</TABLE>
(I) Represents adjustment to accrue costs related to the Merger, including
legal and accounting fees, financial advisory fees, printing and other
costs.
(J) Represents the issuance of 22,064,147 Shares of the Trust valued at $57,918
based on a per share price of $2.625, as follows:
<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Exchange ratio....................... 79.52 143.17 82.99 75.68
LP units outstanding................. 54,610 27,141 111,549 60,495
--------- --------- --------- ---------
Trust Shares to be issued............ 4,342,857 3,885,714 9,257,143 4,578,433 22,064,147
========= ========= ========= ========= ==========
Value................................ $ 11,400 $ 10,200 $ 24,300 $ 12,018 $ 57,918
========= ========= ========= ========= ==========
</TABLE>
(K) Represents adjustment to eliminate the partners' equity of the RELPS.
71
<PAGE> 92
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
TRUST RELPS RELPS MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C> <C>
INCOME
Rents and tenant
reimbursements.................. $11,320 $14,448 $(1,264)(C) $ -- $24,504
Equity in earnings of joint
venture......................... -- 144 (144)(D) -- --
Interest income................... 158 886 (886)(E) -- 158
------- ------- ------- ------- -------
11,478 15,478 (2,294) -- 24,662
------- ------- ------- ------- -------
EXPENSES
Property operating expenses....... 4,022 1,594 (400)(C) -- 5,216
Depreciation and amortization..... 2,909 4,402 (320)(C) (2,196)(F) 4,795
Interest on mortgage notes
payable......................... 5,901 4,452 (907)(C) 90(G) 9,536
General and administrative........ 3,378 1,271 -- -- 4,649
Minority interest in consolidated
joint venture................... -- 185 -- -- 185
------- ------- ------- ------- -------
16,210 11,904 (1,627) (2,106) 24,381
------- ------- ------- ------- -------
Income (loss) from operations..... $(4,732) $ 3,574 $ (667) $ 2,106 $ 281(H)
======= ======= ======= ======= =======
Income (loss) from operations per
share........................... $ (0.52) $ 0.01(H)
======= =======
Weighted average number of Shares
outstanding..................... 9,108 44,462
======= =======
</TABLE>
72
<PAGE> 93
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
(A) Certain reclassifications have been made to the historical statements of
operations of the Trust to conform to the pro forma financial information
presentation. In addition, excludes gain on sale of real estate of $177 and
extraordinary gain on extinguishment of debt of $5,810.
(B) Combined historical statements of operations of the RELPS for year ended
December 31, 1996 as follows (certain reclassifications have been made to
conform to the pro forma financial information presentation):
<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME
Rents and tenant reimbursements...... $1,397 $1,306 $7,930 $3,815 $14,448
Equity in earnings of joint
venture............................ -- 144 -- -- 144
Interest income...................... 141 43 592 110 886
------ ------ ------ ------ -------
1,538 1,493 8,522 3,925 15,478
------ ------ ------ ------ -------
EXPENSES
Property operating expenses.......... 247 52 930 365 1,594
Depreciation and amortization........ 616 300 1,614 1,872 4,402
Interest on mortgage notes payable... -- -- 2,336 2,116 4,452
General and administrative........... 319 158 520 274 1,271
Minority interest in consolidated
joint venture...................... -- -- -- 185 185
------ ------ ------ ------ -------
1,182 510 5,400 4,812 11,904
------ ------ ------ ------ -------
Income (loss) from operations........ $ 356 $ 983 $3,122 $ (887) $ 3,574
====== ====== ====== ====== =======
</TABLE>
(C) Represents adjustments to eliminate the results of operations of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to an
Affiliate in conjunction with the Merger.
(D) Represents adjustments to eliminate the equity in earnings of joint venture
(RELP II), which interest in will be sold by the RELP to an Affiliate in
conjunction with the Merger.
(E) Represents adjustment to eliminate interest income as a substantial
majority of cash held by the RELPS will be distributed to the limited
partners in connection with the Merger.
(F) Represents adjustments to reduce the depreciation of real estate resulting
from the recording of the RELPS' real estate assets at fair value.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the buildings of 40 years.
(G) Represents adjustments of (i) $140 for interest expense on additional
borrowings of $1,550 to fund the Merger costs at an interest rate of 9.0%
per annum; offset by (ii) $50 related to the elimination of deferred
financing cost amortization recorded by the RELPS.
73
<PAGE> 94
(H) The Pro Forma Statement of Operations is presented assuming all the RELPS
participate in the Merger. The following table illustrates the impact on
income (loss) from operations, income (loss) from operations per share and
number of Shares of the Trust outstanding assuming any one RELP does not
participate in the Merger.
<TABLE>
<CAPTION>
PRO EXCLUDES EXCLUDES EXCLUDES EXCLUDES
FORMA RELP I RELP II RELP III RELP IV
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations....... $ 281 $ (274) $ (751) $(3,321) $ 317
Income (loss) from operations
per share......................... $ 0.01 $ (0.01) $ (0.02) $ (0.09) $ 0.01
Weighted average number of Shares
outstanding....................... 44,462 40,119 40,576 35,205 39,884
</TABLE>
74
<PAGE> 95
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
TRUST RELPS RELPS MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C> <C>
INCOME
Rents and tenant reimbursements............. $ 2,637 $3,004 $(316)(C) $ -- $ 5,325
Equity in earnings of joint venture......... -- 39 (39)(D) -- --
Interest income............................. 29 141 (141)(E) -- 29
------- ------ ----- ----- -------
2,666 3,184 (496) -- 5,354
------- ------ ----- ----- -------
EXPENSES
Property operating expenses................. 936 1,037 (99)(C) -- 1,874
Depreciation and amortization............... 693 1,214 (78)(C) (633)(F) 1,196
Interest on mortgage notes payable.......... 1,404 1,105 (223)(C) 23(G) 2,309
General and administrative.................. 652 453 -- -- 1,105
Minority interest in consolidated joint
venture................................... -- (54) -- -- (54)
------- ------ ----- ----- -------
3,685 3,755 (400) (610) 6,430
------- ------ ----- ----- -------
Income (loss) from operations............... $(1,019) $ (571) $ (96) $ 610 $(1,076)(H)
======= ====== ===== ===== =======
Income (loss) from operations per share..... ($ 0.10) ($ 0.02)(H)
======= =======
Weighted average number of common shares
outstanding............................... 10,000 45,354
======= =======
</TABLE>
75
<PAGE> 96
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (MERGER)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
(A) Certain reclassifications have been made to the historical statements of
operations of the Trust to conform to the pro forma financial information
presentation. In addition, excludes gain on sale of real estate of $312 and
extraordinary gain on extinguishment of debt of $2,643.
(B) Combined historical statements of operations of the RELPS for the three
months ended March 31, 1997 as follows (certain reclassifications have been
made to conform to the pro forma financial information presentation):
<TABLE>
<CAPTION>
RELP I RELP II RELP III RELP IV COMBINED
------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME
Rents and tenant reimbursements...... $471 $349 $1,178 $1,006 $3,004
Equity in earnings of joint
venture............................ -- 39 -- -- 39
Interest income...................... 13 10 106 12 141
---- ---- ------ ------ ------
484 398 1,284 1,018 3,184
---- ---- ------ ------ ------
EXPENSES
Property operating expenses.......... 128 23 681 205 1,037
Depreciation and amortization........ 157 78 446 533 1,214
Interest on mortgage notes payable... -- -- 578 527 1,105
General and administrative........... 97 42 198 116 453
Minority interest in consolidated
joint venture...................... -- -- -- (54) (54)
---- ---- ------ ------ ------
382 143 1,903 1,327 3,755
---- ---- ------ ------ ------
Income (loss) from operations........ $102 $255 $ (619) $ (309) $ (571)
==== ==== ====== ====== ======
</TABLE>
(C) Represents adjustments to eliminate the results of operations of Curlew
Crossing shopping center (RELP III), which will be sold by the RELP to an
Affiliate in conjunction with the Merger.
(D) Represents adjustments to eliminate the equity in earnings of joint venture
(RELP II), which interest in will be sold by the RELP to an Affiliate in
conjunction with the Merger.
(E) Represents adjustment to eliminate interest income as a substantial
majority of cash held by the RELPS will be distributed to the limited
partners in connection with the Merger.
(F) Represents adjustments to reduce the depreciation of real estate resulting
from the recording of the RELPS' real estate assets at fair value.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the buildings of 40 years.
(G) Represents adjustments of (i) $35 for interest expense on additional
borrowings of $1,550 to fund the Merger costs at an interest rate of 9.0%
per annum; offset by (ii) $12 related to the elimination of deferred
financing cost amortization recorded by the RELPS.
(H) The Pro Forma Statement of Operations is presented assuming all the RELPS
participate in the Merger. The following table illustrates the impact on
income (loss) from operations, income (loss) from operations per share and
number of Shares of the Trust outstanding assuming any one RELP does not
participate in the Merger.
<TABLE>
<CAPTION>
PRO EXCLUDES EXCLUDES EXCLUDES EXCLUDES
FORMA RELP I RELP II RELP III RELP IV
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations............ $(1,076) $(1,253) $(1,347) $ (633) $(1,049)
Income (loss) from operations per
share.................................. $ (0.02) $ (0.03) $ (0.03) $ (0.02) $ (0.03)
Weighted average number of Shares
outstanding............................ 45,354 41,011 41,468 36,097 40,776
</TABLE>
76
<PAGE> 97
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE TRUST
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Trust and accompanying Notes included
elsewhere in this Joint Proxy Statement/Prospectus. The statements contained in
this Joint Proxy Statement/Prospectus that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Actual results may differ materially
from those included in the forward-looking statements. These forward-looking
statements involve risks and uncertainties including, but not limited to,
changes in general economic conditions in the markets that could impact demand
for the Trust's properties and changes in financial markets and interest rates
impacting the Trust's ability to meet its financing needs and obligations.
RESULTS OF OPERATIONS
Comparison of 1996 to 1995
The sale of two properties in late 1996 and the purchase of a property in
August 1995 resulted in a net decrease in 1996 property revenue and net
operating income of $67,000 and $51,000, respectively, when compared to 1995. On
a same property basis, property revenues decreased from $10,209,000 in 1995 to
$10,186,000 in 1996, a decrease of 0.2%, comprised of a 2.9% increase in revenue
related to industrial properties and a 6.2% decrease in revenue at the Trust's
retail property. The decrease in revenue at the Trust's retail property stemmed
principally from lower percentage rents ($115,000) and slower leasing of
vacancies and is partially attributable to the opening of a new regional mall in
Denver during the third quarter of 1996. Overall leased occupancy of the Trust's
portfolio was 94.2% at December 31, 1996 compared to 93.7% at December 31, 1995.
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, Trust administration and
overhead expenses or provision for possible losses on real estate) decreased
from $6,704,000 in 1995 to $6,494,000 in 1996, a decrease of 3.1%. This overall
decrease is comprised of a 0.5% increase related to industrial properties and a
10.7% decrease related to the Trust's retail property. The decrease in the
Trust's retail property is a result of the decrease in revenue explained above.
Same property operating expenses increased by 5.3%, reflecting an increase in
repairs and maintenance expenses and tenant refit costs of $98,000 in 1996. On
the same property basis, loss from operations increased from $4,964,000 in 1995
to $5,351,000 in 1996 (see following explanation).
Loss from operations increased from $4,338,000 in 1995 to $4,732,000 in
1996 as a result of the decrease in net operating income explained above, a
decrease in total interest expense of $584,000 (due to the larger accrual of
default rate interest on the MLI Notes in 1995), the provision of $600,000 for
possible losses on real estate in 1995, an increase in litigation, refinancing
and proxy costs of $568,000 (due to the shareholder litigation in 1996), an
increase in Trust administration and overhead expenses of $406,000 (due to the
accrual of $240,000 in incentive compensation, higher legal fees and increased
Trust Manager compensation in 1996) and a decrease in interest income (due to
higher invested balances in 1995 from the nonpayment of interest to the Trust's
unsecured lender).
During 1996, the Trust sold two industrial properties and recognized a gain
on sale of $177,000, compared to the sale of one property in 1995 resulting in a
loss on sale of $191,000. In 1996, the Trust recognized an extraordinary gain on
extinguishment of debt of $5,810,000, or $0.64 per share, pursuant to settlement
of litigation with The Manufacturers Life Insurance Company ("MLI").
Comparison of 1995 to 1994
Property revenues increased from $11,080,000 in 1994 to $11,410,000 in
1995, resulting from the stabilization in occupancy of the Trust's portfolio and
improving rental rates in selected markets. Property operating expenses
decreased from $3,952,000 in 1994 to $3,851,000 in 1995, primarily due to the
net effect of a sale of a property in February 1995 and the purchase of a
property in August 1995. Property net operating
77
<PAGE> 98
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 Three Months Ended March 31, 1997 to March 31, 1996
The Trust had net income of $1,936,000 for the quarter ended March 31, 1997
compared to a net loss of $1,510,000 for the same quarter in 1996. This change
was primarily related to the extraordinary gain of $2,643,000 realized by the
Trust on extinguishment of debt and the gain on sale of real estate of $312,000
in the first quarter of 1997, a decrease in interest expense of $324,000 (due to
the default rate interest accrued on the MLI notes in 1996 and not incurred in
1997, paydown of debt during 1996 and 1997, and the accrual in 1997 of
approximately $272,000 related to the expected future conversion of debt to
equity), a decrease in litigation and proxy costs of $252,000 (due to the
settlement of litigation matters in 1996), a decrease in net operating income of
$176,000 (due to the sale of two properties in 1996 and the sale of a third
property during the first quarter of 1997), and a decrease in administrative
expenses of $141,000 (due to the accrual of incentive compensation in the first
quarter of 1996).
The overall occupancy of the Trust's portfolio on March 31, 1997 was 91.1%,
compared to 93.9% on March 31, 1996. When comparing the three months ended March
31, 1997 to the same period in 1996 on a same property basis, revenue was up
10.6% and net operating income was up 11.7% for the Trust's industrial
properties whereas revenue was down 11.1% and net operating income was down
20.6% for the Trust's retail property. The decline in the performance of the
Trust's retail property was primarily related to a nonrecurring collection of
approximately $76,000 in percentage rents during the first quarter of 1996 and a
bad debt writeoff of approximately $20,000 in the first quarter of 1997.
Occupancy at the Trust's retail property was 83.6% at March 31, 1997 compared to
84.9% at March 31, 1996. The Trust is currently working toward the repositioning
of the property and its tenants as a means of increasing occupancy.
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
78
<PAGE> 99
of the Trust's property financing in 1996. Interest expense reflects several
items of non-recurring nature, including a decrease in accrued interest of
$2,986,000 related to the settlement of the MLI litigation in 1996, the accrual
of $369,000 of default rate interest which was ultimately forgiven and
approximately $535,000 related to principal which was forgiven in November 1996
and February 1997. In addition, administrative expenses includes $1,548,000 of
litigation, refinancing and proxy costs which relate to special situations and
should not be considered to be recurring expenses. Management believes that, in
the future, cash flow provided by operations will increase due to the
elimination of the non-recurring items described above and the Trust's plans to
attract capital and pursue a growth strategy.
Cash flow provided by investing activities in 1996 was $5,173,000,
representing proceeds from the sale of two properties and amounts expended on
capitalized improvements and leasing commissions. The sale of the two properties
was necessary to raise capital with which to make payments under the Trust's
option to retire certain indebtedness at a discount.
Cash flow used in financing activities in 1996 was $3,199,000. This amount
reflects proceeds from the mortgage financing on nine properties, the payment of
amounts on the option to retire certain indebtedness at a discount, the sale of
Shares to Realco, and the first quarter distribution to shareholders.
Comparison of Three Months Ended March 31, 1997 to March 31, 1996
Net cash used in operating activities was $460,000 for the first quarter of
1997. This is primarily the net result of the operational items discussed above
and a decrease in accounts payable, other liabilities and tenant security
deposits of $507,000 (due principally to the payment of property taxes during
the first quarter), offset by an increase in accrued interest of $263,000.
Included in net cash used in operating activities is approximately $236,000 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 used in operating activities during the first quarter of 1996 was
$28,000. This was generated by the results of operations, a decrease in accounts
payable, other liabilities and tenant security deposits of $508,000 (due
principally to the payment of property taxes during the first quarter) and an
increase in accrued interest of $1,320,000 due to the non-payment of interest on
the Trust's $45.2 million in 8.8% notes payable. Included in net cash used in
operating activities is approximately $488,000 in litigation and proxy costs,
which management believes is of a nonrecurring nature.
Funds from Operations
In March 1995, NAREIT issued its White Paper on FFO which clarified the
treatment of certain items in determining FFO and recommended additional
supplemental disclosures. The Trust has adopted the recommendations of NAREIT
and restated its FFO calculation for prior years. The changes promulgated by
NAREIT eliminate the add back of depreciation and amortization of non-real
estate items, including the amortization of deferred financing costs, in
determining FFO. The revised definition of FFO is net income (loss) computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In addition, NAREIT recommends that
extraordinary items or significant non-recurring items that distort
comparability should not be considered in arriving at FFO. Accordingly, the
Trust does not include the default rate interest accrued on its $45.2 million in
unsecured notes payable in the determination of FFO. Funds Available for
Distribution ("FAD") is also presented as it more accurately portrays the
ability of the Trust to make distributions because it reflects capital
expenditures. The Trust believes FFO and FAD are appropriate measures of
performance relative to other REITs. FFO provides investors with an
understanding of the ability of the Trust to incur and service debt and make
capital expenditures. There can be no assurance that FFO and FAD presented by
the Trust is comparable to similarly titled measures of other REITs. While other
REITs may not always use a similar definition, this information does add
comparability to those which have adopted the NAREIT definitions.
79
<PAGE> 100
FFO and FAD should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of the Trust's operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital improvements or
principal payments on indebtedness.
FFO and FAD are calculated as follows:
<TABLE>
<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>
- ---------------
(a) The breakdown of capitalized improvements and leasing commissions is as
follows for each of the two years ending December 31, 1996:
<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>
80
<PAGE> 101
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Net income (loss)........................................... $ 1,936 $(1,510)
Exclude effects of:
Gain on sale of real estate............................... (312) --
Extraordinary gain on extinguishment of debt.............. (2,643) --
Real estate depreciation and amortization................. 693 700
Additional interest accrual assuming future conversion of
debt to equity......................................... 272 --
Default rate interest accrual............................. -- 327
------- -------
Funds from operations....................................... $ (54) $ (483)
======= =======
Funds from operations....................................... $ (54) $ (483)
Capitalized improvements and leasing commissions............ (176) (194)
Non-cash effect of straight-line rents on FFO............... 44 38
------- -------
Funds available for distribution............................ $ (186) $ (639)
======= =======
</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 $2.45 per share. 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. 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 June 30, 1997, the Trust had $1,253,000 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 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 $2.00 per Share (if converted prior to December 31, 1997) or
$2.25 per Share (if converted between December 31, 1997 and December 31, 2000).
If conversion of this debt were to occur in 1997, Realco would own approximately
21.9% of the outstanding Shares of the Trust (assuming no other issuances of
Shares).
The Trust declared a distribution of $0.04 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
81
<PAGE> 102
approved an increase in the number of authorized Shares. To the extent
allowable, the Trust intends to evaluate future distributions on a quarterly
basis.
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 $430,000 in the six months
ended June 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 June 30, 1997, the Trust had $41,547,061 in mortgage debt outstanding,
all of which is comprised of fixed rate debt with a weighted average interest
rate of 8.61%.
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 2,257,606 Shares from certain shareholders for $2.75
per Share, pending approval of the settlement of certain shareholder litigation,
which the Trust had initiated, alleging that certain significant shareholders of
the Trust had made material misrepresentations in their filings with the
Commission. The $2.75 price per Share was negotiated between the selling
shareholders and Realco without any involvement by the Trust. The majority of
these 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 998,100 Shares from the selling
shareholder not involved in the shareholder litigation. On December 19, 1996,
the Trust sold 924,600 Shares, representing the remainder of its authorized
Shares, to Realco for $2.75 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 2,257,606 Shares, including the
acquisition of 998,100 Shares held by a subsidiary of the Trust in return for
cancellation of the related loan discussed above, resulting in Realco's
ownership of 3,182,206 Shares, or 13.66% of the outstanding Shares of the Trust
as of July 18, 1997.
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 $2.00 per Share
during 1997 and $2.25 per Share thereafter. On February 26, 1997, Realco
acquired the MLI notes for $5,481,152. The MLI notes were then modified to
reduce the outstanding principal balance from $9,419,213 to $7,040,721, to
release all security for the notes, to provide for monthly payments of interest
at 8.8% and to extend the maturity date from March 31, 1997 to December 31,
2000. In addition, Realco has the option to convert the principal amount of the
notes into Shares of the Trust at the conversion rate of $2.00 per Share (if
converted prior to December 31, 1997) or $2.25 per Share (if converted between
December 31, 1997 and December 31, 2000). Subsequent to the modification, the
Trust made a principal payment of $1,591,103, resulting in a current principal
balance of $5,449,618. The modification of this debt resulted in a reduction of
approximately $1,591,000 of the potential $3,969,000 discount remaining under 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
82
<PAGE> 103
approximately $2,643,000 or $0.26 per share in the first quarter of 1997; and
(v) allowed for the possibility of conversion of this obligation into 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 $2.38 per Share
on February 26, 1997 and the $2.00 conversion price, as interest expense between
February 26, 1997 and September 30, 1997. The date of February 26, 1997 is used
to measure market value as this is deemed to be the date of issuance of the
modified notes, which contain the convertibility option. This will result in
additional interest expense of approximately $272,000 in the first quarter of
1997 and approximately $375,000 in each of the second and third quarters of
1997.
The closing sale price of the Trust's Shares on the NYSE on the above dates
was as follows: $2.13 per Share on November 25, 1996, $2.00 per Share on
December 18 and December 19, 1996, $1.88 per Share on December 20, 1996, and
$2.38 per Share on February 26, 1997.
ALLOCATION OF CONSIDERATION
ALLOCATION PRINCIPLES
The Trust is offering to issue in the aggregate up to 22,064,147 Shares,
which will be allocate among the Participating RELPS in accordance with their
Net Asset Values. Pursuant to the Merger Agreement, each Limited Partner of the
Participating RELPS will receive Shares in exchange for Units held as follows:
each Unit in RELP I will be converted into the right to receive 79.52 Shares,
each Unit in RELP II will be converted into the right to receive 143.17 Shares,
each Unit in RELP III will be converted into the right to receive 82.99 Shares
and each Unit in RELP IV will be converted into the right to receive 75.68
Shares. Cash will be issued in lieu of fractional Shares (based on $2.625 per
Share).
The following table has been prepared to show the allocations of Shares
among the RELPS and includes the following: (a) the Net Asset Values assigned to
each of the RELPS; (b) the percentage of the Net Asset Value of each RELP
against the aggregate Net Asset Value of all RELPS; (c) the number of Shares to
be allocable to each of the RELPS based upon its Net Asset Value and the
percentage of the total amount of all such Shares offered by the Trust; (d) the
number of Shares that would be issued by the Trust in exchange for each $500 of
original investment in each of the RELPS.
<TABLE>
<CAPTION>
ALLOCATION OF SHARES
PERCENTAGE OF NUMBER OF SHARES PERCENTAGE OF PER $500 OF ORIGINAL
NET ASSET AGGREGATE NET ALLOCABLE TO THE AGGREGATE INVESTMENT BY
RELP VALUE ASSET VALUE RELP FOR UNITS SHARES LIMITED PARTNERS
---- ----------- ------------- ---------------- ------------- ----------------------
<S> <C> <C> <C> <C> <C>
RELP I............... $11,400,000 19.68% 4,342,857 19.68% 79.52
RELP II.............. 10,200,000 17.61 3,885,714 17.61 143.17
RELP III............. 24,300,000 41.96 9,257,143 41.96 82.99
RELP IV.............. 12,018,387 20.75 4,578,433 20.75 75.68
</TABLE>
Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares it might have otherwise been entitled to in exchange for its
general partnership interest.
NET ASSET VALUES
The Net Asset Value of each of the RELPS is defined as the relative value
of each RELP's real estate and other assets (if any), as adjusted for the RELP's
known liabilities. The value placed on each RELP's assets was determined by the
General Partner of such RELP as of June 30, 1997. Substantially all cash and
cash equivalents held by each RELP will be distributed to the Limited Partners
immediately prior to the Merger. Consequently, the Trust will essentially only
acquire real properties from the RELPS pursuant to the Merger.
83
<PAGE> 104
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the RELPS, the General Partners, Realco, the Trust and its Trust Managers and
officers. Certain of these conflicts of interest are summarized below.
AFFILIATED GENERAL PARTNERS
The General Partners have sought to discharge faithfully their fiduciary
duties to each of the RELPS, but it should be borne in mind that each of the
General Partners is affiliated with the other General Partners and Realco, which
ultimately controls the General Partners and which is one of the largest
shareholders of the Trust, owning approximately 13.66% of the outstanding
Shares. If each of the RELPS had nonaffiliated General Partners, these persons
would have had a totally independent perspective, not affected by a
consideration of the interests of any of the other RELPS which might have led
them to advocate positions during the negotiations and structuring of the Merger
different than those taken by the General Partners.
BENEFITS TO REALCO, GENERAL PARTNERS AND AFFILIATES
Because Realco and the General Partners have a financial interest in
consummating the Merger, there is an inherent conflict of interest in their
structuring the terms and conditions of the Merger and the manner in which the
Merger has been structured might have been different if structured by persons
having no financial interest in whether or not the Merger proceeded. The
financial benefits to the General Partners and to Realco from the Merger include
the following:
(a) As part of the Merger, the Trust will assume all of the
liabilities of the Participating RELPS, effectively relieving the General
Partners of liability for payment of such debts and obligations.
(b) An affiliate of Realco will manage the Participating RELPS'
properties on behalf of the Trust after the Merger. The Management
Agreement is terminable at will by either party upon 30 days prior notice.
However, the Merger eliminates certain benefits currently enjoyed by the General
Partners. If the Merger proceeds, the General Partners will relinquish their
control over the RELPS, because the Trust will be controlled by Trust Managers
who are elected by the shareholders. The General Partners have waived their
rights to receive any Shares to which they may be entitled in exchange for their
general partnership interests. Any such Shares will instead be distributed to
the Limited Partners of the RELP.
TRUST MANAGERS AND OFFICERS
Realco ultimately owns and controls each of the General Partners and each
of the officers and directors of the General Partners are also officers or
directors of Realco. Realco, a wholly-owned indirect subsidiary of USAA, is also
one of the largest shareholders of the Trust, owning 3,182,206 Shares or
approximately 13.66% of the issued and outstanding Shares. Pursuant to the
Realco Share Purchase Agreement between the Trust and Realco, Realco has the
right to appoint two members of the Trust Board until 1999. See "Management."
The relationships among USAA, Realco and the Trust involves an inherent conflict
of interest in their structuring the terms and conditions of the Merger.
FEATURES DISCOURAGING POTENTIAL TAKEOVERS
Certain provisions in the Declaration of Trust and Bylaws, as well as
statutory rights under Texas law, could be used by the Trust's management to
delay, discourage, or thwart efforts of third parties to acquire control of, or
a significant equity interest in, the Trust. See "Comparison of Ownership of
Units and Shares.
84
<PAGE> 105
FIDUCIARY RESPONSIBILITY
TRUST MANAGERS AND OFFICERS OF THE TRUST
The Trust Managers are accountable to the Trust and its shareholders as
fiduciaries and must perform their duties in good faith, in a manner believed to
be in the best interests of the Trust and its shareholders and with such care,
including reasonable inquiry, as an ordinarily prudent person in a like position
would use under similar circumstances. The Trust's Declaration of Trust provides
that no Trust Manager or officer of the Trust shall be liable to the Trust for
any act, omission, loss, damage, or expense arising from the performance of his
or her duties under the Trust save only for his or her own willful misfeasance
or malfeasance or negligence. In discharging their duties to the Trust, Trust
Managers and officers of the Trust shall be entitled to rely upon experts and
other matters as provided in the Texas REIT Act and the Trust's Bylaws. The
Trust's Declaration of Trust provides that the Trust will indemnify its Trust
Managers and officers to the fullest extent permitted under Texas law. Pursuant
to the Declaration of Trust and Texas law, the Trust will indemnify each Trust
Manager and officer against any liability and related expenses (including
attorneys' fees) incurred in connection with any proceeding in which he may be
involved by reason of serving in such capacity so long as the Trust Manager or
officer acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the Trust, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. A Trust Manager and officer is also entitled to indemnification
against expenses incurred in any action or suit by or in the right of the Trust
to procure a judgment in its favor by reason of serving in such capacity if he
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Trust, except that no such indemnification will be
made if the Trust Manager or officer is judged to be liable to the Trust, unless
the applicable court of law determines that despite the adjudication of
liability the Trust Manager or officer is reasonably entitled to indemnification
for such expenses.
The Declaration of Trust authorizes the Trust to advance reasonable funds
to a Trust Manager or officer for costs and expenses (including attorneys' fees)
incurred in a suit or proceeding upon receipt of an undertaking by such Trust
Manager or officer to repay such amounts if it is ultimately determined that he
is not entitled to be indemnified. The Trust has entered into agreements with
the its Trust Managers and executive officers, indemnifying them to the fullest
extent permitted by Texas law. Shareholders may have more limited recourse
against such persons than would apply absent these provisions and agreements. To
the extent that the foregoing provisions concerning indemnification apply to
actions arising under the Securities Act, the Trust has been advised that, in
the opinion of the Commission, such provisions are contrary to public policy and
therefore are not enforceable. The Trust has obtained insurance policies
indemnifying the Trust Managers and officers against certain civil liabilities,
including liabilities under the federal securities laws, which might be incurred
by them in such capacity.
GENERAL PARTNERS OF THE RELPS
Under California, Texas and Delaware partnership law, the General Partners
are accountable to the RELPS as fiduciaries and are required to exercise good
faith and integrity in all their dealings in the RELP's affairs. The Partnership
Agreements generally provide that neither the General Partners nor any of their
Affiliates performing services on behalf of the RELPS will be liable to the RELP
or any of the Limited Partners for any act or omission by any such person
performed in good faith pursuant to authority granted to such person by the
Partnership Agreements, or in accordance with its provisions, and any manner
reasonably believed by such person to be within the scope of authority granted
to such person and in the best interests of the RELP provided that such act or
omission did not constitute fraud, misconduct, bad faith or negligence. As a
result, Limited Partners might have a more limited right of action in certain
circumstances than they would have in the absence of such a provision in the
Partnership Agreements.
The Partnership Agreements also generally provide that the General Partners
and certain related parties are indemnified from losses relating to acts
performed or failures to act in connection with the business of the RELPS
(except to the extent indemnification is prohibited by law) provided that such
person determined in good faith that the course of conduct did not constitute
fraud, negligence or misconduct. Notwithstanding the
85
<PAGE> 106
foregoing, none of the above-mentioned persons is to be indemnified by the RELPS
from liability, loss, damage, cost or expense incurred by him in connection with
any claim involving allegations that such person violated federal or state
securities laws unless (a) there has been a successful adjudication on the
merits of the claims of each count involving alleged securities law violations
as to the person seeking indemnification and the court approves indemnification
of the litigation costs, (b) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction and the court approves
indemnification of the litigation costs, or (c) a court of competent
jurisdiction has approved a settlement of the claims against the person seeking
indemnification and finds that indemnification of the settlement and related
costs should be made. In each of the foregoing situations, the court of law
considering the request for indemnification must be advised as to the position
of the Commission, and any other applicable regulatory authority regarding
indemnification for violations of securities laws. Indemnification may not be
enforceable as to certain liabilities arising from claims under the Securities
Act and state securities laws; and, in the opinion of the Commission, such
indemnification is contrary to public policy and is therefore unenforceable. For
purposes of the foregoing, the Affiliates of the General Partners will be
indemnified only when operating within the scope of the General Partner's
authority. Any claim for indemnification under the Partnership Agreement will be
satisfied only out of the assets of the RELP and no Limited Partner will have
any personal liability to satisfy an indemnification claim made against the
RELP.
The RELPS may also advance funds to a person indemnified under the
Partnership Agreements for legal expenses incurred as a result of legal action
brought against such person if such person undertakes to repay the advanced
funds to the RELP if it is subsequently determined that such person is not
entitled to indemnification. The RELPS do not pay for any insurance covering
liability of the General Partners or any other indemnified person for acts or
omissions for which indemnification is not permitted by the Partnership
Agreements, although the General Partners may be named as additional insured
parties on policies obtained for the benefit of the RELP if there is no
additional cost to such RELP. As part of its assumption of liabilities in the
Merger, the Trust will indemnify the General Partners and their Affiliates for
periods prior to and following the Merger to the extent of the indemnity under
the terms of the Partnership Agreements and applicable law.
MARKET PRICES AND DISTRIBUTIONS
THE MARKET PRICE OF THE SHARES
The Shares are listed and traded on the NYSE under the symbol "IND." The
following table sets forth for the periods indicated the high and low closing
sales price of the Shares, and the cash distributions declared per Share for
such fiscal quarter:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DISTRIBUTIONS
------------- ---- --- -------------
<S> <C> <C> <C>
September 30, 1997 (through July 18, 1997)............ $3 1/8 $2 7/8 $.00
June 30, 1997......................................... 3 1/8 2 3/8 .00
March 31, 1997........................................ 2 3/4 2 1/4 .00
December 31, 1996..................................... 2 3/8 1 7/8 .00
September 30, 1996.................................... 2 1 5/8 .00
June 30, 1996......................................... 1 7/8 1 3/8 .00
March 31, 1996........................................ 2 1/4 1 3/8 .04
December 31, 1995..................................... 2 1/2 1 5/8 .04
September 30, 1995.................................... 2 1 3/8 .00
June 30, 1995......................................... 1 5/8 1 1/8 .00
March 31, 1995........................................ 1 1/2 1 1/4 .00
</TABLE>
As of July 18, 1997, the closing sale price per Share on the NYSE was
$3.125. On such date, there were 23,289,867 outstanding Shares held by 1,693
shareholders of record.
86
<PAGE> 107
DISTRIBUTIONS
A distribution of $0.04 per share was declared on October 2, 1995, payable
on October 23, 1995 to shareholders of record on October 11, 1995 and a
distribution of $0.04 per share was declared on January 22, 1996, payable on
February 13, 1996 to shareholders of record on February 2, 1996.
On May 22, 1996, the Trust and certain of its affiliates entered into a
settlement agreement with MLI to repay the Trust's 8.8% unsecured notes to MLI
at a substantial discount in connection with the settlement of the Trust's
litigation with MLI and Fidelity Management and Research Company and certain of
its affiliates. The settlement agreement with MLI prohibited the Trust from
making distributions to shareholders while the agreement was in place.
In February 1997, Realco acquired the Trust's notes held by MLI and
pursuant to the Renewal, Extension, Modification and Amendment Agreement dated
as of February 26, 1997, by and between the Trust and Realco, the MLI notes were
amended to incorporate various amendments. The prohibition on payment of
distributions terminated upon the passing of certain proposals by the
shareholders of the Trust at the Trust's annual meeting on June 30, 1997. As a
result, except with respect to the limitations imposed by the Merger Agreement,
the Trust is no longer contractually prohibited from making distributions to its
shareholders.
The Trust intends to evaluate future distributions on a quarterly basis.
MARKET PRICE OF UNITS
The Units are not listed on any national securities exchange or quoted on
Nasdaq, and there is no established public trading market for the Units.
Secondary sales activity for the Units has been limited and sporadic. The
General Partners monitor transfers of the Units (i) because the admission of the
transferee as a substitute Limited Partner requires the consent of the General
Partner under each Partnership Agreement; and (ii) in order to track compliance
with safe harbor provisions to avoid treatment as a "publicly traded
partnership" for tax purposes. It should be noted that some transactions may not
be reflected on the records of the RELPS. The General Partners estimate, based
solely upon the transfer records of the RELPS, that the number of Units
transferred in sale transactions, (i.e., excluding transactions believed to be
between related parties, family members or the same beneficial owner) was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
RELP I
Quarter -- 1.............................................. 47 5 1
Quarter -- 2.............................................. 37 2 1
Quarter -- 3.............................................. 0 2
Quarter -- 4.............................................. 6 2
--- --- ---
TOTAL............................................. 84 13 6
=== === ===
RELP II(1)
Quarter -- 1.............................................. 0 3 2
Quarter -- 2.............................................. 0 2 1
Quarter -- 3.............................................. 0 0 0
Quarter -- 4.............................................. 0 0 0
--- --- ---
TOTAL............................................. 0 5 3
=== === ===
</TABLE>
87
<PAGE> 108
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
RELP III
Quarter -- 1.............................................. 49 2 3
Quarter -- 2.............................................. 364 15 3
Quarter -- 3.............................................. 12 4
Quarter -- 4.............................................. 18 7
--- --- ---
TOTAL............................................. 413 47 17
=== === ===
RELP IV
Quarter -- 1.............................................. 20 1 2
Quarter -- 2.............................................. 27 3 0
Quarter -- 3.............................................. 6 1
Quarter -- 4.............................................. 2 3
--- --- ---
TOTAL............................................. 47 12 6
=== === ===
</TABLE>
PARTNERSHIP DISTRIBUTIONS
The following table sets forth the distributions paid per Unit per RELP
during the periods indicated below. Amounts paid in the indicated quarter were
determined based upon RELP operations during the preceding quarter. The original
cost per Unit was $500 for each of the RELPS. All distributions were made from
cash flow from operations except as otherwise noted.
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
RELP I
Quarter -- 1.............................................. $4.00 $3.00 $4.00
Proceeds from Loan receivable............................. 91.56
Quarter -- 2.............................................. 4.00 3.00 4.00
Quarter -- 3.............................................. 3.00 4.00
Quarter -- 4.............................................. 4.00 4.00
RELP II(1)
Quarter -- 1.............................................. 8.75 7.00 8.75
Quarter -- 2.............................................. 8.75 7.00 8.75
Quarter -- 3.............................................. 8.75 7.00 8.75
Quarter -- 4.............................................. 8.75 7.00 7.00
RELP III
Quarter -- 1.............................................. 2.00 3.75 3.75
Quarter -- 2.............................................. 2.00 2.00 3.75
Quarter -- 3.............................................. 2.00 3.75
Quarter -- 4.............................................. 2.00 3.75
RELP IV
Quarter -- 1.............................................. 2.00 3.75 3.75
Quarter -- 2.............................................. 2.00 2.00 3.75
Quarter -- 3.............................................. 2.00 3.75
Quarter -- 4.............................................. 2.00 3.75
</TABLE>
- ---------------
(1) RELP II's fiscal year is July 1 through June 30. Accordingly, the
information is presented for the years ended June 30, 1995, 1996 and 1997.
88
<PAGE> 109
INVESTMENT POLICIES AND RESTRICTIONS
The Trust's policies with respect to the following activities have been
determined by the Trust Managers and may be amended or revised from time to time
at the discretion of the Trust Managers without a vote of the shareholders if
they determine in the future that such a change is in the best interest of the
Trust and its shareholders. See "Risk Factors -- Changes in Policies."
While the Trust has emphasized equity real estate investments, it may, in
its discretion, invest in mortgage and other real estate interests, including
securities of other REITs, consistent with its qualification as a REIT. The
Trust has not previously invested in mortgages or securities of other entities,
including other REITs, and does not presently intend to make such investments.
Subject to the percentage of ownership limitations and gross income tests
necessary for qualification as a REIT (see "The Merger -- Material Federal
Income Tax Consequences"), the Trust also may invest in securities of concerns
engaged in real estate activities or securities of other issuers. The Trust may
also invest in the securities of other issuers in connection with acquisitions
of indirect interests in properties (normally general or limited partnership
interests in special purpose partnerships owning properties). The Trust may in
the future acquire all or substantially all of the securities or assets of other
REITs or similar entities where such investments would be consistent with the
Trust's investment policies. The Trust will not be limited as to the percentage
of securities of any one issuer it may acquire. However, the Trust does not
anticipate investing in issuers of securities (other than REITs and to acquire
interests in real property) for the purpose of exercising control or acquiring
any investments primarily for sale in the ordinary course of business or holding
any investments with a view to making short-term profits from their sale. In any
event, the Trust does not intend that its investments in securities will require
the Trust to register as an "investment trust" under the Investment Trust Act of
1940, and the Trust intends to divest securities before any such registration
would be required. The Trust does not intend to underwrite the securities of
other issuers.
The Trust may, but has no present intention to, make investments other than
as previously described. At all times, the Trust intends to make investments in
a manner consistent with the requirements of the Code to qualify as a REIT
unless, because of circumstances or changes in the applicable law, the Trust
Managers determine that it is no longer in the best interests of the Trust to
qualify as a REIT. See "The Merger -- Material Federal Income Tax Consequences."
DISPOSITION
Management will periodically review the assets comprising the Trust's
portfolio. Except as described elsewhere in this Joint Proxy
Statement/Prospectus, the Trust has no current intention to dispose of any of
its properties or other properties acquired in the Merger unless the sale of
properties is necessary or appropriate because of liquidity problems. The Trust
reserves the right to dispose of any of the properties or any property that may
be acquired in the future if the Trust Managers, based in part upon management's
periodic reviews, determines that the disposition of such property is in the
best interests of the Trust.
CONFLICT OF INTEREST POLICY
Each of Messrs. Wolcott, Warner, Friedland and Simpson are prohibited from
engaging in any real estate acquisitions, development or management activities,
except on behalf of the Trust, during their employment with the Trust.
AFFILIATE TRANSACTION POLICY
The Trust will not enter into any transactions, including without
limitation, loans, acquisitions or sales of property, joint ventures and
partnerships, in which the Trust or a subsidiary is a party and in which any
Trust Manager, officer, principal security holder or Affiliate has any direct or
indirect pecuniary interest, unless such transaction is approved by a majority
of the disinterested Trust Managers after full disclosure of such interests to
the disinterested the Trust Managers. In determining whether to approve the
transaction, the Trust Managers will condition such approval on the transaction
being fair and reasonable to the Trust and, to the
89
<PAGE> 110
extent deemed relevant by such Trust Managers, on terms no less favorable to the
Trust than prevailing market terms and conditions for comparable transactions.
Trust Managers who are also officers of the Trust will be considered to be
disinterested for this purpose provided they have no direct or indirect
pecuniary interest in the transaction.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Trust has authority to issue additional Shares or other securities in
exchange for property and other valid consideration, and to repurchase or
otherwise reacquire its shares or any other securities and may engage in such
activities in the future. The Trust has a dividend reinvestment program, and may
from time to time repurchase Shares in the open market for the purposes of
fulfilling its obligations under the program or may elect to issue additional
Shares.
BUSINESS OF THE TRUST
GENERAL
The Trust was organized on September 26, 1985. On November 27, 1985, the
Trust completed an initial public offering and commenced operations. The Trust's
investment objective is to maximize the total return to its shareholders through
the acquisition, leasing, management and disposition of industrial real estate
properties.
The Trust is currently engaged in the operation of developed industrial
real estate properties and one retail real estate property. The industrial
properties are leased for office, office-showroom, warehouse, distribution,
research and development, and light assembly purposes. The retail property is
leased to retail merchandise establishments, restaurants and a cinema. The Trust
leases space in its properties to a variety of tenants. No single tenant
accounts for more than 10% of the Trust's consolidated gross revenue for the six
months ended June 30, 1997. On December 31, 1996, the Trust's portfolio
consisted of 11 industrial properties located in California, Texas, Maryland and
Wisconsin, and one retail property, Tamarac Square, located in Colorado. Rents
and tenant reimbursements related to Tamarac Square were approximately 29%, 30%
and 31% of the Trust's total revenues in 1996, 1995 and 1994, respectively.
The Trust was initially advised by an outside advisor under an advisory
agreement that provided for the payment of an annual advisory fee and
reimbursements for certain expenses as well as transaction fees for asset
acquisitions and dispositions. In June 1993, the Trust terminated its agreement
with the advisor and converted to self-administration. The name of the Trust was
changed to American Industrial Properties REIT and its ticker symbol on the NYSE
was changed to "IND" to reflect the Trust's industrial property focus. In
October 1993, shareholders voted to remove the finite life term of the Trust as
contained in the original Declaration of Trust, thereby making the Trust a
perpetual life entity.
As part of its initial capitalization in 1985, the Trust issued
$179,698,000 (face amount at maturity) of Zero Coupon Notes due 1997. As part of
its effort to retire the outstanding notes, which were accruing interest at 12%,
the Trust utilized net proceeds from property sales and issuance of certain
unsecured notes payable to reduce the amount of outstanding notes to $19,491,000
(face amount at maturity) at December 31, 1993. On December 31, 1993, the Trust
partially in-substance defeased $12,696,000 (face amount at maturity) of the
outstanding notes with proceeds from disposal of short term investments. During
the first half of 1994, the Trust purchased $239,000 (face amount at maturity)
of notes and submitted the notes to the Trustee for cancellation. In November
1994, $3,669,000 (face amount at maturity) of the outstanding notes were
partially in-substance defeased with the proceeds from a refinancing of certain
of the Trust's properties. In December 1994, the Trust purchased the remaining
non-defeased notes outstanding of approximately $2,887,000 (face amount at
maturity) in the open market and submitted the notes to the Trustee for
cancellation. As a result of the 1994 defeasance, the liens securing the notes
on each of the Trust's properties were released.
90
<PAGE> 111
In connection with the retirement of certain notes, the Trust issued
$53,234,000 in unsecured promissory notes in February 1992 to MLI. The terms of
these unsecured notes included an 8.8% fixed rate of interest, semi-annual
interest only payments commencing May 1993, the deferral of interest due prior
to May 1993, full principal maturity on November 27, 1997 and a mandatory
principal payment on or before November 27, 1993. On December 31, 1992, the
Trust used $11,648,000 of the net sales proceeds from its 1992 sales of real
estate to make a principal and interest payment on the 8.8% unsecured notes
which included the mandatory principal payment due November 27, 1993.
On May 1, 1995, the Trust filed a lawsuit against MLI alleging that MLI had
engaged in acts of bad faith and conspiracy in an attempt to force the Trust to
consent to the transfer of the MLI notes to a third party. Subsequent to the
filing of this lawsuit, the Trust elected not to make a scheduled interest
payment on the MLI notes and MLI declared the notes in default. An agreement to
settle this lawsuit was entered into on May 22, 1996 whereby the Trust settled
the litigation and obtained an option to repay the outstanding $45,239,000 in
principal amount due on the MLI notes for $36,800,000. As a result of the
settlement agreement and subsequent principal payments, the Trust recorded an
extraordinary gain on extinguishment of debt of $5,810,000 for the year ended
December 31, 1996.
On February 26, 1997, Realco purchased these notes, with an outstanding
principal balance of $9,419,213. 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. In addition,
Realco has the option to convert the principal amount of the notes into Shares
at the conversion rate of $2.00 per Share (if converted prior to December 31,
1997) or $2.25 per share (if converted between December 31, 1997 and December
31, 2000).
To further its business objectives and strategy, the Trust may sell certain
properties and reinvest such proceeds in properties in targeted markets. In
December 1993, the Trust purchased an industrial distribution property in
Dallas, Texas. In February 1995, the Trust sold its industrial distribution
property in Ft. Lauderdale, Florida and in August 1995, the Trust purchased an
industrial distribution property in Arlington, Texas. In November 1996, December
1996 and March 1997, the Trust sold industrial distribution properties in
Seattle, Washington and Minneapolis, Minnesota, respectively.
The Trust has historically qualified as a REIT for federal income tax
purposes and intends to maintain its REIT qualification in the future. In order
to preserve its REIT status, the Trust must meet certain criteria with respect
to assets, income, and shareholder ownership. In addition, the Trust is required
to distribute at least 95% of taxable income (as defined) to its shareholders.
BUSINESS OBJECTIVES AND STRATEGY
The Trust intends to pursue a growth strategy which will maximize the total
return to its shareholders. In February 1997, the Trust engaged Prudential as
its exclusive financial advisor to provide consultation and advice on attracting
debt and/or equity capital to implement this strategy. On June 20, 1997, the
Trust entered into the MSAM Transaction to sell an aggregate of up to 8,163,265
Shares to MS Real Estate Special Situations, Inc. and certain clients of MSAM
for $20 million. As of July 18, 1997, the Trust has sold an aggregate of
7,167,418 Shares pursuant to the MSAM Agreement for the aggregate consideration
of $17,560,176. The Trust currently anticipates issuing the remaining 995,847
Shares pursuant to the MSAM Agreement prior to the end of fiscal 1997. On July
3, 1997, the Trust entered in to the LaSalle Transaction. Pursuant to the terms
of the LaSalle Transaction, on July 10, 1997, the Trust issued an aggregate of
6,122,449 Shares for $15 million. Prudential acted as the placement agent in
connection with these transactions.
The Trust intends to focus on the industrial and light industrial sectors
of the real estate market, believing that these sectors are underserved and
capable of providing significantly higher returns than other more competitive
sectors. The Trust's growth strategy will focus on major markets in the South
and Southwest regions of the United States, with the goal of achieving a
significant presence in the industrial markets of
91
<PAGE> 112
targeted cities. In pursuing its growth strategy, the Trust intends to utilize
research-driven investment analysis, disciplined buy/sell decisions and
state-of-the-art operating systems.
The Trust presently intends to raise debt and equity capital to fund its
growth strategy through traditional mortgage debt transactions and private
equity placements and/or public equity offerings.
GEOGRAPHIC ANALYSIS OF REVENUE
The geographic breakdown of the Trust's rents and tenant reimbursements for
each of the years ended December 31, 1996, 1995, and 1994 is as follows (in
thousands):
<TABLE>
<CAPTION>
MARKET 1996 1995 1994
------ ------- ------- -------
<S> <C> <C> <C>
Baltimore industrial.................................. $ 541 $ 577 $ 583
Dallas industrial(1).................................. 2,863 2,575 2,259
Ft. Lauderdale industrial(2).......................... -- 71 384
Houston industrial.................................... 1,461 1,387 1,197
Los Angeles industrial................................ 908 922 936
Milwaukee industrial.................................. 910 906 982
Minneapolis industrial(3)............................. 805 824 721
Seattle industrial(4)................................. 524 623 577
Denver retail......................................... 3,308 3,525 3,441
------- ------- -------
Total rents and tenant reimbursements................. $11,320 $11,410 $11,080
======= ======= =======
</TABLE>
- ---------------
(1) One property was purchased in August 1995.
(2) The Ft. Lauderdale property was sold in February 1995.
(3) One property was sold in December 1996.
(4) The Seattle property was sold in November 1996.
EMPLOYEES
The Trust currently employs seven people on a full-time basis.
PROPERTIES
The Trust currently owns 12 real estate properties consisting of 11
industrial developments and one enclosed specialty retail mall. The Trust sold
one industrial property in each of February 1995, November 1996, December 1996
and March 1997. The Trust purchased an industrial property in August 1995. A
description of the properties owned by the Trust as of June 30, 1997, as well as
related leased occupancy and mortgage indebtedness, is presented below.
Baltimore Industrial
Patapsco Industrial Center. Patapsco Industrial Center is a five-building,
two phase industrial park located in Linthicum Heights, Maryland, a suburb of
Baltimore. The project comprises approximately 95,000 square feet of net
rentable space. As of June 30, 1997, leased occupancy was 93.7%. Patapsco
Industrial Center is subject to a mortgage with a principal amount outstanding
of $3,088,150 as of June 30, 1997.
Dallas Industrial
Beltline Business Center. Beltline Business Center consists of three
industrial buildings located in Irving, Texas, a suburb of Dallas, that are 100%
finished for office space and, together, comprise approximately 60,000 square
feet of net rentable space. The Trust's corporate offices, comprising
approximately 4,850 square feet of space, are located in this property. As of
June 30, 1997, leased occupancy (including space utilized by the Trust) was
87.6%. Beltline Business Center is subject to a mortgage with a principal amount
outstanding of $2,753,290 as of June 30, 1997.
92
<PAGE> 113
Gateway 5 and 6. Gateway 5 and 6 consists of two industrial buildings
located in Irving, Texas comprising approximately 79,000 square feet of net
rentable space. As of June 30, 1997, leased occupancy was 100%. Gateway 5 and 6
is subject to a mortgage with a principal amount outstanding of $2,827,703 as of
June 30, 1997.
Meridian Street Warehouse. The Meridian Street Warehouse, purchased in
August 1995, is an industrial distribution property in Arlington, Texas
comprising approximately 72,000 square feet of net rentable space. As of June
30, 1997, leased occupancy was 100%. The Meridian Street Warehouse is subject to
a mortgage with a principal amount outstanding of $1,153,405 as of June 30,
1997.
Northgate II. Northgate II consists of four industrial buildings located
within a 21-building industrial park in Dallas, Texas. The project consists of
approximately 236,000 square feet of net rentable space. As of June 30, 1997,
leased occupancy was 98.2%. Northgate II is subject to a mortgage with a
principal amount outstanding of $5,134,514 as of June 30, 1997.
Northview Distribution Center. Northview Distribution Center consists of
two industrial buildings located in Dallas, Texas. The project consists of
approximately 175,000 square feet of net rentable space. As of June 30, 1997,
leased occupancy was 100%. Northview Distribution Center is subject to a
mortgage with a principal amount outstanding of $2,178,091 as of June 30, 1997.
Houston Industrial
Plaza Southwest. Plaza Southwest consists of five industrial buildings in
Houston, Texas comprising approximately 149,000 square feet of net rentable
space. As of June 30, 1997, leased occupancy was 84.8%. Plaza Southwest is
subject to a mortgage with a principal amount outstanding of $3,348,596 as of
June 30, 1997.
Commerce Park. Commerce Park consists of two industrial buildings in
Houston, Texas comprising approximately 87,000 square feet of net rentable
space. As of June 30, 1997, leased occupancy was 97.2%. Commerce Park is subject
to a mortgage with a principal amount outstanding of $2,083,571 as of June 30,
1997.
Westchase Park. Westchase Park consists of two industrial buildings in
Houston, Texas comprising approximately 47,000 square feet of net rentable
space. As of June 30, 1997, leased occupancy was 100%. Westchase Park is subject
to a mortgage with a principal amount outstanding of $1,317,115 as of June 30,
1997.
Los Angeles Industrial
Huntington Drive Center. Huntington Drive Center consists of a two-story
office building and an industrial building comprising approximately 62,000
square feet of net rentable space located in Monrovia, California, a suburb of
Los Angeles. As of June 30, 1997, leased occupancy was 100%. Huntington Drive
Center is subject to a mortgage with a principal amount outstanding of
$4,539,208 as of June 30, 1997.
Milwaukee Industrial
Northwest Business Park. Northwest Business Park consists of three
industrial buildings comprising approximately 143,000 square feet of net
rentable space located in Menomonee Falls, Wisconsin, a suburb of Milwaukee. As
of June 30, 1997, leased occupancy was 90.2%. The Trust is currently soliciting
offers for the sale of Northwest Business Park. If an acceptable offer is
received, it is likely that the Trust will sell this property during 1997. Phase
I of Northwest Business Park is subject to a mortgage with a principal amount
outstanding of $1,264,922 as of June 30, 1997.
Denver Retail
Tamarac Square. Tamarac Square, located in Denver, Colorado, consists of an
enclosed specialty retail mall of approximately 139,000 net rentable square feet
with an adjacent convenience center of approximately 33,000 net rentable square
feet, two free-standing buildings of approximately 8,000 net rentable square
feet
93
<PAGE> 114
each, a separate free-standing building of approximately 9,000 net rentable
square feet and two ground leases comprising approximately 4.91 acres. During
1993, the Trust completed a $2 million renovation of Tamarac Square. As of June
30, 1997, leased occupancy was 84.0%. Tamarac Square is subject to a mortgage
with a principal amount outstanding of $11,858,496 as of June 30, 1997. The
Trust has been notified of the existence of limited underground petroleum based
contamination at a portion of Tamarac Square. The source of the contamination is
apparently related to underground storage tanks ("USTs") located on adjacent
property. The owner of the adjacent property has agreed to remediate the
property to comply with state standards, and has indemnified the Trust against
costs related to its sampling activity. The responsible party for the adjacent
USTs has submitted a corrective Action Plan to the Colorado Department of Public
Health and Environment. Implementation of the plan is ongoing. The responsible
party is negotiating to obtain access agreements from impacted landowners,
including the Trust.
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
JUNE 30, 1997 RENTAL RATES
NET LEASABLE YEAR PLACED AVG. % PER NET
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY LEASABLE SQUARE FEET
--------------------- ------------ ----------- ------------- --------------------
<S> <C> <C> <C> <C>
Northwest, Milwaukee, WI.... 143,120 1983-86 88.4% $0.42
Tamarac, Denver, CO......... 196,453 1976-79 85.4 0.87
Northview, Dallas, TX....... 174,793 1980 100.0 0.25
Beltline, Irving, TX........ 59,656 1984 90.5 0.46
Gateway, Irving, TX......... 78,786 1984-85 100.0 0.48
Meridian, Arlington, TX..... 72,072 1981 100.0 0.00
Northgate, Dallas, TX....... 235,827 1982-83 99.1 0.26
Commerce Park, Houston, TX.. 87,279 1984 97.2 0.43
Plaza Southwest, Houston,
TX........................ 149,680 1970-74 85.9 0.31
Westchase, Houston, TX...... 47,630 1983 100.0 0.45
Huntington, Los Angeles..... 62,218 1984-85 100.0 1.38
Patapsco, Baltimore, MD..... 95,151 1980-84 89.9 0.52
---------
Total............. 1,402,665
=========
</TABLE>
LEASE EXPIRATION
The following table shows lease expirations for the next 10 years for the
Trust's properties assuming that none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
LEASE NUMBER OF ----------------------- ----------------------
EXPIRATION LEASES APPROX. PERCENTAGE PERCENTAGE AVG. PER
YEAR EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
---------- --------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998.......................... 41 276,956 19.7% 25.2% $ 6.53
1999.......................... 47 325,618 23.2 19.4 4.27
2000.......................... 44 214,006 15.3 21.4 7.17
2001.......................... 20 172,104 12.3 14.6 6.09
2002.......................... 10 84,259 6.0 6.9 5.89
2003.......................... 2 19,894 1.4 4.3 15.55
2004.......................... 5 88,485 6.3 5.1 4.14
2005.......................... 4 10,700 0.8 2.4 16.29
2006.......................... 1 3,150 0.2 0.7 15.50
2007.......................... -- -- 0.0 0.0 --
--- --------- ---- ----- ------
Total............... 174 1,195,172 85.2% 100.0% $ 6.01
=== ========= ==== ===== ======
</TABLE>
94
<PAGE> 115
MORTGAGE INDEBTEDNESS
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZATION ANNUAL DEBT
PROPERTY BALANCE SCHEDULE INTEREST RATE MATURITY DATE SERVICE
-------- ----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Northwest............ $ 1,264,922 30 years 11.00% Mar-99 $ 165,732
Tamarac.............. 11,858,496 25 years 8.40 Dec-01 1,174,764
Northview............ 2,178,091 25 years 8.40 Dec-01 215,772
Beltline............. 2,753,290 22 years 8.61 Dec-03 281,580
Gateway.............. 2,827,703 22 years 8.61 Dec-03 289,188
Meridian............. 1,153,405 22 years 8.61 Dec-03 117,960
Northgate............ 5,134,514 22 years 8.61 Dec-03 525,096
Commerce Park........ 2,083,571 22 years 8.61 Dec-03 213,084
Plaza Southwest...... 3,348,596 22 years 8.61 Dec-03 342,456
Westchase............ 1,317,115 22 years 8.61 Dec-03 134,700
Huntington........... 4,539,208 22 years 8.61 Dec-03 464,220
Patapsco............. 3,088,150 22 years 8.61 Dec-03 315,816
----------- ----- ----------
Total...... $41,547,061 8.61% $4,240,368
=========== ===== ==========
</TABLE>
LEGAL PROCEEDINGS
The Trust is currently not involved in any material pending legal
proceedings.
95
<PAGE> 116
BUSINESS OF THE RELPS
RELP I
General
RELP I was formed in August 1984 under the California Revised Limited
Partnership Act. RELP I has two primary business purposes: (i) to purchase
qualified income producing real properties; and (ii) to make participating first
mortgage loans on qualified income producing properties. To the extent possible
(i) all acquisitions of real property will be made for cash (no acquisition
indebtedness will be incurred); and (ii) participating first mortgage loans will
earn fixed interest and will contain participation rights in the underlying
property's cash flow and net proceeds of sale or refinancing and other items, or
both.
In 1985, RELP I sold $27,305,000 of Units (54,610 Units at $500 per Unit).
Limited Partners are not required to make any additional capital contributions.
Proceeds of the offering were used to acquire Volusia Point Shopping Center in
1985. In 1986, RELP I acquired one property (the Systech building) and funded
one first mortgage loan, which was paid in full in January 1996. Remaining
offering proceeds were used to repay the mortgage indebtedness on the Systech
building upon its maturity in 1988.
Properties
Volusia Point Shopping Center. The Volusia Point Shopping Center, located
in Daytona Beach, Florida, is a shopping center containing 76,579 gross rentable
square feet situated on approximately nine acres of land. As of June 30, 1997,
the property was 92% leased and average monthly cash rental was approximately
$61,000. There are lease expirations totaling approximately 3% of total square
footage in 1997 which are subject to market risk. There is no debt on the
property and RELP I owns the property in fee-simple. Occupancy at Volusia Point
increased throughout 1996 to 92% at year end, compared to approximately 95% in
the surrounding retail market.
The Systech Building. The Systech building, located in San Diego,
California, is an office building containing 54,094 gross rentable square feet
situated on approximately two acres of land. As of June 30, 1997, the property
was 100% leased and average monthly cash rental was approximately $49,000. There
are no lease expirations in 1997. There is no debt on the property. The building
was vacated in August 1993 upon the lease expiration of the prior single tenant,
and remained vacant throughout 1994 during building renovations and improvements
and re-tenanting efforts. A lease for approximately 79% of the building
commenced in March 1995 with Systech Computer Corporation; the lease provided
for an increase in occupancy to 98% in March 1996. After a change in their
business requirements, the lease with Systech Computer Corporation was amended
in July 1996 to allow for scheduled decreases in occupied square footage. At the
same time, a 42-month lease was executed with Integrated Systems, Inc. ("ISI").
ISI is scheduled to occupy additional space as Systech Computer Corporation
downsizes throughout the remainder of their lease term which expires in February
2000. As a result of the above leasing activity, the Systech building was 100%
leased as of June 30, 1997. During the years ended December 31, 1996 and 1995,
RELP I recorded rental income of approximately $493,000 and $414,000,
respectively, from a major tenant in the computer industry. This income
represented approximately 35% and 37% of total rental income of RELP I for 1996
and 1995, respectively. Due to the configuration of the Systech building, it
competes in both the office and research and development ("R&D") markets of the
Sorrento Valley submarket of San Diego.
Employees and General Partner
RELP I has no employees; it has, however, entered into an Advisory
Agreement with Realco. Realco is responsible for managing the day-to-day
operations of RELP I. The General Partner of RELP I is USAA Investors I, Inc, a
Texas corporation and a subsidiary of Realco. USAA Investors I, Inc. has the
general responsibility for management of RELP I's business and oversees the
activities of Realco.
96
<PAGE> 117
Market for RELP I Units and Distributions
There is no established public trading market for RELP I Units, and it is
not anticipated that a public market will develop. Upon request, Real Estate
Limited Partnership Investor Services ("Investor Services"), a department of
Realco, may assist a Limited Partner desiring to transfer his Units. The
purchase price for the Units upon resale and all other terms of a resale
transaction are subject to negotiations between the buyer and the seller.
As of June 30, 1997, there were 6,330 Limited Partners of RELP I, owning an
aggregate of 54,610 Units.
During the year ended December 31, 1996, quarterly distributions totaling
$709,930 and $7,171 were distributed to the Limited Partners and the General
Partner, respectively, for a total of $717,101 in cash distributions. In
addition, a special distribution of approximately $4,999,986 was made in March
1996 to Limited Partners after the payoff of the mortgage loan. The return of
capital portion of the total 1996 distributions was $5,357,405 and $3,610 for
the Limited Partners and General Partner, respectively.
During the year ended December 31, 1995, quarterly distributions totaling
$873,760 and $8,826 were distributed to the Limited Partners and the General
Partner, respectively, for a total of $882,586 in cash distributions. The return
of capital portion of 1995 distributions was $232,975 and $2,354 for the Limited
Partners and General Partner, respectively.
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
RENTAL RATES
JUNE 30, 1997 PER NET
NET LEASABLE YEAR PLACED AVG. % LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Volusia Point Shopping Center; Daytona
Beach, Fla........................... 76,579 1984 92.40% $0.80
Systech Building San Diego, CA......... 54,094 1982 100.00 0.91
-------
Total........................ 130,673
=======
</TABLE>
LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for RELP
I's properties assuming that none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
LEASE NUMBER OF --------------------- ----------------------
EXPIRATION LEASES APPROX. PERCENTAGE PERCENTAGE AVG. PER
YEAR EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
---------- --------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998......................... 5 8,692 6.65% 21.94% $11.87
1999......................... 6 15,867 12.14 22.72 12.29
2000......................... 6 76,814 58.78 24.52 13.26
2001......................... 1 N/A* 0.00 0.00 0.00
2002......................... 0 0.00 0.00 0.00 0.00
2003......................... 0 0.00 0.00 0.00 0.00
2004......................... 2 6,800 5.20 30.82 16.67
2005......................... 0 0.00 0.00 0.00 0.00
2006......................... 0 0.00 0.00 0.00 0.00
2007......................... 0 0.00 0.00 0.00 0.00
-- ------- ----- ------ ------
Total.............. 20 108,173 82.77% 100.00% $54.09
== ======= ===== ====== ======
</TABLE>
- ---------------
* Roof top lease with Pacific Bell Mobile Services; rent not included in
annualized 1997 base rental income as there is no square footage applicable to
this lease.
97
<PAGE> 118
RELP II
General
RELP II was formed in August 1987 under the Texas Revised Limited
Partnership Act. RELP II has three principal business objectives: (i) preserve
and protect RELP II's capital; (ii) provide the Limited Partners with quarterly
distributions of net cash from operations; and (iii) obtain long-term
appreciation in the value of the properties. RELP II was formed to invest in a
diversified portfolio of income-producing multi-family residential and
commercial properties and/or make one or more participating first mortgage
loans. Pursuant to the agreement of RELP II, to the extent possible all
acquisitions of real property are made for cash and all participating first
mortgage loans earn fixed interest and contain participation rights in the
underlying property's cash flow and net proceeds of sale or refinancing and
other items, or both.
From the commencement of the offering of Units on February 11, 1988 through
the termination of the offering on January 30, 1989, RELP II sold $13,570,500 of
Units (27,141 Units at $500 per Unit). Proceeds of the offering were used to
acquire the Continental Plastic Containers Buildings on April 21, 1989.
RELP II also invested in the Combined Capital Resources Joint Venture (the
"joint venture"), the owner of a participating first mortgage loan secured by
Sequoia Plaza I. The joint venture's investment in the mortgage loan was
converted to ownership of the underlying property in August 1991 through
foreclosure on the mortgage loan. Sequoia Plaza I has not been offered for sale.
However, the property was externally appraised as of January 1, 1997 at a total
value of $29.7 million. This joint venture interest will not be included in the
Merger but will be purchased by Realco or an Affiliate of Realco for $2.25
million if the Merger is approved by the Limited Partners of RELP II. RELP II
purchased its final property, Bowater Communication Papers Building ("Bowater")
on July 24, 1989.
Properties
RELP II owns two single-tenant industrial complexes. The lease agreements
between RELP II and these tenants (a manufacturer in the packaging industry and
a manufacturer of business forms) are absolute triple net lease arrangements
whereby the lessee is required to make all payments for expenses related to the
use and occupation of the leased premises including real estate taxes and
assessments, property and liability insurance, repairs and maintenance,
utilities and other operating costs associated with the property.
Continental Plastic Containers Buildings. The Continental Plastic
Containers Buildings (the "Continental Buildings") comprise a manufacturing and
distribution facility containing 208,290 net rentable square feet situated on
approximately 9.37 acres. As of June 30, 1997 the property was 100% leased and
average monthly cash rental was approximately $62,000 per net rentable square
foot. RELP II owns the property in fee-simple. These buildings are 100% leased
under a triple net lease to Continental Plastic Containers, Inc., a wholly-owned
subsidiary of Plastic Containers, Inc. which manufactures materials and
containers used in the packaging industry. The tenant provided approximately
$677,739 of annual rental income to RELP II for the fiscal year ended 1996, and
$593,829 for each of the fiscal years 1995 and 1994 which represented
approximately 60% of total RELP II rental income for 1996 and 58% for 1995 and
1994.
In March 1995, RELP II completed negotiations with Continental Plastic
Containers, Inc. to expand the facilities under lease and to extend the term of
the triple net lease at the Continental Buildings. The original lease expiration
was extended from April 1998 to February 2011. RELP II funded approximately $1.7
million to provide 45,200 square feet of additional leasable area. The building
expansion was completed and the tenant occupied the building in March 1996. RELP
II utilized existing working capital and cash available due to decreased
distributions to partners to fund the construction. Distributions were reduced
to $7.00 per Unit for the quarter ended March 31, 1995, in order to avoid
borrowing to fund the construction of the addition and maintain working capital
at an adequate level for operations.
Bowater Communications Papers Building. Bowater is a 111,720 square foot
industrial warehouse building in Lakeland, Florida and is 100% leased under a
triple net lease to CST Office Products, Inc., which expires in 1999. As of June
30, 1997, the average monthly cash rental was approximately $37,000. RELP II
owns the property in fee-simple. CST Office Products, Inc. is a manufacturer of
continuous computer stock
98
<PAGE> 119
forms, including word processing forms. Under terms of the lease with CST Office
Products, the lease rate on the RELP II property will increase each year by the
rate of the Consumer Price Index, up to a maximum of 5.5% per year, through the
lease expiration in 1999. The tenant provided approximately $447,304 of annual
rental income to RELP II for the fiscal year ended 1996, $434,864 in 1995 and
$425,171 in 1994 which represented approximately 40% of total RELP II rental
income for fiscal 1996 and 42% for 1995 and 1994. Leasing efforts will begin to
pursue renewal of this lease.
Employees and General Partner
RELP II has no employees. The General Partner of RELP II is USAA Investors
II, Inc., a Texas corporation. USAA Investors II, Inc. maintains general
responsibility for management of RELP II's business.
Market for RELP II Units and Distributions
There is no established public market for the RELP II Units and it is not
anticipated that a public market will develop. Upon request, Investor Services
may assist an investor desiring to transfer his Units. The limited market for
the Units could affect the value of the Units. The purchase price for the Units
upon resale and any other terms of a resale transaction will be subject to
negotiation between the buyer and the seller. As of June 30, 1997, there were
1,675 Limited Partners of RELP II owning an aggregate of 27,141 Units.
During the fiscal year ended June 30, 1996, quarterly distributions
totaling $759,948 and $84,438 were distributed to the Limited Partners and
General Partner, respectively, for a total of $844,386 in cash distributions.
During the fiscal year ended June 30, 1995, quarterly distributions totaling
$902,438 and $100,271 were distributed to the Limited Partners and General
Partner, respectively, for a total of $1,002,709 in cash distributions. The
return of capital portion of 1995 distributions was $118,037 and $13,115 for the
Limited Partners and General Partner, respectively. During the fiscal year ended
June 30, 1994, quarterly distributions totaling $949,935 and $105,549 were
distributed to the Limited Partners and General Partner, respectively, for a
total of $1,055,484 in cash distributions. The return of capital portion of 1994
distributions was $186,558 and $20,729 for the Limited Partners and General
Partner, respectively.
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
RENTAL RATES
JUNE 30, 1997 PER NET
NET LEASABLE YEAR PLACED AVG. % LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Continental Plastic Containers
Buildings 1963, 1969,
Elk Grove Village, Ill............ 208,290 1996 100% $0.30
Bowater Communications Paper
Building
Lakeland, Fla..................... 111,720 1989 100 0.33
-------
Total..................... 320,010
=======
</TABLE>
99
<PAGE> 120
LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for RELP
II's properties assuming that none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
-------------------- ---------------------
NUMBER OF APPROX. PERCENTAGE PERCENTAGE AVG. PER
LEASE EXPIRATION YEAR LEASES EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
--------------------- --------------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998............................ 0 -- --% --% $ --
1999............................ 1 111,720 34.91 100 4.02
2000............................ 0 -- -- -- --
2001............................ 0 -- -- -- --
2002............................ 0 -- -- -- --
2003............................ 0 -- -- -- --
2004............................ 0 -- -- -- --
2005............................ 0 -- -- -- --
2006............................ 0 -- -- -- --
2007............................ 0 -- -- -- --
-- ------- ----- --- -----
Total................. 1 111,720 34.91% 100% $4.02
== ======= ===== === =====
</TABLE>
RELP III
General
RELP III was formed in February 1985 under the Uniform Limited Partnership
Act of the State of Delaware to invest in a diversified portfolio of
income-producing real properties such as shopping centers, office buildings,
apartments, industrial buildings and other similar income- producing real
property. RELP III has four principal business objectives: (i) to provide the
limited partners with cash distributions which will not constitute taxable
income by reason of partnership tax deductions and possibly tax losses which may
be used to offset other taxable income; (ii) to preserve and protect the Limited
Partners' capital and related buying power; (iii) to obtain long-term
appreciation in the value of the properties; and (iv) to provide a build-up of
equity through the reduction of mortgage loans on the properties.
In 1985, RELP III sold $55,774,500 in Units (111,549 Units at $500 per
Unit). Proceeds from the offering were used to acquire the following properties
in fiscal year 1986: Curlew Crossing (formerly Courtyard Shoppes) Shopping
Center, Manhattan Towers (formerly Parkview Plaza Office Buildings) and the
Skygate Commons (formerly Ramada World Headquarters Office Buildings). These
properties comprise the complete portfolio of RELP III.
Properties
Curlew Crossing Shopping Center. Curlew Crossing Shopping Center is located
in Clearwater, Florida in northern Pinellas County on North U.S. Highway 19. The
shopping center contains approximately 207,090 net rentable square feet,
situated on 22.32 acres including the ground under lease to Home Depot. At
December 31, 1996, the property was 92% occupied and average monthly cash rental
was approximately $78,000. RELP III owns the property in fee-simple. The
$11,000,000 mortgage on Curlew Crossing matured on March 31, 1996. The lender,
which is Realco, renewed the loan for a period of two years at an annual
interest rate of 8.25% to reflect market rates at the time of maturity. This
rate is a decrease from the 10.25% paid in March 1996 which was based on the
lesser of 12% or prime rate plus two percent. Interest is payable monthly with
the principal due March 31, 1998.
In April 1996, RELP III received $220,400 as a result of land condemned at
Curlew Crossing by the Florida Department of Transportation ("FDOT"). This
represented a good faith estimate of the value of the land actually taken. The
land was condemned in connection with the widening of Curlew Road. During 1996,
the tenant of two out parcels, containing approximately 15,700 square feet,
claimed the right to terminate its
100
<PAGE> 121
respective leases based upon the FDOT taking. RELP III has initiated legal
action against the defaulted tenant and is currently seeking a summary
declaration by the court regarding the continuing nature of the leases as well
as recovery of the rent and other sums due under the leases. Following the
adjudication of this tenant related action, a final determination will be made
regarding the total damages due from the FDOT to RELP III as a result of the
condemnation. Resolution of both the tenant action and condemnation proceeding
are anticipated by the third quarter of 1997.
Curlew Crossing is not included in the Merger, but will be purchased by
Realco for $11,200,000 if the Merger is approved by the Limited Partners of RELP
III. Realco has an $11,000,000 loan secured by the property. Curlew Crossing has
been offered for sale and one offer of $9,124,000 has been received. The
purchaser declined a counter-offer of $10.5 million, and the sale was not
completed.
Manhattan Towers. The Manhattan Towers are located in the City of Manhattan
Beach, California, a suburb of Los Angeles. The property consists of two office
buildings containing, in the aggregate, 301,457 net rentable square feet,
situated on approximately 5.13 acres of land. At June 30, 1997, the property was
100% leased and average monthly cash rental for the six months ended June 30,
1997 was approximately $422,000. The mortgage payable on this property is
$15,000,000. RELP III owns the property in fee-simple. The two buildings on the
site were triple net leased to Hughes Aircraft Company, a wholly-owned
subsidiary of General Motors, through August 1996. Control of the daily
operations at the property were assumed by RELP III upon expiration of the
Hughes lease. As part of the marketing campaign to re-lease the property, the
name of the property was changed from Parkview Plaza to Manhattan Towers. Along
with this name change, the property will undergo repairs and renovations to the
lobby area, corridors and parking lot, as well as exterior landscaping and
signage. The cost of these renovations is estimated to be $1.4 million to be
funded from the working capital reserve of RELP III. In addition, subterranean
water damage was discovered in the parking garage. Engineers and other
consultants were hired to assess the damage and determine the appropriate
remediation. The cost of the repairs to the parking garage is estimated to be
$1.1 million to be funded from the working capital reserve of RELP III.
Manhattan Towers will experience a significant decrease in cash flow in 1997 as
a result of the expiration of the Hughes lease and the cash requirement for
tenant improvements and lease commissions needed to re-lease the property.
Current rental rates in the market surrounding the property are lower than the
rate that was paid by Hughes. Hughes provided approximately $4,869,000 of annual
rental income to RELP III during 1996, approximately $6,679,000 during 1995 and
approximately $6,241,000 during 1994 which represents approximately 62% of total
RELP III rental income for 1996, 69% for 1995 and 67% for 1994.
Since the expiration of the Hughes lease in August 1996, significant
leasing activity has occurred. Hughes Aircraft Company negotiated a one-year
lease for 79,647 square feet at an annual rental rate of $12 gross per square
foot with an expiration date of August 31, 1997. The previous annual rental rate
was at approximately $22.64 net per square foot for the entire 301,457 square
feet of net leasable area. Other leases signed have terms from three to five
years at an annual rental rate of $13.80 per square foot. One of the five year
leases provided for an allowance for tenant improvements at $6.00 per square
foot for a total of $74,274 to be paid out of the working capital reserve of
RELP III.
A sixty-two month lease was signed during the fourth quarter of 1996 for
11,553 square feet. This lease commenced February 1, 1997 and ends March 31,
2002. The lease provides for an annual rental rate of $19.20 per square foot. An
allowance for tenant improvements was provided for a total of approximately
$404,000 to be paid from the working capital reserve of RELP III.
As of June 30, 1997, these leases at Manhattan Towers total 145,796 of the
301,457 square feet, or 48% of the total leasable area of property. Rental rates
for these new leases are lower than the previous rate charged to Hughes,
reflecting the current market conditions in the area surrounding the property.
One of the two buildings at this property remains vacant. Several prospects have
expressed interest in leasing the vacant building.
The Manhattan Towers mortgage loan matured on August 31, 1996. The lender,
Las Colinas Management Company, an affiliate of the General Partner of RELP III,
renewed the loan for a period of two
101
<PAGE> 122
years at an annual interest rate of 9.57% to reflect market rates at the time of
maturity. The loan was converted to monthly interest only payments with the
principal of $15,000,000 due September 30, 1998.
Skygate Commons. The Skygate Commons are located in Phoenix, Arizona. This
property is an office complex which is comprised of three office buildings
containing, in the aggregate, 142,696 net rentable square feet, situated on
approximately 7.4 acres of land. At June 30, 1997, the property was 89% leased
and average monthly cash rental was approximately $70,000. There is no debt on
this property. RELP III owns the property in fee-simple. At June 30, 1997, 70%
of the property, the ten-story building, was leased to Hospitality Franchise
Systems, Inc. ("HFS"). Substantial completion of tenant improvements for HFS
occurred October 31, 1996. RELP III funded approximately $1.2 million related to
its commitment for improvements from the working capital reserve of RELP III.
During the tenant improvement phase, the base rent due from HFS was at a reduced
rate and HFS was responsible for all operating expenses of the property. Upon
substantial completion of the improvements, the rental rate increased to
approximately $14.61 per square foot annually and HFS will pay its proportionate
share of operating expenses which exceed $7.00 per square foot annually. HFS
paid approximately $1,644,000 of rental income to RELP III during 1996 and
approximately $1,246,000 during 1995, which represents approximately 21% of
total RELP III rental income for 1996 and 13% for 1995.
During the fourth quarter of 1996, a small parcel of land adjacent to the
Skygate Commons property was purchased for approximately $72,000. RELP III
purchased the property to be used for additional parking. Market interest in the
area surrounding the Ramada property has been increasing. In order to more
successfully market the vacancy, the remaining two buildings at the Ramada
property are scheduled for renovation which began in March 1997. Renovations
will include improvements to comply with the ADA, heating and air conditioning
and exterior renovations. The total cost of renovations will be approximately
$900,000 to be paid from the working capital reserve of RELP III. It is
anticipated that the renovation will be completed by December, 1997.
Employees and General Partner
RELP III has no employees; it has, however, entered into an Advisory
Agreement with Realco. Realco is responsible for managing the day-to-day
operations of RELP III. The General Partner of RELP III is USAA Properties III,
Inc., a Texas corporation and a subsidiary of Realco. RELP III, Inc. has the
general responsibility for management of RELP III's business and oversees the
activities of Realco.
Market for the RELP III Units and Distributions
There is no established public trading market for the RELP III Units, and
it is not anticipated that a public market will develop. Upon request, Investor
Services may assist a Limited Partner desiring to transfer his Units. The
purchase price for the Units upon resale and all other terms of a resale
transaction are subject to negotiation between the buyer and the seller. The
limited market for the Units may adversely affect the value of the Units.
As of June 30, 1997, there were 7,717 Limited Partners of RELP III, owning
an aggregate of 111,549 Units.
During the year ended December 31, 1996, quarterly distributions totaling
$1,087,603 and $10,985 were distributed to the Limited Partners and General
Partner, respectively, for a total of $1,098,588 in cash distributions. During
the year ended December 31, 1995, quarterly distributions totaling $1,673,236
and $16,902 were distributed to the Limited Partners and General Partner,
respectively, for a total of $1,690,138 in cash distributions.
102
<PAGE> 123
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
JUNE 30, 1997 RENTAL RATES PER
NET LEASABLE YEAR PLACED AVG. % NET LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Curlew Crossing Shopping
Center, Clearwater, Fla...... 207,090 1985 91.40% 0.38
Manhattan Tower, Manhattan
Beach, CA.................... 301,457 1985 74.35 1.40
Skygate Common; Phoenix, AZ.... 142,696 1964-1973 79.66 0.49
--------
Total................ 651,243
========
</TABLE>
LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for RELP
III's properties assuming that none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
--------------------- ----------------------
NUMBER OF APPROX. PERCENTAGE PERCENTAGE AVG. PER
LEASE EXPIRATION YEAR LEASES EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
--------------------- --------------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998........................ 0 0 0.00% 0.00% $ 0.00
1999(1)..................... 4 47,183 7.25 19.73 24.70
2000(1)..................... 2 4,595 0.71 2.17 15.15
2001........................ 1 12,379 1.90 5.33 13.80
2002........................ 2 33,673 5.17 17.10 33.95
2003(1)..................... 2 20,374 3.13 4.65 7.32
2004(1)..................... 1 5,000 0.77 2.32 14.90
2005........................ 0 0 0.00 0.00 0.00
2006........................ 0 0 0.00 0.00 0.00
2007........................ 1 100,000 15.36 48.70 15.61
-- ------- ----- ------ ------
Total............. 13 223,204 34.27% 100.00% $14.36
== ======= ===== ====== ======
</TABLE>
- ---------------
(1) Includes expiring leases at Curlew Crossing of 6,484, 4,595, 20,374 and
5,000 for 1999, 2000, 2003 and 2004, respectively. Average Annualized 1997
Base Rental Income for Curlew Crossing of $10.90, $15.15, $7.32 and $14.90
for 1999, 2000, 2003 and 2004, respectively.
MORTGAGE INDEBTEDNESS
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZATION INTEREST MATURITY ANNUAL DEBT
PROPERTY BALANCE SCHEDULE RATE DATE SERVICE
-------- ----------- ---------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Manhattan Towers..... $15,000,000 Monthly 9.57% 09/30/98 $1,435,500
interest
only
Curlew Crossing...... 11,000,000 Monthly 8.25 03/31/98 907,500
interest
only
----------- ----------
Total...... $26,000,000 $2,343,000
=========== ==========
</TABLE>
103
<PAGE> 124
RELP IV
General
RELP IV was formed in February 1987 under the Uniform Limited Partnership
Act of the State of Delaware to invest in a diversified portfolio of
income-producing real properties such as shopping centers, office buildings,
apartments, industrial buildings and other similar income-producing real
property. RELP IV has three principal business objectives: (i) to preserve and
protect RELP IV's capital; (ii) to obtain long-term appreciation in the value of
its properties; and (iii) to provide partially "tax-sheltered" distributions of
cash from operations.
In 1987 and 1988, RELP IV sold $30,247,500 of Units (60,495 Units at $500
per Unit). Limited Partners are not required to make any additional capital
contributions. Proceeds of the offering were used to acquire the following
properties in fiscal year 1987: Linear Technology Corporate Headquarters,
Eastman Kodak Building, and 1881 Pine Street (Century Electric Office Building).
During 1988, RELP IV acquired a 55.84% joint venture interest in USAA Chelmsford
Associates Joint Venture, the beneficial owner of the Apollo Computer Research
and Development Headquarters Building.
Properties
The Linear Technology Building. The Linear Technology Building is located
in Milpitas, California. The property is comprised of an office building
containing approximately 42,130 net leasable square feet situated on 2.66 acres.
At December 31, 1996, the property was 100% occupied and average monthly cash
rental was approximately $32,000. There is no debt on this property and RELP IV
owns the property in fee-simple. At June 30, 1997, the building was leased under
a triple net lease by Linear Technology Corporation ("Linear Technology") as its
corporate headquarters under a lease which expires in 2000. The $168,500 tenant
improvement allowance from the 1995 renewal was expended in May 1997. Linear
Technology provided approximately $379,000 of annual rental income to RELP IV in
1996, $459,000 during 1995 and $561,000 during 1994, which represented
approximately 10% of total RELP IV rental income for 1996 and 11% for 1995 and
1994.
The Eastman Kodak Building. The Eastman Kodak Building is located in San
Diego, California and consists of an office building containing approximately
57,747 net leasable square feet situated on 4.64 acres. At June 30, 1997, the
property was 61% occupied and average monthly cash rental was $49,000. The
mortgage payable on this property is $1,098,504. RELP IV owns the property in
fee-simple. Eastman Kodak occupies 34,600 square feet and Invitrogen Corporation
occupies the remaining 23,147 square feet. Eastman Kodak's lease expires in
February 1998. The lease with Invitrogen was scheduled to expire in April 1996;
however, the lease was extended through December 1996, and Invitrogen paid an
extension fee of $20,000. Invitrogen remained in the building until February
1997, paying holdover rent (200% of December 1996 rent) for January and February
1997. [Update] Discussions have commenced with Eastman Kodak regarding the
possibility of early lease renewal and leasing the entire building.
The 1881 Pine Street Office Building. The 1881 Pine Street Office Building
is located in St. Louis, Missouri and is comprised of an office building
containing approximately 106,340 net leasable square feet situated on
approximately one acre. At June 30, 1997, the property was 89.84% leased and
average monthly cash rental was $24,000. There is no debt on this property and
RELP IV owns the property in fee-simple. During the third quarter of 1996, a
five-year lease was signed with Sherwood Medical Company. Sherwood occupied the
building on August 24, 1996 and the lease will expire August 2001. The lease
provides for an annual rental rate of $12.75 per square foot for 22,376 square
feet of space and provides for annual parking revenue of $21,600. In addition to
rent, Sherwood will pay their pro rata share of operating expenses in excess of
their base year of 1996. An allowance for tenant improvements of approximately
$259,600 was provided which was paid out of the working capital reserve of RELP
IV. During the fourth quarter of 1996, a five-year lease was signed with Busch
Creative Services Corporation for 64,805 square feet at 1881 Pine Street. This
lease commenced February 1, 1997 and will expire on January 31, 2002. The lease
provides for an annual rental rate of approximately $12.25 per square foot and
annual parking revenue of $71,400. In addition, this
104
<PAGE> 125
tenant will pay their pro rata share of operating expenses in excess of their
base year of 1997. An allowance for tenant improvements of $1,036,880 was
provided to be paid out of the working capital reserve of RELP IV.
Apollo Computer Building. USAA Chelmsford Associates Joint Venture, the
joint venture in which RELP IV holds a 55.84% interest is the sole beneficiary
of USAA IV Trust which owns the property in fee-simple and operates the Apollo
Computer Research and Development Headquarters Building which is located in
Chelmsford, Massachusetts, a suburb of Boston. The property consists of an
office/research and development facility containing approximately 291,424 net
leasable square feet situated on 26.651 acres. At June 30, 1997, the property
was 100% leased and average monthly cash rental was $236,000. The mortgage
payable on this property at June 30, 1997 is $15,202,386. The property is an
office/R & D building and is leased under a triple net lease to Hewlett-Packard
Company, successor in interest to Apollo Computer, Inc. During 1995,
negotiations with Hewlett-Packard Company resulted in the renewal of their lease
for an additional 41 months. The new monthly rental rate of approximately $.57
per square foot for the 291,424 square foot building began January 1997. This
rate is lower than the rate paid in 1996 of approximately $.76 per square foot
and reflects the current market conditions in the area surrounding the property.
An allowance for tenant improvements was provided at a total of approximately
$565,000 to be paid from the working capital reserve. During 1996,
Hewlett-Packard used approximately $260,000 of the allowance for tenant
improvements. Approximately $305,000 remains of the tenant improvement allowance
as of June 30, 1997. This tenant provided approximately $2,763,000 of annual
rental income to RELP IV in 1996, $2,759,000 in 1995 and $2,761,000 in 1994
which represented approximately 72% of total Partnership rental income for 1996,
65% for 1995 and 54% for 1994.
Employees and General Partner
RELP IV has no employees; it has, however, entered into an Advisory
Agreement with Realco. Realco is responsible for managing the day-to-day
operations of RELP IV. The General Partner of RELP IV is USAA Properties IV,
Inc., a Texas corporation and a subsidiary of Realco. USAA Properties IV, Inc.
has the general responsibility for management of RELP IV's business and oversees
the activities of Realco.
Market for the RELP IV Interests and Distributions
There is no established public trading market for the RELP IV Units, and it
is not anticipated that a public market will develop. Upon request, Investor
Services may assist a Limited Partner desiring to transfer his Units. The
limited market for the Units may adversely affect the value of the Units. The
purchase price for the Units upon resale and all other terms of a resale
transaction are subject to negotiation between the buyer and the seller.
As of June 30, 1997 there were 2,995 Limited Partners of RELP IV, owning an
aggregate of 60,495 Units.
During the year ended December 31, 1996, quarterly distributions totaling
$589,826 and $5,958 were distributed to the Limited Partners and General
Partner, respectively, for a total of $595,784 in cash distributions. These
distributions represented a return of capital for both the Limited Partners and
General Partner. During the year ended December 31, 1995, quarterly
distributions totaling $907,425 and $9,166 were distributed to the Limited
Partners and General Partner, respectively, for a total of $916,591 in cash
distributions. During the year ended December 31, 1994, quarterly distributions
totalling $907,426 and $9,166 were distributed to the Limited Partners and
General Partner, respectively, for a total of $916,592 in cash distributions.
105
<PAGE> 126
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
JUNE 30, 1997
AVG. MONTHLY
JUNE 30, 1997 RENTAL RATES PER
NET LEASABLE YEAR PLACED AVG. % NET LEASABLE
PROPERTY AND LOCATION SQUARE FEET IN SERVICE OCCUPANCY SQUARE FEET
--------------------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Linear Technology Office Building,
Milpitas, CA....................... 42,130 1986 100.00% 0.76
Eastman Kodak Office Building, San
Diego, CA.......................... 57,747 1987 80.58 0.85
1881 Pine Street Office Building, St.
Louis, Missouri.................... 106,340 1987 87.22 0.23
Apollo Computer Research and
Development Headquarters Building,
Chelmsford, MA..................... 291,424 1987 100.00 0.81
-------
Total...................... 497,641
</TABLE>
LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for RELP
IV's properties assuming that none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
ANNUALIZED 1997
NET LEASABLE AREA BASE RENTAL INCOME
-------------------- ---------------------
NUMBER OF APPROX. PERCENTAGE PERCENTAGE AVG. PER
LEASE EXPIRATION YEAR LEASES EXPIRING SQ. FT. OF TOTAL OF TOTAL SQ. FT.
--------------------- --------------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1998................................ 1 34,600 6.95% 9.14% $10.44
1999................................ 0 0 0.00 0.00 0.00
2000................................ 2 333,554 67.03 60.18 15.86
2001................................ 1 22,376 4.50 7.22 12.75
2002................................ 2 73,155 14.70 23.46 12.68
2003................................ 0 0 0.00 0.00 0.00
2004................................ 0 0 0.00 0.00 0.00
2005................................ 0 0 0.00 0.00 0.00
2006................................ 0 0 0.00 0.00 0.00
2007................................ 0 0 0.00 0.00 0.00
- ------- ----- ------ ------
Total..................... 6 463,685 93.18% 100.00% $ 8.53
= ======= ===== ====== ======
</TABLE>
MORTGAGE INDEBTEDNESS
<TABLE>
<CAPTION>
6/30/97
PRINCIPAL AMORTIZATION ANNUAL DEBT
PROPERTY BALANCE SCHEDULE INTEREST RATE MATURITY DATE SERVICE
-------- ----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Kodak...................... $ 1,131,500 $ 14,391* 9.625% 08/01/08 $ 172,692
Apollo..................... 15,287,583 $130,181 9.125 08/01/01 1,562,172
----------- ----------
Total............ $16,419,083 $1,734,864
=========== ==========
</TABLE>
- ---------------
* (monthly, including interest)
106
<PAGE> 127
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RELP I
The following discussion should be read in conjunction with the Financial
Statements of RELP I and accompanying Notes included elsewhere in this Joint
Proxy Statement/Prospectus. The statements contained in this Joint Proxy
Statement/Prospectus that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results may differ materially from those
included in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, changes in
general economic conditions in the markets that could impact demand for RELP I's
properties and changes in financial markets and interest rates impacting RELP
I's ability to meet its financing needs and obligations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, RELP I had cash of $46,204 and temporary investments
of $926,892. These funds were held in the working capital reserve for the
payment of obligations of RELP I . Accounts receivable consisted of amounts due
from tenants at Volusia Point and the Systech building. Deferred charges and
other assets consisted of deferred rent that resulted from recognition of income
as required by generally accepted accounting principles and lease commissions.
Accounts payable included amounts due to Affiliates for management fees and
reimbursable expenses and amounts due to third parties for expenses incurred for
operations. Accrued expenses and other liabilities consisted of security
deposits and prepaid revenue from tenants.
On January 31, 1996, the maturity date of the Plaza on the Lake mortgage
loan receivable, RELP I received $5,440,000 from Realco, the borrower, in full
payment of the loan. Approximately $5,000,000 of the proceeds from the loan
payoff, or $91.56 per Unit, was distributed to the Limited Partners during the
quarter ended March 31, 1996. The balance of the proceeds of approximately
$440,000 was held by RELP I for future operating requirements.
In addition to the distribution of funds from the mortgage loan payoff,
RELP I distributed $709,930 to its Limited Partners and $7,171 to the General
Partner during 1996 for a total of $717,101, or $13.00 per Unit. Quarterly
distributions were decreased from $4.00 per Unit to $3.00 per Unit beginning in
the first quarter of 1996 due to the reduced cash flow that occurred subsequent
to the repayment of the mortgage loan receivable and the resulting loss of
interest income to RELP I. During the ten-year term of the mortgage loan
receivable, RELP I recorded interest income on the mortgage loan receivable,
including participation income, averaging approximately $590,000 per year.
Quarterly distributions were increased in the fourth quarter of 1996 from
$3.00 to $4.00 per Unit.
Management evaluates reserves and the availability of funds for
distribution to the partners on a continuing basis based on anticipated leasing
activity and cash flows available from RELP I investments.
At the Systech building, a 42-month lease was executed in July 1996 between
RELP I and a new tenant after a change in Systech Computer Corporation's
business requirements. The new tenant is ISI. In August 1996, ISI occupied
24,191 square feet of the Systech building. Prior to the scheduled date of
December 1996, ISI moved into an additional 4,712 square feet. The lease
provides for a subsequent addition of 13,201 square feet in April 1998,
following vacancy of that space by Systech Computer Corporation. The lease also
provides ISI with the right of first refusal for any additional space which may
become available on the fourth floor of the building as a result of the early
termination of the lease with Systech Computer Corporation. The rental rate for
ISI began at $10.13 per square foot per year and will increase to $12.57 per
square foot per year over the term of the lease. In addition to rent, ISI will
pay their pro rata share of property operating expenses which exceed those of
1995, the base year.
The lease between RELP I and Systech Computer Corporation was amended in
July 1996 to allow for the gradual decrease of leased square footage and early
termination. In August 1996, Systech Computer Corporation vacated the first two
floors of the four story office building to accommodate occupancy by ISI.
Systech Computer Corporation's lease obligation was further reduced in December
1996 by the 4,712 square
107
<PAGE> 128
feet ISI expanded into; a further reduction is scheduled to occur in March 1998,
and will again be followed by the increases in space occupied by ISI.
The rental rate for ISI is lower than the rate paid by Systech Computer
Corporation. To compensate RELP I for this difference and the potential vacancy
of approximately 8,300 square feet on the fourth floor of the Systech building,
the tenant forfeited its security deposit of approximately $36,400, paid a
$10,000 buy-out fee and was responsible for payment of brokerage fees and legal
fees associated with this lease restructuring process. In addition to payment of
these fees, Systech's current rental rate was increased from $11.04 to $11.53
per square foot per year, and will increase to $12.98 over the remaining term of
the lease.
Approximately $75,000 of RELP I's commitment for the final phase of tenant
improvements at the Systech building was expended as of December 31, 1996. The
original $84,400 allowance for the improvements was increased to approximately
$97,000 to allow for HVAC improvements. The balance of approximately $22,000 was
paid in January 1997 and was funded from the working capital reserve of RELP I.
Comparison of Three Months Ended March 31, 1997 to March 31, 1996
At March 31, 1997, RELP I had cash of $41,435 and temporary investments of
$1,004,834. These funds were held in the working capital reserve for the payment
of obligations of the Partnership. Accounts receivable consisted of amounts due
from tenants at both of RELP I properties. Deferred charges and other assets
consisted of deferred rent that resulted from recognition of income as required
by generally accepted accounting principles and lease commissions. Accounts
payable included amounts due to affiliates for management fees and reimbursable
expenses and to third parties for expenses incurred for operations. Accrued
expenses and other liabilities consisted of property tax accruals, security
deposits and prepaid revenue from tenants.
During the quarter ended March 31, 1997, RELP I distributed $218,440 to
Limited Partners and $2,206 to the General Partner for a total of $220,646.
Management evaluates reserves and the availability of funds for distribution to
the Partners on a continuing basis based on anticipated leasing activity and
cash flows available from RELP I investments. As a result of this analysis,
quarterly distributions were increased from $3.00 to $4.00 per limited
partnership unit in the fourth quarter of 1996.
Due to strengthening market conditions surrounding RELP I properties and
occupancy levels achieved at the properties, management believes the portfolio
is well positioned to sell. The Partnership will continue to explore options for
possible sale of both properties. To date, no formal plan for final disposition
of the properties has been made.
Due to the recent change in tenancy, the name of the Systech building has
been changed to 10505 Sorrento Valley Road. The balance of approximately $22,000
of RELP I's commitment for the final phase of tenant improvements at this
property was expended in January 1997. The funding of these improvements was
from the working capital reserve of RELP I.
Future liquidity is expected to result from cash generated from operations
of the properties, interest on temporary investments and ultimately through the
sale of the properties.
RESULTS OF OPERATIONS
For each of the years in the three-year period ended December 31, 1996,
income was generated from rental income from the income producing properties,
interest income and participation income earned on the mortgage loan and
interest income earned on the funds invested in temporary investments. As there
was no lease in force at the Systech building from August 1993 through February
1995, no income was generated by that property during that period. Subsequent to
January 31, 1996, the date of the payoff of the mortgage loan receivable, no
interest was earned on that investment. Expenses incurred during the same
periods were associated with operations of RELP I's properties and various other
costs required for administration of RELP I.
108
<PAGE> 129
The decrease in rental properties from December 31, 1995 to December 31,
1996 was attributable to depreciation on RELP I's properties, and was offset by
the tenant improvements at the Systech building. Cash and cash equivalents
increased during the same period primarily due to the reserve held by RELP I
from the proceeds of the mortgage loan payoff. The increase in accounts
receivable from December 31, 1995 to December 31, 1996 reflects outstanding
reimbursement of property operating expenses from tenants at the Systech
building. Amortization of lease commissions for the Systech building caused the
decrease in deferred charges. The increase in accounts payable reflected timing
of payment of tenant improvements at the Systech building. The receipt of
prepaid revenue from a tenant at the Systech building accounted for the increase
in accrued expenses from December 31, 1995 to December 31, 1996.
The increases in rental income from the twelve-month period ended December
31, 1994 to December 31, 1995 and from the twelve-month period ended December
31, 1995 to December 31, 1996 reflected the March 1, 1995 commencement of a
single-tenant lease at the Systech building. The increase in rental income from
1995 to 1996 was also impacted by Systech Computer Corporation's forfeiture of
its $36,456 security deposit, payment of a $10,000 fee related to the lease
restructuring and receipt of reimbursable property operating expenses subsequent
to the 1995 base year of the leases at the Systech building.
Occupancy at Volusia Point remained fairly consistent at 92%, 88% and 93%
at December 31, 1996, 1995 and 1994, respectively. The increase in rental income
at Volusia Point from the year ended December 31, 1995 to December 31, 1996 that
resulted from the increase in occupancy was offset by a decrease in percentage
rent during the same period.
The decrease in interest income from the mortgage loan receivable for the
year ended December 31, 1996 from the two prior years reflected the January 31,
1996 payoff of the receivable. Interest income on cash held by RELP I fluctuated
during the three-year period ended December 31, 1996 as a result of the changes
in cash and cash equivalents held by RELP I.
The increases in direct expenses during the three-year period ended
December 31, 1996 was consistent with the increase in depreciation on the tenant
and building improvements at the Systech building. This increase in depreciation
expense from 1995 to 1996 was partially offset by increases in reimbursements of
property operating expenses from tenants at the Systech building during the same
time period.
General and administrative expenses remained stable overall during each of
the years in the three-year period ended December 31, 1996. Printing charges
decreased in each of the years in the three-year period ended December 31, 1996.
The decrease from 1994 to 1995 reflected savings realized on annual reports to
investors. Legal charges were higher for the year ended December 31, 1994 than
for the years ended December 31, 1995 and 1996 due to pending litigation at both
of RELP I's properties during 1994. The mortgage loan servicing fee decreased as
a result of the payoff of the mortgage loan receivable in January 1996. These
decreases in printing and legal charges and the mortgage loan servicing fee were
offset by increases in amortization expense on lease commissions at the Systech
building.
RELP I's management fee is based on cash flow from operations of RELP I
adjusted for cash reserves and fluctuated accordingly. The decrease in the
management fee for the year ended December 31, 1996 from the prior year
reflected the decrease in revenue resulting from the maturity of the mortgage
loan receivable. The increase in the management fee for the year ended December
31, 1995 from the prior year resulted from the increase in rental revenue at the
Systech building.
Comparison of Three Months Ended March 31, 1997 to March 31, 1996
For the three-month periods ended March 31, 1997 and 1996, income was
generated from rental income from the income producing properties and interest
earned on the funds invested in temporary investments. Interest income and
participation income earned on the mortgage loan prior to the January 31, 1996
payoff of the mortgage loan receivable is also included in income for the
three-month period ended March 31, 1996. Expenses incurred during the same
periods were associated with operations of RELP I's properties and various other
costs required for administration of RELP I.
109
<PAGE> 130
The decrease in rental properties from December 31, 1996 to March 31, 1997
was primarily attributable to depreciation on RELP I properties. The decrease in
accounts receivable during the same time period reflects the collection of rents
and reimbursable operating expenses from tenants at both of RELP I properties.
Amortization of lease commissions for 10505 Sorrento Valley Road caused the
decrease in deferred charges. The decrease in accounts payable reflected timing
in payment of tenant improvements at 10505 Sorrento Valley Road. Accrued
property taxes for both of RELP I properties accounted for the increase in
accrued expenses and other liabilities.
Rental income increased at both of RELP I properties from the three-month
period ended March 31, 1996 to the same three-month period in 1997.
Approximately $26,000 of the increase was attributable to the increase in
occupancy and percentage rent at Volusia Point Shopping Center. The balance of
the increase of approximately $53,000 was realized as a result of the increase
in physical occupancy at 10505 Sorrento Valley Road and the receipt from tenants
of reimbursable operating expenses subsequent to their base year. The decrease
in interest income from the mortgage loan for the three-month period ended March
31, 1997 was the result of the January 31, 1996 payoff of the receivable.
Interest income was higher for the three-month period in 1996 as a result of the
increase in cash and cash equivalents temporarily held by RELP I after the
payoff of the mortgage loan receivable and prior to distribution of those
proceeds to Limited Partners.
The increase in direct expenses from the three-month period ended March 31,
1996 to the three-month period ended March 31, 1997 reflected increases in
utility and cleaning charges at 10505 Sorrento Valley Road which resulted from
the increase in physical occupancy at the property. The increase in depreciation
during the same period was due to the addition of tenant improvements at 10505
Sorrento Valley Road, and was partially offset by a decrease in depreciation at
Volusia Point as some tenant improvements were fully depreciated in 1996.
General and administrative expenses decreased from the three-month period
in 1996 to the three-month period in 1997 primarily as a result of lower postage
and audit fees. Legal expenses were also higher during the three-month period
ended March 31, 1996 due to the lease restructuring that occurred at 10505
Sorrento Valley Road during that period. The portfolio management fee is based
on cash flow from operations of RELP I, adjusted for cash reserves, and
fluctuated accordingly.
INFLATION
An increase in inflation could affect RELP I's investments through
increases in the costs of operating and maintaining the properties acquired and
in various administrative costs of Partnership operation. The adverse effect
inflation may have on operating expenses would be offset to some extent by
increases in rental rates charged tenants at RELP I's properties. If high
occupancy levels are maintained at the properties, increases in rental income
should offset increasing property operating expenses with a minimal effect on
operating income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RELP II
The following discussion should be read in conjunction with the Financial
Statements of RELP II and accompanying Notes included elsewhere in this Joint
Proxy Statement/Prospectus. The statements contained in this Joint Proxy
Statement/Prospectus that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results may differ materially from those
included in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, changes in
general economic conditions in the markets that could impact demand for RELP
II's properties and changes in financial markets and interest rates impacting
RELP II's ability to meet its financing needs and obligations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, RELP II had cash of $30,737 and temporary investments of
$804,821. Included in RELP II's cash and cash equivalents was the working
capital reserve. Deferred charges and other assets
110
<PAGE> 131
included an acquisition fee paid to the General Partner on the joint venture
interest and deferred rent resulting from recognition of income as required by
generally accepted accounting principles. Accounts payable included amounts due
to affiliates for reimbursable expenses and amounts due to third parties for
expenses incurred for operations. Accrued expenses and other liabilities
consisted primarily of prepaid rent and a security deposit.
Total cash distributions to partners for the year ended June 30, 1996
decreased as compared to the year ended June 30, 1995. Distributions were
reduced to $7.00 per Unit as of the quarter ended March 31, 1995. Distributions
were decreased in order to avoid borrowing to fund the construction of the
addition at the Continental Plastic Buildings and maintain working capital at an
adequate level for operations. Management will continue to monitor RELP II's
cash requirements.
In March 1995, RELP II completed negotiations with Continental Plastic
Containers, Inc. to expand the facilities under lease and to extend the term of
the triple net lease at the Continental Plastic Buildings. The original lease
expiration was extended from April 1998 to February 2011. RELP II funded
approximately $1.7 million to provide 45,200 square feet of additional leasable
area. The building expansion was completed and the tenant occupied the building
in March 1996. RELP II utilized working capital to fund the construction.
The Bowater Building, located in Lakeland, Florida, remained 100% occupied
during the fiscal year ended June 30, 1996. The property was leased under a
triple net lease to Bowater Communication Papers, Inc. with a lease expiration
in July 1999. During the year, Bowater Communication Papers changed its name to
Star Forms Incorporated. During the second fiscal quarter, Star Forms, Inc. was
sold to CST Office Products. Leasing efforts will begin to pursue renewal of
this lease.
Future liquidity is expected to result from the temporary investment of
working capital funds, cash generated from the operations of the properties and
ultimately through the liquidation of such properties.
Comparison of Three Months and Nine Months Ended March 31, 1997 to March 31,
1996
At March 31, 1997, RELP II had cash of $115,904 and temporary investments
of $772,817. These funds were held in the working capital reserve for the
payment of obligations of RELP II. Deferred charges and other assets included an
acquisition fee paid in 1988 to USAA Investors II, Inc., the General Partner, in
connection with the acquisition of the interest in the joint venture which owns
Sequoia Plaza -- Building I. Deferred charges also included deferred rent
resulting from recognition of income as required by generally accepted
accounting principles. Accounts payable included amounts due to affiliates for
reimbursable expenses and to third parties for expenses incurred for operations.
Accrued expenses and other liabilities consisted primarily of a security deposit
and prepaid rent.
During the quarter ended March 31, 1997, RELP II distributed $237,484 to
Limited Partners and $26,387 to the General Partner for a total of $263,871.
During the second fiscal quarter, Star Forms, Inc., the single tenant at
the Bowater Building in Lakeland, Florida, was sold to CST Office Products, Inc.
The lease has an expiration date of July 1999. Also during the second fiscal
quarter, RELP II entered into a contract to sell the Bowater Building. During
the due diligence period, the potential buyer inspects the property, arranges
for financing, evaluates the tenant and the lease terms and has the option to
cancel the contract. The contract with the potential buyer was canceled during
April due to the buyer being unable to arrange for third-party financing. The
property will continue to be marketed to other interested buyers.
RESULTS OF OPERATIONS
For the three-year period ended June 30, 1996, income was generated from
rental income from the income-producing rental properties, interest income
earned on the funds in temporary investments and earnings from the joint venture
interest.
111
<PAGE> 132
Expenses incurred during each of the years in the three-year period ended
June 30, 1996 were associated with the operations of RELP II's properties and
various other costs required for the administration of RELP II.
Rental properties at June 30, 1996 increased from June 30, 1995 due to the
building addition costs at Continental Plastic offset by depreciation. The
investment in the joint venture decreased by the amount of distributions
received from the joint venture offset by increases as a result of equity in
earnings of the joint venture which were derived from the net income of the
Sequoia Plaza I property. The decrease in cash and cash equivalents at June 30,
1996 was attributable to the building addition costs at the Continental Plastic
Buildings. Accounts receivable decreased due to payment of reimbursable expenses
by a tenant. The increase in accounts payable at June 30, 1996 was due to final
invoices for the building expansion at the Continental Plastic Buildings.
Accrued expenses and other liabilities at June 30, 1996 increased from June 30,
1995 as a result of an increase in prepaid rent.
Rental income was higher for the year ended June 30, 1996 as compared to
the year ended June 30, 1995 primarily as a result of Continental Plastic
Containers occupying the building addition and paying the increased rental rate.
The increase in rental income for the year ended June 30, 1995 as compared to
the year ended June 30, 1994 was attributable to rent increases based on CPI
(Consumer Price Index) at Bowater.
Direct expenses were higher for the year ended 1996 as compared to the year
ended 1995 as a result of four months of depreciation on the building addition
at Continental Plastic.
Lower cash balances caused the decrease in interest income for the year
ended 1996 as compared to the year ended 1995. A higher cash balance and an
increase in interest rates resulted in an increase in interest income for 1995
as compared to 1994.
General and administrative expenses for 1996 were lower than 1995 due to a
decrease in state filing fees. General and administrative expenses for 1995
increased as compared to 1994 due to an increase in state filing fees and higher
charges for the preparation of federal and state returns.
Comparison of Three Months and Nine Months Ended March 31, 1997 to March 31,
1996
For the three months and nine months ended March 31, 1997 and 1996, income
was generated from rental income from the income-producing properties, earnings
from the joint venture investment and interest income earned on the funds
invested in temporary investments.
Expenses incurred during the same periods were associated with operation of
RELP II's properties and various other costs required for administration of RELP
II.
Rental properties at March 31, 1997 decreased from June 30, 1996 due to
depreciation. Deferred charges and other assets at March 31, 1997 increased from
June 30, 1996 due to deferred rent at Continental Plastic.
Rental income was higher for the three-month and nine-month periods ended
March 31, 1997 as compared to the three-month and nine-month periods ended March
31, 1996 as a result of the lease renewal and the building addition at
Continental Plastic. The tenant began paying the increased rent on March 1,
1996.
Equity in earnings increased for the three-month and nine-month periods
ended March 31, 1997 as compared to the three-month and nine-month periods ended
March 31, 1996 as a result of an increase in net income of Sequoia I, the joint
venture property. Net income increased at Sequoia I due to an increase in
occupancy.
Interest income decreased as a result of lower cash balances for the
three-month and nine-month periods ended March 31, 1997 as compared to the
three-month and nine-month periods ended March 31, 1996.
Direct expenses increased for the nine-month period ended March 31, 1997 as
compared to the nine-month period ended March 31, 1996 due to loading dock
repairs at the Bowater Building.
112
<PAGE> 133
Depreciation increased for the three-month and nine-month periods ended
March 31, 1997 due to the building addition at Continental Plastic.
General and administrative expenses for the three-month and nine-month
periods ended March 31, 1997 increased as compared to the three-month and
nine-month periods ended March 31, 1996 due to lease commissions paid at
Continental Plastic on the lease renewal.
INFLATION
An increase in inflation could affect RELP II's investments through
increases in the costs of operating and maintaining the properties and in
various administrative costs of operations. The adverse effect inflation may
have on operating expenses would be offset to some extent by contractual
increases in rental rates and tenant reimbursement of expenses incurred at RELP
II's properties.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RELP III
The following discussion should be read in conjunction with the Financial
Statements of RELP III and accompanying Notes included elsewhere in this Joint
Proxy Statement/Prospectus. The statements contained in this Joint Proxy
Statement/Prospectus that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results may differ materially from those
included in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, changes in
general economic conditions in the markets that could impact demand for RELP
III's properties and changes in financial markets and interest rates impacting
RELP III's ability to meet its financing needs and obligations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, RELP III had cash of $118,000 and temporary
investments of $9,301,147. Included in the cash and cash equivalents were the
working capital reserve and funds held for current obligations of RELP III.
Accounts receivable consisted of tenant receivables. Deferred charges and other
assets included deferred rent resulting from recognition of income as required
by generally accepted accounting principles, lease commissions and prepaid
expenses. Accounts payable included amounts due to affiliates for reimbursable
expenses and management fees, and amounts due to third parties for expenses
incurred for operations. Accrued expenses and other liabilities consisted
primarily of security deposits, prepaid rent and accrued property taxes.
The $11,000,000 mortgage on Curlew Crossing matured on March 31, 1996. The
lender, Realco, renewed the loan for a period of two years at an annual interest
rate of 8.25% to reflect market rates at the time of maturity. This rate is a
decrease from the 10.25% paid in March 1996 which was based on the lesser of 12%
or prime rate plus two percent. Interest is payable monthly with the principal
due March 31, 1998.
In April 1996, RELP III received $220,400 as a result of land condemned at
Curlew Crossing by the Florida Department of Transportation ("FDOT"). This
represented a good faith estimate of the value of the land actually taken. The
land was condemned in connection with the widening of Curlew Road. Contrary to
early concerns regarding the extent and nature of the condemnation, no parking,
access or structure at Curlew was included in the taking. During 1996, the
tenant of two out parcels, containing approximately 15,700 square feet, has
claimed the right to terminate its respective leases based upon the FDOT taking.
RELP III has initiated legal action against the defaulted tenant and is
currently seeking a summary declaration by the court regarding the continuing
nature of the leases as well as recovery of the rent and other sums due under
the leases. Following the adjudication of this tenant related action, a final
determination will be made regarding the total damages due from the FDOT to RELP
III as a result of the condemnation. Resolution of both the tenant action and
condemnation proceeding are anticipated by the third quarter of 1997.
113
<PAGE> 134
Substantial completion of the improvements for Hospitality Franchise
Systems, Inc. ("HFS") at the Ramada property in Phoenix, Arizona occurred
October 31, 1996. RELP III funded approximately $1.2 million related to its
commitment for improvements from the working capital reserve of RELP III.
During the tenant improvement phase, the base rent due from HFS was at a
reduced rate and HFS was responsible for all operating expenses of the property.
Upon substantial completion of the improvements, the rental rate increased to
approximately $14.61 per square foot annually and HFS will pay its proportionate
share of operating expenses which exceed $7.00 per square foot annually.
During the fourth quarter, a small parcel of land adjacent to the Skygate
Commons property was purchased for approximately $72,000. RELP III purchased the
property to be used for additional parking. Market interest in the area
surrounding the Skygate Commons property has been increasing. As a result of
this interest, the remaining two buildings at the Skygate Commons property were
scheduled for renovation which will begin in March 1997. Renovations will
include improvements to comply with the ADA, and heating, air conditioning and
exterior renovations. The total cost of renovations will be approximately
$900,000 to be paid from the working capital reserve of RELP III.
The Manhattan Towers Buildings in Manhattan Beach, California were 100%
leased to Hughes Aircraft Company until August 31, 1996. Control of the daily
operations was assumed upon expiration of the Hughes lease. As part of the
marketing campaign to re-lease the property, the name of the property was
changed from Parkview Plaza to Manhattan Towers. Along with this name change,
the property will undergo repairs and renovations to the lobby area, corridors
and parking lot, as well as exterior landscaping and signage. The cost of these
renovations is estimated to be $2.7 million to be funded from the working
capital reserve of RELP III. In addition, subterranean water damage was
discovered in the parking garage. Engineers and other consultants were hired to
assess the damage and determine the appropriate remediation. The cost of the
repairs to the parking garage is estimated to be $1.1 million and will be funded
from the working capital reserve of RELP III.
Since the expiration of the Hughes lease in August 1996, significant
leasing activity has occurred. Hughes Aircraft Company negotiated a one-year
lease for 79,647 square feet at an annual rate of $12 gross per square foot with
an expiration date of August 31, 1997. The previous annual rental rate was
approximately $22.64 net per square foot for the entire 301,457 square feet of
net leasable area.
Other leases signed have terms from three to five years at an annual rental
rate of $13.80 per square foot. One of the five year leases provided for an
allowance for tenant improvements at $6.00 per square foot for a total of
$74,274 to be paid out of the working capital reserve of RELP III.
A 62-month lease was signed during the fourth quarter for 11,553 square
feet. This lease commenced February 1, 1997 and ends March 31, 2002. The lease
provides for an annual rental rate of $19.20 per square foot. An allowance for
tenant improvements was provided for a total of approximately $404,000 to be
paid from the working capital reserve of the Partnership.
As of December 31, 1996, these leases at Manhattan Towers total 145,796 of
the 301,457 square feet, or 48%, of the total leasable area of the property.
Rental rates for these new leases are lower than the previous rate charged to
Hughes, reflecting the current market conditions in the area surrounding the
property. One of the two buildings at this property remains vacant. Several
large tenant prospects have expressed interest in leasing the vacant building.
The Manhattan Towers mortgage loan matured on August 31, 1996. The lender,
Las Colinas Management Company, an affiliate of the General Partner of RELP III,
renewed the loan for a period of two years at an annual interest rate of 9.57%
to reflect market rates at the time of maturity. The loan was converted to
monthly interest only payments with the principal of $15,000,000 due September
30, 1998. This change in payment terms of the mortgage loan resulted in a
decrease in monthly debt service payments of approximately $190,000.
During the year ended December 31, 1996, quarterly distributions totaling
$1,087,603 and $10,985 were distributed to the Limited Partners and General
Partner, respectively, for a total of $1,098,588 in cash
114
<PAGE> 135
distributions. Total cash distributions to partners for the year ended December
31, 1996 decreased as compared to the year ended December 31, 1995 to reserve
cash for the renovations, tenant improvements and lease commissions required to
re-lease Manhattan Towers upon expiration of the Hughes lease. Due to the
expiration of the Hughes lease in August 1996, the two remaining vacant
buildings at Skygate Commons and the vacancy at Curlew Crossing, tenant
improvements and lease commissions will be required at all of RELP III
properties and will be funded from RELP III's working capital reserve.
Management evaluates reserves and the availability of funds for distribution to
partners on a continuing basis based on anticipated leasing activity and cash
flows available from RELP III's investments.
Comparison of Three Months Ended March 31, 1997 to March 31, 1996
At March 31, 1997, RELP III had cash of $58,242 and temporary investments
of $7,924,399. These funds were held in the working capital reserve for the
payment of obligations of RELP III. Accounts receivable consisted of amounts due
from tenants. Deferred charges and other assets included deferred rent resulting
from recognition of income as required by generally accepted accounting
principles and lease commissions. Accounts payable included amounts due to
affiliates for reimbursable expenses and amounts payable to third parties for
expenses incurred for operations. Accrued expenses and other liabilities
consisted primarily of accrued property taxes, prepaid rent and security
deposits.
During the quarter ended March 31, 1997, RELP III distributed $223,098 to
Limited Partners and $2,254 to the General Partner for a total of $225,352.
During April, a fifty-six month lease was signed at Manhattan Towers with
TRW, Inc. for 155,118 square feet at a net monthly base rent of $141,200. In
addition, TRW will pay its pro rata share of operating expenses of the property.
TRW will occupy one of the two towers at Manhattan Towers. RELP III provided a
tenant improvement allowance for a total of approximately $2.7 million, or
approximately $17 per square foot, to be paid out of the working capital reserve
of RELP III. This lease resulted in approximately 97% of the property being
leased.
Also at Manhattan Towers, the parking garage water damage remediation work
is in progress and is scheduled to be complete by the end of May. The cost of
the repairs is estimated to be approximately $1.1 million and will be funded
from the working capital reserve of RELP III. Renovations at the property are
also in progress which include lobby area, corridors and parking lot as well as
exterior landscaping and signage. The cost for renovations is estimated to be
approximately $1.4 million and will be funded from the working capital reserve
of RELP III.
As part of a marketing campaign to lease the two vacant buildings of the
three building complex at the Phoenix, Arizona property, the name of the
property has been changed from Ramada World Headquarters Building to Skygate
Commons. Renovation to the two vacant buildings began during the first quarter
of 1997 which includes improvements to comply with the Americans With
Disabilities Act, and heating, air conditioning and exterior renovations. The
total cost of the renovations will be approximately $900,000 to be paid from the
working capital reserve of RELP III. In addition, the construction of additional
parking on the adjacent land is planned in an attempt to increase the property's
competitiveness in the market. The cost for the parking lot is estimated at
$95,000 to be funded from the working capital reserve of RELP III.
During April, a five-year lease was signed at Skygate Commons with FHP
International Corporation for one of the two vacant buildings or 22,120 square
feet at an annual rental rate beginning at $14.75 per square foot. The lease
commences July 1997 and terminates June 2002. RELP III provided a tenant
improvement allowance of $331,800 to be paid from the working capital reserve of
RELP III. This lease resulted in approximately 86% of the property being leased.
Future liquidity is expected to result from cash generated from operations
of the properties, interest on temporary investments and ultimately through the
sale of the properties.
115
<PAGE> 136
RESULTS OF OPERATIONS
For the three-year period ended December 31, 1996, income was generated
from rental income from the income-producing real estate properties and interest
income earned on the funds in temporary investments.
Expenses incurred during the same period were associated with the operation
of RELP III's properties, interest on the mortgages payable and various other
costs required for administration of RELP III.
During 1995 and 1994, lease agreements between RELP III and tenants at two
properties were absolute triple net leases. Under an absolute triple net lease,
the lessee is required to make all payments for expenses related to the use and
occupation of the leased premises, including real estate taxes and assessments,
property and liability insurance, repairs and maintenance, utilities and other
operating costs associated with the property. Accordingly, RELP III receives
rental income and the lessee absorbs all such expenses.
Rental properties increased at December 31, 1996 as compared to December
31, 1995 due primarily to improvements at Skygate Commons for HFS, offset by
depreciation. The decrease in cash and cash equivalents was due to payment for
tenant improvements for HFS. Deferred charges and other assets decreased at
December 31, 1996 primarily due to amortizing deferred charges. Other deposits
held decreased as a result of using the deposit held as a contribution toward
tenant improvements for HFS. Accrued expenses and other liabilities decreased at
December 31, 1996 due to a decrease in prepaid rent.
Rental income decreased for the year ended December 31, 1996 as compared to
December 31, 1995 primarily as a result of the expiration of the Hughes lease at
Manhattan Towers. Hughes provided monthly rent revenue of $568,748. Rental
income increased for the year ended December 31, 1995 as compared to December
31, 1994 due to the write-down of a deferred rent receivable on Manhattan Towers
in 1993. Rental income is recognized under the operating method, whereby
aggregate rentals are reported on a straight-line basis as income over the life
of the lease. The deferred rent receivable remaining after the original maturity
date of the mortgage loan (March 31, 1995) was written off in 1993; therefore,
income recognized after March 31, 1995 was actual rent received.
Depreciation expense increased for the year ended December 31, 1996 due to
two months of depreciation on the tenant improvements for HFS. The write-down on
Manhattan Towers in 1994 caused the decrease in depreciation as of December 31,
1995. Other direct expenses increased for 1996 as compared to 1995 as a result
of assuming control of the operations at both Manhattan Towers and Skygate
Commons. Prior to the Hughes lease expiration on August 31, 1996, at Manhattan
Towers, Hughes was responsible for all operating expenses under their triple net
lease. Prior to substantial completion of the tenant improvements at Skygate
Commons for HFS on October 31, 1996, HFS was responsible for all operating
expenses. Operating expenses for Manhattan Towers accounted for approximately
$500,000 of the increase in other direct expenses at December 31, 1996.
Operating expenses for the Skygate Commons property accounted for approximately
$100,000 of the increase. The default by a tenant at Curlew Crossing caused an
increase in property taxes and bad debt expense. Other direct expenses were
higher for 1995 as compared to 1994. Contributing to this increase was an
increase in property insurance expense at Manhattan Towers and an increase in
bad debt expense at Curlew Crossing. Property tax expense was also higher at
Curlew Crossing due to a credit in 1994 resulting from a tax protest. The gain
on disposal of rental property at December 31, 1996 was a result of the land
condemnation at Curlew Crossing. See "Liquidity and Capital Resources" above. An
investment property write-down was recognized on Manhattan Towers in 1994.
Interest income decreased for the year ended December 31, 1996 as compared
to the year ended December 31, 1995 due to lower cash balances. An increase in
interest rates and a higher cash reserve accounted for the increase in interest
income for the year ended December 31, 1995.
General and administrative expenses increased for the year ended 1996 as
compared to the year ended 1995. An increase in legal expenses accounted for
approximately half of the increase. Legal fees were incurred as a result of the
default by a tenant and the land condemnation at Curlew Crossing and new leases
at Manhattan Towers. Lease commissions at Manhattan Towers accounted for the
remaining increase in general and administrative expenses. General and
administrative expenses decreased in 1995 as compared to 1994 due to a decrease
in printing charges and legal fees. The management fee is based on cash flow
from operations of
116
<PAGE> 137
the Partnership adjusted for cash reserves and fluctuated accordingly. The
decrease in management fees for the year ended 1996 was primarily caused by the
expiration of the Hughes lease at Manhattan Towers.
Interest expense decreased for the year ended December 31, 1996 as compared
to the year ended December 31, 1995. The interest rate on the Curlew Crossing
mortgage loan was decreased to 8.25% as compared to the 10.5% paid December 31,
1995. Interest expense on the Manhattan Towers loan decreased due to principal
balance reductions through August 31, 1996. The decrease in interest expense for
1995 as compared to 1994 reflected a decrease in the interest rate charged on
the Manhattan Towers mortgage loan attributable to the loan modifications in
1994 and a decrease in the loan balance from forgiveness of debt and principal
payments. Slightly offsetting this decrease was an increase in interest paid on
the Curlew Crossing mortgage. The Curlew Crossing mortgage is based on the prime
rate and the changes in expense for this mortgage were a result of changes in
the prime rate.
Comparison of Three Months Ended March 31, 1997 to March 31, 1996
For the three-month periods ended March 31, 1997 and 1996, income was
generated from rental income from the income-producing real estate properties
and interest income earned on the funds in temporary investments.
Expenses incurred during the same periods were associated with the
operation of RELP III's properties, interest on the mortgages payable and
various other costs required for administration of RELP III.
Rental properties increased as of March 31, 1997 as compared to December
31, 1996 due to renovation costs and tenant improvements at Manhattan Towers
offset by depreciation. The decrease in cash and cash equivalents at March 31,
1997 was due to payment for renovations and tenant improvements. Accounts
receivable increased at March 31, 1997 primarily due to an increase in
receivables at Skygate Commons. The decrease in accounts payable reflected
timing in the payment of renovation costs at Manhattan Towers. The increase in
accrued expenses and other liabilities was a result of an increase in prepaid
rent and property tax accruals.
Rental income decreased for the three-month period ended March 31, 1997 as
compared to the three-month period ended March 31, 1996 as a result of a
decrease in occupancy from 100% at March 31, 1996 to 48% at March 31, 1997 at
Manhattan Towers. Rental rates for the new leases signed at Manhattan Towers,
since the expiration of the Hughes lease in August 1996, are lower than the rate
charged to Hughes, reflecting market conditions in the area surrounding the
property.
Interest income decreased for the three-month period ended March 31, 1997
as compared to the three-month period ended March 31, 1996 due to lower cash
balances.
Direct expenses were higher for the three-month period ended March 31, 1997
as compared to the three-month period ended March 31, 1996 as a result of
assuming control of the daily operations at both Manhattan Towers and Skygate
Commons. Prior to the Hughes lease expiration on August 31, 1996, at Manhattan
Towers, Hughes was responsible for all operating expenses under terms of their
triple net lease. Operating expenses at Manhattan Towers for the three months
ended March 31, 1997 accounted for approximately $390,000 of the increase in
operating expenses. Prior to substantial completion of the tenant improvements
at for Hospitality Franchise Systems, Inc. ("HFS") at Skygate Commons on October
31, 1996, HFS was responsible for all operating expenses. Operating expenses at
Skygate Commons for the three months ended March 31, 1997 accounted for the
remaining increase in direct expenses. Operating expenses included utilities,
cleaning, landscaping, repairs and maintenance, property taxes, property
insurance, management fees and other building service expenses.
Depreciation expense increased for the three-month period ended March 31,
1997 as compared to the three-month period ended March 31, 1996 due to
depreciation on the tenant improvements at Skygate Commons for HFS which were
completed October 31, 1996.
117
<PAGE> 138
General and administrative expenses increased for the three-month period
ended March 31, 1997 as compared to the three-month period ended March 31, 1996
due to lease commission expense at Manhattan Towers on the new leases.
The management fee is based on cash flow from operations of RELP III
adjusted for cash reserves and fluctuated accordingly. The decrease in
management fees for the three-month period ended March 31, 1997 as compared to
the three-month period ended March 31, 1996 was primarily a result of a decrease
in revenues and an increase in expenses at Manhattan Towers.
Interest expense decreased for the three-month period ended March 31, 1997
as compared to the three-month period ended March 31, 1996. The interest rate on
the Curlew Crossing mortgage loan was decreased to 8.25% in April 1996 compared
to 10.25% paid in March 1996. Interest expense on the Manhattan Towers mortgage
loan increased for the three months ended March 31, 1997. Terms of the loan for
the three months ended March 31, 1997 included monthly interest only payments at
an interest rate of 9.57% on a principal balance of $15,000,000. Terms of the
mortgage loan for the three months ended March 31, 1996 included monthly
principal payments in the set amount of $227,272.72 and interest payments set
monthly at the London Interbank Offered Rate (LIBOR) plus .625% which was
approximately 6% for the March 1996 interest payment.
INFLATION
An increase in inflation could affect RELP III's investments through
increases in the costs of operating and maintaining the properties and in
various administrative costs of operations. The adverse effect inflation may
have on operating expenses would be offset to some extent by increases in rental
rates charged tenants at RELP III's properties. If high occupancy levels are
maintained at the properties, increases in rental income should offset
increasing property operating expenses with minimal effect on operating income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RELP IV
The following discussion should be read in conjunction with the
Consolidated Financial Statements of RELP IV and accompanying Notes included
elsewhere in this Joint Proxy Statement/Prospectus. The statements contained in
this Joint Proxy Statement/Prospectus that are not historical facts are forward-
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Actual results may differ materially from those
included in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, changes in
general economic conditions in the markets that could impact demand for RELP
IV's properties and changes in financial markets and interest rates impacting
RELP IV's ability to meet its financing needs and obligations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, RELP IV had cash of $226,365 and temporary
investments of $977,512. Included in these amounts were the working capital
reserve and funds held for payment of current obligations of RELP IV. Accounts
receivable consisted of amounts due from tenants. Deferred charges and other
assets consisted primarily of deferred rent resulting from recognition of income
as required by generally accepted accounting principles and lease commissions.
Accounts payable consisted of amounts due to affiliates for management fees and
reimbursable expenses and amounts due to third parties for expenses incurred for
operations. Accrued expenses and other liabilities consisted of security
deposits and prepaid rent.
During the third quarter of 1996, a five-year lease was signed with
Sherwood Medical Company at 1881 Pine Street in St. Louis, Missouri. Sherwood
occupied the building on August 24, 1996 and the lease will expire August 2001.
The lease provides for an annual rental rate of $12.75 per square foot for
22,376 square feet of space and annual parking revenue of $21,600. In addition
to rent, Sherwood will pay their pro rata share of operating expenses in excess
of their base year of 1996. An allowance for tenant improvements in the
118
<PAGE> 139
approximate amount of $259,600 was provided which was paid out of the working
capital reserve of RELP IV. In addition, Sherwood paid a security deposit of
$23,774.
During the fourth quarter of 1996, a five-year lease was signed with Busch
Creative Services Corporation for 64,805 square feet at 1881 Pine Street. This
lease commenced February 1, 1997 and will expire on January 31, 2002. The lease
provides for an annual rental rate of approximately $12.25 per square foot and
annual parking revenue of $71,400. In addition, this tenant will pay their pro
rata share of operating expenses in excess of their base year of 1997. An
allowance for tenant improvements of $1,036,880 was provided to be paid out of
the working capital reserve of RELP IV. These two leases at 1881 Pine Street
have resulted in 87,181 square feet of the 106,340 square feet leased at
December 31, 1996.
During 1995, the lease with Hewlett-Packard Company, the single tenant at
the Apollo Building in Chelmsford, Massachusetts was renewed for an additional
41 months. The new monthly rental rate of approximately $.57 per square foot for
the 291,424 square foot building began in January 1997. This rate is lower than
the rate paid in 1996 of approximately $.76 per square foot and reflects the
market conditions in the area surrounding the property. An allowance for tenant
improvements was provided at a total of $565,000 to be paid from the working
capital reserve. During 1996, Hewlett-Packard used approximately $260,000 of the
allowance for tenant improvements. Approximately $197,000 of the tenant
improvement allowance remained as of December 31, 1996.
The Kodak Building was 100% occupied at December 31, 1996 with Eastman
Kodak occupying 34,600 square feet and Invitrogen Corporation occupying the
remaining 23,147 square feet. The lease with Invitrogen was scheduled to expire
in April 1996; however, the lease was extended through December 1996. Invitrogen
paid an extension fee of $20,000. Invitrogen remained in the building until
February 1997 paying holdover rent (200% of December 1996 rent) for January and
February 1997. Eastman Kodak's lease is scheduled to expire February 1998.
Discussions have commenced with Eastman Kodak regarding the possibility of
renewing early and leasing the entire building.
During the year ended December 31, 1996, quarterly distributions totaling
$589,826 and $5,958 were distributed to the Limited Partners and General
Partner, respectively for a total of $595,784 in cash distributions. Cash
distributions were reduced to $2.00 per Unit for the quarter ended March 31,
1996 in order to build working capital reserves to meet the cash requirements
needed for tenant improvements and lease commissions at 1881 Pine Street as new
leases are signed. In addition, tenant improvements and lease commissions will
be required at Kodak due to Invitrogen vacating the premises. Management
evaluates reserves and the availability of funds for distribution to partners on
a continuing basis based on anticipated leasing activity and cash flows
available from investments. Due to the significant amount of the working capital
reserve that was used and will be needed for leasing costs at RELP IV's
properties, RELP IV borrowed $1,200,000 from Realco, subsequent to year-end to
fund working capital needs in 1997. The $6,000,000 note payable was thereby
increased to $7,200,000 with a decrease in the interest rate from 10% to 9%. The
maturity date of the note was extended from September 1997 to March 1, 1999.
Comparison of Three Months Ended March 31, 1997 to March 31, 1996
At March 31, 1997, RELP IV had cash of $102,445 and temporary investments
of $1,504,817. These funds were held in the working capital reserve for the
payment of obligations of RELP IV. Accounts receivable consisted of amounts due
from tenants. Deferred charges and other assets consisted primarily of deferred
rent resulting from recognition of income as required by generally accepted
accounting principles and lease commissions. Accounts payable consisted of
amounts due to affiliates for reimbursable expenses and management fees, and
amounts due to third parties for expenses incurred for operations. Accrued
expenses and other liabilities consisted primarily of security deposits,
property tax accruals and prepaid rent.
During the quarter ended March 31, 1997, RELP IV distributed $120,990 to
Limited Partners and $1,222 to the General Partner for a total of $122,212.
A significant amount of the working capital reserve was used during 1996
and will be needed in 1997 for leasing costs at RELP IV properties. During the
first quarter of 1997, RELP IV borrowed $1,200,000 from
119
<PAGE> 140
USAA Real Estate Company (the Adviser) to fund working capital needs in 1997.
The $6,000,000 note payable was thereby increased to $7,200,000 with a decrease
in the interest rate from 10% to 9%. The maturity date of the note payable was
extended from September 1, 1997 to March 1, 1999.
At March 31, 1997, the Kodak Building was 61% occupied by Eastman Kodak.
Eastman Kodak's lease is scheduled to expire February 1998. Discussions continue
with Eastman Kodak regarding early renewal and the possibility of leasing the
entire building. The lease with Invitrogen Corporation was scheduled to expire
December 31, 1996; however, Invitrogen remained in the building until February
1997 paying holdover rent (200% of December 1996 rent) for January and February.
Water infiltration has been discovered at the Kodak Building which has caused
damage to a portion of the ground floor tiles, exterior walls and slab joints.
Remediation alternatives are being sought with costs estimated to be
approximately $120,000 to be funded from the working capital reserve of RELP IV.
During the first quarter of 1997, a sixty-two month lease was signed at
1881 Pine Street for 8,350 rentable square feet. This resulted in 90% of the
building being leased at March 31, 1997. The lease commenced May 1, 1997 and
will terminate on June 30, 2002. The lease provides for an annual rental rate
beginning at $16.00 per square foot. In addition, this tenant will pay their pro
rata share of operating expenses in excess of a 1997 base year.
RELP IV provided approximately $133,600 of tenant improvements to be paid
out of the working capital reserve of RELP IV.
During 1995, the lease with Hewlett-Packard Company, the single tenant at
the Apollo Building in Chelmsford, Massachusetts was renewed for an additional
41 months. The new monthly rental rate of approximately $.57 per square foot net
for the 291,454 square foot building began January 1, 1997. This rate is lower
than the rate paid in 1996 of approximately $.76 per square foot net and
reflects the market conditions in the area surrounding the property at the time
of the lease renewal. An allowance for tenant improvements was provided for a
total of $565,000 to be paid from the working capital reserve. During the first
quarter of 1997, Hewlett-Packard used approximately $81,000 of the allowance.
Approximately $116,000 of the allowance remains. Hewlett-Packard has announced
plans to relocate its workstation group out of Massachusetts. They also
announced plans to sublease the top floor of the Apollo Building.
Future liquidity is expected to result from cash generated from the
operations of the properties, interest on temporary investments and ultimately
through the sale of the properties.
RESULTS OF OPERATIONS
For the three-years ended December 31, 1996, income was generated from
rental income from the income-producing real estate properties and from interest
income earned on the funds in temporary investments.
Expenses incurred during the same periods were associated with the
operation of RELP IV's properties, interest on the mortgages and note payable
and various other costs required for administration of RELP IV.
During 1996, 1995 and 1994, two of RELP IV's properties were single-tenant
properties with absolute triple net leases. Under an absolute triple net lease,
the lessee is required to make all payments for expenses related to the use and
occupation of the leased premises, including real estate taxes and assessments,
property and liability insurance, repairs and maintenance, utilities and other
operating costs associated with the property. Accordingly, RELP IV received
rental income and the lessee absorbed all such expenses on these properties.
Rental properties decreased as of December 31, 1996 as compared to December
31, 1995 due to depreciation, offset by tenant improvements at 1881 Pine Street
and Apollo. Cash and cash equivalents decreased as of December 31, 1996 as
compared to December 31, 1995 due to payment for tenant improvements. Deferred
charges and other assets increased as of December 31, 1996 due to lease
commissions at 1881 Pine Street.
120
<PAGE> 141
Rental income decreased for the year ended 1996 as compared to the year
ended 1995 primarily due to the vacancy at 1881 Pine Street. The rental rate
decrease at Linear due to the 1995 renewal added to the variance for 1996.
Rental income decreased for 1995 as compared to 1994 primarily due to the single
tenant at 1881 Pine Street vacating the property in May 1995 upon expiration of
the lease. The single tenant provided approximately $1.3 million of rental
income during 1994. Also contributing to the decrease in rental income in 1995
was the rent reduction at Linear. The tenant at Linear renewed at a monthly rate
of $.75 per square foot for the 42,130 square foot building, which is lower than
the previous monthly rate of $1.15 per square foot and reflects the current
market conditions in the area surrounding the property.
Depreciation increased for 1995 as compared to 1994 due to improvements at
1881 Pine Street and Kodak. Other direct expenses were higher for 1996 as
compared to 1995 due to operating expenses at 1881 Pine Street. The 1881 Pine
Street property incurred legal fees for new leases, expenses for utilities,
heating and air conditioning repairs and other building service expenses
previously paid by the single tenant. Other direct expenses were higher for 1995
as compared to 1994 as a result of sidewalk repairs, property tax payments and
demolition costs at the 1881 Pine Street property to enhance the appearance of
the property for showing to prospective tenants. Also contributing to the
increase were parking lot repairs at the Apollo Building which was part of the
tenant improvement allowance.
Lower cash reserves caused the decrease in interest income for the year
ended 1996 as compared to the year ended 1995. Higher interest rates and an
increase in cash reserves accounted for the increase in interest income for 1995
as compared to 1994.
General and administrative expenses increased for the year ended 1996 as
compared to the year ended 1995 primarily due to lease commission expense. Lease
commissions were paid for the Linear Technology lease renewal and the Invitrogen
lease renewal at the Kodak Building. General and administrative expenses
decreased for 1995 as compared to 1994 due to a reduction in charges for
preparation of federal and state tax returns, a reduction in a partnership
earnings tax paid to the City of St. Louis and a decrease in printing charges.
The management fee payable to Realco is based on cash flow from operations
of RELP IV adjusted for cash reserves and fluctuated accordingly. The decrease
in the management fee for 1996 as compared to 1995 was a result of the decrease
in revenues and an increase in operating expenses at 1881 Pine Street.
Interest expense decreased in 1996 and 1995 as compared to 1994 due to
principal balance reductions.
Minority interest in joint venture earnings increased for the year ended
1996 as compared to the year ended 1995 as a result of an increase in net income
of the joint venture property due to decreases in parking lot repairs and
interest expense. Minority interest in joint venture earnings decreased for 1995
as compared to 1994 due to a decrease in net income of the joint venture
property as a result of parking lot repairs, offset somewhat by a decrease in
interest expense.
Comparison of Three Months Ended March 31, 1997 to March 31, 1996
For the three-month periods ended March 31, 1997 and 1996, income was
generated from rental income from the income-producing real estate properties
and interest income earned on the funds in temporary investments.
Expenses incurred during the same periods were associated with the
operation of RELP IV's properties, interest on the mortgages payable and various
other costs required for administration of RELP IV.
Rental properties increased as of March 31, 1997 as compared to December
31, 1996 due to tenant improvements at 1881 Pine Street for Busch Creative
Services, Inc. and at the Apollo Building for Hewlett-Packard, offset by
depreciation. Cash and cash equivalents and the note payable to affiliate
increased as of March 31, 1997 due to borrowing from the Adviser to fund working
capital needs. See "Liquidity and Capital Resources". Accounts receivable was
higher at March 31, 1997 due to a receivable from a tenant at 1881 Pine Street
for tenant improvements over the allowance. Deferred charges and other assets
increased as a result lease commissions paid at 1881 Pine Street. Accounts
payable was higher at March 31, 1997 due to
121
<PAGE> 142
timing in the payment of tenant improvements. Accrued expenses and other
liabilities increased primarily due to an increase in property taxes at 1881
Pine Street.
Rental income increased for the three-month period ended March 31, 1997 as
compared to the three-month period ended March 31,1996. Rental income at the
Kodak Building increased by approximately $14,000 due to Invitrogen paying
holdover rent for January and February 1997. Rental income at 1881 Pine Street
increased by approximately $219,000 due to occupancy going from 100% vacant to
82% occupied at March 31, 1997. Offsetting these increases in rental income was
a decrease in rental income at the Apollo Building. The 1995 lease renewal
became effective January 1, 1997, decreasing monthly rental income from
approximately $.76 per square foot to approximately $.57 per square foot
resulting in a decrease for the three-month period ended March 31, 1997 of
approximately $189,000.
Interest income decreased due to lower cash balances for the three-month
period ended March 31, 1997 as compared to the three-month period ended March
31, 1996.
Direct expenses were higher for the three-month period ended March 31, 1997
as compared to the three-month period ended March 31, 1996 due to operating
expenses at 1881 Pine Street. Expenses were minimal for the three-month period
ended March 31, 1996 due to the building being 100% vacant. For the three-month
period ended March 31, 1997, 1881 Pine Street incurred expenses for utilities,
heating and air conditioning repairs, cleaning and other building services. Also
contributing to the increase was an increase in the property tax accrual. 1881
Pine Street was under a redevelopment real estate tax incentive program which
expired December 31, 1996. The 1996 tax payment was approximately $23,000
compared to an estimate for 1997 taxes of approximately $212,000.
Depreciation increased for the three-month period ended March 31, 1997 as
compared to the three-month period ended March 31, 1996 due to tenant
improvements at 1881 Pine Street and Apollo offset by a decrease at Kodak caused
by tenant improvements for Invitrogen being fully depreciated in April 1996.
General and administrative expenses increased for the three-month period
ended March 31, 1997 as compared to the three-month period ended March 31, 1996
due to lease commission expense at 1881 Pine Street for the new leases and at
Apollo for the lease renewal. The management fee is based on cash flow from
operations of RELP IV adjusted for cash reserves and fluctuated accordingly.
Minority interest in joint venture earnings decreased for the three-month
period ended March 31, 1997 as compared to the three-month period ended March
31, 1996 due to a net loss for the joint venture property for the three-month
period ended March 31, 1997. Rental income at the Apollo Building decreased
based on the lease renewal effective January 1, 1997.
INFLATION
An increase in inflation could affect RELP IV's investments through
increases in the costs of operating and maintaining the properties and in
various administrative costs of RELP IV operations. The adverse effect inflation
may have on operating expenses would be offset to some extent by increases in
rental rates charged tenants at RELP IV'S properties. If high occupancy levels
are maintained at the properties, increases in rental income should offset
increasing property operating expenses with minimal effect on operating income.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES
The information below highlights a number of the significant differences
between the RELPS and the Trust relating to, among other things, form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, compensation and fees,
and investor rights, and compares certain of the respective legal rights
associated with the ownership of Units and Shares. These comparisons are
intended to assist Limited Partners in understanding how their investments will
be changed if, as a result of the Merger, their Units are exchanged for Shares.
This discussion is summary in nature and does not constitute a complete
discussion of these matters, and Limited Partners should carefully review the
balance of this Joint Proxy Statement/Prospectus for additional discussions.
122
<PAGE> 143
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
FORM OF ORGANIZATION
Each of the RELPS is a limited partnership organized under California, Texas or
Delaware law formed for the purpose of investing in a real estate portfolio
consisting of income producing commercial or industrial real property. Each RELP
has been treated as a partnership for federal income tax purposes. See "Business
of the RELPS."
The Trust is a Texas real estate investment trust (a "Texas REIT") formed for
the purpose of investing in real estate properties. As a Texas REIT, the Trust
may remain in existence in perpetuity. The Trust intends to continue to qualify
as a REIT for federal income tax purposes.
Each of the RELPS is a limited partnership under state law, while the Trust is
organized as a Texas REIT. The RELPS and the Trust are each vehicles recognized
as appropriate for the holding of real estate investments and afford passive
investors, such as Limited Partners and shareholders, certain benefits,
including limited liability, a professionally managed portfolio and the
avoidance of double-level taxation on distributed income. The RELPS are under
the control of their General Partners, while the Trust is governed by its Trust
Managers. In addition, there are significant differences in the tax treatment of
the RELPS as partnerships and the Trust as a REIT, and some of the material tax
differences are summarized below under the captions "Taxation of Taxable
Investors" and "Taxation of Tax-Exempt Investors."
LENGTH OF INVESTMENT
An investment in each of the RELPS was presented to Limited Partners as a finite
life investment, with the Limited Partners to receive regular cash distributions
out of the RELP's net operating income and special distributions of net sale
proceeds through the liquidation of the RELP's real estate investments. Under
each of the Partnership Agreements, the RELP's stated term of existence was for
a substantial period (from 40 to 65 years depending upon the RELP), but the
General Partner stated its intention of selling the RELP's properties within a
period of four to ten years after acquisition or development of the properties.
Limited Partners were advised that sale of the RELP's assets would, however, be
dependent upon market conditions and as such, might vary from time to time. See
"Business of the RELPS -- Properties."
Unlike the RELPS, the Trust intends to continue its operations for an indefinite
time period and has no specific plans for disposition of the assets acquired
through the Merger or subsequent acquisitions. The Trust intends to distribute
at least 95% of its REIT taxable income, but expects to retain net sale or
refinancing proceeds for new investments, capital expenditures, working capital
reserves or other appropriate purposes. In contrast to the RELPS, the Trust will
constitute a vehicle for taking advantage of future investment opportunities
that may be available in the real estate markets. See "The Merger -- Background
of and Reasons for Merger."
Limited Partners in each of the RELPS expect liquidation of their investment
when the assets of the RELP are liquidated. In contrast, the Trust does not
expect to dispose of its investments within any prescribed periods and, in any
event, plans to retain the net sale proceeds for future investments unless
distributions are required to retain REIT status. Shareholders are expected to
achieve liquidity for their investments by trading the Shares in the market that
may develop after the Merger, and not through the liquidation of the Trust's
assets. The Shares may trade at a discount from, or premium to, their pro rata
interest in the liquidation value of the Trust's properties.
123
<PAGE> 144
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
PROPERTIES AND DIVERSIFICATION
The investment portfolio of each of the RELPS is generally limited to the assets
acquired with the initial equity raised from the General and Limited Partners as
well as the debt financing obtained by the RELPS within the established
borrowing restrictions.
As a result of the Merger, the Trust will acquire substantially all of the
properties of the Participating RELPS. In addition, the Trust may issue debt
and/or equity securities in the future, and to retain all, or substantially all,
of the net liquidation proceeds from the sale of the Trust's assets to finance
expansion of the Trust's investment portfolio.
Through the Merger, the Trust's current portfolio and through additional
investments that may be made from time to time, the Trust will have an
investment portfolio substantially larger and more diversified than the
portfolio of any of the RELPS. An investment in the Trust is subject to the
risks normally attendant to ongoing real estate ownership and, if the Trust
develops property, to the risks related to property development.
PERMITTED INVESTMENTS
Each of the RELPS was generally authorized to invest in all types of
income-producing properties, as well as, in some cases, undeveloped real estate.
The RELPS have limited their investments primarily to office buildings, shopping
centers and industrial buildings. See "Business of the RELPS."
Under the Declaration of Trust, the Trust may purchase, hold, lease, manage,
sell, develop, subdivide and improve real property and interests in real
property. See "Investment Policies and Restrictions."
The RELPS have concentrated their investment typically in office and industrial
buildings, while the Trust has concentrated its investments in industrial
properties. The Declaration of Trust, however, authorizes it to make other real
estate investments. Consequently, after the Merger, the Trust's investments will
be more diversified than the investments of the RELPS. Such diversification, if
it occurs, may serve as a hedge against the risk of having all of the Trust's
investments limited to a single asset group but will also expose the Trust to
the risk of owning and operating assets not directly related to its primary
business.
ADDITIONAL EQUITY
None of the RELPS is authorized to issue equity securities other than the Units.
The Trust Managers may, in their discretion, issue additional equity securities
consisting of Common Shares or Preferred Shares, provided that the total number
of Shares issued does not exceed the authorized number of Shares or Preferred
Shares set forth in the Declaration of Trust. The Trust expects to raise
additional equity from time to time to increase its available capital for
investment.
Unlike the RELPS, the Trust has substantial flexibility to raise equity, through
the sale of Shares or Preferred Shares, to finance its business and affairs. The
Trust, through the issuance of new equity securities, may substantially expand
its capital base to make new real estate investments. An investment in the Trust
should not be viewed as an investment in a specified pool of assets, but instead
as an investment in an ongoing real estate investment business, subject to the
risks associated with a real estate portfolio that is expected to change from
time to time. The issuance of additional equity securities by the Trust will
dilute the interests of shareholders if sold at prices below their fair market
value.
124
<PAGE> 145
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
BORROWING POLICIES
Each of the RELPS is authorized to borrow funds for the acquisition and
development of its real estate. The Partnership Agreement of each of the RELPS
places, however, various restrictions on the authority of the RELP to borrow
funds. Furthermore, each of the RELPS is limited in the amount it borrows to
finance such RELP's acquisitions and other business activities.
The Trust is permitted to borrow, on a secured or unsecured basis, funds to
finance its business.
In conducting its business, the Trust may borrow funds to the extent believed
appropriate. It is expected that the Trust will be more leveraged than the
RELPS, some of which have not incurred significant borrowings in comparison to
the overall value of their assets. Borrowing funds may allow the Trust to
substantially expand its asset base, but likewise will increase the Trust's
risks due to its leveraged investments.
RESTRICTIONS UPON RELATED PARTY TRANSACTIONS
In varying degrees, each of the Partnership Agreements restricts the applicable
RELP from entering into a variety of business transactions with the General
Partners and their Affiliates. Since each of the Partnership Agreements may be
amended by a majority vote of Limited Partners, it is possible to amend the
Partnership Agreement to authorize any transaction with the General Partners and
affiliates.
Texas law allows the Trust to engage in transactions with Trust Managers, or
other persons a Trust Manager is directly or indirectly interested in or
connected with, as a trustee, partner, trust manager, shareholder, member,
employee, officer or agent of such other persons. The Bylaws prohibit the Trust
from entering into a transaction with any of the interested parties unless the
terms and conditions of such transaction have been disclosed to the Trust
Managers and approved by a majority of Trust Managers not otherwise interested
in the matter (including a majority of independent Trust Managers or has been
disclosed in reasonable detail to the shareholders, and approved by holders of a
majority of Shares then outstanding or entitled to vote thereon).
Except for transactions specifically approved in the Partnership Agreements, the
RELPS are, to varying degrees, not authorized to enter into transactions with
the General Partners and their affiliates without Limited Partner approval.
Texas law allows the Trust to enter into transactions with interested parties,
such as Trust Managers, officers, significant shareholders, Realco and
Affiliates thereof, but such transactions must be approved by a majority of the
Trust Managers not interested in the matter provided that they have determined
the transaction to be fair, competitive and commercially reasonable. Since the
neither the Bylaws nor the Declaration of Trust requires the approval of
shareholders for entering into transactions with interested parties, it may be
easier for the Trust to enter into such transactions than it would be for the
RELPS, where Limited Partner approval for such transactions is mandated.
125
<PAGE> 146
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
MANAGEMENT CONTROL AND RESPONSIBILITY
Under each of the Partnership Agreements, the General Partners are, subject to
certain narrow limitations, vested with all management authority to conduct the
business of the RELP, including authority and responsibility for overseeing all
executive, supervisory and administrative services rendered to the RELP. The
General Partners have the right to continue to serve in such capacities unless
removed by a majority vote of Limited Partners. Limited Partners have no right
to participate in the management and control of the RELP and have no voice in
its affairs except for certain limited matters that must be submitted to a vote
of the Limited Partners under the terms of the Partnership Agreements or as
required by law. See "Voting Rights" below. The General Partners are accountable
as fiduciaries to the RELPS and are required to exercise good faith and
integrity in their dealings in conducting the RELP's affairs.
The Board of Trust Managers will have exclusive control over the Trust's
business and affairs subject only to the restrictions in the Declaration of
Trust and the Bylaws. Shareholders have the right to elect members of the Board
of Trust Managers. The Trust Managers are required to act in good faith and
exercise care in conducting the Trust's affairs.
Shareholders will have greater control over management of the Trust than the
Limited Partners have over the RELPS because the Trust Board is elected by the
shareholders. The General Partners do not need to seek re-election annually, but
instead serve unless removed by an affirmative vote of the Limited Partners,
which is generally regarded as an extraordinary event only appropriate in cases
of mismanagement and changes in control due to shifts in the ownership of Units.
126
<PAGE> 147
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of state law, the General Partners have liability for the payment of
RELP obligations and debts unless limitations upon such liability are expressly
stated in the obligation. Each of the Partnership Agreements provides generally
that neither General Partners nor any of their affiliates performing services on
behalf of the RELP will be liable to the partnership or its Limited Partners for
any act or omission performed in good faith pursuant to authority granted by the
Partnership Agreement, and in a manner reasonably believed to be within the
scope of the authority granted and in the best interest of the RELPS, provided
that such act or omission did not constitute fraud, misconduct, bad faith or
negligence. In addition, the Partnership Agreements indemnify the General
Partners and their affiliates for liability, loss, damage, cost and expenses,
including attorneys' fees, incurred by them in conducting the RELPS' business,
except in events such as fraud, misconduct, bad faith or negligence.
The Declaration of Trust and state law provide broad indemnification rights to
Trust Managers and officers who act in good faith, and in a manner reasonably
believed to be in or not opposed to the best interests of the Trust and, with
respect to criminal actions or proceedings, without reasonable cause to believe
their conduct was unlawful. In addition, the Declaration of Trust indemnifies
Trust Managers and officers against amounts paid in settlement, authorizes the
Trust to advance expenses incurred in defense, upon the Trust's receipt of an
appropriate undertaking to repay such amounts if appropriate, and authorizes the
Trust to carry insurance for the benefit of its offices and trust managers even
for matters as to which such persons are not entitled to indemnification. See
"Fiduciary Responsibility." Through the Merger, the Trust will be assuming all
existing and contingent liabilities of the Participating RELP, including their
obligations to indemnify the General Partners and others for litigation expenses
that might be incurred by them for serving as general partners of the RELPS or
for sponsoring the Merger.
To varying degrees, the General Partners of each of the RELPS have limited
liability to the RELP for acts of omissions undertaken by them when performed in
good faith, in a manner reasonably believed to be within the scope of their
authority and in the best interests of the RELP. The General Partners also have,
under specified circumstances, a right to be reimbursed for liability, loss,
damage, costs and expenses incurred by them by virtue of serving as General
Partners. Although the standards are expressed somewhat differently, there are
similar limitations upon the liability of the Trust Managers and officers of the
Trust when acting on behalf of the Trust and upon the rights of such persons to
seek indemnification from the Trust. The Trust believes that the scope of the
liability and indemnification provisions in the Trust's governing documents
provides protection against claims for personal liability against the Trust's
Trust Managers and officers which is comparable to, though not identical with,
the protections afforded to the General Partners and their affiliates under the
Partnership Agreements. Through the Merger, the Trust will be assuming all of
the existing and contingent liabilities of Participating RELP, including their
obligations to indemnify the General Partners and other persons.
127
<PAGE> 148
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
ANTI-TAKEOVER PROVISIONS
Changes in management can be effected only by removal of the General Partners,
which action requires a majority vote of Limited Partners. Due to transfer
restrictions in the Partnership Agreements, the General Partners may restrict
transfers of the Units and, in particular, affect whether the transferees have
voting rights. Of particular significance is that an assignee of a Unit may not
become a substitute Limited Partner, entitling him to vote on matters that may
be submitted to the Limited Partners for approval, unless such substitution is
consented to by the General Partners, which consent, in the General Partners'
absolute discretion, may be withheld. The General Partners may exercise this
right of approval to deter, delay or hamper attempts by persons to acquire a
majority interest of the Limited Partners.
The Declaration of Trust and Bylaws contain a number of provisions that might
have the effect of entrenching current management and delaying or discouraging a
hostile takeover of the Trust. These provisions include, among others, the
following:
(a) the power of the Trust Managers to issue 50,000,000 Preferred Shares, with
such rights and preferences as determined by the Trust Managers;
(b) the power of the Trust Managers to stop transfers and/or redeem Shares under
the following conditions: from any shareholder who owns, directly or
indirectly, 9.8% or more of the outstanding Shares, from any five or fewer
shareholders who own, directly or indirectly, more than 50% of the
outstanding Shares, or from any other Shareholder if the Trust Managers
otherwise determine in good faith that ownership of the outstanding Shares
has or may become concentrated to an extent that may prevent the Trust from
qualifying as a REIT under the Code. Any Shares transferred in violation of
this restriction become "Excess Shares," with no voting or distribution
rights. The Trust has the power to purchase or direct the sale of such
Excess Shares, with the sale proceeds being paid to the former owner; and
(c) Trust Managers remain in office unless removed by the shareholders or if
another nominee for Trust Manager receives the vote of a majority of the
outstanding Shares. Trust Managers remain on the Trust Board regardless of
whether they receive a vote of the majority of the outstanding Shares at the
Trust's annual meeting.
Certain provisions of the governing documents of the RELPS and the Trust could
be used to deter attempts to obtain control of the RELPS and the Trust in
transactions not approved by the General Partners and the Trust Managers,
respectively. Because the Shares are freely transferable and traded on the NYSE,
there is a greater likelihood of changes in control in the case of the Trust,
notwithstanding those provisions that might be employed by the Trust Board to
resist efforts to change control.
128
<PAGE> 149
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
VOTING RIGHTS
Limited Partners by a majority vote may, without the concurrence of the General
Partners, amend the Partnership Agreement, dissolve the RELP, remove and/or
elect a General Partner, and approve or disapprove the sale of all or
substantially all of the RELP's assets. Limited Partners may not exercise these
rights in a way to extend the term of the RELP, change the RELP to a general
partnership, change the limited liability to the Limited Partners or affect the
status of the RELP for federal income tax purposes. Furthermore, the RELPS
cannot change the allocations of income, losses and cash distributions or the
powers, rights and duties of the General Partner without the consent of the
General Partner.
Shareholders are entitled to elect the Trust Board at each annual meeting of the
Trust. However, Trust Managers remain in office even if they do not receive the
vote of the holders of a majority of the outstanding Shares unless another
nominee for his seat receives such a vote. The Declaration of Trust grants
shareholders the non-exclusive right, with approval of the Trust Managers, to
amend the Declaration of Trust or without Trust Manager approval, to amend the
Bylaws, dissolve the Trust, vote to remove members of the Board of Trust
Managers, and approve or disapprove the sale of substantially all of the Trust's
assets. In addition, certain other actions may not be taken by the Trust
Managers without the approval of shareholders, such as:
(a) amendment of the Declaration of Trust; and
(b) merger of the Trust with or into another entity unless (i) the Trust is the
surviving entity and the merger does not amend in any respect the
Declaration of Trust; (ii) each share of the Trust outstanding prior to the
merger is to be an identical share of the Trust after the merger; and (iii)
either no Shares or no securities convertible into Shares are issued under
the plan or the authorized unissued Shares or treasury shares of the Trust
to be issued under the merger plus those issuable upon conversion of any
other securities to be issued in the merger do not exceed 20% of the Shares
of the Trust outstanding immediately prior to the merger.
Shareholders have broader voting rights (i.e., the right to elect the Trust
Managers at each annual meeting) than those currently afforded to Limited
Partners.
129
<PAGE> 150
- --------------------------------------------------------------------------------
RELP TRUST
- --------------------------------------------------------------------------------
LIMITED LIABILITY OF INVESTORS
Under each of the Partnership Agreements and applicable state law, the liability
of Limited Partners for the RELP's debts and obligations is generally limited to
the amount of their investment in the RELP, together with an interest in
undistributed income, if any. The Units are fully paid and nonassessable.
Under Texas law, shareholders will not be liable for Trust debts or obligations.
The Shares, upon issuance, will be fully paid and nonassessable.
The limitation on personal liability of Shareholders of the Trust is
substantially the same as that of Limited Partners in the RELPS.
REVIEW OF INVESTOR LISTS
Generally speaking, Limited Partners of each of the RELPS are entitled to
request copies of investor lists showing the names and addresses of all General
and Limited Partners. The right to receive such investor lists may be
conditioned upon the Limited Partners' payment of the cost of duplication and a
showing that the request is for a reasonable purpose. Reasonable requests would
include requests for investor lists for the purpose of opposing the Merger.
A Shareholder is entitled, upon written demand, to inspect and copy the share
records of the Trust, at any time during usual business hours, for a purpose
reasonably related to his interest as a shareholder.
The right of shareholders to review investor lists is substantially the same as
the right afforded Limited Partners.
130
<PAGE> 151
EXECUTIVE AND TRUST MANAGER COMPENSATION
The following table summarizes the compensation paid by the Trust to the
executive officers of the Trust for the three years ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
------------------ ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
Charles W. Wolcott 1996 $195,000 $100,000(1) $8,039(4)
President and CEO 1995 189,000 72,000(2) 7,040(5)
1994 180,000 62,100(3) 7,222(6)
Marc A. Simpson 1996 110,000 55,000(1) 8,039(4)
Vice President and CFO, 1995 105,000 40,000(2) 6,838(5)
Secretary and Treasurer 1994 81,859(7) 34,500(3) 4,095(6)
David B. Warner 1996 110,000 55,000(1) 8,039(4)
Vice President -- Operations 1995 100,000 43,000(2) 6,312(5)
1994 92,000 34,500(3) 4,429(6)
</TABLE>
- ---------------
(1) Represents bonus payments for 1996 paid in January 1997.
(2) Represents bonus payments for 1995 paid in January 1996.
(3) Represents bonus payments for 1994 paid in February 1995.
(4) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1997.
(5) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1996.
(6) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan paid in February 1995.
(7) Mr. Simpson's annualized salary for 1994 was $100,000.
In 1995, the Trust paid its Non-Employee Trust Managers an annual fee of
$20,000 plus $1,000 for each Trust Manager or committee meeting attended in
person. In addition, the Trust Managers are reimbursed for their expenses
incurred in connection with their duties as Trust Managers. In addition to the
annual fee, Mr. Bricker received $17,000 in 1995 for attendance at Trust Manager
and committee meetings. Mr. Wolcott did not receive any compensation for his
services as a Trust Manager. In March 1996, the Trust increased the annual fee
paid its Non-Employee Trust Managers to $40,000 plus $1,000 for each Trust
Manager or committee meeting attended in person. In addition to the annual fee,
Mr. Bricker received $16,000 and Mr. Giles received $11,000 in 1996 for
attendance at Trust Manager and committee meetings.
The Board of Trust Managers has voted to reduce their compensation
effective July 1, 1997 to an annual retainer of $25,000 plus $1,000 for each
Trust Manager meeting attended in person, $500 for each Trust Manager meeting
attended via teleconference, $500 for each committee meeting attended in person
and $250 for each committee meeting attended via teleconference. Each
non-employee Trust Manager has the right to receive his annual retainer in cash
and/or Shares.
Bylaws Amendments Limiting Trust Manager Compensation
Section 3.9 of the Bylaws of the Trust has been amended by the Trust
Managers to limit the increase in cash compensation paid to the Trust Managers
to 20% over the prior year without the approval of the holders of a majority of
the Shares cast at the annual meeting of shareholders.
131
<PAGE> 152
Employment Agreements
On March 13, 1996, the Trust entered into Bonus and Severance Agreements
with each of Messrs. Wolcott, Simpson and Warner. These agreements formalized
the Trust's policy of providing an annual incentive bonus of up to 50% of the
employee's base salary upon the achievement of certain objectives established by
the Compensation Committee. In addition, the agreements generally provide that
if the employee is terminated within one year after a Change in Control (as
defined), the employee will be entitled to receive an amount equal to one times
the employee's annual base salary, continuation of health and welfare benefits
for up to one year and the prorated amount of any annual incentive bonus earned
through the date of termination. The agreements are effective through March 13,
1999.
Committees of the Trust Managers
The Trust Managers have appointed three committees, the Audit Committee,
the Compensation Committee and the Investment Committee. All of the Committees
include only Trust Managers who are independent of management and who are free
from any relationship that would interfere with the exercise of their
independent judgment. The Audit Committee appoints the independent public
accountants for the Trust subject to ratification by the shareholders at the
Annual Meeting and consults with the independent public accountants on the
Trust's audited financial statements and on the efficacy of the Trust's internal
control systems. The Compensation Committee establishes guidelines for
compensation and benefits of the executive officers of the Trust based upon
achievement of objectives and other factors, including review of compensation to
executive officers of comparable entities and recommendations of independent
compensation consultants. The Investment Committee reviews potential real
property acquisitions and makes recommendations to the Trust Board. Mr. Bricker
was the sole independent Trust Manager and member of the Audit and Compensation
Committees until March 1996, at which time Mr. Giles was appointed to both of
such committees. In January 1997, Mr. Duncan was appointed to the Compensation
Committee and Mr. Kelley was appointed to the Audit Committee. The Trust does
not have a Nominating Committee. The Investment Committee was formed in 1997 and
consists of Messrs. Giles, Platt, Duncan and Kraska.
Audit Committee. The Audit Committee of the Trust Managers met once during
the 1996 fiscal year. The Audit Committee reviews and approves the scope and
results of any outside audit of the Trust, and the fees therefor, and makes
recommendations to the Trust Managers or management concerning auditing and
accounting matters and the efficacy of the Trust's internal control systems. The
Audit Committee selects the Trust's independent auditors. During the 1996 fiscal
year, Messrs. Bricker and Giles served on the Audit Committee. Current members
of the Audit Committee are Messrs. Bricker, Kelley and Giles.
Compensation Committee. The Compensation Committee met two times during the
1996 fiscal year. The Compensation Committee establishes guidelines for
compensation and benefits of the executive officers of the Trust based upon
achievement of objectives and other factors. The Compensation Committee is also
responsible for acting upon all matters concerning, and exercising such
authority as is delegated to it under the provisions of, any benefit, retirement
or pension plan. During the 1996 fiscal year, Messrs. Bricker and Giles served
on the Compensation Committee. Current members of the Compensation Committee are
Messrs. Bricker, Duncan and Giles.
132
<PAGE> 153
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of 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 July 18, 1997. The percentage ownership of each person
assumes conversion of the Trust's notes held by Realco and the purchase of an
additional 995,847 Shares by clients and affiliates of MSAM. Except as otherwise
noted, each person named in the table has sole voting and investment power with
respect to all 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....................................... -- --
William H. Bricker....................................... 2,000 *
T. Patrick Duncan........................................ 3,000 *
Robert E. Giles.......................................... 3,750 *
Edward B. Kelley......................................... 5,000 *
Russell C. Platt......................................... -- --
Stanley J. Kraska, Jr.................................... -- --
Charles W. Wolcott....................................... 83,000 *
Marc A. Simpson.......................................... 14,500 *
David B. Warner.......................................... 6,000 *
Lewis D. Friedland....................................... -- --
USAA Real Estate Company
8000 Robert F. McDermott Freeway
IH-10 West, Suite 600
San Antonio, Texas 78230-3884.......................... 5,907,015(1) 21.87%
ABKB/LaSalle Securities Limited Partnership and
LaSalle Advisors Limited Partnership
100 East Pratt Street
Baltimore, MD. 21202................................... 6,122,449 22.67
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.
1221 Avenue of the Americas
New York, N.Y. 10020................................... 8,163,265(2)(3) 30.22
All Trust Managers and executive officers as a group (11
persons)............................................... 117,250 *%
</TABLE>
- ---------------
* Ownership is less than 1% of outstanding Shares.
(1) Includes 2,724,809 Shares into which notes held by Realco may be converted
(assumes a $2.00 per Share conversion price).
(2) Includes 995,847 Shares that may be acquired by certain clients and
affiliates of MSAM in connection with the MSAM Transaction.
(3) Based upon the Schedule 13D filed jointly by the listed shareholders on July
18, 1997 with the Commission, (i) Morgan Stanley, Dean Witter, Discover &
Co. has sole voting and dispositive power over 627,943 of such Shares and
shared voting and dispositive power over 6,539,476 of such Shares; (ii) MSAM
has shared voting and dispositive power over 6,539,476 of such Shares; (iii)
The Morgan Stanley Real Estate Special Situations Fund I, L.P. has shared
voting and dispositive power over 1,883,830 of such Shares; and (iv) The
Morgan Stanley Real Estate Special Situations Fund II, L.P. has shared
voting and dispositive power over 2,326,660 of such Shares.
133
<PAGE> 154
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As detailed above, Realco currently owns 3,182,206 Shares, representing
13.66% of the outstanding Shares of the Trust. In February 1997, Realco
purchased certain outstanding indebtedness of the Trust having a then current
principal balance of $9,419,213. 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 in the first
quarter of 1997. 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. In addition, Realco has the option to convert the
principal amount of the notes into Shares of the Trust at the conversion rate of
$2.00 per Share (if converted prior to December 31, 1997) or $2.25 per Share (if
converted between December 31, 1997 and December 31, 2000).
Pursuant to its rights under the Realco Share Purchase Agreement, Realco
requested that Edward B. Kelley and T. Patrick Duncan, who are also executive
officers of Realco, be appointed Trust Managers. On December 20, 1996, the Trust
Managers unanimously voted to appoint Messrs. Kelley and Duncan as Trust
Managers.
On June 20, 1997, the Trust entered into the MSAM Transaction pursuant to
which certain clients and affiliates of MSAM agreed to acquire up to 8,163,265
Shares. As of July 18, 1997, they had acquired 7,167,418 Shares. The remaining
Shares will be acquired at such time as the Trust issues additional Shares.
Messrs. Platt and Bigman were appointed as Trust Managers effective July 8, 1997
in connection with the MSAM Transaction.
On July 3, 1997, the Trust entered into the LaSalle Transaction pursuant to
which ABKB and LaSalle Advisors, on behalf of certain clients, agreed to
purchase 6,122,449 Shares. The closing of the sale occurred on July 10, 1997.
Mr. Kraska was appointed as a Trust Manager effective July 10, 1997 in
connection with the LaSalle Transaction.
134
<PAGE> 155
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
RELP I
Realco, as the advisor to RELP I, may receive real estate brokerage
commissions of up to 1% of the aggregate selling prices of properties sold,
management fees of up to 4% of gross revenues from operations or 9% of the RELP
I's adjusted cash flow, and an annual mortgage servicing fee of up to 1/4 of 1%
of amounts funded by RELP I in mortgage loans which are serviced by Realco.
Through January 1995, a portion of RELP I's working capital reserve and
other available funds were invested in USAA Mutual Fund, Inc., an affiliate of
the RELP I General Partner, and earned interest thereon at market rates.
Quorum Real Estate Services Corporation ("USAA Realty"), an affiliate of
the RELP I General Partner, provides managing and leasing services for the
properties.
A summary of transactions with affiliates for the years ended December 31,
1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
MORTGAGE
REIMBURSEMENT INTEREST MANAGEMENT LEASING SERVICING
OF EXPENSES(1) INCOME FEES COMMISSIONS FEES TOTAL
-------------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996..................... $ -- $ -- $ -- $ -- $ -- $ --
1995..................... -- (18) -- -- -- (18)
1994..................... -- (363) -- -- -- (363)
Realco:
1996..................... $117,027 (52,124) 67,893 -- 1,115 133,911
1995..................... 112,413 (612,757) 77,791 -- 13,600 (408,953)
1994..................... 136,978 (605,535) 49,325 -- 12,427 (406,805)
USAA Realty:
1996..................... $ 60,609 -- 48,992 17,282 -- 126,883
1995..................... 19,550 -- 40,089 16,273 -- 75,912
1994..................... 15,832 -- 29,205 15,745 -- 60,782
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP I at actual cost and
does not include any mark-up or items normally considered as overhead.
135
<PAGE> 156
RELP II
USAA Investors II, Inc., the General Partner, may receive, in the
aggregate, property acquisition fees and loan origination and commitment fees of
up to 5% of the gross offering proceeds; real estate brokerage commissions of up
to 2% of the selling prices of properties sold; 10% of all distributions of Net
Cash from Operations and an annual mortgage servicing fee of up to 1/4 of 1% of
amounts funded by the RELP in mortgage loans which are serviced by the General
Partner.
Through January 1995, RELP II had funds invested in USAA Mutual Fund, Inc.
and earned interest thereon at market rates.
USAA Realty provides property management and leasing services for the
properties.
A summary of transactions with affiliates for the years ended June 30,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
REIMBURSEMENT MORTGAGE
OF INTEREST MANAGEMENT LEASING SERVICING
EXPENSES(1) INCOME FEES COMMISSIONS FEES TOTAL
------------- -------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996......................... $ -- $ -- $ -- $ -- $ --
1995......................... -- (316) -- -- -- (316)
1994......................... -- (2,298) -- -- -- (2,298)
Realco:
1996......................... 71,029 -- -- -- -- 71,029
1995......................... 89,155 -- -- -- -- 89,155
1994......................... 71,289 -- -- -- -- 71,289
USAA Realty:
1996......................... 3,016 -- 12,110 12,444 -- 27,570
1995......................... 2,823 -- 12,299 -- -- 15,122
1994......................... 3,562 -- 11,380 -- -- 14,942
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP II at actual cost and
does not include any mark-up or items normally considered as overhead.
136
<PAGE> 157
RELP III
Realco, as the advisor to RELP III, may receive property acquisition fees
of up to 4% of the gross offering proceeds, real estate brokerage commissions of
up to 1% of the aggregate selling prices of property sold and management fees
equal to 4% of Cash Receipts from Operations not to exceed 9% of adjusted cash
flow from RELP III.
Through January 1995, RELP III had funds invested in USAA Mutual Fund, Inc.
and earned interest thereon at market rates.
An affiliate of the General Partner, Las Colinas Management Company,
received monthly payments of principal of $227,272.72 plus interest at one-month
LIBOR plus .625% through August 31, 1996. The mortgage loan was converted to
interest only payments at an interest rate of 9.57%.
USAA Realty provides property management and leasing services for the
properties.
A summary of transactions with affiliates for the years ended December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
REIMBURSEMENT INTEREST MANAGEMENT LEASING INTEREST
OF EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
-------------- -------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996.................... $ -- $ -- $ -- $ -- $ -- $ --
1995.................... -- (1,262) -- -- -- (1,262)
1994.................... -- (36,253) -- -- -- (36,253)
Realco:
1996.................... 200,417 -- 60,523 -- 964,529 1,225,469
1995.................... 162,493 -- 168,389 -- 1,191,014 1,521,896
1994.................... 174,407 -- 149,216 -- 1,005,973 1,329,596
Las Colinas Management
Company:
1996.................... -- -- -- -- 1,141,138 1,141,138
1995.................... -- -- -- -- 1,229,888 1,229,888
1994.................... -- -- -- -- 208,656 208,656
USAA Realty:
1996.................... 85,876 -- 63,446 30,541 -- 179,863
1995.................... 47,548 -- 46,628 22,816 -- 116,992
1994.................... 41,652 -- 46,501 24,824 -- 112,977
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP III at actual cost and
does not include any mark-up or items normally considered as overhead.
(2) Represents interest expense incurred on an note payable.
137
<PAGE> 158
RELP IV
Realco may receive property acquisition fees of up to 5% of gross offering
proceeds, real estate brokerage commissions of up to 2% of the aggregate selling
prices of properties sold and management fees of 9% of adjusted cash flow from
operations.
Through January 1995, a portion of RELP IV's working capital reserve and
other available funds were invested in USAA Mutual Funds, Inc. and earned
interest thereon at market rates.
USAA Realty provides property management and leasing services for the
properties.
A summary of transactions with affiliates for the years ended December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
REIMBURSEMENT
OF INTEREST MANAGEMENT LEASING INTEREST
EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
------------- -------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996........................ $ -- $ -- $ -- $ -- $ -- $ --
1995........................ -- (27) -- -- -- (27)
1994........................ -- (542) -- -- -- (542)
Realco:
1996........................ 114,171 -- 50,134 -- 600,000 764,305
1995........................ 108,885 -- 90,376 -- 600,000 799,261
1994........................ 110,947 -- 91,449 -- 600,000 802,396
USAA Realty:
1996........................ 33,042 -- 50,894 30,947 -- 114,883
1995........................ 36,559 -- 52,802 9,487 -- 98,848
1994........................ 22,556 -- 63,118 8,865 -- 94,539
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expense incurred on behalf of RELP IV at actual cost and
does not include any mark-up or items normally considered as overhead.
(2) Represents interest expense incurred on an note payable.
138
<PAGE> 159
EXPERTS
The consolidated financial statements and the related financial statement
schedule of American Industrial Properties REIT as of December 31, 1996 and 1995
and for the years ended December 31, 1996, 1995 and 1994 included in this Joint
Proxy Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included herein in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements and financial statement schedules of USAA Real
Estate Income Investments I Limited Partnership, A California Limited
Partnership and USAA Income Properties III Limited Partnership as of December
31, 1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996, and the consolidated financial statements and financial
statement schedules of USAA Income Properties IV Limited Partnership as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, and the financial statements and financial statement
schedules of USAA Real Estate Income Investments II Limited Partnership as of
June 30, 1996 and 1995, and for each of the years in the three-year period ended
June 30, 1996, have been included herein in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, included herein, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
The legality of the Shares to be issued in the Merger will be passed on for
the Trust by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas.
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas, counsel to the
Trust and to each RELP, will deliver opinions to the Trust and each RELP
respectively, concerning federal income tax consequences of the Merger.
SHAREHOLDER PROPOSALS
A proper proposal submitted by a shareholder for presentation at the
Trust's annual meeting relating to fiscal 199 and received at the Trust's
principal executive office no later than , 199 will be included in
the Proxy Statement and Proxy related to such annual meeting.
OTHER MATTERS
The Trust Managers do not intend to bring any matter before the Trust
Special Meeting other than as specifically set forth in the Notice of Special
Meeting of Shareholders, nor does it know of any matter to be brought before the
Trust Special Meeting by others. If, however, any other matters properly come
before the Trust Special Meeting, it is the intention of the proxy holders to
vote such proxy in accordance with their best judgment.
The General Partners do not intend to bring any matter before the RELP
Special Meeting other than as specifically set forth in each Notice of Special
Meeting of Partners, nor does it know of any matter to be brought before the
RELP Special Meeting by others. If, however, any other matters properly come
before the RELP Special Meeting, it is the intention of the proxy holders to
vote such proxies in accordance with their best judgment.
139
<PAGE> 160
GLOSSARY
"ABKB" means ABKB/LaSalle Securities Limited Partnership.
"ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.
"ACMS" means asbestos-containing materials.
"ADA" means Americans with Disabilities Act of 1990.
"AFFILIATE" means with respect to a specified person, a person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
"AIP ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.
"AIP EXPENSES" means all documented out-of-pocket costs and expenses (up to
a maximum of a RELP's Proportionate Share of $1,000,000) incurred by the Trust
in connection with the Merger Agreement and the transactions contemplated
thereby.
"AIP MATERIAL ADVERSE EFFECT" shall have the meaning set forth in the
Merger Agreement.
"BOARD OF DIRECTORS" means collectively the Boards of Directors of the
RELPS.
"BYLAWS" means the Trust's Fifth Amended and Restated Bylaws.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CORPORATE SUBSIDIARIES" means the Trust's wholly-owned corporate
subsidiaries.
"DECLARATION OF TRUST" means the Trust's Third Amended and Restated
Declaration of Trust.
"DISSENTING UNITS" means the Units held by Limited Partners that demand
appraisal of the fair market value of their Units.
"DUE DILIGENCE PERIOD" means June 30, 1997 through July 31, 1997.
"EFFECTIVE TIME" means the effective time of the Merger.
"EXCHANGE AGENT" means Boston EquiServe Limited Partnership.
"EXEMPT ORGANIZATIONS" means the tax exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"EXPENSES" means collectively the AIP Expense and the RELP expenses.
"EXCHANGE RATIO" means with respect to (i) RELP I, 79.52 Shares per Unit;
(ii) RELP II, 143.17 Shares per Unit; (iii) RELP III, 82.99 Shares per Unit; and
(iv) RELP IV, 75.68 Shares per Unit.
"FAD" means funds available for distribution.
"FDOT" means Florida Department of Transportation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"FFO" means funds from operations.
"GP VALUE" means Houlihan's estimate as to the value of the General
Partners' interest in each RELP.
"GENERAL PARTNER" shall mean collectively USAA Investors I, Inc., USAA
Investors II, Inc., USAA Income Properties III, Inc. and USAA Income Properties
IV, Inc., the General Partner of RELP I, RELP II, RELP III and RELP IV,
respectively.
"HFS" means Hospitality Franchise Systems, Inc.
"HOULIHAN" means Houlihan Lokey Howard & Zukin.
140
<PAGE> 161
"HOULIHAN OPINION" means the fairness opinion of Houlihan delivered to the
Boards of Directors of the General Partners on June 30, 1997.
"INDEPENDENT APPRAISER" means the appraiser of the fair market value of
Dissenting Units.
"ISI" means Integrated Systems, Inc.
"INVESTOR SERVICES" means Real Estate Limited Partnership Investor
Services, a department of Realco.
"JOINT VENTURE" means the Combined Capital Resources Joint Venture.
"LASALLE ADVISORS" means LaSalle Advisors Limited Partnership.
"LASALLE TRANSACTION" means the sale by the Trust of an aggregate of
6,122,449 Shares to ABKB, as Agent for and for the benefit of certain clients,
and LaSalle Advisors, as Agent for and for the benefit of certain clients,
pursuant to Common Share Purchase Agreements dated as of July 3, 1997.
"LIQUIDATED DAMAGES AMOUNT" means $2,000,000.
"LIMITED PARTNERS" means collectively, the holders of Units in the RELPS.
"LINEAR TECHNOLOGY" means Linear Technology Corporation.
"LP VALUE" means Houlihan's estimate as to the value of the General
Partners' interest in each RELP.
"MERGER" means the merging of the RELPS with and into the Trust.
"MERGER AGREEMENT" means collectively, the Agreements and Plans of Merger
dated as of June 30, 1997, by and between the Trust and each of the RELPS.
"MERGER CONSIDERATION" means the Shares to be received by Limited Partners
in connection with the Merger.
"MLI" means The Manufacturers Life Insurance Company.
"MSAM" means Morgan Stanley Asset Management Inc., a Delaware corporation.
"MSAM TRANSACTION" means the sale by the Trust of up to an aggregate of
8,163,265 Shares to MS Real Estate Special Situations, Inc. and MSAM, as agent
and attorney-in-fact of certain of its clients, pursuant to a Common Share
Purchase Agreement dated as of June 30, 1997.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NON-U.S. SHAREHOLDERS" means nonresident alien individuals, foreign
corporation, foreign partnership and other foreign holders of Shares.
"NYSE" means the New York Stock Exchange.
"OPTION PRICE" means the price at which MIL was willing to sell the Trust's
notes to the Trust.
"PARTICIPATING RELP" means those RELPS whose Limited Partners approve the
Merger.
"PREFERRED SHARES" means the Trust's Preferred Shares of Beneficial
Interest, par value $0.10 per share.
"PRIVATE PLACEMENT" means collectively, the sale of Shares pursuant to the
MSAM Transaction and the LaSalle Transaction.
"PROPORTIONATE SHARE" means each RELP's share based upon its book value as
of March 31, 1997.
"PRUDENTIAL" means Prudential Securities Incorporated.
"PRUDENTIAL OPINION" means the fairness opinion of Prudential delivered to
the Trust on July 10, 1997.
"QUALIFYING INCOME" means income described in Section 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code.
"R&D" means research and development.
141
<PAGE> 162
"REALCO" means USAA Real Estate Company, a Delaware corporation.
"REALCO SHARE PURCHASE AGREEMENT" means that certain Share Purchase
Agreement dated December 13, 1996, by and between the Trust and Realco.
"REIT" means a real estate investment trust.
"RELATED TRANSACTIONS" means the proposed sale of the Curlew Crossing
property by RELP III to Realco and the proposed sale of RELP II's joint venture
interest in the Sequoia Plaza I Building to Realco.
"RELP" means any of RELP I, RELP II, RELP III and RELP IV.
"RELP I" means USAA Real Estate Income Investments I, A California Limited
Partnership, a California limited partnership.
"RELP II" means USAA Real Estate Income Investments II Limited Partnership,
a Texas limited partnership.
"RELP III" means USAA Real Estate Income Properties III Limited
Partnership, a Delaware limited partnership.
"RELP IV" means USAA Income Properties IV Limited Partnership, a Delaware
limited partnership.
"RELP ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.
"RELP EXPENSES" means all documented out-of-pocket costs and expenses (up
to a maximum of a RELP's Proportionate Share of $1,000,000) incurred by the RELP
in connection with the Merger Agreement and the transactions contemplated
thereby.
"RELP MATERIAL ADVERSE EFFECT" shall have the meaning set forth in the
Merger Agreement.
"RELP SPECIAL MEETING" means the joint special meeting of the Limited
Partners to be held on , 199 .
"RELPS" means collectively, RELP I, RELP II, RELP III and RELP V.
"RENT" means rent received by the Trust from its tenants.
"SHARES" means the Trust's Common Shares of Beneficial Interest, par value
$0.10 per share.
"SPECIAL MEETINGS" means collectively the Trust Special Meeting and the
RELP Special Meeting.
"TRUST" means American Industrial Properties REIT, a Texas REIT.
"TRUST SPECIAL MEETING" means the special meeting of shareholders of the
Trust to be held on , 199 .
"UBTI" means unrelated business taxable income.
"UNITS" means Units of Limited Partnership Interests in any of the RELPS.
"USAA" means United Services Automobile Association.
"USAA REALTY" means USAA Realty Company.
142
<PAGE> 163
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN INDUSTRIAL PROPERTIES REIT
ANNUAL AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors......................... F-3
Consolidated Statements of Operations for the years
ended December 31, 1996,
1995 and 1994........................................ F-4
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................. F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1996, 1995 and 1994..................... F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1996,
1995 and 1994........................................ F-7
Notes to Consolidated Financial Statements............. F-8
Schedule III -- Consolidated Real Estate and
Accumulated Depreciation.............................. F-15
Notes to Schedule III.................................. F-16
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (unaudited)...... F-17
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996..................... F-18
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (unaudited)...... F-19
Notes to Consolidated Financial Statements............. F-20
</TABLE>
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-23
Balance Sheets as of December 31, 1996 and 1995........ F-24
Statements of Income for the years ended December 31,
1996, 1995 and 1994................................... F-25
Statements of Partners' Equity for the years ended
December 31, 1996, 1995 and 1994...................... F-26
Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................... F-27
Notes to Financial Statements.......................... F-28
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996..................... F-32
Condensed Statements of Income for the three months
ended March 31, 1997 and 1996 (unaudited)............. F-33
Condensed Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (unaudited)............. F-34
Notes to Condensed Financial Statements................ F-35
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-36
Balance Sheets as of June 30, 1996 and 1995............ F-37
Statements of Income for the years ended June 30, 1996,
1995 and 1994......................................... F-38
Statements of Partners' Equity for the years ended June
30, 1996, 1995 and 1994............................... F-39
Statements of Cash Flows for the years ended June 30,
1996, 1995 and 1994................................... F-40
Notes to Financial Statements.......................... F-41
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 1997
(unaudited) and June 30, 1996......................... F-47
Condensed Statements of Income for the three and nine
months ended March 31, 1997 and 1996 (unaudited)...... F-48
F-1
<PAGE> 164
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Statements of Cash Flows for the nine months
ended March 31, 1997 and 1996 (unaudited)............. F-49
Notes to Condensed Financial Statements................ F-50
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-51
Balance Sheets as of December 31, 1996 and 1995........ F-52
Statements of Income for the years ended December 31,
1996, 1995 and 1994................................... F-53
Statements of Partners' Equity for the years ended
December 31, 1996, 1995 and 1994...................... F-54
Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................... F-55
Notes to Financial Statements.......................... F-56
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996..................... F-61
Condensed Statements of Operations for the three months
ended March 31, 1997 and 1996 (unaudited)............. F-62
Condensed Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (unaudited)............. F-63
Notes to Condensed Financial Statements................ F-64
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-65
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................. F-66
Consolidated Statements of Operations for the years
ended December 31, 1996,
1995 and 1994........................................ F-67
Consolidated Statements of Partners' Equity for the
years ended December 31, 1996,
1995 and 1994........................................ F-68
Consolidated Statements of Cash Flows for the years
ended December 31, 1996,
1995 and 1994........................................ F-69
Notes to Consolidated Financial Statements............. F-70
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31,
1997 (unaudited) and
December 31, 1996.................................... F-75
Condensed Consolidated Statements of Operations for the
three months ended
March 31, 1997 and 1996 (unaudited).................. F-76
Condensed Consolidated Statements of Cash Flows for the
three months ended
March 31, 1997 and 1996 (unaudited).................. F-77
Notes to Condensed Financial Statements................ F-78
</TABLE>
F-2
<PAGE> 165
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
-----------------------------
ERNST & YOUNG LLP
Dallas, Texas
February 13, 1997
except for Note 14, as to
which the date is February 26, 1997
F-3
<PAGE> 166
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Rents................................................... $ 8,592 $ 8,676 $ 8,397
Tenant reimbursements................................... 2,728 2,734 2,683
Interest income......................................... 158 369 146
--------- --------- ---------
11,478 11,779 11,226
--------- --------- ---------
EXPENSES
Property operating expenses:
Property taxes....................................... 1,421 1,397 1,421
Property management fees............................. 430 428 442
Utilities............................................ 476 478 501
General operating.................................... 849 795 705
Repairs and maintenance.............................. 529 431 656
Other property operating expenses.................... 317 322 227
Depreciation and amortization........................... 2,909 2,777 3,133
Interest on 8.8% notes payable.......................... 4,003 4,707 4,001
Interest on mortgages payable........................... 1,898 1,778 850
Amortization of original issue discount on Zero Coupon
Notes due 1997....................................... -- -- 419
Administrative expenses:
Trust administration and overhead.................... 1,830 1,424 1,505
Litigation, refinancing and proxy costs.............. 1,548 980 1,027
Provision for possible losses on real estate............ -- 600 650
--------- --------- ---------
16,210 16,117 15,537
--------- --------- ---------
Loss from operations.................................... (4,732) (4,338) (4,311)
Gain (loss) on sales of real estate..................... 177 (191) --
--------- --------- ---------
Loss before extraordinary items......................... (4,555) (4,529) (4,311)
Extraordinary gain (loss) on extinguishment of debt..... 5,810 (55) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997........................... -- -- (344)
--------- --------- ---------
NET INCOME (LOSS)......................................... $ 1,255 $ (4,584) $ (4,655)
========= ========= =========
PER SHARE DATA
Loss from operations.................................... $ (0.52) $ (0.48) $ (0.47)
Gain (loss) on sales of real estate..................... 0.02 (0.02) --
Extraordinary gain (loss) on extinguishment of debt..... 0.64 (0.01) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997........................... -- -- (0.04)
--------- --------- ---------
Net Income (Loss)....................................... $ 0.14 $ (0.51) $ (0.51)
========= ========= =========
Distributions Paid...................................... $ 0.04 $ 0.04 $ 0.00
========= ========= =========
Weighted average shares outstanding..................... 9,108,241 9,075,400 9,075,400
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 167
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Real estate:
Held for investment....................................... $ 84,693 $ 97,091
Held for sale............................................. 9,779 4,806
-------- --------
Total real estate......................................... 94,472 101,897
Accumulated depreciation.................................. (23,973) (23,441)
-------- --------
Net real estate........................................... 70,499 78,456
Cash and cash equivalents:
Unrestricted.............................................. 4,010 7,694
Restricted................................................ 1,366 659
-------- --------
Total cash and cash equivalents........................... 5,376 8,353
Other assets, net........................................... 3,061 2,573
-------- --------
Total Assets...................................... $ 78,936 $ 89,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 43,797 $ 17,576
8.8% notes payable........................................ 9,419 45,239
Accrued interest.......................................... 602 5,178
Accounts payable, accrued expenses and other
liabilities............................................ 1,964 1,620
Tenant security deposits.................................. 471 521
-------- --------
Total Liabilities................................. 56,253 70,134
-------- --------
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
10,000,000 Shares; issued and outstanding 10,000,000
Shares at 1996 and 9,075,400 Shares at 1995............ 1,000 908
Additional paid-in capital................................ 127,056 124,605
Accumulated distributions................................. (58,456) (58,093)
Accumulated loss from operations and extraordinary gains
(losses)............................................... (48,065) (49,143)
Accumulated net realized gain on sales of real estate..... 1,148 971
-------- --------
Total Shareholders' Equity........................ 22,683 19,248
-------- --------
Total Liabilities and Shareholders' Equity........ $ 78,936 $ 89,382
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 168
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS
NUMBER AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................... 9,075,400 $ 908 $124,605 $ (96,662) $28,851
Net loss................................... -- -- -- (4,655) (4,655)
---------- ------ -------- --------- -------
Balance at December 31, 1994................. 9,075,400 908 124,605 (101,317) 24,196
Net loss................................... -- -- -- (4,584) (4,584)
Distributions to shareholders.............. -- -- -- (364) (364)
---------- ------ -------- --------- -------
Balance at December 31, 1995................. 9,075,400 908 124,605 (106,265) 19,248
Issuance of additional shares.............. 924,600 92 2,451 -- 2,543
Net income................................. -- -- -- 1,255 1,255
Distributions to shareholders.............. -- -- -- (363) (363)
---------- ------ -------- --------- -------
Balance at December 31, 1996................. 10,000,000 $1,000 $127,056 $(105,373) $22,683
========== ====== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 169
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,255 $(4,584) $(4,655)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Extraordinary (gains) losses........................... (5,810) 55 344
(Gains) losses on real estate.......................... (177) 791 650
Depreciation........................................... 2,577 2,479 2,622
Amortization of deferred financing costs............... 70 70 --
Other amortization..................................... 332 298 511
Amortization of original issue discount................ -- -- 419
Changes in operating assets and liabilities:
(Increase) decrease in other assets and restricted
cash.............................................. (1,270) 126 (858)
Increase (decrease) in accounts payable, other
liabilities and tenant security deposits.......... 351 (61) 373
(Decrease) increase in accrued interest................ (2,986) 4,674 --
-------- ------- -------
Net Cash (Used In) Provided By Operating
Activities...................................... (5,658) 3,848 (594)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales of real estate.................... 6,545 2,476 --
Capitalized improvements and leasing commissions.......... (1,372) (1,023) (1,476)
Acquisition of real estate................................ -- (1,309) --
-------- ------- -------
Net Cash Provided By (Used In) Investing
Activities...................................... 5,173 144 (1,476)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (31,832) (2,798) (1,283)
Proceeds from mortgage financing.......................... 26,453 -- 14,500
Proceeds from sale of common shares....................... 2,543 -- --
Distributions to shareholders............................. (363) (364) --
Prepayment penalty on extinguishment of debt.............. -- (55) --
Partial in-substance defeasance of Zero Coupon Notes...... -- -- (3,106)
Partial repurchase of Zero Coupon Notes................... -- -- (2,241)
-------- ------- -------
Net Cash (Used In) Provided By Financing
Activities...................................... (3,199) (3,217) 7,870
-------- ------- -------
Net (Decrease) Increase in Unrestricted Cash and
Cash Equivalents................................ (3,684) 775 5,800
Unrestricted Cash and Cash Equivalents at Beginning of
Year...................................................... 7,694 6,919 1,119
-------- ------- -------
Unrestricted Cash and Cash Equivalents at End of Year....... $ 4,010 $ 7,694 $ 6,919
======== ======= =======
Cash Paid for Interest...................................... $ 8,817 $ 1,741 $ 4,718
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 170
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 lower of depreciated cost or fair market value less costs
to sell. In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, issued in March 1995, the Trust records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the expected undiscounted cash flows estimated
to be generated by those assets are less than the related carrying amounts. If
an asset held for investment is determined to be impaired, the impairment would
be measured based upon the excess of the asset's carrying value over the fair
value. In addition, the Trust records impairment losses on assets held for sale
when the estimated sales proceeds, after estimated selling costs, are less than
the carrying value of the related asset (see Note 2).
Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital improvements is
computed using the straight-line method over forty years. Depreciation of tenant
improvements is computed using the straight-line method over ten years.
Cash and Cash Equivalents.
Cash equivalents include demand deposits and all highly liquid instruments
purchased with an original maturity of three months or less. Restricted amounts
reflect escrow deposits held by third parties for the payment of taxes and
insurance and reserves held by third parties for property repairs or tenant
improvements.
F-8
<PAGE> 171
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets.
Other assets primarily consists of deferred rent receivable, prepaid
commissions and loan fees. Leasing commissions are capitalized and amortized on
a straight line basis over the life of the lease. Loan fees are capitalized and
amortized to interest expense on a level yield basis over the term of the
related loan.
Rents and Tenant Reimbursements.
Rental income, including contractual rent increases or delayed rent starts,
is recognized on a straight-line basis over the lease term. The Trust has
recorded deferred rent receivable (representing the excess of rental revenue
recognized on a straight line basis over actual rents received under the
applicable lease provisions) of $599,000 and $810,000 at December 31, 1996 and
1995, respectively.
Several tenants in the Trust's retail property are also required to pay as
rent a percentage of their gross sales volume, to the extent such percentage
rent exceeds their base rents. Such percentage rents amounted to $154,000,
$269,000 and $245,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. In addition to paying base and percentage rents, most tenants are
required to reimburse the Trust for operating expenses in excess of a negotiated
base amount.
Tamarac Square, the Trust's only retail property, has rental revenues in
excess of 10% of the total revenues of the Trust. Rental revenues and tenant
reimbursements from Tamarac totaled $3,308,000, $3,525,000, and $3,441,000 in
1996, 1995, and 1994, respectively.
Income Tax Matters.
The Trust operates as a real estate investment trust ("REIT") for federal
income tax purposes. Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a deduction for dividends
paid during the year. The Trust had a taxable loss in each of the years ending
December 31, 1996, 1995, and 1994. Accordingly, no provision for income taxes
has been reflected in the financial statements.
The Trust has a net operating loss carryforward from 1996 and prior years
of approximately $34,800,000. Subject to certain restrictions, the losses may be
carried forward for up to 15 years. The present losses will expire beginning in
the year 2004. Management intends to operate the Trust in such a manner as to
continue to qualify as a REIT and to continue to distribute cash flow in excess
of taxable income.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from that reported for financial reporting purposes
due primarily to differences in the basis of the assets and the estimated useful
lives used to compute depreciation.
Concentrations.
The Trust owns industrial properties in Baltimore, Dallas, Houston, Los
Angeles, Milwaukee, and Minneapolis, and one retail property in Denver. The
principal competitive factors in these markets are price, location, quality of
space, and amenities. In each case, the Trust owns a small portion of the total
similar space in the market and competes with owners of other space for tenants.
Each of these markets is highly competitive, and other owners of property may
have competitive advantages not available to the Trust. The Trust's retail
property, Tamarac Square, represents approximately 29% of the rent and tenant
reimbursement revenues for the year ended December 31, 1996, and approximately
41% of net real estate at December 31, 1996.
F-9
<PAGE> 172
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-10
<PAGE> 173
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-11
<PAGE> 174
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 2,257,606 Shares
from certain shareholders for $2.75 per share, pending approval of the
settlement of the shareholder litigation discussed above. On December 19, 1996,
the Trust sold 924,600 Shares, representing the remainder of its authorized
Shares, to USAA REALCO for $2.75 per share, the same price at which USAA REALCO
had independently agreed to purchase the Shares from other shareholders. On
December 20, 1996, after approval of the settlement of the shareholder
litigation, USAA REALCO closed the purchase of 2,257,606 Shares, resulting in
USAA REALCO's current ownership of 3,182,206 Shares, or 31.82% of the
outstanding Shares of the Trust.
On December 18, 1996, the Trust executed an agreement with USAA REALCO
contemplating the purchase by USAA REALCO of certain outstanding indebtedness of
the Trust. This agreement set forth the modifications which would occur if USAA
REALCO acquired the indebtedness, including the right to convert the principal
amount of this indebtedness into Shares of the Trust at either $2.00 or $2.25
per share, depending upon the date of conversion. On February 26, 1997, USAA
REALCO purchased this debt (see Note 14).
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 material
adverse effect on the consolidated financial position of the Trust.
NOTE 9 -- RETIREMENT AND PROFIT SHARING PLAN:
During 1993, the Trust adopted a retirement and profit sharing plan which
qualifies under section 401(k) of the Internal Revenue Code. All existing Trust
employees at adoption and subsequent employees who have completed six months of
service are eligible to participate in the plan. Subject to certain limitations,
employees may contribute up to 15% of their salary. The Trust may make annual
discretionary contributions to the plan. Contributions by the Trust related to
the years ended December 31, 1996, 1995 and 1994 were $30,000, $25,000 and
$20,000, respectively.
F-12
<PAGE> 175
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> <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 ($0.04 per share) in 1996 and
$364,000 ($0.04 per share) in 1995 represent a return of capital to shareholders
(to the extent of the shareholder's basis in the Shares.) The Trust did not pay
any distributions in 1994.
NOTE 12 -- PER SHARE DATA:
Per share data is based on a weighted average number of Shares outstanding
of 9,108,241 for the year ending December 31, 1996 and 9,075,400 or the years
ended December 31, 1995 and 1994.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
Accounts receivable, accounts payable and accrued expenses and other
liabilities are carried at amounts that reasonably approximate their fair
values. The fair values of the Trust's mortgage notes payable are estimated
using discounted cash flow analyses, based on the Trust's incremental borrowing
rates for similar types of borrowing arrangements. The carrying values of such
mortgage notes payable reasonably approximate their fair values.
NOTE 14 -- SUBSEQUENT EVENT:
On February 26, 1997, USAA REALCO, a shareholder owning 31.8% of the
outstanding Shares in the Trust, purchased outstanding indebtedness of the Trust
totaling $9,419,213 pursuant to an earlier agreement with the Trust. (See Note
7). USAA REALCO and the Trust then entered into an agreement modifying the terms
of the indebtedness. The amount of the outstanding debt was reduced from
$9,419,213 to $7,040,721, allowing the Trust to recognize an extraordinary gain
on extinguishment of debt (including accrued interest) of $2,643,000 in the
first quarter of 1997. The Trust made an immediate principal reduction on the
modified notes of $1,591,103, leaving an outstanding principal balance of
$5,449,618.
The terms of the modified notes provide for monthly payments of interest at
8.8% and an extension in the maturity date from March 31, 1997 to December 31,
2000. In addition, USAA REALCO has the option to convert the principal amount of
the notes into Shares of the Trust at the conversion rate of $2.00 per share (if
converted prior to December 31, 1997) or $2.25 per share (if converted between
December 31, 1997 and December 31, 2000). In order for USAA REALCO to convert
its debt into Shares, the shareholders must approve an increase in the
authorized Shares of the Trust. An increase in the authorized Shares of the
Trust requires approval by holders of two-thirds of the outstanding Shares. In
addition, the shareholders must approve the right of USAA REALCO to convert its
debt into Shares. The notes provide that if shareholder
F-13
<PAGE> 176
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approval of this conversion right is not approved by June 30, 1997, interest on
the debt will increase to the lesser of 18% or the highest lawful rate effective
July 1, 1997 and the full principal amount will become due and payable on
October 31, 1997. Management believes that the sale of one or more properties
would be required to satisfy this obligation in the event the notes become due
and payable.
The Trust anticipates shareholder approval for this transaction will be
received on or about June 30, 1997 and that USAA REALCO will convert the
principal amount of the debt into Shares of the Trust soon thereafter.
Therefore, the Trust currently anticipates it will reflect approximately
$1,022,000, representing the difference between the market trading price of
$2.38 per share on February 26, 1997 and the $2.00 conversion price, as interest
expense between February 26, 1997 and June 30, 1997. The date of February 26,
1997 is used to measure market value as this is deemed to be the date of
issuance of the modified note, which contains the convertibility option. This
will result in additional interest expense of approximately $272,000 in the
first quarter of 1997 and approximately $750,000 in the second quarter of 1997.
F-14
<PAGE> 177
SCHEDULE III
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
($000'S)
<TABLE>
<CAPTION>
INITIAL COST
ENCUM- ---------------------- WRITEDOWNS
BRANCES BUILDINGS & CAPITALIZED AND
DESCRIPTION AT 12/31/96 LAND IMPROVEMENTS IMPROVEMENTS RETIREMENTS ALLOWANCES
----------- ----------- ------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 2,775 $ 1,303 $ 5,213 $ 424 ($ 5) ($ 3,516)
Commerce Park............ 2,100 1,108 4,431 542 (2,014)
Gateway 5 & 6............ 2,850 935 3,741 693 (1,861)
Northgate II............. 5,175 2,153 8,612 758 (4,122)
Northview................ 2,194 658 2,631 38
Plaza Southwest.......... 3,375 1,312 5,248 979
Westchase................ 1,327 697 2,787 322 (74) (1,158)
Meridian................. 1,163 262 1,047
CALIFORNIA --
Huntington Drive......... 4,575 1,559 6,237 731
MARYLAND --
Patapsco................. 3,112 1,147 4,588 371 (1,250)
MINNESOTA --
Burnsville............... 1,927 761 3,045 443 (18) (1,563)
WISCONSIN --
Northwest Business
Park................... 1,278 1,296 5,184 762 (131)
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 11,946 6,799 27,194 4,383 (241)
TRUST HOME OFFICE.......... 31
------- ------- ------- ------- ----- --------
TOTAL............. $43,797 $19,990 $79,958 $10,477 ($469) ($15,484)
======= ======= ======= ======= ===== ========
<CAPTION>
GROSS AMT. CARRIED
AT DECEMBER 31, 1996
-----------------------------------------------
BUILDINGS & ACCUMULATED DATE OF DATE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ------- ------------ ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 600 $ 2,819 $ 3,419 $ 1,320 1984 1985
Commerce Park............ 705 3,362 4,067 1,214 1984 1985
Gateway 5 & 6............ 563 2,945 3,508 1,208 1984-85 1985
Northgate II............. 1,329 6,072 7,401 2,365 1982-83 1985
Northview................ 658 2,669 3,327 215 980 1993
Plaza Southwest.......... 1,312 6,227 7,539 1,737 1970-74 1985
Westchase................ 465 2,109 2,574 773 1983 1985
Meridian................. 262 1,047 1,309 35 1981 1995
CALIFORNIA --
Huntington Drive......... 1,559 6,968 8,527 2,004 1984-85 1985
MARYLAND --
Patapsco................. 897 3,959 4,856 1,155 1980-84 1985
MINNESOTA --
Burnsville............... 432 2,236 2,668 941 1984 1986
WISCONSIN --
Northwest Business
Park................... 1,296 5,815 7,111 1,668 1983-86 1986
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 6,799 31,336 38,135 9,307 1976-79 1985
TRUST HOME OFFICE.......... 31 31 31 N/A various
------- ------- ------- -------
TOTAL............. $16,877 $77,595 $94,472 $23,973
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this schedule.
F-15
<PAGE> 178
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-16
<PAGE> 179
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
REVENUES
Rents..................................................... $ 1,970 $ 2,150
Tenant reimbursements..................................... 667 667
Interest income........................................... 29 87
----------- ----------
2,666 2,904
----------- ----------
EXPENSES
Property operating expenses:
Property taxes......................................... 355 376
Property management fees............................... 98 106
Utilities.............................................. 97 107
General operating...................................... 219 230
Repairs and maintenance................................ 89 49
Other property operating expenses...................... 78 72
Depreciation and amortization............................. 693 701
Interest on 8.8% notes payable............................ 390 1,320
Interest on mortgages payable............................. 1,014 408
Administrative expenses:
Trust administration and overhead...................... 416 557
Litigation and proxy costs............................. 236 488
----------- ----------
3,685 4,414
----------- ----------
Loss from operations...................................... (1,019) (1,510)
Gain on sale of real estate............................... 312 --
Extraordinary gain on extinguishment of debt.............. 2,643 --
----------- ----------
NET INCOME (LOSS)........................................... $ 1,936 $ (1,510)
=========== ==========
PER SHARE DATA
Loss from operations...................................... $ (0.10) $ (0.17)
Gain on sale of real estate............................... 0.03 --
Extraordinary gain on extinguishment of debt.............. 0.26 --
----------- ----------
Net Income (Loss)......................................... $ 0.19 $ (0.17)
=========== ==========
Distributions Paid........................................ $ -- $ 0.04
=========== ==========
Number of shares outstanding.............................. 10,000,000 9,075,400
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 180
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate:
Held for investment....................................... $ 91,940 $ 84,693
Held for sale............................................. -- 9,779
-------- --------
91,940 94,472
Accumulated depreciation.................................. (23,637) (23,973)
-------- --------
Net real estate........................................... 68,303 70,499
Cash and cash equivalents:
Unrestricted.............................................. 1,725 4,010
Restricted................................................ 1,138 1,366
-------- --------
Total cash and cash equivalents........................... 2,863 5,376
Other assets, net........................................... 3,079 3,061
-------- --------
Total Assets...................................... $ 74,245 $ 78,936
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 41,710 $ 43,797
8.8% notes payable........................................ 5,450 9,419
Accrued interest.......................................... 600 602
Accounts payable, accrued expenses and other
liabilities............................................ 1,419 1,964
Tenant security deposits.................................. 447 471
-------- --------
Total Liabilities................................. 49,626 56,253
-------- --------
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
issued and outstanding 10,000,000 Shares............... 1,000 1,000
Additional paid-in capital................................ 127,056 127,056
Accumulated distributions................................. (58,456) (58,456)
Accumulated loss from operations and extraordinary gains
(losses)............................................... (46,441) (48,065)
Accumulated net realized gain on sales of real estate..... 1,460 1,148
-------- --------
Total Shareholders' Equity........................ 24,619 22,683
-------- --------
Total Liabilities and Shareholders' Equity........ $ 74,245 $ 78,936
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 181
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,936 $(1,510)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary gain on extinguishment of debt........... (2,643) --
Gain on sale of real estate............................ (312)
Depreciation........................................... 606 620
Amortization of deferred financing costs............... 49 17
Other amortization..................................... 87 81
Changes in operating assets and liabilities:
Decrease (increase) in other assets and restricted
cash................................................ 61 (48)
Decrease in accounts payable, other liabilities and
tenant security deposits............................ (507) (508)
Increase in accrued interest........................... 263 1,320
------- -------
Net Cash Used In Operating Activities....................... (460) (28)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized improvements and leasing commissions.......... (176) (194)
Net proceeds from sales of real estate.................... 2,029 --
------- -------
Net Cash Provided By (Used In) Investing Activities......... 1,853 (194)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (3,678) (56)
Distributions to shareholders............................. -- (363)
------- -------
Net Cash Used In Financing Activities....................... (3,678) (419)
------- -------
Net Decrease in Unrestricted Cash and Cash Equivalents...... (2,285) (641)
Unrestricted Cash and Cash Equivalents at Beginning of
Period.................................................... 4,010 7,694
------- -------
Unrestricted Cash and Cash Equivalents at End of Period..... $ 1,725 $ 7,053
======= =======
Cash Paid for Interest...................................... $ 1,092 $ 408
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 182
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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 $554,000 and $599,000 at March 31, 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-20
<PAGE> 183
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.
NOTE 3 -- ZERO COUPON NOTES
In December 1993 and November 1994, the Trust partially in-substance
defeased certain of its Zero Coupon Notes due 1997 totaling $16,365,000 (face
amount at maturity). At March 31, 1997, the accreted value of these Zero Coupon
Notes was $15,158,000.
NOTE 4 -- SHAREHOLDER TRANSACTIONS
On February 26, 1997, USAA Real Estate Company ("USAA REALCO"), the owner
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 USAA 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. In addition, USAA REALCO has the option to convert the
principal amount of the notes into Shares of the Trust at the conversion rate of
$2.00 per share (if converted prior to December 31, 1997) or $2.25 per share (if
converted between December 31, 1997 and December 31, 2000). In order for USAA
REALCO to convert its debt into Shares, an increase in the authorized Shares of
the Trust, which requires approval by holders of two-thirds of the outstanding
Shares, is necessary. In addition, the right of USAA REALCO to convert its debt
into Shares requires approval by the shareholders. The notes provide that if
shareholder approval of this conversion right is not received 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 of
the Trust's properties would be required to satisfy this obligation in the event
the notes become due and payable.
The Trust anticipates shareholder approval for this transaction will be
received on or about June 30, 1997 and that USAA REALCO will convert the
principal amount of the debt into Shares of the Trust soon thereafter.
Therefore, the Trust currently anticipates it will reflect approximately
$1,022,000, representing the difference between the market trading price of
$2.38 per share on February 26, 1997 and the $2.00 conversion price, as interest
expense between February 26, 1997 and June 30, 1997. The date of February 26,
1997 is used to measure market value as this is deemed to be the date of
issuance of the modified note, which contains the convertibility option. Based
upon these assumptions, the Trust recorded additional interest expense of
$272,000 in the first quarter of 1997 and expects to record approximately
$750,000 in additional interest expense in the second quarter of 1997.
NOTE 5 -- SUBSEQUENT EVENTS
On May 1, 1997, the Trust entered into an agreement with Morgan Stanley
Asset Management, Inc. ("MSAM") whereby certain clients and affiliates of MSAM
will purchase up to $20,000,000 of senior convertible debt issued by the Trust.
This debt will automatically be converted into Shares of the Trust at $2.45 per
share if the shareholders of the Trust approve proposals authorizing such
conversion and increasing the number of authorized common shares to enable such
conversion to occur. The debt is non-interest bearing unless shareholder
approval of these proposals is not received by June 30, 1997, at which time the
debt begins
F-21
<PAGE> 184
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to bear interest at 10% and the debt matures in two years. The obligation of the
affiliates and clients of MSAM to invest this amount is contingent on various
conditions, including completion of due diligence investigation by MSAM.
The Trust is currently pursuing a growth strategy and is seeking
shareholder approval of various capital transactions at its Annual Meeting of
Shareholders to be held on June 30, 1997. Among other items, the Trust is
seeking approval for the following:
(1) An increase in authorized Shares from 10,000,000 to 500,000,000;
(2) Authorization of 50,000,000 preferred shares;
(3) Conversion of debt held by USAA REALCO into Shares;
(4) Conversion of $20,000,000 of debt by certain clients and affiliates
of MSAM;
(5) Issuance by the Trust of up to $15,000,000 of convertible debt on
similar terms and conditions as the MSAM debt; and
(6) An employee and Trust Manager incentive share plan.
F-22
<PAGE> 185
INDEPENDENT AUDITORS' REPORT
The Partners
USAA Real Estate Income Investments I Limited Partnership:
We have audited the accompanying balance sheets of USAA Real Estate Income
Investments I Limited Partnership as of December 31, 1996 and 1995, and the
related statements of income, partners' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of USAA Real Estate Income
Investments I Limited Partnership as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 29, 1997
F-23
<PAGE> 186
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Rental properties, net (note 3)............................. $ 9,964,683 $ 10,438,578
Mortgage loan receivable from affiliate (note 4)............ -- 5,440,000
Temporary investments at cost which approximates market
value -- Money market fund................................ 926,892 343,834
Cash........................................................ 46,204 23,003
------------ ------------
Cash and cash equivalents................................. 973,096 366,837
Accounts receivable......................................... 72,175 45,201
Deferred charges, at amortized cost, and other assets....... 386,325 410,731
------------ ------------
$ 11,396,279 $ 16,701,347
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to affiliates of
$27,907 and $45,090 (note 6).............................. $ 83,582 $ 55,379
Accrued expenses............................................ 35,634 8,510
Security deposits........................................... 66,616 65,996
------------ ------------
Total liabilities................................. 185,832 129,885
------------ ------------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 89,818 86,257
Cumulative distributions............................... (184,391) (177,220)
------------ ------------
(93,573) (89,963)
------------ ------------
Limited Partners (54,610 units):
Capital contributions, net of offering costs........... 25,666,700 25,666,700
Cumulative net income.................................. 8,892,025 8,539,514
Cumulative distributions............................... (23,254,705) (17,544,789)
------------ ------------
11,304,020 16,661,425
------------ ------------
Total Partners' equity............................ 11,210,447 16,571,462
------------ ------------
$ 11,396,279 $ 16,701,347
============ ============
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 187
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
INCOME
Rental income............................................ $1,397,128 $1,199,715 $ 849,543
Interest from mortgage loan (notes 4 and 6).............. 52,124 612,757 605,535
Less direct expenses, including depreciation of $572,255,
$543,494 and $431,171.................................. (863,601) (861,541) (766,591)
---------- ---------- ---------
Net operating income........................... 585,651 950,931 688,487
Interest income (note 6)................................. 89,058 26,283 50,447
---------- ---------- ---------
Total income................................... 674,709 977,214 738,934
---------- ---------- ---------
EXPENSES
General and administrative (note 6)...................... 250,744 252,165 253,560
Management fee (note 6).................................. 67,893 77,792 49,325
---------- ---------- ---------
Total expenses................................. 318,637 329,957 302,885
---------- ---------- ---------
Net income............................................... $ 356,072 $ 647,257 $ 436,049
========== ========== =========
Net income per limited partnership unit.................. $ 6.46 $ 11.73 $ 7.90
========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 188
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1993........................... $(83,144) $17,336,471 $17,253,327
Net income............................................ 4,360 431,689 436,049
Cash distributions.................................... (8,825) (873,760) (882,585)
-------- ----------- -----------
Balances at December 31, 1994........................... (87,609) 16,894,400 16,806,791
Net income............................................ 6,472 640,785 647,257
Cash distributions.................................... (8,826) (873,760) (882,586)
-------- ----------- -----------
Balances at December 31, 1995........................... (89,963) 16,661,425 16,571,462
Net income............................................ 3,561 352,511 356,072
Cash distributions.................................... (7,171) (5,709,916) (5,717,087)
-------- ----------- -----------
Balances at December 31, 1996........................... $(93,573) $11,304,020 $11,210,447
======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 189
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 356,072 $ 647,257 $ 436,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 572,255 543,494 431,171
Amortization....................................... 44,937 34,290 9,467
Loss on early retirement of assets................. -- -- 2,465
Decrease (increase) in accounts receivable......... (26,974) (9,297) 65,380
Increase in deferred charges and other assets...... (20,531) (168,240) (194,539)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities................... 55,947 (32,205) 35,086
----------- ---------- ----------
Cash provided by operating activities......... 981,706 1,015,299 785,079
----------- ---------- ----------
Cash flows from investing activities:
Additions to rental properties........................ (98,360) (561,552) (684,626)
Proceeds from mortgage loan receivable................ 5,440,000 -- --
----------- ---------- ----------
Cash provided by (used in) investing
activities.................................. 5,341,640 (561,552) (684,626)
----------- ---------- ----------
Cash flows used in financing activities -- Payment of
distributions......................................... (5,717,087) (882,586) (882,585)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.... 606,259 (428,839) (782,132)
Cash and cash equivalents at beginning of year.......... 366,837 795,676 1,577,808
----------- ---------- ----------
Cash and cash equivalents at end of year................ $ 973,096 $ 366,837 $ 795,676
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 190
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER
USAA Real Estate Income Investments I Limited Partnership is engaged solely
in the business of real estate investment; therefore, presentation of
information about industry segments is not applicable. The General Partner, USAA
Investors I, Inc., is a wholly-owned subsidiary of USAA Real Estate Company,
which is a wholly-owned subsidiary of USAA Capital Corporation, which is a
wholly-owned subsidiary of United Services Automobile Association ("USAA").
At December 31, 1996, the Partnership owned a shopping center located in
Daytona Beach, Florida and an office building located in San Diego, California.
The Partnership's revenue is subject to changes in the economic environments of
these areas.
Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("Statement 121"). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. The
assessment for and measurement of impairment is based upon the undiscounted
future cash flows and fair value, respectively, of the individual real estate
properties. Based on the provisions of Statement 121, the Partnership's
long-lived assets, real estate and improvements are not considered impaired. The
adoption of Statement 121 had no financial statement impact.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
For purposes of the Statements of Cash Flows, all highly liquid marketable
securities that have a maturity at purchase of three months or less and money
market mutual funds are considered to be cash equivalents.
Depreciation is provided over the estimated useful lives of properties
using the straight-line method. The estimated lives of the buildings and
improvements are 30 years (19-39 years for Federal income tax purposes).
Rental income is recognized under the operating method, whereby aggregate
rentals are reported as income on the straight-line basis over the life of the
lease. Rental income recognized was $15,873, $65,461 and $68,669 more than the
amount due per the lease agreements for the years ended December 31, 1996, 1995
and 1994, respectively.
No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return on an accrual basis.
For financial reporting purposes, net income (loss) is allocated 1% to the
General Partner and 99% to the Limited Partners. Net income (loss) per limited
partnership unit is based upon the limited partnership units outstanding at the
end of the period and the net income (loss) allocated to the Limited Partners.
Cash distributions per limited partnership unit were $104.56 during 1996
and $16.00 during 1995 and 1994. The distributions of $13.00, $16.00 and $16.00
per limited partnership unit paid during the years ended December 31, 1996, 1995
and 1994, respectively, were based on the limited partnership units outstanding
at each quarter end and the cash distributions allocated to Limited Partners.
The additional distribution of $91.56 per limited partnership unit that was paid
in March 1996 was based on the limited partnership units outstanding at January
31, 1996, the date of the mortgage loan payoff. See note 4.
F-28
<PAGE> 191
2. PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, all net cash flow shall
be distributed in the ratio of 1% to the General Partner and 99% to the Limited
Partners within 60 days after the close of each fiscal quarter. Generally, net
taxable income or losses not arising from the sale or refinancing of properties
of the Partnership are allocated 99% to the Limited Partners and 1% to the
General Partner.
Residual proceeds are allocated first to the Limited Partners until the
Limited Partners shall receive an amount equal to their adjusted capital
contributions plus an amount which when added to all prior distributions to
Limited Partners equals a 9% per annum cumulative return on their adjusted
capital contributions; second, to all Partners, in an amount equal to their
respective positive capital account balances to the extent such balances exceed
the amounts provided for in the preceding clauses; third, in the case of any
sale of a property, a real estate brokerage commission to the Advisor as
provided in the Partnership Agreement; and fourth, the balance, 90% to the
Limited Partners and 10% to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 99% to the Limited Partners and 1% to the General
Partner. Net taxable gain or loss from the sale or other disposition of a
property shall be allocated as described in the Partnership Agreement.
3. RENTAL PROPERTIES
Rental properties at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Buildings and improvements.............................. $13,710,277 $13,611,917
Land.................................................... 2,282,163 2,282,163
----------- -----------
15,992,440 15,894,080
Less accumulated depreciation........................... (6,027,757) (5,455,502)
----------- -----------
$ 9,964,683 $10,438,578
=========== ===========
</TABLE>
4. MORTGAGE LOAN RECEIVABLE FROM AFFILIATE
On January 31, 1986, the Partnership funded a first mortgage loan in the
amount of $5,440,000 with interest at 10% due January 31, 1996 to Plaza on the
Lake Investors, Ltd. USAA Real Estate Company, the parent of the General
Partner, held a second mortgage note on Plaza on the Lake. On February 9, 1987,
as allowed in the loan documents, upon default of the borrower, USAA Real Estate
Company accepted a deed on the property effective January 1, 1987, and replaced
Plaza on the Lake Investors, Ltd. as the borrower on the first lien held by the
Partnership. All terms and conditions contained in the original documents
remained as originally written.
On January 31, 1996, in accordance with the terms of the mortgage loan
agreement between USAA Real Estate Income Investments I Limited Partnership and
USAA Real Estate Company, the principal balance of the $5,440,000 mortgage loan
receivable was received by the Partnership and the underlying note paid in full.
Approximately $5,000,000 of the proceeds from the loan payoff, or $91.56 per
Limited Partnership unit, was distributed to the Limited Partners during the
first quarter of 1996.
In addition to the interest income, the Partnership received 3.2% of the
gross revenues of the property through year six and 3.84% in years seven through
ten. The Partnership recorded interest income on the mortgage loan receivable of
$52,124, $612,757 and $605,535, which includes $5,921, $68,757 and $61,535 in
participation income for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-29
<PAGE> 192
The following is summarized financial information for the years ended
December 31 for Plaza on the Lake, the underlying property of the mortgage loan
receivable.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Rental income............................................... $1,594,840 $1,520,306
Net loss.................................................... (77,393) (274,968)
Net rental property at period end........................... 7,659,893 7,702,603
Total assets at period end.................................. 8,169,336 8,174,974
Mortgage payable at period end.............................. 5,440,000 5,440,000
Total liabilities at period end............................. 5,782,150 5,761,506
</TABLE>
Financial information for Plaza on the Lake for fiscal year 1996 is not
included as the mortgage loan receivable was paid in full in January 1996.
5. MINIMUM FUTURE RENTALS
Operating leases with tenants have remaining terms from one to twelve
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental income
reported in the Statements of Income is recognized under the operating method,
whereby aggregate rentals are reported as income on the straight-line basis over
the life of the lease. Approximate minimum future rentals are as follows:
<TABLE>
<S> <C>
1997..................................................... $1,319,000
1998..................................................... 1,235,000
1999..................................................... 1,096,000
2000..................................................... 384,000
2001..................................................... 222,000
Thereafter............................................... 1,073,000
----------
$5,329,000
==========
</TABLE>
6. TRANSACTIONS WITH AFFILIATES
USAA Real Estate Company (as the Advisor) may receive real estate brokerage
commissions of up to 1% of the aggregate selling prices of properties sold,
management fees of up to 4% of gross revenues from operations or 9% of the
Partnership's adjusted cash flow, and an annual mortgage servicing fee of up to
1/4 of 1% of amounts funded by the Partnership in mortgage loans which are
serviced by the Advisor.
Through January 1995, a portion of the Partnership's working capital
reserve and other available funds were invested in USAA Mutual Fund, Inc., an
affiliate of the General Partner, and earned interest thereon at market rates.
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, receives fees of up to 6% of the
cash receipts of Partnership properties for managing and providing leasing
services for the properties.
F-30
<PAGE> 193
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
MORTGAGE
REIMBURSEMENT INTEREST MANAGEMENT LEASE SERVICING
OF EXPENSES(1) INCOME FEES COMMISSIONS FEES TOTAL
-------------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996.................................... $ -- $ -- $ -- $ -- $ -- $ --
1995.................................... -- (18) -- -- -- (18)
1994.................................... -- (363) -- -- -- (363)
USAA Real Estate Company:
1996.................................... 117,027 (52,124) 67,893 -- 1,115 133,911
1995.................................... 112,413 (612,757) 77,791 -- 13,600 (408,953)
1994.................................... 136,978 (605,535) 49,325 -- 12,427 (406,805)
Quorum Real Estate Services Corporation:
1996.................................... 60,609 -- 48,992 17,282 -- 126,883
1995.................................... 19,550 -- 40,089 16,273 -- 75,912
1994.................................... 15,832 -- 29,205 15,745 -- 60,782
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
7. INCOME TAXES
A reconciliation of financial statement net income to taxable loss follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net income -- financial statement basis........... $ 356,072 $ 647,257 $ 436,049
Adjusted by:
Increase in deferred rent....................... (15,600) (65,461) (66,001)
Repairs and maintenance capitalized............. -- -- 33,728
Excess tax depreciation over financial statement
depreciation................................. (412,660) (441,114) (531,939)
Prepaid rent.................................... 27,933 (10,420) 8,407
Other reconciling items......................... (1,946) 1,638 3,692
Tax loss on disposal of asset................... -- (133,124) --
--------- --------- ---------
Taxable loss...................................... $ (46,201) $ (1,224) $(116,064)
========= ========= =========
</TABLE>
8. MAJOR CUSTOMER INFORMATION
During the years ended December 31, 1996 and 1995, the Partnership recorded
rental income of approximately $493,000 and $414,000, respectively, from a major
tenant in the computer industry. This income represented approximately 35% and
37% of total rental income for 1996 and 1995, respectively. There is no
applicable major customer information for the year ended December 31, 1994.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts payable and
accrued expenses and other liabilities approximates fair value because of the
short-term nature of these instruments.
F-31
<PAGE> 194
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Rental properties, net...................................... $ 9,822,011 $ 9,964,683
Temporary investments, at cost which approximates market
value-
Money market fund........................................... 1,004,834 926,892
Cash........................................................ 41,435 46,204
----------- ------------
Cash and cash equivalents................................. 1,046,269 973,096
Accounts receivable......................................... 51,317 72,175
Deferred charges, at amortized cost, and other assets....... 376,197 386,325
----------- ------------
$11,295,794 $ 11,396,279
=========== ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to affiliates of
$36,517 and $27,907....................................... $ 67,244 $ 83,582
Accrued expenses and other liabilities...................... 70,323 35,634
Security deposits........................................... 66,616 66,616
----------- ------------
Total liabilities................................. 204,183 185,832
----------- ------------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 90,836 89,818
Cumulative distributions............................... (186,597) (184,391)
----------- ------------
(94,761) (93,573)
Limited Partners (54,610 units):
Capital contributions, net of offering costs........... 25,666,700 25,666,700
Cumulative net income.................................. 8,992,817 8,892,025
Cumulative distributions............................... (23,473,145) (23,254,705)
----------- ------------
11,186,372 11,304,020
----------- ------------
Total Partners' equity............................ 11,091,611 11,210,447
----------- ------------
$11,295,794 $ 11,396,279
=========== ============
</TABLE>
See accompanying notes to condensed financial statements.
F-32
<PAGE> 195
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Income
Rental income............................................. $470,977 $392,081
Interest from mortgage loan from affiliate................ -- 52,124
Interest income........................................... 12,942 48,046
-------- --------
Total income...................................... 483,919 492,251
-------- --------
Expenses
Direct expenses, $33,783 and $31,086 to affiliates (note
1)..................................................... 138,877 130,312
Depreciation.............................................. 146,243 141,364
General and administrative, $42,153 and $36,401 to
affiliates (note 1).................................... 76,866 86,148
Management fee to affiliate (note 1)...................... 20,123 21,787
-------- --------
Total expenses.................................... 382,109 379,611
======== ========
Net income........................................ $101,810 $112,640
======== ========
Net income per limited partnership unit..................... $ 1.85 $ 2.04
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-33
<PAGE> 196
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 101,810 $ 112,640
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 146,243 141,364
Amortization........................................... 11,364 11,053
Decrease in accounts receivable........................ 20,858 30,502
Increase in deferred charges and other assets.......... (1,236) (9,586)
Increase in accounts payable, accrued expenses and
other liabilities..................................... 18,351 114,928
---------- ----------
Cash provided by operating activities................ 297,390 400,901
---------- ----------
Cash flows from investing activities:
Additions to rental properties............................ (3,571) --
Proceeds from mortgage loan receivable.................... -- 5,440,000
---------- ----------
Cash provided by (used in) investing activities...... (3,571) 5,440,000
---------- ----------
Cash flows used in financing activities --
Distributions to Partners................................. (220,646) (5,165,470)
---------- ----------
Net increase in cash and cash equivalents................. 73,173 675,431
Cash and cash equivalents at beginning of period.......... 973,096 366,837
---------- ----------
Cash and cash equivalents at end of period................ $1,046,269 $1,042,268
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-34
<PAGE> 197
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. TRANSACTIONS WITH AFFILIATES
A summary of transactions with affiliates follows for the three-month
period ended March 31, 1997:
<TABLE>
<CAPTION>
QUORUM
USAA REAL ESTATE
REAL ESTATE SERVICES
COMPANY CORPORATION
----------- -----------
<S> <C> <C>
Reimbursement of expenses(a)................................ $36,996 $18,552
Management fees............................................. 20,123 15,231
Lease commissions........................................... -- 5,157
------- -------
Total............................................. $57,119 $38,940
======= =======
</TABLE>
- ---------------
(a) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
2. OTHER
Reference is made to the financial statements in the Annual Report filed as
part of the Form 10-K for the year ended December 31, 1996 with respect to
significant accounting and financial reporting policies as well as to other
pertinent information concerning the Partnership. Information furnished in this
report reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Further, the operating results presented for these interim
periods are not necessarily indicative of the results which may occur for the
remaining nine months of 1997 or any other future period.
The financial information included in this interim report as of March 31,
1997 and for the three-month period ended March 31, 1997 and 1996 has been
prepared by management without audit by independent certified public accountants
who do not express an opinion thereon. The Partnership's annual report includes
audited financial statements.
Certain 1996 balances have been reclassified to conform to the 1997
presentation.
F-35
<PAGE> 198
INDEPENDENT AUDITORS' REPORT
The Partners
USAA Real Estate Income Investments II Limited Partnership:
We have audited the accompanying balance sheets of USAA Real Estate Income
Investments II Limited Partnership as of June 30, 1996 and 1995 and the related
statements of income, partners' equity, and cash flows for each of the years in
the three-year period ended June 30, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of USAA Real Estate Income
Investments II Limited Partnership as of June 30, 1996 and 1995, and the results
of its operations and its cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
August 1, 1996
F-36
<PAGE> 199
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Rental properties, net (note 3)............................. $ 9,493,829 $ 8,059,941
Investment in joint venture (note 4)........................ 2,147,966 2,190,057
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 804,821 1,958,789
Cash........................................................ 30,737 48,582
----------- -----------
Cash and cash equivalents................................. 835,558 2,007,371
Accounts receivable......................................... -- 6,000
Deferred charges and other assets........................... 230,824 231,117
----------- -----------
$12,708,177 $12,494,486
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to affiliates of
$7,981
and $7,290................................................ $ 113,426 $ 9,904
Accrued expenses and other liabilities...................... 172,579 164,480
----------- -----------
Total liabilities................................. 286,005 174,384
----------- -----------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 677,435 582,789
Cumulative distributions............................... (710,943) (626,505)
----------- -----------
(32,508) (42,716)
----------- -----------
Limited Partners (27,141 interests):
Capital contributions, net of offering costs........... 12,756,270 12,756,270
Cumulative net income.................................. 6,096,899 5,245,089
Cumulative distributions............................... (6,398,489) (5,638,541)
----------- -----------
12,454,680 12,362,818
----------- -----------
Total Partners' equity............................ 12,422,172 12,320,102
----------- -----------
$12,708,177 $12,494,486
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 200
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income (notes 5 and 7).......................... $1,125,043 $1,028,693 $1,019,000
Equity in earnings of joint venture (note 4)........... 147,059 153,787 148,848
Less direct expenses, including depreciation of
$262,935, $239,039 and $238,615...................... (268,956) (245,292) (247,792)
---------- ---------- ----------
Net operating income......................... 1,003,146 937,188 920,056
Interest income (note 6)............................... 74,952 98,629 56,798
---------- ---------- ----------
Total income................................. 1,078,098 1,035,817 976,854
---------- ---------- ----------
EXPENSES
General and administrative (note 6).................... 131,642 164,260 128,657
---------- ---------- ----------
Net income............................................. $ 946,456 $ 871,557 $ 848,197
========== ========== ==========
Net income per limited partnership interest............ $ 31.38 $ 28.90 $ 28.13
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 201
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balances at June 30, 1993............................ $ (8,872) $12,667,413 $12,658,541
Net income......................................... 84,820 763,377 848,197
Cash distributions................................. (105,549) (949,935) (1,055,484)
--------- ----------- -----------
Balances at June 30, 1994............................ (29,601) 12,480,855 12,451,254
Net income......................................... 87,156 784,401 871,557
Cash distributions................................. (100,271) (902,438) (1,002,709)
--------- ----------- -----------
Balances at June 30, 1995............................ (42,716) 12,362,818 12,320,102
Net income......................................... 94,646 851,810 946,456
Cash distributions................................. (84,438) (759,948) (844,386)
--------- ----------- -----------
Balances at June 30, 1996............................ $ (32,508) $12,454,680 $12,422,172
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 202
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 946,456 $ 871,557 $ 848,197
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 262,935 239,039 238,615
Amortization................................... 2,528 2,528 2,528
Earnings from joint venture.................... (147,059) (153,787) (148,848)
Distributions from joint venture............... 189,150 185,513 161,868
Decrease (increase) in accounts receivable..... 6,000 9,000 (15,000)
Decrease (increase) in deferred charges and
other assets................................. (2,235) 49,024 46,896
Increase in accounts payable, accrued expenses
and other liabilities........................ 111,621 47,737 6,430
----------- ----------- -----------
Cash provided by operating activities........ 1,369,396 1,250,611 1,140,686
----------- ----------- -----------
Cash flows used in investing activities --
Additions to rental properties.................... (1,696,823) (64,685) (38,857)
Cash flows used in financing activities --
Distributions to partners......................... (844,386) (1,002,709) (1,055,484)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (1,171,813) 183,217 46,345
Cash and cash equivalents at beginning of period.... 2,007,371 1,824,154 1,777,809
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 835,558 $ 2,007,371 $ 1,824,154
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 203
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA Real Estate Income Investments II Limited Partnership is engaged
solely in the business of real estate investment; therefore, presentation of
information about industry segments is not applicable.
The Partnership owns industrial buildings in Lakeland, Florida and Elk
Grove Village, Illinois and an equity investment in an office building in
Arlington, Virginia.
The General Partner, USAA Investors II, Inc., is a wholly-owned subsidiary
of USAA Real Estate Company, which is a wholly-owned subsidiary of USAA Capital
Corporation, which is a wholly-owned subsidiary of United Services Automobile
Association (USAA).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of," (Statement 121). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. Based
on the provisions of Statement 121, the Partnership's long-lived assets, real
estate and improvements, are not considered impaired. The adoption of this
Statement had no financial statement impact.
The Partnership's investment in Combined Capital Resources Joint Venture is
accounted for on the equity method. The Partnership has a 7.275% interest and
USAA Real Estate Equities, Inc. has a 92.725% interest. Both partners have joint
control of the joint venture.
For purposes of the Statement of Cash Flows, all highly liquid marketable
securities that have a maturity at purchase of three months or less and money
market mutual funds are considered to be cash equivalents.
Depreciation is provided over the estimated useful lives of the properties
using the straight-line method. The estimated lives of the buildings and
improvements are 30 years (31.5 years for Federal income tax purposes).
Acquisition fees related to the investment in joint venture are being
amortized over the remaining life of the building (note 4).
Rental income is recognized under the operating method, whereby aggregate
rentals are reported on the straight-line basis over the life of the lease.
Rental income recognized was $2,185 more than the amount per lease agreements
for the year ended June 30, 1996. Rental income recognized was $48,746 less than
the amount per lease agreements for each of the years ended June 30, 1995 and
1994.
Deferred charges consisted primarily of deferred rent resulting from
recognition of income as required by generally accepted accounting principles.
No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return each calendar year on an accrual basis.
For financial reporting purposes, net income is allocated 10% to the
General Partner and 90% to the Limited Partners. Net income per limited
partnership interest is based upon the limited partnership interests outstanding
at the end of the period and net income allocated to the Limited Partners.
F-41
<PAGE> 204
Cash distributions per limited partnership interest were $28.00 for the
year ended June 30, 1996 and $33.25 for the year ended June 30, 1995 and $35.00
for the year ended June 30, 1994 and were based on the limited partnership
interests outstanding at each quarter end and the cash distributions allocated
to Limited Partners.
2. PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, Net Cash from
Operations shall be allocated and paid 10% to the General Partner and 90% to the
Limited Partners. Any Net Cash from Operations received by a Limited Partner
shall count toward his 6% cumulative Preferred Return (10% as to that portion of
Partnership funds invested in mortgage loans), as defined in the Partnership
Agreement. Net Proceeds from Sales or Refinancings shall be allocated and paid
1% to the General Partner and 99% to the Limited Partners until the Limited
Partners have been returned their Original Invested Capital plus their Preferred
Return. Second, Net Proceeds from Sales or Refinancings shall be allocated and
paid to the General Partner in payment of any unpaid Subordinated Disposition
Fee. Third, Net Proceeds from Sales or Refinancings shall be allocated and paid
90% to the Limited Partners and 10% to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 90% to the Limited Partners and 10% to the General
Partner. Net gain or net loss from the sale or other disposition of a Property
shall be allocated as described in the Partnership Agreement.
3. RENTAL PROPERTIES
Rental properties at June 30 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Buildings and improvements................................ $ 8,914,013 $ 7,217,190
Land...................................................... 2,276,850 2,276,850
----------- -----------
11,190,863 9,494,040
Less accumulated depreciation............................. (1,697,034) (1,434,099)
----------- -----------
$ 9,493,829 $ 8,059,941
=========== ===========
</TABLE>
4. INVESTMENT IN JOINT VENTURE
On September 28, 1988, the Partnership entered into the Combined Capital
Resources Joint Venture (the joint venture) with USAA Real Estate Company
(REALCO), an affiliate of the General Partner, for the ownership and operation
of income-producing properties and participating first mortgage loans. The joint
venture was structured in a manner which granted joint control of the joint
venture to both partners, but which gave REALCO the responsibility of conducting
the ordinary and usual day-to-day management of the joint venture property.
The initial joint venture investment was a participating first mortgage on
Sequoia Plaza I in an amount of $30,927,000 which was originally extended by
REALCO on May 23, 1988. On June 30, 1989, the Partnership invested $2,250,000 in
this participating first mortgage which was paid directly to REALCO with the
understanding that such sum would be the Partnership's capital contribution to
the joint venture and would reduce REALCO's contribution. As a result, REALCO's
contribution became $28,677,000. REALCO's joint venture interest is 92.725% and
the Partnership's joint venture interest is 7.275%.
On March 27, 1990, REALCO sold its joint venture interest to USAA Real
Estate Equities, Inc., a real estate investment trust, which is majority-owned
by REALCO. All other terms and conditions contained in the joint venture
agreement remained as originally written and amended.
On August 20, 1991, the Combined Capital Resources Joint Venture acquired
the underlying mortgaged property through foreclosure. This transaction
converted the joint venture's investment from a mortgage loan to real property.
As the fair value of the asset approximated the mortgage loan and other
receivables, no loss
F-42
<PAGE> 205
was recorded on this transaction. This event did not have a material negative
impact on the Partnership's cash flow but has reduced the equity in earnings
from the joint venture due to depreciation expense on the property.
The following is the summary financial information for the Combined Capital
Resources Joint Venture as of June 30, 1996 and 1995 and for the three years
ended June 30, 1996.
F-43
<PAGE> 206
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash........................................................ $ 487,379 $ 295,132
Property, net............................................... 27,501,449 28,216,158
Other receivables........................................... 123,058 82,861
Deferred rent and other assets.............................. 1,766,585 1,553,308
----------- -----------
$29,878,471 $30,147,459
=========== ===========
LIABILITIES AND EQUITY
Accounts payable............................................ $ 54,276 $ 41,996
Equity:
USAA Real Estate Equities, Inc............................ 27,676,229 27,915,406
USAA Real Estate Income Investments II.................... 2,147,966 2,190,057
----------- -----------
Total equity...................................... 29,824,195 30,105,463
----------- -----------
$29,878,471 $30,147,459
=========== ===========
</TABLE>
OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues(a)............................................ $3,946,260 $4,068,973 $3,984,432
Operating expenses..................................... (939,074) (971,684) (959,213)
Other expenses......................................... (225,152) (218,975) (230,694)
Depreciation........................................... (760,608) (764,227) (749,064)
---------- ---------- ----------
Net income................................... $2,021,426 $2,114,087 $2,045,461
========== ========== ==========
Equity in net income:
USAA Real Estate Equities, Inc....................... $1,874,367 $1,960,300 $1,896,613
USAA Real Estate Income Investments II............... 147,059 153,787 148,848
---------- ---------- ----------
$2,021,426 $2,114,087 $2,045,461
========== ========== ==========
Cash distributions:
USAA Real Estate Equities, Inc....................... $2,410,850 $2,364,487 $2,063,132
USAA Real Estate Income Investments II............... 189,150 185,513 161,868
---------- ---------- ----------
$2,600,000 $2,550,000 $2,225,000
========== ========== ==========
</TABLE>
- ---------------
(a) For the years ended June 30, 1996, 1995 and 1994, the joint venture recorded
$3,560,658 of revenue, from a single tenant which represented 90%, 88% and
89%, respectively, of total revenue.
5. MINIMUM FUTURE RENTALS
Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental income
reported in the Statements of Income is recognized under the operating method,
whereby aggregate rentals are reported as income over the life of the lease. The
Partnership's rental properties are leased for three
F-44
<PAGE> 207
to fifteen years under triple-net leases whereby the tenants pay all operating
expenses. Approximate minimum future rentals are as follows:
<TABLE>
<S> <C>
1997................................................... $ 1,190,000
1998................................................... 1,190,000
1999................................................... 1,190,000
2000................................................... 747,000
2001................................................... 776,000
Thereafter............................................. 8,800,000
-----------
$13,893,000
===========
</TABLE>
6. TRANSACTIONS WITH AFFILIATES
USAA Investors II, Inc. (the General Partner) may receive, in the
aggregate, property acquisition fees and loan origination and commitment fees of
up to 5% of the gross offering proceeds; real estate brokerage commissions of up
to 2% of the selling prices of properties sold; 10% of all distributions of Net
Cash from Operations and an annual mortgage servicing fee of up to 1/4 of 1% of
amounts funded by the Partnership in mortgage loans which are serviced by the
General Partner.
Through January 1995, the Partnership had funds invested in USAA Mutual
Fund, Inc. and earned interest thereon at market rates.
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property management and
leasing services for the properties and may receive a fee up to 6% of property
cash receipts for those services.
A summary of transactions with affiliates follows for the three years ended
June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
REIMBURSEMENT MANAGEMENT LEASE INTEREST
OF EXPENSES(1) FEES COMMISSIONS INCOME TOTAL
-------------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996.......................................... $ -- $ -- $ -- $ -- $ --
1995.......................................... -- -- -- (316) (316)
1994.......................................... -- -- -- (2,298) (2,298)
USAA Real Estate Company:
1996.......................................... 71,029 -- -- -- 71,029
1995.......................................... 89,155 -- -- -- 89,155
1994.......................................... 71,289 -- -- -- 71,289
Quorum Real Estate Services Corporation:
1996.......................................... 3,016 12,110 12,444 -- 27,570
1995.......................................... 2,823 12,299 -- -- 15,122
1994.......................................... 3,562 11,380 -- -- 14,942
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
7. MAJOR CUSTOMER INFORMATION
The Partnership owns two single-tenant industrial complexes. The lease
agreements between the Partnership and these tenants (a manufacturer in the
packaging industry and a manufacturer of business forms) are absolute triple net
lease arrangements whereby the lessee is required to make all payments for
expenses related to the use and occupation of the leased premises including real
estate taxes and assessments, property and liability insurance, repairs and
maintenance, utilities and other operating costs associated with the property.
Accordingly, net operating income for 1996, 1995 and 1994 reflects only rental
income and excludes all expenses directly related to the operations of the
properties as payments for such expenses are made directly by the respective
lessees.
For the year ended June 30, 1996, the Partnership recorded $677,739 and
$447,304 of rental income from two single tenants which represents 60% and 40%,
respectively, of total rental income.
F-45
<PAGE> 208
For the year ended June 30, 1995, the Partnership recorded $593,829 and
$434,864 of rental income from two single tenants which represents 58% and 42%,
respectively, of total rental income.
For the year ended June 30, 1994, the Partnership recorded $593,829 and
$425,171 of rental income from two single tenants which represents 58% and 42%,
respectively, of total rental income.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts payable and
accrued expenses and other liabilities approximate fair value because of the
short-term nature of these instruments.
F-46
<PAGE> 209
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Rental properties, net...................................... $ 9,258,183 $ 9,493,829
Investment in joint venture................................. 2,143,965 2,147,966
Temporary investments, at cost which approximates market
value -
Money market fund......................................... 772,817 804,821
Cash........................................................ 115,904 30,737
----------- -----------
Cash and cash equivalents................................. 888,721 835,558
----------- -----------
Accounts receivable......................................... 2,141 --
Deferred charges and other assets........................... 308,009 230,824
----------- -----------
$12,601,019 $12,708,177
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to affiliates of
$8,105 and $7,981......................................... $ 44,347 $ 113,426
Accrued expenses and other liabilities...................... 170,351 172,579
----------- -----------
Total liabilities................................. 214,698 286,005
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 753,011 677,435
Cumulative distributions............................... (790,104) (710,943)
----------- -----------
(36,093) (32,508)
----------- -----------
Limited Partners (27,141 interests):
Capital contributions, net of offering costs........... 12,756,270 12,756,270
Cumulative net income.................................. 6,777,085 6,096,899
Cumulative distributions............................... (7,110,941) (6,398,489)
----------- -----------
12,422,414 12,454,680
----------- -----------
Total Partners' equity............................ 12,386,321 12,422,172
----------- -----------
$12,601,019 $12,708,177
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-47
<PAGE> 210
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
------------ ------------
<S> <C> <C>
Income
Rental income............................................... $ 349,453 $ 303,519
Equity in earnings of joint venture......................... 39,006 33,407
Interest income............................................. 9,587 14,026
---------- ----------
Total income...................................... 398,046 350,952
========== ==========
Expenses
Direct expenses, $5,397 and $4,844 to affiliates (note 1)... 23,002 22,955
Depreciation................................................ 78,555 65,386
General and administrative, $32,889 and $19,814 to
affiliates (note 1)....................................... 41,929 33,783
---------- ----------
Total expenses.................................... 143,486 122,124
---------- ----------
Net income........................................ $ 254,560 $ 228,828
========== ==========
Net income per limited partnership interest................. $ 8.44 $ 7.59
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Income
Rental income............................................... $1,054,033 $ 865,557
Equity in earnings of joint venture......................... 112,399 109,392
Interest income............................................. 28,434 65,268
---------- ----------
Total income...................................... 1,194,866 1,040,217
========== ==========
Expenses
Direct expenses, $12,249 and $11,238 to affiliates (note
1)........................................................ 72,016 65,637
Depreciation................................................ 235,693 184,906
General and administrative, $91,854 and $52,032 to
affiliates (note 1)....................................... 131,395 96,873
---------- ----------
Total expenses.................................... 439,104 347,416
---------- ----------
Net income........................................ $ 755,762 $ 692,801
========== ==========
Net income per limited partnership interest................. $ 25.06 $ 22.97
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-48
<PAGE> 211
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 755,762 $ 692,801
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 235,693 184,906
Amortization........................................... 1,896 1,896
Earnings from joint venture............................ (112,399) (109,392)
Distributions from joint venture....................... 116,400 145,499
Decrease (increase) in accounts receivable............. (2,141) 5,745
Decrease (increase) in deferred charges and other
assets................................................ (79,081) 22,706
Increase (decrease) in accounts payable and other
liabilities........................................... (71,307) 160,133
--------- -----------
Cash provided by operating activities............. 844,823 1,104,294
Cash flows used in investing activities -- Additions to
rental properties......................................... (47) (1,573,390)
Cash flows used in financing activities -- Payment of
distributions............................................. (791,613) (633,290)
--------- -----------
Net increase (decrease) in cash and cash equivalents........ 53,163 (1,102,386)
Cash and cash equivalents at beginning of period............ 835,558 2,007,371
--------- -----------
Cash and cash equivalents at end of period.................. $ 888,721 $ 904,985
========= ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-49
<PAGE> 212
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. TRANSACTIONS WITH AFFILIATES
A summary of transactions with affiliates follows for the nine months ended
March 31, 1997:
<TABLE>
<CAPTION>
QUORUM
USAA REAL ESTATE
REAL ESTATE SERVICES
COMPANY CORPORATION
----------- -----------
<S> <C> <C>
Reimbursement of expenses(a)................................ $61,762 $ 2,527
Management fees............................................. -- 9,722
Lease commissions........................................... -- 30,092
------- -------
Total............................................. $61,762 $42,341
======= =======
</TABLE>
- ---------------
(a) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
2. OTHER
Reference is made to the financial statements in the Annual Report filed as
part of the Form 10-K for the year ended June 30, 1996 with respect to
significant accounting and financial reporting policies as well as to other
pertinent information concerning the Partnership. Information furnished in this
report reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
presented. Further, the operating results presented for these interim periods
are not necessarily indicative of the results which may occur for the remaining
three months of this fiscal year or any other future period.
The financial information included in this interim report as of March 31,
1997 and for the three-month and nine-month periods ended March 31, 1997 and
1996 has been prepared by management without audit by independent certified
public accountants who do not express an opinion thereon. The Partnership's
annual report includes audited financial statements.
Certain 1996 balances have been reclassified to conform to the 1997
presentation.
F-50
<PAGE> 213
INDEPENDENT AUDITORS' REPORT
The Partners
USAA Income Properties III Limited Partnership:
We have audited the accompanying balance sheets of USAA Income Properties
III Limited Partnership as of December 31, 1996 and 1995, and the related
statements of income, partners' equity, and cash flows for each of the years in
the three-year period ended December 31, 1996. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of USAA Income Properties III
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 3, 1997
F-51
<PAGE> 214
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Rental properties, net (notes 3, 4 and 7)................... $ 39,262,249 $ 39,125,747
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 9,301,147 12,202,023
Cash........................................................ 118,000 573,020
------------ ------------
Cash and cash equivalents................................. 9,419,147 12,775,043
Accounts receivable, net of allowance for doubtful accounts
of $90,000 and $12,000.................................... 555,959 419,871
Deferred rent............................................... 2,882,064 1,841,535
Deferred charges and other assets, at amortized cost........ 1,646,751 2,218,611
------------ ------------
$ 53,766,170 $ 56,380,807
============ ============
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable to affiliates (notes 7 and 8)............. $ 26,000,000 $ 27,818,182
Accounts payable, including amounts due to affiliates of
$101,194 and $65,139...................................... 414,274 138,535
Other deposits held......................................... 18,485 2,761,130
Accrued expenses and other liabilities...................... 326,166 837,192
------------ ------------
Total liabilities................................. 26,758,925 31,555,039
============ ============
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net earnings................................ 14,982 (17,819)
Cumulative distributions............................... (269,199) (258,214)
------------ ------------
(253,217) (275,033)
------------ ------------
Limited Partners (111,549 units):
Capital contributions, net of offering costs........... 52,428,030 52,428,030
Cumulative net earnings................................ 1,483,181 (1,764,083)
Cumulative distributions............................... (26,650,749) (25,563,146)
------------ ------------
27,260,462 25,100,801
------------ ------------
Total Partners' equity............................ 27,007,245 24,825,768
------------ ------------
$ 53,766,170 $ 56,380,807
============ ============
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 215
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
INCOME
Rental income.................................... $ 7,930,447 $ 9,694,383 $ 9,249,018
Less direct expenses, including depreciation of
$1,509,109, $1,477,439 and $2,324,394......... (2,543,615) (1,743,046) (2,533,232)
Gain on disposal of rental property.............. 157,852 -- --
Provision for investment property write-down
(note 4)...................................... -- -- (21,164,478)
----------- ----------- ------------
Net operating income (loss) (note 6)..... 5,544,684 7,951,337 (14,448,692)
Interest income (note 8)......................... 592,123 648,218 343,378
----------- ----------- ------------
Total income (loss)...................... 6,136,807 8,599,555 (14,105,314)
----------- ----------- ------------
EXPENSES
General and administrative (note 8).............. 459,834 366,291 412,691
Management fee (note 8).......................... 60,523 168,389 149,216
Interest (note 8)................................ 2,336,385 2,766,034 4,390,598
----------- ----------- ------------
Total expenses........................... 2,856,742 3,300,714 4,952,505
----------- ----------- ------------
Income (loss) before extraordinary item.......... 3,280,065 5,298,841 (19,057,819)
Extraordinary gain on debt forgiveness (note
4)............................................ -- -- 20,800,000
----------- ----------- ------------
Net income....................................... $ 3,280,065 $ 5,298,841 $ 1,742,181
=========== =========== ============
Net income (loss) per limited partnership unit
before extraordinary item..................... $ 29.11 $ 47.03 $ (169.14)
Extraordinary item............................... -- -- 184.60
----------- ----------- ------------
Net income per limited partnership unit.......... $ 29.11 $ 47.03 $ 15.46
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 216
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1993........................ $(311,640) $21,476,661 $21,165,021
Net income......................................... 17,422 1,724,759 1,742,181
Distributions...................................... (16,901) (1,673,236) (1,690,137)
--------- ----------- -----------
Balances at December 31, 1994........................ (311,119) 21,528,184 21,217,065
Net income......................................... 52,988 5,245,853 5,298,841
Distributions...................................... (16,902) (1,673,236) (1,690,138)
--------- ----------- -----------
Balances at December 31, 1995........................ (275,033) 25,100,801 24,825,768
Net income......................................... 32,801 3,247,264 3,280,065
Distributions...................................... (10,985) (1,087,603) (1,098,588)
--------- ----------- -----------
Balances at December 31, 1996........................ $(253,217) $27,260,462 $27,007,245
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 217
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 3,280,065 $ 5,298,841 $ 1,742,181
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 1,509,109 1,477,439 2,324,394
Amortization...................................... 105,325 84,471 57,759
Provision for investment property write-down...... -- -- 21,164,478
Gain on debt forgiveness.......................... -- -- (20,800,000)
Decrease (increase) in accounts receivable........ (136,088) (335,001) 169,410
Decrease (increase) in deferred charges and other
assets.......................................... (573,994) (334,751) 91,275
Increase (decrease) in accounts payable, accrued
expenses and other liabilities.................. (2,977,932) 2,820,522 (1,910,760)
Gain on disposal of rental property............... (157,852) -- --
Loss on early retirement of fixed assets.......... 10,598 -- --
Other adjustments................................. -- 7,118 --
----------- ----------- ------------
Cash provided by operating activities........... 1,059,231 9,018,639 2,838,737
----------- ----------- ------------
Cash flows from investing activities:
Additions to rental properties....................... (1,718,757) -- (22,771)
Proceeds from disposal of rental properties.......... 220,400 -- --
----------- ----------- ------------
Cash used in investing activities............... (1,498,357) -- (22,771)
----------- ----------- ------------
Cash flows from financing activities:
Repayment of mortgages payable....................... (1,818,182) (2,727,273) (454,545)
Distributions to partners............................ (1,098,588) (1,690,138) (1,690,137)
----------- ----------- ------------
Cash used in financing activities............... (2,916,770) (4,417,411) (2,144,682)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents... (3,355,896) 4,601,228 671,284
Cash and cash equivalents at beginning of year......... 12,775,043 8,173,815 7,502,531
----------- ----------- ------------
Cash and cash equivalents at end of year............... $ 9,419,147 $12,775,043 $ 8,173,815
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 218
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER
USAA Income Properties III Limited Partnership is engaged solely in the
business of real estate investment; therefore, presentation of information about
industry segments is not applicable.
The Partnership owns a shopping center in Clearwater, Florida and office
buildings in Phoenix, Arizona and Manhattan Beach, California. The Partnership's
revenue is subject to changes in the economic environments of these areas.
The General Partner, USAA Properties III, Inc., is a wholly-owned
subsidiary of USAA Real Estate Company (Realco), which is a wholly-owned
subsidiary of USAA Capital Corporation, which is a wholly-owned subsidiary of
United Services Automobile Association (USAA).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("Statement 121"). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. The
assessment for and measurement of impairment is based upon the undiscounted cash
flows and fair value, respectively, of the individual properties. Based on the
provisions of Statement 121, the Partnership's long-lived assets, real estate
and improvements are not considered impaired. The adoption of Statement 121 had
no financial statement impact.
Depreciation is provided over the estimated useful lives of the properties
using the straight-line method. The estimated useful lives of the buildings and
improvements are 30 years (19-39 years for Federal income tax purposes).
Rental income is recognized under the operating method, whereby aggregate
rentals are reported on a straight-line basis as income over the life of the
lease. Rental income recognized was $1,048,477 more, $874,036 more and $399,737
less than the amount due per the lease agreements for the years ended December
31, 1996, 1995 and 1994, respectively.
Deferred rent results from recognition of income as required by generally
accepted accounting principles.
A land lease receivable, arising from the sale of improvements at a rental
property, was accounted for in accordance with generally accepted accounting
principles, whereby the carrying amount of the receivable was reduced by a
portion of the payment received on the ground lease.
No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return on an accrual basis.
For the purposes of the Statements of Cash Flows, all highly liquid
marketable securities that have a maturity at purchase of three months or less,
and money market mutual funds are considered to be cash equivalents.
For financial reporting purposes, net income (loss) is allocated 1% to the
General Partner and 99% to the Limited Partners. Net income (loss) per limited
partnership unit is based upon the limited partnership units outstanding at the
end of each year and the net income (loss) allocated to the Limited Partners.
F-56
<PAGE> 219
Cash distributions per limited partnership unit were $9.75 for 1996 and
$15.00 for 1995 and 1994, and were based on the limited partnership units
outstanding at each quarter end and the cash distributions allocated to Limited
Partners.
Certain 1995 balances have been reclassified to conform to the 1996
presentation.
2. PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, all Distributable Cash
shall be distributed in the ratio of 1% to the General Partner and 99% to the
Limited Partners within 60 days after the close of each fiscal quarter.
Generally, net taxable income or losses not arising from the sale or
refinancing of properties of the Partnership and Distributable Cash are
allocated 99% to the Limited Partners and 1% to the General Partner. Cash
Distributions from the sale or refinancing of property are allocated first to
the Limited Partners until the Limited Partners shall receive an amount equal to
their adjusted capital contributions; second, to the Limited Partners until the
Limited Partners shall receive a cumulative amount from cash distributions from
operations, sales or refinancings equal to 6% per annum of their adjusted
capital contributions; third, to all Partners, in an amount equal to their
respective positive capital account balances to the extent such balances exceed
the amounts provided for in the Partnership Agreement; and fourth, the balance,
90% to the Limited Partners and 10% to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 99% to the Limited Partners and 1% to the General
Partner. Net gain or net loss from the sale or other disposition of a property
shall be allocated as described in the Partnership Agreement.
3. RENTAL PROPERTIES
Rental properties at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Buildings and improvements.............................. $ 54,041,957 $ 52,405,717
Land.................................................... 8,970,396 8,961,025
------------ ------------
63,012,353 61,366,742
Less accumulated depreciation........................... (23,750,104) (22,240,995)
------------ ------------
$ 39,262,249 $ 39,125,747
============ ============
</TABLE>
4. PROVISION FOR INVESTMENT PROPERTY WRITE-DOWN
On October 31, 1994, after lengthy negotiations with the third-party
lender, the $40,800,000 non-recourse loan was purchased from the lender for
$20,000,000 by Las Colinas Management Company ("LCMC"), an affiliate of the
General Partner. Effective with the loan acquisition, LCMC modified the terms of
the loan to the Partnership whereby $20,800,000 of the loan balance was
forgiven, resulting in a loan principal balance of $20,000,000. The Partnership
recognized an extraordinary income item for the gain on debt forgiveness in the
amount of $20,800,000. Other modifications in loan terms included extension of
the loan maturity date from March 15, 1995 to August 31, 1996, the date of
expiration of the single-tenant lease at Manhattan Towers. Payment terms were
revised from semi-annual payments of interest-only to monthly payments including
principal of approximately $227,000 plus interest at a floating rate based on
the London Interbank Offered Rate ("LIBOR") plus .625%. On October 31, 1994, the
Partnership reimbursed LCMC for fees paid to the third-party lender, legal fees
and filing fees of approximately $693,000, in addition to accrued interest of
approximately $309,000 for the period from September 16, 1994, the date of the
previous semi-annual interest payment, to October 31, 1994.
Under generally accepted accounting principles, a review of an asset's
value is required when events indicate that the carrying amount of the asset may
not be recoverable. Acquisition of the loan by an affiliate of
F-57
<PAGE> 220
the General Partner at a $20,800,000 discount resulted in a review of value of
the Manhattan Towers property. Through analysis it was determined that a
permanent impairment of value had occurred on Manhattan Towers. Accordingly, a
provision for investment property write-down was recorded at December 31, 1994
for $21,164,478, the amount by which the carrying value of the asset exceeded
$20,000,000, the amount determined to be the fair value of the property.
5. MINIMUM FUTURE RENTALS
Operating leases with tenants have remaining terms from eight months to 26
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental income
reported in the Statements of Income is recognized under the operating method,
whereby aggregate rentals are reported on a straight-line basis as income over
the life of the lease. Approximate minimum future rentals are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 4,076,000
1998.................................................... 3,600,000
1999.................................................... 3,411,000
2000.................................................... 3,049,000
2001.................................................... 3,039,000
Thereafter.............................................. 20,979,000
-----------
$38,154,000
===========
</TABLE>
6. TRIPLE NET LEASES
During 1995 and 1994, lease agreements between the Partnership and tenants
at two properties were absolute triple net lease arrangements whereby the lessee
was required to make all payments for expenses related to the use and occupation
of the leased premises including real estate taxes and assessments, property and
liability insurance, repairs and maintenance, utilities and other operating
costs associated with the property. Accordingly, net operating income for 1995
and 1994 reflects only rental income and excludes all expenses directly related
to the operations of the properties as payments for such expenses are made
directly by the respective lessees.
7. MORTGAGES PAYABLE
Mortgages payable to affiliates at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
First mortgage note payable, interest at 8.25%, due March
31, 1998, interest only payable monthly; secured by
rental property with a depreciated cost of approximately
$7,590,000.............................................. $11,000,000 $11,000,000
First mortgage note payable, interest at 9.57%, due
September 30, 1998, interest only payable monthly;
secured by rental property with a depreciated cost of
approximately $18,842,000............................... 15,000,000 16,818,182
----------- -----------
$26,000,000.. $27,818,182
=========== ===========
</TABLE>
Cash payments for interest expense were $2,105,667, $2,420,902 and
$5,422,625 for 1996, 1995 and 1994, respectively.
8. TRANSACTIONS WITH AFFILIATES
USAA Real Estate Company (the Adviser) may receive property acquisition
fees of up to 4% of the gross offering proceeds, real estate brokerage
commissions of up to 1% of the aggregate selling prices of
F-58
<PAGE> 221
property sold and management fees equal to 4% of Cash Receipts from Operations
not to exceed 9% of adjusted cash flow from the Partnership.
Through January 1995, the Partnership had funds invested in USAA Mutual
Fund, Inc. and earned interest thereon at market rates.
An affiliate of the General Partner, Las Colinas Management Company,
received monthly payments of principal of $227,272.72 plus interest at one-month
LIBOR plus .625% through August 31, 1996. The mortgage loan was converted to
interest only payments at an interest rate of 9.57%.
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property management and
leasing services for the properties and may receive fees of up to 6% of the
property cash receipts for those services.
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
REIMBURSEMENT INTEREST MANAGEMENT LEASE INTEREST
OF EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
--------------- -------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996............................. $ -- $ -- $ -- $ -- $ -- $ --
1995............................. -- (1,262) -- -- -- (1,262)
1994............................. -- (36,253) -- -- -- (36,253)
USAA Real Estate Company:
1996............................. 200,417 -- 60,523 -- 964,529 1,225,469
1995............................. 162,493 -- 168,389 -- 1,191,014 1,521,896
1994............................. 174,407 -- 149,216 -- 1,005,973 1,329,596
Las Colinas Management Company:
1996............................. -- -- -- -- 1,141,138 1,141,138
1995............................. -- -- -- -- 1,229,888 1,229,888
1994............................. -- -- -- -- 208,656 208,656
Quorum Real Estate Services
Corporation:
1996............................. 85,876 -- 63,446 30,541 -- 179,863
1995............................. 47,548 -- 46,628 22,816 -- 116,992
1994............................. 41,652 -- 46,501 24,824 -- 112,977
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
(2) Represents interest expense at market rate on mortgage loans (note 7).
9. INCOME TAXES
A reconciliation of financial statement net income to taxable income (loss)
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income -- financial statement basis............... $ 3,280,065 $ 5,298,841 $ 1,742,181
Adjusted by:
Excess tax depreciation over financial statement
depreciation..................................... (2,677,702) (2,695,639) (1,849,019)
Increase (decrease) in prepaid rent................. (521,993) 569,123 (687,208)
Decrease (increase) in deferred rent and land
costs............................................ (557,275) 525,592 147,025
Investment property write-down...................... -- -- 21,164,478
Book bad debt expense in excess of tax bad debt
expense.......................................... 78,000 12,000 --
Other reconciling items............................. 19,673 (68,354) 31,271
----------- ----------- -----------
Taxable income (loss)................................. $ (379,232) $ 3,641,563 $20,548,728
=========== =========== ===========
</TABLE>
F-59
<PAGE> 222
10. MAJOR CUSTOMER INFORMATION
During 1996, the Partnership recorded approximately $1,644,000 and
$4,869,000 of rental income from two major tenants which represented
approximately 21% and 62% respectively of total rental income for 1996.
During 1995, the Partnership recorded approximately $1,246,000 and
$6,679,000 of rental income from two major tenants which represented
approximately 13% and 69% respectively of total rental income for 1995.
During 1994, the Partnership recorded approximately $1,652,000 and
$6,241,000 of rental income from two major tenants which represented
approximately 18% and 67% respectively of total rental income for 1994.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturities of these instruments.
The carrying amount of the mortgages payable at December 31, 1996
approximates fair value since these two mortgages payable were re-negotiated
during 1996 to interest rates currently being offered for mortgage loans with
similar characteristics and maturities.
The current fair value of the mortgages payable at December 31, 1995 was
approximately $27,395,000, estimated by discounting the future cash flows using
interest rates currently being offered for mortgage loans with similar
characteristics and maturities.
F-60
<PAGE> 223
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Rental properties, net...................................... $ 40,077,090 $ 39,262,249
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 7,924,399 9,301,147
Cash........................................................ 58,242 118,000
------------ ------------
Cash and cash equivalents................................. 7,982,641 9,419,147
------------ ------------
Accounts receivable, net of allowance for doubtful accounts
of $90,000................................................ 617,573 555,959
Deferred rent............................................... 2,925,479 2,882,064
Deferred charges and other assets, at amortized cost........ 1,657,549 1,646,751
------------ ------------
$ 53,260,332 $ 53,766,170
============ ============
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable to affiliates............................. $ 26,000,000 $ 26,000,000
Accounts payable, including amounts due to affiliates of
$75,084 and $101,194...................................... 375,648 414,274
Accrued expenses and other liabilities...................... 721,876 344,651
------------ ------------
Total liabilities................................. 27,097,524 26,758,925
------------ ------------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 8,791 14,982
Cumulative distributions............................... (271,453) (269,199)
------------ ------------
(261,662) (253,217)
------------ ------------
Limited Partners (111,549 units):
Capital contributions, net of offering costs........... 52,428,030 52,428,030
Cumulative net earnings................................ 870,287 1,483,181
Cumulative distributions............................... (26,873,847) (26,650,749)
------------ ------------
26,424,470 27,260,462
------------ ------------
Total Partners' equity............................ 26,162,808 27,007,245
------------ ------------
$ 53,260,332 53,766,170
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-61
<PAGE> 224
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Income
Rental income............................................... $1,178,422 $2,618,865
Interest income............................................. 106,064 167,589
---------- ----------
Total income...................................... 1,284,486 2,786,454
---------- ----------
Expenses
Direct expenses, $93,930 and $24,504 to affiliates (note
1)........................................................ 729,390 224,439
Depreciation................................................ 397,566 369,151
General and administrative, $94,190 and $59,525 to
affiliates (note 1)....................................... 167,466 149,923
Management fee to affiliate (note 1)........................ 31,423 78,822
Interest, $577,726 and $538,366 to affiliates (note 1)...... 577,726 624,412
---------- ----------
Total expenses.................................... 1,903,571 1,446,747
---------- ----------
Net income (loss)........................................... $ (619,085) $1,339,707
========== ==========
Net income (loss) per limited partnership unit.............. $ (5.49) $ 11.89
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-62
<PAGE> 225
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (619,085) $ 1,339,707
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 397,566 369,151
Amortization........................................... 48,466 25,650
Increase in accounts receivable........................ (61,614) (29,647)
Increase in deferred charges and other assets.......... (102,679) (153,630)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................ 338,599 (220,066)
----------- -----------
Cash provided by operating activities................ 1,253 1,331,165
----------- -----------
Cash flows used in investing activities -- Additions to
rental properties......................................... (1,212,407) (9,424)
Cash flows from financing activities:
Repayment of mortgages payable............................ -- (681,818)
Distributions to partners................................. (225,352) (422,534)
----------- -----------
Cash used in financing activities.................... (225,352) (1,104,352)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (1,436,506) 217,389
Cash and cash equivalents at beginning of period............ 9,419,147 12,775,043
----------- -----------
Cash and cash equivalents at end of period.................. $ 7,982,641 $12,992,432
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-63
<PAGE> 226
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. TRANSACTIONS WITH AFFILIATES
A summary of transactions with affiliates follows for the three-month
period ended March 31, 1997:
<TABLE>
<CAPTION>
QUORUM
USAA LAS COLINAS REAL ESTATE
REAL ESTATE MANAGEMENT SERVICES
COMPANY COMPANY CORPORATION
----------- ----------- -----------
<S> <C> <C> <C>
Reimbursement of expenses(a)..................... $ 75,355 -- 56,590
Management fees.................................. 31,423 -- 37,340
Lease commissions................................ -- -- 18,835
Interest expense(b).............................. 223,767 353,959 --
-------- -------- --------
Total.................................. $330,545 353,959 112,765
======== ======== ========
</TABLE>
- ---------------
(a) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
(b) Represents interest expense at market rate on a mortgage loan.
2. OTHER
Reference is made to the financial statements in the Annual Report filed as
part of the Form 10-K for the year ended December 31, 1996 with respect to
significant accounting and financial reporting policies as well as to other
pertinent information concerning the Partnership. Information furnished in this
report reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Further, the operating results presented for these interim
periods are not necessarily indicative of the results which may occur for the
remaining nine months of 1997 or any other future period.
The financial information included in this interim report as of March 31,
1997 and for the three months ended March 31, 1997 and 1996 has been prepared by
management without audit by independent certified public accountants who do not
express an opinion thereon. The Partnership's annual report includes audited
financial statements.
Certain 1996 balances have been reclassified to conform to the 1997
presentation.
F-64
<PAGE> 227
INDEPENDENT AUDITORS' REPORT
The Partners
USAA Income Properties IV Limited Partnership:
We have audited the accompanying consolidated balance sheets of USAA Income
Properties IV Limited Partnership and majority-owned joint venture as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, partners' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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 financial position of USAA Income
Properties IV Limited Partnership and majority-owned joint venture as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 31, 1997
F-65
<PAGE> 228
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Rental properties, net (notes 3, 4 and 7)................... $ 45,409,746 $ 46,218,351
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 977,512 2,217,339
Cash........................................................ 226,365 61,643
------------ ------------
Cash and cash equivalents................................. 1,203,877 2,278,982
Accounts receivable......................................... 32,715 81,956
Deferred charges and other assets........................... 260,706 193,842
------------ ------------
$ 46,907,044 $ 48,773,131
============ ============
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable (note 7).................................. $ 16,419,083 $ 16,638,886
Note payable to affiliate (notes 4, 7 and 8)................ 6,000,000 6,000,000
Accounts payable, including amounts due to affiliates of
$29,663 and $44,323....................................... 89,097 57,801
Other liabilities........................................... 269,410 251,595
------------ ------------
Total liabilities................................. 22,777,590 22,948,282
------------ ------------
Minority interest in joint venture (note 4)................. 4,098,771 4,310,989
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 43,804 52,678
Cumulative distributions............................... (127,834) (121,876)
------------ ------------
(83,030) (68,198)
------------ ------------
Limited Partners (60,495 interests):
Capital contributions, net of offering costs........... 28,432,650 28,432,650
Cumulative net income.................................. 4,336,617 5,215,136
Cumulative distributions............................... (12,655,554) (12,065,728)
------------ ------------
20,113,713 21,582,058
------------ ------------
Total Partners' equity............................ 20,030,683 21,513,860
------------ ------------
$ 46,907,044 $ 48,773,131
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE> 229
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income.......................................... $3,815,441 $4,276,734 $5,119,505
Less direct expenses, including depreciation of
$1,852,360, $1,873,494 and $1,866,275................ 2,238,144 2,094,869 1,977,988
---------- ---------- ----------
Net operating income (note 6)................ 1,577,297 2,181,865 3,141,517
Interest income (note 8)............................... 110,173 144,048 73,388
---------- ---------- ----------
Total income................................. 1,687,470 2,325,913 3,214,905
---------- ---------- ----------
EXPENSES
General and administrative (note 8).................... 224,443 197,963 233,198
Management fee (note 8)................................ 50,134 90,376 91,449
Interest (notes 7 and 8)............................... 2,115,064 2,134,420 2,152,088
Minority interest in joint venture earnings (note 4)... 185,222 170,664 180,975
---------- ---------- ----------
Total expenses............................... 2,574,863 2,593,423 2,657,710
---------- ---------- ----------
Net income (loss)...................................... $ (887,393) $ (267,510) $ 557,195
========== ========== ==========
Net income (loss) per limited partnership interest..... $ (14.52) $ (4.38) $ 9.12
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE> 230
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1993........................... $(52,763) $23,110,121 $23,057,358
Net income............................................ 5,572 551,623 557,195
Distributions......................................... (9,166) (907,426) (916,592)
-------- ----------- -----------
Balances at December 31, 1994........................... (56,357) 22,754,318 22,697,961
Net loss.............................................. (2,675) (264,835) (267,510)
Distributions......................................... (9,166) (907,425) (916,591)
-------- ----------- -----------
Balances at December 31, 1995........................... (68,198) 21,582,058 21,513,860
Net loss.............................................. (8,874) (878,519) (887,393)
Distributions......................................... (5,958) (589,826) (595,784)
-------- ----------- -----------
Balances at December 31, 1996........................... $(83,030) $20,113,713 $20,030,683
======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE> 231
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ (887,393) $ (267,510) $ 557,195
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation....................................... 1,852,360 1,873,494 1,866,275
Amortization....................................... 20,184 24,108 24,108
Loss on early retirement of assets................. 49,395 -- --
Decrease (increase) in accounts receivable......... 49,241 (18,451) 12,959
Decrease (increase) in deferred charges and other
assets........................................... (87,048) 133,239 144,745
Increase (decrease) in accounts payable, accrued
expenses and other liabilities................... 49,111 (1,427) 127,383
Minority interest in joint venture earnings........ 185,222 170,664 180,975
----------- ----------- -----------
Cash provided by operating activities......... 1,231,072 1,914,117 2,913,640
----------- ----------- -----------
Cash flows used in investing activities --
Additions to rental properties........................ (1,093,150) (285,241) (39,306)
Cash flows from financing activities:
Repayment of mortgages payable........................ (219,803) (200,448) (182,780)
Distributions to co-venturer.......................... (397,440) (441,599) (574,080)
Distributions to partners............................. (595,784) (916,591) (916,592)
----------- ----------- -----------
Cash used in financing activities............. (1,213,027) (1,558,638) (1,673,452)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... (1,075,105) 70,238 1,200,882
Cash and cash equivalents at beginning of year.......... 2,278,982 2,208,744 1,007,862
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 1,203,877 $ 2,278,982 $ 2,208,744
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-69
<PAGE> 232
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER
USAA Income Properties IV Limited Partnership is engaged solely in the
business of real estate investment; therefore, presentation of information about
industry segments is not applicable.
The Partnership owns office buildings in Milpitas, California; San Diego,
California; St. Louis, Missouri and a joint venture interest in a research and
development property in Chelmsford, Massachusetts. The Partnership's revenue is
subject to changes in the economic environments of these areas.
The General Partner, USAA Properties IV, Inc., is a wholly-owned subsidiary
of USAA Real Estate Company (Realco), which is a wholly-owned subsidiary of USAA
Capital Corporation, which is a wholly-owned subsidiary of United Services
Automobile Association (USAA).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("Statement 121"). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. The
assessment for and measurement of impairment is based upon the undiscounted
future cash flows and fair value, respectively, of the individual real estate
properties. Based on the provisions of Statement 121, the Partnership's
long-lived assets, real estate and improvements are not considered impaired. The
adoption of Statement 121 had no financial statement impact.
Depreciation is provided over the estimated useful lives of the properties
using the straight-line method. The estimated lives of the buildings and
improvements is 30 years (31.5-39 years for Federal income tax purposes).
Rental income is recognized under the operating method, whereby aggregate
rentals are reported on a straight-line basis as income over the life of the
lease. Rental income recognized was $96,237, $142,781 and $148,920 less than the
amount due per the lease agreements for the years ended December 31, 1996, 1995
and 1994, respectively.
No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return on an accrual basis.
For purposes of the Consolidated Statements of Cash Flows, all highly
liquid marketable securities that have a maturity at purchase of three months or
less, and money market mutual funds are considered to be cash equivalents.
The consolidated financial statements include the accounts of the
Partnership and its majority-owned joint venture. All significant intercompany
accounts have been eliminated in consolidation.
For financial reporting purposes, net income is allocated 1% to the General
Partner and 99% to the Limited Partners. Net income per limited partnership
interest is based upon the limited partnership interests outstanding at the end
of the period and net income allocated to the Limited Partners.
F-70
<PAGE> 233
Cash distributions per limited partnership interest were $9.75 for 1996 and
$15.00 for 1995 and 1994, and were based on the limited partnership interests
outstanding at each quarter end and the cash distributions allocated to Limited
Partners.
2. PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, Net Cash from
Operations shall be allocated and paid 1% to the General Partner and 99% to the
Limited Partners. Any Net Cash from Operations received by a Limited Partner
shall count toward his 6% cumulative Preferred Return, as defined in the
Partnership Agreement. Net Proceeds from Sales or Refinancings, shall be
allocated and paid 1% to the General Partner and 99% to the Limited Partners
until the Limited Partners have been returned their Original Invested Capital
from Net Proceeds from Sales or Refinancings, plus their Preferred Return.
Second, Net Proceeds from Sales or Refinancings shall be allocated and paid to
the Adviser in payment of any unpaid Subordinated Disposition Fee. Third, Net
Proceeds from Sales or Refinancings shall be allocated and paid 90% to the
Limited Partners and 10% to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 99% to the Limited Partners and 1% to the General
Partner. Net gain or net loss from the sale or other disposition of a property
shall be allocated as described in the Partnership Agreement.
3. RENTAL PROPERTIES
Rental properties at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Buildings and improvements.............................. $ 51,856,859 $ 50,831,721
Land.................................................... 9,020,016 9,020,016
60,876,875 59,851,737
Less accumulated depreciation........................... (15,467,129) (13,633,386)
$ 45,409,746 $ 46,218,351
</TABLE>
4. INVESTMENT IN JOINT VENTURE
On May 31, 1988, the Partnership entered into the USAA Chelmsford
Associates Joint Venture with USAA Real Estate Company for the ownership and
operation of the Apollo Computer Research and Development Headquarters Building.
The Partnership contributed $9,000,000 for its 55.8% joint venture interest. The
contribution consisted of $3,000,000 in remaining offering proceeds and
$6,000,000 in proceeds from a note payable to USAA Real Estate Company (note 7).
F-71
<PAGE> 234
Summary financial information for the joint venture as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 follows:
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash........................................................ $ 416,888 $ 346,262
Property, net............................................... 24,288,391 24,957,807
Account receivable.......................................... 27,115 74,356
Deferred rent and other assets.............................. 4,663 64,102
$24,737,057 $25,442,527
LIABILITIES AND EQUITY
Liabilities:
Mortgage payable.......................................... $15,287,583 $15,446,788
Accounts payable.......................................... 167,247 232,946
15,454,830 15,679,734
Equity:
USAA Income Properties IV
Limited Partnership.................................... 5,183,456 5,451,804
Co-venturer-affiliate..................................... 4,098,771 4,310,989
Total equity...................................... 9,282,227 9,762,793
$24,737,057 $25,442,527
</TABLE>
OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $ 2,789,770 $ 2,771,135 $ 2,771,501
Operating expenses.................................. (28,054) (63,018) (30,885)
Other expenses...................................... (9,802) (8,967) (5,484)
Depreciation........................................ (929,510) (895,877) (895,877)
Interest expense.................................... (1,402,970) (1,416,805) (1,429,437)
Net income................................ $ 419,434 386,468 409,818
Equity in net income:
USAA Income Properties IV
Limited Partnership............................ $ 234,212 $ 215,804 $ 228,843
Co-venturer-affiliate............................. 185,222 170,664 180,975
$ 419,434 $ 386,468 $ 409,818
Cash distributions:
USAA Income Properties IV
Limited Partnership............................ $ 502,560 $ 558,401 $ 725,920
Co-venturer-affiliate............................. 397,440 441,599 574,080
$ 900,000 $ 1,000,000 $ 1,300,000
</TABLE>
5. MINIMUM FUTURE RENTALS
Operating leases with tenants have remaining terms from one year to five
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental income
reported in the Consolidated Statements of Operations is recognized under the
operating method, whereby aggregate rentals
F-72
<PAGE> 235
are reported on a straight-line basis as income over the life of the lease.
Approximate minimum future rentals are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 3,750,000
1998.................................................... 3,519,000
1999.................................................... 3,458,000
2000.................................................... 2,102,000
2001.................................................... 984,000
Thereafter.............................................. 66,000
$13,879,000
</TABLE>
6. TRIPLE NET LEASES
During 1996, 1995 and 1994, the Partnership had ownership interests in two
office buildings occupied by single tenants. The lease agreements between the
tenants and the Partnership were absolute triple net lease arrangements whereby
the lessee is required to make all payments for expenses related to the use and
occupation of the leased premises including real estate taxes and assessments,
property and liability insurance, repairs and maintenance, utilities and other
operating costs associated with the property. Accordingly, net operating income
reflected only rental income and excluded all expenses directly related to the
operations of the property as payments for such expenses are made directly by
the lessee.
7. MORTGAGES AND NOTE PAYABLE
Mortgages payable at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
9.625% first mortgage note, payable in monthly installments
of $14,391, including interest, due August 1, 2008;
secured by rental property with a depreciated cost of
approximately $5,902,000.................................. $ 1,131,500 $ 1,192,098
9.125% first mortgage note, due August 1, 2001, interest
only payable monthly for the first five years; interest
and principal of $130,181 are payable monthly for the
remaining term with a balloon payment of $14,361,580;
secured by rental property with a depreciated cost of
approximately $24,667,000................................. 15,287,583 15,446,788
$16,419,083 $16,638,886
</TABLE>
On May 31, 1988, $6,000,000 of the total $9,000,000 Partnership investment
in USAA Chelmsford Associates Joint Venture was borrowed from USAA Real Estate
Company (note 4). The original unsecured demand note payable had a maturity date
of September 1, 1997 and included monthly interest only payments at 10%.
Subsequent to year-end, the note was increased to $7,200,000 and was extended to
March 1, 1999 with a decrease in the interest rate from 10% to 9%.
Aggregate maturities of mortgages and note payable for 1997 through 2001
are $241,000, $264,374, $7,489,934, $317,946 and $14,582,029 respectively.
Cash payments for interest expense were $2,115,064, $2,134,420 and
$2,152,088 for 1996, 1995 and 1994, respectively.
8. TRANSACTIONS WITH AFFILIATES
USAA Real Estate Company (the Adviser) may receive property acquisition
fees of up to 5% of gross offering proceeds, real estate brokerage commissions
of up to 2% of the aggregate selling prices of properties sold and management
fees of 9% of adjusted cash flow from operations.
Through January 1995, a portion of the Partnership's working capital
reserve and other available funds were invested in USAA Mutual Fund, Inc. and
earned interest thereon at market rates.
F-73
<PAGE> 236
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property management and
leasing services for the properties and may receive fees of up to 6% of property
cash receipts for those services.
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
REIMBURSEMENT INTEREST MANAGEMENT LEASE INTEREST
OF EXPENSES(1) INCOME FEES COMMISSIONS EXPENSE(2) TOTAL
--------------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1996.............................. $ -- $ -- $ -- $ -- $ -- $ --
1995.............................. -- (27) -- -- -- (27)
1994.............................. -- (542) -- -- -- (542)
USAA Real Estate Company:
1996.............................. 114,171 -- 50,134 -- 600,000 764,305
1995.............................. 108,885 -- 90,376 -- 600,000 799,261
1994.............................. 110,947 -- 91,449 -- 600,000 802,396
Quorum Real Estate Services
Corporation:
1996.............................. 33,042 -- 50,894 30,947 -- 114,883
1995.............................. 36,559 -- 52,802 9,487 -- 98,848
1994.............................. 22,556 -- 63,118 8,865 -- 94,539
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
(2) Represents interest expense incurred on a note payable (note 7).
9. INCOME TAXES
A reconciliation of financial statement net income (loss) to taxable income
(loss) follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss) -- financial statement basis...... $(887,393) $(267,510) $ 557,195
Adjusted by:
Taxable income over financial statement income --
USAA Chelmsford Associates..................... 72,054 99,037 227,432
Increase in deferred rent......................... 36,947 77,506 83,647
Excess financial statement depreciation over tax
depreciation................................... 166,438 233,836 230,903
Other reconciling items........................... 114,633 (20,780) (46,070)
Taxable income (loss)............................... $(497,321) $ 122,089 $1,053,107
</TABLE>
10. MAJOR CUSTOMER INFORMATION
During 1996, the Partnership recorded approximately $2,763,000 and $379,000
of rental income from single-tenant leases which represented approximately 72%
and 10% of total rental income, respectively.
During 1995, the Partnership recorded approximately $2,759,000, $537,000
and $459,000 of rental income from single-tenant leases which represented
approximately 65%, 13% and 11% of total rental income, respectively.
During 1994, the Partnership recorded approximately $2,761,000, $1,306,000
and $561,000 of rental income from single-tenant leases which represented
approximately 54%, 26% and 11% of total rental income, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents approximates fair value due
to the short maturity of these instruments.
The fair value of mortgages and note payable at December 31, 1996 and 1995
was $21,767,785 and $21,677,908, respectively, and was estimated by discounting
the future cash flows using interest rates currently being offered for mortgage
loans and notes with similar characteristics and maturities.
F-74
<PAGE> 237
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Rental properties, net...................................... $45,594,652 $45,409,746
Temporary investments, at cost which approximates market
value -- Money market fund................................ 1,504,817 977,512
Cash........................................................ 102,445 226,365
----------- -----------
Cash and cash equivalents................................. 1,607,262 1,203,877
----------- -----------
Accounts receivable......................................... 193,928 32,715
Deferred charges and other assets, at amortized cost........ 340,688 260,706
----------- -----------
$47,736,530 $46,907,044
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable........................................... $16,360,520 $16,419,083
Note payable to affiliate................................... 7,200,000 6,000,000
Accounts payable, including amounts due to affiliates of
$33,872 and $29,663....................................... 219,576 89,097
Accrued expenses and other liabilities...................... 351,831 269,410
----------- -----------
Total liabilities................................. 24,131,927 22,777,590
----------- -----------
Minority interest in joint venture.......................... 4,004,848 4,098,771
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 40,717 43,804
Cumulative distributions............................... (129,056) (127,834)
----------- -----------
(87,339) (83,030)
----------- -----------
Limited Partners (60,495 interests):
Capital contributions, net of offering costs........... 28,432,650 28,432,650
Cumulative net income.................................. 4,030,988 4,336,617
Cumulative distributions............................... (12,776,544) (12,655,554)
----------- -----------
19,687,094 20,113,713
----------- -----------
Total Partners' equity............................ 19,599,755 20,030,683
----------- -----------
$47,736,530 $46,907,044
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-75
<PAGE> 238
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Income
Rental income............................................... $1,006,436 $ 961,042
Interest income............................................. 12,305 28,713
---------- ----------
Total income...................................... 1,018,741 989,755
---------- ----------
Expenses
Direct expenses, $22,882 and $25,026 to affiliates (note
1)........................................................ 218,339 109,095
Depreciation................................................ 520,260 474,924
General and administrative, $68,470 and $36,980 to
affiliates (note 1)....................................... 102,305 81,415
Management fee to affiliate (note 1)........................ 13,557 11,665
Interest, $152,022 and $149,180 to affiliate (note 1)....... 527,175 529,680
Minority interest in joint venture earnings................. (54,179) 43,148
---------- ----------
Total expenses.................................... 1,327,457 1,249,927
---------- ----------
Net loss.................................................... $ (308,716) $ (260,172)
========== ==========
Net loss per limited partnership interest................... $ (5.05) $ (4.26)
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-76
<PAGE> 239
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (308,716) $ (260,172)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 520,260 474,924
Amortization........................................... 12,954 6,027
Decrease (increase) in accounts receivable............. (161,213) 33,243
Decrease (increase) in deferred charges and other
assets................................................ (92,936) 60,559
Increase in accounts payable, accrued expenses and
other liabilities..................................... 212,900 9,510
Minority interest in joint venture earnings............ (54,179) 43,148
---------- ----------
Cash provided by operating activities................ 129,070 367,239
---------- ----------
Cash flows used in investing activities --
Additions to rental properties............................ (705,166) --
---------- ----------
Cash flows from financing activities:
Repayment of mortgages payable............................ (58,563) (53,217)
Distributions to co-venturer.............................. (39,744) --
Distributions to partners................................. (122,212) (229,148)
Proceeds from issuance of note payable.................... 1,200,000 --
---------- ----------
Cash provided by (used in) financing activities........ 979,481 (282,365)
---------- ----------
Net increase in cash and cash equivalents................... 403,385 84,874
Cash and cash equivalents at beginning of period............ 1,203,877 2,278,982
---------- ----------
Cash and cash equivalents at end of period.................. $1,607,262 $2,363,856
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-77
<PAGE> 240
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. TRANSACTIONS WITH AFFILIATES
A summary of transactions with affiliates follows for the three-month
period ended March 31, 1997:
<TABLE>
<CAPTION>
QUORUM
USAA REAL ESTATE
REAL ESTATE SERVICES
COMPANY CORPORATION
----------- -----------
<S> <C> <C>
Reimbursement of expenses(a)................................ $ 41,741 $10,557
Management fees............................................. 13,557 12,325
Lease commissions........................................... -- 26,729
Interest expense(b)......................................... 152,022 --
-------- -------
Total............................................. $207,320 $49,611
======== =======
</TABLE>
- ---------------
(a) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
(b) Represents interest expense at market rate on a note payable.
2. OTHER
Reference is made to the consolidated financial statements in the Annual
Report filed as part of the Form 10-K for the year ended December 31, 1996 with
respect to significant accounting and financial reporting policies as well as to
other pertinent information concerning the Partnership. Information furnished in
this report reflects all normal recurring adjustments which are, in the opinion
of management, necessary for a fair presentation of the results for the interim
periods presented. Further, the operating results presented for these interim
periods are not necessarily indicative of the results which may occur for the
remaining nine months of 1997 or any other future period.
The financial information included in this interim report as of March 31,
1997 and for the three months ended March 31, 1997 and 1996 has been prepared by
management without audit by independent certified public accountants who do not
express an opinion thereon. The Partnership's annual report includes audited
financial statements.
Certain 1996 balances have been reclassified to conform to the 1997
presentation.
F-78
<PAGE> 241
ANNEX I
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of June 30,
1997, is entered into by and between American Industrial Properties REIT, a
Texas real estate investment trust ("AIP") , and , a
limited partnership ("RELP"). USAA Real Estate Company, a
Delaware corporation ("Realco"), is a party to this Agreement solely for the
purpose of binding itself to the provisions of Section 7.10 hereunder.
RECITALS
A. The Board of Trust Managers of AIP (the "Board of Trust Managers") and
the general partner of RELP have each determined that a business combination
between AIP and RELP is in the best interests of their shareholders and
partners, respectively, and presents an opportunity for their respective
businesses to achieve strategic and financial benefits, and accordingly have
agreed to effect a merger subject to the terms and conditions set forth herein.
B. AIP and RELP desire to make certain representations, warranties and
agreements in connection with the merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, AIP and
RELP hereby agree as follows:
ARTICLE I. THE MERGER
1.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), RELP shall be merged with and
into AIP in accordance with this Agreement and the Plan of Merger (the "Plan of
Merger") in substantially the form attached hereto as Exhibit A, with such
completions, additions and substitutions conforming to the terms of this
Agreement as the parties shall approve, such approval to be conclusively
evidenced by their causing the Plan of Merger containing such completions,
additions or substitutions to be filed in accordance with applicable laws; and
the separate existence of RELP shall thereupon cease (the "Merger"). AIP shall
be the surviving entity in the Merger (sometimes hereinafter referred to as the
"Survivor"). The Merger shall have the effects specified in Section 23.60 of the
Texas Real Estate Investment Trust Act, as amended (the "Texas REIT Act") and
Section 17-211 of the Delaware Revised Uniform Limited Partnership Act (the "LP
Act").
1.2. The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at the offices of
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. ("Liddell, Sapp"), located at 2200
Ross Avenue, Suite 900, Dallas, Texas at 10:00 a.m., local time, within five
business days after receipt of approval of the Merger by AIP's shareholders and
RELP's partners, or at such other time, date or place as AIP and RELP may agree.
The date on which the Closing occurs is hereinafter referred to as the "Closing
Date."
1.3. Effective Time. If all the conditions to the Merger set forth in
Article VIII shall have been fulfilled or waived (and this Agreement shall not
have been terminated as provided in Article IX), AIP and RELP shall cause
Articles of Merger satisfying the requirements of the Texas REIT Act and
Articles of Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with the LP Act and
the Texas REIT Act on the Closing Date. The Merger shall become effective for
accounting and all other purposes to the fullest extent permitted by law as of
the close of business on December 31, 1997 (the "Effective Time") or such other
date as may be agreed to by the parties. For state law purposes, the Merger
shall become effective upon the issuance of a certificate of merger by the
Secretary of State of the State of Delaware in accordance with the LP Act or at
such later time which AIP and RELP shall have agreed upon and designated in such
filings in accordance with applicable law.
I-1
<PAGE> 242
ARTICLE II. DECLARATION OF TRUST
AND BYLAWS OF THE SURVIVOR
2.1. Declaration of Trust. The Declaration of Trust of AIP in effect
immediately prior to the Effective Time shall be the Declaration of Trust of the
Survivor until duly amended in accordance with applicable law.
2.2. Bylaws. The Bylaws of AIP in effect immediately prior to the Effective
Time shall be the Bylaws of the Survivor until duly amended in accordance with
applicable law.
ARTICLE III. TRUST MANAGERS AND OFFICERS OF AIP
3.1. Trust Managers. The Trust Managers of AIP immediately prior to the
Effective Time shall be the Trust Managers of AIP as of the Effective Time.
3.2. Officers. The officers of AIP immediately prior to the Effective Time
shall be the officers of AIP as of the Effective Time.
ARTICLE IV. RELP PARTNERSHIP INTERESTS
4.1. Conversion of the RELP Partnership Interest. (a) At the Effective
Time, each Common Share of Beneficial Interest of AIP outstanding immediately
prior to the Effective Time shall remain outstanding and shall represent one
Common Share of Beneficial Interest of AIP.
(b) At the Effective Time, the general and limited partnership interests of
RELP (each a "RELP Interest"), issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of holder thereof, be converted into the right to receive Common Shares of
Beneficial Interest, $0.10 par value per share (the "AIP Common Shares"), of
AIP. The aggregate number of AIP Common Shares to be issued to the RELP partners
in connection with the Merger shall be equal to $ (the "Purchase Price")
divided by the Share Price (the "Total Shares"). If RELP repays any mortgage
indebtedness existing on the date hereof during the period from the date hereof
to and including the Closing Date, the Purchase Price shall be appropriately
adjusted. The term "Share Price" shall mean $ . The number of AIP Common
Shares to be received by a partner shall be equal to the Total Shares multiplied
by such partner's percentage interest in RELP plus each limited partner's pro
rata portion of the general partnership interest of the RELP's general partner.
(c) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all RELP Interests shall cease to be
outstanding and shall be canceled and retired, and each holder of a RELP
Interest shall thereafter cease to have any rights with respect to such RELP
Interest, except the right to receive, without interest, the AIP Common Shares
and cash for fractional shares of AIP Common Shares in accordance with Sections
4.1(b) and 4.2(e).
4.2. Exchange of RELP Interests. (a) As of the Effective Time, AIP shall
deposit, or shall cause to be deposited, with an exchange agent selected by AIP,
which shall be AIP's Transfer Agent or such other party reasonably satisfactory
to RELP (the "Exchange Agent"), for the benefit of the holders of RELP
Interests, for exchange in accordance with this Article IV, certificates
representing the Total Shares and the cash in lieu of fractional shares (such
cash and certificates for the Total Shares together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Section 4.1 and paid pursuant to this
Section 4.2 in exchange for outstanding RELP Interests.
(b) Promptly after the Effective Time, AIP shall cause the Exchange Agent
to mail to each holder of record of a RELP Interest (x) a certificate
representing the number of whole shares of AIP Common Shares and (y) a check
representing the amount of cash in lieu of fractional shares, if any, and unpaid
dividends and distributions, if any, which such holder has the right to receive
in respect of the RELP Interest surrendered pursuant to the provisions of this
Article IV, after giving effect to any required withholding tax. No interest
will be paid or accrued on the cash in lieu of fractional shares and unpaid
dividends and distributions, if any, payable to holders of RELP Interests. In
the event of a transfer of ownership of RELP Interests which is not
I-2
<PAGE> 243
registered in the transfer records of RELP, a certificate representing the
proper number of AIP Common Shares, together with a check for the cash to be
paid in lieu of fractional shares, may be issued to such a transferee if such
holder presents to the Exchange Agent, all documents required to evidence and
effect such transfer and to evidence that any applicable transfer taxes have
been paid.
(c) At and after the Effective Time, there shall be no transfers on the
transfer books of RELP of RELP Interests which were outstanding immediately
prior to the Effective Time.
(d) No fractional AIP Common Shares shall be issued pursuant hereto. In
lieu of the issuance of any fractional AIP Common Shares pursuant to Section
4.1(b), cash adjustments will be paid to holders in respect of any fractional
AIP Common Shares that would otherwise be issuable, and the amount of such cash
adjustment shall be equal to such fractional proportion of the Share Price.
(e) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any AIP Common Shares) that remains unclaimed by the
former partners of RELP one year after the Effective Time shall be delivered to
AIP. Any former partners of RELP who have not theretofore complied with this
Article IV shall thereafter look only to AIP for delivery of their AIP Common
Shares, and payment of cash in lieu of fractional shares and unpaid dividends
and distributions on the AIP Common Shares deliverable in respect of each RELP
Interest such partners hold as determined pursuant to this Agreement, in each
case, without any interest thereon.
(f) None of AIP, RELP, the Exchange Agent or any other person shall be
liable to any former holder of RELP Interests for any amount properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF RELP
RELP represents and warrants to AIP as set forth below. As contemplated
below, a "RELP Disclosure Letter" will be delivered to AIP on or before August
11, 1997. The RELP Disclosure Letter shall provide the information or exceptions
described below and shall list all of the assets of the RELP that will not be
transferred in connection with the Merger. The RELP Disclosure Letter shall be
amended prior to Closing to cause such representations and warranties to be
materially true and correct on the Closing Date, but RELP shall remain liable
for any material breach of such representations and warranties reflected in such
amendment only as provided in Section 9.5(d), below.
5.1. Existence; Good Standing; Authority; Compliance with Law. (a) RELP is
a limited partnership, duly formed, validly existing and in good standing under
the laws of the State of . To its actual knowledge, RELP is duly licensed
or qualified to do business as a foreign limited partnership and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary, except where the
failure to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of RELP (a "RELP Material
Adverse Effect"). RELP has all requisite power and authority to own, operate,
lease and encumber its properties and carry on its business as now conducted.
(b) To the RELP's actual knowledge, it is not in violation of any order of
any court, governmental authority or arbitration board or tribunal, or any law,
ordinance, governmental rule or regulation to which RELP or any of its
properties or assets is subject, where such violation would have a RELP Material
Adverse Effect. RELP has obtained all licenses, permits and other authorizations
and has taken all actions required by applicable law or governmental regulations
in connection with its business as now conducted, where the failure to obtain
any such item or to take any such action would have a RELP Material Adverse
Effect. A copy of RELP's Agreement of Limited Partnership and Certificate of
Limited Partnership (collectively, the "RELP Organizational Documents") have
been delivered or made available to AIP and its counsel and such documents will
be listed in the RELP Disclosure Letter and were or will be true and correct
when delivered or made available.
5.2. Authorization, Validity and Effect of Agreements. RELP has the
requisite power and authority to enter into the transactions contemplated hereby
and to execute and deliver this Agreement and all other
I-3
<PAGE> 244
documents, agreements and instruments related to the transactions contemplated
by this Agreement (the "RELP Ancillary Agreements"). Subject only to the
approval of this Agreement and the transactions contemplated hereby in
accordance with the Agreement of Limited Partnership of the RELP, the
consummation by RELP of this Agreement, the RELP Ancillary Agreements and the
transactions contemplated hereby have been duly authorized by all requisite
action on the part of RELP. In reliance upon the legal opinion described in
Section 8.2(e), RELP believes this Agreement constitutes, and the RELP Ancillary
Agreements (when executed and delivered pursuant hereto for value received) will
constitute, the valid and legally binding obligations of RELP, enforceable
against RELP in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity (collectively, "Equitable Remedies").
5.3. Future Issuances. To RELP's actual knowledge, there are not at the
date of this Agreement any existing options, warrants, calls, subscriptions,
convertible securities, or other rights, agreements or commitments which
obligate RELP to issue, transfer or sell any RELP Interests. After the Effective
Time, AIP will have no obligation to issue, transfer or sell any RELP Interest.
5.4. Other Interests. Except as set forth in the RELP Disclosure Letter,
RELP does not own directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
5.5. No Violation. To RELP's actual knowledge, neither the execution and
delivery by RELP of this Agreement nor the consummation by RELP of the
transactions contemplated hereby in accordance with the terms hereof, will: (i)
conflict with or result in a breach of any provisions of the Agreement of
Limited Partnership of RELP; (ii) except as contemplated by the RELP Ancillary
Agreements or as will be set forth in the RELP Disclosure Letter, violate, or
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of RELP under, or result in being declared void,
voidable or without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other instrument, commitment or
obligation to which RELP is a party, or by which RELP or any of its properties
is bound or affected, except for any of the foregoing matters which,
individually or in the aggregate, would not have a RELP Material Adverse Effect;
or (iii) other than the filings provided for in Article I, any filings required
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act or applicable state securities and "Blue Sky" laws (collectively,
the "Regulatory Filings"), require any consent, approval or authorization of, or
declaration, filing or registration with, any domestic governmental or
regulatory authority, except where the failure to obtain any such consent,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority would not have an RELP Material Adverse
Effect.
5.6. SEC Documents. (a) RELP has made available or will make available to
AIP prior to July 31, 1997, each registration statement, report, proxy statement
or information statement and all exhibits thereto prepared by it or relating to
its properties (including registration statements covering mortgage pass-through
certificates) since January 1, 1994, each in the form (including exhibits and
any amendments thereto) filed with the SEC (collectively, the "RELP Reports").
The RELP Reports, which were or will be filed with the SEC in a timely manner,
constitute all forms, reports and documents required to be filed by RELP under
the Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act
and the rules and regulations promulgated thereunder (collectively the
"Securities Laws") for the periods stated above.
(b) To the RELP's actual knowledge, as of their respective dates, the RELP
Reports (i) complied as to form in all material respects with the applicable
requirements of the Securities Laws and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. To the RELP's
actual knowledge, each of the balance sheets of RELP included in or incorporated
by reference into the RELP Reports (including the related notes and schedules)
fairly presents
I-4
<PAGE> 245
the financial position of RELP as of its date and each of the consolidated
statements of income, retained earnings and cash flows of RELP included in or
incorporated by reference into the RELP Reports (including any related notes and
schedules) fairly presents the results of operations, retained earnings and cash
flows, as the case may be, of RELP for the periods set forth therein (subject,
in the case of unaudited statements, to normal year-end audit adjustments which
would not be material in amount or effect), in each case in accordance with
generally accepted accounting principles consistently applied during the periods
involved, except as may be noted therein and except, in the case of the
unaudited statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the balance sheet of RELP at
March 31, 1997, including all notes thereto, or as set forth in the RELP
Reports, RELP has no material liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on, or reserved against in, a balance sheet of RELP or in the notes
thereto, prepared in accordance with generally accepted accounting principles
consistently applied, except liabilities arising in the ordinary course of
business since such date which would not have a RELP Material Adverse Effect.
5.7. Litigation. To the RELP's actual knowledge, there are (i) no
continuing orders, injunctions or decrees of any court, arbitrator or
governmental authority to which RELP is a party or by which any of its
properties or assets are bound or to which (the "General Partner") or
the General Partner's, directors, officers, or affiliates is a party or by which
any of their properties or assets are bound, and (ii) except as will be set
forth in the RELP Disclosure Letter, no actions, suits or proceedings pending
against RELP or against the General Partner or the General Partner's directors,
officers or affiliates or, to the knowledge of the General Partner, threatened
against RELP or against the General Partner or the General Partner's directors,
officers or affiliates, at law or in equity, or before or by any federal or
state commission, board, bureau, agency or instrumentality, that in the case of
clauses (i) or (ii) above are reasonably likely, individually or in the
aggregate, to have a RELP Material Adverse Effect.
5.8. Absence of Certain Changes. Except as disclosed in the RELP Reports
filed prior to the date hereof, since March 31, 1997, (i) RELP conducted its
business only in the ordinary course of such business (which for purposes of
this section only, shall include all acquisitions of real estate properties and
financing arrangements made in connection therewith or otherwise will be set
forth in the RELP Disclosure Letter); (ii) there has not been any RELP Material
Adverse Effect; (iii) there has not been any distribution, setting aside or
payment of any distribution with respect to any RELP Interest, and (iv) there
has not been any material change in RELP's accounting principles, practices or
methods.
5.9. Taxes. (a) Except as may be set forth in the RELP Disclosure Letter,
RELP (i) has timely filed all federal, state and foreign tax returns including,
without limitation, information returns and reports required to be filed by it
for tax periods ended prior to the date of this Agreement or requests for
extensions have been timely filed and any such request has been granted and has
not expired and all such returns are accurate and complete in all material
respects, (ii) has paid or accrued all taxes shown to be due and payable on such
returns or which have become due and payable pursuant to any assessment,
deficiency notice, 30-day letter or other notice received by it and (iii) has
properly accrued all taxes for such periods and periods subsequent to the
periods covered by such returns. RELP has not received notice that the federal,
state and local income and franchise tax returns of RELP has been or will be
examined by any taxing authority. RELP has not executed or filed with the
Internal Revenue Service (the "IRS") or any other taxing authority any agreement
now in effect extending the period for assessment or collection of any income or
other taxes.
(b) Except as may be set forth in the RELP Disclosure Letter, RELP is not a
party to any pending action or proceeding by any governmental authority for
assessment or collection of taxes, and no claim for assessment or collection of
taxes has been asserted against it. True, correct and complete copies of all
federal, state and local income or franchise tax returns filed by RELP since
January 1, 1991 and all communications relating thereto have been delivered to
AIP or made available to representatives of AIP or will be so delivered or made
available prior to July 31, 1997. RELP does not hold any asset (i) the
disposition of which could be subject to rules similar to Section 1374 of the
Internal Revenue Code of 1986, as amended (the "Code") as a result of an
election under IRS Notice 88-19 or (ii) that is subject to a consent filed
pursuant to
I-5
<PAGE> 246
Section 341(f) of the Code and regulations thereunder. For purposes of this
Section 5.9, "taxes" includes any interest, penalty or additional amount payable
with respect to any tax.
5.10. Books and Records. The books of account and other financial records
of RELP are in all material respects true, complete and correct, have been
maintained in accordance with good business practices, and are accurately
reflected in all material respects in the financial statements included in the
RELP Reports.
5.11. Properties. (a) RELP owns fee simple title to each of the real
properties reflected on the most recent balance sheet of RELP included in the
RELP Reports or as may be identified in the RELP Disclosure Letter (the "RELP
Properties"), which are all of the real estate properties owned by it, free and
clear of liens, mortgages or deeds of trust, claims against title, charges which
are liens or security interests ("Encumbrances") except as will be noted in the
RELP Disclosure Letter. To RELP's actual knowledge, the RELP Properties are not
subject to any rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations of an interest
in title (collectively, "Property Restrictions"), except for (i) Encumbrances
and Property Restrictions that will be set forth in the RELP Disclosure Letter,
(ii) Property Restrictions imposed or promulgated by law or any governmental
body or authority with respect to real property, including zoning regulations,
provided they do not materially adversely affect the current use of the
property, (iii) Encumbrances and Property Restrictions disclosed on existing
title reports or current surveys (in either case copies of which title reports
and surveys have been or will be delivered or made available to AIP July 31,
1997), (iv) mechanics', carriers', workmen's, repairmen's liens and other
Encumbrances, Property Restrictions and other limitations of any kind, if any,
which have heretofore been bonded (and that will be listed in the RELP
Disclosure Letter) or which individually or in the aggregate do not exceed
$100,000, do not materially detract from the value of or materially interfere
with the present use of any of the RELP Properties subject thereto or affected
thereby, and do not otherwise materially impair business operations conducted by
RELP and which have arisen or been incurred only in its construction activities
or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring either (a)
RELP's fee simple title to the RELP Properties or (b) first mortgage liens
thereon, subject only to the matters disclosed above and as may be set forth in
the RELP Disclosure Letter, and such policies are, at the date hereof, in full
force and effect and no claim has been made against any such policy. To RELP's
actual knowledge, except as will be set forth in the RELP Disclosure Letter: (i)
there is no certificate, permit or license from any governmental authority
having jurisdiction over any of the RELP Properties or any agreement, easement
or other right which is necessary to permit the lawful use and operation of the
buildings and improvements on any of the RELP Properties or which is necessary
to permit the lawful use and operation of all driveways, roads and other means
of egress and ingress to and from any of the RELP Properties that has not been
obtained and is not in full force and effect, or of any pending threat of
modification or cancellation of any of same; (ii) RELP has not received written
notice of any material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion of any of the
RELP Properties issued by any governmental authority; (iii) there are no
structural defects relating to the RELP Properties and no RELP Properties whose
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any RELP Property in excess of $100,000 for
which there is no insurance in effect covering the cost of the restoration, (B)
no current renovation to any RELP Property the cost of which exceeds $100,000
and (C) no current restoration (excluding tenant improvements) of any RELP
Property, the cost of which exceeds $100,000.
(c) Except as will be set forth in the RELP Disclosure Letter, RELP has not
received notice to the effect that and there are no (A) condemnation or rezoning
proceedings that are pending or threatened with respect to any of the RELP
Properties or (B) zoning, building or similar laws, codes, ordinances, orders or
regulations that are or will be violated by the continued maintenance, operation
or use of any buildings or other improvements on any of the RELP Properties or
by the continued maintenance, operation or use of the parking areas. All work to
be performed, payments to be made and actions to be taken by RELP prior to the
date hereof pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or other
similar action relating to the RELP Properties (e.g., Local Improvement
District, Road Improvement District, Environmental Mitigation) has been
performed, paid or
I-6
<PAGE> 247
taken, as the case may be, and RELP is not aware of any planned or proposed
work, payments or actions that may be required after the date hereof pursuant to
such agreements, except as will be set forth in the RELP Disclosure Letter.
5.12. Environmental Matters. To RELP's actual knowledge, RELP has not
caused (i) the unlawful presence of any hazardous substances, hazardous
materials, toxic substances or waste materials (collectively, "Hazardous
Materials") on any of the RELP Properties, or (ii) any unlawful spills,
releases, discharges or disposal of Hazardous Materials to have occurred or be
presently occurring on or from the RELP Properties as a result of any
construction on or operation and use of such properties, which presence or
occurrence would, individually or in the aggregate, have a RELP Material Adverse
Effect; and in connection with the construction on or operation and use of the
RELP Properties, RELP has not failed to comply, in any material respect, with
any applicable local, state and federal environmental laws, regulations,
ordinances and administrative and judicial orders relating to the generation,
recycling, reuse, sale, storage, handling, transport and disposal of any
Hazardous Materials.
5.13. Labor Matters. RELP is not a party to, or bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor union organization. There is no unfair labor practice or labor
arbitration proceeding pending or, to the knowledge of the General Partner,
threatened against RELP relating to its business, except for any such proceeding
which would not have a RELP Material Adverse Effect. To the knowledge of the
General Partner, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of RELP or any of its Subsidiaries.
5.14. No Brokers. Except the fee that is to be paid to Houlihan Lokey
Howard & Zukin ("Houlihan") by RELP as described in Section 5.15 below, RELP has
not entered into any contract, arrangement or understanding with any person or
firm which may result in the obligation of RELP or AIP to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. RELP is not aware of any claim for payment of any finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.
5.15. Opinion of Financial Advisor. RELP has retained Houlihan to review
the transaction contemplated by this Agreement and to issue an opinion to the
effect that, as of the date of such opinion, the Purchase Price is fair to the
holders of RELP Interests from a financial point of view.
5.16. Related Party Transactions. Except as set forth in the RELP
Disclosure Letter, there are no arrangements, agreements or contracts entered
into by RELP with (i) any consultant, (ii) any person who is an officer,
director or affiliate of RELP or its General Partner, any relative of any of the
foregoing or any entity of which any of the foregoing is an affiliate, or (iii)
any person who acquired RELP Interests in a private placement.
5.17. Contracts and Commitments. The RELP Disclosure Letter will set forth
(i) all unsecured notes or other obligations of RELP which individually may
result in total payments in excess of $100,000, (ii) all notes, debentures,
bonds and other evidence of indebtedness which are secured or collateralized by
mortgages, deeds of trust or other security interests in the RELP Properties or
personal property of RELP, and (iii) each commitment entered into by RELP which
may result in total payments or liability in excess of $100,000. Copies of the
foregoing will be delivered or made available to AIP prior to July 31, 1997,
will be listed on the RELP Disclosure Letter and will be materially true and
correct when delivered or made available. RELP has not received any notice of a
default that has not been cured under any of the documents described in clause
(i) above or is in default respecting any payment obligations thereunder beyond
any applicable grace periods. All options of RELP to purchase real property will
be set forth on the RELP Disclosure Letter and such options and RELP's rights
thereunder are in full force and effect. All joint venture agreements to which
RELP is a party will be set forth on the RELP Disclosure Letter and RELP is not
in default with respect to any obligations, which individually or in the
aggregate are material, thereunder.
I-7
<PAGE> 248
5.18. Development Rights. Set forth in the RELP Disclosure Letter will be a
list of all material agreements entered into by RELP relating to the
development, rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties, which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true and correct copies of all of which will
be delivered or made available to AIP prior to July 31, 1997, will be listed in
the RELP Disclosure Letter, have not been modified and are valid and binding in
accordance with their respective terms.
5.19. Convertible Securities. To RELP's actual knowledge, RELP has no
outstanding options, warrants or other securities exercisable for, or
convertible into, RELP Interests, the terms of which would require any
anti-dilution adjustments by reason of the consummation of the transactions
contemplated hereby.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF AIP
AIP represents and warrants to RELP as set forth below. As contemplated
below, an "AIP Disclosure Letter" will be delivered to RELP on or before August
11, 1997. The AIP Disclosure Letter shall provide the information or exceptions
described below. The AIP Disclosure Letter shall be amended prior to Closing to
cause such representations and warranties to be materially true and correct on
the Closing Date, but AIP shall remain liable for any material breach of such
representations and warranties reflected in such amendment only as provided in
Section 9.5(d), below.
6.1. Existence; Good Standing; Authority; Compliance with Law. (a) AIP is a
real estate investment trust duly organized and validly existing under the laws
of the State of Texas. To AIP's actual knowledge, AIP is duly licensed or
qualified to do business and is in good standing under the laws of any other
state of the United States in which the character of the properties owned or
leased by it therein or in which the transaction of its business makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the business, results of operations or
financial condition of AIP and its subsidiaries taken as a whole (an "AIP
Material Adverse Effect"). AIP has all requisite power and authority to own,
operate, lease and encumber its properties and carry on its business as now
conducted. Each of AIP's Subsidiaries is a corporation, limited liability
company or partnership duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation or organization, has the
requisite power and authority to own its properties and to carry on its business
as it is now being conducted, and is duly qualified to do business and is in
good standing in each jurisdiction in which the ownership of its property or the
conduct of its business requires such qualification, except for jurisdictions in
which such failure to be so qualified or to be in good standing would not have
an AIP Material Adverse Effect.
(b) To AIP's actual acknowledge, neither AIP nor any AIP Subsidiary is in
violation of any order of any court, governmental authority or arbitration board
or tribunal, or any law, ordinance, governmental rule or regulation to which AIP
or any AIP Subsidiary or any of their respective properties or assets is
subject, where such violation would have an AIP Material Adverse Effect. AIP and
its Subsidiaries have obtained all licenses, permits and other authorizations
and have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted, where the
failure to obtain any such item or to take any such action would have an AIP
Material Adverse Effect. Copies of AIP's and its Subsidiaries' Declaration of
Trust, Articles of Incorporation, Bylaws, organizational documents and
partnership and joint venture agreements have been or will be prior to July 31,
1997, delivered or made available to RELP and such documents will be listed in
the AIP Disclosure Letter and were or will be true and correct when delivered or
made available. For the purposes of the immediately preceding sentence, the term
"Subsidiary" shall include the entities set forth in the AIP Disclosure Letter,
which are all of AIP's Subsidiaries.
6.2. Authorization, Validity and Effect of Agreements. AIP has the
requisite power and authority to enter into the transactions contemplated hereby
and to execute and deliver this Agreement and all other documents, agreements
and instruments related to the transactions contemplated by this Agreement to
which it is a party (the "AIP Ancillary Agreements"). Subject only to the
approval of the issuance of AIP Common Shares pursuant to the Merger
contemplated hereby by the holders of two-thirds of the outstanding AIP Common
I-8
<PAGE> 249
Shares, present and voting thereon, the consummation by AIP of this Agreement,
the AIP Ancillary Agreements and the transactions contemplated hereby have been
duly authorized by all requisite action on the part of AIP. This Agreement
constitutes, and the AIP Ancillary Agreements (when executed and delivered
pursuant hereto for value received) will constitute, the valid and legally
binding obligations of AIP enforceable against AIP in accordance with their
respective terms, subject to Equitable Remedies.
6.3. Capitalization. On June 15, 1997, the authorized capital stock of AIP
consists of 10,000,000 Common Shares. As of the date hereof, all 10,000,000
Common Shares are outstanding. AIP has no outstanding bonds, debentures, notes
or other obligations (other than to Realco), the holders of which have the right
to vote (or which are convertible into or exercisable for securities having the
right to vote) with the shareholders of AIP on any matter. Except as set forth
in the AIP Disclosure Letter, all such issued and outstanding of AIP Common
Shares are duly authorized, validly issued, fully paid, nonassessable and free
of preemptive rights. Except as set forth in the AIP Disclosure Letter, there
are not at the date of this Agreement any existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate AIP or any of its Subsidiaries to issue, transfer or
sell any shares or other equity interest of AIP or any of its Subsidiaries
except under any employee incentive plan approved by AIP's shareholders. There
are no agreements or understandings to which AIP is a party with respect to the
voting of any AIP Common Shares or which restrict the transfer of any such
shares, except in order to protect its REIT status.
6.4. Subsidiaries. Except as set forth in the AIP Disclosure Letter, AIP
owns directly or indirectly each of the outstanding shares of capital stock or
all of the partnership or other equity interests of each of AIP's Subsidiaries
free and clear of all liens, pledges, security interests, claims or other
encumbrances other than liens imposed by local law which are not material.
6.5. Other Interests. Except as will be disclosed in the AIP Disclosure
Letter and except for interests in the AIP Subsidiaries, neither AIP nor any AIP
Subsidiary owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or entity (other than investments in short-term investment securities).
6.6. No Violation. Neither the execution and delivery by AIP of this
Agreement nor the consummation by AIP of the transactions contemplated hereby in
accordance with the terms hereof, will: (i) conflict with or result in a breach
of any provisions of AIP's Declaration of Trust; (ii) violate, or conflict with,
or result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties of AIP or
its Subsidiaries under, or result in being declared void, voidable or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which AIP or any of its Subsidiaries is a party, or by which AIP or any of its
Subsidiaries or any of their properties is bound or affected, except for any of
the foregoing matters which, individually or in the aggregate, would not have an
AIP Material Adverse Effect; or (iii) other than the Regulatory Filings require
any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority, except
where the failure to obtain such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not have an AIP Material Adverse Effect.
6.7. SEC Documents. (a) AIP has made available or will make available to
RELP prior to July 31, 1997, the registration statements of AIP filed with the
SEC in connection with public offerings of AIP securities since January 1, 1994
and all exhibits, amendments and supplements thereto (the "AIP Registration
Statements"), and each registration statement, report, proxy statement or
information statement and all exhibits thereto prepared by it or relating to its
properties since the effective date of the latest AIP Registration Statement,
each in the form (including exhibits and any amendments thereto) filed with the
SEC (collectively, the "AIP Reports"). The AIP Reports, which were or will be
filed with the SEC in a
I-9
<PAGE> 250
timely manner, constitute all forms, reports and documents required to be filed
by AIP under the Securities Laws.
(b) To AIP's actual knowledge, as of their respective dates, the AIP
Reports (i) complied as to form in all material respects with the applicable
requirements of the Securities Laws, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. To AIP's actual
acknowledge, each of the consolidated balance sheets of AIP included in or
incorporated by reference into the AIP Reports (including the related notes and
schedules) fairly presents the consolidated financial position of AIP and the
AIP Subsidiaries as of its date and each of the consolidated statements of
income, retained earnings and cash flows of AIP included in or incorporated by
reference into the AIP Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings or cash flows, as
the case may be, of AIP and the AIP Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments which would not be material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein and except, in the
case of the unaudited statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the consolidated balance sheet
of AIP and its Subsidiaries at March 31, 1997, including all notes thereto, or
as set forth in the AIP Reports, neither AIP nor any of the AIP Subsidiaries has
any material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected on, or
reserved against in, a balance sheet of AIP or in the notes thereto, prepared in
accordance with generally accepted accounting principles consistently applied,
except liabilities arising in the ordinary course of business since such date
which would not have an AIP Material Adverse Effect.
6.8. Litigation. To AIP's actual knowledge, there are (i) no continuing
orders, injunctions or decrees of any court, arbitrator or governmental
authority to which AIP or any AIP Subsidiary is a party or by which any of its
properties or assets are bound or, to which any of its directors, officers, or
affiliates is a party or by which any of their properties or assets are bound,
and (ii) except as will be set forth in the AIP Disclosure Letter, no actions,
suits or proceedings pending against AIP or any AIP Subsidiary or, to the
knowledge of AIP, against any of its Trust Managers, officers, or affiliates or,
to the knowledge of AIP, threatened against AIP or any AIP Subsidiary or against
any of its Trust Managers, officers, or affiliates, at law or in equity, or
before or by any federal or state commission, board, bureau, agency or
instrumentality, that in the case of clauses (i) or (ii) above are reasonably
likely, individually or in the aggregate, to have an AIP Material Adverse
Effect.
6.9. Absence of Certain Changes. Except as disclosed in the AIP Reports
filed with the SEC prior to the date hereof, (i) AIP and its Subsidiaries have
conducted their business only in the ordinary course of such business (which,
for purposes of this section only, shall include all acquisitions of real estate
properties and financing arrangements made in connection therewith); (ii) there
has not been any AIP Material Adverse Effect; (iii) there has not been any
declaration, setting aside or payment of any dividend or other distribution with
respect to the AIP Common Shares; and (iv) there has not been any material
change in AIP's accounting principles, practices or methods.
6.10. Taxes. (a) Except as may be set forth in the AIP Disclosure Letter,
AIP and each of its Subsidiaries (i) has timely filed all federal, state and
foreign tax returns including, without limitation, information returns and
reports required to be filed by any of them for tax periods ended prior to the
date of this Agreement or requests for extensions have been timely filed and any
such request has been granted and has not expired and all such returns are
absolute and complete in all material respects, (ii) has paid or accrued all
taxes shown to be due and payable on such returns or which have become due and
payable pursuant to any assessment, deficiency notice, 30-day letter or other
notice received by it and (iii) has properly accrued all taxes for such periods
subsequent to the periods covered by such returns. Neither AIP nor any of its
Subsidiaries has received notice that the federal, state and local income and
franchise tax returns of AIP or any such Subsidiary has been or will be examined
by any taxing authority. Neither AIP nor any of its
I-10
<PAGE> 251
Subsidiaries has executed or filed with the IRS or any other taxing authority
any agreement now in effect extending the period for assessment or collection of
any income or other taxes.
(b) Except as will be disclosed in the AIP Disclosure Letter, neither AIP
nor any of its Subsidiaries is a party to any pending action or proceeding by
any governmental authority for assessment or collection of taxes, and no claim
for assessment or collection of taxes has been asserted against it. True,
correct and complete copies of all federal, state and local income or franchise
tax returns filed by AIP and each of its Subsidiaries and all communications
relating thereto have been delivered to RELP or made available to
representatives of RELP or will be so delivered or made available prior to July
31, 1997. AIP (i) has qualified to be taxed as a REIT pursuant to Sections 856
through 859 of the Code for its taxable years ended December 31, 1985 through
1996, inclusive (ii) has operated, and intends to continue to operate, in such a
manner as to qualify to be taxed as a REIT pursuant to Sections 856 through 859
of the Code for its taxable year ended on the effective date of the Merger, and
(iii) has not taken or omitted to take any action which could result in, and
each of the executive officers of AIP, each acting in his respective capacity as
such, has no actual knowledge of, a challenge to its status as a REIT. AIP
represents that each of its Subsidiaries is a Qualified REIT Subsidiary as
defined in Section 856(i) of the Code. Neither AIP nor any of its Subsidiaries
holds any asset (i) the disposition of which could be subject to rules similar
to Section 1374 of the Code as a result of an election under IRS Notice 88-19 or
(ii) that is subject to a consent filed pursuant to Section 341(f) of the Code
and regulations thereunder. For purposes of this Section 6.10, "taxes" includes
any interest, penalty or additional amount payable with respect to any tax.
6.11. Books and Records. (a) The books of account and other financial
records of AIP and its Subsidiaries are in all material respects true, complete
and correct, have been maintained in accordance with good business practices,
and are accurately reflected in all material respects in the financial
statements included in the AIP Reports.
(b) The minute books and other records of AIP and its Subsidiaries contain
in all material respects accurate records of all meetings and accurately reflect
in all material respects all other corporate action of the shareholders and
Trust Managers and any committees of the Board of Trust Managers of AIP and its
Subsidiaries.
6.12. Properties. (a) AIP and its Subsidiaries own fee simple title to each
of the real properties reflected on the most recent balance sheet of AIP
included in the AIP Reports or as may be identified in the AIP Disclosure Letter
(the "AIP Properties"), which are all of the real estate properties owned by
them, free and clear of Encumbrances. To AIP's actual knowledge, the AIP
Properties are not subject to any rights of way, written agreements, laws,
ordinances and regulations affecting building use or occupancy, or reservations
of an interest in title (collectively, "Property Restrictions"), except for (i)
Encumbrances and Property Restrictions that will be set forth in the AIP
Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law or
any governmental body or authority with respect to real property, including
zoning regulations, provided they do not materially adversely affect the current
use of the property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or surveys (in either case copies of which title reports
and surveys have been or will be delivered or made available to RELP prior to
July 31, 1997), and (iv) mechanics', carriers', workmen's, repairmen's liens and
other Encumbrances, Property Restrictions and other limitations of any kind, if
any, which have heretofore been bonded (and that will be listed in the AIP
Disclosure Letter) or which individually or in the aggregate, do not exceed
$100,000, do not materially detract from the value of or materially interfere
with the present use of any of the AIP Properties subject thereto or affected
thereby, and do not otherwise materially impair business operations conducted by
AIP and its Subsidiaries and which have arisen or been incurred only in its
construction activities or in the ordinary course of business.
(b) Valid policies of title insurance have been issued insuring AIP's or
any of its Subsidiaries' fee simple title to the AIP Properties, subject only to
the matters disclosed above and as may be set forth in the AIP Disclosure
Letter, and such policies are, at the date hereof, in full force and effect and
no material claim has been made against any such policy. To AIP's actual
knowledge, except as will be set forth in the AIP Disclosure Letter, (i) there
is no certificate, permit or license from any governmental authority having
I-11
<PAGE> 252
jurisdiction over any of the AIP Properties or any agreement, easement or other
right which is necessary to permit the lawful use and operation of the buildings
and improvements on any of the AIP Properties or which is necessary to permit
the lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the AIP Properties that has not been obtained and
is not in full force and effect, or of any pending threat of modification or
cancellation of any of same; (ii) neither AIP nor its Subsidiaries has received
written notice of any material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion of any of the
AIP Properties issued by any governmental authority; (iii) there are no
structural defects relating to the AIP Properties and no AIP Properties whose
building systems are not in working order in any material respect; and (iv)
there is (A) no physical damage to any AIP Property in excess of $100,000 for
which there is no insurance in effect covering the cost of the restoration, (B)
no current renovation to any AIP Property the cost of which exceeds $100,000 and
(C) no current restoration (excluding tenant improvements) of any AIP Property
the cost of which exceeds $100,000.
(c) Except as will be set forth in the AIP Disclosure Letter, AIP or its
Subsidiaries have received no notice to the effect that and there are no (A)
condemnation or rezoning proceedings that are pending or threatened with respect
to any of the AIP Properties or (B) any zoning, building or similar laws, codes,
ordinances, orders or regulations that are or will be violated by the continued
maintenance, operation or use of any buildings or other improvements on any of
the AIP Properties or by the continued maintenance, operation or use of the
parking areas in any material respect. All work to be performed, payments to be
made and actions to be taken by AIP or its Subsidiaries prior to the date hereof
pursuant to any agreement entered into with a governmental body or authority in
connection with a site approval, zoning reclassification or other similar action
relating to the AIP Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been performed, paid or
taken, as the case may be, and AIP is not aware of any planned or proposed work,
payments or actions that may be required after the date hereof pursuant to such
agreements, except as will be set forth in the AIP Disclosure Letter.
6.13. Environmental Matters. To the actual knowledge of AIP, none of AIP,
any of its Subsidiaries or, any other person has caused or permitted (i) the
unlawful presence of any Hazardous Materials on any of the AIP Properties, or
(ii) any unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from the AIP
Properties as a result of any construction on or operation and use of such
properties, which presence or occurrence would, individually or in the
aggregate, have an AIP Material Adverse Effect; and in connection with the
construction on or operation and use of the AIP Properties, AIP and its
Subsidiaries have not failed to comply, in any material respect, with any
applicable local, state and federal environmental laws, regulations, ordinances
and administrative and judicial orders relating to the generation, recycling,
reuse, sale, storage, handling, transport and disposal of any Hazardous
Materials.
6.14. Labor Matters. Neither AIP nor any of its Subsidiaries is a party to,
or bound by, any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor union organization. There is no unfair
labor practice or labor arbitration proceeding pending or, to the knowledge of
the executive officers of AIP, threatened against AIP or its Subsidiaries
relating to their business, except for any such proceeding which would not have
an AIP Material Adverse Effect. To the knowledge of AIP, there are no
organizational efforts with respect to the formation of a collective bargaining
unit presently being made or threatened involving employees of AIP or any of its
Subsidiaries.
6.15. No Brokers. Except for the fee payable to Prudential Securities
Incorporated ("Prudential") as described in Section 6.16 below, AIP has not
entered into any contract, arrangement or understanding with any person or firm
which may result in the obligation of AIP or RELP to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. AIP is not aware of any claim for payment of any finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.
I-12
<PAGE> 253
6.16. Opinion of Financial Advisor. AIP has retained Prudential to review
the transaction contemplated by this Agreement and to issue an opinion as to the
fairness to AIP, from a financial point of view, of the consideration to be paid
by AIP pursuant to the Merger.
6.17. RELP Share Ownership. Except as may be set forth in the AIP
Disclosure Letter, neither AIP nor any of its Subsidiaries owns any RELP
Interests or other securities convertible into RELP interests.
6.18. AIP Common Shares. The issuance and delivery by AIP of AIP Common
Shares in connection with the Merger and this Agreement have been duly and
validly authorized by all necessary action on the part of AIP except for the
approval of its shareholders contemplated by this Agreement. The AIP Common
Shares to be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable, except that shareholders may be subject to further
assessment with respect to certain claims for tort, contract, taxes, statutory
liability and otherwise in some jurisdictions to the extent such claims are not
satisfied by AIP.
6.19. Convertible Securities. AIP has no outstanding options, warrants or
other securities exercisable for, or convertible into, shares of AIP Common
Shares, the terms of which would require any anti-dilution adjustments by reason
of the consummation of the transactions contemplated hereby, except the
preemptive rights held by certain clients of Morgan Stanley Asset Management,
Inc. and held by MS Real Estate Special Situations, Inc. and the convertible
debt securities held by Realco.
6.20. Related Party Transactions. Set forth in the AIP Disclosure Letter
will be a list of all arrangements, agreements and contracts entered into by AIP
or any of its Subsidiaries with (i) any person who is an officer, Trust Manager
or affiliate of AIP or any of its Subsidiaries, any relative of any of the
foregoing or any entity of which any of the foregoing is an affiliate or (ii)
any person who acquired AIP Common Shares in a private placement. The copies of
such documents, all of which have been or will be delivered or made available to
RELP prior to July 31, 1997, are or will be true, complete and correct when
delivered or made available.
6.21. Contracts and Commitments. The AIP Disclosure Letter will set forth
(i) all unsecured notes or other obligations of AIP and AIP Subsidiaries which
individually may result in total payments in excess of $100,000, (ii) notes,
debentures, bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security interests in the
AIP Properties or personal property of AIP and its Subsidiaries, and (iii) each
commitment entered into by AIP or any of its Subsidiaries which individually may
result in total payments or liability in excess of $100,000. Copies of the
foregoing have been or will be delivered or made available to RELP prior to July
31, 1997, will be listed on the AIP Disclosure Letter and are or will be
materially true and correct when delivered or made available. None of AIP or any
of its Subsidiaries has received any notice of a default that has not been cured
under any of the documents described in clause (i) or (ii) above or is in
default respecting any payment obligations thereunder beyond any applicable
grace periods. All options of AIP or any of its Subsidiaries to purchase real
property will be set forth on the AIP Disclosure Letter and such options and
AIP's or its Subsidiaries' rights thereunder are in full force and effect. All
joint venture agreements to which AIP or any of its Subsidiaries is a party will
be set forth on the AIP Disclosure Letter and AIP or its Subsidiaries are not in
default with respect to any obligations, which individually or in the aggregate
are material, thereunder.
6.22. Development Rights. Set forth in the AIP Disclosure Letter will be a
list of all material agreements entered into by AIP or any of its Subsidiaries
relating to the development, rehabilitation, capital improvement or construction
of office buildings, industrial facilities or other real estate properties which
development or construction has not been substantially completed as of the date
of this Agreement. Such agreements, true, complete and correct copies of all of
which have been or will be delivered or made available to RELP prior to July 31,
1997, will be listed in the AIP Disclosure Letter.
6.23. Certain Payments Resulting From Transactions. The execution of, and
performance of the transactions contemplated by, this Agreement will not (either
alone or upon the occurrence of any additional or subsequent events) (i)
constitute an event under any AIP Benefit Plan, policy, practice, agreement or
other arrangement or any trust or loan (the "Employee Arrangements") that will
or may result in any payment
I-13
<PAGE> 254
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any employee, director or consultant of AIP or any of
its Subsidiaries unless such rights have been waived by any such person, or (ii)
result in the triggering or imposition of any restrictions or limitations on the
right of AIP or RELP to amend or terminate any Employee Arrangement and receive
the full amount of any excess assets remaining or resulting from such amendment
or termination, subject to applicable taxes. No payment or benefit which will be
required to be made pursuant to the terms of any agreement, commitment or AIP
Benefit Plan, as a result of the transactions contemplated by this Agreement, to
any officer, director or employee of AIP or any of its Subsidiaries, will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
ARTICLE VII. COVENANTS
7.1. Acquisition Proposals. Prior to the Effective Time, RELP and AIP each
agree (i) that neither of them nor any of their Subsidiaries shall, and each of
them shall direct and use its best efforts to cause its respective officers,
General Partner, limited partners, Trust Managers, employees, agents, affiliates
and representatives (including, without limitation, any investment banker,
attorney or accountant retained by it or any of its Subsidiaries), as
applicable, not to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its shareholders) with respect to a
merger, acquisition, tender offer, exchange offer, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities (or any debt securities convertible into equity
securities) of, such party or any of its Subsidiaries, other than the
transactions contemplated by this Agreement (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; (ii) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and each will take the necessary
steps to inform the individuals or entities referred to above of the obligations
undertaken in this Section 7.1; and (iii) that it will notify the other party
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that nothing
contained in this Section 7.1 shall prohibit the Board of Directors of the
General Partner of RELP (the "Board of Directors") or the Board of Trust
Managers from (x) furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal, if, and only to the extent that, (A) the Board of
Directors or Board of Trust Managers, as applicable, determines in good faith
that such action is required for it to comply with its fiduciary duties to
limited partners or shareholders, as applicable, imposed by law as advised by
counsel, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, such party provides
written notice to the other party to this Agreement to the effect that it is
furnishing information to, or entering into discussions with, such person or
entity, and (C) subject to any confidentiality agreement with such person or
entity (which such party determined in good faith was required to be executed in
order for the Board of Directors or Board of Trust Managers, as applicable, to
comply with its fiduciary duties to limited partners or shareholders, as
applicable, imposed by law as advised by counsel), such party keeps the other
party to this Agreement informed of the status (but not the terms) of any such
discussions or negotiations; and (y) to the extent applicable, complying with
Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal.
Nothing in this Section 7.1 shall (i) permit any party to terminate this
Agreement (except as specifically provided in Article IX hereof), (ii) permit
any party to enter into any agreement with respect to an Acquisition Proposal
during the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that provides
for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)), or (iii) affect any other
obligation of any party under this Agreement.
I-14
<PAGE> 255
7.2. Conduct of Businesses.
(i) Prior to the Effective Time, except as may be set forth in the RELP
Disclosure Letter or the AIP Disclosure Letter or as contemplated by this
Agreement, unless the other party has consented in writing thereto, AIP and
RELP:
(a) Shall use their reasonable efforts, and shall cause each of their
respective Subsidiaries to use their reasonable efforts, to preserve
intact their business organizations and goodwill and keep available
the services of their respective officers and employees;
(b) Shall confer on a regular basis with one or more representatives of
the other to report operational matters of materiality and, subject
to Section 7.1, any proposals to engage in material transactions;
(c) Shall promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the
breach in any material respect of any representation, warranty,
covenant or agreement contained herein;
(d) Shall not pay quarterly dividends or make distributions payable with
respect to the AIP Common Shares and RELP Partnership Interests,
respectively; and
(e) Shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the
date of this Agreement.
(ii) Prior to the Effective Time, except as may be set forth in the RELP
Disclosure Letter, unless AIP has consented (such consent not to be unreasonably
withheld or delayed) in writing thereto, RELP:
(a) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore
conducted;
(b) Shall not amend the RELP Organizational Documents;
(c) Shall not (i) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date
hereof and disclosed pursuant to this Agreement, issue any RELP
Interests, make any distribution, effect any recapitalization or
other similar transaction, (ii) grant, confer or award any option,
warrant, conversion right or other right not existing on the date
hereof to acquire any RELP Interest, (iii) increase any compensation
or enter into or amend any employment agreement with any of its
present or future officers or directors of the General Partner, or
(iv) adopt any new employee benefit plan or amend any existing
employee benefit plan in any material respect, except for changes
which are less favorable to participants in such plans;
(d) Shall not declare, set aside or make any distribution or payment
with respect to any RELP Interest or directly or indirectly redeem,
purchase or otherwise acquire any RELP Interest, or make any
commitment for any such action;
(e) Shall not sell or otherwise dispose of (i) any RELP Properties, or
(ii) except in the ordinary course of business, any of its other
assets which are material, individually or in the aggregate;
(f) Shall not make any loans, advances or capital contributions to, or
investments in, any other person;
(g) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent
or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of RELP included in the
RELP Reports or incurred in the ordinary course of business
consistent with past practice;
I-15
<PAGE> 256
(h) Shall not enter into any commitment which individually may result in
total payments or liability by or to it in excess of $250,000 in the
case of any one commitment or in excess of $500,000 for all
commitments;
(i) Shall not, and shall not permit any of its Subsidiaries to, enter
into any commitment with any officer, director or affiliate of RELP
or its General Partner except to the extent the same occur in the
ordinary course of business consistent with past practice and would
not have a RELP Material Adverse Effect; and
(j) Shall not enter into or terminate any lease representing annual
revenues of $100,000 or more.
(iii) Prior to the Effective Time, except as may be set forth in the AIP
Disclosure Letter, unless RELP has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, AIP:
(a) Shall, and shall cause each of its Subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(b) Shall not amend its Declaration of Trust or Bylaws except as
contemplated by this Agreement;
(c) Shall not (i) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights (including AIP's
existing dividend reinvestment plan) existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of its
capital stock, effect any share split, reverse share split, share
dividend, recapitalization or other similar transaction, (ii) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital
shares (except pursuant to any employee incentive plan approved by
shareholders), (iii) amend any employment agreement with any of its
present or future officers or Trust Managers, or (iv) adopt any new
employee benefit plan (including any share option, share benefit or
share purchase plan) except the employee incentive plan to be voted
on at its shareholder meeting for the fiscal year ended December 31,
1995;
(d) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any Common Shares or
directly or indirectly redeem, purchase or otherwise acquire any
Common Shares or capital stock of any of its Subsidiaries, or make
any commitment for any such action;
(e) Except as will be set forth in the AIP Disclosure Letter, shall not,
and shall not permit any of its Subsidiaries to, sell or otherwise
dispose of (i) any AIP Properties or any of its capital stock of or
other interests in Subsidiaries or (ii) except in the ordinary
course of business, any of its other assets which are material,
individually or in the aggregate;
(f) Shall not, and shall not permit any of its Subsidiaries to, make any
loans, advances or capital contributions to, or investments in, any
other person other than in connection with the sale of properties;
(g) Shall not, and shall not permit any of its Subsidiaries to, pay,
discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of AIP included in the
AIP Reports or incurred in the ordinary course of business
consistent with past practice;
(h) Shall not, and shall not permit any of its Subsidiaries to, enter
into any commitment which individually may result in total payments
or liability by or to it in excess of $500,000 in the case of any
one commitment or in excess of $500,000 for all commitments; and
I-16
<PAGE> 257
(i) Shall not, and shall not permit any of its Subsidiaries to, enter
into any commitment with any officer, Trust Manager or affiliate of
AIP or any of its Subsidiaries, except as herein or in the AIP
Disclosure Letter provided and except in the ordinary course of
business.
For purposes of this Section 7.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. Further, if no response is received by
the end of business on such third day, the party receiving the request shall be
deemed to have consented to such action.
7.3 Meetings of Shareholders and Partners. Each of AIP and RELP will take
all action necessary in accordance with applicable law and its organizational
documents to convene a meeting of its shareholders or partners, as applicable,
as promptly as practicable to consider and vote upon or otherwise to obtain the
consent of its shareholders or partners, as applicable, to (i) in the case of
AIP, approve this Agreement and the transactions contemplated hereby, and (ii)
in the case of RELP, approve this Agreement and the transactions contemplated
hereby. The Board of Trust Managers and the General Partner shall each recommend
such approval and AIP and RELP shall each take all lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy
Statement/Prospectus (as defined in Section 7.7); provided, however, that such
recommendation or solicitation is subject to any action taken by, or upon
authority of, the Board of Trust Managers or the General Partner, as the case
may be, in the exercise of its good faith judgment as to its fiduciary duties to
its shareholders or partners, as applicable, imposed by law as advised by
counsel. AIP and RELP shall coordinate and cooperate with respect to the timing
of such meetings and shall use their best efforts to hold such meetings on the
same day.
7.4. Filings; Other Action. Subject to the terms and conditions herein
provided, RELP and AIP shall: (a) use all reasonable efforts to cooperate with
one another in (i) determining which filings are required to be made prior to
the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from
governmental or regulatory authorities of the United States and the several
states in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use all reasonable efforts to obtain in writing any consents
required from third parties in form reasonably satisfactory to RELP and AIP
necessary to effectuate the Merger; and (c) use all reasonable efforts to take,
or cause to be taken, all other action and do, or cause to be done, all other
things necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors of AIP and the General Partner
shall take all such necessary action.
7.5. Inspection of Records. From the date hereof to the Effective Time,
each of RELP and AIP shall allow all designated officers, attorneys, accountants
and other representatives of the other access at all reasonable times to the
records and files, correspondence, audits and properties, as well as to all
information relating to commitments, contracts, titles and financial position,
or otherwise pertaining to the business and affairs of RELP and AIP and their
respective Subsidiaries.
7.6. Publicity. RELP and AIP shall, subject to their respective legal
obligations (including requirements of stock exchanges and other similar
regulatory bodies), consult with each other, and use reasonable efforts to agree
upon the text of any press release before issuing any such press release or
otherwise making public statements with respect to the transactions contemplated
hereby and in making any filings with any federal or state governmental or
regulatory agency or with any national securities exchange with respect thereto.
7.7. Registration Statement. AIP and RELP shall cooperate and promptly
prepare and AIP shall file with the SEC as soon as practicable a Registration
Statement on Form S-4 (the "Form S-4") under the Securities Act, with respect to
the AIP Common Shares issuable in the Merger, a portion of which Registration
Statement shall also serve as the joint proxy statement with respect to the
meetings of the shareholders and partners, respectively, of AIP and RELP in
connection with the Merger (the "Proxy Statement/Prospectus"). The respective
parties will cause the Proxy Statement/Prospectus and the Form S-4 to comply as
to form in all material respects with the applicable provisions of the
Securities Act, the Exchange Act and the rules and
I-17
<PAGE> 258
regulations promulgated thereunder. AIP shall use all reasonable efforts, and
RELP will cooperate with AIP to have the Form S-4 declared effective by the SEC
as promptly as practicable. AIP shall use its best efforts to obtain, prior to
the effective date of the Form S-4, all necessary state securities law or "Blue
Sky" permits or approvals required to carry out the transactions contemplated by
this Agreement and will pay all expenses incident thereto. AIP agrees that the
Proxy Statement/Prospectus and each amendment or supplement thereto, at the time
of mailing thereof and at the time of the respective meetings of shareholders
and partners, respectively, of AIP and RELP, or, in the case of the Form S-4 and
each amendment or supplement thereto, at the time it is filed or becomes
effective, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by AIP in reliance upon and in conformity with written
information concerning RELP furnished to AIP by RELP specifically for use in the
Proxy Statement/Prospectus. RELP agrees that the written information provided by
it specifically for inclusion in the Proxy Statement/Prospectus and each
amendment or supplement thereto, at the time of mailing thereof and at the time
of the respective meetings of shareholders and partners, respectively, of AIP
and RELP, or, in the case of written information provided by RELP specifically
for inclusion in the Form S-4 or any amendments or supplement thereto, at the
time it is filed or becomes effective, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. AIP will advise RELP, promptly after it
receives notice thereof, of the time when the Form S-4 has become effective or
any supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the AIP Common Shares issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by the
SEC for amendment of the Proxy Statement/Prospectus or the Form S-4 or comments
thereon and responses thereto or requests by the SEC for additional information.
7.8. Listing Application. AIP shall promptly prepare and submit to the NYSE
a listing application covering the AIP Common Shares issuable in the Merger, and
shall use its reasonable efforts to obtain, prior to the Effective Time,
approval for the listing of such AIP Common Shares, subject to official notice
of issuance.
7.9. Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performances set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
7.10. Expenses. Subject to Section 9.5, if the Merger is approved by RELP's
partners, all transaction costs of the proposed consolidation shall be paid by
AIP. If three of the four limited partnerships party to the Proxy
Statement/Prospectus (the "Other RELPS") do not approve their proposed merger
into AIP, Realco shall reimburse AIP for AIP's expenses relating to the proposed
merger up to $ . If RELP and the Other RELPS approve their proposed
merger into AIP, but the shareholders of AIP do not approve the proposer merger,
and if Realco voted its AIP Common Shares in favor of such mergers, AIP will
reimburse RELP and the Other RELPS for all expenses they incurred in connection
with the proposed merger. Any expenses to be reimbursed hereunder shall include,
but not be limited to, costs of fairness opinions, property appraisals,
engineering and environmental reports, title policies, accounting fees, legal
fees, printing and solicitation expenses. RELP will bear the costs of preparing
its initial fairness opinion, with later reimbursement by AIP in the event the
Merger is approved by RELP's partners. If the limited partners of RELP fail to
approve the proposed Merger, then Realco will reimburse AIP for the RELP's
expenses (to the extent paid by AIP) as follows: the actual cost of such RELP's
fairness opinion, legal fees up to $80,000, and the actual cost or the Allocable
Share (if the actual cost is not separately determined), of RELP's accounting
fees, engineering and environmental reports, printing and solicitation expenses.
Allocable Share, for this purpose, shall be the ratio of such RELP's net book
value of assets at March 31, 1997 to the total net book value of all of the
assets of RELP and the Other RELPS at March 31, 1997.
7.11. Indemnification. For a period of six years from and after the
Effective Time, AIP shall indemnify the partners, or agents of RELP who at any
time prior to the Effective Time were entitled to indemnification
I-18
<PAGE> 259
under the Agreement of Limited Partnership of RELP existing on the date hereof
to the same extent as such partners or agents are entitled to indemnification
under such Agreement of Limited Partnership in respect of actions or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement).
7.12. Reorganization. From and after the date and until the Effective Time,
neither AIP nor RELP nor any of their respective Subsidiaries or other
affiliates shall (i) knowingly take any action, or knowingly fail to take any
action, that would jeopardize qualification of the Merger as a reorganization
within the meaning of Section 368(a)(1)(A) of the Code; or (ii) enter into any
contract, agreement, commitment or arrangement with respect to the foregoing.
Following the Effective Time, AIP shall use its best efforts to conduct its
business in a manner that would not jeopardize the characterization of the
Merger as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code.
7.13. Survival of RELP Obligations; Assumption of RELP Liabilities by AIP.
All of the obligations of RELP that are outstanding at the Closing shall survive
the Closing and shall not be merged therein. Upon the consummation of the
Merger, such obligations shall be assumed, automatically, by AIP; provided,
however, that such assumption shall not impose upon or expose AIP to any
liability for which RELP was not liable, and provided, further, that AIP shall
be entitled to the same defenses, offsets and counterclaims to which RELP would
have been entitled, but for the Merger.
7.14. Third Party Consents. AIP and RELP each shall take all necessary
corporate and other action and will use its commercially reasonable efforts to
obtain the consents and applicable approvals from third parties that may be
required to enable it to carry out the transactions contemplated by this
Agreement.
7.15. Efforts to Fulfill Conditions. AIP and RELP each shall use
commercially reasonable efforts to insure that all conditions precedent to its
obligations hereunder are fulfilled at or prior to the Closing.
7.16. Representations, Warranties and Conditions Prior to Closing. AIP and
RELP each shall use its commercially reasonable efforts to cause its
representations and warranties contained in this Agreement to be true and
correct on and as of the Closing Date in all material respects. Prior to
Closing, AIP and RELP each shall promptly notify the other in writing (i) if any
representation or warranty contained in this Agreement is discovered to be or
becomes untrue or (ii) if AIP or RELP fails to perform or comply with any of its
covenants or agreements contained in this Agreement or it is reasonably expected
that it will be unable to perform or comply with any of its covenants or
agreements contained in this Agreement.
7.17. Cooperation of the Parties. AIP and RELP each will cooperate with the
other in supplying such information as may be reasonably requested by the other
in connection with obtaining consents or approvals to the transactions
contemplated by this Agreement.
7.18. Lock-Ups. The General Partner shall use its best efforts prior to the
Closing to have each of its directors and officers and Realco execute a 90-day
lock-up agreement in a form (reasonably acceptable to RELP) supplied to RELP by
AIP. The executed agreements will be delivered to AIP at the Closing. AIP shall
use its best efforts prior to the Closing to have each of its Trust Managers and
officers execute a 90-day lock-up agreement, in a form (reasonably acceptable to
AIP) supplied to AIP by RELP. The agreements will be delivered to RELP at the
Closing.
ARTICLE VIII. CONDITIONS
8.1. Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by the Declaration of Trust and
Bylaws and Agreement of Limited Partnership of AIP and RELP,
respectively, and by applicable law or by applicable regulations of
any stock exchange or other regulatory body by the holders of the
AIP Common Shares and RELP Interests entitled to vote thereon.
I-19
<PAGE> 260
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In
the event any such order or injunction shall have been issued, each
party agrees to use its reasonable efforts to have any such
injunction lifted.
(c) The Form S-4 shall have become effective and all necessary state
securities law or "Blue Sky" permits or approvals required to carry
out the transactions contemplated by this Agreement shall have been
obtained and no stop order with respect to any of the foregoing
shall be in effect.
(d) AIP shall have obtained the approval for the listing of the AIP
Common Shares issuable in the Merger on the NYSE, subject to
official notice of issuance.
(e) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other
regulatory body or third parties required in connection with the
execution, delivery and performance of this Agreement shall have
been obtained or made, except for filings in connection with the
Merger and any other documents required to be filed after the
Effective Time and except where the failure to have obtained or made
any such consent, authorization, order, approval, filing or
registration would not have a material adverse effect on the
business, results of operations or financial condition of AIP and
RELP (and their respective Subsidiaries), taken as a whole,
following the Effective Time.
8.2 Conditions to Obligations of RELP to Effect the Merger. The obligation
of RELP to effect the Merger shall be subject to the fulfillment at or prior to
the Closing Date of the following conditions, unless waived by RELP:
(a) AIP shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of AIP contained in this Agreement
shall be true and correct in all material respects as of the Closing
Date as if made on the Closing Date, and RELP shall have received a
certificate of the President or an Executive or Senior Vice
President of AIP, dated the Closing Date, certifying to such effect.
(b) RELP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by AIP and approved by RELP, dated the
Closing Date, to the effect that the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning
of Section 368(a)(1)(A) of the Code, and that RELP and AIP will each
be a party to that reorganization within the meaning of Section
368(b) of the Code. In rendering its opinion, said counsel shall be
entitled to rely as to any factual matter upon certificates given by
executive officers of RELP and AIP and shall be entitled to assume
that the covenants of AIP pursuant to Section 7.15 shall be fully
complied with.
(c) From the date of the Agreement through the Effective Time, there
shall not have occurred any change in the financial condition,
business or operations of AIP and its Subsidiaries, taken as a
whole, that would have or would be reasonably likely to have an AIP
Material Adverse Effect other than any such change that affects both
RELP and AIP in a substantially similar manner.
(d) The opinion of Houlihan addressed to RELP that the Purchase Price is
fair, from a financial point of view, to the partners of RELP shall
not have been withdrawn or materially modified.
(e) RELP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by AIP and approved by RELP, dated the
Closing Date, as to such customary matters as RELP may reasonably
request, such opinion to be reasonably satisfactory to RELP.
I-20
<PAGE> 261
8.3 Conditions to Obligation of AIP to Effect the Merger. The obligations
of AIP to effect the Merger shall be subject to the fulfillment at or prior to
the Closing Date of the following conditions, unless waived by AIP:
(a) RELP shall have performed its agreements contained in this Agreement
required to be performed on or prior to the Closing Date and the
representations and warranties of RELP contained in this Agreement
shall be true and correct in all material respects as of the Closing
Date as if made on the Closing Date and AIP shall have received a
certificate of the Chief Executive Officer, President or an
Executive Vice President of the General Partner dated the Closing
Date, certifying to such effect.
(b) AIP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by RELP and approved by AIP, dated the
Closing Date, to the effect that the consummation of the Merger will
not result in AIP's failure to continue to satisfy the requirements
for qualification as a REIT for federal income tax purposes. In
rendering its opinion, said counsel shall be entitled to rely as to
any factual matter upon certificates given by executive officers of
AIP and RELP and shall be entitled to assume that the covenants of
Section 7.15 shall be fully complied with.
(c) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition,
business or operations of RELP and its Subsidiaries, taken as a
whole, that would have or would be reasonably likely to have an RELP
Material Adverse Effect, other than any such change that affects
both RELP and AIP in a substantially similar manner.
(d) Each person listed on Exhibit 8.3(d) attached hereto shall have
delivered to AIP a written agreement to the effect that such person
will not offer to sell, sell or otherwise dispose of any shares of
AIP Common Stock issued in the Merger, except, in each case,
pursuant to an effective registration statement or in compliance
with Rule 145, as amended from time to time, or in a transaction
which, in the opinion of legal counsel reasonably satisfactory to
AIP, is exempt from the registration requirements of the Securities
Act and that the certificates representing the AIP shares issued to
him or her in the Merger may bear a legend to such effect.
(e) The opinion of Prudential addressed to the Board of Trust Managers
of AIP that the consideration to be paid by AIP pursuant to the
Merger is fair, from a financial point of view, to AIP shall not
have been withdrawn or materially modified.
(f) AIP shall have received the opinion of Liddell, Sapp or another
recognized law firm selected by RELP and approved by AIP, dated the
Closing Date, as to such customary matters as AIP may reasonably
request, such opinion to be reasonably satisfactory to AIP.
(g) The limited partners of at least two of the Other RELPS shall have
approved the merger of such limited partnership with and into AIP.
ARTICLE IX. TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval of this Agreement by the partners of RELP or the shareholders of
AIP or by the mutual written consent of AIP and RELP, with the prior approval of
their respective Board of Trust Managers and General Partner.
9.2 Termination by Either AIP or RELP. This Agreement may be terminated and
the Merger may be abandoned by action of the General Partner of RELP or the
Board of Trust Managers of AIP if (i) the Merger shall not have been consummated
by March 31, 1998, (ii) a meeting of RELP's partners shall have been duly
convened and held and the approval of RELP's partners required by Section 8.1(a)
shall not have been obtained at such meeting or at any adjournment thereof,
(iii) a meeting of AIP's shareholders shall have
I-21
<PAGE> 262
been duly convened and held and the approval of AIP's shareholders required by
Section 8.1(a) shall not have been obtained at such meeting or at any
adjournment thereof, (iv) as a result of due diligence investigation by one of
the parties hereto, it is determined in good faith by such party that certain
facts or circumstances not previously known by such party constitute a Material
Adverse Effect on the business, results of operations or financial condition of
the other party, (v) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and non-appealable,
provided that the party seeking to terminate this Agreement pursuant to this
clause (v) shall have used all reasonable efforts to remove such order, decree,
ruling or injunction, or (vi) any of the conditions set forth in Article VIII
shall not have been satisfied, and provided, in the case of a termination
pursuant to clause (i) or (vi) above, that the terminating party shall not have
breached in any material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the occurrence of the failure
referred to in said clause. AIP and RELP each shall (i) deliver its Disclosure
Letter to one another not later than 5:00 P.M., Central Time, August 11, 1997,
and (ii) shall complete its due diligence investigations not later than 5:00
P.M., Central Time, on July 31, 1997 (the period from the date of this Agreement
through July 31, 1997 being hereinafter referred to as the "Due Diligence
Period"). Until the expiration of the Due Diligence Period, either party may
terminate this Agreement without liability or penalty due to (i) the discovery
of a fact or circumstance that reasonably could be expected to constitute a
Material Adverse Effect on the business, results of operations or financial
condition of the other party, or (ii) the party's failure to receive a written
fairness opinion as described herein within seven business days from the date of
execution of this Agreement.
9.3 Termination by RELP. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
adoption and approval by the partners of RELP referred to in Section 8.1(a), by
action of the General Partner, if (i) in the exercise of its good faith judgment
as to its fiduciary duties to its partners imposed by law, as advised by
counsel, the General Partner determines that such termination is required by
reason of a RELP Acquisition Proposal being made, (ii) the Board of Trust
Managers withdraws, materially modifies or changes in a manner materially
adverse to RELP its recommendations to AIP's shareholders of this Agreement or
the Merger, other than as a result of the occurrence of an event that in the
good faith judgment of the Board of Trust Managers has or is reasonably likely
to have a RELP Material Adverse Effect, (iii) the Board of Trust Managers
postpones the date scheduled for the meeting of shareholders of AIP to approve
this Agreement and the transactions contemplated hereby beyond March 31, 1998 or
fails to set a date for such meeting by such date, except with the written
consent of RELP, (iv) there has been a breach by AIP of any representation or
warranty contained in this Agreement which would have or would be reasonably
likely to have an AIP Material Adverse Effect, which breach is not curable by
March 31,1998, or (v) there has been material breach of any of the covenants or
agreements set forth in this Agreement on the part of AIP, which breach is not
curable or, if curable, is not cured within 30 days after written notice of such
breach is given by RELP to AIP, or (vi) the condition set forth in Section
8.3(g) is not satisfied.
9.4 Termination by AIP. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, before or after the
approval by the shareholders of AIP referred to in Section 8.1(a), by action of
the Board of Trust Managers, if (i) in the exercise of its good faith judgment
as to its fiduciary duties to its shareholders imposed by law, as advised by
counsel, the Board of Trust Managers determines that such termination is
required by reason of an AIP Acquisition Proposal being made, (ii) the General
Partner withdraws, materially modifies or changes in a manner materially adverse
to AIP its recommendation to RELP's partners of this Agreement or the Merger,
other than as a result of the occurrence of an event that in the good faith
judgment of the General Partner has or is reasonably likely to have an AIP
Material Adverse Effect, (iii) the General Partner postpones the date scheduled
for the meeting of partners of RELP to approve this Agreement and the
transactions contemplated hereby beyond March 31, 1998, or fails to set a date
for such meeting by such date, except with the written consent of AIP, (iv)
there has been a breach by RELP of any representation or warranty contained in
this Agreement which would have or would be reasonably likely to have a RELP
Material Adverse Effect, which breach is not curable by March 31, 1998, or
I-22
<PAGE> 263
(v) there has been a material breach of any of the covenants or agreements set
forth in this Agreement on the part of RELP, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by AIP to RELP.
9.5. Effect of Termination and Abandonment. (a) If an election to terminate
this Agreement is made pursuant to (i) Section 9.2(i) (except as a result of a
default or breach hereunder by AIP) or Section 9.2(ii), and a RELP Acquisition
Proposal relating to RELP shall have been made and, within one year from the
date of such termination, RELP consummates a RELP Acquisition Proposal or enters
into an agreement to consummate a RELP Acquisition Proposal which is
subsequently consummated, or (ii) Section 9.3(i), RELP shall pay to AIP,
provided that AIP was not in material breach of its obligations hereunder at the
time of such termination, as liquidated damages and not as a penalty or
forfeiture, an amount equal to the lesser of (m) $ (the "Liquidated
Damages Amount") and (n) the sum of (1) the maximum amount that can be paid to
AIP without causing AIP to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of
the Code ("Qualifying Income"), as determined by AIP's certified public
accountants, plus (2) an amount equal to the Liquidated Damages Amount less the
amount payable under clause (1) above in the event AIP receives a letter from
AIP's counsel indicating that AIP has received a ruling from the IRS to the
effect that Liquidated Damages Amount payments constitute Qualifying Income. In
addition to the Liquidated Damages Amount, AIP shall be entitled to receive from
RELP (or its successor in interest) all documented out-of-pocket costs and
expenses, up to a maximum of $ in connection with this Agreement and
the transactions contemplated hereby (the "AIP Expenses") incurred by AIP. The
payments to which AIP is entitled under this Section 9.5(a) shall be its sole
remedy with respect to the termination of the Agreement under the circumstances
contemplated in this Section 9.5(a).
(b) If an election to terminate this Agreement is made pursuant to Section
9.2(i) (as a result of the condition set forth in Section 8.3(c) not being
satisfied), RELP shall, provided that AIP was not in material breach of its
obligations hereunder at the time of such termination, pay AIP for the AIP
Expenses, up to a maximum of $ , although it shall not be required to
pay the Liquidated Damages Amount, which payment of the AIP Expenses shall be
AIP's sole remedy for termination of the Agreement in such circumstances.
(c) If an election to terminate this Agreement is made pursuant to (i)
Section 9.2(i) (except as a result of a default or breach hereunder by RELP) or
Section 9.2(iii), and an AIP Acquisition Proposal relating to AIP shall have
been made and, within one year from the date of such termination, AIP
consummates an AIP Acquisition Proposal or enters into an agreement to
consummate an AIP Acquisition Proposal which is subsequently consummated, or
(ii) Section 9.4(i), AIP shall pay to RELP, provided that RELP was not in
material breach of its obligations hereunder at the time of such termination, as
liquidated damages and not as a penalty or forfeiture, an amount equal to the
Liquidated Damages Amount. In addition to the Liquidated Damages Amount, RELP
shall be entitled to receive from AIP (or its successor in interest) all
documented out-of-pocket costs and expenses, up to a maximum of $ , in
connection with this Agreement and the transactions contemplated hereby (the
"RELP Expenses" and, together with the AIP Expenses, the "Expenses") incurred by
RELP. The payments to which RELP is entitled under this Section 9.5(c) shall be
its sole remedy with respect to the termination of the Agreement under the
circumstances contemplated in this Section 9.5(c)
(d) If an election to terminate this Agreement is made pursuant to Section
9.2(i) (as a result of the condition set forth in Section 8.2(c) not being
satisfied), AIP shall, provided that RELP was not in material breach of its
obligations hereunder at the time of such termination, pay RELP for the RELP
Expenses, up to a maximum of $ , although it shall not be required to
pay the Liquidated Damages Amount, which payment of the RELP Expenses shall be
RELP's sole remedy for termination of the Agreement in such circumstances.
(e) If this Agreement is terminated pursuant to Section 9.3(iv), Section
9.3(v), Section 9.4(iv), or Section 9.4(v), the non-terminating party shall,
provided that the terminating party was not in material breach
I-23
<PAGE> 264
of its obligations hereunder at the time of such termination, pay the
terminating party all Expenses, up to a maximum of $ , incurred by it
and the non-terminating party shall remain liable to the terminating party for
its breach.
(f) If either party terminates this Agreement during the Due Diligence
Period described in Section 9.2 above other than for a due diligence related
reason, the non-terminating party shall be entitled to receive the Liquidated
Damages Amount and the Expenses as provided in this Article IX.
(g) RELP agrees to amend this Section 9.5 at the request of AIP in order to
(x) maximize the portion of the Liquidated Damages Amount that may be
distributed to AIP hereunder without causing AIP to fail to meet the
requirements of Sections 856(c)(2) and (3) of the Code or (y) improve AIP's
chances of securing a favorable ruling described in this Section 9.5, provided
that no such amendment may result in any additional cost or expense to such
other party.
(h) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article IX, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
9.5 and Section 7.10 and except for the provisions of Section 10.3, 10.4, 10.5,
10.6, 10.7, 10.9, 10.10, 10.13, 10.14 and 10.16. In the event AIP or RELP has
received the Liquidated Damages Amount, such recipient shall not assert or
pursue in any manner, directly or indirectly, any claim or cause of action
against the other party hereto or any of its officers, Trust Managers, or
General Partners, as applicable, based in whole or part upon its or their
receipt, consideration, recommendation or approval of an Acquisition Proposal or
the exercise by AIP of its right to termination under Section 9.4(i) or the
exercise by RELP of its right to termination under Section 9.3(i).
Notwithstanding the foregoing, in the event AIP or RELP is required to file suit
to seek all or a portion of such Liquidated Damages Amount, and it ultimately
succeeds, it shall be entitled to all expenses, including attorney's fees and
expenses, which it has incurred in enforcing its right hereunder.
(i) If either party willfully fails to perform its duties and obligations
under this Agreement, the nonbreaching party is additionally entitled to all
remedies available to it at law or in equity and to recover its expenses from
the breaching party.
9.6 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Trust Managers or General Partner, as
applicable, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE X. GENERAL PROVISIONS
10.1. Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Merger;
provided, however, that the agreements contained in Article IV, the last
sentence of Section 7.4 and Sections 7.10, 7.11, 7.12, 7.13, 7.14, 7.15 and 7.16
and this Article X shall survive the Merger.
10.2. Notices. Any notice required to be given hereunder shall be in
writing and shall be sent by facsimile transmission (confirmed by any of the
methods that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to AIP:
American Industrial Properties REIT
6220 N. Beltline Road, Suite 205
Irving, Texas 75063
Attention: Charles W. Wolcott, President
I-24
<PAGE> 265
Telecopy: (972) 550-6037
If to RELP:
USAA Real Estate Company
8000 I-H 10 West, Suite 600
San Antonio, Texas 78230
Attention: Patrick Duncan, Senior Vice-President
Telecopy: (210) 498-6214
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
delivered.
10.3. Assignment; Binding Effect; Benefit. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except as provided in the following
sentence, nothing in this Agreement, expressed or implied, is intended to confer
on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement. The provisions
of Article IV and Sections 7.11, 7.12, 7.13, 7.14 and 7.15 (collectively, the
"Third Party Provisions") shall benefit the persons identified therein, but the
aggregate liability of AIP with respect thereto shall not exceed the amount
specified in Article IX.
10.4. Entire Agreement. This Agreement, the Exhibits, the RELP Disclosure
Letter, the AIP Disclosure Letter, the RELP Ancillary Agreements, the AIP
Ancillary Agreements and any documents delivered by the parties in connection
herewith constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto. No addition to or modification of any
provision of this Agreement shall be binding upon any party hereto unless made
in writing and signed by all parties hereto.
10.5. Confidentiality. (a) As used herein, "Confidential Material" means,
with respect to either party hereto (the "Providing Party"), all information
(written or oral) furnished (whether before or after the date hereof) by the
Providing Party and its directors, officers, employees, affiliates or
representatives of advisors, including counsel, lenders and financial advisors
(collectively, the "Providing Party Representatives") to the other party hereto
(the "Receiving Party") or such Receiving Party's directors, officers,
employees, affiliates or representatives of advisors, including counsel, lenders
and financial advisors or the Receiving Party's potential sources of financing
for the transactions contemplated by this Agreement (collectively "the Receiving
Party Representatives") and all analyses, compilations, forecasts and other
studies or other documents prepared by the Providing Party or the Providing
Party Representatives in connection with its or their review of the transactions
contemplated by this Agreement which contain or reflect such information. The
term "Confidential Material" does not include, however, information which (i) at
the time of disclosure or thereafter is generally available to and known by the
public other than as a result of a disclosure directly or indirectly by the
Receiving Party or the Receiving Party Representatives in violation of this
Agreement, (ii) at the time of disclosure was available on a nonconfidential
basis from a source other than the Providing Party or the Providing Party
Representatives, providing that such source is not and was not bound by a
confidentiality agreement with the Providing Party, (iii) was known by the
Receiving Party prior to receiving the Confidential Material from the Providing
Party or has been independently acquired or developed by the Receiving Party
without violating any of its obligations under this Agreement, or (iv) is
contained in any RELP Reports or AIP Reports or Proxy Statement/Prospectus.
(b) Subject to paragraph (c) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the prior
written consent of the Providing Party, be disclosed by the Receiving Party or
its Representatives, in whole or in part and will not be used by the Receiving
Party or its Representatives, directly or indirectly, for any purpose other than
in connection with this Agreement, the Merger or the evaluating, negotiating or
advising with respect to a transaction contemplated herein. Moreover,
I-25
<PAGE> 266
each Receiving Party agrees to transmit Confidential Material to its
Representatives only if and to the extent that such Representatives need to know
the Confidential Material for purposes of such transaction and are informed by
such Receiving Party of the confidential nature of the Confidential Material and
of the terms of this Section.
(c) In the event that either Receiving Party, its Representatives or anyone
to whom such Receiving Party or its Representatives supply the Confidential
Material, are requested or required (by oral questions, interrogatories,
requests for information or documents, subpoena, civil investigative demand, any
informal or formal investigation by any government or governmental agency or
authority or otherwise in connection with legal processes) to disclose any
Confidential Material, such Receiving Party agrees (i) to immediately notify the
Providing Party of the existence, terms and circumstances surrounding such a
request, (ii) to consult with the Providing Party on the advisability of taking
legally available steps to resist or narrow such request and (iii) if disclosure
of such information is required, to furnish only that portion of the
Confidential Material which, in the opinion of such Receiving Party's counsel,
such Receiving Party is legally compelled to disclose and to cooperate with any
action by the Providing Party to obtain an appropriate protective order or
otherwise reliable assurances that confidential treatment will be accorded the
Confidential Material (it being agreed that the Providing Party shall reimburse
the Receiving Party for all reasonable out-of-pocket expenses incurred by the
Receiving Party in connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from either Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the Providing
Party or destroy all tangible Confidential Material and will not retain any
copies, extracts or other reproductions thereof in whole or in part. Any such
destruction shall be certified in writing to the Providing Party by an
authorized officer of the Receiving Party supervising the same. Notwithstanding
the foregoing, each Receiving Party and one Representative designated by each
Receiving Party shall be permitted to retain one permanent file copy of each
document constituting Confidential Material.
(e) Each party hereto further agrees that if this Agreement is terminated
in accordance with its terms, until one year from the date of termination, (1)
it will not offer to hire or hire any person currently or formerly employed by
the other party with whom such party has had contact prior hereto other than
persons whose employment shall have been terminated by such other party prior to
the date of such offer to hire or hiring and (2) neither it nor its affiliates
shall directly or indirectly, (a)(w) solicit, seek or offer to effect or effect,
(x) negotiate with or provide any information to the Board of Trust Managers or
General Partner, as applicable, of the other party, or officer of the other
party or any shareholder or partner, as applicable, of the other party with
respect to, (y) make any statement or proposal, whether written or oral, either
alone or in concert with others, to the Board of Trust Managers or Board of
Directors of the General Partner of the other party, any director, Trust Manager
or officer of the other party or any shareholder or partner of the other party
or any other person with respect to, or (z) make any public announcement (except
as required by law in respect of actions permitted hereby) or proposal or offer
whatsoever (including, but not limited to, any "solicitation"of "proxies"as such
terms are defined or used in Regulation 14A of the Exchange Act) with respect
to, (i) any form of business combination or similar or other extraordinary
transaction involving the other party or any affiliate thereof, including,
without limitation, a merger, tender or exchange offer or liquidation of the
other party's assets, (ii) any form of restructuring, recapitalization or
similar transaction with respect to the other party or any affiliate thereto,
(iii) any purchase of any securities or assets, or rights or options to acquire
any securities or assets (through purchase, exchange, conversion or otherwise),
of the other party or any affiliate thereof, (iv) any proposal to seek
representation on the Board of Trust Managers or the Board of Directors of the
General Partner, as applicable, or otherwise to seek to control or influence the
management, Board of Trust Managers or the Board of Directors of the General
Partner, as applicable, or policies of the other party or any affiliate thereof,
(v) any request or proposal to waive, terminate or amend the provisions of this
Section 10.5 or (vi) any proposal or other statement inconsistent with the terms
of this Section 10.5 or (b) instigate, encourage, join, act in concert with or
assist (including, but not limited to, providing or assisting in any way in the
obtaining of financing for, or acting as a joint or co-bidder for the other
party with) any third party to do any of the foregoing, unless and until such
party has received the prior written invitation or approval of a majority of the
Board of Trust Managers or the General Partner, as applicable, to do
I-26
<PAGE> 267
any of the foregoing; provided that without such invitation or approval, either
party may at any time, on a confidential non-public basis, submit to the Chief
Executive Officer of AIP or the General Partner, as applicable, a proposal to
(a) amend any of the provisions of this Section 10.5(e) or (b) effect a business
combination or other extraordinary transaction with the other party providing
for the acquisition of all or substantially all of the assets or the securities
of the other party, including, without limitation, a merger, tender offer or
exchange offer. Each party hereto agrees that it will not agree with any third
party to waive its rights under this Section 10.5.
10.6. Amendment. This Agreement may be amended by the parties hereto, by
action taken by the Board of Trust Managers or the Board of Directors of the
General Partner, as applicable, at any time before or after approval of this
Agreement or any other matter presented in connection with the Merger by the
shareholders of AIP and partners of RELP, but after any such approval, no
amendment shall be made which by law requires the further approval of
shareholders or partners, as applicable, without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
10.7. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws. Each of AIP and RELP hereby irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of the State of
Texas and of the United States District Court, Northern District of Texas (the
"Texas Courts") for any litigation arising out of or relating to this Agreement
and the transactions contemplated hereby (and agrees not to commence any
litigation relating thereto except in such courts), waives any objection to the
laying of venue of any such litigation in the Texas Courts and agrees not to
plead or claim in any Texas Court that such litigation brought therein has been
brought in an inconvenient forum.
10.8. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
10.9. Headings. Heading of the Articles and Sections of this Agreement are
for the convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
10.10. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
10.11. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
10.12. Incorporation. The RELP Disclosure Letter and the AIP Disclosure
Letter and all Exhibits and Schedules attached hereto and thereto and referred
to herein and therein are hereby incorporated herein and made a part hereof for
all purposes as if fully set forth herein.
10.13. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any current or future law, and if the
rights or obligations of the parties under this Agreement would not be
materially and adversely affected thereby, such provision shall be fully
separable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof,
and the remaining provisions of this Agreement shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance therefrom. In lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a part of this
Agreement, a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible, and the parties
hereto request the court or any arbitrator to whom disputes relating to this
Agreement
I-27
<PAGE> 268
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Section 10.13.
10.14. Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Texas Court, this being in addition to
any other remedy to which they are entitled at law or in equity.
10.15. Subsidiaries. As used in this Agreement, the word "Subsidiary" when
used with respect to any party means any corporation, partnership, joint
venture, business trust or other entity, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization.
10.16. Non-Recourse. Neither the officers, Trust Managers nor shareholders
of AIP shall be personally bound or have any personal liability hereunder. RELP
shall look solely to the assets of AIP for satisfaction of any liability of AIP
with respect to this Agreement and the Ancillary Agreements to which it is a
party. RELP will not seek recourse or commence any action against any of the
shareholders of AIP or any of their personal assets, and will not commence any
action for money judgments against any of the Trust Managers or officers of AIP
or seek recourse against any of their personal assets, for the performance or
payment of any obligation of AIP hereunder or thereunder. The partners of RELP
shall not be personally bound or have any personal liability hereunder. AIP
shall look solely to the assets of RELP for satisfaction of any liability of
RELP with respect to this Agreement and the Ancillary Agreements to which it is
a party. AIP will not seek recourse or commence any action against any of the
partners of RELP or any of their personal assets, and will not commence any
action for money judgments against any of the directors or officers of RELP or
seek recourse against any of their personal assets, for the performance or
payment of any obligation of RELP hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
AMERICAN INDUSTRIAL PROPERTIES REIT
------------------------------------
Charles W. Wolcott, President and
Chief Executive Officer
By:
----------------------------------
Its General Partner
------------------------------------
T. Patrick Duncan
Senior Vice President -- Operations
I-28
<PAGE> 269
ANNEX II-A
Trust Managers
American Industrial Properties REIT
6220 North Beltline
Irving, Texas 75063 July 10, 1997
Gentlemen:
We understand that American Industrial Properties REIT, a Texas Real Estate
Investment Trust ("AIP"), USAA Real Estate Income Investments I Limited
Partnership, a California limited partnership ("USAA I"), USAA Real Estate
Income Investments II Limited Partnership, a Texas limited partnership ("USAA
II"), USAA Income Properties III Limited Partnership, a Delaware limited
partnership ("USAA III") and USAA Income Properties IV Limited Partnership, a
Delaware limited partnership ("USAA IV") (each, a "RELP" and collectively, the
"RELPs"), propose to enter into four separate merger agreements (collectively,
the "Merger Agreements") pursuant to which, among other things, each RELP will
merge into AIP and substantially all of the properties and operations of the
RELPs will be merged with and into AIP (the "Transaction").
The partnership interests of the RELPs issued and outstanding prior to the
closing of the Transaction shall be converted into the right to receive
22,064,147 common shares of beneficial interest, $0.10 par value per share (the
"Common Stock"). The aggregate number of shares of Common Stock to be issued to
the partners of each RELP in connection with the Transaction shall be equal to
the net asset value for such RELP (agreed upon by AIP and the RELP) divided by
$2.625 (the "Total Shares per RELP"). The number of shares of Common Stock to be
received by a limited partner of each RELP shall be equal to such partner's
respective percentage interest in the individual RELP multiplied by the Total
Shares per RELP for such RELP. The general partner will not receive any shares
to which it may be entitled in exchange for its general partner's interest.
You have asked us whether, in our opinion, the consideration to be paid by
the Trust pursuant to the Transaction is fair to the Trust from a financial
point of view.
In conducting our analysis and arriving at the opinion set forth below, we
have reviewed such materials and considered such financial and other factors as
we deemed relevant under the circumstances, including:
1. the Form 10-K and related financial information for the fiscal year
ended December 31, 1996 and the Form 10-Q and the related unaudited
financial information for the quarterly period ended March 31, 1997 for
the Trust;
2. the Form 10-K and related financial information for the fiscal year
ended December 31, 1996 and the Form 10-Q and the related unaudited
financial information for the quarterly period ended March 31, 1997 for
each of USAA I, USAA III and USAA IV and the Form 10-K and related
financial information for the fiscal year ended June 30, 1996 and the
Form 10-Q and the related unaudited financial information for the
quarterly period ended March 31, 1997 for USAA II;
3. certain information, including projections, relating to the business,
earnings, cash flow, assets and prospects of the Trust, furnished to us
by the Trust;
4. certain information, including projections, relating to the business,
earnings, cash flow, assets and prospects regarding the properties of
each RELP provided to us by the RELPs;
5. certain information provided by AIP management relating to the
properties of the RELPs, including projections of net operating income
for 1998 and 1999 based on AIP's review and analysis of the properties
and lease profiles of the RELPs;
6. the historical market prices and trading activity for the Common Stock
and certain publicly traded companies we deemed to be reasonably
similar to the Trust, the historical and projected results of
A-1
<PAGE> 270
operations of the Trust, and historical and certain future earnings
estimates of selected companies we deemed to be reasonably similar to
the Trust;
7. publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed comparable
to the Trust or otherwise relevant to our inquiry;
8. the financial terms of certain recent transactions we deemed relevant;
9. drafts, dated July 3, 1997, of the Merger Agreements; and
10. such other financial studies, analyses and investigations and such
other matters we deemed necessary.
We have assumed, with your consent, that the drafts of the Merger
Agreements which we reviewed will conform in all material respects to those
documents when in final form.
We have met with senior management of the Trust to discuss: (i) the
prospects for their business, (ii) their estimate of such business' future
financial performance, (iii) the financial impact of the Transaction on the
Trust, and (iv) such other matters as we deemed relevant. We have also visited
selected RELP properties.
In preparing our opinion, we have relied on the accuracy and completeness
of publicly available information and all of the information supplied or
otherwise made available to us by the Trust and the RELPs, including the
financial projections for the Trust and of each of the properties owned by the
RELPs and we have not independently verified such information or undertaken an
independent appraisal of the assets of the Trust or the RELPs. With respect to
the projections furnished by the Trust and the RELPs, we have assumed that they
have been reasonably prepared and reflect the best currently available estimates
and judgment of the Trusts' and the RELPs' management as to the expected future
financial performance of the respective entities. Further, our opinion is based
on economic, financial and market conditions as they exist and can be evaluated
as of the date hereof.
As you know, we have been retained by the Trust to render this opinion in
connection with the Transaction and will receive a fee for such service. We may
actively trade the Common Stock for our own account and for the accounts of
customers and accordingly, may at any time hold a long or short position in such
securities. This letter and the opinion expressed herein may not be reproduced,
summarized, excerpted from or otherwise publicly referred to or disclosed in any
manner, without our prior written consent; provided, the Trust may set forth in
full this letter in any proxy statement relating to the Transaction sent to the
Trust's shareholders.
Our opinion expressed herein is solely for the benefit of the Trust
Managers of the Trust in the evaluation of the Transaction, and our opinion is
not intended to be, and does not, constitute a recommendation to any shareholder
of the Trust as to how such shareholder should vote in connection with the
Transaction.
On the basis of, and subject to, the foregoing, we are of the opinion that,
as of the date hereof, the consideration to be paid by the Trust pursuant to the
Transaction is fair to the Trust from a financial point of view.
Very truly yours,
Prudential Securities Incorporated
A-2
<PAGE> 271
ANNEX II-B
June 30, 1997
To The General Partner of
USAA Real Estate Income Investments I, A California Limited Partnership
We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Real Estate Income Investments I, A California Limited Partnership
(the "Partnership"), and USAA Real Estate Company ("Realco").
(i) AIP is an equity real estate investment trust which owns and
operates 14 industrial properties in eight states and one retail mall in
Colorado.
(ii) AIP has ten million (10,000,000) common shares of beneficial
interest authorized and outstanding prior to the transactions described
here; such common shares are listed on the New York Stock Exchange.
(iii) In November 1996 and January 1997 Realco acquired a total of a
31.8 percent interest in AIP at a price of two dollars seventy five cents
($2.75) per common share. Realco's acquisition of the AIP common shares was
made in connection with AIP entering into a settlement agreement resolving
all litigation which had arisen between AIP and its former shareholder,
Pure World, Inc., and AIP's rejection of an offer from Black Bear Realty,
Ltd. to purchase 30 percent of AIP. Realco's acquisition of AIP shares is
referred to as the "Realco Share Acquisition". As a result of the Realco
Share Acquisition, AIP's largest shareholder is Realco.
(iv) On May 2, 1997 Morgan Stanley Asset Management Inc. ("MSAM"), on
behalf of certain of its clients, and an affiliate of MSAM (collectively
"Morgan Stanley") agreed to purchase twenty million ($20,000,000) of senior
convertible debt securities (the "Securities") of AIP, with such Securities
convertible into AIP common shares at a price of two dollars forty five
cents ($2.45) per share. The final documentation for such agreement between
Morgan Stanley and AIP was executed on June 27, 1997, but effective as of
June 20, 1997 and shareholder approval is expected as of the date of this
letter. Upon such shareholder approval, Morgan Stanley will acquire up to
8,163,264 AIP common shares. Morgan Stanley's investment in AIP common
shares is referred to herein as the "Morgan Stanley Transaction." The terms
of the Morgan Stanley Transaction are the result of arm's-length
negotiations between Morgan Stanley and AIP.
(v) AIP has also conducted arm's-length negotiations with an
additional institutional investor (the "Institutional Investor") with such
negotiations resulting in the Institutional Investor offering to purchase
fifteen million ($15,000,000) of AIP's common shares at a price per common
share of $2.45 per share (the "Institutional Investor Transaction"). Formal
announcement of the Institutional Investor Transaction is expected shortly
after the date of this letter, AIP expects to promptly close the
Institutional Investor Transaction thereafter.
(vi) AIP plans to enter into a series of transactions involving four
partnerships (the "RELP Partnerships"), each of which has a separate entity
serving as the General Partner, with each General Partner being a
wholly-owned subsidiary of Realco. Pursuant to the planned series of
transactions, the RELP Partnerships shall merge with and into AIP, (the
"AIP/RELP Partnership Mergers"). In connection with the AIP/RELP
Partnership Mergers AIP will issue a total of 22,064,147 AIP common shares
to the aggregate limited partners of the RELP Partnerships. The General
Partners of the four partnerships will assign their respective general
partner interests in the RELP Partnerships to AIP without receiving
consideration for such general partner interests. Any shares they are
entitled to receive will be divided among the Limited Partners.
B-1
<PAGE> 272
Specifically, with respect to the Partnership, we understand the following:
(i) The Partnership owns two properties (the "Properties") consisting
of:
-- a retail center in Daytona Beach, Florida known as Volusia Point,
and
-- an office and research and development building in San Diego,
California known as the Systech Building.
(ii) The limited partners of the Partnership (the "Limited Partners")
will exchange their partnership units in the Partnership for the right to
receive 4,342,857 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Concurrent with
or shortly after the Exchange, the Partnership will distribute all of its
cash (and cash realized from short term investments), net of expenses, to
the Partnership's General Partners and Limited Partners in accordance with
the terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Cash Distribution, the Partnership's merger with AIP
and the related Exchange of the Limited Partners' units for the AIP Common
Shares are referred to collectively herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address AIP's, the General Partners', the RELP
Partnerships', or Realco's underlying business decision to effect the
Transaction. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of AIP, Realco, the
Partnership, or the other RELP Partnerships, or any interests therein. We have
also not been asked to opine on and are not expressing any opinion as to: (i)
tax consequences of the Transaction, including but not limited to tax
consequences of the Exchange to the Limited Partners, (ii) the public market
values or realizable value of the AIP Common Shares or the prices at which the
AIP Common Shares may trade in the future following the Transaction, (iii)
alternatives to the Transaction, or (iv) the fairness of any aspect of the
Transaction not expressly addressed in this Opinion. Furthermore, at your
request, we have not negotiated the AIP/RELP Partnership Mergers or the
Transaction or advised you with respect to alternatives to them. Additionally,
you have advised us that the Partnership and the other RELP Partnerships have
indicated that, subject to General Partner's fiduciary duties, they have no
intention of engaging in any alternative to the AIP/RELP Partnership Mergers and
the Transaction.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Partnership's annual reports to partners for the five
fiscal years ended December 31, 1996;
2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;
3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;
4. met with certain members of the senior management of Realco to
discuss Realco's, the Partnership's, the other RELP Partnerships', and
AIP's operations, financial condition, future prospects, projected
operations and performance, the AIP/RELP Partnership Mergers, and the
Transaction;
5. held discussions with senior management of AIP to discuss the
history and nature of AIP's business, AIP's operations, financial
condition, future prospects, projected operations and performance, the
Realco Share Acquisition, the Morgan Stanley Transaction, the Institutional
Investor Transaction, and the AIP/RELP Partnership Mergers;
6. visited certain facilities and business offices of Realco and the
Partnership, and visited certain real property owned by the RELP
Partnerships and the Partnership;
7. reviewed forecasts and projections prepared by Realco's management
with respect to the Partnership's Properties for the years ended 1997
through 2007;
8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;
B-2
<PAGE> 273
9. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Partnership, the other
RELP Partnerships, and AIP, and publicly available prices and premiums paid
in other transactions that we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AIP and the Partnership, and that there has been no
material change in the assets, financial condition, business or prospects of AIP
or the Partnership since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Partnership or AIP and do not
assume any responsibility with respect to it. Other than as set forth above, we
have not made any physical inspection or independent appraisal of any of the
properties or assets of the Partnership or AIP. Our opinion is necessarily based
on business, economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.
This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.
In our analysis of the Partnership, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnerships, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.
Additionally, with respect to AIP, we have considered the price and trading
history of AIP's common shares. Moreover, with respect to AIP, we have taken
into consideration both the Morgan Stanley Transaction and the Institutional
Investor Transaction and assumed that the indicated price per AIP Common Share
resulting from these transactions of two dollars forty five cents ($2.45) is the
result of arm's-length negotiations involving sophisticated, institutional
investors who are willing buyers (Morgan Stanley and the Institutional Investor)
and AIP who is a willing seller, with all parties having reasonable knowledge of
all relevant facts, with no parties having compulsion to act, and with equity to
all parties.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Real Estate Income Investments I, A California
Limited Partnership in connection with the Transaction is fair to the Limited
Partners as a group from a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
B-3
<PAGE> 274
June 30, 1997
To The General Partner of
USAA Income Investments II Limited Partnership
We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Income Investments II Limited Partnership (the "Partnership"), and
USAA Real Estate Company ("Realco").
(i) AIP is an equity real estate investment trust which owns an
operates 14 industrial properties in eight states and one retail mall in
Colorado.
(ii) AIP has ten million (10,000,000) common shares of beneficial
interest authorized and outstanding prior to the transactions described
here; such common shares are listed on the New York Stock Exchange.
(iii) In November 1996 and January 1997 Realco acquired a total of a
31.8 percent interest in AIP at a price of two dollars seventy five cents
($2.75) per common share. Realco's acquisition of the AIP common shares was
made in connection with AIP entering into a settlement agreement resolving
all litigation which had arisen between AIP and its former shareholder,
Pure World, Inc., and AIP's rejection of an offer from Black Bear Realty,
Ltd. to purchase 30 percent of AIP. Realco's acquisition of AIP shares is
referred to as the "Realco Share Acquisition". As a result of the Realco
Share Acquisition, AIP's largest shareholder is Realco.
(iv) On May 2, 1997 Morgan Stanley Asset Management Inc. ("MSAM"), on
behalf of certain of its clients, and an affiliate of MSAM (collectively
"Morgan Stanley") agreed to purchase twenty million ($20,000,000) of senior
convertible debt securities (the "Securities") of AIP, with such Securities
convertible into AIP common shares at a price of two dollars forty five
cents ($2.45) per share. The final documentation for such agreement between
Morgan Stanley and AIP was executed on June 27, 1997, but effective as of
June 20, 1997 and shareholder approval is expected as of the date of this
letter. Upon such shareholder approval, Morgan Stanley will acquire up to
8,163,264 AIP common shares. Morgan Stanley's investment in AIP common
shares is referred to herein as the "Morgan Stanley Transaction." The terms
of the Morgan Stanley Transaction are the result of arms length
negotiations between Morgan Stanley and AIP.
(v) AIP has also conducted arms length negotiations with an additional
institutional investor (the "Institutional Investor") with such
negotiations resulting in the Institutional Investor offering to purchase
fifteen million ($15,000,000) of AIP's common shares at a price pre common
share of $2.45 per share (the "Institutional Investor Transaction"). Formal
announcement of the Institutional Investor Transaction is expected shortly
after the date of this letter, AIP expects to promptly close the
Institutional Investor Transaction thereafter.
(vi) AIP plans to enter into a series of transactions involving four
partnerships (the "RELP Partnerships"), each of which has a separate entity
serving as the General Partner, with each General Partner having an
affiliation with Realco. Pursuant to the planned series of transactions,
the RELP Partnerships shall merge with and into AIP, (the "AIP/RELP
Partnership Mergers"). In connection with the AIP/RELP Partnership Mergers
AIP will issue a total of 22,064,147 AIP common shares to the aggregate
limited partners of the RELP Partnerships. The General Partners of the four
partnerships will assign their respective general partner interests in the
RELP Partnerships to AIP without receiving consideration for such general
partner interests. Any shares they are entitled to receive will be divided
among the Limited Partners.
Specifically, with respect to the Partnership, we understand the following:
(i) The Partnership owns three properties (the "Properties")
consisting of:
-- a single story industrial building in Elk Grove Village, Illinois
known as Continental Plastics,
B-4
<PAGE> 275
-- a single story industrial building in Lakeland, Florida known a
the CST Office Products Building, and
-- a 7.275 percent interest in a retail center Arlington, Virginia
known as Sequoia Plaza.
(ii) The Partnership plans to sell its interest in Sequoia Plaza I to
Realco or an affiliate of Realco for cash consideration of $2,250,000 (the
"Property Sale").
(iii) The limited partners of the Partnership (the "Limited Partners")
will exchange their partnership units in the Partnership for the right to
receive 3,885,714 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Prior to or
concurrent with the Exchange, the Partnership shall distribute all cash
associated with the Property Sale to the Limited Partners of the
Partnership on a pro-rata basis. Additionally, concurrent with or shortly
after the Exchange, the Partnership will distribute all of its cash (and
cash realized from short term investments), net of expenses, to the
Partnership's General Partner and Limited Partners in accordance with the
terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Property Sale, Cash Distribution, the Partnership's
merger with AIP and the related Exchange of the Limited Partners' units for
the AIP Common Shares are referred to collectively herein as the
"Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address AIP's, the General Partners', the RELP
Partnerships', or Realco's underlying business decision to effect the
Transaction. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of AIP, Realco, the
Partnership, or the other RELP Partnerships, or any interests therein. We have
also not been asked to opine on and are not expressing any opinion as to: (i)
tax consequences of the Transaction, including but not limited to tax
consequences of the Exchange to the Limited Partners, (ii) the public market
values or realizable value of the AIP Common Shares or the prices at which the
AIP Common Shares may trade in the future following the Transaction, (iii)
alternatives to the Transaction, or (iv) the fairness of any aspect of the
Transaction not expressly addressed in this Opinion. Furthermore, at your
request, we have not negotiated the AIP/RELP Partnership Mergers or the
Transaction or advised you with respect to alternatives to them. Additionally,
you have advised us that the Partnership and the other RELP Partnerships have
indicated that, subject to General Partner's fiduciary duties, they have no
intention of engaging in any alternative to the AIP/RELP Partnership Mergers and
the Transaction.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed USAA Income Investments II Limited Partnership's annual
reports to partners for the five fiscal years ended June 30, 1996;
2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;
3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;
4. met with certain members of the senior management of Realco to
discuss Realco's, the Partnership's, the other RELP Partnerships', and
AIP's operations, financial condition, future prospects, projected
operations and performance, the AIP/RELP Partnership Mergers, and the
Transaction;
5. held discussions with senior management of AIP to discuss the
history and nature of AIP's business, AIP's operations, financial
condition, future prospects, projected operations and performance, the
Realco Share Acquisition, the Morgan Stanley Transaction, the Institutional
Investor Transaction, and the AIP/RELP Partnership Mergers;
6. visited certain facilities and business offices of Realco and USAA
Income Investments II Limited Partnership, including certain real property
owned by the RELP Partnerships and the Partnership;
7. reviewed forecasts and projections prepared by Realco's management
with respect to the Partnership's Properties for the years ended 1997
through 2007;
B-5
<PAGE> 276
8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;
9. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Partnership, the other
RELP Partnerships, and AIP, and publicly available prices and premiums paid
in other transactions that we considered similar to the Transaction; and
10. reviewed drafts of certain documents to be delivered at the
closing of the Transaction; and
11. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AIP and the Partnership, and that there has been no
material change in the assets, financial condition, business or prospects of AIP
or the Partnership since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Partnership or AIP and do not
assume any responsibility with respect to it. Other than as set forth above, we
have not made any physical inspection or independent appraisal of any of the
properties or assets of the Partnership or AIP. Our opinion is necessarily based
on business, economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.
This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.
In our analysis of the Partnerships, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnerships, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.
Additionally, with respect to AIP, we have considered the price and trading
history of AIP's common shares. Moreover, with respect to AIP, we have taken
into consideration both the Morgan Stanley Transaction and the Institutional
Investor Transaction and assumed that the indicated price per AIP Common Share
resulting from these transactions of two dollars forty five cents ($2.45) is the
result of arm's-length negotiations involving sophisticated, institutional
investors who are willing buyers (Morgan Stanley and the Institutional Investor)
and AIP who is a willing seller, with all parties having reasonable knowledge of
all relevant facts, with no parties having compulsion to act, and with equity to
all parties.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Income Investments II Limited Partnership in
connection with the Transaction and the cash consideration received in
connection with the Property Sale is fair to the Limited Partners as a group
from a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
B-6
<PAGE> 277
June 30, 1997
To The General Partner of
USAA Income Properties III Limited Partnership
We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Income Properties III Limited Partnership (the "Partnership"), and
USAA Real Estate Company ("Realco").
(i) AIP is an equity real estate investment trust which owns an
operates 14 industrial properties in eight states and one retail mall in
Colorado.
(ii) AIP has ten million (10,000,000) common shares of beneficial
interest authorized and outstanding prior to the transactions described
here; such common shares are listed on the New York Stock Exchange.
(iii) In November 1996 and January 1997 Realco acquired a total of a
31.8 percent interest in AIP at a price of two dollars seventy five cents
($2.75) per common share. Realco's acquisition of the AIP common shares was
made in connection with AIP entering into a settlement agreement resolving
all litigation which had arisen between AIP and its former shareholder,
Pure World, Inc., and AIP's rejection of an offer from Black Bear Realty,
Ltd. to purchase 30 percent of AIP. Realco's acquisition of AIP shares is
referred to as the "Realco Share Acquisition". As a result of the Realco
Share Acquisition, AIP's largest shareholder is Realco.
(iv) On May 2, 1997 Morgan Stanley Asset Management Inc. ("MSAM"), on
behalf of certain of its clients, and an affiliate of MSAM (collectively
"Morgan Stanley") agreed to purchase twenty million ($20,000,000) of senior
convertible debt securities (the "Securities") of AIP, with such Securities
convertible into AIP common shares at a price of two dollars forty five
cents ($2.45) per share. The final documentation for such agreement between
Morgan Stanley and AIP was executed on June 27, 1997, but effective as of
June 20, 1997 and shareholder approval is expected as of the date of this
letter. Upon such shareholder approval, Morgan Stanley will acquire up to
8,163,264 AIP common shares. Morgan Stanley's investment in AIP common
shares is referred to herein as the "Morgan Stanley Transaction." The terms
of the Morgan Stanley Transaction are the result of arms length
negotiations between Morgan Stanley and AIP.
(v) AIP has also conducted arm's-length negotiations with an
additional institutional investor (the "Institutional Investor") with such
negotiations resulting in the Institutional Investor offering to purchase
fifteen million ($15,000,000) of AIP's common shares at a price per common
share of $2.45 per share (the "Institutional Investor Transaction"). Formal
announcement of the Institutional Investor Transaction is expected shortly
after the date of this letter, AIP expects to promptly close the
Institutional Investor Transaction thereafter.
(vi) AIP plans to enter into a series of transactions involving four
partnerships (the "RELP Partnerships"), each of which has a separate entity
serving as the General Partner, with each General Partner being a
wholly-owned subsidiary of Realco. Pursuant to the planned series of
transactions, the RELP Partnerships shall merge with and into AIP, (the
"AIP/RELP Partnership Mergers"). In connection with the AIP/RELP
Partnership Mergers AIP will issue a total of 22,064,147 AIP common shares
to the aggregate limited partners of the RELP Partnerships. The General
Partners of the four partnerships will assign their respective general
partner interests in the RELP Partnerships to AIP without receiving
consideration for such general partner interests. Any shares they are
entitled to receive will be divided among the Limited Partners.
Specifically, with respect to the Partnership, we understand the following:
(i) The Partnership owns three properties (the "Properties")
consisting of:
-- a retail center in Clearwater, Florida known as Curlew Crossing
Shopping Center,
B-7
<PAGE> 278
-- two office buildings in Manhattan Beach, California known as
Manhattan Towers, and
-- three office buildings in Phoenix, Arizona known as Skygate Commons.
(ii) The Partnership plans to sell Curlew Crossing Shopping Center to
Realco or an affiliate of Realco for cash consideration of $11,150,000,
(the "Property Sale").
(iii) The limited partners (the "Limited Partners") of the Partnership
will exchange their partnership units in the Partnership for the right to
receive 9,257,143 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Prior to or
concurrent with the Exchange, the Partnership shall distribute all cash
associated with the Property Sale to the Limited Partners of the
Partnership on a pro-rata basis. Additionally, concurrent with or shortly
after the Exchange, the Partnership will distribute all of its cash (and
cash realized from short term investments), net of expenses, to the
Partnership's General Partner and Limited Partners in accordance with the
terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Property Sale, Cash Distribution, the Partnership's
merger with AIP and the related Exchange of the Limited Partners' units for
the AIP Common Shares are referred to collectively herein as the
"Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address AIP's, the General Partners', the RELP
Partnerships', or Realco's underlying business decision to effect the
Transaction. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of AIP, Realco, the
Partnership, or the other RELP Partnerships, or any interests therein. We have
also not been asked to opine on and are not expressing any opinion as to: (i)
tax consequences of the Transaction, including but not limited to tax
consequences of the Exchange to the Limited Partners, (ii) the public market
values or realizable value of the AIP Common Shares or the prices at which the
AIP Common Shares may trade in the future following the Transaction, (iii)
alternatives to the Transaction, or (iv) the fairness of any aspect of the
Transaction not expressly addressed in this Opinion. Furthermore, at your
request, we have not negotiated the AIP/RELP Partnership Mergers or the
Transaction or advised you with respect to alternatives to them. Additionally,
you have advised us that the Partnership and the other RELP Partnerships have
indicated that, subject to General Partner's fiduciary duties, they have no
intention of engaging in any alternative to the AIP/RELP Partnership Mergers and
the Transaction.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed USAA Income Properties III Limited Partnership's annual
reports to shareholders for the five fiscal years ended December 31, 1996;
2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;
3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;
4. met with certain members of the senior management of Realco to
discuss Realco's, the Partnership's, the RELP Partnerships', and AIP's
operations, financial condition, future prospects, projected operations and
performance, the AIP/RELP Partnership Mergers, and the Transaction;
5. held discussions with senior management of AIP to discuss the
history and nature of AIP's business, AIP's operations, financial
condition, future prospects, projected operations and performance, the
Realco Share Acquisition, the Morgan Stanley Transaction, the Institutional
Investor Transaction, and the AIP/RELP Partnership Mergers;
6. visited certain facilities and business offices of Realco and USAA
Income Properties III Limited Partnership, including certain real property
owned by the RELP Partnerships and the Partnership;
7. reviewed forecasts and projections prepared by Realco's management
with respect to USAA Income Properties III Limited Partnership's real
properties for the years ended 1997 through 2007;
B-8
<PAGE> 279
8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;
9. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Partnership, the other
RELP Partnerships, and AIP, and publicly available prices and premiums paid
in other transactions that we considered similar to the Transaction; and
10. reviewed drafts of certain documents to be delivered at the
closing of the Transaction; and 11. conducted such other studies, analyses
and inquiries as we have deemed appropriate.
11. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AIP and the Partnership, and that there has been no
material change in the assets, financial condition, business or prospects of AIP
or the Partnership since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Partnership or AIP and do not
assume any responsibility with respect to it. Other than as set forth above, we
have not made any physical inspection or independent appraisal of any of the
properties or assets of the Partnership or AIP. Our opinion is necessarily based
on business, economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.
This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.
In our analysis of the Partnership, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnership, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.
Additionally, with respect to AIP, we have considered the price and trading
history of AIP's common shares. Moreover, with respect to AIP, we have taken
into consideration both the Morgan Stanley Transaction and the Institutional
Investor Transaction and assumed that the indicated price per AIP Common Share
resulting from these transactions of two dollars forty five cents ($2.45) is the
result of arm's-length negotiations involving sophisticated, institutional
investors who are willing buyers (Morgan Stanley and the Institutional Investor)
and AIP who is a willing seller, with all parties having reasonable knowledge of
all relevant facts, with no parties having compulsion to act, and with equity to
all parties.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Income Properties III Limited Partnership in
connection with the Transaction and the cash consideration received in
connection with the Property Sale is fair to the Limited Partners as a group
from a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
B-9
<PAGE> 280
June 30, 1997
To The General Partner of
USAA Income Properties IV Limited Partnership
We understand the following regarding American Industrial Properties REIT
("AIP"), USAA Income Properties IV Limited Partnership (the "Partnership"), and
USAA Real Estate Company ("Realco").
(i) AIP is an equity real estate investment trust which owns and
operates 14 industrial properties in eight states and one retail mall in
Colorado.
(ii) AIP has ten million (10,000,000) common shares of beneficial
interest authorized and outstanding prior to the transactions described
here; such common shares are listed on the New York Stock Exchange.
(iii) In November 1996 and January 1997 Realco acquired a total of a
31.8 percent interest in AIP at a price of two dollars seventy five cents
($2.75) per common share. Realco's acquisition of the AIP common shares was
made in connection with AIP entering into a settlement agreement resolving
all litigation which had arisen between AIP and its former shareholder,
Pure World, Inc., and AIP's rejection of an offer from Black Bear Realty,
Ltd. to purchase 30 percent of AIP. Realco's acquisition of AIP shares is
referred to as the "Realco Share Acquisition". As a result of the Realco
Share Acquisition, AIP's largest shareholder is Realco.
(iv) On May 2, 1997 Morgan Stanley Asset Management Inc. ("MSAM"), on
behalf of certain of its clients, and an affiliate of MSAM (collectively
"Morgan Stanley") agreed to purchase twenty million ($20,000,000) of senior
convertible debt securities (the "Securities") of AIP, with such Securities
convertible into AIP common shares at a price of two dollars forty five
cents ($2.45) per share. The final documentation for such agreement between
Morgan Stanley and AIP was executed on June 27, 1997, but effective as of
June 20, 1997 and shareholder approval is expected as of the date of this
letter. Upon such shareholder approval, Morgan Stanley will acquire up to
8,163,264 AIP common shares. Morgan Stanley's investment in AIP common
shares is referred to herein as the "Morgan Stanley Transaction." The terms
of the Morgan Stanley Transaction are the result of arm's-length
negotiations between Morgan Stanley and AIP.
(v) AIP has also conducted arm's-length negotiations with an
additional institutional investor (the "Institutional Investor") with such
negotiations resulting in the Institutional Investor offering to purchase
fifteen million ($15,000,000) of AIP's common shares at a price per common
share of $2.45 per share (the "Institutional Investor Transaction"). Formal
announcement of the Institutional Investor Transaction is expected shortly
after the date of this letter, AIP expects to promptly close the
Institutional Investor Transaction thereafter.
(vi) AIP plans to enter into a series of transactions involving four
partnerships (the "RELP Partnerships"), each of which has a separate entity
serving as the General Partner, with each General Partner having an
affiliation with Realco. Pursuant to the planned series of transactions,
the RELP Partnerships shall merge with and into AIP, (the "AIP/RELP
Partnership Mergers"). In connection with the AIP/RELP Partnership Mergers
AIP will issue a total of 22,064,147 AIP common shares to the aggregate
limited partners of the RELP Partnerships. The General Partners of the four
partnerships will assign their respective general partner interests in the
RELP Partnerships to AIP without receiving consideration for such general
partner interests. Any shares they are entitled to receive will be divided
among the Limited Partners.
B-10
<PAGE> 281
Specifically, with respect to the Partnership, we understand the following:
(i) The Partnership owns four properties (the "Properties") consisting
of:
-- an office and research and development building in Chelmsford,
Massachusetts known as Apollo Computer,
-- a single story office and research and development building in San
Diego, California known as the Eastman Kodak Building,
-- a two story office and research and development building in San
Diego, California known as the Linear Technology Building, and
-- a five story office building in St. Louis, Missouri known as 1881
Pine Street.
(ii) The limited partners (the "Limited Partners") of the Partnership
will exchange their partnership units in the Partnership for the right to
receive 4,578,433 Common Shares of Beneficial Interest, $0.10 par value per
share (the "AIP Common Shares"), of AIP, (the "Exchange"). Concurrent with
or shortly after the Exchange, the Partnership will distribute all of its
cash (and cash realized from short term investments), net of expenses, to
the Partnership's General Partner and Limited Partners in accordance with
the terms of the Partnership Agreement (defined herein), (the "Cash
Distribution"). The Cash Distribution, the Partnership's merger with AIP
and the related Exchange of the Limited Partners' units for the AIP Common
Shares are referred to collectively herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address AIP's, the General Partners', the RELP
Partnerships', or Realco's underlying business decision to effect the
Transaction. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of AIP, Realco, the
Partnership, or the other RELP Partnerships, or any interests therein. We have
also not been asked to opine on and are not expressing any opinion as to: (i)
tax consequences of the Transaction, including but not limited to tax
consequences of the Exchange to the Limited Partners, (ii) the public market
values or realizable value of the AIP Common Shares or the prices at which the
AIP Common Shares may trade in the future following the Transaction, (iii)
alternatives to the Transaction, or (iv) the fairness of any aspect of the
Transaction not expressly addressed in this Opinion. Furthermore, at your
request, we have not negotiated the AIP/RELP Partnership Mergers or the
Transaction or advised you with respect to alternatives to them. Additionally,
you have advised us that the Partnership and the other RELP Partnerships have
indicated that, subject to General Partner's fiduciary duties, they have no
intention of engaging in any alternative to the AIP/RELP Partnership Mergers and
the Transaction.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed USAA Income Properties IV Limited Partnership's annual
reports to shareholders for the five fiscal years ended December 31, 1996;
2. reviewed AIP's annual reports to shareholders and on Form 10-K for
the three fiscal years ended December 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended March 31, 1997;
3. reviewed the draft Agreement and Plan of Merger dated June 17,
1997;
4. met with certain members of the senior management of Realco to
discuss Realco's, the Partnership's, the other RELP Partnerships', and
AIP's operations, financial condition, future prospects, projected
operations and performance, the AIP/RELP Partnership Mergers, and the
Transaction;
5. held discussions with senior management of AIP to discuss the
history and nature of AIP's business, AIP's operations, financial
condition, future prospects, projected operations and performance, the
Realco Share Acquisition, the Morgan Stanley Transaction, the Institutional
Investor Transaction, and the AIP/RELP Partnership Mergers;
B-11
<PAGE> 282
6. visited certain facilities and business offices of Realco and the
Partnership, and visited certain real property owned by the RELP
Partnerships;
7. reviewed forecasts and projections prepared by Realco's management
with respect to RELP Income Properties IV Limited Partnership's real
properties for the years ended 1997 through 2007;
8. reviewed the historical market prices and trading volume for AIP's
publicly traded securities;
9. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Partnership, the other
RELP Partnerships, and AIP, and publicly available prices and premiums paid
in other transactions that we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AIP and the Partnership, and that there has been no
material change in the assets, financial condition, business or prospects of AIP
or the Partnership since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Partnership or AIP and do not
assume any responsibility with respect to it. Other than as set forth above, we
have not made any physical inspection or independent appraisal of any of the
properties or assets of the Partnership or AIP. Our opinion is necessarily based
on business, economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.
This Opinion does not constitute a recommendation to any holder of
Partnership units as to whether such holder should exchange such units for AIP
Common Shares.
In our analysis of the Partnership, the other RELP Partnerships, and AIP,
we have taken into consideration their income- and cash-generating capabilities.
Often, an investor contemplating an investment in a company with income- and
cash-generating capabilities similar to the Partnership, the other RELP
Partnerships, and AIP will evaluate the risks and returns of its investment on a
going-concern basis. However, because the Partnership, the other RELP
Partnerships, and AIP are primarily real estate holding entities, an investor
contemplating an investment in such an entity will also evaluate the value which
would be realized in a liquidation value of such real estate assets.
Accordingly, in our analyses we have also considered such liquidation values.
Additionally, with respect to AIP, we have considered the price and trading
history of AIP's common shares. Moreover, with respect to AIP, we have taken
into consideration both the Morgan Stanley Transaction and the Institutional
Investor Transaction and assumed that the indicated price per AIP Common Share
resulting from these transactions of two dollars forty five cents ($2.45) is the
result of arm's-length negotiations involving sophisticated, institutional
investors who are willing buyers (Morgan Stanley and the Institutional Investor)
and AIP who is a willing seller, with all parties having reasonable knowledge of
all relevant facts, with no parties having compulsion to act, and with equity to
all parties.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the aggregate number of AIP Common Shares to be received as consideration by all
of the Limited Partners of USAA Income Properties IV Limited Partnership in
connection with the Transaction is fair to the Limited Partners as a group from
a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
B-12
<PAGE> 283
AMERICAN INDUSTRIAL PROPERTIES REIT
SUPPLEMENT TO PROSPECTUS
FOR
USAA REAL ESTATE INCOME INVESTMENTS I, A CALIFORNIA LIMITED PARTNERSHIP
The General Partner of USAA Real Estate Income Investments I, A California
Limited Partnership (herein referred to as "RELP I" or the "Partnership") is
soliciting the Limited Partners' approval of the merger with and into American
Industrial Properties REIT, a Texas real estate investment trust (the "Trust"),
as part of which Limited Partners of RELP I will exchange Units of Limited
Partnership Interests ("Units") in RELP I for Shares of Beneficial Interests
("Shares") in the Trust. This solicitation is being made in conjunction with the
proposed merger with and into the Trust of up to four publicly-held limited
partnerships, including RELP I (the "Merger"). The proposal is described in
detail in the Joint Proxy Statement/Prospectus dated July , 1997 (the
"Prospectus"). For the definition of capitalized terms used in the Supplement,
which are not separately defined herein, see "Glossary" in the Prospectus.
Cross-references in this Supplement also refer to the cited discussions in the
Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP I. It
does not purport to provide an overall summary of the Merger or to highlight all
of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to RELP I at 8000 Robert F. McDermott Fwy., IH 10 West, Suite 600, San
Antonio, Texas 78230-3884.
Limited Partners of RELP I participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:
Risks Related to the Merger
- The Trust has generated losses from operations every year since 1988.
- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP I. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions.
- Uncertainties at the time of voting regarding the potential assets and
leverage of the Trust because of the uncertainty as to which RELPS will
participate in the Merger, making it difficult for Limited Partners to
make an informed decision regarding the Trust's potential financial
strength.
- The change in the nature of each Limited Partner's investment from
holding an interest in a specific portfolio of properties in a finite
life entity to holding an interest in an ongoing real estate investment
trust, whose real estate portfolio may be changed from time to time by
the Trust's Board without the approval of the shareholders and which does
not plan to liquidate such assets within a fixed period.
- The possibility that the Net Asset Values assigned to RELP I may not
reflect the true value of RELP I's assets.
- The common management of the RELPS, who are also Affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. As a
result, the terms of the Merger may be less favorable to
<PAGE> 284
RELP I than if RELP I had a representative independent of Realco
negotiating on its behalf. Realco is subject to various conflicts of
interest, including the following:
- It is the sole shareholder of each General Partner.
- It is a significant shareholder of the Trust.
- Two of the eight members of the Board of Trust Managers are Affiliates
of and were designated by Realco.
- An Affiliate will receive benefits from the Trust in connection with the
management and leasing of the properties formerly owned by the RELPS.
- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP I attributable to the Merger in an amount equal to the Limited
Partner's allocable share of the income or loss recognized by RELP I from
the Trust's acquisition of RELP I's assets and Limited Partners will
receive no cash from the Merger (other than cash received in lieu of
fractional Shares) to pay taxes arising from any taxable income (see "The
Merger -- Material Federal Income Tax Consequences").
- Potential liability of the Trust for unknown, undisclosed or contingent
liabilities of the Participating RELPS including claims against the Trust
for indemnification, environmental liabilities, and title defects, which
could adversely affect the cash liquidity of the Trust and its future
ability to make distributions to shareholders.
- Potential dilution to shareholders of the Trust from the issuance of
additional equity securities at what may be less than their fair market
value.
- Any declaration of distributions to shareholders is subordinate to the
payment of the Trust's debts and obligations, which could adversely
affect the ability of the Trust to make expected distributions to
shareholders in the future.
- Expenses of the Merger will be borne by the Trust exclusively, unless (i)
three or more of the RELPS do not approve the Merger, in which event
Realco will reimburse the Trust for up to $250,000 of the Trust's
expenses, or (ii) the Merger Agreement is terminated under certain
circumstances.
- The majority vote of the Limited Partners of RELP I binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares unless they
properly exercise their dissenters' rights.
- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP I's assets
or continuing its operations as a limited partnership.
- The Trust has different business objectives than RELP I, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.
- The Shares may initially trade at prices substantially below prices as of
the date of execution of the Merger Agreement, the date hereof or the
date of the Special Meetings.
- Increases in market interest rates may adversely affect the price of the
Shares.
- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the RELP I Partnership Agreement and the
partnership law of the State of California.
- If the Merger Agreement is terminated prior to consummation, under
certain circumstances, each RELP and the Trust may have to pay their
Proportionate Share of a termination fee or of the expenses of the
Merger.
- The Trust's organizational documents do not restrict the Trust's ability
to incur additional indebtedness. As a result, the Trust could increase
its debt service requirements to a level that may adversely affect the
Trust's ability to make future distributions and may increase the risk of
default.
2
<PAGE> 285
- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.
- Possible claims against the Trust for the remediation of environmental
conditions, which could result in substantial expenditures for
remediation and in a loss of revenues during remediation efforts.
- Risks associated with the acquisition and development of commercial and
industrial properties, including lease-up and financing risks and the
risk that such properties may not perform as expected.
- Risks associated with increased portfolio size and geographic
diversification as a result of the Merger, including the adequacy of the
number of personnel and the available resources to manage the new
portfolio.
- The occurrences of uninsured liability or casualty, reducing the Trust's
capital and adversely affecting anticipated profits.
- The potential expense of compliance with the Americans With Disabilities
Act, fire and safety, and other regulatory requirements applicable to the
operation of the Trust's properties.
- Taxation of the Trust as a corporation if it fails to qualify as a REIT
and the Trust's liability for increased federal, state and local income
taxes in such event.
- Certain provisions in the Trust's governing documents, including the
right to redeem Shares from a shareholder if he owns, directly or
indirectly, more than 9.8% of the Trust's outstanding Shares or to
restrict voting and distribution rights with respect to Shares owned in
excess of such limit, and the Trust Managers' right to issue other
classes of equity securities could delay or prevent changes in control of
the Trust, even if such changes in control were in the shareholders' best
interest.
General Real Estate Investment Risks
- Risks normally incidental to the ownership and operation of industrial
and commercial properties, including, among others, changes in general
national economic or local market conditions, competition for tenants,
changes in market rental rates, inability to collect rents from tenants
due to bankruptcy or insolvency of tenants or otherwise, and the need to
periodically make capital improvements.
- Risks associated with leveraged real estate investments, such as the
Trust's inability to meet required principal and interest payments, the
risk that existing indebtedness will not be refinanced or that the terms
of such refinancing will not be favorable, and the risk that necessary
capital expenditures will not be able to be financed on favorable terms
or at all.
- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.
- Competition from competing properties which could decrease the occupancy
levels and rental rates of the Trust's investments.
- The Trust's assets are subject to general operating risks common to all
real estate developments, including increases in operating costs not
offset by rental increases. In addition, the Trust's assets are primarily
industrial or commercial properties, making the Trust's profitability
dependent upon general trends affecting that type of real estate
investment.
The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Considerations" in the Prospectus. The material federal income tax issues
include the following:
- The taxable Limited Partners will realize taxable gain or loss in the
Merger (which may be ordinary or capital in nature) and the Limited
Partners will not receive cash from the Merger (other than cash
3
<PAGE> 286
received in lieu of fractional Shares) to pay any taxes due on any
taxable gain. Any gain or loss will be recognized in the year the Merger
is consummated.
- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP I and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.
- As a REIT, the Trust will be entitled to a tax deduction for
distributions made to its shareholders. To continue to qualify as a REIT,
however, the Trust must satisfy income, asset and ownership tests imposed
by the Code. Failure to so qualify will result in the loss of such
deduction for distributions paid as well as additional tax on Trust
income and reduced or no distributions to shareholders.
- Trust distributions received by taxable shareholders should be treated as
portfolio income. Such distributions should not be treated as UBTI to
certain tax-exempt shareholders (subject to certain exceptions which may
be applicable to pension-trusts.
ALLOCATION OF CONSIDERATION
THE MERGER
The Trust is proposing to acquire the Units of each of the RELPS from
Limited Partners who, by a majority vote, approve participation in the Merger.
If the Merger is approved, the RELPS will cease to exist and the Limited
Partners will receive Shares based upon the relative Net Asset Values of the
RELPs renegotiated by the common management of the RELPs and the Trust. The
Shares received by the Limited Partners will be listed for trading on the New
York Stock Exchange (the "NYSE"). If the requisite number of Limited Partners of
only one of the RELPS approves the Merger, the Trust has the right, but not the
obligation, to consummate the Merger with the one participating RELP.
Any Limited Partner may abstain from or vote against the Merger and, if the
Merger is approved, the Limited Partner can still participate in the Merger, so
long as the Limited Partner does not exercise dissenters' rights. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "The Merger -- Dissenters' Rights" and "The Special Meetings -- RELP
Meeting."
The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger. Limited
Partners voting in favor of the Merger will be deemed to have voted in favor of
each of these proposed amendments. A majority vote of Limited Partners is
required to approve the proposed amendments and to approve the Merger. The
proposed amendments authorize the following: (i) the Merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partners; and (ii) all understandings between the Trust and the
General Partners contemplated by the Prospectus, irrespective of any provisions
in the Partnership Agreements which might otherwise prohibit such transactions.
See "The Merger -- Proposed Amendments to Partnership Agreements." As of May 15,
1997, the General Partner of RELP I owned 6,039 Units in RELP I, or
approximately 11% of all outstanding Units of RELP I. The General Partner will
vote all Units it holds in favor of the Merger.
Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
4
<PAGE> 287
NET ASSET VALUE
The Trust is offering 79.52 Shares in consideration for each Unit in RELP
I. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:
<TABLE>
<S> <C>
Asset Value of Partnership Properties....................... $11,400,000
Cash and Cash Equivalents(1)................................ $ 0
Mortgages and Other Long-Term Debt.......................... $ 0
Net Asset Value of Partnership Properties(2)................ $11,400,000
Percentage of Aggregate Net Asset Value of All RELPS........ 19.68%
Net Asset Value Per Original $500 Investment(3)............. $ 208.75
Number of Shares Allocable to Partnership................... 4,342,857
Percentage of Total Shares to be issued in the Merger....... 19.68%
Allocation of Shares to
- -- Limited Partners......................................... 4,342,857
- -- General Partner(4)....................................... 0
Allocation of Shares Per Original $500 Investment by Limited
Partners.................................................. 79.52
</TABLE>
- ---------------
(1) All cash and cash equivalents held by RELP I, net of related payables,
liabilities or other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special distribution.
(2) Such amounts were determined by negotiation between common management of the
RELPS and the Trust.
(3) "Net Asset Value Per Original $500 Investment" is computed by dividing that
portion of the Net Asset Value allocable to the Limited Partners by the
number of outstanding Units. This is not intended to be an estimate of the
value of the Shares exchangeable for each Unit or the price at which such
Shares may trade in the market. See "Risk Factors."
(4) The General Partner of RELP I has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
CONSIDERATIONS UNIQUE TO RELP I
Due to the substantial similarities among the RELPS, such as their similar
investment portfolios, common investment objectives and policies, the fact that
the RELPS' assets are managed by the General Partners or Affiliates and
substantial similarities in the language and scope of their Partnership
Agreements, many of the consequences of participating in the Merger are common
to the Limited Partners of each of the RELPS. The purpose of this section is,
however, to highlight features of RELP I which may distinguish the situation of
this Partnership from that of the other RELPS and which should be taken into
account by RELP I Limited Partners when evaluating the merits and risks of the
proposed Merger.
Status of the Portfolio. At the time of RELP I's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within six to
eight years after the acquisition of the properties. Accordingly, based on the
completion of the acquisition of RELP I's portfolio in 1986, it was anticipated
that the portfolio would be liquidated by 1994. Of the three investments made by
RELP I, the mortgage loan receivable was repaid in March, 1996 as scheduled.
Volusia Point Shopping Center has been offered for sale at a price of $7.05
million. An offer of $6.8 million was received and the counter-offer declined in
June, 1997. The Systech Building has been offered for sale for $4.5 million. Two
offers, one in April, 1997 for $4.19 million and one in June, 1997 for $3.67
million, have been received, and counter-offers declined. See "Business of
RELPs -- RELP I" in the Prospectus for additional information regarding the RELP
I portfolio. The General Partner believes that the Net Asset Value of $11.4
million for the portfolio which was negotiated by common management of the RELPS
and the Trust is fair to the Limited Partners. See "The Merger -- Background and
Reasons for the Merger" in the Prospectus.
5
<PAGE> 288
Amount of Partnership Debt. As of December 31, 1996, RELP I had no
indebtedness. As a group, the RELPS had, as of that same date, aggregate
outstanding indebtedness of $30,668,087, representing approximately 34% of the
total value of the RELPS' real estate investments. Excluding interests in RELP
properties that will not be acquired by the Trust pursuant to the Merger of
December 31, 1996, the Trust had indebtedness of $53,818,000, representing
approximately 57% of its real estate assets. Therefore, if the Limited Partners
of RELP I approve the Merger, they will exchange Units in an entity with no debt
for Shares in a REIT with significant indebtedness. In that the Trust will be
more leveraged than RELP I, this will result in an increase in the debt service
payments that must be made by the Trust, increase the Trust's risk of losing its
assets through foreclosure and increase the risk that the Trust may not be able
to make distributions to shareholders.
Merger as a Taxable Event. Limited Partners of RELP I will realize a
taxable loss on the Merger in an amount equal to their allocable share of the
excess of the sum of the fair market value of the Shares received by the
Partnership over the Partnership's adjusted tax basis of the Partnership assets.
Assuming that the value of the Shares reflects the Net Asset Values of the
assets acquired in the Merger, if RELP I participates in the Merger, each of its
Limited Partners would have recognized taxable loss of approximately 8.3% (as of
December 31, 1997) for every Unit held, representing an original investment of
$500. The actual amount of loss recognized by each Limited Partner will depend
upon the value ascribed to the Shares for federal tax purposes. Because the
value of the Shares will fluctuate immediately after the Merger, and the 1997
operating results have not been included, it is possible that such values used
for purposes of calculating the taxable income or loss and that the taxable
income or loss per Unit will differ from the calculation stated above.
Investment Strategy. The principal investment objectives of RELP I are to
(i) preserve and protect the Limited Partners' capital; (ii) provide the Limited
Partners with quarterly cash distributions from operations; (iii) obtain
long-term appreciation in the value of its properties; and (iv) provide
increased cash distributions to the Limited Partners as the cash flow from its
investments increases over the life of the Partnership. The Partnership acquired
the Volusia Point Shopping Center in 1985, the Systech Building (formerly called
the Computer Associates Building) in 1986 and funded a first mortgage loan
secured by the Plaza on the Lake property in 1986. The loan held by RELP I was
paid in full in January 1996. RELP I's properties had a average occupancy level
of 95% at an average annual rent of $20.52 per square foot for fiscal 1996 and
96% at an average annual rent of $20.88 per square foot in the six months ended
June 30, 1997. RELP I has a history of making regular quarterly distributions to
its Limited Partners. See "Miscellaneous -- Distributions to Limited Partners"
below in this Supplement.
Management Compensation. RELP I has no employees but its operations are
managed by Realco. Under the Advisory Agreement pursuant to which Realco manages
the operations of RELP I, Realco is entitled to annual management fees equal to
the lesser of 4% of gross revenues from operations or 9% of adjusted cash flow
from operations of the Partnership. Realco may also receive annually up to 1/4
of 1% of amounts funded by RELP I in mortgage loans which are serviced by
Realco. This relationship will terminate after the Merger if RELP I merges into
the Trust. USAA Realty Company, an Affiliate of Realco, currently provides
property management and leasing services for the properties and may receive fees
up to 6% of property cash receipts for those services. If RELP I participates in
the Merger, neither the General Partner nor any of its Affiliates will receive
any compensation for services rendered in connection the Merger. The Trust
intends to retain the services of an Affiliate of Realco to provide property
management and leasing services. See "Comparative Compensation, Fees and
Distributions -- New Compensation" below.
RISK FACTORS AND OTHER CONSIDERATIONS
In evaluating the Merger, Limited Partners should carefully consider the
contents of the Prospectus and give particular attention to the discussion of
the risks in participating in the Merger. See "Risk Factors" and "The
Merger -- Material Federal Income Tax Considerations."
6
<PAGE> 289
FAIRNESS OF THE MERGER
Based upon its analysis of the Merger, the General Partner of RELP I
believes that:
(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP I;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP I; and
(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP I than such alternatives.
THE GENERAL PARTNER OF RELP I RECOMMENDS THAT LIMITED PARTNERS VOTE IN
FAVOR OF THE MERGER AND TENDER THEIR UNITS IN EXCHANGE FOR SHARES IN THE TRUST.
EACH LIMITED PARTNER IS URGED TO REVIEW CAREFULLY HIS OR HER PERSONAL FINANCIAL
CIRCUMSTANCES TO ASSESS THE RELATIVE BENEFITS AND RISKS OF HOLDING SHARES.
Each of the General Partners determined that the terms of the Merger
Agreement and the transactions contemplated thereby, including the consideration
to be received by the Limited Partners in connection with the Merger, are fair
to its respective Limited Partners from a financial point of view and are in the
best interests of each RELP's Limited Partners. Accordingly, the Boards of
Directors of the General Partners approved and adopted the Merger Agreement and
the transactions contemplated thereby and resolved to recommend that the Limited
Partners approve and adopt the Merger Agreement and the transactions
contemplated thereby.
In reaching their determinations that the Merger Agreement and the
transactions contemplated thereby are fair to the Limited Partners from a
financial point of view and in their best interests, the General Partners
consulted with Realco and its advisors, and considered the long-term interests
of the Limited Partners based on several factors as to which relative weights
were not assigned. For a full discussion of the RELPS' reason for the Merger and
a greater discussion relating to the fairness of the Merger, see "The
Merger -- Background of and Reasons for the Merger" in the Prospectus.
Fairness Opinion. On June 16, 1997, the General Partners, on behalf of each
RELP, retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the RELPS as to the consideration to
be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the RELPS and the Trust. The General Partners, on behalf of each RELP,
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions and valuation for corporate purposes especially with respect to
REITs and other real estate companies. On June 30, 1997, Houlihan delivered its
written opinion to the Boards of Directors of the General Partners (the
"Houlihan Opinion"), to the effect that, as of the date of such opinion, based
on Houlihan's review and subject to the limitations described in the Prospectus,
see "The Merger -- Fairness Opinions," the consideration to be received by the
Limited Partners in connection with the Merger was fair, from a financial point
of view, to the RELP's respective Limited Partners. The Houlihan Opinion does
not constitute a recommendation to any Limited Partner as to how any such
Limited Partner should vote on the Merger.
Comparison of Benefits and Detriments. Prior to concluding that the Merger
should be proposed to Limited Partners, each of the General Partners considered
several alternatives to the Merger. The alternatives considered by the General
Partners were liquidation of the RELPS, continuation of the RELPS and
reorganization of the RELPS into one or as separate REITs. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partners compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "The Merger -- Background of and
Reasons for the Merger."
7
<PAGE> 290
THE GENERAL PARTNER OF RELP I BELIEVES THAT THE MERGER, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, IS FAIR AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS OF RELP I AND
HAS APPROVED THE AGREEMENT AND RECOMMENDS THAT THE LIMITED PARTNERS OF RELP I
VOTE FOR APPROVAL OF THE MERGER.
In the event the Merger is not consummated for any reason, RELP I will
continue to pursue its business objectives of maximizing the value of its
properties.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP I arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by RELP I to the General Partner
and its Affiliates during the three most recent fiscal years and the six-month
period ended June 30, 1997 and compares those payments against the amount that
would have been paid assuming the Merger had occurred January 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------ SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------------------- -------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees(1)............. $ 29,205 $29,205 $ 40,089 $40,089 $ 48,992 $48,992 $ 27,014 $27,014
Adviser Fees(2)................ 49,325 -- 77,791 -- 67,893 0 36,029 0
Leasing Commissions(3)......... 28,108 28,108 9,671 9,671 9,199 9,199 220 220
Cash Distributions(4).......... 104,826 -- 104,826 19,210 634,946 19,210 52,693 --
-------- ------- -------- ------- -------- ------- -------- -------
$211,464 $57,313 $232,377 $68,970 $761,030 $77,401 $115,956 $27,234
-------- ------- -------- ------- -------- ------- -------- -------
</TABLE>
- ---------------
(1) USAA Realty Company receives fees of up to 6% of the cash receipts of the
properties for managing and providing leasing services for the properties.
(2) Realco receives advisory fees of up to 4% of gross revenues from operations
or 9% of the RELP I's adjusted cash flow.
(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments to outside brokers have not been included. It was assumed for the
pro forma numbers that the services of the outside brokers would still have
been utilized.
(4) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.
NEW COMPENSATION
The Trust intends to engage an Affiliate of Realco to manage and lease the
properties obtained by the Trust from the RELPS pursuant to the Merger. The
terms of this engagement will be substantially similar to the terms governing
the management arrangements the Trust typically uses in managing its current
properties.
8
<PAGE> 291
MISCELLANEOUS
DISTRIBUTIONS TO LIMITED PARTNERS
Set forth below are distributions per Unit made by RELP I to the Limited
Partners during the most recent five fiscal years and the most recently
completed interim period:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
1992 1993 1994 1995 1996 JUNE 30, 1997
- ------ ------ ------ ------ ------- ----------------
<S> <C> <C> <C> <C> <C>
$33.00 $20.00 $16.00 $16.00 $104.56(1) $8.00
</TABLE>
- ---------------
(1) Includes a special distribution of $91.56 per Unit that was paid in March
1996 in connection with the repayment of a mortgage note held by RELP I.
SELECTED FINANCIAL INFORMATION
Selected Financial Information and certain pro forma financial statements
with respect to the Partnership are set forth in "Pro Forma Financial Statements
of the Trust" and "Index to Financial Information" in the Prospectus.
9
<PAGE> 292
AMERICAN INDUSTRIAL PROPERTIES REIT
SUPPLEMENT TO PROSPECTUS
FOR
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
The General Partner of USAA Real Estate Income Investments II Limited
Partnership (herein referred to as "RELP II" or the "Partnership") is soliciting
the Limited Partners' approval of the merger with and into American Industrial
Properties REIT, a Texas real estate investment trust (the "Trust"), as part of
which Limited Partners of RELP II will exchange Units of Limited Partnership
Interests ("Units") in RELP II for Shares of Beneficial Interests ("Shares") in
the Trust. This solicitation is being made in conjunction with the proposed
merger with and into the Trust of up to four publicly-held limited partnerships,
including RELP II (the "Merger"). The proposal is described in detail in the
Joint Proxy Statement/Prospectus dated July , 1997 (the "Prospectus"). For the
definition of capitalized terms used in the Supplement, which are not separately
defined herein, see "Glossary" in the Prospectus. Cross-references in this
Supplement also refer to the cited discussions in the Prospectus, unless
specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP II.
It does not purport to provide an overall summary of the Merger, or to highlight
all of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to RELP II at 8000 Robert F. McDermott Fwy., IH 10 West, Suite 600, San
Antonio, Texas 78230-3884.
Limited Partners of RELP II participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:
Risks Related to the Merger
- The Trust has generated losses from operations every year since 1988.
- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP II. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions.
- Uncertainties at the time of voting regarding the potential assets and
leverage of the Trust because of the uncertainty as to which RELPS will
participate in the Merger, making it difficult for Limited Partners to
make an informed decision regarding the Trust's potential financial
strength.
- The change in the nature of each Limited Partner's investment from
holding an interest in a specific portfolio of properties in a finite
life entity to holding an interest in an ongoing real estate investment
trust, whose real estate portfolio may be changed from time to time by
the Trust's Board without the approval of the shareholders and which does
not plan to liquidate such assets within a fixed period.
- The possibility that the Net Asset Values assigned to RELP II may not
reflect the true value of such RELP II's assets.
- The common management of the RELPS, who are also Affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. As a
result, the terms of the Merger may be less favorable to
<PAGE> 293
RELP II than if RELP II had a representative independent of Realco
negotiating on its behalf. Realco is subject to various conflicts of
interest, including the following:
- It is the sole shareholder of each General Partner.
- It is a significant shareholder of the Trust.
- Two of the eight members of the Board of Trust Managers are Affiliates
of and were designated by Realco.
- An Affiliate will receive benefits from the Trust in connection with the
management and leasing of the properties formerly owned by the RELPS.
- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP II attributable to the Merger in an amount equal to the Limited
Partner's allocable share of the income or loss recognized by RELP II
from the Trust's acquisition of RELP II's assets and Limited Partners
will receive no cash from the Merger (other than cash received in lieu of
fractional Shares) to pay taxes arising from any taxable income (see "The
Merger -- Material Federal Income Tax Consequences").
- Potential liability of the Trust for unknown, undisclosed or contingent
liabilities of the Participating RELPS including claims against the Trust
for indemnification, environmental liabilities, and title defects, which
could adversely affect the cash liquidity of the Trust and its future
ability to make distributions to shareholders.
- Potential dilution to shareholders of the Trust from the issuance of
additional equity securities at what may be less than their fair market
value.
- Any declaration of distributions to shareholders is subordinate to the
payment of the Trust's debts and obligations, which could adversely
affect the ability of the Trust to make expected distributions to
shareholders in the future.
- Expenses of the Merger will be borne by the Trust exclusively, unless (i)
three or more of the RELPS do not approve the Merger, in which event
Realco will reimburse the Trust for up to $250,000 of the Trust's
expenses, or (ii) the Merger Agreement is terminated under certain
circumstances.
- The majority vote of the Limited Partners of RELP II binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares unless they
properly exercise their dissenters' rights.
- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP II or
continuing its operations as a limited partnership.
- The Trust has different business objectives than the RELPS, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.
- The Shares may initially trade at prices substantially below prices as of
the date of execution of the Merger Agreement, the date hereof or the
date of the Special Meetings.
- Increases in market interest rates may adversely affect the price of the
Shares.
- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the Partnership Agreement and the
partnership law of the State of Texas.
- If the Merger Agreement is terminated prior to consummation, under
certain circumstances, each RELP and the Trust may have to pay their
Proportionate Share of a termination fee or of the expenses of the
Merger.
2
<PAGE> 294
- The Trust's organizational documents do not restrict the Trust's ability
to incur additional indebtedness. As a result, the Trust could increase
its debt service requirements to a level that may adversely affect the
Trust's ability to make future distributions and may increase the risk of
default.
- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.
- Possible claims against the Trust for the remediation of environmental
conditions, which could result in substantial expenditures for
remediation and in a loss of revenues during remediation efforts.
- Risks associated with the acquisition and development of commercial and
industrial properties, including lease-up and financing risks and the
risk that such properties may not perform as expected.
- Risks associated with increased portfolio size and geographic
diversification as a result of the Merger, including the adequacy of the
number of personnel and the available resources to manage the new
portfolio.
- The occurrences of uninsured liability or casualty, reducing the Trust's
capital and adversely affecting anticipated profits.
- The potential expense of compliance with the Americans With Disabilities
Act, fire and safety, and other regulatory requirements applicable to the
operation of the Trust's properties.
- Taxation of the Trust as a corporation if it fails to qualify as a REIT
and the Trust's liability for increased federal, state and local income
taxes in such event.
- Certain provisions in the Trust's governing documents, including the
right to redeem Shares from a shareholder if he owns, directly or
indirectly, more than 9.8% of the Trust's outstanding Shares or to
restrict voting and distribution rights with respect to Shares owned in
excess of such limit, and the Trust Managers' right to issue other
classes of equity securities could delay or prevent changes in control of
the Trust, even if such changes in control were in the shareholders' best
interest.
General Real Estate Investment Risks
- Risks normally incidental to the ownership and operation of industrial
and commercial properties, including, among others, changes in general
national economic or local market conditions, competition for tenants,
changes in market rental rates, inability to collect rents from tenants
due to bankruptcy or insolvency of tenants or otherwise, and the need to
periodically make capital improvements.
- Risks associated with leveraged real estate investments, such as the
Trust's inability to meet required principal and interest payments, the
risk that existing indebtedness will not be refinanced or that the terms
of such refinancing will not be favorable, and the risk that necessary
capital expenditures will not be able to be financed on favorable terms
or at all.
- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.
- Competition from competing properties which could decrease the occupancy
levels and rental rates of the Trust's investments.
- The Trust's assets are subject to general operating risks common to all
real estate developments, including increases in operating costs not
offset by rental increases. In addition, the Trust's assets are primarily
industrial or commercial properties, making the Trust's profitability
dependent upon general trends affecting that type of real estate
investment.
The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger --
3
<PAGE> 295
Material Federal Income Tax Considerations" in the Prospectus. The material
federal income tax issues include the following:
- The taxable Limited Partners will realize taxable gain or loss in the
Merger (which may be ordinary or capital in nature) and the Limited
Partners will not receive cash from the Merger (other than cash received
in lieu of fractional Shares) to pay any taxes due on any taxable gain.
Any gain or loss will be recognized in the year the Merger is
consummated.
- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP II and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.
- As a REIT, the Trust will be entitled to a tax deduction for
distributions made to its shareholders. To continue to qualify as a REIT,
however, the Trust must satisfy income, asset and ownership tests imposed
by the Code. Failure to so qualify will result in the loss of such
deduction for distributions paid as well as additional tax on Trust
income and reduced or no distributions to shareholders.
- Trust distributions received by taxable shareholders should be treated as
portfolio income. Such distributions should not be treated as UBTI to
certain tax-exempt shareholders (subject to certain exceptions which may
be applicable to pension-trusts.
ALLOCATION OF CONSIDERATION
THE MERGER
The Trust is proposing to acquire the Units of each of the RELPS from
Limited Partners who, by a majority vote, approve participation in the Merger.
If the Merger is approved, the RELPS will cease to exist and the Limited
Partners will receive Shares based upon the relative Net Asset Values of the
RELPS negotiated by the common management of the RELPs and the Trust. The Shares
received by the Limited Partners will be listed for trading on the New York
Stock Exchange (the "NYSE"). If the requisite number of Limited Partners of only
one of the RELPS approves the Merger, the Trust has the right, but not the
obligation, to consummate the Merger with the one participating RELP.
Any Limited Partner may abstain from or vote against the Merger and, if the
Merger is approved, the Limited Partner can still participate in the Merger, so
long as the Limited Partner does not exercise dissenters' rights. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "The Merger -- Dissenters' Rights" and "The Special Meetings -- RELP
Meeting."
The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger. Limited
Partners voting in favor of the Merger will be deemed to have voted in favor of
each of these proposed amendments. A majority vote of Limited Partners is
required to approve the proposed amendments and to approve the Merger. The
proposed amendments authorize the following: (i) the merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partners; (ii) the sale to Realco or an Affiliate of Realco of
RELP II's interest in the joint venture which owns the Sequoia Plaza I Building
and (iii) all understandings between the Trust and the General Partners
contemplated by the Prospectus, irrespective of any provisions in the
Partnership Agreements which might otherwise prohibit such transactions. See
"The Merger -- Proposed Amendments to Partnership Agreements." As of May 15,
1997, the General Partner of RELP II owned 6,681 Units in RELP II, or
approximately 25% of all outstanding Units of RELP II. Pursuant to the RELP II
Limited Partnership Agreement, the Units held by the RELP II General Partner are
not eligible to vote at the RELP Special Meeting.
Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
4
<PAGE> 296
NET ASSET VALUE
The Trust is offering 143.17 Shares in consideration for each Unit in RELP
II. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:
<TABLE>
<S> <C>
Asset Value of Partnership Properties....................... $10,200,000
Cash and Cash Equivalents(1)................................ $ 0
Mortgages and Other Long-Term Debt.......................... $ 0
Net Asset Value of Partnership(2)........................... $10,200,000
Percentage of Aggregate Net Asset Value of All RELPS........ 17.61%
Net Asset Value Per Original $500 Investment(3)............. $ 375.82
Number of Shares Allocable to Partnership................... 3,885,714
Percentage of Total Shares to be issued in the Merger....... 17.61%
Allocation of Shares to
- --Limited Partners.......................................... 3,885,714
- --General Partner(4)........................................ 0
Allocation of Shares Per Original $500 Investment by Limited
Partners.................................................. 143.17
</TABLE>
- ---------------
(1) All cash and cash equivalents held by RELP II, net of related payables,
liabilities or other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special distribution.
(2) Such amounts were determined by negotiations between common management of
the RELPS and the Trust.
(3) "Net Asset Value Per Original $500 Investment" is computed by dividing that
portion of the Net Asset Value allocable to the Limited Partners by the
number of outstanding Units. This is not intended to be an estimate of the
value of the Shares exchangeable for each Unit or the price at which such
Shares may trade in the market. See "Risk Factors."
(4) The General Partner of RELP II has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
CONSIDERATIONS UNIQUE TO RELP II
Due to the substantial similarities among the RELPS, such as their similar
investment portfolios, common investment objectives and policies, the fact that
the RELPS' assets are managed by the General Partners or Affiliates and
substantial similarities in the language and scope of their Partnership
Agreements, many of the consequences of participating in the Merger are common
to the Limited Partners of each of the RELPS. The purpose of this section is,
however, to highlight features of RELP II which may distinguish the situation of
this Partnership from that of the other RELPS and which should be taken into
account by RELP II Limited Partners when evaluating the merits and risks of the
proposed Merger.
Status of the Portfolio. At the time of RELP II's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within eight
years after the acquisition of the properties. Accordingly based on the
completion of the acquisition of RELP II's portfolio in 1989, it was anticipated
that the portfolio would be liquidated by 1997. Of the two investments made by
RELP II which will be included in the Merger, both have been offered for sale.
Bowater Communication Papers Building was offered for a price of $4.2 million.
During the twelve months ended June 30, 1997, three offers were received ranging
from $3.35 million to $3.9 million, but were not completed. The General Partner
has removed the property from the market due to the short time remaining on the
lease of the single tenant at the property. The Continental Plastic Containers
Buildings have been offered for sale at a price of $8.2 million. During the
twelve months ended June 30, 1997, offers ranging from $5 million to $7.4
million have been received, but not consummated.
The remaining investment in RELP II, a 7.275% interest in the joint venture
which owns Sequoia Plaza I, has not been offered for sale. However, the property
was externally appraised as of January 1, 1997, at
5
<PAGE> 297
a total value of $29.7 million. This joint venture interest will not be included
in the Merger but will be purchased by Realco or an Affiliate of Realco for
$2,250,000, if the Merger is approved by the Limited Partners of RELP II. See
"Business of RELPs -- RELP II" in the Prospectus for additional information
regarding the RELP II portfolio.
The General Partner believes that the Net Asset Value of $10.2 million for
the portfolio, excluding the joint venture interest which was negotiated by
common management of the RELPS and the Trust is fair to the Limited Partners.
See "The Merger -- Background and Reasons for the Merger" in the Prospectus.
Amount of Partnership Debt. As of December 31, 1996, RELP II had no
indebtedness. As a group, the RELPS had, as of that same date, aggregate
outstanding indebtedness of $30,668,087, representing approximately 34% of the
total value of the RELPS' real estate investments. Excluding interests in RELP
properties that will not be acquired by the Trust pursuant to the Merger, as of
December 31, 1996, the Trust had indebtedness of $53,818,000, representing
approximately 57% of its real estate assets. Therefore, if the Limited Partners
of RELP II approve the Merger, they will exchange Units in an entity with no
debt for Shares in a REIT with significant indebtedness. In that the Trust is
more leveraged than the RELP II, this will result in an increase in the debt
service payments that must be made by the Trust, increase the Trust's risk of
losing its assets through foreclosure and increase the risk that the Trust may
not be able to make distributions to shareholders.
Merger as a Taxable Event. Limited Partners of RELP II will realize a
taxable income on the Merger in an amount equal to their allocable share of the
excess of the sum of the fair market value of the Shares received by the
Partnership over the Partnership's adjusted tax basis of the Partnership assets.
Assuming that the value of the Shares reflects the Net Asset Values of the
assets acquired in the Merger, if RELP II participates in the Merger, each of
its Limited Partners would have recognized taxable income of approximately 7%
(as of December 31, 1997) for every Unit held, representing an original
investment of $500. The actual amount of income or loss recognized by each
Limited Partner will depend upon the value ascribed to the Shares for federal
tax purposes. Because the value of the Shares will fluctuate immediately after
the Merger and the 1997 operations of RELP II have not been included, it is
possible that such values used for purposes of calculating the taxable income or
loss and that the taxable income or loss per Unit will differ from the
calculation stated above.
Investment Strategy. The principal investment objectives of RELP II are to
(i) preserve and protect RELP II's capital; (ii) provide the Limited Partners
with quarterly distributions of cash from operations; and (iii) obtain long-term
appreciation in the value of its properties. RELP II has attempted to achieve
these objectives through investment in a diversified portfolio of
income-producing real properties and by making first mortgage loans. In 1989,
the Partnership acquired the Continental Plastic Containers Buildings located in
Illinois and the Bowater Communication Papers Building located in Florida. RELP
II also formed the Combined Capital Resources Joint Venture with Realco in 1989,
which owned a participating first mortgage loan secured by the Sequoia Plaza I
Building in Virginia. The joint venture's investment in the mortgage loan was
converted to ownership of the underlying property in August 1991 through
foreclosure on the loan. RELP II's properties had an average occupancy level of
100% at an average annual rent of $7.67 per square foot for fiscal 1996 and 100%
at an average annual rent of $7.61 per square foot in the six months ended June
30, 1997. RELP II has a history of making regular quarterly distributions to its
Limited Partners. See "Miscellaneous -- Distributions to Limited Partners" below
in this Supplement.
Management Compensation. USAA Realty Company, an affiliate of Realco,
provides property management and leasing services for the properties and may
receive fees up to 6% of property cash receipts for those services. If RELP II
participates in the Merger, neither the General Partner nor any of its
Affiliates will receive any compensation for services rendered in connection the
Merger. The Trust intends to retain the services of an Affiliate of Realco to
provide property management services. See "Comparative Compensation, Fees and
Distributions -- New Compensation" below.
6
<PAGE> 298
RISK FACTORS AND OTHER CONSIDERATIONS
In evaluating the Merger, Limited Partners should carefully consider the
contents of the Prospectus and give particular attention to the discussion of
the risks in participating in the Merger. See "Risk Factors" and "The
Merger -- Material Federal Income Tax Considerations."
FAIRNESS OF THE MERGER
Based upon its analysis of the Merger, the General Partner of RELP II
believes that:
(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP II;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP II; and
(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP II than such alternatives.
THE GENERAL PARTNER OF RELP II RECOMMENDS THAT LIMITED PARTNERS VOTE IN
FAVOR OF THE MERGER AND TENDER THEIR UNITS IN EXCHANGE FOR SHARES IN THE TRUST.
EACH LIMITED PARTNER IS URGED TO REVIEW CAREFULLY HIS OR HER PERSONAL FINANCIAL
CIRCUMSTANCES TO ASSESS THE RELATIVE BENEFITS AND RISKS OF HOLDING SHARES.
Each of the General Partners determined that the terms of the Merger
Agreement and the transactions contemplated thereby, including the consideration
to be received by the Limited Partners in connection with the Merger, are fair
to its respective Limited Partners from a financial point of view and are in the
best interests of each RELP's Limited Partners. Accordingly, the Boards of
Directors of the General Partners approved and adopted the Merger Agreement and
the transactions contemplated thereby and resolved to recommend that the Limited
Partners approve and adopt the Merger Agreement and the transactions
contemplated thereby.
In reaching their determinations that the Merger Agreement and the
transactions contemplated thereby are fair to the Limited Partners from a
financial point of view and in their best interests, the General Partners
consulted with Realco and its advisors and considered the long-term interests of
the Limited Partners based on several factors as to which relative weights were
not assigned. For a full discussion of the RELPS' reason for the Merger and a
greater discussion relating to the fairness of the Merger, see "The
Merger -- Background of and Reasons for the Merger" in the Prospectus.
Fairness Opinion. On June 16, 1997, the General Partner, on behalf of each
RELP, retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the General Partner, on behalf of
each RELP, as to the consideration to be received by the Limited Partners in
connection with the Merger, which consideration was determined through
negotiations between the common management of the RELPS and the Trust. The RELPS
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions and valuation for corporate purposes especially with respect to
REITs and other real estate companies. On June 30, 1997, Houlihan delivered its
written opinion to the Boards of Directors of the General Partners (the
"Houlihan Opinion"), to the effect that, as of the date of such opinion, based
on Houlihan's review and subject to the limitations described in the Prospectus,
see "The Merger -- Fairness Opinions," the consideration to be received by the
Limited Partners in connection with the Merger was fair, from a financial point
of view, to the RELP's respective Limited Partners. The Houlihan Opinion does
not constitute a recommendation to any Limited Partner as to how any such
Limited Partner should vote on the Merger.
Comparison of Benefits and Detriments. Prior to concluding that the Merger
should be proposed to Limited Partners, each of the General Partners considered
several alternatives to the Merger. The alternatives considered by the General
Partners were liquidation of the RELPS, continuation of the RELPS and
7
<PAGE> 299
reorganization of the RELPS into one or as separate REITs. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partners compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "The Merger -- Background of and
Reasons for the Merger."
THE GENERAL PARTNER OF RELP II BELIEVES THAT THE MERGER, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, IS FAIR AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS OF RELP II AND
HAS APPROVED THE AGREEMENT AND RECOMMENDS THAT THE LIMITED PARTNERS OF RELP II
VOTE FOR APPROVAL OF THE MERGER.
In the event the Merger is not consummated for any reason, RELP II will
continue to pursue its business objectives of maximizing the value of its
properties.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP II arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by the RELP II to the General
Partner and its Affiliates during the four most recent fiscal years and compares
those payments against the amount that would have been paid assuming the Merger
had occurred January 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------
1994 1995 1996 1997
-------------------- -------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees(1)............. $ 11,380 $11,380 $ 12,299 $ 12,299 $ 12,110 $12,110 $ 12,496 $12,496
Leasing Commissions(2)......... -- -- 185,066 185,066 -- -- -- --
Cash Distributions(3).......... 338,088 -- 321,184 38,260 270,471 38,260 339,208 --
-------- ------- -------- -------- -------- ------- -------- -------
$349,468 $11,380 $518,549 $235,625 $282,581 $50,370 $351,704 $12,496
======== ======= ======== ======== ======== ======= ======== =======
</TABLE>
- ---------------
(1) USAA Realty Company receives fees of up to 6% of the cash receipts of the
properties for managing and providing leasing services for the properties.
Actual and pro forma numbers are based on a 1% property management fee.
(2) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
(3) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.
NEW COMPENSATION
The Trust intends to engage an Affiliate of Realco to manage and lease the
properties obtained by the Trust from the RELPS pursuant to the Merger. The
terms of this engagement will be substantially similar to the terms governing
the management arrangements the Trust typically uses in managing its current
properties.
8
<PAGE> 300
MISCELLANEOUS
DISTRIBUTIONS TO LIMITED PARTNERS
Set forth below are distributions per Unit made by RELP II to the Limited
Partners during the most recent five fiscal years.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
$35.00 $35.00 $33.25 $28.00 $35.00
</TABLE>
SELECTED FINANCIAL INFORMATION
Selected Financial Information and certain pro forma financial statements
with respect to the Partnership are set forth in "Pro Forma Financial Statements
of the Trust" and "Index to Financial Information" in the Prospectus.
9
<PAGE> 301
AMERICAN INDUSTRIAL PROPERTIES REIT
SUPPLEMENT TO PROSPECTUS
FOR
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
The General Partner of USAA Income Properties III Limited Partnership
(herein referred to as "RELP III" or the "Partnership") is soliciting the
Limited Partners' approval of the merger with and into American Industrial
Properties REIT, a Texas real estate investment trust (the "Trust"), as part of
which Limited Partners of RELP III will exchange Units of Limited Partnership
Interests ("Units") in RELP III for Shares of Beneficial Interests ("Shares") in
the Trust. This solicitation is being made in conjunction with the proposed
merger with and into the Trust of up to four publicly-held limited partnerships,
including RELP III (the "Merger"). The proposal is described in detail in the
Joint Proxy Statement/Prospectus dated July , 1997 (the "Prospectus"). For the
definition of capitalized terms used in the Supplement, which are not separately
defined herein, see "Glossary" in the Prospectus. Cross-references in this
Supplement also refer to the cited discussions in the Prospectus, unless
specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP III.
It does not purport to provide an overall summary of the Merger or to highlight
all of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to RELP III at 8000 Robert F. McDermott Fwy., IH 10 West, Suite 600, San
Antonio, Texas 78230-3884.
Limited Partners of RELP III participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:
Risks Related to the Merger
- The Trust has generated losses from operations every year since 1988.
- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP III. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions.
- Uncertainties at the time of voting regarding the potential assets and
leverage of the Trust because of the uncertainty as to which RELPS will
participate in the Merger, making it difficult for Limited Partners to
make an informed decision regarding the Trust's potential financial
strength.
- The change in the nature of each Limited Partner's investment from
holding an interest in a specific portfolio of properties in a finite
life entity to holding an interest in an ongoing real estate investment
trust, whose real estate portfolio may be changed from time to time by
the Trust's Board without the approval of the shareholders and which does
not plan to liquidate such assets within a fixed period.
- The possibility that the Net Asset Values assigned to RELP III may not
reflect the true value of RELP III's assets.
- The common management of the RELPS, who are also Affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. As a
result, the terms of the Merger may be less favorable to
<PAGE> 302
RELP III than if RELP III had a representative independent of Realco
negotiating on its behalf. Realco is subject to various conflicts of
interest, including the following:
- It is the sole shareholder of each General Partner.
- It is a significant shareholder of the Trust.
- Two of the eight members of the Board of Trust Managers are Affiliates
of and were designated by Realco.
- An Affiliate will receive benefits from the Trust in connection with the
management and leasing of the properties formerly owned by the RELPS.
- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP III attributable to the Merger in an amount equal to the Limited
Partner's allocable share of the income or loss recognized by RELP III
from the Trust's acquisition of the RELP III's and Limited Partners will
receive no cash from the Merger (other than cash received in lieu of
fractional Shares) to pay taxes arising from any taxable income (see "The
Merger -- Material Federal Income Tax Consequences").
- Potential liability of the Trust for unknown, undisclosed or contingent
liabilities of the Participating RELPS including claims against the Trust
for indemnification, environmental liabilities, and title defects, which
could adversely affect the cash liquidity of the Trust and its future
ability to make distributions to shareholders.
- Potential dilution to shareholders of the Trust from the issuance of
additional equity securities at what may be less than their fair market
value.
- Any declaration of distributions to shareholders is subordinate to the
payment of the Trust's debts and obligations, which could adversely
affect the ability of the Trust to make expected distributions to
shareholders in the future.
- Expenses of the Merger will be borne by the Trust exclusively, unless (i)
three or more of the RELPS do not approve the Merger, in which event
Realco will reimburse the Trust for up to $250,000 of the Trust's
expenses, or (ii) the Merger Agreement is terminated under certain
circumstances.
- The majority vote of the Limited Partners of RELP III binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares unless they
properly exercise their dissenters' rights.
- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP III's assets
or continuing its operating as a limited partnership.
- The Trust has different business objectives than RELP III, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.
- The Shares may initially trade at prices substantially below prices as of
the date of execution of the Merger Agreement, the date hereof or the
date of the Special Meetings.
- Increases in market interest rates may adversely affect the price of the
Shares.
- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the RELP III Partnership Agreement and the
partnership law of the State of Delaware.
- If the Merger Agreement is terminated prior to consummation, under
certain circumstances, each RELP and the Trust may have to pay their
Proportionate Share of a termination fee or of the expenses of the
Merger.
- The Trust's organizational documents do not restrict the Trust's ability
to incur additional indebtedness. As a result, the Trust could increase
its debt service requirements to a level that may adversely affect the
Trust's ability to make future distributions and may increase the risk of
default.
2
<PAGE> 303
- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.
- Possible claims against the Trust for the remediation of environmental
conditions, which could result in substantial expenditures for
remediation and in a loss of revenues during remediation efforts.
- Risks associated with the acquisition and development of commercial and
industrial properties, including lease-up and financing risks and the
risk that such properties may not perform as expected.
- Risks associated with increased portfolio size and geographic
diversification as a result of the Merger, including the adequacy of the
number of personnel and the available resources to manage the new
portfolio.
- The occurrences of uninsured liability or casualty, reducing the Trust's
capital and adversely affecting anticipated profits.
- The potential expense of compliance with the Americans With Disabilities
Act, fire and safety, and other regulatory requirements applicable to the
operation of the Trust's properties.
- Taxation of the Trust as a corporation if it fails to qualify as a REIT
and the Trust's liability for increased federal, state and local income
taxes in such event.
- Certain provisions in the Trust's governing documents, including the
right to redeem Shares from a shareholder if he owns, directly or
indirectly, more than 9.8% of the Trust's outstanding Shares or to
restrict voting and distribution rights with respect to Shares owned in
excess of such limit, and the Trust Managers' right to issue other
classes of equity securities could delay or prevent changes in control of
the Trust, even if such changes in control were in the shareholders' best
interest.
General Real Estate Investment Risks
- Risks normally incidental to the ownership and operation of industrial
and commercial properties, including, among others, changes in general
national economic or local market conditions, competition for tenants,
changes in market rental rates, inability to collect rents from tenants
due to bankruptcy or insolvency of tenants or otherwise, and the need to
periodically make capital improvements.
- Risks associated with leveraged real estate investments, such as the
Trust's inability to meet required principal and interest payments, the
risk that existing indebtedness will not be refinanced or that the terms
of such refinancing will not be favorable, and the risk that necessary
capital expenditures will not be able to be financed on favorable terms
or at all.
- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.
- Competition from competing properties which could decrease the occupancy
levels and rental rates of the Trust's investments.
- The Trust's assets are subject to general operating risks common to all
real estate developments, including increases in operating costs not
offset by rental increases. In addition, the Trust's assets are primarily
industrial or commercial properties, making the Trust's profitability
dependent upon general trends affecting that type of real estate
investment.
The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger -- Material Federal Income Tax
Considerations" in the Prospectus. The material federal income tax issues
include the following:
- The taxable Limited Partners will realize taxable gain or loss in the
Merger (which may be ordinary or capital in nature) and the Limited
Partners will not receive cash from the Merger (other than cash received
in lieu of fractional Shares) to pay any taxes due on any taxable gain.
Any gain or loss will be recognized in the year the Merger is
consummated.
3
<PAGE> 304
- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP III and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.
- As a REIT, the Trust will be entitled to a tax deduction for
distributions made to its shareholders. To continue to qualify as a REIT,
however, the Trust must satisfy income, asset and ownership tests imposed
by the Code. Failure to so qualify will result in the loss of such
deduction for distributions paid as well as additional tax on Trust
income and reduced or no distributions to shareholders.
- Trust distributions received by taxable shareholders should be treated as
portfolio income. Such distributions should not be treated as UBTI to
certain tax-exempt shareholders (subject to certain exceptions which may
be applicable to pension-trusts.
ALLOCATION OF CONSIDERATION
THE MERGER
The Trust is proposing to acquire the Units of each of the RELPS from
Limited Partners who, by a majority vote, approve participation in the Merger.
If the Merger is approved, the RELPS will cease to exist and the Limited
Partners will receive Shares based upon the relative Net Asset Values of the
RELPS negotiated by the common management of the RELPS and the Trust. The Shares
received by the Limited Partners will be listed for trading on the New York
Stock Exchange (the "NYSE"). If the requisite number of Limited Partners of only
one of the RELPS approves the Merger, the Trust has the right, but not the
obligation, to consummate the Merger with the one participating RELP.
Any Limited Partner may abstain from or vote against the Merger and, if the
Merger is approved, the Limited Partner can still participate in the Merger, so
long as the Limited Partner does not exercise dissenters' rights. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "The Merger -- Dissenters' Rights" and "The Special Meetings -- RELP
Meeting."
The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger. Limited
Partners voting in favor of the Merger will be deemed to have voted in favor of
each of these proposed amendments. A majority vote of Limited Partners is
required to approve the proposed amendments and to approve the Merger. The
proposed amendments authorize the following: (i) the merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partners; (ii) the sale of the Curlew Crossing property by RELP
III to Realco; and (iii) all understandings between the Trust and the General
Partners contemplated by the Prospectus, irrespective of any provisions in the
Partnership Agreements which might otherwise prohibit such transactions. See
"The Merger -- Proposed Amendments to Partnership Agreements." As of May 15,
1997, the General Partner of RELP III owned 6,428 Units in RELP III, or
approximately 6% of all outstanding Units of RELP III. Pursuant to the RELP III
Limited Partnership Agreement, the Units held by the RELP III General Partner
are not eligible to vote at the RELP Special Meeting.
Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
4
<PAGE> 305
NET ASSET VALUE
The Trust is offering 82.99 Shares in consideration for each Unit in RELP
III. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:
<TABLE>
<S> <C>
Asset Value of Partnership Properties....................... $ 39,300,000
Cash and Cash Equivalents(1)................................ $ 0
Mortgages and Other Long-Term Debt(2)....................... $(15,000,000)
Net Asset Value of Partnership Properties(3)................ $ 24,300,000
Percentage of Aggregate Net Asset Value of All RELPS........ 41.96%
Net Asset Value Per Original $500 Investment(4)............. $ 241.84
Number of Shares Allocable to Partnership................... 9,257,143
Percentage of Total Shares to be issued in the Merger....... 41.96%
Allocation of Shares to
- -- Limited Partners......................................... 9,257,143
- -- General Partner(5)....................................... 0
Allocation of Shares Per Original $500 Investment by Limited
Partners.................................................. 82.99
</TABLE>
- ---------------
(1) All cash and cash equivalents held by RELP III, net of related payables,
liabilities and other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special distribution.
(2) Estimated balance as of December 31, 1997.
(3) Such amounts were determined by negotiations between common management of
the RELPS and the Trust.
(4) "Net Asset Value Per Original $500 Investment" is computed by dividing that
portion of the Net Asset Value allocable to the Limited Partners by the
number of outstanding Units. This is not intended to be an estimate of the
value of the Shares exchangeable for each Unit or the price at which such
Shares may trade in the market. See "Risk Factors."
(5) The General Partner of RELP III has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
CONSIDERATIONS UNIQUE TO RELP III
Due to the substantial similarities among the RELPS, such as their similar
investment portfolios, common investment objectives and policies, the fact that
the RELPS' assets are managed by the General Partners or Affiliates and
substantial similarities in the language and scope of their Partnership
Agreements, many of the consequences of participating in the Merger are common
to the Limited Partners of each of the RELPS. The purpose of this section is,
however, to highlight features of RELP III which may distinguish the situation
of this Partnership from that of the other RELPS and which should be taken into
account by RELP III Limited Partners when evaluating the merits and risks of the
proposed Merger.
Status of the Portfolio. At the time of RELP III's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within four to
eight years after the acquisition of the properties. Accordingly, based upon the
completion of the acquisition of RELP III's portfolio in 1986, it was
anticipated that the portfolio would be liquidated by 1994. Neither of the two
properties to be included in the Merger, Manhattan Towers or Skygate Commons,
have been offered for sale due to pending improvements in the surrounding real
estate markets and stabilization of occupancy and rental revenue through
re-leasing of the properties. Unsolicited offers ranging from $22.0 million to
$30.5 million have been received, and counter-offers declined on Manhattan
Towers, during the twelve months ended June 30, 1997. No offers have been
received on Skygate Commons.
The remaining property, Curlew Crossing Shopping Center, is not included in
the Merger, but will be purchased by Realco for $11,200,000 if the Merger is
approved by the Limited Partners of RELP III. Realco currently has an
$11,000,000 loan secured by the property. Curlew Crossing has been offered for
sale and one
5
<PAGE> 306
offer of $9,124,000 has been received. The purchaser declined a counter-offer of
$10.5 million, and the sale was not completed. See "Business of RELPs -- RELP
III" in the Prospectus for additional information regarding the RELP III
portfolio. The General Partner believes that the Net Asset Value of $39.3
million (including $15 million in debt assumption) for the portfolio, not
including Curlew Crossing, which was negotiated by common management of the
RELPS and the Trust is fair to the Limited Partners. See "The
Merger -- Background and Reasons for the Merger" in the Prospectus.
Amount of Partnership Debt. As of December 31, 1996, RELP III had
indebtedness of $15,000,000, representing approximately 47% of the value of its
real estate investments. As a group, the RELPS had, as of that same date,
aggregate outstanding indebtedness of $30,668,087, representing approximately
34% of the total value of the RELPS' real estate investments. Excluding
interests in RELP properties that will not be acquired by the Trust pursuant to
the Merger, as of December 31, 1996, the Trust had indebtedness of $53,818,000,
representing approximately 57% of its real estate assets. Thus, the Trust's
total indebtedness will be significantly greater, both in amount and as a
percentage of assets, than RELP III's current level of indebtedness. If the
Trust is more leveraged than the RELPS, this will result in an increase in the
debt service payments that must be made by the Trust, increase the Trust's risk
of losing its assets through foreclosure and increase the risk that the Trust
may not be able to make distributions to shareholders.
Merger as a Taxable Event. Limited Partners of RELP III will realize
taxable income or loss on the Merger in an amount equal to their allocable share
of the excess of the sum of the fair market value of the Shares received by the
RELP over the RELP's adjusted tax basis of the RELP's assets. Assuming that the
value of the Shares reflects the Net Asset Values of the assets acquired in the
Merger, if RELP III participates in the Merger, each of its Limited Partners
would have recognized taxable income or loss depending if the election to
exclude discharge of indebtedness in 1994 was taken by the limited partner. If
the Limited Partner elected to exclude the income from the discharge of
indebtedness, then the Limited Partners would have recognized taxable income of
approximately 6.1% (as of December 31, 1997) for every Unit held, representing
an original investment of $500. If the Limited Partner did not elect to exclude
the income, then a taxable loss of approximately 4.4% would have been recognized
(as of December 31, 1997) for every Unit held, representing an original
investment of $500. The actual amount of income or loss recognized by each
Limited Partner will depend upon the value ascribed to the Shares for federal
tax purposes. Because the value of the Shares will fluctuate immediately after
the Merger and since the 1997 operations of RELP III have not been included, it
is possible that such values may be used for purposes of calculating the taxable
income or loss and that the taxable income or loss per Unit will differ from the
calculation stated above.
Investment Strategy. The principal investment objectives of RELP III are to
(i) provide the Limited Partners with cash distributions which will not
constitute taxable income by reason of Partnership tax deductions and possibly
tax losses which may be used to offset other taxable income; (ii) preserve and
protect the Limited Partners' capital and related buying power; (iii) obtain
long-term appreciation in the value of the properties; and (iv) provide a
build-up of equity through the reduction of mortgage loans on the properties.
RELP III has attempted to achieve these objectives through investment in a
diversified portfolio of income-producing real properties and by making first
mortgage loans. In 1986, RELP III acquired the Curlew Crossing (formerly
Courtyard Shoppes) Shopping Center, Manhattan Towers (formerly Parkview Plaza
Office Buildings) and the Skygate Commons (formerly Ramada World Headquarters
Office Buildings). RELP III's properties had an average occupancy level of 76%
at an annual rent of $22.72 per square foot for fiscal 1996 and 76% at an annual
rent of $16.94 per square foot in the six months ended June 30, 1997. RELP III
has a history of making regular quarterly distributions to its Limited Partners.
See "Miscellaneous -- Distributions to Limited Partners" below in this
Supplement. Since the inception of RELP III, it has not sold any of its real
estate investments with the exception of receiving $220,400 as a condemnation
award from the Florida Department of Transportation for a small portion of the
Curlew Crossing property. As discussed in "Status of the Portfolio" above, the
Curlew Crossing property will not be transferred to the Trust if RELP III
approves the Merger but will be sold to Realco.
Management Compensation. RELP III has no employees, rather its operations
are managed by Realco. Under the Advisory Agreement pursuant to which Realco
manages the operations of RELP III, Realco is entitled to management fees equal
to 4% of cash receipts from operations not to exceed 9% of adjusted cash
6
<PAGE> 307
flow from operations of the Partnership. This relationship will terminate if
RELP III is merged into the Trust. USAA Realty Company, an Affiliate of Realco,
provides property management and leasing services for the properties and may
receive fees up to 6% of property cash receipts for those services. If RELP III
participates in the Merger, neither the General Partner nor any Affiliate of the
Partnership will receive any compensation for services rendered in connection
the Merger. The Trust intends to retain the services of an Affiliate of Realco
to provide property management and leasing services. See "Comparative
Compensation, Fees and Distribution -- New Compensation" below.
RISK FACTORS AND OTHER CONSIDERATIONS
In evaluating the Merger, Limited Partners should carefully consider the
contents of the Prospectus and give particular attention to the discussion of
the risks in participating in the Merger. See "Risk Factors" and "The
Merger -- Material Federal Income Tax Considerations."
FAIRNESS OF THE MERGER
Based upon its analysis of the Merger, the General Partner of RELP III
believes that:
(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP III;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP III; and
(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP III than such alternatives.
THE GENERAL PARTNER OF RELP III RECOMMENDS THAT LIMITED PARTNERS VOTE IN
FAVOR OF THE MERGER AND TENDER THEIR UNITS IN EXCHANGE FOR SHARES IN THE TRUST.
EACH LIMITED PARTNER IS URGED TO REVIEW CAREFULLY HIS OR HER PERSONAL FINANCIAL
CIRCUMSTANCES TO ASSESS THE RELATIVE BENEFITS AND RISKS OF HOLDING SHARES.
Each of the General Partners determined that the terms of the Merger
Agreement and the transactions contemplated thereby, including the consideration
to be received by the Limited Partners in connection with the Merger, are fair
to its respective Limited Partners from a financial point of view and are in the
best interests of each RELP's Limited Partners. Accordingly, the Boards of
Directors of the General Partners approved and adopted the Merger Agreement and
the transactions contemplated thereby and resolved to recommend that the Limited
Partners approve and adopt the Merger Agreement and the transactions
contemplated thereby.
In reaching their determinations that the Merger Agreement and the
transactions contemplated thereby are fair to the Limited Partners from a
financial point of view and in their best interests, the General Partners
consulted with Realco and its advisors and considered the long-term interests of
the Limited Partners based on several factors as to which relative weights were
not assigned. For a full discussion of the RELPS' reason for the Merger and a
greater discussion relating to the fairness of the Merger, see "The
Merger -- Background of and Reasons for the Merger" in the Prospectus.
Fairness Opinion. On June 16, 1997, the General Partner, on behalf of each
RELP retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the General Partner, on behalf of
each RELPS as to the consideration to be received by the Limited Partners in
connection with the Merger, which consideration was determined through
negotiations between the common management of the RELPS and the Trust. The RELPS
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions and valuation for corporate purposes especially with respect to
REITs and other real estate companies. On June 30, 1997, Houlihan delivered its
written opinion to the Boards of Directors of the General Partners (the
"Houlihan Opinion"), to the effect that, as of the date of
7
<PAGE> 308
such opinion, based on Houlihan's review and subject to the limitations
described in the Prospectus, see "The Merger -- Fairness Opinion," the
consideration to be received by the Limited Partners in connection with the
Merger was fair, from a financial point of view, to the RELP's respective
Limited Partners. The Houlihan Opinion does not constitute a recommendation to
any Limited Partner as to how any such Limited Partner should vote on the
Merger.
Comparison of Benefits and Detriments. Prior to concluding that the Merger
should be proposed to Limited Partners, each of the General Partners considered
several alternatives to the Merger. The alternatives considered by the General
Partners were liquidation of the RELPS, continuation of the RELPS and
reorganization of the RELPS into one or as separate REITs. In order to determine
whether the Merger or one or its alternatives would be more attractive to the
Limited Partners, the General Partners compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "The Merger -- Background of and
Reasons for the Merger."
THE GENERAL PARTNER OF RELP III BELIEVES THAT THE MERGER, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, IS FAIR AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS OF RELP III
AND HAS APPROVED THE AGREEMENT AND RECOMMENDS THAT THE LIMITED PARTNERS OF RELP
III VOTE FOR APPROVAL OF THE MERGER.
In the event the Merger is not consummated for any reason, RELP III will
continue to pursue its business objectives of maximizing the value of its
properties.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP III arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by RELP III to the General
Partner and its Affiliates during the three most recent fiscal years and the
six-month period ended June 30, 1997 and compares those payments against the
amount that would have been paid assuming the Merger had occurred January 1,
1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------ SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------------------- ----------------------- ----------------------- -----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees(1)......... $ -- $ -- $ -- $ -- $ 27,114 $ 39,117 $ 61,651 $ 102,751
Advisor Fees(2)............ 135,340 -- 166,444 -- 67,148 -- 82,201 --
Leasing Commissions(3)..... -- -- -- -- 62,699 62,699 288,133 288,133
Interest Expense(4)........ 208,656 233,973 1,229,888 1,298,049 1,141,138 1,264,892 711,851 749,042
Cash Distribution(5)....... 106,901 -- 106,901 21,338 70,562 21,338 14,900 --
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
$450,897 $233,973 $1,503,233 $1,319,387 $1,368,661 $1,388,046 $1,158,736 $1,139,926
======== ======== ========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) There were no property management fees for 1994 and 1995 since the
properties were triple-net leased and managed by the respective single
tenants and Curlew was excluded since it is not part of the Merger. In 1996
as the triple-net leases expired and the properties became multi-tenanted,
the RELP began paying property management fees to USAA Realty Company an
Affiliate of Realco. USAA Realty Company receives fees of up to 6% of the
cash receipts for managing and leasing services for the properties. Pro
forma numbers assume a 5% property management fee. RELP III was limited to
paying a 3% property management fee and up to a 3% leasing fee.
(2) Realco receives an advisory fee equal to 4% of cash receipts from operations
not to exceed 9% of adjusted cash flow from the RELP.
8
<PAGE> 309
(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments of lease commissions to outside brokers were not included. It was
assumed for pro forma numbers that the services of an outside broker would
still have been utilized.
(4) Represents interest on a note payable. Pro forma numbers assume the interest
rate would have been .5% higher.
(5) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.
NEW COMPENSATION
The Trust intends to engage an Affiliate to manage and lease the properties
obtained by the Trust from the RELPS pursuant to the Merger. The terms of this
engagement will be substantially similar to the terms governing the management
arrangements the Trust typically uses in managing its current properties.
MISCELLANEOUS
DISTRIBUTIONS TO LIMITED PARTNERS
Set forth below are distributions per Unit made by RELP III to the Limited
Partners during the most recent five fiscal years and the most recently
completed interim period:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
1992 1993 1994 1995 1996 JUNE 30, 1997
- ------ ------ ------ ------ ----- ----------------
<S> <C> <C> <C> <C> <C>
$24.95 $19.80 $15.00 $15.00 $9.75 $4.00
</TABLE>
SELECTED FINANCIAL INFORMATION
Selected Financial Information and certain pro forma financial statements
with respect to the Partnership are set forth in "Pro Forma Financial Statements
of the Trust" and "Index to Financial Information" in the Prospectus.
9
<PAGE> 310
AMERICAN INDUSTRIAL PROPERTIES REIT
SUPPLEMENT TO PROSPECTUS
FOR
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
The General Partner of USAA Income Properties IV Limited Partnership
(herein referred to as
"RELP IV" or the "Partnership") is soliciting the Limited Partners' approval of
the merger with and into American Industrial Properties REIT, a Texas real
estate investment trust (the "Trust"), as part of which Limited Partners of RELP
IV will exchange Units of Limited Partnership Interests ("Units") in RELP IV for
Shares of Beneficial Interests ("Shares") in the Trust. This solicitation is
being made in conjunction with the proposed merger with and into the Trust of up
to four publicly-held limited partnerships, including RELP IV (the "Merger").
The proposal is described in detail in the Joint Proxy Statement/Prospectus
dated July , 1997 (the "Prospectus"). For the definition of capitalized terms
used in the Supplement, which are not separately defined herein, see "Glossary"
in the Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each of
the RELPS. This Supplement to the Prospectus has been prepared to highlight the
risks, effects and fairness of the Merger for the Limited Partners of RELP IV.
It does not purport to provide an overall summary of the Merger or to highlight
all of its material terms, conditions, risks or effects. See "Summary" and "The
Merger" in the Prospectus. Furthermore, to the extent this Supplement summarizes
portions of the Prospectus, such discussions are qualified in their entirety by
the more detailed discussions of those matters appearing in the Prospectus.
Supplements have also been prepared for each of the other RELPS and copies of
such supplements will be provided promptly without charge to each Limited
Partner or his representative who has been so designated in writing upon written
request to RELP IV at 8000 Robert F. McDermott Fwy., IH 10 West, Suite 600, San
Antonio, Texas 78230-3884.
Limited Partners of RELP IV participating in the Merger will be subject to
various risks, and these should be taken into account by the Limited Partners in
deciding how to cast their votes. These risks are briefly summarized below:
Risks Related to the Merger
- The Trust has generated losses from operations every year since 1988.
- Limited Partners who become shareholders of the Trust may not receive the
same level of distributions as previously received from RELP IV. Limited
Partners may initially receive no distributions because the Trust
currently is not paying distributions.
- Uncertainties at the time of voting regarding the potential assets and
leverage of the Trust because of the uncertainty as to which RELPS will
participate in the Merger, making it difficult for Limited Partners to
make an informed decision regarding the Trust's potential financial
strength.
- The change in the nature of each Limited Partner's investment from
holding an interest in a specific portfolio of properties in a finite
life entity to holding an interest in an ongoing real estate investment
trust, whose real estate portfolio may be changed from time to time by
the Trust's Board without the approval of the shareholders and which does
not plan to liquidate such assets within a fixed period.
- The possibility that the Net Asset Values assigned to RELP IV may not
reflect the true value of such RELP IV's assets.
- The common management of the RELPS, who are also Affiliates of Realco,
negotiated the terms of the Merger on behalf of all the RELPS. As a
result, the terms of the Merger may be less favorable to
<PAGE> 311
RELP IV than if RELP IV had a representative independent of Realco
negotiating on its behalf. Realco is subject to various conflicts of
interest, including the following:
- It is the sole shareholder of each General Partner.
- It is a significant shareholder of the Trust.
- Two of the eight members of the Board of Trust Managers are Affiliates
of and were designated by Realco.
- An Affiliate will receive benefits from the Trust in connection with the
management and leasing of the properties formerly owned by the RELPS.
- Taxable income or loss will be recognized by each taxable Limited Partner
of RELP IV attributable to the Merger in an amount equal to the Limited
Partner's allocable share of the income or loss recognized by RELP IV
from the Trust's acquisition of RELP IV's assets and Limited Partners
will receive no cash from the Merger (other than cash received in lieu of
fractional Shares) to pay taxes arising from any taxable income (see "The
Merger -- Material Federal Income Tax Consequences").
- Potential liability of the Trust for unknown, undisclosed or contingent
liabilities of the Participating RELPS including claims against the Trust
for indemnification, environmental liabilities, and title defects, which
could adversely affect the cash liquidity of the Trust and its future
ability to make distributions to shareholders.
- Potential dilution to shareholders of the Trust from the issuance of
additional equity securities at what may be less than their fair market
value.
- Any declaration of distributions to shareholders is subordinate to the
payment of the Trust's debts and obligations, which could adversely
affect the ability of the Trust to make expected distributions to
shareholders in the future.
- Expenses of the Merger will be borne by the Trust exclusively, unless (i)
three or more of the RELPS do not approve the Merger, in which event
Realco will reimburse the Trust for up to $250,000 of the Trust's
expenses, or (ii) the Merger Agreement is terminated under certain
circumstances.
- The majority vote of the Limited Partners of RELP IV binds all Limited
Partners; if the Merger is approved, Limited Partners who voted against
the Merger will have their Units converted into Shares unless they
properly exercise their dissenters' rights.
- Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating RELP IV or
continuing its operations as a limited partnership.
- The Trust has different business objectives than the RELPS, including the
intent to acquire new properties and, from time to time, to dispose of
existing properties and reinvest the proceeds therefrom, to the extent a
distribution is not required to maintain REIT status.
- The Shares may initially trade at prices substantially below prices as of
the date of execution of the Merger Agreement, the date hereof or the
date of the Special Meetings.
- Increases in market interest rates may adversely affect the price of the
Shares.
- Approval of the Merger by the Limited Partners will result in the loss of
their respective rights under the Partnership Agreement and the
partnership law of the State of Delaware.
- If the Merger Agreement is terminated prior to consummation, under
certain circumstances, each RELP and the Trust may have to pay their
Proportionate Share of a termination fee or of the expenses of the
Merger.
2
<PAGE> 312
- The Trust's organizational documents do not restrict the Trust's ability
to incur additional indebtedness. As a result, the Trust could increase
its debt service requirements to a level that may adversely affect the
Trust's ability to make future distributions and may increase the risk of
default.
- The investment and financing policies of the Trust are determined by the
Trust Managers and may be amended or revised at any time without a vote
of the shareholders of the Trust.
- Possible claims against the Trust for the remediation of environmental
conditions, which could result in substantial expenditures for
remediation and in a loss of revenues during remediation efforts.
- Risks associated with the acquisition and development of commercial and
industrial properties, including lease-up and financing risks and the
risk that such properties may not perform as expected.
- Risks associated with increased portfolio size and geographic
diversification as a result of the Merger, including the adequacy of the
number of personnel and the available resources to manage the new
portfolio.
- The occurrences of uninsured liability or casualty, reducing the Trust's
capital and adversely affecting anticipated profits.
- The potential expense of compliance with the Americans With Disabilities
Act, fire and safety, and other regulatory requirements applicable to the
operation of the Trust's properties.
- Taxation of the Trust as a corporation if it fails to qualify as a REIT
and the Trust's liability for increased federal, state and local income
taxes in such event.
- Certain provisions in the Trust's governing documents, including the
right to redeem Shares from a shareholder if he owns, directly or
indirectly, more than 9.8% of the Trust's outstanding Shares or to
restrict voting and distribution rights with respect to Shares owned in
excess of such limit, and the Trust Managers' right to issue other
classes of equity securities could delay or prevent changes in control of
the Trust, even if such changes in control were in the shareholders' best
interest.
General Real Estate Investment Risks
- Risks normally incidental to the ownership and operation of industrial
and commercial properties, including, among others, changes in general
national economic or local market conditions, competition for tenants,
changes in market rental rates, inability to collect rents from tenants
due to bankruptcy or insolvency of tenants or otherwise, and the need to
periodically make capital improvements.
- Risks associated with leveraged real estate investments, such as the
Trust's inability to meet required principal and interest payments, the
risk that existing indebtedness will not be refinanced or that the terms
of such refinancing will not be favorable, and the risk that necessary
capital expenditures will not be able to be financed on favorable terms
or at all.
- The illiquidity of real estate investments will limit the Trust's ability
to vary its portfolio in response to changes in economic or other
conditions.
- Competition from competing properties which could decrease the occupancy
levels and rental rates of the Trust's investments.
- The Trust's assets are subject to general operating risks common to all
real estate developments, including increases in operating costs not
offset by rental increases. In addition, the Trust's assets are primarily
industrial or commercial properties, making the Trust's profitability
dependent upon general trends affecting that type of real estate
investment.
The Merger involves numerous federal income tax consequences to the Limited
Partners and the shareholders of the Trust. For a complete discussion describing
these consequences, see "The Merger --
3
<PAGE> 313
Material Federal Income Tax Considerations" in the Prospectus. The material
federal income tax issues include the following:
- The taxable Limited Partners will realize taxable gain or loss in the
Merger (which may be ordinary or capital in nature) and the Limited
Partners will not receive cash from the Merger (other than cash received
in lieu of fractional Shares) to pay any taxes due on any taxable gain.
Any gain or loss will be recognized in the year the Merger is
consummated.
- The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by RELP IV and, as applicable, the
extent to which the fair market value of the Shares distributed to the
Limited Partner exceeds the Limited Partner's adjusted basis in its
Units.
- As a REIT, the Trust will be entitled to a tax deduction for
distributions made to its shareholders. To continue to qualify as a REIT,
however, the Trust must satisfy income, asset and ownership tests imposed
by the Code. Failure to so qualify will result in the loss of such
deduction for distributions paid as well as additional tax on Trust
income and reduced or no distributions to shareholders.
- Trust distributions received by taxable shareholders should be treated as
portfolio income. Such distributions should not be treated as UBTI to
certain tax-exempt shareholders (subject to certain exceptions which may
be applicable to pension-trusts.
ALLOCATION OF CONSIDERATION
THE MERGER
The Trust is proposing to acquire the Units of each of the RELPS from
Limited Partners who, by a majority vote, approve participation in the Merger.
If the Merger is approved, the RELPS will cease to exist and the Limited
Partners will receive Shares based upon the relative Net Asset Values of the
RELPS negotiated by the common management of the RELPS and the Trust. The Shares
received by the Limited Partners will be listed for trading on the New York
Stock Exchange (the "NYSE"). If the requisite number of Limited Partners of only
one of the RELPS approves the Merger, the Trust has the right, but not the
obligation, to consummate the Merger with the one participating RELP.
Any Limited Partner may abstain from or vote against the Merger and, if the
Merger is approved, the Limited Partner can still participate in the Merger, so
long as the Limited Partner does not exercise dissenters' rights. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "The Merger -- Dissenters' Rights" and "The Special Meetings -- RELP
Meeting."
The General Partners are proposing amendments to the Partnership Agreements
to permit the closing of the transactions contemplated by the Merger. Limited
Partners voting in favor of the Merger will be deemed to have voted in favor of
each of these proposed amendments. A majority vote of Limited Partners is
required to approve the proposed amendments and to approve the Merger. The
proposed amendments authorize the following: (i) the Merger of each RELP with
and into the Trust, whether or not the Trust would be regarded as an Affiliate
of the General Partners; and (ii) all understandings between the Trust and the
General Partners contemplated by the Prospectus, irrespective of any provisions
in the Partnership Agreements which might otherwise prohibit such transactions.
See "The Merger -- Proposed Amendments to Partnership Agreements." As of May 15,
1997, the General Partner of RELP IV owned 6,130 Units in RELP IV, or
approximately 10% of all outstanding Units of RELP IV. Pursuant to the RELP IV
Limited Partnership Agreement, the Units held by the RELP IV General Partner are
not eligible to vote at the RELP Special Meeting.
Each of the General Partners of the RELPS has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
4
<PAGE> 314
NET ASSET VALUE
The Trust is offering 75.68 Shares in consideration for each Unit in RELP
IV. The following table sets forth the methodology utilized in determining the
number of Shares to be offered by the Trust for each Unit:
<TABLE>
<S> <C>
Asset Value of Partnership Properties....................... $ 28,722,400
Cash and Cash Equivalents(1)................................ $ 0
Mortgages and Other Long-Term Debt(2)....................... $(16,704,013)
Net Asset Value of Partnership Properties(3)................ $ 12,018,387
Percentage of Aggregate Net Asset Value of All RELPS........ 20.75%
Net Asset Value Per Original $500 Investment(4)............. $ 198.67
Number of Shares Allocable to Partnership................... 4,578,433
Percentage of Total Shares to be issued in the Merger....... 20.75%
Allocation of Shares to
-- Limited Partners....................................... 4,578,433
-- General Partner(5)..................................... 0
Allocation of Shares Per Original $500 Investment by Limited
Partners.................................................. 75.68
</TABLE>
- ---------------
(1) All cash and cash equivalents held by RELP IV, net of related payables,
liabilities or other contingencies, will be distributed to the Limited
Partners immediately prior to the Merger pursuant to a special
distribution.
(2) Estimated balance as of December 31, 1997.
(3) Such amounts were determined by negotiation between management of the
RELPS and the Trust.
(4) "Net Asset Value Per Original $500 Investment" is computed by dividing
that portion of the Net Asset Value allocable to the Limited Partners
by the number of outstanding Units. This is not intended to be an
estimate of the value of the Shares exchangeable for each Unit or the
price at which such Shares may trade in the market. See "Risk Factors."
(5) The General Partner of RELP IV has agreed to waive any right to receive
Shares to which it may otherwise have been entitled in exchange for its
general partnership interest.
CONSIDERATIONS UNIQUE TO RELP IV
Due to the substantial similarities among the RELPS, such as their similar
investment portfolios, common investment objectives and policies, the fact that
the RELPS' assets are managed by the General Partners or Affiliates and
substantial similarities in the language and scope of their Partnership
Agreements, many of the consequences of participating in the Merger are common
to the Limited Partners of each of the RELPS. The purpose of this section is,
however, to highlight features of RELP IV which may distinguish the situation of
this Partnership from that of the other RELPS and which should be taken into
account by RELP IV Limited Partners when evaluating the merits and risks of the
proposed Merger.
Status of the Portfolio. At the time of RELP IV's formation, the General
Partner anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within ten
years after the acquisition of the properties. Accordingly, based upon the
completion of the acquisition of RELP IV's portfolio in 1988, it was anticipated
that the portfolio would be liquidated by 1998. The General Partner has not
offered any of the properties for sale due to pending improvements in the
surrounding real estate markets and stabilization of occupancy and rental
revenue through re-leasing of the properties. An unsolicited offer of $24.7
million for the Apollo Building was received and a counter-offer declined in
January, 1997. RELP IV owns a 55.84% interest in a joint venture which
beneficially owns the Apollo Building. No offers have been received on the other
three properties. See "Business of RELPS -- RELP IV" in the Prospectus for
additional information regarding the RELP IV portfolio. The General Partner
believes that the valuation of $28,722,400 (including 55.84% of Apollo and
$16,704,013 in debt assumption) for the portfolio which was negotiated by common
management of the RELPS and the Trust is fair to the Limited Partners. See "The
Merger -- Background and Reasons for the Merger."
5
<PAGE> 315
Amount of Partnership Debt. As of December 31, 1996, RELP IV had
indebtedness of $15,668,087, representing approximately 40% of the value of its
real estate investments. Excluding interests in properties that will not be
acquired by the Trust pursuant to the Merger, as a group, the RELPS had, as of
that same date, aggregate outstanding indebtedness of $30,668,087, representing
approximately 34% of the total value of the RELPS' real estate investments. As
of December 31, 1996, the Trust had indebtedness of $53,818,000, representing
approximately 57% of its real estate assets. Thus, the Trust's total
indebtedness will be significantly greater, both in amount and as a percentage
of assets, than RELP IV's current level of indebtedness. If the Trust is more
leveraged than the RELPS, this will result in an increase in the debt service
payments that must be made by the Trust, increase the Trust's risk of losing its
assets through foreclosure and increase the risk that the Trust may not be able
to make distributions to shareholders.
Merger as a Taxable Event. Limited Partners of RELP IV will realize a
taxable loss on the Merger in an amount equal to their allocable share of the
excess of the sum of the fair market value of the Shares received by the
Partnership over the Partnership's adjusted tax basis of the Partnership assets.
Assuming that the value of the Shares reflects the Net Asset Values of the
assets acquired in the Merger, if RELP IV participates in the Merger, each of
its Limited Partners would have recognized taxable loss of approximately 34% (as
of December 31, 1997) for every Unit held, representing an original investment
of $500. The actual amount of loss recognized by each Limited Partner will
depend upon the value ascribed to the Shares for federal tax purposes. Because
the value of the Shares will fluctuate immediately after the Merger and the 1997
operations of RELP IV have not been included, it is possible that such values
may be used for purposes of calculating the taxable loss and that the taxable
loss per Unit will differ from the calculation stated above.
Investment Strategy. The principal investment objectives of RELP IV are, in
order of their priority, to (i) preserve and protect the Partnership's capital,
(ii) obtain long-term appreciation in the value of its properties, and (iii)
provide partially "tax sheltered" cash distributions from operations. RELP IV
has attempted to achieve these objectives through investment in a diversified
portfolio of income-producing real properties. The Partnership acquired the
Linear Technology Corporate Headquarters, the Eastman Kodak Building and the
1881 Pine Street Building (Century Electric Office Building) during 1987 and a
55.8% joint venture interest in USAA Chelmsford Associates Joint Venture, which
beneficially owns the Apollo Computer Research and Development Headquarters
Building, during 1988. These properties had an average occupancy level of 83% at
an average annual rent of $31.68 per square foot for fiscal 1996 and 95% at an
average annual rent of $33.29 per square foot in the six months ended June 30,
1997. RELP IV has a history of making regular quarterly distributions to its
Limited Partners. See "Miscellaneous -- Distributions to Limited Partners" below
in this Supplement.
Management Compensation. RELP IV has no employees, rather its operations
are managed by Realco. Under the Advisory Agreement pursuant to which Realco
manages the operations of RELP IV, Realco is entitled to management fees equal
to 9% of adjusted cash flow from operations of the Partnership. This
relationship will terminate if RELP IV is merged into the Trust. USAA Realty
Company, an Affiliate of Realco provides property management and leasing
services for the properties and may receive fees up to 6% of property cash
receipts for those services. If RELP IV participates in the Merger, neither the
General Partner nor any of its Affiliates will receive any compensation for
services rendered in connection the Merger. The Trust intends to retain the
services of an Affiliate of Realco to provide property management and leasing
services. See "Comparative Compensation, Fees and Distributions -- New
Compensation" below.
RISK FACTORS AND OTHER CONSIDERATIONS
In evaluating the Merger, Limited Partners should carefully consider the
contents of the Prospectus and give particular attention to the discussion of
the risks in participating in the Merger. See "Risk Factors" and "The
Merger -- Material Federal Income Tax Considerations."
6
<PAGE> 316
FAIRNESS OF THE MERGER
Based upon its analysis of the Merger, the General Partner of RELP IV
believes that:
(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners of RELP IV;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners of RELP IV; and
(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more attractive to
the Limited Partners of RELP IV than such alternatives.
THE GENERAL PARTNER OF RELP IV RECOMMENDS THAT LIMITED PARTNERS VOTE IN
FAVOR OF THE MERGER AND TENDER THEIR UNITS IN EXCHANGE FOR SHARES IN THE TRUST.
EACH LIMITED PARTNER IS URGED TO REVIEW CAREFULLY HIS OR HER PERSONAL FINANCIAL
CIRCUMSTANCES TO ASSESS THE RELATIVE BENEFITS AND RISKS OF HOLDING SHARES.
Each of the General Partners determined that the terms of the Merger
Agreement and the transactions contemplated thereby, including the consideration
to be received by the Limited Partners in connection with the Merger, are fair
to its respective Limited Partners from a financial point of view and are in the
best interests of each RELP's Limited Partners. Accordingly, the Boards of
Directors of the General Partners approved and adopted the Merger Agreement and
the transactions contemplated thereby and resolved to recommend that the Limited
Partners approve and adopt the Merger Agreement and the transactions
contemplated thereby.
In reaching their determinations that the Merger Agreement and the
transactions contemplated thereby are fair to the Limited Partners from a
financial point of view and in their best interests, the General Partners
consulted with Realco and its advisors and considered the long-term interests of
the Limited Partners based on several factors as to which relative weights were
not assigned. For a full discussion of the RELPS' reason for the Merger and a
greater discussion relating to the fairness of the Merger, see "The
Merger -- Background of and Reasons for the Merger" in the Prospectus.
Fairness Opinion. On June 16, 1997, the General Partners, on behalf of each
RELP retained Houlihan to render an opinion as to whether the consideration to
be received by the Limited Partners in connection with the Merger was fair, from
a financial point of view, to its Limited Partners. Houlihan was not requested
to, and did not make, any recommendation to the General Partners, on behalf of
each RELP as to the consideration to be received by the Limited Partners in
connection with the Merger, which consideration was determined through
negotiations between the common management of the RELPS and the Trust. The RELPS
retained Houlihan to render fairness opinions based upon Houlihan's experience
in the valuation of businesses and their securities in connection with mergers
and acquisitions and valuation for corporate purposes especially with respect to
REITs and other real estate companies. On June 30, 1997, Houlihan delivered its
written opinion to the Boards of Directors of the General Partners (the
"Houlihan Opinion"), to the effect that, as of the date of such opinion, based
on Houlihan's review and subject to the limitations described is the Prospectus,
see "The Merger -- Fairness Opinions," the consideration to be received by the
Limited Partners in connection with the Merger was fair, from a financial point
of view, to the RELP's respective Limited Partners. The Houlihan Opinion does
not constitute a recommendation to any Limited Partner as to how any such
Limited Partner should vote on the Merger.
Comparison of Benefits and Detriments. Prior to concluding that the Merger
should be proposed to Limited Partners, each of the General Partners considered
several alternatives to the Merger. The alternatives considered by the General
Partners were liquidation of the RELPS, continuation of the RELPS, and
reorganization of the RELPS into one or as separate REITs. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partners compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives.
7
<PAGE> 317
A detailed discussion of the potential benefits and detriments of each of these
alternatives is provided in "The Merger -- Background of and Reasons for the
Merger."
THE GENERAL PARTNER OF RELP IV BELIEVES THAT THE MERGER, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, IS FAIR AND IN THE BEST INTERESTS OF THE LIMITED PARTNERS OF RELP IV AND
HAS APPROVED THE AGREEMENT AND RECOMMENDS THAT THE LIMITED PARTNERS OF RELP IV
VOTE FOR APPROVAL OF THE MERGER.
In the event the Merger is not consummated for any reason, RELP IV will
continue to pursue its business objectives of maximizing the value of its
properties.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and its Affiliates under current RELP IV arrangements with those that
would have been paid had the Merger been in place. The following table sets
forth the compensation, fees and distributions by RELP IV to the General Partner
and its Affiliates during the three most recent fiscal years and the six-month
period ended June 30, 1997 and compares those payments against the amount that
would have been paid assuming the Merger had occurred January 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
-------------------- ---------------------- -------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- ---------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees(1)............ $ 63,118 $ 68,951 $ 52,802 $ 57,512 $ 50,894 $ 54,536 $ 20,967 $ 22,845
Advisor Fees(2)............... 91,449 -- 90,376 -- 50,134 -- 13,557 --
Leasing Commissions(3)........ -- -- 262,476 262,476 3,574 3,574 -- --
Interest Expense(4)........... $600,000 630,000 600,000 630,000 600,000 630,000 313,578 159,929
Cash Distributions(5)......... 100,516 -- 100,516 18,557 65,575 18,557 27,244 --
-------- -------- ---------- -------- -------- -------- -------- --------
$855,083 $698,951 $1,106,170 $968,545 $770,177 $706,667 $375,346 $182,774
======== ======== ========== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) USAA Realty Company receives fees of up to 6% of the cash receipts of the
properties for managing and providing leasing services for the properties.
Pro forma numbers include a 1% property management fee on the Linear
Technologies property.
(2) Realco receives an advisory fee equal to 9% of adjusted cash flow from
operations.
(3) Actual numbers have been adjusted to represent the gross amount of
commissions due, which are presently earned when the monthly rent from the
lease contracts are collected under the current Partnership Agreement.
Payments of lease commissions to outside brokers were not included. It was
assumed for the pro forma numbers that the services of an outside broker
would still have been utilized.
(4) Represents interest on a note payable. Pro forma number 5 assume the
interest rate would have been .5% higher.
(5) Includes all cash distributions made to the General Partner and its
Affiliates resulting from ownership of Units and general partner interests.
8
<PAGE> 318
NEW COMPENSATION
The Trust intends to engage an Affiliate of Realco to manage and lease the
properties obtained by the Trust from the RELPS pursuant to the Merger. The
terms of this engagement will be substantially similar to the terms governing
the management arrangements the Trust typically uses in managing its current
properties.
MISCELLANEOUS
DISTRIBUTIONS TO LIMITED PARTNERS
Set forth below are distributions per Unit made by RELP IV to the Limited
Partners during the most recent five fiscal years and the most recently
completed interim period:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
1992 1993 1994 1995 1996 JUNE 30, 1997
- ------ ------ ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C>
$27.00 $19.50 $15.00 $15.00 $ 9.75 $4.00
</TABLE>
SELECTED FINANCIAL INFORMATION
Selected Financial Information and certain pro forma financial statements
with respect to the Partnership are set forth in "Pro Forma Financial Statements
of the Trust" and "Index to Financial Information" in the Prospectus.
9
<PAGE> 319
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Subsection (B) of Section 9.20 of the Texas Real Estate Investment Trust
Act, as amended (the "Act"), authorizes a real estate investment trust ("REIT")
to indemnify any person who was, is, or is threatened to be made a named
defendant or respondent in any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, arbitrative, or
investigative, any appeal in such an action, suit, or proceeding, or any inquiry
or investigation that can lead to such an action, suit or proceeding because the
person is or was a trust manager, officer, employee or agent of the REIT or is
or was serving at the request of the REIT as a trust manager, director, officer,
partner, venturer, proprietor, trustee, employee, agent, or similar functionary
of another REIT, corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan, or other enterprise against expenses (including
court costs and attorney fees), judgments, penalties, fines and settlements if
he conducted himself in good faith and reasonably believed his conduct was in or
not opposed to the best interests of the REIT and, in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful.
The Act further provides that, except to the extent otherwise permitted by
the Act, a person may not be indemnified in respect of a proceeding in which the
person is found liable on the basis that personal benefit was improperly
received by him or in which the person is found liable to the REIT.
Indemnification pursuant to Subsection (B) of Section 9.20 of the Act is limited
to reasonable expenses actually incurred and may not be made in respect of any
proceeding in which the person has been found liable for willful or intentional
misconduct in the performance of his duty to the REIT.
Subsection (C) of Section 15.10 of the Act provides that a trust manager
shall not be liable for any claims or damages that may result from his acts in
the discharge of any duty imposed or power conferred upon him by the REIT if, in
the exercise of ordinary care, he acted in good faith and in reliance upon
information, opinions, reports, or statements, including financial statements
and other financial data, concerning the real estate investment trust, that were
prepared or presented by officers or employees of the real estate investment
trust, legal counsel, public accountants, investment bankers, or certain other
professionals, or a committee of trust manager of which the trust manager is not
a member. In addition, no trust manager shall be liable to the REIT for any act,
omission, loss, damage, or expense arising from the performance of his duty to a
REIT, save only for his own willful misfeasance, willful malfeasance or gross
negligence.
Article Sixteen of the Trust's Third Amended and Restated Declaration of
Trust provides that the Trust shall indemnify officers and trust managers as
follows:
"Indemnitee" means (A) any present or former Trust Manager or officer
of the Trust, (B) any person who while serving in any of the capacities
referred to in clause (A) hereof served at the Trust's request as a trust
manager, director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another real estate investment
trust or foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise and (C)
any person nominated or designated by (or pursuant to authority granted by)
the Trust Managers or any committee thereof to serve in any of the
capacities referred to in clauses (A) or (B) hereof.
"Official Capacity" means (A) when used with respect to a Trust
Manager, the office of Trust Manager of the Trust and (B) when used with
respect to a person other than a Trust Manager, the elective or appointive
office of the Trust held by such person or the employment or agency
relationship undertaken by such person on behalf of the Trust, but in each
case does not include service for any other real estate investment trust or
foreign or domestic corporation or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.
"Proceeding" means any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit or proceeding, and any
inquiry or investigation that could lead to such an action, suit or
proceeding.
II-1
<PAGE> 320
The Trust shall indemnify every Indemnitee against all judgments,
penalties (including excise and similar taxes), fines, amounts paid in
settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he or she was, is or is threatened
to be named defendant or respondent, or in which he or she was or is a
witness without being named a defendant or respondent, by reason, in whole
or in part, of his or her serving or having served, or having been
nominated or designated to serve, in any of the capacities referred to in
paragraph (a)(i) of Article Six teen, to the fullest extent that
indemnification is permitted by Texas law. An Indemnitee shall be deemed to
have been found liable in respect of any claim, issue or matter only after
the Indemnitee shall have been so adjudged by a court of competent
jurisdiction after exhaustion of all appeals therefrom. Reasonable expenses
shall include, without limitation, all court costs and all fees and
disbursements of attorneys for the Indemnitee.
Without limitation of paragraph (b) of Article Sixteen and in addition
to the indemnification provided for in paragraph (b) of Article Sixteen,
the Trust shall indemnify every Indemnitee against reasonable expenses
incurred by such person in connection with any proceeding in which he or
she is a witness or a named defendant or respondent because he or she
served in any of the capacities referred to in paragraph (a)(i) of Article
Sixteen.
Reasonable expenses (including court costs and attorneys' fees)
incurred by an Indemnitee who was or is a witness or was, is or is
threatened to be made a named defendant or respondent in a Proceeding shall
be paid or reimbursed by the Trust at reasonable intervals in advance of
the final disposition of such Proceeding after receipt by the Trust of a
written undertaking by or on behalf of such Indemnitee to repay the amount
paid or reimbursed by the Trust if it shall ultimately be determined that
he or she is not entitled to be indemnified by the Trust as authorized in
Article Sixteen. Such written undertaking shall be an unlimited obligation
of the Indemnitee but need not be secured and it may be accepted without
reference to financial ability to make repayment. Notwithstanding any other
provision of Article Sixteen, the Trust may pay or reimburse expenses
incurred by an Indemnitee in connection with his or her appearance as a
witness or other participation in a Proceeding at a time when he or she is
not named a defendant or respondent in the Proceeding.
The indemnification provided by Article Sixteen shall (i) not be
deemed exclusive of, or to preclude, any other rights to which those
seeking indemnification may at any time be entitled under the Trust's
Bylaws, any law, agreement or vote of shareholders or disinterested Trust
Managers, or otherwise, or under any policy or policies of insurance
purchased and maintained by the Trust on behalf of any Indemnitee, both as
to action in his or her Official Capacity and as to action in any other
capacity, (ii) continue as to a person who has ceased to be in the capacity
by reason of which he or she was an Indemnitee with respect to matters
arising during the period he or she was in such capacity, and (iii) inure
to the benefit of the heirs, executors and administrators of such a person.
No amendment, modification or repeal of Article Sixteen or any
provision of Article Sixteen shall in any manner terminate, reduce or
impair the right of any past, present or future Indemnitee to be
indemnified by the Trust, nor the obligation of the Trust to indemnify any
such Indemnitee, under and in accordance with the provisions of Article
Sixteen as in effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to matters
occurring, in whole or in part, prior to such amendment, modification or
repeal, regardless of when such claims may be asserted.
If the indemnification provided in Article Sixteen is either (i)
insufficient to cover all costs and expenses incurred by any Indemnitee as
a result of such Indemnitee being made or threatened to be made a defendant
or respondent in a Proceeding by reason of his or her holding or having
held a position named in paragraph (a)(i) of this Article Sixteen or (ii)
not permitted by Texas law, the Trust shall indemnify, to the fullest
extent that indemnification is permitted by Texas law, every Indemnitee
with respect to all costs and expenses incurred by such Indemnitee as a
result of such Indemnitee being made or threatened to be made a defendant
or respondent in a Proceeding by reason of his or her holding or having
held a position named in paragraph (a)(i) of this Article Sixteen.
II-2
<PAGE> 321
Each officer and Trust Manager of the Trust is party to an
Indemnification Agreement with the Trust which provides that the Trust
shall indemnify such person to the fullest extent permitted by the Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
*3.1 -- Third Amended and Restated Declaration of Trust
**3.2 -- Fifth Amended and Restated Bylaws
4.1 -- Indenture dated November 15, 1985, by and between
American Industrial Properties REIT (the "Trust") and IBJ
Schroder Bank & Trust Company (Incorporated herein by
reference from Exhibit 10.4 to Form S-4 of American
Industrial Properties REIT, Inc. ("AIP Inc.") dated March
16, 1994; File No. 33-74292)
**5.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
**8.1 -- Tax Opinion of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P.
*10.1 -- Form of Indemnification Agreement
*10.2 -- Employee and Trust Manager Incentive Share Plan
10.3 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.4 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.5 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Advisors Limited
Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.6 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.7 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.8 -- Registration Rights Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Securities Advisors
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.9 -- Common Share Purchase Agreement dated as of June 20,
1997, by and among the Trust, MS Real Estate Special
Situations, Inc. ("MSRE") and Morgan Stanley Asset
Management, Inc. ("MSAM") as agent and attorney-in-fact
for specified clients (the "MSAM Purchasers")
(Incorporated herein by reference from the Trust's Form
8-K dated July 22, 1997; File No. 1-9016)
</TABLE>
II-3
<PAGE> 322
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.10 -- Registration Rights Agreement dated as of June 20, 1997,
by and among the Trust, MSRE and MSAM on behalf of the
MSAM Purchasers (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.11 -- Renewal, Extension, Modification and Amendment Agreement
dated February 26, 1997, executed by the Trust in favor
of USAA Real Estate Company ("Realco") (Incorporated
herein by reference from Exhibit 10.1 to the Trust's Form
8-K dated March 4, 1997; File No. 1-9016)
10.12 -- Share Purchase Agreement dated as of December 20, 1996,
by and among the Trust, Realco and AIP (Incorporated by
reference from Exhibit 99.7 to the Trust's Form 8-K dated
December 23, 1996; File No. 1-9016)
10.13 -- Share Purchase Agreement dated as of December 13, 1996,
by and between the Trust and Realco (Incorporated herein
by reference from the Trust's Form 8-K dated December 23,
1996; File No. 1-9016)
10.14 -- Registration Rights Agreement dated as of December 20,
1996, by and between the Trust and Realco, as amended
(Incorporated herein by reference from Exhibit 99.9 to
the Trust's Form 8-K dated December 23, 1996; File No.
1-9016)
10.15 -- Registration Rights Agreement dated as of December 19,
1996, by and between the Trust and Realco (Incorporated
herein by reference from Exhibit 99.8 to the Trust's Form
8-K dated December 23, 1996; File No. 1-9016)
10.16 -- 401(k) Retirement and Profit Sharing Plan (Incorporated
herein by reference from Exhibit 10.5 to Amendment No. 1
to Form S-4 of AIP, Inc. dated March 4, 1994; File No.
33-74292)
10.17 -- Amendments to 401(k) Retirement and Profit Sharing Plan
(Incorporated herein by reference from Exhibit 10.4 to
Form 10-K of the Trust dated March 27, 1995)
10.18 -- Settlement Agreement by and between American Industrial
Properties REIT, Patapsco #1 Limited Partnership,
Patapsco #2 Limited Partnership, The Manufacturers Life
Insurance Company and The Manufacturers Life Insurance
Company (U.S.A.) dated as of May 22, 1996 (incorporated
herein by reference from Exhibit 99.1 to Form 8-K of the
Trust dated May 22, 1996; File No. 1-9016)
10.19 -- Agreement and Assignment of Partnership Interest, Amended
and Restated Agreement and Certificate of Limited
Partnership and Security Agreement for Patapsco
Center -- Linthicum Heights, Maryland (incorporated
herein by reference from Exhibit 10.8 to Amendment No. 1
to Form S-4 of AIP Inc. dated March 4, 1994; File No.
33-74292)
10.20 -- Note dated November 15, 1994 in the original principal
amount of $12,250,000 with AIP Properties #1 L.P. as
Maker and AMRESCO Capital Corporation as Payee
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 22, 1994; File No.
1-9016)
10.21 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #1 L.P. and
AMRESCO Capital Corporation (incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.22 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$12,250,000 (incorporated herein by reference from
Exhibit 99.2 to Form 8-K of the Trust dated June 23,
1995; File No. 1-9016)
</TABLE>
II-4
<PAGE> 323
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.23 -- Note dated November 15, 1994 in the original principal
amount of $2,150,000 with AIP Properties #2 L.P. as Maker
and AMRESCO Capital Corporation as Payee (Incorporated
herein by reference from Exhibit 99.3 to Form 8-K of the
Trust dated November 22, 1994; File No. 1-9016)
10.24 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #2 L.P. and
AMRESCO Capital Corporation (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.25 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$2,250,000 (Incorporated herein by reference from Exhibit
99.1 to Form 8-K of the Trust dated June 23, 1995; File
No. 1-9016)
10.26 -- Promissory Note dated November 25, 1996, by and between
AIP Inc. and Realco (Incorporated herein by reference
from Exhibit No. 99.5 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.27 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Huntington Drive Center)
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.28 -- Note dated November 15, 1996 in the original principal
amount of $4,575,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Huntington Drive Center) (Incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.29 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Patapsco Industrial Center)
incorporated herein by reference from Exhibit 99.3 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.30 -- Note dated November 15, 1996 in the original principal
amount of $3,112,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Patapsco Industrial Center) (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.31 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Woodlake Distribution
Center) (incorporated herein be reference from Exhibit
99.5 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.32 -- Note dated November 15, 1996 in the original principal
amount of $1,537,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Woodlake Distribution Center) (Incorporated herein by
reference from Exhibit 99.6 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.33 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (All Texas properties except
Woodlake) (Incorporated herein by reference from Exhibit
99.7 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.34 -- Note dated November 15, 1996 in the original principal
amount of $1,162,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Meridian Street Warehouse) (Incorporated herein by
reference from Exhibit 99.8 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
</TABLE>
II-5
<PAGE> 324
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.35 -- Note dated November 15, 1996 in the original principal
amount of $2,775,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Beltline Business Center) (Incorporated herein by
reference from Exhibit 99.9 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.36 -- Note dated November 15, 1996 in the original principal
amount of $3,375,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Plaza South) (Incorporated herein by reference from
Exhibit 99.10 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.37 -- Note dated November 15, 1996 in the original principal
amount of $2,100,00 with AIP Properties #3, L.P. as Maker
and Life Investors Insurance Company as Payee (Commerce
North Park) (Incorporated herein by reference from
Exhibit 99.11 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.38 -- Note dated November 15, 1996 in the original principal
amount of $2,850,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Gateway 5 & 6) (Incorporated herein by reference from
Exhibit 99.12 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.39 -- Note dated November 15, 1996 in the original principal
amount of $5,175,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Northgate II) (Incorporated herein by reference from
Exhibit 99.13 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.40 -- Note dated November 15, 1996 in the original principal
amount of $1,327,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Westchase Park) (Incorporated herein by reference from
Exhibit 99.14 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.41 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Charles W. Wolcott
(Incorporated herein by reference from Exhibit 10.12 to
Form 10-K of the Trust for the year ended December 31,
1996)
10.42 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Marc Simpson (Incorporated
herein by reference from Exhibit 10.13 to Form 10-K of
the Trust for the year ended December 31, 1996)
10.43 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and David B. Warner (Incorporated
herein by reference from Exhibit 10.14 to Form 10-K of
the Trust for the year ended December 31, 1996)
10.44 -- Amendment No. 1 to Share Purchase Agreement dated as of
December 13, 1996 by and between the Trust and Realco
(Incorporated herein by reference from Exhibit 10.2 to
Form 8-K of the Trust dated March 4, 1997; File No.
1-9016)
**10.45 -- Management Agreement dated , 1997, by and
between the Trust and .
21.1 -- Listing of Subsidiaries (incorporated herein by reference
from Exhibit 27.1 to Form 10-K for the year ended
December 31, 1996; File No. 1-9016)
*23.1 -- Consent of Ernst & Young LLP
*23.2 -- Consent of KPMG Peat Marwick LLP
*27.1 -- Financial Data Schedule
*99.1 -- Proxy card of the Trust
*99.2 -- Proxy card of USAA Real Estate Income Investments I, A
California Limited Partnership
*99.3 -- Proxy card of USAA Real Estate Income Investments II
Limited Partnership
</TABLE>
II-6
<PAGE> 325
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
*99.4 -- Proxy card of USAA Income Properties III Limited
Partnership
*99.5 -- Proxy card of USAA Income Properties IV Limited
Partnership
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules
None
(c) Item 4(b) Information
The opinions of Prudential Securities Incorporated and Houlihan Lokey
Howard & Zukin are included as an Annex II-A and Annex II-B, respectively, to
the Joint Proxy Statement/Prospectus included in this Registration Statement.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or for the most recent
post-effective amendment thereof) which, individually or in the
aggregate, representing a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
4. That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
5. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the registrant undertakes that such reoffering
prospectus
II-7
<PAGE> 326
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
6. That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
7. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of the
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE> 327
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
the 22nd day of July, 1997.
AMERICAN INDUSTRIAL PROPERTIES REIT
/s/ CHARLES W. WOLCOTT
----------------------------------------
Charles W. Wolcott
President and Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on July 22, 1997. Each of the undersigned officers and
Trust Managers of the registrant hereby appoints Charles W. Wolcott or Marc A.
Simpson, either of whom may act, his true and lawful attorneys-in-fact with full
power to sign for him and in his name in the capacities indicated below and to
file any and all amendments to the registration statement filed herewith, making
such changes in the registration statement as the registrant deems appropriate,
and generally to do all such things in his name and behalf in his capacity as an
officer and director to enable the registrant to comply with the provisions of
the Securities Act of 1933 and all requirements of the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ CHARLES W. WOLCOTT Trust Manager, President and Chief Executive
- --------------------------------------------- Officer (Principal Executive Officer)
Charles W. Wolcott
/s/ MARC A. SIMPSON Vice President -- Finance, Chief Financial
- --------------------------------------------- Officer, Treasurer and Secretary (Principal
Marc A. Simpson Financial and Accounting Officer)
/s/ W.H. BRICKER Trust Manager
- ---------------------------------------------
W.H. Bricker
/s/ EDWARD B. KELLEY Trust Manager
- ---------------------------------------------
Edward B. Kelley
/s/ T. PATRICK DUNCAN Trust Manager
- ---------------------------------------------
T. Patrick Duncan
/s/ ROBERT E. GILES Trust Manager
- ---------------------------------------------
Robert E. Giles
/s/ STANLEY J. KRASKA, JR. Trust Manager
- ---------------------------------------------
Stanley J. Kraska, Jr.
/s/ RUSSELL C. PLATT Trust Manager
- ---------------------------------------------
Russell C. Platt
/s/ THEODORE R. BIGMAN Trust Manager
- ---------------------------------------------
Theodore R. Bigman
</TABLE>
II-9
<PAGE> 328
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
*3.1 -- Third Amended and Restated Declaration of Trust
**3.2 -- Fifth Amended and Restated Bylaws
4.1 -- Indenture dated November 15, 1985, by and between
American Industrial Properties REIT (the "Trust") and IBJ
Schroder Bank & Trust Company (Incorporated herein by
reference from Exhibit 10.4 to Form S-4 of American
Industrial Properties REIT, Inc. ("AIP Inc.") dated March
16, 1994; File No. 33-74292)
**5.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
**8.1 -- Tax Opinion of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P.
*10.1 -- Form of Indemnification Agreement
*10.2 -- Employee and Trust Manager Incentive Share Plan
10.3 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.4 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.5 -- Common Share Purchase Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Advisors Limited
Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.6 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.7 -- Registration Rights Agreement dated as of July 10, 1997,
by and between the Trust and ABKB/LaSalle Securities
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.8 -- Registration Rights Agreement dated as of July 3, 1997,
by and between the Trust and LaSalle Securities Advisors
Limited Partnership as Agent for and for the benefit of a
particular client (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
10.9 -- Common Share Purchase Agreement dated as of June 20,
1997, by and among the Trust, MS Real Estate Special
Situations, Inc. ("MSRE") and Morgan Stanley Asset
Management, Inc. ("MSAM") as agent and attorney-in-fact
for specified clients (the "MSAM Purchasers")
(Incorporated herein by reference from the Trust's Form
8-K dated July 22, 1997; File No. 1-9016)
10.10 -- Registration Rights Agreement dated as of June 20, 1997,
by and among the Trust, MSRE and MSAM on behalf of the
MSAM Purchasers (Incorporated herein by reference from
the Trust's Form 8-K dated July 22, 1997; File No.
1-9016)
</TABLE>
<PAGE> 329
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.11 -- Renewal, Extension, Modification and Amendment Agreement
dated February 26, 1997, executed by the Trust in favor
of USAA Real Estate Company ("Realco") (Incorporated
herein by reference from Exhibit 10.1 to the Trust's Form
8-K dated March 4, 1997; File No. 1-9016)
10.12 -- Share Purchase Agreement dated as of December 20, 1996,
by and among the Trust, Realco and AIP (Incorporated by
reference from Exhibit 99.7 to the Trust's Form 8-K dated
December 23, 1996; File No. 1-9016)
10.13 -- Share Purchase Agreement dated as of December 13, 1996,
by and between the Trust and Realco (Incorporated herein
by reference from the Trust's Form 8-K dated December 23,
1996; File No. 1-9016)
10.14 -- Registration Rights Agreement dated as of December 20,
1996, by and between the Trust and Realco, as amended
(Incorporated herein by reference from Exhibit 99.9 to
the Trust's Form 8-K dated December 23, 1996; File No.
1-9016)
10.15 -- Registration Rights Agreement dated as of December 19,
1996, by and between the Trust and Realco (Incorporated
herein by reference from Exhibit 99.8 to the Trust's Form
8-K dated December 23, 1996; File No. 1-9016)
10.16 -- 401(k) Retirement and Profit Sharing Plan (Incorporated
herein by reference from Exhibit 10.5 to Amendment No. 1
to Form S-4 of AIP, Inc. dated March 4, 1994; File No.
33-74292)
10.17 -- Amendments to 401(k) Retirement and Profit Sharing Plan
(Incorporated herein by reference from Exhibit 10.4 to
Form 10-K of the Trust dated March 27, 1995)
10.18 -- Settlement Agreement by and between American Industrial
Properties REIT, Patapsco #1 Limited Partnership,
Patapsco #2 Limited Partnership, The Manufacturers Life
Insurance Company and The Manufacturers Life Insurance
Company (U.S.A.) dated as of May 22, 1996 (incorporated
herein by reference from Exhibit 99.1 to Form 8-K of the
Trust dated May 22, 1996; File No. 1-9016)
10.19 -- Agreement and Assignment of Partnership Interest, Amended
and Restated Agreement and Certificate of Limited
Partnership and Security Agreement for Patapsco
Center -- Linthicum Heights, Maryland (incorporated
herein by reference from Exhibit 10.8 to Amendment No. 1
to Form S-4 of AIP Inc. dated March 4, 1994; File No.
33-74292)
10.20 -- Note dated November 15, 1994 in the original principal
amount of $12,250,000 with AIP Properties #1 L.P. as
Maker and AMRESCO Capital Corporation as Payee
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 22, 1994; File No.
1-9016)
10.21 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #1 L.P. and
AMRESCO Capital Corporation (incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.22 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$12,250,000 (incorporated herein by reference from
Exhibit 99.2 to Form 8-K of the Trust dated June 23,
1995; File No. 1-9016)
10.23 -- Note dated November 15, 1994 in the original principal
amount of $2,150,000 with AIP Properties #2 L.P. as Maker
and AMRESCO Capital Corporation as Payee (Incorporated
herein by reference from Exhibit 99.3 to Form 8-K of the
Trust dated November 22, 1994; File No. 1-9016)
</TABLE>
<PAGE> 330
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.24 -- Mortgage, Deed of Trust and Security Agreement dated
November 15, 1994 between AIP Properties #2 L.P. and
AMRESCO Capital Corporation (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 22, 1994; File No. 1-9016)
10.25 -- Loan Modification Agreement modifying the Note dated
November 15, 1994 in the original principal amount of
$2,250,000 (Incorporated herein by reference from Exhibit
99.1 to Form 8-K of the Trust dated June 23, 1995; File
No. 1-9016)
10.26 -- Promissory Note dated November 25, 1996, by and between
AIP Inc. and Realco (Incorporated herein by reference
from Exhibit No. 99.5 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.27 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Huntington Drive Center)
(Incorporated herein by reference from Exhibit 99.1 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.28 -- Note dated November 15, 1996 in the original principal
amount of $4,575,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Huntington Drive Center) (Incorporated herein by
reference from Exhibit 99.2 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.29 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Patapsco Industrial Center)
incorporated herein by reference from Exhibit 99.3 to
Form 8-K of the Trust dated November 20, 1996; File No.
1-9016)
10.30 -- Note dated November 15, 1996 in the original principal
amount of $3,112,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Patapsco Industrial Center) (Incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.31 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (Woodlake Distribution
Center) (incorporated herein be reference from Exhibit
99.5 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.32 -- Note dated November 15, 1996 in the original principal
amount of $1,537,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Woodlake Distribution Center) (Incorporated herein by
reference from Exhibit 99.6 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.33 -- Deed of Trust and Security Agreement dated November 15,
1996 between AIP Properties #3, L.P. and Life Investors
Insurance Company of America (All Texas properties except
Woodlake) (Incorporated herein by reference from Exhibit
99.7 to Form 8-K of the Trust dated November 20, 1996;
File No. 1-9016)
10.34 -- Note dated November 15, 1996 in the original principal
amount of $1,162,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Meridian Street Warehouse) (Incorporated herein by
reference from Exhibit 99.8 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.35 -- Note dated November 15, 1996 in the original principal
amount of $2,775,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Beltline Business Center) (Incorporated herein by
reference from Exhibit 99.9 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
</TABLE>
<PAGE> 331
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.36 -- Note dated November 15, 1996 in the original principal
amount of $3,375,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Plaza South) (Incorporated herein by reference from
Exhibit 99.10 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.37 -- Note dated November 15, 1996 in the original principal
amount of $2,100,00 with AIP Properties #3, L.P. as Maker
and Life Investors Insurance Company as Payee (Commerce
North Park) (Incorporated herein by reference from
Exhibit 99.11 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.38 -- Note dated November 15, 1996 in the original principal
amount of $2,850,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Gateway 5 & 6) (Incorporated herein by reference from
Exhibit 99.12 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.39 -- Note dated November 15, 1996 in the original principal
amount of $5,175,000 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Northgate II) (Incorporated herein by reference from
Exhibit 99.13 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.40 -- Note dated November 15, 1996 in the original principal
amount of $1,327,500 with AIP Properties #3, L.P. as
Maker and Life Investors Insurance Company as Payee
(Westchase Park) (Incorporated herein by reference from
Exhibit 99.14 to Form 8-K of the Trust dated November 20,
1996; File No. 1-9016)
10.41 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Charles W. Wolcott
(Incorporated herein by reference from Exhibit 10.12 to
Form 10-K of the Trust for the year ended December 31,
1996)
10.42 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and Marc Simpson (Incorporated
herein by reference from Exhibit 10.13 to Form 10-K of
the Trust for the year ended December 31, 1996)
10.43 -- Bonus and Severance Agreement dated March 13, 1996, by
and between the Trust and David B. Warner (Incorporated
herein by reference from Exhibit 10.14 to Form 10-K of
the Trust for the year ended December 31, 1996)
10.44 -- Amendment No. 1 to Share Purchase Agreement dated as of
December 13, 1996 by and between the Trust and Realco
(Incorporated herein by reference from Exhibit 10.2 to
Form 8-K of the Trust dated March 4, 1997; File No.
1-9016)
**10.45 -- Management Agreement dated , 1997, by and
between the Trust and .
21.1 -- Listing of Subsidiaries (incorporated herein by reference
from Exhibit 27.1 to Form 10-K for the year ended
December 31, 1996; File No. 1-9016)
*23.1 -- Consent of Ernst & Young LLP
*23.2 -- Consent of KPMG Peat Marwick LLP
*27.1 -- Financial Data Schedule
*99.1 -- Proxy card of the Trust
*99.2 -- Proxy card of USAA Real Estate Income Investments I, A
California Limited Partnership
*99.3 -- Proxy card of USAA Real Estate Income Investments II
Limited Partnership
*99.4 -- Proxy card of USAA Income Properties III Limited
Partnership
*99.5 -- Proxy card of USAA Income Properties IV Limited
Partnership
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
THIRD AMENDED AND RESTATED
DECLARATION OF TRUST
OF
AMERICAN INDUSTRIAL PROPERTIES REIT
The undersigned, acting as the Trust Managers of a real estate investment
trust under the Texas Real Estate Investment Trust Act (the "Texas REIT Act"),
hereby adopt the following Third Amended and Restated Declaration of Trust for
such trust, which replaces in its entirety the previously enacted Second
Amended and Restated Declaration of Trust, which Third Amended and Restated
Declaration of Trust was adopted by the Shareholders of the Trust on June 30,
1997 pursuant to the affirmative vote of the holders of at least two-thirds of
the outstanding Shares of the Trust.
ARTICLE ONE
The name of the trust (the "Trust") is "American Industrial Properties
REIT." An assumed name certificate setting forth such name has been filed in
the manner prescribed by law.
ARTICLE TWO
The Trust is formed pursuant to the Texas REIT Act and has the following
as its purpose:
To purchase, hold, lease, manage, sell, exchange, develop, subdivide
and improve real property and interests in real property, and in
general, to carry on any other business and do any other acts in
connection with the foregoing and to have and exercise all powers
conferred by the laws of the State of Texas upon real estate
investment trusts formed under the Texas REIT Act, and to do any or
all of the things hereinafter set forth to the same extent as natural
persons might or could do. The term "real property" and the term
"interests in real property" for the purposes stated herein shall not
include severed mineral, oil or gas royalty interests.
ARTICLE THREE
The address of the Trust's principal office and place of business is 6220
North Beltline, Suite 205, Irving, Texas 75063.
A-1
<PAGE> 2
ARTICLE FOUR
The street address of the Trust's registered office is 6220 North
Beltline, Suite 205, Irving, Texas 75063. The name of the Trust's registered
agent at that address is Marc A. Simpson.
ARTICLE FIVE
The names and business addresses of the Trust Managers approving and
adopting this Declaration of Trust are as follows:
Name Mailing Address
- ---- ---------------
William H. Bricker 16475 Dallas Parkway, Suite 350
Dallas, Texas 75248
T. Patrick Duncan 8000 Robert F. McDermott Frwy., Suite 600
San Antonio, Texas 78230
Robert E. Giles 5051 Westheimer, Suite 300
Houston, Texas 77056
Edward B. Kelley 8000 Robert F. McDermott Frwy., Suite 600
San Antonio, Texas 78230
Charles W. Wolcott 6220 North Beltline, Suite 205
Irving, Texas 75063
ARTICLE SIX
The period of the Trust's duration is perpetual. The Trust may be sooner
terminated by the vote of the holders of at least a majority of the outstanding
voting Shares.
ARTICLE SEVEN
The aggregate number of shares of beneficial interest which the Trust
shall have authority to issue is five hundred million common shares, par value
$0.10 per share ("Common Shares"), and fifty million preferred shares, par
value $0.10 per share ("Preferred Shares"). All of the Common Shares shall be
equal in all respects to every other such Common Share, and shall have no
preference, conversion, exchange or preemptive rights.
Unless otherwise specified, the term "Shares" in this Declaration of Trust
shall be deemed to refer to the Common Shares and, solely to the extent
specifically required by law or as specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, to the Preferred Shares. For purposes of Articles
Ten and
A-2
<PAGE> 3
Nineteen (other than Article Nineteen (j)) of this Declaration of Trust, the
term Shares shall be deemed to refer to both the Common Shares and the
Preferred Shares and, for purposes of such Articles Ten and Nineteen (other
than Article Nineteen (j)), the number of outstanding Shares shall be deemed to
be equal to the value of the Trust's outstanding Shares as determined from time
to time by resolution of the Trust Managers, such determination to include an
allocation of relative value among the Common Shares and any outstanding series
of Preferred Shares.
The Trust may issue one or more series of Preferred Shares, each such
series to consist of such number of shares as shall be determined by resolution
of the Trust Managers creating such series. The Preferred Shares of each such
series shall have such designations, preferences, conversion, exchange or other
rights, participations, voting powers, options, restrictions, limitations,
special rights or relations, limitations as to dividends, qualifications or
terms, or conditions of redemption thereof, as shall be stated and expressed by
the Trust Managers in the resolution or resolutions providing for the issuance
of such series of Preferred Shares pursuant to the authority to do so which is
hereby expressly vested in the Trust Managers.
Except as otherwise specifically provided in any resolution or resolutions
of the Trust Managers providing for the issue of any particular series of
Preferred Shares, the number of shares of any such series so set forth in such
resolution or resolutions may be increased or decreased (but not below the
number of shares of such series then outstanding) by a resolution or
resolutions likewise adopted by the Trust Managers.
Except as otherwise specifically provided in any resolution or resolutions
of the Trust Managers providing for the issue of any particular series of
Preferred Shares, Preferred Shares redeemed or otherwise acquired by the Trust
shall assume the status of authorized but unissued Preferred Shares and shall
be unclassified as to series and may thereafter, subject to the provisions of
this Article Seven and to any restrictions contained in any resolution or
resolutions of the Trust Managers providing for the issuance of any such series
of Preferred Shares, be reissued in the same manner as other authorized but
unissued Preferred Shares.
Except as otherwise specifically provided in any resolution or resolutions
of the Trust Managers providing for the issue of any particular series of
Preferred Shares, holders of Preferred Shares shall have no preemptive rights.
Except as otherwise specifically required by law or this Declaration of
Trust or as specifically provided in any resolution or resolutions of the Trust
Managers providing for the issuance of any particular series of Preferred
Shares, the exclusive voting power of the Trust shall be vested in the Common
Shares of the Trust. Each Common Share entitles the holder thereof to one vote
at all meetings of the shareholders of the Trust.
ARTICLE EIGHT
The Trust shall issue Shares for consideration consisting of any tangible
or intangible benefit to the Trust, including cash, promissory notes, services
performed, contracts for services to be
A-3
<PAGE> 4
performed, or other securities of the Trust, such consideration to be
determined by the Trust Managers.
ARTICLE NINE
The Trust Managers shall manage all money and/or property received for the
issuance of Shares for the benefit of the shareholders of the Trust.
ARTICLE TEN
The Trust will not commence business until it has received for the
issuance of Shares consideration of at least $1,000 value.
ARTICLE ELEVEN
The Trust shall not engage in any activities beyond the scope of the
purpose of a real estate investment trust formed pursuant to the Texas REIT
Act, as such purpose is set forth in Article Two hereof.
ARTICLE TWELVE
Cumulative voting for the election of Trust Managers is prohibited.
ARTICLE THIRTEEN
(a) The affirmative vote of the holders of not less than 80% of the
outstanding Shares of the Trust, including the affirmative vote of the holders
of not less than 50% of the outstanding Shares not owned, directly or
indirectly, by any Related Person (as hereinafter defined), shall be required
for the approval or authorization of any Business Combination (as hereinafter
defined); provided, however, that the 50% voting requirement referred to above
shall not be applicable if the Business Combination is approved by the
affirmative vote of the holders of not less than 90% of the outstanding Shares;
provided further, that neither the 80% voting requirement nor the 50% voting
requirement referred to above shall be applicable if:
(i) The Trust Managers of the Trust by a vote of not less than 80% of the
Trust Managers then holding office (A) have expressly approved in
advance the acquisition of Shares of the Trust that caused the
Related Person to become a Related Person or (B) have expressly
approved the Business Combination prior to the date on which the
Related Person involved in the Business Combination shall have become
a Related Person; or
A-4
<PAGE> 5
(ii) The Business Combination is solely between the Trust and another
entity, 100% of the voting stock, shares or comparable interests of
which is owned directly or indirectly by the Trust; or
(iii) The Business Combination is proposed to be consummated within one
year of the consummation of a Fair Tender Offer (as hereinafter
defined) by the Related Person in which Business Combination the cash
or Fair Market Value (as hereinafter defined) of the property,
securities or other consideration to be received per Share by all
remaining holders of Shares of the Trust in the Business Combination
is not less than the price offered in the Fair Tender Offer; or
(iv) All of conditions (A) through (D) of this subparagraph (iv) shall
have been met: (A) if and to the extent permitted by law, the
Business Combination is a merger or consolidation, consummation of
which is proposed to take place within one year of the date of the
transaction pursuant to which such person became a Related Person and
the cash or Fair Market Value of the property, securities or other
consideration to be received per share by all remaining holders of
Shares of the Trust in the Business Combination is not less than the
Fair Price (as hereinafter defined); (B) the consideration to be
received by such holders is either cash or, if the Related Person
shall have acquired the majority of its holdings of the Trust's
Shares for a form of consideration other than cash, in the same form
of consideration with which the Related Person acquired such
majority; (C) after such person has become a Related Person and prior
to consummation of such Business Combination: (1) there shall have
been no reduction in the annual rate of dividends, if any, paid per
share on the Trust's Shares (adjusted as appropriate for
recapitalizations and for Share splits, reverse Share splits and
Share dividends), except any reduction in such rate that is made
proportionately with any decline in the Trust's net income for the
period for which such dividends are declared and except as approved
by a majority of the Continuing Trust Managers (as hereinafter
defined), and (2) such Related Person shall not have received the
benefit, directly or indirectly (except proportionately as a
shareholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Trust prior to the consummation of such Business
Combination (other than in connection with financing a Fair Tender
Offer); and (D) a proxy statement that conforms in all respects with
the provisions of the Securities Exchange Act of 1934 (the "Exchange
Act") and the rules and regulations thereunder (or any subsequent
provisions replacing the Exchange Act or the rules or regulations
thereunder) shall be mailed to holders of the Trust's Shares at least
45 days prior to the consummation of the Business Combination for the
purpose of soliciting shareholder approval of the Business
Combination; or
(v) The Rights (as defined in paragraph (b) of this Article Thirteen)
shall have become exercisable.
A-5
<PAGE> 6
(b) If a person has become a Related Person and within one year after the
date (the "Acquisition Date") of the transaction pursuant to which the Related
Person became a Related Person (x) a Business Combination meeting all of the
requirements of subparagraph (iv) of the proviso to paragraph (a) of this
Article Thirteen regarding the applicability of the 80% voting requirement
shall not have been consummated and (y) a Fair Tender Offer shall not have been
consummated and (z) the Trust shall not have been dissolved and liquidated,
then, in such event the beneficial owner of each Share (not including Shares
beneficially owned by the Related Person) (each such beneficial owner being
hereinafter referred to as a "Holder") shall have the right (individually a
"Right" and collectively the "Rights"), which may be exercised subject to the
provisions of paragraph (d) of this Article Thirteen, commencing at the opening
of business on the one-year anniversary date of the Acquisition Date and
continuing for a period of 90 days thereafter, subject to extensions as
provided in paragraph (d) of this Article Thirteen (the "Exercise Period"), to
sell to the Trust on the terms set forth herein one Share upon exercise of such
Right. Within five business days after the commencement of the Exercise Period
the Trust shall notify the Holders of the commencement of the Exercise Period,
specifying therein the terms and conditions for exercise of the Rights. During
the Exercise Period, each certificate representing Shares beneficially owned by
a Holder (a "Certificate") shall also represent the number of Rights equal to
the number of Shares represented thereby and the surrender for transfer of any
Certificate shall also constitute the transfer of the Rights represented by
such Shares. At 5:00 P.M., Dallas, Texas time, on the last day of the Exercise
Period, each Right not exercised shall become void, all rights in respect
thereof shall cease as of such time and the Certificates shall no longer
represent Rights.
(c) The purchase price for a Share upon exercise of an accompanying Right
shall be equal to the then-applicable Fair Price paid by the Related Person
(plus, as an allowance for interest, an amount equal to the prime rate of
interest as published in the Wall Street Journal and as in effect from time to
time from the Acquisition Date until the date of the payment for such Share but
less the amount of any cash and the Fair Market Value of any property or
securities distributed with respect to such Shares as dividends or otherwise
during such time period), pursuant to the exercise of the Right relating
thereto. In the event the Related Person shall have acquired any of its
holdings of the Trust's Shares for a form of consideration other than cash, the
value of such other consideration shall be the Fair Market Value thereof.
(d) Notwithstanding the foregoing in paragraph (b) of this Article
Thirteen, the Exercise Period will be deferred in the event (a "Deferral
Event") that the Trust is otherwise prohibited under applicable law from
repurchasing Shares pursuant to the Rights. In the event the Exercise Period is
deferred, or if at any time the Trust reasonably anticipates that a Deferral
Event will exist, the Trust will, as soon as practicable, notify the Holders.
If at the end of any fiscal quarter the Deferral Event ceases to exist, notice
shall be given to the Holders of the commencement of the deferred Exercise
Period, which Exercise Period shall commence no sooner than 15 days nor more
than 45 days from the date of such notice and which shall continue in effect
for a period of time equal in duration to the previously unexpired portion of
the Exercise Period. Notwithstanding any other provision of this Declaration of
Trust to the contrary, during the Exercise Period (including during the
existence of any Deferral Event), neither the Trust nor any subsidiary may
declare or pay any dividend or make any distribution on its shares or to its
shareholders (other than dividends or distributions payable in its Shares or,
in the case of any subsidiary, dividends payable to the Trust) or purchase,
redeem or
A-6
<PAGE> 7
otherwise acquire or retire for value, or permit any subsidiary to purchase or
otherwise acquire for value, any Shares of the Trust if, upon giving effect to
such dividend, distribution, purchase, redemption, or other acquisition or
retirement, the aggregate amount expended for all such purposes (the amount
expended for such purposes, if other than in cash, to be determined by a
majority of the Continuing Trust Managers, whose determination shall be
conclusive) would prejudice the ability of the Trust to satisfy its maximum
obligation to purchase Shares upon exercise of the Rights.
(e) Rights may be exercised upon surrender to the Trust's principal
transfer agent (the "Transfer Agent") at its principal office of the
Certificate or Certificates evidencing the Shares to be tendered for purchase
by the Trust, together with the form on the reverse thereof completed and duly
signed in accordance with the instructions thereon. In the event that a Holder
shall tender a Certificate which represents greater than the number of Shares
which the Holder elects to require the Trust to purchase upon exercise of the
Rights, the Holder shall designate on the reverse side of such Certificate the
number of Shares to be sold from such Certificate. The Transfer Agent shall
thereupon issue a new Certificate or Certificates for the balance of the number
of Shares not sold to the Trust, which new Certificate or Certificates shall
also represent Rights for an equivalent number of Shares.
(f) For the purposes of this Article:
(i) The term "Business Combination" shall mean (A) any merger or
consolidation, if and to the extent permitted by law, of the
Trust or a subsidiary, with or into a Related Person, (B) any
sale, lease, exchange, mortgage, pledge, transfer or other
disposition, of all or any Substantial Part (as hereinafter
defined) of the assets of the Trust and its subsidiaries (taken
as a whole) (including, without limitation, any voting
securities of a subsidiary) to or with a Related Person, (C) the
issuance or transfer by the Trust or a subsidiary (other than by
way of a pro rata distribution to all shareholders) of any
securities of the Trust or a subsidiary of the Trust to a
Related Person, (D) any reclassification of securities
(including any reverse Share split) or recapitalization by the
Trust, the effect of which would be to increase the voting power
(whether or not currently exercisable) of the Related Person,
(E) the adoption of any plan or proposal for the liquidation or
dissolution of the Trust proposed by or on behalf of a Related
Person which involves any transfer of assets, or any other
transaction, in which the Related Person has any direct or
indirect interest (except proportionately as a shareholder), (F)
any series or combination of transactions having, directly or
indirectly, the same or substantially the same effect as any of
the foregoing, and (G) any agreement, contract or other
arrangement providing, directly or indirectly, for any of the
foregoing.
(ii) The term "Continuing Trust Manager' shall mean (x) any Trust
Manager of the Trust who is not affiliated with a Related Person
and who was a Trust Manager immediately prior to the time that
the Related Person became a Related Person, and (y) any other
Trust Manager who is not affiliated with the Related Person and
is recommended either by a majority of the persons described in
clause (x) of this subparagraph (ii) or by persons described in
this
A-7
<PAGE> 8
clause (y) who are then Trust Managers of the Trust to succeed a
person described in either the said clause (x) or clause (y) as
a Trust Manager of the Trust.
(iii) The term "Fair Market Value" shall mean: (A) in the case of
securities, the highest closing sale price during the 30-day
period immediately preceding the date in question of such
security on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if such security is not quoted on
the Composite Tape on the New York Stock Exchange, or, if such
security is not listed on such Exchange, on the principal United
States securities exchange registered under the Exchange Act on
which such security is listed, or, if such security is not
listed on any such exchange, the highest closing bid quotation
with respect to such security during the 30-day period preceding
the date in question on the National Association of Securities
Dealers, Inc. Automated Quotation System or any system then in
use, or if no such quotations are available, the fair market
value on the date in question of such security as reasonably
determined by an independent appraiser selected by a majority of
the Continuing Trust Managers (or, if there are no Continuing
Trust Managers, by the investment banking firm most recently
retained by the Trust) in good faith; and (B) in the case of
property other than cash or stock, the fair market value of such
property on the date in question as reasonably determined by an
independent appraiser selected by a majority of the Continuing
Trust Managers (or, if there are no Continuing Trust Managers,
by the investment banking firm most recently retained by the
Trust) in good faith. In each case hereunder in which an
independent appraiser is to be selected to determine Fair Market
Value, (1) in the event (x) there are no Continuing Trust
Managers, and (y) the investment banking firm most recently
retained by the Trust is unable or elects not to serve as such
appraiser, or (2) in the event there are Continuing Trust
Managers that do not select an independent appraiser within 10
days of a request for such appointment made by a Related Person,
such independent appraiser may be selected by such Related
Person.
(iv) The term "Fair Price" shall mean the highest per-Share price
(which, to the extent not paid in cash, shall equal the Fair
Market Value of any other consideration paid), with appropriate
adjustments for recapitalizations and for Share splits, reverse
Share splits and Share dividends, paid by the Related Person in
acquiring any of its holdings of the Trust's Shares.
(v) The term "Fair Tender Offer" shall mean a bona fide tender offer
for all of the Trust's Shares outstanding (and owned by persons
other than a Related Person if the tender offer is made by the
Related Person), whether or not such offer is conditional upon
any minimum number of Shares being tendered, in which the
aggregate amount of cash or the Fair Market Value of any
securities or other property to be received by all holders who
tender their Shares for each Share so tendered shall be at least
equal to the then applicable
A-8
<PAGE> 9
Fair Price paid by a Related Person or paid by the person making
the tender offer if such person is not a Related Person. In the
event that at the time such tender offer is commenced the terms
and conduct thereof are not directly regulated by Section 14(d)
or 13(e) of the Exchange Act and the general rules and
regulations promulgated thereunder, then the terms of such
tender offer regarding the time such offer is held open and
regarding withdrawal rights shall conform in all respects with
such terms applicable to tender offers regulated by either of
such Sections of the Exchange Act. A Fair Tender Offer shall not
be deemed to be "consummated" until Shares are purchased and
payment in full has been made for all duly tendered Shares.
(vi) The term "Related Person" shall mean and include any individual,
corporation, partnership or other "person" (as defined in
Section 13(d)(3) of the Exchange Act), and the "Affiliates" and
"Associates" (as defined in Rule 12b-2 of the Exchange Act) of
any such individual, corporation, partnership or other person)
which individually or together is the "Beneficial Owner" (as
defined in Rule 13d-3 of the Exchange Act) in the aggregate of
more than 50% of the outstanding Shares of the Trust, other than
the Trust or any employee benefit plan(s) sponsored by the
Trust, except that an individual, corporation, partnership or
other person which individually or together Beneficially Owns or
upon conversion of debt securities (owned or with regard to
which such individual, corporation, partnership or other person
is committed to purchase as of the date of adoption of this
Declaration of Trust) would own in excess of 20% of the
outstanding Shares at the time this provision is adopted by vote
of the Trust's shareholders shall only be considered a Related
Person at such time as he, she, it or they acquire in the
aggregate Beneficial Ownership of more than 80% of the
outstanding Shares.
(vii) The term "Substantial Part" shall mean more than 35% of the
book value of the total assets of the Trust and its subsidiaries
(taken as a whole) as of the end of the fiscal year ending prior
to the time the determination is being made.
(viii) Any person (as such term is defined in subsection (vi) of this
paragraph (f)) that has the right to acquire any Shares of the
Trust pursuant to any agreement, or upon the exercise of
conversion rights, warrants or options, or otherwise, shall be
deemed a Beneficial Owner of such Shares for purposes of
determining whether such person, individually or together with
its Affiliates and Associates, is a Related Person.
(ix) For purposes of subparagraph (iii) of paragraph (a) of this
Article Thirteen, the term "other consideration to be received"
shall include, without limitation, Shares of the Trust retained
by its existing public shareholders in the event of a Business
Combination in which the Trust is the surviving entity.
(g) The affirmative vote of the holders of not less than 80% of the
outstanding Shares of the Trust, including the affirmative vote of the holders
of not less than 50% of the outstanding Shares
A-9
<PAGE> 10
not owned, directly or indirectly, by any Related Person (such 50% voting
requirement shall not be applicable if such amendment, alteration, change,
repeal or rescission is approved by the affirmative vote of not less than 90%
of the outstanding Shares) shall be required to amend, alter, change, repeal or
rescind, or adopt any provisions inconsistent with, this Article Thirteen.
(h) The provisions of this Article Thirteen shall be subject to all valid
and applicable laws, including, without limitation, the Texas REIT Act, and, in
the event this Article Thirteen or any of the provisions hereof are found to be
inconsistent with or contrary to any such valid laws, such laws shall be deemed
to control and this Article Thirteen shall be regarded as modified accordingly,
and, as so modified, to continue in full force and effect.
ARTICLE FOURTEEN
The Trust Managers may from time to time declare, and the Trust may pay,
dividends on its outstanding Shares in cash, in property or in its Shares,
except that no dividend shall be declared or paid when the Trust is unable to
pay its debts as they become due in the usual course of its business, or when
the payment of such dividend would result in the Trust being unable to pay its
debts as they become due in the usual course of business.
ARTICLE FIFTEEN
Upon resolution adopted by the Trust Managers, the Trust shall be entitled
to purchase or redeem, directly or indirectly, its own Shares, subject to any
limitations of the Texas REIT Act.
ARTICLE SIXTEEN
(a) In this Article:
(i) "Indemnitee" means (A) any present or former Trust Manager or
officer of the Trust, (B) any person who while serving in any of
the capacities referred to in clause (A) hereof served at the
Trust's request as a trust manager, director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar
functionary of another real estate investment trust or foreign
or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise
and (C) any person nominated or designated by (or pursuant to
authority granted by) the Trust Managers or any committee
thereof to serve in any of the capacities referred to in clauses
(A) or (B) hereof.
(ii) "Official Capacity" means (A) when used with respect to a Trust
Manager, the office of Trust Manager of the Trust and (B) when
used with respect to a person other than a Trust Manager, the
elective or appointive office of the Trust held by such person
or the employment or agency relationship
A-10
<PAGE> 11
undertaken by such person on behalf of the Trust, but in each
case does not include service for any other real estate
investment trust or foreign or domestic corporation or any
partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise.
(iii) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, any appeal in such an action, suit
or proceeding, and any inquiry or investigation that could lead
to such an action, suit or proceeding.
(b) The Trust shall indemnify every Indemnitee against all judgments,
penalties (including excise and similar taxes), fines, amounts paid in
settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he or she was, is or is threatened to
be named defendant or respondent, or in which he or she was or is a witness
without being named a defendant or respondent, by reason, in whole or in part,
of his or her serving or having served, or having been nominated or designated
to serve, in any of the capacities referred to in paragraph (a)(i) of this
Article Sixteen, to the fullest extent that indemnification is permitted by
Texas law. An Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after the Indemnitee shall have been so
adjudged by a court of competent jurisdiction after exhaustion of all appeals
therefrom. Reasonable expenses shall include, without limitation, all court
costs and all fees and disbursements of attorneys for the Indemnitee.
(c) Without limitation of paragraph (b) of this Article Sixteen and in
addition to the indemnification provided for in paragraph (b) of this Article
Sixteen, the Trust shall indemnify every Indemnitee against reasonable expenses
incurred by such person in connection with any proceeding in which he or she is
a witness or a named defendant or respondent because he or she served in any of
the capacities referred to in paragraph (a)(i) of this Article Sixteen.
(d) Reasonable expenses (including court costs and attorneys' fees)
incurred by an Indemnitee who was or is a witness or was, is or is threatened
to be made a named defendant or respondent in a Proceeding shall be paid or
reimbursed by the Trust at reasonable intervals in advance of the final
disposition of such Proceeding after receipt by the Trust of a written
undertaking by or on behalf of such Indemnitee to repay the amount paid or
reimbursed by the Trust if it shall ultimately be determined that he or she is
not entitled to be indemnified by the Trust as authorized in this Article
Sixteen. Such written undertaking shall be an unlimited obligation of the
Indemnitee but need not be secured and it may be accepted without reference to
financial ability to make repayment. Notwithstanding any other provision of
this Article Sixteen, the Trust may pay or reimburse expenses incurred by an
Indemnitee in connection with his or her appearance as a witness or other
participation in a Proceeding at a time when he or she is not named a defendant
or respondent in the Proceeding.
(e) The indemnification provided by this Article Sixteen shall (i) not be
deemed exclusive of, or to preclude, any other rights to which those seeking
indemnification may at any time be entitled under the Trust's Bylaws, any law,
agreement or vote of shareholders or disinterested Trust Managers, or
otherwise, or under any policy or policies of insurance purchased and
maintained by the Trust on behalf of any Indemnitee, both as to action in his
or her Official Capacity and as to action in any other capacity, (ii) continue
as to a person who has ceased to be in the capacity by reason of
A-11
<PAGE> 12
which he or she was an Indemnitee with respect to matters arising during the
period he or she was in such capacity, and (iii) inure to the benefit of the
heirs, executors and administrators of such a person.
(f) The provisions of this Article Sixteen (i) are for the benefit of, and
may be enforced by, each Indemnitee of the Trust, the same as if set forth in
their entirety in a written instrument duly executed and delivered by the Trust
and such Indemnitee and (ii) constitute a continuing offer to all present and
future Indemnitees. The Trust, by its adoption of this Declaration of Trust,
(x) acknowledges and agrees that each Indemnitee of the Trust has relied upon
and will continue to rely upon the provisions of this Article Sixteen in
becoming, and serving in any of the capacities referred to in paragraph (a)(i)
of this Article Sixteen, (y) waives reliance upon, and all notice of acceptance
of, such provisions by such Indemnitees and (z) acknowledges and agrees that no
present or future Indemnitee shall be prejudiced in his or her right to enforce
the provisions of this Article Sixteen in accordance with their terms by any
act or failure to act on the part of the Trust.
(g) No amendment, modification or repeal of this Article Sixteen or any
provision of this Article Sixteen shall in any manner terminate, reduce or
impair the right of any past, present or future Indemnitees to be indemnified
by the Trust, nor the obligation of the Trust to indemnify any such
Indemnitees, under and in accordance with the provisions of this Article
Sixteen as in effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless
of when such claims may be asserted.
(h) If the indemnification provided in this Article Sixteen is either (i)
insufficient to cover all costs and expenses incurred by any Indemnitee as a
result of such Indemnitee being made or threatened to be made a defendant or
respondent in a Proceeding by reason of his or her holding or having held a
position named in paragraph (a)(i) of this Article Sixteen or (ii) not
permitted by Texas law, the Trust shall indemnify, to the fullest extent that
indemnification is permitted by Texas law, every Indemnitee with respect to all
costs and expenses incurred by such Indemnitee as a result of such Indemnitee
being made or threatened to be made a defendant or respondent in a Proceeding
by reason of his or her holding or having held a position named in paragraph
(a)(i) of this Article Sixteen.
(i) The indemnification provided by this Article Sixteen shall be subject
to all valid and applicable laws, including, without limitation, the Texas REIT
Act, and, in the event this Article Sixteen or any of the provisions hereof or
the indemnification contemplated hereby are found to be inconsistent with or
contrary to any such valid laws, such laws shall be deemed to control and this
Article Sixteen shall be regarded as modified accordingly, and, as so modified,
to continue in full force and effect.
ARTICLE SEVENTEEN
No Trust Manager or officer of the Trust shall be liable to the Trust for
any act, omission, loss, damage, or expense arising from the performance of his
or her duties under the Trust save only for his or her own willful misfeasance
or malfeasance or negligence. In discharging their duties to
A-12
<PAGE> 13
the Trust, Trust Managers and officers of the Trust shall be entitled to rely
upon experts and other matters as provided in the Texas REIT Act and the
Trust's Bylaws.
ARTICLE EIGHTEEN
The number of Trust Managers may be increased from time to time by the
affirmative vote of the majority of the Trust Managers or decreased by the
unanimous vote of the Trust Managers. Each Trust Manager shall serve until his
or her successor is elected and qualified or until his or her death,
retirement, resignation or removal.
A Trust Manager may be removed by the vote of the holders of two-thirds of
the outstanding Shares at a special meeting of the shareholders called for such
purpose pursuant to the Trust's Bylaws.
ARTICLE NINETEEN
(a) No Person may own Shares of any class with an aggregate value in
excess of 9.8% of the aggregate value of all outstanding Shares of such class
of Shares or more than 9.8% of the number of outstanding Shares of any class of
Shares (the limitation on the ownership of outstanding Shares is referred to in
this Article Nineteen as the "Ownership Limit" and the 9.8% threshold is
referred to in this Article Nineteen as the "Percentage Limit"), and no
Securities (as hereinafter defined) shall be accepted, purchased, or in any
manner acquired by any Person if such issuance or transfer would result in that
Person's ownership of Shares exceeding the Percentage Limit. For purposes of
determining if the Ownership Limit is exceeded by a Person, Convertible
Securities (as hereinafter defined) owned by such Person shall be treated as if
the Convertible Securities owned by such Person had been converted into Shares
if the effect of such treatment would be to increase the ownership percentage
of such Person in the Trust. The Ownership Limit shall not apply (i) to
acquisitions of Securities by any Person that has made a tender offer for all
outstanding Shares of the Trust (including Convertible Securities) in
conformity with applicable federal securities laws, (ii) to the acquisition of
Securities of the Trust by an underwriter in a public offering of Securities of
the Trust, or in any transaction involving the issuance of Securities by the
Trust, in which a majority of the Trust Managers determines that the
underwriter or other Person or party initially acquiring such Securities will
timely distribute such Securities to or among others so that, following such
distribution, none of such Securities will be Excess Securities (as hereinafter
defined), (iii) to the acquisition of Securities pursuant to the exercise of
employee share options, or (iv) to the acquisition of Securities pursuant to an
exception made pursuant to paragraph (h) hereof.
(b) Nothing in this Article Nineteen shall preclude the settlement of any
transaction in Securities entered into through the facilities of the New York
Stock Exchange. If any Securities are accepted, purchased, or in any manner
acquired by any Person resulting in a violation of paragraph (a) or (e) hereof,
such issuance or transfer shall be valid only with respect to such amount of
Securities issued or transferred as does not result in a violation of paragraph
(a) or (e) hereof, and such acceptance, purchase or acquisition shall be void
ab initio with respect to the amount of Securities that results in a violation
of paragraph (a) or (e) hereof (the "Excess Securities"), and the
A-13
<PAGE> 14
intended transferee of such Excess Securities shall acquire no rights in such
Excess Securities except as set forth in subsection (d) below.
(c) Each shareholder shall, within ten days of demand by the Trust,
disclose to the Trust in writing such information with respect to his, her or
its ownership of shares as the Trust Managers in their discretion deem
necessary or appropriate in order that the Trust may fully comply with all
provisions of the Internal Revenue Code of 1986, as amended, and any successor
statute (the "Code") relating to REITs and all regulations, rulings and cases
promulgated or decided thereunder (the "REIT Provisions") and to comply with
the requirements of any taxing authority or governmental agency. All Persons
who own Shares of any class with an aggregate value in excess of 9.8% of the
aggregate value of such class of Shares or 9.8% of the number of outstanding
Shares of any class must disclose in writing such ownership information to the
Trust no later than January 31 of each year. Failure to provide such
information, upon reasonable request, shall result in the Securities so owned
being treated as Excess Securities pursuant to paragraph (b) hereof for so long
as such failure continues.
(d) The Excess Securities, and the owners thereof, shall have the
following characteristics, rights and powers:
(i) Upon any purported purchase, sale, exchange, acquisition,
disposition or other transfer or upon any change in the capital
structure of the Trust (including any redemption of Securities)
that results in Excess Securities pursuant to paragraphs (a) or
(e) of this Article Nineteen, such Excess Securities shall be
deemed to have been transferred to the Trust, as trustee of a
trust for the exclusive benefit of such beneficiary or
beneficiaries to whom an interest in such Excess Securities may
later be transferred pursuant to subparagraph (v) of this
subsection (d) (the "Beneficial Trust"). Any such Excess
Securities so held in the Beneficial Trust shall be issued and
outstanding shares of the Trust. The purported transferee shall
have no rights in such Excess Securities except as provided in
subparagraph (v) of this subsection (d).
(ii) The holder of Excess Securities shall not be entitled to receive
any dividends, interest payments or other distributions. Any
dividend or distribution paid prior to the discovery by the
Trust that the Securities have become Excess Securities shall be
repaid to the Trust upon demand.
(iii) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of, or any distribution of the assets
of, the Trust, each holder of Excess Securities shall be
entitled to receive, ratably with each other holder of
Securities and Excess Securities, that portion of the assets of
the Trust available for distribution to its shareholders. The
Trust as holder of all Excess Securities in the Beneficial Trust
or if the Trust shall have been dissolved, any trustee of such
Beneficial Trust appointed by the Trust prior to its
dissolution, shall distribute ratably to the beneficiaries of
such Beneficial Trust any such assets received in respect of the
Excess Securities in any liquidation, dissolution or winding up
of, or any distribution of the assets of, the Trust.
A-14
<PAGE> 15
(iv) The holders of shares of Excess Securities shall not be entitled
to vote on any matters (except as required by law).
(v) Except as otherwise provided in this Article Nineteen, Excess
Securities shall not be transferable. The purported transferee
may freely designate a beneficiary of an interest in the
Beneficial Trust (representing the number of shares of Excess
Securities that have not been acquired by the Trust pursuant to
subparagraph (vi) of this subsection (d) that are held by the
Beneficial Trust attributable to a purported transfer that
resulted in the Excess Securities), if (A) the shares of Excess
Securities held in the Beneficial Trust would not be Excess
Securities in the hands of such beneficiary and (B) the
purported transferee does not receive a price from such
beneficiary that reflects a price per share for such Excess
Securities that exceeds (x) the price per share such purported
transferee paid for the Securities in the purported transfer
that resulted in the Excess Securities, or (y) if the purported
transferee did not give value for such Excess Securities
(through a gift, devise or other transaction), a price per share
equal to the Market Price (as hereinafter defined) on the date
of the purported transfer that resulted in the Excess
Securities. Upon such transfer of an interest in the Beneficial
Trust, the corresponding shares of Excess Securities in the
Beneficial Trust shall be automatically exchanged for an equal
number of shares of the applicable Securities and such
Securities shall be transferred of record to the transferee of
the interest in the Beneficial Trust if such Securities would
not be Excess Securities in the hands of such transferee. Prior
to any transfer of any interest in the Beneficial Trust, the
purported transferee must give advance notice to the Trust of
the intended transfer and the Trust must have waived in writing
its purchase rights under subparagraph (vi) of this subsection
(d). Notwithstanding the foregoing, if a purported transferee
receives a price for designating a beneficiary of an interest in
the Beneficial Trust that exceeds the amounts allowable under
the foregoing provisions of this subparagraph (v), such
purported transferee shall pay, or cause such beneficiary to
pay, such excess to the Trust immediately upon demand.
(vi) Excess Securities shall be deemed to have been offered for sale
to the Trust, or its designee, at a price per share equal to the
lesser of (A) the price per share in the transaction that
created such Excess Securities (or, in the case of a devise or
gift, the Market Price at the time of such devise or gift) and
(B) the Market Price on the date the Trust, or its designee,
accepts such offer. The Trust shall have the right to accept
such offer for a period of 90 days after the later of (x) the
date of the transfer which resulted in such Excess Securities
and (y) the date the Trust Managers determine in good faith that
a transfer resulting in Excess Securities has occurred.
(e) Any sale, transfer, gift, assignment, devise or other disposition of
Shares (a "transfer") that, if effective, would result in (i) the Shares of the
Trust being owned by less than 100 persons
A-15
<PAGE> 16
(determined without reference to any rules of attribution) shall be void ab
initio as to the Shares which would otherwise be beneficially owned by the
transferee, (ii) the Trust being "closely held" within the meaning of Section
856(h) of the Code, shall be void ab initio as to the transfer of the Shares
that would cause the Trust to be "closely held" within the meaning of Section
856(h) of the Code, (iii) the Trust owning, directly or indirectly, 10% or more
of the ownership interest in any tenant or subtenant of the Trust's real
property within the meaning of Section 856(d)(2)(B) of the Code and the
Treasury Regulations thereunder, shall be void ab initio, or (iv) the
disqualification of the Trust as a REIT shall be void ab initio as to the
transfer of the Shares that would cause the Trust to be disqualified as a REIT,
and, in the case of each of clauses (i), (ii), (iii) and (iv) of this paragraph
(e), the intended transferee shall acquire no rights in such Shares except as
set forth in subsection (d) above.
(f) For purposes of this Article Nineteen:
(i) The term "Convertible Securities" means any securities of the
Trust that are convertible into Shares.
(ii) The term "individual" shall mean any natural person as well as
those organizations treated as natural persons under Section
542(a) of the Code.
(iii) The term "Market Price" means the average of the last reported
sales price of Common Shares reported on the New York Stock
Exchange on the five trading days immediately preceding the
relevant date, or if the Common Shares are not then traded on
the New York Stock Exchange, the last reported sales price of
the Common Shares on the five trading days immediately preceding
the relevant date as reported on any exchange or quotation
system over which the Common Shares may be traded, or if the
Common Shares are not then traded over any exchange or quotation
system, then the market price of the Common Shares on the
relevant date as determined in good faith by the Trust Managers.
(iv) The term "ownership" (including "own" or "owns") of Shares means
beneficial ownership. Beneficial ownership, for this purpose
shall be defined to include actual ownership by a Person as well
as constructive ownership by such Person after application of
principles in accordance with or by reference to Sections 856 or
544 of the Code.
(v) The term "Person" includes an individual, corporation,
partnership, association, joint stock company, limited liability
company, trust, unincorporated association or other entity and
also includes a "group" as that term is defined in Section
13(d)(3) of the Exchange Act.
(vi) The term "REIT" means a "real estate investment trust" as
defined in Section 856 of the Code and applicable Treasury
Regulations.
(vii) The term "Securities" means Shares and Convertible Securities.
A-16
<PAGE> 17
(g) If any of the restrictions on transfer set forth in this Article
Nineteen are determined to be void, invalid or unenforceable by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of
any Excess Securities may be deemed, at the option of the Trust, to have acted
as an agent on behalf of the Trust in acquiring the Excess Securities and to
hold the Excess Securities on behalf of the Trust.
(h) The Percentage Limit set forth in paragraph (a) hereof shall not apply
to Securities which the Trust Managers in their sole discretion may exempt from
the Percentage Limit while owned by a Person who has provided the Trust with
evidence and assurances acceptable to the Trust Managers that the qualification
of the Trust as a REIT would not be jeopardized thereby. The Trust Managers, in
their sole discretion, may at any time revoke any exception pursuant to this
paragraph (h) in the case of any Person, and upon such revocation, the
provisions of paragraph (a) hereof shall immediately become applicable to such
Person and all Securities which such Person may own. A decision to exempt or
refuse to exempt from the Percentage Limit the ownership of certain designated
Securities, or to revoke an exemption previously granted, shall be made by the
Trust Managers in their sole discretion, based on any reason whatsoever,
including, but not limited to, the preservation of the Trust's qualification as
a REIT.
(i) Subject to the provisions of the first sentence of paragraph (b)
hereof, nothing herein contained shall limit the ability of the Trust to impose
or to seek judicial or other imposition of additional restrictions if deemed
necessary or advisable to protect the Trust and the interests of its security
holders by preservation of the Trust's status as a qualified REIT under the
Code.
(j) All Persons who own 5% or more of the Trust's outstanding Shares
during any taxable year of the Trust shall file with the Trust an affidavit
setting forth the number of Shares during such taxable year (i) owned directly
(held of record by such Person or by a nominee or nominees of such Person) and
(ii) constructively owned (within the meaning of Section 544 of the Code or for
purposes of Rule 13(d) of the Exchange Act) by the Person filing the affidavit.
The affidavit to be filed with the Trust shall set forth all the information
required to be reported (i) in returns of shareholders under Section 1.857-9 of
the Treasury Regulations or similar provisions of any successor Treasury
Regulations and (ii) in reports to be filed under Section 13(d) of the Exchange
Act. The affidavit or an amendment to a previously filed affidavit shall be
filed with the Trust annually within 60 days after the close of the Trust's
taxable year. A Person shall have satisfied the requirements of this paragraph
(j) if the person furnishes to the Trust the information in such person's
possession after such person has made a good faith effort to determine the
Shares it owns and to acquire the information required by income tax regulation
1.857-9 or similar provisions of any successor regulation.
ARTICLE TWENTY
The Board of Trust Managers shall use its best efforts to cause the Trust
and its shareholders to qualify for U.S. federal income tax treatment in
accordance with the provisions of the Code applicable to REITs. In furtherance
of the foregoing, the Board of Trust Managers shall use its best efforts to
take such actions as are necessary, and may take such actions as it deems
desirable (in its sole discretion) to preserve the status of the Trust as a
REIT.
A-17
<PAGE> 18
ARTICLE TWENTY-ONE
Special meetings of the shareholders for any purpose or purposes, unless
otherwise prescribed by law or by the Declaration of Trust, may be called by
the Trust Managers, any officer of the Trust or the holders of at least five
percent (5%) of all of the shares entitled to vote at such meeting.
ARTICLE TWENTY-TWO
This Declaration of Trust may be amended from time to time by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting Shares, except that (i) Article Eleven hereof (relating to the
prohibition against engaging in non-real estate investment trust businesses);
(ii) Article Thirteen hereof (relating to the approval of Business
Combinations); (iii) Article Eighteen hereof (relating to the number and
removal of Trust Managers); (iv) Article Nineteen hereof (relating to Share
ownership requirements); and (v) this Article Twenty-Two may not be amended or
repealed, and provisions inconsistent therewith and herewith may not be
adopted, except by the affirmative vote of the holders of at least 80% of the
outstanding voting Shares.
ARTICLE TWENTY-THREE
If any provision of this Declaration of Trust or any application of any
such provision is determined to be invalid by any federal or state court having
jurisdiction over the issue, the validity of the remaining provisions shall not
be affected and other applications of such provision shall be affected only to
the extent necessary to comply with the determination of such court. In lieu of
such illegal, invalid or unenforceable provision, there shall be added
automatically as a part of this Declaration of Trust, a legal, valid and
enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible, and the parties hereto request the
court or any arbitrator to whom disputes relating to this Declaration of Trust
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Article Twenty-Three.
A-18
<PAGE> 19
IN WITNESS WHEREOF, the undersigned Trust Managers do hereby execute this
Third Amended and Restated Declaration of Trust as of the 30th day of June,
1997.
---------------------------------------
WILLIAM H. BRICKER
---------------------------------------
T. PATRICK DUNCAN
---------------------------------------
ROBERT E. GILES
---------------------------------------
EDWARD B. KELLEY
---------------------------------------
CHARLES W. WOLCOTT
A-19
<PAGE> 20
STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared
William H. Bricker, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, that he executed the foregoing
instrument on behalf of the said American Industrial Properties REIT, as his
own free and voluntary act and deed, for the uses, purposes and considerations
therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together
with me, Notary, at my office in the County and State aforesaid, on the 30th
day of June, 1997.
My commission expires:________________
_______________________________________
STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared T.
Patrick Duncan, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, that he executed the foregoing
instrument on behalf of the said American Industrial Properties REIT, as his
own free and voluntary act and deed, for the uses, purposes and considerations
therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together
with me, Notary, at my office in the County and State aforesaid, on the 30th
day of June, 1997.
My commission expires:________________
_______________________________________
STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared
Robert E. Giles, in his capacity as
A-20
<PAGE> 21
Trust Manager of American Industrial Properties REIT, and acknowledged to me,
Notary, that he executed the foregoing instrument on behalf of the said
American Industrial Properties REIT, as his own free and voluntary act and
deed, for the uses, purposes and considerations therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together
with me, Notary, at my office in the County and State aforesaid, on the 30th
day of June, 1997.
My commission expires:________________
_______________________________________
STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BEFORE ME, the undersigned Notary Public, duly commissioned and qualified
within and for the State and County aforesaid, personally came and appeared
Edward B. Kelley, in his capacity as Trust Manager of American Industrial
Properties REIT, and acknowledged to me, Notary, that he executed the foregoing
instrument on behalf of the said American Industrial Properties REIT, as his
own free and voluntary act and deed, for the uses, purposes and considerations
therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together
with me, Notary, at my office in the County and State aforesaid, on the 30th
day of June, 1997.
My commission expires:________________
_______________________________________
A-21
<PAGE> 22
STATE OF TEXAS )
) ss.
COUNTY OF DALLAS )
BEFORE ME, the undersigned Notary Public, duly commissioned and
qualified within and for the State and County aforesaid, personally came and
appeared Charles W. Wolcott, in his capacity as Trust Manager of American
Industrial Properties REIT, and acknowledged to me, Notary, that he executed
the foregoing instrument on behalf of the said American Industrial Properties
REIT, as his own free and voluntary act and deed, for the uses, purposes and
considerations therein expressed.
IN WITNESS WHEREOF, said Appearer has executed these presents together
with me, Notary, at my office in the County and State aforesaid, on the 30th
day of June, 1997.
My commission expires:________________
_______________________________________
A-22
<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into as of the ____ day of July, 1997, by and between American Industrial
Properties REIT, a Texas real estate investment trust (the "Trust"), and the
undersigned trust manager (the "Indemnitee").
RECITALS
WHEREAS, it is essential to the Trust to retain and attract as trust
managers and officers the most capable persons available;
WHEREAS, the Indemnitee is trust manager and/or officer of the Trust;
WHEREAS, both the Trust and the Indemnitee recognize the increased
risk of litigation and other claims being asserted against trust managers and
officers of companies in today's environment;
WHEREAS, the Trust's Third Amended and Restated Declaration of Trust
(the "Declaration of Trust") provides that the Trust will indemnify its trust
managers and officers to the full extent permitted by law, and the Indemnitee's
willingness to serve as a trust manager and/or officer of the Trust is based in
part on the Indemnitee's reliance on such provisions; and
WHEREAS, the Texas Real Estate Investment Trust Act, as amended (the
"Texas Statute") expressly recognizes that the indemnification provisions of
the Texas Statute are not exclusive of any other rights to which a person
seeking indemnification may be entitled under the Declaration of Trust or
Bylaws of the Trust, a resolution of the trust managers, an agreement or as
permitted or required by common law, and this Agreement is being entered into
pursuant to and in furtherance of the Declaration of Trust and Bylaws, as
permitted by the Texas Statute and as authorized by the Declaration of Trust
and the trust managers of the Trust (the "Trust Managers"); and
WHEREAS, in recognition of the Indemnitee's need for substantial
protection against personal liability in order to enhance the Indemnitee's
continued service to the Trust in an effective manner, and the Indemnitee's
reliance on the aforesaid provisions of the Declaration of Trust, and in part
to provide the Indemnitee with specific contractual assurance that the
protection promised by such provisions will be available to the Indemnitee
(regardless of, among other things, any amendment to or revocation of such
provisions or any change in the composition of the Trust Managers or any
acquisition or business combination transaction relating to the Trust), the
Trust wishes to provide in this Agreement for the indemnification of and the
advancement of expenses to the Indemnitee as set forth in this Agreement and,
to the extent insurance is maintained, for the continued coverage of the
Indemnitee under the Trust's trust managers' and officers' liability insurance
policies.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1
<PAGE> 2
1. Indemnification.
(a) In accordance with the provisions of subsection (b) of this
Section 1, the Trust shall hold harmless and indemnify the Indemnitee against
any and all expenses, liabilities and losses (including, without limitation,
investigation expenses and expert witnesses' and attorneys' fees and expenses,
judgments, penalties, fines, ERISA excise taxes and amounts paid or to be paid
in settlement) actually incurred by the Indemnitee (net of any related
insurance proceeds or other amounts received by the Indemnitee or paid by or on
behalf of the Trust on the Indemnitee's behalf), in connection with any action,
suit, arbitration or proceeding (or any inquiry or investigation, whether
brought by or in the right of the Trust or otherwise, that the Indemnitee in
good faith believes might lead to the institution of any such action, suit,
arbitration or proceeding), whether civil, criminal, administrative or
investigative, or any appeal therefrom, in which the Indemnitee is a party, is
threatened to be made a party, is a witness or is participating (a
"Proceeding") based upon, arising from, relating to or by reason of the fact
that Indemnitee is, was, shall be or shall have been a trust manager and/or
officer of the Trust or is or was serving, shall serve, or shall have served at
the request of the Trust as a trust manager, officer, partner, trustee,
employee or agent ("Affiliate Indemnitee") of another foreign or domestic
corporation or non-profit corporation, cooperative, partnership, joint venture,
trust or other incorporated or unincorporated enterprise.
(b) In providing the foregoing indemnification, the Trust shall, with
respect to a Proceeding, hold harmless and indemnify the Indemnitee to the
fullest extent required by the Texas Statute and to the fullest extent
permitted by the Express Permitted Indemnification Provisions (as hereinafter
defined) of the Texas Statute. For purposes of this Agreement, the Express
Permitted Indemnification Provisions of the Texas Statute shall mean
indemnification as permitted by Section 9.20 of the Texas Statute or by any
amendment thereof or other statutory provisions expressly permitting such
indemnification which is adopted after the date hereof (but, in the case of any
such amendment, only to the extent that such amendment permits the Trust to
provide broader indemnification rights than said law required or permitted the
Trust to provide prior to such amendment).
(c) Without limiting the generality of the foregoing, the Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1
for any expenses, liabilities and losses actually incurred in any Proceeding
initiated by or in the right of the Trust, provided that in the event that the
Indemnitee shall have been adjudged to be liable to the Trust or shall have
been adjudged liable on the basis that personal benefit was improperly received
by the Indemnitee, indemnification (i) is limited to reasonable expenses
actually incurred by the Indemnitee in connection with the Proceeding; and (ii)
shall not be made in respect of any Proceeding in which the person shall have
been found liable for wilful or intentional misconduct in the performance of
his duty to the Trust.
2
<PAGE> 3
(d) If the Indemnitee is entitled under this Agreement to
indemnification by the Trust for some or a portion of the Indemnified Amounts
(as hereinafter defined) but not, however, for all of the total amount thereof,
the Trust shall nevertheless indemnify the Indemnitee for the portion thereof
to which Indemnitee is entitled.
2. Other Indemnification Arrangements. The Texas Statute and the
Declaration of Trust permit the Trust to purchase and maintain insurance or
furnish similar protection or make other arrangements, including, without
limitation, securing indemnification obligations by granting a security
interest or other lien on the assets of the Trust and providing self insurance,
a letter of credit, guaranty or surety bond (collectively, the "Indemnity
Arrangements") on behalf of the Indemnitee against any liability asserted
against him or incurred by or on behalf of him in such capacity as a trust
manager or officer of the Trust or as an Affiliate Indemnitee, or arising out
of his status as such, whether or not the Trust would have the power to
indemnify him against such liability under the provisions of this Agreement or
under the Texas Statute, as it may then be in effect. The purchase,
establishment and maintenance of any such Indemnity Arrangement shall not in
any way limit or affect the rights and obligations of the Trust or of the
Indemnitee under this Agreement except as expressly provided herein, and the
execution and delivery of this Agreement by the Trust and the Indemnitee shall
not in any way limit or affect the rights and obligations of the Trust or the
other party or parties thereto under any such Indemnification Agreement. All
amounts payable by the Trust pursuant to this Section 2 and Section 1 hereof
are herein referred to as "Indemnified Amounts."
3. Advance Payment of Indemnified Amounts.
(a) The Indemnitee hereby is granted the right to receive in advance
of a final, nonappealable judgment or other final adjudication of a Proceeding
(a "Final Determination") the amount of any and all expenses, including,
without limitation, investigation expenses, expert witness' and attorneys' fees
and other expenses expended or incurred by the Indemnitee in connection with
any Proceeding or otherwise expended or incurred by the Indemnitee (such
amounts so expended or incurred being referred to as "Advanced Amounts").
(b) In making any written request for the Advanced Amounts, the
Indemnitee shall submit to the Trust a schedule setting forth in reasonable
detail the dollar amount expended or incurred and expected to be expended. Each
such listing shall be supported by the bill, agreement or other documentation
relating thereto, each of which shall be appended to the schedule as an
exhibit. In addition, before the Indemnitee may receive Advanced Amounts from
the Trust, the Indemnitee shall provide to the Trust (i) a written affirmation
of the Indemnitee's good faith belief that the applicable standard of conduct
required for indemnification by the Trust has been satisfied by the Indemnitee,
and (ii) a written undertaking by or on behalf of the Indemnitee to repay the
Advanced Amounts if it shall ultimately be determined that the Indemnitee has
not satisfied any applicable standard of conduct. The written undertaking
required from the Indemnitee shall be an unlimited general obligation of the
Indemnitee but need not be secured. The Trust shall pay
3
<PAGE> 4
to the Indemnitee all Advanced Amounts within ten (10) business days after
receipt by the Trust of all information and documentation required to be
provided by the Indemnitee pursuant to this subsection (b).
4. Procedure for Payment of Indemnified Amounts.
(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Trust a written request for payment of the appropriate
Indemnified Amounts, including with such request such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Trust shall, promptly upon receipt of
such a request for indemnification, advise the Trust Managers in writing that
the Indemnitee has requested indemnification.
(b) The Trust shall pay the Indemnitee the appropriate Indemnified
Amounts unless it is established that the Indemnitee has not met any applicable
standard of conduct of the Express Permitted Indemnification Provisions. For
purposes of determining whether the Indemnitee is entitled to Indemnified
Amounts, in order to deny indemnification to the Indemnitee the Trust has the
burden of proof in establishing that the Indemnitee did not meet the applicable
standard of conduct. In this regard, a termination of any Proceeding by
judgment, order, settlement, conviction, pleading of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, does not
create a presumption that the Indemnitee did not meet the requisite standard of
conduct.
(c) Any determination that the Indemnitee has not met the applicable
standard of conduct required to qualify for indemnification shall be made (i)
either by the Trust Managers by a majority vote of a quorum consisting of trust
managers who were not parties to such action, suit or proceeding; or (ii) or by
independent legal counsel (who may be the outside counsel regularly employed by
the Trust), provided that the manner in which (and, if applicable, the counsel
by which) the right to indemnification is to be determined shall be approved in
advance in writing by both the highest ranking executive officer of the Trust
who is not party to such action (sometimes hereinafter referred to as "Senior
Officer") and by the Indemnitee. In the event that such parties are unable to
agree on the manner in which any such determination is to be made, such
determination shall be made by independent legal counsel retained by the Trust
especially for such purpose, provided that such counsel be approved in advance
in writing by both the said Senior Officer and Indemnitee and provided further,
that such counsel shall not be outside counsel regularly employed by the Trust.
The fees and expenses of counsel in connection with making said determination
contemplated hereunder shall be paid by the Trust, and if requested by such
counsel, the Trust shall give such counsel an appropriate written agreement
with respect to the payment of their fees and expenses and such other matters
as may be reasonably requested by counsel.
(d) The Trust will use its best efforts to conclude as soon as
practicable any required determination pursuant to subsection (c) above and
promptly will advise the Indemnitee in writing with respect to any
determination that the Indemnitee is or is not entitled to indemnification,
4
<PAGE> 5
including a description of any reason or basis for which indemnification has
been denied. Payment of any applicable Indemnified Amounts will be made to the
Indemnitee within ten (10) days after any determination of the Indemnitee's
entitlement to indemnification.
(e) Notwithstanding the foregoing, the Indemnitee may, at any time
after sixty (60) days after a claim for Indemnified Amounts has been filed with
the Trust (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent
determination of whether the Indemnitee is entitled to indemnification as
provided under this Agreement, irrespective of any prior determination made by
the Trust Managers or independent counsel. If the court shall determine that
the Indemnitee is entitled to indemnification as to any claim, issue or matter
involved in the Proceeding with respect to which there has been no prior
determination pursuant to this Agreement or with respect to which there has
been a prior determination that the Indemnitee was not entitled to
indemnification hereunder, the Trust shall pay all expenses (including
attorneys' fees) actually incurred by the Indemnitee in connection with such
judicial determination.
5. Agreement Not Exclusive; Subrogation Rights, etc.
(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss or expense by the Trust, any
subsidiary of the Trust or any other person or entity under any declaration of
trust, charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of shareholders or Trust Managers, disinterested or not, or
otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Trust's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Trust for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against the
Indemnitee in respect of Indemnified Amounts after payments on account of all
or part of such Indemnified Amounts have been made by the Trust pursuant
hereto, the Indemnitee shall promptly reimburse to the Trust the amount, if
any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Trust or pursuant to arrangements made by the
Trust to Indemnitee exceeds such Indemnified Amounts; provided, however, that
such portions, if any, of such insurance proceeds that are required to be
reimbursed to the insurance carrier under the terms of its insurance policy,
such as deductible or co-insurance payments, shall not be deemed to be payments
to the Indemnitee hereunder. In addition, upon payment of Indemnified Amounts
hereunder, the Trust shall be
5
<PAGE> 6
subrogated to the rights of the Indemnitee receiving such payments (to the
extent thereof) against any insurance carrier (to the extent permitted under
such insurance policies) or plaintiff in respect of such Indemnified Amounts
and the Indemnitee shall execute and deliver any and all instruments and
documents and perform any and all other acts or deeds which the Trust deems
necessary or advisable to secure such rights. Such right of subrogation shall
be terminated upon receipt by the Trust of the amount to be reimbursed by the
Indemnitee pursuant to the first sentence of this subsection (b).
6. Insurance Coverage. In the event that the Trust maintains trust
managers' and officers' liability insurance to protect itself and any trust
manager or officer of the Trust against any expense, liability or loss, such
insurance shall cover the Indemnitee to at least the same extent as any other
trust manager or officer of the Trust.
7. Establishment of Trust. The Trust may, in its sole discretion,
create a trust (the "Indemnification Trust") for the benefit of the Indemnitee
and, to the extent such Indemnification Trust has been created, from time to
time upon written request of Indemnitee shall fund the Indemnification Trust in
an amount sufficient to satisfy any and all Indemnified Amounts (including
Advanced Amounts) which are actually paid or which Indemnitee reasonably
determines from time to time may be payable by the Trust under this Agreement.
The amount or amounts to be deposited in the Indemnification Trust pursuant to
the foregoing funding obligation shall be determined by the independent legal
counsel appointed under Section 4 hereof. If such Indemnification Trust is
established, the terms thereof shall provide that (i) the Indemnification Trust
shall not be revoked or the principal thereof invaded without the written
consent of the Indemnitee; (ii) the trustee of the Indemnification Trust (the
"Trustee") shall advance, within ten (10) business days of a request by the
Indemnitee, any and all Advanced Amounts to the Indemnitee (and the Indemnitee
hereby agrees to reimburse the Indemnification Trust under the circumstances,
under which the Indemnitee would be required to reimburse the Trust under
Section 3(b)(ii) hereof); (iii) the Trust shall continue to fund the
Indemnification Trust from time to time in accordance with the funding
obligations set forth above; (iv) the Trustee shall promptly pay to the
Indemnitee all Indemnified Amounts for which the Indemnitee shall be entitled
to indemnification pursuant to this Agreement; and (v) all unexpended funds in
the Indemnification Trust shall revert to the Trust upon a final determination
by a court of competent jurisdiction in a final decision from which there is no
further right of appeal that the Indemnitee has been fully indemnified under
the terms of this Agreement. The Trustee shall be chosen by the Indemnitee.
Nothing in this Section 7 shall relieve the Trust of any of its obligations
under this Agreement.
8. Continuation of Indemnity. All agreements and obligations of the
Trust contained herein shall continue during the period the Indemnitee is a
trust manager or officer of the Trust (or is serving at the request of the
Trust as an Affiliate Indemnitee) and shall continue thereafter for a period of
ten (10) years from the date the Indemnitee ceases to serve as a trust manager
or officer of the Trust or ceases to serve as an Affiliate Indemnitee
(whichever is later).
9. Notice and Defense of Claim. Indemnitee agrees promptly to notify
the Trust in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to
6
<PAGE> 7
indemnification or advancement of expenses covered hereunder. Notwithstanding
any other provision of this Agreement, with respect to any such Proceeding or
matter as to which Indemnitee notifies the Trust of the commencement thereof:
(a) The Trust will be entitled to participate therein at its own
expense.
(b) Except as otherwise provided in this Section 9(b), to the extent
it desires, the Trust, jointly with any other indemnifying party similarly
notified, shall be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee. After notice from the Trust to
Indemnitee of its election to so assume the defense thereof, the Trust shall
not be liable to Indemnitee under this Agreement for any legal or other
expenses subsequently incurred by Indemnitee in connection with the defense
thereof other than reasonable costs of investigation or as otherwise provided
below. Indemnitee shall have the right to employ his own counsel in such
Proceeding or matter, but the fees and expenses of such counsel incurred after
notice from the Trust of its assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Trust; (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Trust and Indemnitee in
the conduct of the defense of such action; or (iii) the Trust shall not in fact
have employed counsel to assume the defense of such Proceeding or matter, in
each of which cases the fees and expenses of counsel shall be at the expense of
the Trust. The Trust shall not be entitled to assume the defense of any
Proceeding or matter brought by or on behalf of the Trust or as to which
Indemnitee shall have made the conclusion provided for in (ii) above.
(c) The Trust shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding or matter
affected without its written consent. The Trust shall not settle any Proceeding
or matter in any manner that would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Trust nor
Indemnitee will unreasonably withhold their consent to any proposed settlement.
10. Defense Counsel. Indemnitee hereby agrees that in any Proceeding
in which Indemnitee and other past or present trust managers or officers of the
Trust (or its successor) who are entitled to indemnification from the Trust are
named defendants or respondents, Indemnitee and such other past or present
trust managers or officers shall collectively select one firm of attorneys in
any jurisdiction to defend all such defendants and respondents in such
Proceeding unless counsel for Indemnitee advises that there are issues which
may raise conflicts of interest between Indemnitee and such other persons.
11. Indemnification for Negligence. TO THE EXTENT PERMITTED BY THEN
APPLICABLE LAW AND SUBJECT TO THE PROVISIONS OF THIS AGREEMENT, THE PARTIES
HERETO RECOGNIZE AND ACKNOWLEDGE THAT INDEMNITEE MAY BE INDEMNIFIED IN
ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT IN PROCEEDINGS INVOLVING THE
NEGLIGENCE OF INDEMNITEE.
12. Successors; Binding Agreement. This Agreement shall be binding on
and shall inure to the benefit of and be enforceable by the Trust's successors
and assigns and by the
7
<PAGE> 8
Indemnitee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. The Trust shall require
any successor or assignee (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Trust, by written agreement in form and substance reasonably
satisfactory to the Trust and to the Indemnitee, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent that the
Trust would be required to perform if no such succession or assignment had
taken place.
13. Enforcement. The Trust has entered into this Agreement and assumed
the obligations imposed on the Trust hereby in order to induce the Indemnitee
to act as a trust manager or officer, as the case may be, of the Trust, and
acknowledge that the Indemnitee is relying upon this Agreement in continuing in
such capacity. In the event the Indemnitee is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Trust shall reimburse the Indemnitee for all of the
Indemnitee's fees and expenses in bringing and pursuing such action. The
Indemnitee shall be entitled to the advancement of Indemnified Amounts to the
full extent contemplated by Section 3 hereof in connection with such
proceeding.
14. Severability. Each of the provisions of this Agreement is a
separate and distinct agreement independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable for any reason,
such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof, which other provisions shall
remain in full force and effect, and, to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of
any section of this Agreement containing any such provision held to invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held illegal, invalid or unenforceable.
15. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is agreed to
in writing signed by the Indemnitee and either the President and Chief
Executive Officer of the Trust or another officer of the Trust specifically
designated by the Trust Managers. No waiver by either party at any time of any
breach by the other party of, or of compliance with, any condition or provision
of this Agreement to be performed by such other party shall be deemed a wavier
of similar or dissimilar provisions or conditions at the same time or at any
prior or subsequent times. No agreements or representations, oral or otherwise,
express or impled, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of Texas, without giving effect to the
principles of conflicts of laws thereof.
16. Notices. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
8
<PAGE> 9
If to the Indemnitee:
-----------------------------
-----------------------------
-----------------------------
If to the Trust:
American Industrial Properties REIT, Inc.
6220 North Beltline, Suite 205
Irving, Texas 75063-2656
Attention: President
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
18. Effectiveness. This Agreement shall be effective as of the date
first above written.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
AMERICAN INDUSTRIAL PROPERTIES REIT
---------------------------------------
Charles W. Wolcott
President and Chief Executive Officer
INDEMNITEE
---------------------------------------
9
<PAGE> 1
EXHIBIT 10.2
EMPLOYEE AND TRUST MANAGER INCENTIVE
SHARE PLAN
OF
AMERICAN INDUSTRIAL PROPERTIES REIT
1. PURPOSE OF THE PLAN AND DEFINITIONS
1.1 Purpose. The purposes of this Employee and Trust Manager
Incentive Share Plan (the "Plan") of American Industrial Properties REIT (the
"Trust") are to:
(a) furnish incentive to individuals chosen to receive share-based
awards because they are considered capable of responding by improving
operations and increasing profits;
(b) encourage selected persons to accept or continue employment
with the Trust; and
(c) increase the interest of Trust Managers in the Trust's welfare
through their participation in the growth in value of the Trust's Shares.
To accomplish these purposes, this Plan provides a means whereby Employees,
Trust Managers and other enumerated persons may receive Awards.
1.2 Definitions. For purposes of this Plan, the following terms
have the following meanings:
"Affiliate" means a parent or subsidiary entity, to be
interpreted in accordance with the comparable terms "parent" and "subsidiary"
corporation in the applicable provisions (currently Section 424) of the Code at
the time this definition is being applied.
"Award" means any award under this Plan, including any grant
of Options, Restricted Shares, Share Appreciation Rights, Dividend Equivalent
Rights or Trust Manager Shares.
"Award Agreement" means, with respect to each Award, the
written agreement executed by the Trust and the Participant or other written
document approved by the Committee setting forth the terms and conditions of
the Award.
"Board" means the Board of Trust Managers of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute.
"Commission" means the Securities and Exchange Commission and
any successor agency.
"Committee" has the meaning given it in Section 4.1.
B-1
<PAGE> 2
"Common Shares" or "Shares" means common shares of beneficial
interest of the Trust, par value $0.10 per share.
"Declaration of Trust" means the then operative declaration of
trust adopted by the shareholders of the Trust.
"Dividend Equivalent Right" means an Award of rights pursuant
to Section 9.
"Effective Date" has the meaning given it in Section 19.
"Employee" has the meaning ascribed to it for purposes of
Section 3401(c) of the Code and the Treasury Regulations adopted under that
Section. It includes an officer or a Trust Manager who is also an employee of
the Trust.
"Employment Termination" means that a Participant has ceased,
for any reason and with or without cause, to be an Employee or Trust Manager
of, or a consultant to, the Trust or any Affiliate of the Trust. However, the
term "Employment Termination" shall not include a Non-Employee Trust Manager
ceasing to be a Trust Manager or a transfer of a Participant from the Trust to
an Affiliate or vice versa, or from one Affiliate to another, or a leave of
absence duly authorized by the Trust unless the Committee has provided
otherwise.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor statute.
"Exercise Notice" has the meaning given it in Section 6.1(h).
"Executive Officer" means an eligible person who, as of the
earlier of: (i) the date an Award is vested, (ii) the date restrictions with
respect to an Award lapse or (iii) the date a payment is made pursuant to an
Award Agreement, is a "covered employee" as defined in Section 1.162-27(c)(2)
of the Treasury Regulations and any successor Treasury Regulation adopted under
Section 162(m).
"Grant Date" has the meaning given it in Section 6.1(d).
"Incentive Share Option" or "ISO" mean any Option intended to
be and designated as an "incentive stock option" within the meaning of Section
422 of the Code or successor provision.
"Non-Employee Trust Manager" means a person who qualifies as a
"Non-Employee Director" as defined in Rule 16b-3 and an "outside director" as
defined in Treasury Regulation Section 1.162-27(e)(3) and any successor
Treasury Regulation.
"Non-Qualified Share Option" or "NQO" mean any Option that is
not an Incentive
B-2
<PAGE> 3
Share Option.
"Option" means an option granted under Section 5.
"Participant" means an eligible person who is granted an
Award.
"Plan" means this Employee and Trust Manager Incentive Share
Plan.
"Restricted Shares" means an Award granted under Section 7.
"Retainer" has the meaning given it in Section 10.
"Rule 16b-3" means Rule 16b-3 adopted under Section 16(b) of
the Exchange Act or any successor rule, as it may be amended from time to time,
and references to paragraphs or clauses of Rules 16b-3 refer to the
corresponding paragraphs or clauses of Rule 16b-3 as it exists at the Effective
Date or the comparable paragraph or clause of Rule 16b-3 or successor rule, as
that paragraph or clause may thereafter be amended.
"Securities Act" means the Securities Act of 1933, as amended
from time to time, and any successor statute.
"Share Appreciation Right" means an Award granted under
Section 8.
"Ten Percent Shareholder" means any person who, at the time
this definition is being applied, owns, directly or indirectly (or is treated
as owning by reason of attribution rules currently set forth in Code Section
424 or any successor statute), shares of the Trust constituting more than 10%
of the total combined voting power of all classes of outstanding shares of the
Trust or of any Affiliate of the Trust.
"Trust" has the meaning given it in Section 1.1.
"Trust Manager" means a person elected or appointed and
serving as a trust manager of the Trust in accordance with the Declaration of
Trust and the Texas Real Estate Investment Trust Act.
"Trust Manager Option" has the meaning given it in Section
5.3.
"Trust Manager Shares" means Shares issued to a Non-Employee
Trust Manager under Section 10.
B-3
<PAGE> 4
2. ELIGIBLE PERSONS
Every person who, at or as of the Grant Date, is (a) a full-time
Employee of the Trust or an Affiliate of the Trust, (b) a Trust Manager of the
Trust or an Affiliate of the Trust, or (c) someone whom the Committee
designates as eligible for an Award (other than for Incentive Share Options)
because the person (i) performs bona fide consulting or advisory services for
the Trust or an Affiliate of the Trust (other than services in connection with
the offer or sale of securities in a capital-raising transaction) and (ii) has
a direct and significant effect on the financial development of the Trust or an
Affiliate of the Trust, shall be eligible to receive Awards hereunder. Trust
Managers of the Trust who are not full-time Employees are only eligible to
receive Trust Manager Options under Section 5.3 and Trust Manager Shares under
Section 10.
3. SHARES SUBJECT TO THIS PLAN
The total number of Shares that may be issued under Awards, all or any
part of which may be issued to any Participant, is 800,000. Such Shares may
consist, in whole or in part, of authorized and unissued Common Shares or
Shares reacquired in private transactions or open market purchases, but all
Shares issued under the Plan, regardless of their source, shall be counted
against the 800,000 Share limitation. Any Shares that are retained by the
Trust upon exercise or settlement of an Award in order to satisfy the exercise
price in whole or in part, or to pay withholding taxes due with respect to such
exercise or settlement, shall be treated as issued to the Participant and will
thereafter not be available under the Plan. The number of Shares reserved for
issuance under this Plan is subject to adjustment in accordance with the
provisions for adjustment in this Plan.
4. ADMINISTRATION
4.1 Committee. This Plan shall be administered by a committee
(the "Committee") appointed by the Board. The Committee shall be constituted
so that, as long as Shares are registered under Section 12 of the Exchange Act,
each member of the Committee shall be a Non-Employee Trust Manager. The number
of persons that shall constitute the Committee shall be determined from time to
time by a majority of all the members of the Board; provided, however, the
Committee shall not consist of fewer than two persons.
4.2 Duration, Removal, Etc. The members of the Committee shall
serve at the pleasure of the Board, which shall have the power, at any time and
from time to time, to remove members from or add members to the Committee.
Removal from the Committee may be with or without cause. Any individual
serving as a member of the Committee shall have the right to resign from the
Committee by giving at least three days' written notice to the Board. The
Board, and not the remaining members of the Committee, shall have the power and
authority to fill vacancies on the Committee, however caused. The Board shall
promptly fill any vacancy that causes the number of members of the Committee to
be fewer than two or any other minimum number that Rule 16b-3 may require from
time to time (unless the Board expressly determines not to have Awards under
the Plan comply with Rule 16b-3).
B-4
<PAGE> 5
4.3 Meetings and Actions of Committee. The Board shall designate
which of the Committee members shall be the chairperson of the Committee. If
the Board fails to designate a chairperson for the Committee, the members of
the Committee shall elect one of the Committee members as chairperson, who
shall act as chairperson until he or she ceases to be a member of the Committee
or until the Board elects a new chairperson. The Committee shall hold its
meetings at those times and places as the chairperson of the Committee may
determine. At all meetings of the Committee, a quorum for the transaction of
business shall be required and a quorum shall be deemed present if at least a
majority of the members of the Committee is present. At any meeting of the
Committee, each member shall have one vote. All decisions and determinations
of the Committee shall be made by the majority vote of all of its members
present at a meeting at which a quorum is present and a unanimous vote of the
members of the Committee shall be required if the Committee is comprised of
only two members; provided, however, that any decision or determination reduced
to writing and signed by all members of the Committee shall be as fully
effective as if it had been made at a meeting that was duly called and held.
The Committee may make any rules and regulations for the conduct of its
business that are not inconsistent with this Plan, the Declaration of Trust or
bylaws of the Trust or Rule 16b-3 (so long as it is applicable).
4.4 Committee's Powers. Subject to the express provisions of this
Plan and Rule 16b-3 (so long as it is applicable), the Committee shall have the
authority, in its sole discretion: (a) to adopt, amend and rescind
administrative and interpretive rules and regulations relating to the Plan; (b)
to determine the eligible persons to whom, and the time or times at which,
Awards shall be granted; (c) to determine the number of Shares that shall be
the subject of each Award; (d) to determine the terms and provisions of each
Award Agreement (which need not be identical) and any amendments thereto,
including provisions defining or otherwise relating to (i) the period or
periods and extent of exercisability of any Option or Share Appreciation Right,
(ii) the extent to which the transferability of Shares issued or transferred
pursuant to any Award is restricted, (iii) the effect of Employment Termination
on an Award, and (iv) the effect of approved leaves of absence (consistent with
any applicable Treasury Regulations); (e) to accelerate the time of
exercisability of any Option, Dividend Equivalent Right or Share Appreciation
Right; (f) to construe the respective Award Agreements and the Plan; (g) to
make determinations of the fair market value of Shares; (h) to waive any
provision, condition or limitation set forth in an Award Agreement; (i) to
delegate its duties under the Plan to such agents as it may appoint from time
to time, provided, however, that the Committee may not delegate its duties with
respect to making or exercising discretion with respect to Awards to eligible
persons if such delegation would cause Awards not to qualify for the exemptions
provided by Rule 16b-3 (unless the Board expressly determines not to have
Awards under the Plan comply with Rule 16b-3); and (j) to make all other
determinations, perform all other acts and exercise all other powers and
authority necessary or advisable for administering the Plan, including the
delegation of those ministerial acts and responsibilities as the Committee
deems appropriate. Subject to Rule 16b-3 (so long as it is applicable), the
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan, in any Award or in any Award Agreement in the manner
and to the extent it deems necessary or desirable to implement the Plan, and
the Committee shall be the sole and final judge of that necessity or
desirability. The determinations of the Committee on the matters referred to
in this Section 4.4 shall be final and conclusive. Notwithstanding any
provision in this Plan to the contrary, Awards will be made to Non-Employee
Trust Managers only under Sections 5.3 and 10 of this Plan. In addition,
B-5
<PAGE> 6
notwithstanding any provision of this Plan to the contrary, the Committee may
not in any manner exercise discretion under the Plan with respect to any Awards
made to Non-Employee Trust Managers.
4.5 Term of Plan. No Awards shall be granted under this Plan
after 10 years from the Effective Date of this Plan.
5. GRANT OF OPTIONS
5.1 Written Agreement. Each Option shall be evidenced by an Award
Agreement. The Award Agreement shall specify whether each Option it evidences
is a NQO or an ISO.
5.2 Annual $100,000 Limitation on ISOs. To the extent that the
aggregate "fair market value" of Shares with respect to which ISOs first become
exercisable by a Participant in any calendar year exceeds $100,000, taking into
account ISOs granted under this Plan and any other plan of the Trust or any
Affiliate of the Trust, the Options covering such additional Shares becoming
exercisable in that year shall cease to be ISOs and thereafter be NQOs. For
this purpose, the "fair market value" of Shares subject to Options shall be
determined as of the date the Options were granted. In reducing the number of
Options treated as ISOs to meet this $100,000 limit, the most recently granted
Options shall be reduced first.
5.3 Annual Grants to Non-Employee Trust Managers. On the date of
approval of this Plan by the Trust's shareholders, the Non-Employee Trust
Managers shall receive an option to purchase 10,000 Shares for the fair market
value of such Shares on the date of approval by the shareholders. The options
will vest upon the date of shareholder approval. In addition to the foregoing,
on the last day of each calendar year beginning with the last day of 1997, each
Non-Employee Trust Manager who is then a member of the Board shall
automatically be granted a NQO to purchase 5,000 Shares. Each option referred
to in the previous sentence is referred to as a "Trust Manager Option." The
exercise price of Trust Manager Options shall be the fair market value of the
Shares subject to the Option on the date the Option is granted. Each Trust
Manager Option shall be fully exercisable upon the date of grant and
continuing, unless sooner terminated as provided in this Plan, for 10 years
after the date it is granted. If, for any reason other than death or permanent
and total disability, a Non-Employee Trust Manager ceases to be a member of the
Board, each Trust Manager Option held by that Non-Employee Trust Manager on the
date that the Non-Employee Trust Manager ceases to be a member of the Board may
be exercised in whole or in part at any time within one year after the date of
such termination or until the expiration of the Trust Manager Option, whichever
is earlier. If a Non-Employee Trust Manager dies or becomes permanently and
totally disabled (within the meaning of Section 422(c)(6) of the Code) while a
member of the Board (or within the period that the Trust Manager Options remain
exercisable after the Non-Employee Trust Manager ceases to be a member of the
Board), each Trust Manager Option then held by that Non-Employee Trust Manager
may be exercised, in whole or in part, by the Non-Employee Trust Manager, by
the Non-Employee Trust Manager's personal representative or by the person to
whom the Non-Employee Trust Manager transferred the Trust Manager Option by
will or the laws of descent and distribution, at any time within two years
after the date of death or permanent and total disability of the Non-Employee
Trust Manager or until the expiration date of the Trust Manager
B-6
<PAGE> 7
Option, whichever is earlier. Each Trust Manager Option shall be evidenced by
an Award Agreement.
6. CERTAIN TERMS AND CONDITIONS OF OPTIONS AND OTHER AWARDS
Each Option shall be designated as an ISO or a NQO and shall be
subject to the terms and conditions set forth in Section 6.1. Notwithstanding
the foregoing, the Committee may provide for different terms and conditions in
any Award Agreement or amendment thereto as provided in Section 4.4.
6.1 All Awards. All Options and other Awards shall be subject to
the following terms and conditions:
(a) Changes in Capital Structure. If the number of outstanding
Shares is increased by means of a share dividend payable in Shares, a share
split or other subdivision or by a reclassification of Shares, then, from and
after the record date for such dividend, subdivision or reclassification, the
number and class of Shares subject to this Plan (including, without limitation,
its Sections 3, 5.3 and 10) and each outstanding Award shall be increased in
proportion to such increase in outstanding Shares and the then-applicable
exercise price of each outstanding Award shall be correspondingly decreased.
If the number of outstanding Shares is decreased by means of a share split or
other subdivision or by a reclassification of Shares, then, from and after the
record date for such split, subdivision or reclassification, the number and
class of Shares subject to this Plan (including, without limitation, its
Sections 3, 5.3 and 10) and each outstanding Award shall be decreased in
proportion to such decrease in outstanding Shares and the then-applicable
exercise price of each outstanding Award shall be correspondingly increased.
(b) Certain Corporate Transactions. This Section 6.1(b) addresses
the impact of certain corporate transactions on outstanding Awards other than
Awards granted to Non-Employee Trust Managers (except to the extent provided in
Section 6.1(c)) and other than transactions requiring adjustments in accordance
with Section 6.1(a). In the case of any reclassification or change of
outstanding Shares issuable upon exercise of an outstanding Award or in the
case of any consolidation or merger of the Trust with or into another entity
(other than a merger in which the Trust is the surviving entity and which does
not result in any reclassification or change in the then-outstanding Shares) or
in the case of any sale or conveyance to another entity of the property of the
Trust as an entirety or substantially as an entirety, then, as a condition of
such reclassification, change, consolidation, merger, sale or conveyance, the
Trust or such successor or purchasing entity, as the case may be, shall make
lawful and adequate provision whereby the holder of each outstanding Award
shall thereafter have the right, on exercise of such Award, to receive the kind
and amount of securities, property and/or cash receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Award immediately
before such reclassification, change, consolidation, merger, sale or
conveyance. Such provision shall include adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section
6.1(a). Notwithstanding the foregoing, if such a transaction occurs, in lieu
of causing such rights to be substituted for outstanding Awards, the Committee
may, upon 20 days' prior written notice to Participants in its sole discretion:
(i)
B-7
<PAGE> 8
shorten the period during which Awards are exercisable, provided they remain
exercisable, to the extent otherwise exercisable, for at least 20 days after
the date the notice is given, or (ii) cancel an Award upon payment to the
Participant in cash, with respect to each Award to the extent then exercisable,
of an amount which, in the sole discretion of the Committee, is determined to
be equivalent to the amount, if any, by which the fair market value (at the
effective time of the transaction) of the consideration that the Participant
would have received if the Award had been exercised before the effective time
exceeds the exercise price of the Award. The actions described in this Section
6.1(b) may be taken without regard to any resulting tax consequences to the
Participant. The fourth sentence of this Section 6.1(b) shall not apply to any
Award held by a person then subject to Section 16(b) if such Award has not been
outstanding for at least six months.
(c) Special Rule For Non-Employee Trust Managers. In the case of
any of the transactions described in the second sentence of Section 6.1(b),
that second sentence and the third sentence, but not the fourth sentence, of
Section 6.1(b) shall apply to any outstanding Options granted to Non-Employee
Trust Managers under Section 5.3.
(d) Grant Date. Each Award Agreement shall specify the date as of
which it shall be effective (the "Grant Date").
(e) Fair Market Value. For purposes of this Plan, the fair market
value of Shares shall be determined as follows:
(i) If the Shares are listed on any established stock
exchange or a national market system, including, without limitation, the
National Market System of the National Association of Securities Dealers
Automated Quotation System, its fair market value shall be the closing sales
price for the Shares, or the mean between the high bid and low asked prices if
no sales were reported, as quoted on such system or exchange (or, if the Shares
are listed on more than one exchange, then on the largest such exchange) for
the date the value is to be determined (or if there are no sales or bids for
such date, then for the last preceding business day on which there were sales
or bids), as reported in The Wall Street Journal or similar publication.
(ii) If the Shares are regularly quoted by a recognized
securities dealer but selling prices are not reported, its fair market value
shall be determined in good faith by the Committee, with reference to the
Trust's net worth, prospective earning power, dividend-paying capacity and
other relevant factors, including the goodwill of the Trust, the economic
outlook in the Trust's industry, the Trust's position in the industry and its
management, and the values of stock of other corporations in the same or
similar lines of business.
(f) Time of Exercise; Vesting. Awards may, in the sole discretion
of the Committee, be exercisable or may vest, and restrictions may lapse, as
the case may be, at such times and in such amounts as may be specified by the
Committee in the grant of the Award.
(g) Nonassignability of Rights. No Award that is a derivative
security (as defined in Rule 16a-1(c) under the Exchange Act) shall be
transferable other than with the consent of the Committee (which consent will
not be granted in the case of ISOs unless the conditions for transfer of ISOs
B-8
<PAGE> 9
specified in the Code have been satisfied) or by will or the laws of the
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of ERISA. Awards requiring exercise shall be
exercisable only by the Participant, assignees that were approved by the
Committee, executors, administrators or beneficiaries of the Participant (who
are the permitted transferees hereunder), guardians or members of a committee
for an incompetent Participant, or similar persons duly authorized by law to
administer the estate or assets of a Participant.
(h) Notice and Payment. To the extent it is exercisable, an Award
shall be exercisable only by written or recorded electronic notice of exercise,
in the manner specified by the Committee from time to time, delivered to the
Trust or its designated agent during the term of the Award (the "Exercise
Notice"). The Exercise Notice shall: (a) state the number of Shares with
respect to which the Award is being exercised; (b) be signed by the holder of
the Award or by the person authorized to exercise the Award pursuant to Section
6.1(g); and (c) include such other information, instruments and documents as
may be required to satisfy any other condition to exercise set forth in the
Award Agreement. Except as provided below, payment in full, in cash or check,
shall be made for all Shares purchased at the time notice of exercise of an
Award is given to the Trust. The proceeds of any payment shall constitute
general funds of the Trust. At the time an Award is granted or before it is
exercised, the Committee, in the exercise of its sole discretion, may authorize
any one or more of the following additional methods of payment:
(i) for all Participants other than officers and Trust
Managers, acceptance of such Participants' full recourse promissory note for
some or all of the exercise price of the Shares being acquired, payable on such
terms and bearing such interest rate as determined by the Committee, and
secured in such manner, if at all, as the Committee shall approve, including,
without limitation, by a security interest in the Shares which are the subject
of the Award or other securities;
(ii) for all Participants, delivery by such Participants
of Shares of the Trust already owned by such Participants for all or part of
the exercise price of the Award being exercised, provided that the fair market
value of such Shares are equal on the date of exercise to the exercise price of
the Award being exercised, or such portion thereof as the Participants are
authorized to pay and elects to pay by delivery of such Shares;
(iii) for all Participants, surrender by such Participants,
or withholding by the Trust from the Shares issuable upon exercise of the
Award, of a number of Shares subject to the Award being exercised with a fair
market value equal to some or all of the exercise price of the Shares being
acquired, together with such documentation as the Committee and the broker, if
applicable, shall require; or
(iv) for all Participants, to the extent permitted by
applicable law, payment may be made pursuant to arrangements with a brokerage
firm under which that brokerage firm, on behalf of such Participants, shall pay
to the Trust the exercise price of the Award being exercised (either as a loan
to the Participant or from the proceeds of the sale of Shares issued under that
Award), and the Trust shall promptly cause the Shares being purchased under the
Award to be delivered to the brokerage firm. Such transactions shall be
effected in accordance with the procedures that the Committee may establish
from time to time.
B-9
<PAGE> 10
If the exercise price is satisfied in whole or in part by the delivery of
Shares pursuant to paragraph (ii) above, the Committee may issue the
Participant an additional Option, with terms identical to those set forth in
the option agreement governing the exercised Option, except for the exercise
price which shall be the fair market value used for such delivery and the
number of Shares subject to such additional Option shall be the number of
Shares so delivered.
(i) Termination of Employment. Any Award or portion thereof which
has not vested on or before the date of a Participant's Employment Termination
shall expire on the date of Employment Termination. As to an Award or portion
thereof that has vested by the time of Employment Termination, the Committee
shall establish, in respect of each Award when granted, the effect of an
Employment Termination on the rights and benefits thereunder and in so doing
may, but need not, make distinctions based upon the cause of termination (such
as retirement, death, disability or other factors) or which party effected the
termination (the employer or the Employee). Notwithstanding any other
provision in this Plan or the Award Agreement, the Committee may decide in its
discretion at the time of any Employment Termination (or within a reasonable
time thereafter) to extend the exercise period of an Award (but not beyond the
period specified in Section 6.2(b) or 6.3(b), as applicable) and not decrease
the number of Shares covered by the Award with respect to which the Award is
exercisable or vested. A transfer of a Participant from the Trust to an
Affiliate or vice versa, or from one Affiliate to another, or a leave of
absence duly authorized by the Trust, shall not be deemed an Employment
Termination or a break in continuous employment unless the Committee has
provided otherwise.
(j) Death. Any Award or portion thereof which has not vested on
or before the date of the Participant's death shall expire on the date of such
Participant's death. As to an Award or portion thereof that has vested by the
date of death of the Participant, such Awards or portions thereof must be
exercised within two years of the date of the Participant's death by a person
authorized under this Plan to exercise such Awards.
(k) Payment of Dividends Upon Exercise of Options. Upon exercise
of an Option, the Participant shall be entitled to receive a cash payment from
the Trust equal to the amount of dividends that have been paid from the Grant
Date of the Option through the date of exercise of the Option on that number of
Common Shares that is equal to the number of Common Shares being purchased upon
exercise of such Option.
(l) Other Provisions. Each Award Agreement may contain such other
terms, provisions and conditions not inconsistent with this Plan, as may be
determined by the Committee, and each ISO granted under this Plan shall include
such provisions and conditions as are necessary to qualify such Option as an
"incentive stock option" within the meaning of Section 422 of the Code, unless
the Committee determines otherwise.
(m) Withholding and Employment Taxes. At the time of exercise of
an Award, the lapse of restrictions on an Award or a disqualifying disposition
of Shares issued under an ISO (within the meaning of Section 6.3(c)), the
Participant shall remit to the Trust in cash all applicable federal and state
withholding and employment taxes. If and to the extent authorized and approved
by the Committee in its sole discretion, a Participant may elect, by means of a
form of election to be
B-10
<PAGE> 11
prescribed by the Committee, to have Shares which are acquired upon exercise of
an Award withheld by the Trust or tender other Shares owned by the Participant
to the Trust at the time the amount of such taxes is determined, in order to
pay the amount of such tax obligations, subject to such limitations as the
Committee determines are necessary or appropriate to comply with Rule 16b-3 in
the case of Participants who are subject to Section 16(b). For example, the
Committee may require that the election be irrevocable and that the election
not be made within six months of the acquisition of the securities to be
tendered to satisfy the tax withholding obligation (except that this limitation
shall not apply in the event that death or disability of the Participant occurs
before the expiration of the six-month period). Any Shares so withheld or
tendered shall be valued by the Trust as of the date they are withheld or
tendered. If Shares are tendered to satisfy such withholding tax obligation,
the Committee may issue the Participant an additional Option, with terms
identical to those set forth in the option agreement governing the Option
exercised, except that the exercise price shall be the fair market value used
by the Trust in accepting the tender of Shares for such purpose and the number
of Shares subject to the additional Option shall be the number of Shares
tendered by the Participant.
6.2 Terms and Conditions to Which Only NQOs Are Subject. Options
granted under this Plan which are designated as NQOs shall be subject to the
following terms and conditions:
(a) Exercise Price. The exercise price of a NQO shall be
determined by the Committee; provided, however, that the exercise price of a
NQO shall not be less than 100% of the fair market value of the Shares subject
to the Option on the Grant Date or, if required by applicable state securities
laws in the case of a NQO granted to any Ten Percent Shareholder, not less than
110% of such fair market value.
(b) Option Term. Unless an earlier expiration date is specified
by the Committee at the Grant Date, each NQO shall expire 10 years after the
Grant Date or, if required by applicable state securities laws in the case of a
NQO granted to a Ten Percent Shareholder, five years after the Grant Date.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options
granted under this Plan which are designated as ISOs shall be subject to the
following terms and conditions:
(a) Exercise Price. The exercise price of an ISO shall be
determined in accordance with the applicable provisions of the Code and shall
in no event be less than 100% of the fair market value of the Shares covered by
the ISO at the Grant Date; provided, however, that the exercise price of an ISO
granted to a Ten Percent Shareholder shall not be less than 110% of such fair
market value.
(b) Option Term. Unless an earlier expiration date is specified
by the Committee at the Grant Date, each ISO shall expire 10 years after the
Grant Date; provided, however, that an ISO granted to a Ten Percent Shareholder
shall expire no later than five years after the Grant Date.
(c) Disqualifying Dispositions. If Shares acquired by exercise of
an ISO are disposed of within two years after the Grant Date or within one year
after the transfer of the Shares to the optionee, the holder of the Shares
immediately before the disposition shall promptly notify the Trust
B-11
<PAGE> 12
in writing of the date and terms of the disposition, shall provide such other
information regarding the disposition as the Trust may reasonably require and
shall pay the Trust any withholding and employment taxes which the Trust in its
sole discretion deems applicable to the disposition.
(d) Termination of Employment. All vested ISOs must be exercised
within three months of the Employment Termination of the optionee unless such
Employment Termination is due to the employee being disabled (within the
meaning of Section 422 (c)(6) of the Code), in which case the ISO shall be
exercised within one year of the Employment Termination.
6.4 Surrender of Options. The Committee, acting in its sole
discretion, may include a provision in an option agreement allowing the
optionee to surrender the Option covered by the agreement, in whole or in part
in lieu of exercise in whole or in part, on any date that the fair market value
of the Shares subject to the Option exceeds the exercise price and the Option
is exercisable (to the extent being surrendered). The surrender shall be
effected by the delivery of the option agreement, together with a signed
statement which specifies the number of shares as to which the optionee is
surrendering the Option, together with a request for such type of payment.
Upon such surrender, the optionee shall receive (subject to any limitations
imposed by Rule 16b-3), at the election of the Committee, payment in cash or
Shares, or a combination of the two, equal to (or equal in fair market value
to) the excess of the fair market value of the Shares covered by the portion of
the Option being surrendered on the date of surrender over the exercise price
for such Shares. The Committee, acting in its sole discretion, shall determine
the form of payment, taking into account such factors as it deems appropriate.
To the extent necessary to satisfy Rule 16b-3, the Committee may terminate an
optionee's rights to receive payments in cash for fractional Shares. Any
option agreement providing for such surrender privilege shall also incorporate
such additional restrictions on the exercise or surrender of Options as may be
necessary to satisfy the conditions of Rule 16b-3.
7. RESTRICTED SHARES.
Restricted Shares shall be subject to the following terms and
conditions:
7.1 Grant. The Committee may grant one or more Awards of
Restricted Shares to any Participant other than Non-Employee Trust Managers.
Each Award of Restricted Shares shall specify the number of Shares to be issued
to the Participant, the date of issuance and the restrictions imposed on the
Shares including the conditions of release or lapse of such restrictions.
Unless the Committee provides otherwise, the restrictions shall not lapse
earlier than six months after the date of the Award. Pending the lapse of
restrictions, Share certificates evidencing Restricted Shares shall bear a
legend referring to the restrictions and shall be held by the Trust. Prior to
the issuance of any Restricted Shares, the Participant receiving such
Restricted Shares shall pay to the Trust an amount of cash equal to, at a
minimum, the par value per Restricted Share multiplied by the number of
Restricted Shares to be issued. Upon the issuance of Restricted Shares, the
Participant may be required to furnish such additional documentation or other
assurances as the Committee may require to enforce the restrictions.
7.2 Restrictions. Except as specifically provided elsewhere in
this Plan or the Award Agreement regarding Restricted Shares, Restricted Shares
may not be sold, assigned, transferred,
B-12
<PAGE> 13
pledged or otherwise disposed of or encumbered, either voluntarily or
involuntarily, until the restrictions have lapsed and the rights to the Shares
have vested. The Committee may in its discretion provide for the lapse of such
restrictions in installments and may accelerate or waive such restrictions, in
whole or in part, based on service, performance or such other factors or
criteria as the Committee may determine.
7.3 Dividends. Unless otherwise determined by the Committee, cash
dividends with respect to Restricted Shares shall be paid to the recipient of
the Award of Restricted Shares on the normal dividend payment dates, and
dividends payable in Shares shall be paid in the form of Restricted Shares
having the same terms as the Restricted Shares upon which such dividend is
paid. Each Award Agreement for Awards of Restricted Shares shall specify
whether and, if so, the extent to which the Participant shall be obligated to
return to the Trust any cash dividends paid with respect to any Restricted
Shares which are subsequently forfeited.
7.4 Forfeiture of Restricted Shares. Except to the extent
otherwise provided in the governing Award Agreement, when a Participant's
Employment Termination occurs, the Participant shall forfeit all Restricted
Shares still subject to restriction.
8. SHARE APPRECIATION RIGHTS
The Committee may grant Share Appreciation Rights to eligible persons
other than Non-Employee Trust Managers. A Share Appreciation Right shall
entitle its holder to receive from the Trust, at the time of exercise of the
right, an amount in cash equal to (or, at the Committee's discretion, Shares
equal in fair market value to) the excess of the fair market value (at the date
of exercise) of a Share over a specified price fixed by the Committee in the
governing Award Agreement multiplied by the number of Shares as to which the
holder is exercising the Share Appreciation Right. The specified price fixed
by the Committee shall not be less than the fair market value of the Shares at
the date of grant of the Share Appreciation Right. Share Appreciation Rights
may be granted in tandem with any previously or contemporaneously granted
Option or independent of any Option. The specified price of a tandem Share
Appreciation Right shall be the exercise price of the related Option. Any
Share Appreciation Rights granted in connection with an ISO shall contain such
terms as may be required to comply with Section 422 of the Code.
9. DIVIDEND EQUIVALENT RIGHTS
9.1 General. The Committee shall have the authority to grant
Dividend Equivalent Rights to Participants other than Non-Employee Trust
Managers upon such terms and conditions as it shall establish, subject in all
events to the following limitations and provisions of general application set
forth in this Plan. Each Dividend Equivalent Right shall entitle a holder to
receive, for a period of time to be determined by the Committee, a payment
equal to the quarterly dividend declared and paid by the Trust on one Common
Share. If the right relates to a specific Option, the period shall not extend
beyond the earliest of the date the Option is exercised, the date any Share
Appreciation Right related to the Option is exercised, or the expiration date
set forth in the Option.
9.2 Rights and Options. Each right may relate to a specific
Option granted under this
B-13
<PAGE> 14
Plan and may be granted to the optionee either concurrently with the grant of
such Option or at such later time as determined by the Committee, or each right
may be granted independent of any Option.
9.3 Payments. The Committee shall determine at the time of grant
whether payment pursuant to a right shall be immediate or deferred and if
immediate, the Trust shall make payments pursuant to each right concurrently
with the payment of the quarterly dividend to holders of Common Shares. If
deferred, the payments shall not be made until a date or the occurrence of an
event specified by the Committee and then shall be made within 30 days after
the occurrence of the specified date or event, unless the right is forfeited
under the terms of the Plan or applicable Award Agreement.
9.4 Termination of Employment. In the event of Employment
Termination, any Dividend Equivalent Right held by such Participant on the date
of Employment Termination shall be forfeited, unless otherwise expressly
provided by the Committee.
10. TRUST MANAGER SHARES
10.1 Election. The Trust intends to pay each Non-Employee Trust
Manager an annual fee in the amount set from time to time by the Board (the
"Retainer"). Each Non-Employee Trust Manager shall be entitled to receive his
or her Retainer exclusively in cash, exclusively in unrestricted Shares ("Trust
Manager Shares") or any portion in cash and Trust Manager Shares. Following
the approval of this Plan by the shareholders of the Trust, each Non-Employee
Trust Manager shall be given the opportunity, during the month the Non-Employee
Trust Manager first becomes a Non-Employee Trust Manager and during each
December thereafter, to elect among these choices for the balance of the
calendar year (in the case of the election made during the month the
Non-Employee Trust Manager first becomes a Non-Employee Trust Manager) and for
the ensuing year (in the case of a subsequent election made during any
December). If the Non-Employee Trust Manager chooses to receive at least some
of his or her Retainer in Trust Manager Shares, the election shall also
indicate the percentage of the Retainer to be paid in Trust Manager Shares. If
a Non-Employee Trust Manager makes no election during his or her first
opportunity to make an election, the Non-Employee Trust Manager shall be
assumed to have elected to receive his or her entire Retainer in cash. If a
Non-Employee Trust Manager makes no election during any succeeding election
month, the Non-Employee Trust Manager shall be assumed to have remade the
election then currently in effect for that Non-Employee Trust Manager.
10.2 Issuance. The Trust shall make the first issuance of Trust
Manager Shares on the first trading day following the last day of the full
calendar quarter following the approval of the Plan by the Trust's
shareholders. Subsequent issuances of Trust Manager Shares shall be made on
the first trading day of each subsequent calendar quarter and shall be made to
all persons who are Non-Employee Trust Managers on that trading day except any
Non-Employee Trust Manager whose Retainer is to be paid entirely in cash. The
number of Shares issuable to those Non-Employee Trust Managers on the relevant
trading date indicated above shall equal:
(% x R) / P
---
4
B-14
<PAGE> 15
where:
% = the percentage of the Non-Employee Trust Manager's
Retainer that the Non-Employee Trust Manager elected
or is deemed to have elected to receive in the form
of Trust Manager Shares, expressed as a decimal;
R = the Non-Employee Trust Manager's Retainer for the
year during which the issuance occurs; and
P = the fair market value of Shares determined in
accordance with Section 6.1(e).
Trust Manager Shares shall not include any fractional Shares. Fractions shall
be rounded to the nearest whole Share.
11. SECURITIES LAWS
Nothing in this Plan or in any Award or Award Agreement shall require
the Trust to issue any Shares with respect to any Award if, in the opinion of
counsel for the Trust, that issuance could constitute a violation of the
Securities Act, any other law or the rules of any applicable securities
exchange or securities association then in effect. As a condition to the grant
or exercise of any Award, the Trust may require the Participant (or, in the
event of the Participant's death, the Participant's legal representatives,
heirs, legatees or distributees) to provide written representations concerning
the Participant's (or such other person's) intentions with regard to the
retention or disposition of the Shares covered by the Award and written
covenants as to the manner of disposal of such Shares as may be necessary or
useful to ensure that the grant, exercise or disposition will not violate the
Securities Act, any other law or any rule of any applicable securities exchange
or securities association then in effect. The Trust shall not be required to
register any Shares under the Securities Act or register or qualify any Shares
under any state or other securities laws.
12. EMPLOYMENT OR OTHER RELATIONSHIP
Nothing in this Plan or any Award shall in any way interfere with or
limit the right of the Trust or any of its Affiliates to terminate any
Participant's employment or status as a consultant or Trust Manager at any
time, nor confer upon any Participant any right to continue in the employ of,
or as a Trust Manager or consultant of, the Trust or any of its Affiliates.
13. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN
The Board may at any time amend, suspend or discontinue this Plan
without shareholder approval, except as required by applicable law; provided,
however, that no amendment, alteration, suspension or discontinuation shall be
made which would impair the rights of any Participant under any Award
previously granted, without the Participant's consent, except to conform this
Plan and Awards granted to the requirements of federal or other tax laws,
including, without limitation, Section 422 of the Code and/or ERISA, or to the
requirements of Rule 16b-3. The provisions of the Plan relating to Awards for
Non-Employee Trust Managers may not be amended more than once
B-15
<PAGE> 16
each six months. The Board may choose to require that the Trust's shareholders
approve any amendment to this Plan in order to satisfy the requirements of
Section 422 of the Code, Rule 16b-3 or for any other reason.
14. LIABILITY AND INDEMNIFICATION OF THE COMMITTEE
No person constituting, or member of the group constituting, the
Committee shall be liable for any act or omission on such person's part,
including, but not limited to, the exercise of any power or discretion given to
such member under this Plan, except for those acts or omissions resulting from
such member's gross negligence or willful misconduct. The Trust shall
indemnify each present and future person constituting, or member of the group
constituting, the Committee against, and each person or member of the group
constituting the Committee shall be entitled without further act on his or her
part to indemnity from the Trust for, all expenses (including the amount of
judgments and the amount of approved settlements made with a view to the
curtailment of costs of litigation) reasonably incurred by such person in
connection with or arising out of any action, suit or proceeding to the fullest
extent permitted by law and by the Declaration of Trust and Bylaws of the
Trust.
15. GRANTS TO PERSONS EXPECTED TO BECOME EMPLOYEES OR TRUST MANAGERS
As allowed by this Plan, the Committee may grant Awards (other than
ISOs) to persons who are expected to become Employees, Trust Managers (other
than Non-Employee Trust Managers) or consultants of the Trust. The grant shall
be deemed to have been made upon the date the grantee becomes an Employee,
Trust Manager or consultant of the Trust without further action or approval by
the Committee.
16. CERTAIN TRUST MANAGERS AND OFFICERS
All Award Agreements for Participants who are subject to Section 16(b)
shall be deemed to include such additional limitations, terms and provisions as
Rule 16b-3 then requires unless the Committee determines that any such Award
should not comply with the requirements of Rule 16b-3. All Award Agreements
relating to ISOs shall be deemed to include such additional terms and
provisions as Section 422 of the Code or any successor provision thereto then
requires under the Committee expressly determines that such Award should not
comply with such requirements.
17. SECURITIES LAW LEGENDS
Certificates of Shares and Restricted Shares, when issued, may have
the following legend and statements of other applicable restrictions endorsed
thereon:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR
SALE, SOLD,
B-16
<PAGE> 17
PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL THE HOLDER
HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN
THE SOLE DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE,
PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT VIOLATE ANY
APPLICABLE FEDERAL OR STATE SECURITIES LAWS.
This legend shall not be required for any Shares issued pursuant to an
effective registration statement under the Securities Act.
18. SEVERABILITY
If any provision of this Plan is held to be illegal or invalid for any
reason, that illegality or invalidity shall not affect the remaining portions
of the Plan, but such provision shall be fully severable and the Plan shall be
construed and enforced as if the illegal or invalid provision had never been
included in this Plan. Such an illegal or invalid provision shall be replaced
by a revised provision that most nearly comports to the substance of the
illegal or invalid provision. If any of the terms or provisions of this Plan or
any Award Agreement conflict with the requirements of Rule 16b-3 (as those
terms or provisions are applied to eligible persons who are subject to Section
16(b) or Section 422 of the Code (with respect to ISOs)), those conflicting
terms or provisions shall be deemed inoperative to the extent they conflict
with those requirements. With respect to ISOs, if this Plan does not contain
any provision required to be included in a plan under Section 422 of the Code,
that provision shall be deemed to be incorporated into this Plan with the same
force and effect as if it had been expressly set out in this Plan; provided,
however, that, to the extent any Option that is intended to qualify as an ISO
cannot so qualify, that Option (to that extent) shall be deemed to be a NQO for
all purposes of the Plan.
19. EFFECTIVE DATE AND PROCEDURAL HISTORY
This Plan was originally approved by the Trust's Board on January 27,
1997. It was approved in that form by the holders of the Trust's voting shares
on June 30, 1997 (the "Effective Date").
B-17
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 13, 1997 (except for Note 14, as to which the
date is February 26, 1997), in the Registration Statement on Form S-4 and the
related Joint Proxy Statement/Prospectus of American Industrial Properties REIT
dated July 22, 1997.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
July 18, 1997
2
<PAGE> 1
EXHIBIT 23.2
The Partners
USAA Real Estate Income Investments I Limited Partnership
USAA Real Estate Income Investments II Limited Partnership
USAA Income Properties III Limited Partnership
USAA Income Properties IV Limited Partnership:
We consent to the use of our reports dated January 29, 1997 and February 3,
1997 on the financial statements and financial statement schedules of USAA Real
Estate Income Investments I Limited Partnership and USAA Income Properties III
Limited Partnership, respectively, and the report dated January 31, 1997 on the
consolidated financial statements and financial statement schedules of USAA
Income Properties IV Limited Partnership as of December 31, 1996 and 1995, and
for each of the years in the three-year period ended December 31, 1996, and the
report dated August 1, 1996 on the financial statements and financial statement
schedules of USAA Real Estate Income Investments II Limited Partnership as of
June 30, 1996 and 1995, and for each of the years in the three-year period
ended June 30, 1996, included herein and to the reference to our firm under the
heading "Experts" in the joint proxy statement/prospectus.
KPMG Peat Marwick LLP
San Antonio, Texas
July 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 2,863 5,376
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 91,940 94,472
<DEPRECIATION> (23,637) (23,973)
<TOTAL-ASSETS> 74,245 78,936
<CURRENT-LIABILITIES> 49,626 56,253
<BONDS> 0 0
0 0
0 0
<COMMON> 1,000 1,000
<OTHER-SE> 23,619 21,683
<TOTAL-LIABILITY-AND-EQUITY> 74,245 78,936
<SALES> 0 0
<TOTAL-REVENUES> 2,666 11,478
<CGS> 0 0
<TOTAL-COSTS> 2,281 10,309
<OTHER-EXPENSES> 0 (117)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,404 5,901
<INCOME-PRETAX> (707) 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (707) (4,555)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,643 5,810
<CHANGES> 0 0
<NET-INCOME> 1,936 1,255
<EPS-PRIMARY> 0.19 .14
<EPS-DILUTED> 0.19 .14
</TABLE>
<PAGE> 1
EXHIBIT 99.1
- --------------------------------------------------------------------------------
AMERICAN INDUSTRIAL PROPERTIES REIT
SPECIAL MEETING TO BE HELD , 199
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUST MANAGERS OF AMERICAN
INDUSTRIAL PROPERTIES REIT (THE "TRUST").
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 , 199 , at the
Special Meeting of Shareholders or at any postponements or adjournments thereof,
on the proposals set forth below, as directed.
1. Approval of the Agreements and Plans of Merger, dated as of June 30, 1997,
among the Trust, 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 and the issuance of Shares thereunder.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Postponement or adjournment of the Special Meeting for the solicitation of
additional votes, if necessary.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTION MADE ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE AND TWO. THE PROXIES WILL VOTE WITH RESPECT TO THE THIRD PROPOSAL
ACCORDING TO THEIR BEST JUDGMENT. PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON
YOUR SHARE CERTIFICATE.
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
By signing and returning this Proxy, the undersigned acknowledges receipt of
the Notice of Special Meeting and Joint Proxy Statement/ Prospectus delivered
herewith.
Dated , 199
---------------------
--------------------------------
Signature
--------------------------------
Signature (if held jointly)
--------------------------------
Title
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.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE OR DELIVER TO: The Herman Group, Inc., 2121 San Jacinto
Street, 26th Floor, Dallas, Texas 75201. Facsimile copies of the Proxy, properly
completed and duly executed, will be accepted at (214) 999-9323 or (214)
999-9348. If you have any questions, please call The Herman Group, Inc. at (800)
555-6433.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.2
- --------------------------------------------------------------------------------
USAA REAL ESTATE INCOME INVESTMENTS I, A CALIFORNIA LIMITED PARTNERSHIP
SPECIAL MEETING TO BE HELD , 199
THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER OF USAA REAL ESTATE
INCOME INVESTMENTS I, A CALIFORNIA LIMITED PARTNERSHIP (THE "PARTNERSHIP").
The undersigned hereby appoints Edward B. Kelley and Randal R. Seewald, and
each of them, jointly and severally, as Proxies, each with full power of
substitution, to vote all of the undersigned's Limited Partnership Units in the
Partnership, held of record on , 199 , at the Special Meeting of Limited
Partners held on , 199 or at any postponements or adjournments thereof,
on the proposals set forth below, as directed.
1. Approval of the Agreement and Plan of Merger, dated as of June 30, 1997, by
and between American Industrial Properties REIT (the "Trust") and the
Partnership and approval of amendments to the Agreement of Limited
Partnership of the Partnership authorizing (i) the proposed merger of the
Partnership with and into the Trust, whether or not the Trust would be
regarded as an affiliate of the General Partner, and (ii) all understandings
between the Partnership and the Trust contemplated by the Joint Proxy
Statement/Prospectus, irrespective of any provisions of the Agreement of
Limited Partnership of the Partnership which might otherwise prohibit such
transactions.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Postponement or adjournment of the Special Meeting for the solicitation of
additional votes, if necessary.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTION MADE ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE THROUGH THREE. THE PROXIES WILL VOTE WITH RESPECT TO THE FOURTH
PROPOSAL ACCORDING TO THEIR BEST JUDGMENT. PLEASE SIGN EXACTLY AS YOUR NAME
APPEARS ON THE RECORDS OF THE PARTNERSHIP.
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
By signing and returning this Proxy, the undersigned acknowledges receipt of
the Notice of Special Meeting and Joint Proxy Statement/Prospectus delivered
herewith.
Dated , 199
--------------------
--------------------------------
Signature
--------------------------------
Signature (if held jointly)
--------------------------------
Title
Please sign exactly as name
appears hereon. When limited
partnership units 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.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE OR DELIVER TO: USAA Real Estate Company, 8000 Robert F.
McDermott Freeway, IH 10 West, Suite 600, San Antonio, Texas 78230-3884.
Facsimile copies of the Proxy, properly completed and duly executed, will be
accepted at (210) 498-6214. If you have any questions, please call Randal R.
Seewald at (800) 531-8876.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.3
- --------------------------------------------------------------------------------
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
SPECIAL MEETING TO BE HELD , 199
THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER OF USAA REAL ESTATE
INCOME INVESTMENTS II LIMITED PARTNERSHIP (THE "PARTNERSHIP").
The undersigned hereby appoints Edward B. Kelley and Randal R. Seewald, and
each of them, jointly and severally, as Proxies, each with full power of
substitution, to vote all of the undersigned's Limited Partnership Units in the
Partnership, held of record on , 199 , at the Special Meeting of Limited
Partners held on , 199 or at any postponements or adjournments thereof,
on the proposals set forth below, as directed.
1. Approval of the Agreement and Plan of Merger, dated as of June 30, 1997, by
and between American Industrial Properties REIT (the "Trust") and the
Partnership and approval of amendments to the Agreement of Limited
Partnership of the Partnership authorizing (i) the proposed merger of the
Partnership with and into the Trust, whether or not the Trust would be
regarded as an affiliate of the General Partner, (ii) the sale to USAA Real
Estate Company, or to an affiliate of the same, of the Partnership's interest
in the joint venture which owns the Sequoia Plaza I Building, and (iii) all
understandings between the Partnership and the Trust contemplated by the
Joint Proxy Statement/Prospectus, irrespective of any provisions of the
Agreement of Limited Partnership of the Partnership which might otherwise
prohibit such transactions.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Postponement or adjournment of the Special Meeting for the solicitation of
additional votes, if necessary.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTION MADE ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE THROUGH THREE. THE PROXIES WILL VOTE WITH RESPECT TO THE FOURTH
PROPOSAL ACCORDING TO THEIR BEST JUDGMENT. PLEASE SIGN EXACTLY AS YOUR NAME
APPEARS ON THE RECORDS OF THE PARTNERSHIP.
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
By signing and returning this Proxy, the undersigned acknowledges receipt of
the Notice of Special Meeting and Joint Proxy Statement/ Prospectus delivered
herewith.
Dated , 199
--------------------
--------------------------------
Signature
--------------------------------
Signature (if held jointly)
--------------------------------
Title
Please sign exactly as name
appears hereon. When limited
partnership units 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.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE OR DELIVER TO: USAA Real Estate Company, 8000 Robert F.
McDermott Freeway, IH 10 West, Suite 600, San Antonio, Texas 78230-3884.
Facsimile copies of the Proxy, properly completed and duly executed, will be
accepted at (210) 498-6214. If you have any questions, please call Randal R.
Seewald at (800) 531-8876.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.4
- --------------------------------------------------------------------------------
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
SPECIAL MEETING TO BE HELD , 199
THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER OF USAA INCOME
PROPERTIES III LIMITED PARTNERSHIP (THE "PARTNERSHIP").
The undersigned hereby appoints Edward B. Kelley and Randal R. Seewald, and
each of them, jointly and severally, as Proxies, each with full power of
substitution, to vote all of the undersigned's Limited Partnership Units in the
Partnership, held of record on , 199 , at the Special Meeting of Limited
Partners held on , 199 or at any postponements or adjournments thereof,
on the proposals set forth below, as directed.
1. Approval of the Agreement and Plan of Merger, dated as of June 30, 1997, by
and between American Industrial Properties REIT (the "Trust") and the
Partnership and approval of amendments to the Agreement of Limited
Partnership of the Partnership authorizing (i) the proposed merger of the
Partnership with and into the Trust, whether or not the Trust would be
regarded as an affiliate of the General Partner, (ii) the sale of the Curlew
Crossing property by the Partnership to USAA Real Estate Company and (iii)
all understandings between the Partnership and the Trust contemplated by the
Joint Proxy Statement/Prospectus, irrespective of any provisions of the
Agreement of Limited Partnership of the Partnership which might otherwise
prohibit such transactions.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Postponement or adjournment of the Special Meeting for the solicitation of
additional votes, if necessary.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTION MADE ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE THROUGH THREE. THE PROXIES WILL VOTE WITH RESPECT TO THE FOURTH
PROPOSAL ACCORDING TO THEIR BEST JUDGMENT. PLEASE SIGN EXACTLY AS YOUR NAME
APPEARS ON THE RECORDS OF THE PARTNERSHIP.
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
By signing and returning this Proxy, the undersigned acknowledges receipt of
the Notice of Special Meeting and Joint Proxy Statement/Prospectus delivered
herewith.
Dated , 199
--------------------
--------------------------------
Signature
--------------------------------
Signature (if held jointly)
--------------------------------
Title
Please sign exactly as name
appears hereon. When limited
partnership units 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.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE OR DELIVER TO: USAA Real Estate Company, 8000 Robert F.
McDermott Freeway, IH 10 West, Suite 600, San Antonio, Texas 78230-3884.
Facsimile copies of the Proxy, properly completed and duly executed, will be
accepted at (210) 498-6214. If you have any questions, please call Randal R.
Seewald at (800) 531-8876.
<PAGE> 1
EXHIBIT 99.5
- --------------------------------------------------------------------------------
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
SPECIAL MEETING TO BE HELD , 199
THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER OF USAA INCOME
PROPERTIES IV LIMITED PARTNERSHIP (THE "PARTNERSHIP").
The undersigned hereby appoints Edward B. Kelley and Randal R. Seewald, and
each of them, jointly and severally, as Proxies, each with full power of
substitution, to vote all of the undersigned's Limited Partnership Units in the
Partnership, held of record on , 199 , at the Special Meeting of Limited
Partners held on , 199 or at any postponements or adjournments thereof,
on the proposals set forth below, as directed.
1. Approval of the Agreement and Plan of Merger, dated as of June 30, 1997, by
and between American Industrial Properties REIT (the "Trust") and the
Partnership and approval of amendments to the Agreement of Limited
Partnership of the Partnership authorizing (i) the proposed merger of the
Partnership with and into the Trust, whether or not the Trust would be
regarded as an affiliate of the General Partner, and (ii) all understandings
between the Partnership and the Trust contemplated by the Joint Proxy
Statement/Prospectus, irrespective of any provisions of the Agreement of
Limited Partnership of the Partnership which might otherwise prohibit such
transactions.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Postponement or adjournment of the Special Meeting for the solicitation of
additional votes, if necessary.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. 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.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH THE
DIRECTION MADE ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS ONE THROUGH THREE. THE PROXIES WILL VOTE WITH RESPECT TO THE FOURTH
PROPOSAL ACCORDING TO THEIR BEST JUDGMENT. PLEASE SIGN EXACTLY AS YOUR NAME
APPEARS ON THE RECORDS OF THE PARTNERSHIP.
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
By signing and returning this Proxy, the undersigned acknowledges receipt of
the Notice of Special Meeting and Joint Proxy Statement/ Prospectus delivered
herewith.
Dated ,199
--------------------
--------------------------------
Signature
--------------------------------
Signature (if held jointly)
--------------------------------
Title
Please sign exactly as name
appears hereon. When limited
partnership units 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.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE OR DELIVER TO: USAA Real Estate Company, 8000 Robert F.
McDermott Freeway, IH 10 West, Suite 600, San Antonio, Texas 78230-3884.
Facsimile copies of the Proxy, properly completed and duly executed, will be
accepted at (210) 498-6214. If you have any questions, please call Randal R.
Seewald at (800) 531-8876.
