<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant | |
Check the appropriate box:
|X| Preliminary Proxy Statement | | Confidential, for Use of the
| | Definitive Proxy Statement Commission Only (as permitted
| | Definitive Additional Materials by Rule 14a-6(e)(2))
| | Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
AMERICAN INDUSTRIAL PROPERTIES REIT
(Name of Registrant as Specified in Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
| | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
| | Fee paid previously with preliminary materials.
-------------------------------------------------------------------------
| | Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
-------------------------------------------------------------------------
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
---------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 29, 1997
---------------
TO THE SHAREHOLDERS OF AMERICAN INDUSTRIAL PROPERTIES REIT:
You are cordially invited to attend the Annual Meeting of Shareholders of
American Industrial Properties REIT to be held at 2200 Ross Avenue, 40th Floor,
Dallas, Texas 75201, on October 29, 1997 at 9:00 a.m. (Dallas time), for the
following purposes:
1. To approve a one for five reverse share split.
2. To approve an amendment of the Employee and Trust Manager Incentive
Share Plan to increase the number of Common Shares authorized for
issuance under the Plan to an amount equal to 10% of the Trust's
outstanding Common Shares.
3. To elect eight Trust Managers.
4. To ratify the selection of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1997.
5. To approve the postponement or adjournment of the Annual Meeting
for the solicitation of additional votes, if necessary.
6. To transact such other business as may properly come before the
Annual Meeting or any postponements or adjournments thereof.
Only holders of record of Common Shares of the Trust on September 26,
1997 will be entitled to notice of, and to vote at, the Annual Meeting or any
postponements or adjournments thereof.
A copy of the Proxy Statement relating to the Annual Meeting accompanies
this Notice of Annual Meeting of Shareholders. Each shareholder is urged to
read the Proxy Statement in its entirety.
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING
REGARDLESS OF THE NUMBER OF COMMON SHARES YOU HOLD. YOU ARE INVITED TO ATTEND
THE ANNUAL MEETING IN PERSON, BUT WHETHER OR NOT YOU PLAN TO ATTEND, YOU MAY
ENSURE YOUR REPRESENTATION BY COMPLETING, SIGNING, DATING AND PROMPTLY
RETURNING THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE. IF YOU ATTEND
THE ANNUAL MEETING, YOU MAY, IF YOU PREFER, REVOKE YOUR PROXY AND VOTE YOUR
SHARES IN PERSON.
By Order of the Trust Managers
Marc A. Simpson
Secretary and Chief Financial Officer
6210 N. Beltline Road
Suite 170
Irving, Texas 75063
(972) 756-6000
September 26, 1997
<PAGE> 3
AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. BELTLINE ROAD
SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 29, 1997
This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Trust Managers of American Industrial Properties REIT, a Texas
real estate investment trust (the "Trust"), for use at the Annual Meeting of
Shareholders to be held at 2200 Ross Avenue, 40th Floor, Dallas, Texas 75201 at
9:00 a.m. Dallas time on October 29, 1997. Accompanying this Proxy Statement is
the Proxy for the Annual Meeting, which you may use to indicate your vote as to
each of the proposals described in this Proxy Statement. This Proxy Statement
and the accompanying Proxy are first being mailed to shareholders on or about
September 29, 1997. The Annual Report outlining the Trust's operations for the
fiscal year ended December 31, 1996 (the "1996 Fiscal Year") was mailed to
shareholders on or about March 13, 1997 (the "1996 Annual Report").
The close of business on September 26, 1997 has been fixed as the record
date for the determination of shareholders entitled to notice of and to vote at
the Annual Meeting. As of the record date, the Trust had outstanding 23,289,867
common shares of beneficial interest, $0.10 par value, the only outstanding
security of the Trust (the "Common Shares").
At the Annual Meeting, action will be taken to: (i) approve a one for
five reverse share split (the "Reverse Share Split"); (ii) adopt an amendment
to the Employee and Trust Manager Incentive Share Plan (the "Plan") to increase
the number of Common Shares authorized for issuance under the Plan to an amount
equal to 10% of the Trust's outstanding Common Shares; (iii) elect eight Trust
Managers to hold office until their successors, if any, are duly elected and
qualified at the next annual meeting of shareholders; (iv) ratify the selection
of Ernst & Young LLP as independent auditors for the Trust for the fiscal year
ending December 31, 1997 (the "1997 Fiscal Year"); and (v) transact such other
business as may properly come before the Annual Meeting or any postponements or
adjournments thereof.
Management of the Trust believes the approval of proposal one will
enhance the marketability and liquidity of the Common Shares by potentially
obtaining a higher price for the Common Shares that is more acceptable to the
investment community. If the shareholders authorize the Reverse Share Split,
the principal effect will be that the total number of Common Shares held by
each shareholder will be automatically converted into that number of whole
Common Shares equal to the number of Common Shares owned at the close of
business on October 29, 1997, the date of the Annual Meeting, divided by five.
Shareholders entitled to receive a fractional share will instead receive a cash
payment based upon the closing price of the Common Shares on the New York Stock
Exchange (the "NYSE") on the effective date of the Reverse Share Split.
Consequently, any shareholder who owns less than five Common Shares at the
close of business on October 29, 1997 will cease to be a shareholder of the
Trust. There can be no assurance, however, that any of the desired effects of
the Reverse Share Split, including an increase in the market price of Common
Shares, will occur. The Reverse Share Split should not change any shareholder's
proportionate equity interest in the Trust, except for minor differences due to
the elimination of fractional shares and the redemption of Common Shares held
by shareholders who own less than 50 Common Shares after the Reverse Share
Split (as described below). See "Proposal One -- Approval of Reverse Share
Split."
If the Reverse Share Split is approved by shareholders, the Board of
Trust Managers has authorized the redemption of all the Common Shares owned by
shareholders who own less than 50 Common Shares after the Reverse Share Split
(the "Odd Lot Redemption"). Consequently, shareholders who own less than 250
Common Shares at the
1
<PAGE> 4
close of business on October 29, 1997 will cease to be shareholders of the
Trust as of the effective date of the Odd Lot Redemption. SHAREHOLDERS WHO
CURRENTLY OWN LESS THAN 250 COMMON SHARES MAY, HOWEVER, PURCHASE ADDITIONAL
COMMON SHARES IN THE OPEN MARKET BEFORE THE CLOSE OF BUSINESS ON OCTOBER 29,
1997 TO REACH THE THRESHOLD OF 250 COMMON SHARES AND THEREBY NOT BE SUBJECT TO
THE ODD LOT REDEMPTION. The Board of Trust Managers believes that the Odd Lot
Redemption of Common Shares owned by shareholders owning less than 50 Common
Shares will reduce the Trust's administrative expenses and improve the Trust's
administrative efficiency. The Odd Lot Redemption will have the effect of
increasing the proportionate equity interests of the Trust's shareholders whose
Common Shares are not redeemed; however, any such increase in percentage
ownership should be minimal. See "Proposal One -- Approval of Reverse Share
Split -- Odd Lot Redemption."
At the Trust's annual meeting held on June 30, 1997, the shareholders
approved the Plan which reserved 800,000 Common Shares for issuance under the
Plan. If shareholders approve the Reverse Share Split, the number of Common
Shares reserved for issuance under the Plan will be decreased to 160,000, only
21,000 of which will be available for future issuance under the Plan.
Management of the Trust believes the approval of proposal two will allow the
Trust to be more competitive in offering long-term incentives to key employees,
officers and Trust Managers. Increased availability of Common Shares for
issuance under the Plan will give the Trust greater flexibility in attracting
and retaining high-quality employees and officers. The Board of Trust Managers
voted unanimously to amend the Plan, subject to shareholder approval, to
increase the number of Common Shares available for issuance under the Plan to a
maximum of 10% of the total number of Common Shares outstanding at any time.
The Board of Trust Managers believes this additional flexibility is necessary
in order to retain qualified employees, officers and Trust Managers.
A shareholder is entitled to cast one vote for each Common Share held on
the record date on all matters to be considered at the Annual Meeting.
Cumulative voting for the election of Trust Managers is not authorized by the
Trust's Third Amended and Restated Declaration of Trust (the "Declaration of
Trust").
Shareholders are urged to sign the accompanying Proxy, and after
reviewing the information contained in this Proxy Statement, to return the
Proxy in the envelope enclosed for that purpose. Valid Proxies will be voted at
the Annual Meeting and at any adjournments thereof in the manner specified
therein. If no direction is given, but the Proxy is validly executed, such
Proxy will be voted FOR proposals one through five. IN THEIR DISCRETION, THE
PERSONS AUTHORIZED UNDER THE PROXIES WILL VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE ANNUAL MEETING.
A shareholder may revoke his, her or its Proxy at any time before it is
voted either by filing with the Secretary of the Trust at its principal
executive office a written notice of revocation, by submitting a duly executed
Proxy bearing a later date, or by attending the Annual Meeting and expressing a
desire to vote his, her or its Common Shares in person.
The holders of a majority of the Common Shares issued and outstanding and
entitled to vote, present in person or represented by Proxy (11,644,934 Common
Shares), shall constitute a quorum for the transaction of business at the
Annual Meeting. If such quorum should not be present at the Annual Meeting, the
Annual Meeting may be adjourned from time to time without notice, other than
announcement at the Annual Meeting, until a quorum shall be present.
If necessary, and if proposal five is approved, the Annual Meeting may be
postponed or adjourned for the solicitation of additional votes. Adoption of
the proposal to adjourn or postpone the Annual Meeting for the solicitation of
additional votes requires approval by the holders of a majority of the Common
Shares present in person or represented by proxy, and entitled to vote at the
Annual Meeting.
Abstentions and broker non-votes (where a nominee holding Common Shares
for a beneficial owner has not received voting instructions from the beneficial
owner with respect to a particular matter and such nominee does not possess or
choose to exercise discretionary authority with respect thereto) will be
included in the determination of the number of Common Shares present at the
Annual Meeting for quorum purposes. Abstentions and broker non-votes will have
the same effect as a vote against the proposals. Failure to return the Proxy or
failure to vote at the Annual Meeting will have the same effect as a vote
against the proposals.
The Trust's principal executive offices are located at 6210 N. Beltline
Road, Suite 170, Irving, Texas 75063.
2
<PAGE> 5
PROPOSAL ONE
APPROVAL OF REVERSE SHARE SPLIT
GENERAL
The Board of Trust Managers has approved, subject to shareholder
approval, the Reverse Share Split of the presently issued and outstanding
Common Shares of the Trust. If this proposal is approved, the principal effect
of the Reverse Share Split on holders of Common Shares will be that the total
number of Common Shares held by each shareholder will be automatically
converted into that number of whole Common Shares equal to the number of Common
Shares owned immediately prior to the Reverse Share Split divided by five.
Shareholders entitled to receive a fractional share will instead receive a cash
payment as described below under "-- Exchange of Certificates and Settlement of
Fractional Shares." Consequently, as a result of the Reverse Share Split,
shareholders who own less than five Common Shares will cease to be shareholders
of the Trust. Additionally, as a result of the Reverse Share Split, some
shareholders will own less than 50 Common Shares (an "Odd Lot"). The Board of
Trust Managers, acting pursuant to the provisions of the Declaration of Trust,
has approved the Odd Lot Redemption, pursuant to which the Trust shall redeem
all the Common Shares owned by shareholders who own less than 50 Common Shares
after the Reverse Share Split ("Odd Lot Holders"). Odd Lot Holders will cease
to be shareholders of the Trust as of the effective date of the Odd Lot
Redemption. Shareholders who currently own less than 250 Common Shares may,
however, purchase additional Common Shares in the open market to avoid being
subject to the Odd Lot Redemption. A shareholder who owns at least 250 Common
Shares at the close of business on October 29, 1997, the date of the Annual
Meeting, will not have his, her or its Common Shares redeemed by the Trust. See
"-- Odd Lot Redemption" below.
REASONS FOR REVERSE SHARE SPLIT
The Common Shares are traded on the NYSE under the symbol "IND." Between
January 1, 1996 and July 28, 1997, the high and low sales prices for the Common
Shares on the NYSE has ranged from a low of $1 3/8 to a high of $3 3/16 per
share. On July 28, 1997, the closing sales price of Common Shares on the NYSE
was $3 1/8. The Board of Trust Managers, after considering the effects of the
relatively low historical market price of the Common Shares and other factors
described below, believes that the Reverse Share Split is advisable and in the
best interests of the Trust and its shareholders.
The Reverse Share Split would decrease the number of Common Shares
outstanding and presumably increase the per share market price of the Common
Shares after the Reverse Share Split, although there can be no assurance that a
corresponding price increase would occur. The Board of Trust Managers believes
that the relatively low market price per share of the Common Shares may impair
the marketability of the Common Shares to institutional investors and other
members of the investing public. In theory, the number of shares outstanding
should not, alone, affect the marketability of the Common Shares, the type of
investor who acquires them, or the Trust's reputation in the financial
community. In practice this is often not the case, however, because many
investors look upon low-priced shares as speculative in nature, and as a matter
of policy, avoid investment in such stocks. Additionally, certain institutional
investors have internal policies preventing the purchase of stocks that trade
below a certain price. These factors may not only affect the liquidity of the
Common Shares, but also may impair the Trust's ability to raise additional
capital through the sale of equity securities.
The Board of Trust Managers also recognizes that many leading brokerage
firms are reluctant to recommend low-priced securities to their clients or hold
them in their own portfolios. Additionally, many brokerage houses do not permit
low-priced stocks to be used as collateral for margin accounts or to be
purchased on margin. Further, certain brokerage houses have adopted
time-consuming practices and procedures that act to discourage individual
brokers from dealing in low-priced stocks because such practices and procedures
make the handling of such stocks economically unattractive. A low stock price
also has the effect of increasing the amount and percentage of transaction
costs paid by individual investors. Because brokers' commissions on low-priced
stocks generally represent a higher percentage of the stock price than
commissions on higher priced stocks, a low stock price can result in individual
shareholders paying transaction costs (commissions, markups or markdowns) that
are a higher percentage of their total share value than would be the case with
stock with a higher per share trading price. Any reduction in brokerage
commissions resulting from the Reverse Share Split may be offset, however, by
increased brokerage commissions required to be paid by shareholders
3
<PAGE> 6
selling odd lots (blocks of Common Shares not evenly divisible by 100) created
by the Reverse Share Split. See "-- Effects of the Reverse Share Split" below.
The Board of Trust Managers believes that the expected increase in per share
price of the Common Shares resulting from the Reverse Share Split should reduce
the effect of these negative attributes traditionally associated with a low per
share price, thereby enhancing the marketability of the Common Shares with the
financial community and investing public and resulting in a broader market for
the Common Shares than currently exists.
The Board of Trust Managers anticipates that the decrease in the number
of outstanding Common Shares resulting from the Reverse Share Split and the
anticipated corresponding increased price per share will stimulate greater
investor (both individual and institutional) interest in the Common Shares,
promote greater liquidity for the Trust's shareholders, and result in a price
level for the Common Shares that is more appropriate for a NYSE-listed
security. The Board of Trust Managers also anticipates that the Reverse Share
Split will result in a price level for the Common Shares that will mitigate the
present reluctance, policies and practices of brokerage firms, and diminish the
adverse impact of trading commissions, recommendation restrictions and margin
requirements on the potential market for the Common Shares. There is no
assurance, however, that the Reverse Share Split will achieve the desired
results, that any potentially favorable consequences of the Reverse Share Split
will occur, that the market price for the Common Shares will increase
proportionately, or at all, as a result of the Reverse Share Split, or that any
price increase of the Common Shares can be sustained for a prolonged period of
time. The Board of Trust Managers cannot predict what effect the Reverse Share
Split will have on the market price of the Common Shares. Additionally, it is
possible that the liquidity of the Common Shares may be adversely affected by
the reduced number of Common Shares outstanding if the Reverse Share Split is
effected.
EFFECTS OF THE REVERSE SHARE SPLIT
HOLDERS OF COMMON SHARES. If the shareholders approve this proposal, the
Reverse Share Split will be effective at 5:00 p.m., Dallas time, on October 29,
1997 (the "Effective Date"). On the Effective Date, every five Common Shares
then issued and outstanding shall automatically, without any further action on
the part of the shareholders of the Trust, become and be converted into one
Common Share, subject to adjustment to eliminate fractional shares. No
fractional shares will be issued and, in lieu thereof, shareholders owning a
number of Common Shares not evenly divisible by five will receive cash in lieu
of any fractional share to which they would otherwise be entitled upon
surrender of their share certificates. See "-- Exchange of Certificates and
Settlement of Fractional Shares" below.
All shareholders who own less than five Common Shares on the Effective
Date only shall be entitled to receive a cash payment in lieu of a fractional
share, and their interests as shareholders of the Trust shall immediately be
terminated. Each shareholder who owns more than five Common Shares will
continue to own Common Shares after the Reverse Share Split, but such interest
will be represented by 20% of the number of Common Shares that such shareholder
owned before the Reverse Share Split, except that no fractional shares will be
issued. All shareholders who own less than 250 Common Shares on the Effective
Date will own an Odd Lot after the Reverse Share Split. Pursuant to the Odd Lot
Redemption, Odd Lot Holders will have all their Common Shares redeemed by the
Trust as soon as practicable after the Effective Date. Shareholders who
currently own less than 250 Common Shares may purchase additional Common Shares
before the Effective Date so that their Common Shares will not be redeemed by
the Trust. Shareholders who own at least 250 Common Shares on the Effective
Date will not be subject to the Odd Lot Redemption and will continue to be
shareholders of the Trust. See "-- Odd Lot Redemption" below.
The post-Reverse Share Split Common Shares will be validly issued, fully
paid and nonassessable. Except for the elimination of fractional shares, the
Reverse Share Split will not affect or alter the voting or other rights and
privileges of holders of Common Shares. The Board of Trust Managers does not
anticipate that the Reverse Share Split will significantly reduce the number of
the Trust's shareholders. Based on the Trust's records as of July 28, 1997, the
Board of Trust Managers anticipates, however, that the Odd Lot Redemption will
reduce the number of the Trust's shareholders by approximately 40% and the
number of outstanding Common Shares by 1.2%. The Reverse Share Split should not
change any shareholder's proportionate equity interest in the Trust, except for
minor differences due to the elimination of fractional shares and the Odd Lot
Redemption. Although the Odd Lot Redemption will have the effect of increasing
the proportionate equity interests of the Trust's shareholders whose Common
Shares are not redeemed, any such increase in percentage ownership should be
minimal.
4
<PAGE> 7
The Reverse Share Split will result in some shareholders owning odd lots
of Common Shares (blocks of Common Shares not evenly divisible by 100).
Brokerage commissions and other costs of transactions in odd lots generally are
somewhat higher than the costs of transactions in "round lots" of even
multiples of 100 shares. Consequently, transaction costs may increase for those
shareholders who hold odd lots after the Reverse Share Split.
Under the Texas Real Estate Investment Trust Act, as amended (the "Texas
REIT Act"), shareholders of the Trust do not have dissenters' rights with
respect to the Reverse Share Split.
COMMON SHARES. The Declaration of Trust authorizes the Trust to issue
500,000,000 Common Shares. The Reverse Share Split will not change the number
of authorized shares or the par value of the Common Shares. The principal
effect of the Reverse Share Split will be to reduce the number of Common Shares
outstanding from 23,289,867 as of July 28, 1997 to approximately 4,657,973,
subject to adjustment for the elimination of fractional shares. Common Shares
no longer outstanding as a result of the fractional share settlement procedure
will be reflected as authorized, but unissued, Common Shares. The following
table summarizes the effects of the Reverse Share Split on the Trust's Common
Shares:
<TABLE>
<CAPTION>
July 28, 1997
----------------------------------------
As Adjusted For
Actual Reverse Share Split (1)
------ -----------------------
<S> <C> <C>
Common Shares:
Authorized 500,000,000 500,000,000
Issued and Outstanding 23,289,867 4,657,973
Reserved for Issuance 4,415,656(2) 883,130(3)
Available for Issuance 472,294,477 494,458,897
Par value per Common Share $ 0.10 $ 0.10
</TABLE>
- ---------------
(1) Subject to further adjustments due to settlement of fractional shares,
which adjustments are not expected to be material. Does not reflect any
adjustments for the Odd Lot Redemption.
(2) Includes (i) 2,724,809 Common Shares issuable upon conversion by USAA
Real Estate Company ("Realco") of the Modified Notes (as defined below),
(ii) 995,847 Common Shares issuable pursuant to the MSAM Agreement (as
defined below), and (iii) 695,000 Common Shares issuable upon exercise of
currently outstanding options.
(3) Includes (i) 544,961 Common Shares issuable upon conversion of the
Modified Notes by Realco, (ii) 199,169 Common Shares issuable pursuant to
the MSAM Agreement, and (iii) 139,000 Common Shares issuable upon
exercise of currently outstanding options.
PREFERRED SHARES. The Declaration of Trust authorizes the Trust to issue
50,000,000 preferred shares, par value $0.10 per share (the "Preferred
Shares"). As of July 28, 1997, there were no Preferred Shares issued or
outstanding. The Reverse Share Split will not change the number of authorized
shares or the par value of the Preferred Shares.
SHAREHOLDERS' EQUITY. As discussed above, the Reverse Share Split will
reduce the number of Common Shares outstanding, but will not change the par
value of the Common Shares. Consequently, the stated capital of the Trust will
be reduced by approximately 80% on the Effective Date, with the additional
paid-in capital account being credited with the amount by which the stated
capital of the Trust is reduced. The effects of the Reverse Share Split on the
shareholders' equity of the Trust as of June 30, 1997, as adjusted for
issuances of Common Shares in July 1997, are summarized as follows:
5
<PAGE> 8
<TABLE>
<CAPTION>
June 30, 1997 (as adjusted)
---------------------------
(000's)
As Adjusted for
Actual Reverse Share Split
------ -------------------
<S> <C> <C>
Stated Capital 2,329 466
Additional paid-in capital 158,287 160,150
Accumulated distributions (58,456) (58,456)
Accumulated loss from operations
and extraordinary gains (losses) (47,495) (47,495)
Accumulated net realized gain on sales
of real estate 1,460 1,460
-------- --------
Total Shareholders' Equity 56,125 56,125
======== ========
</TABLE>
EMPLOYEE AND TRUST MANAGER INCENTIVE SHARE PLAN. As of July 28, 1997,
under the Plan, options to purchase an aggregate of 695,000 Common Shares were
outstanding at exercise prices ranging between $2 15/16 to $3 per share.
Pursuant to the provisions of the Plan, 800,000 Common Shares may be issued
under the Plan. As of July 28, 1997, 105,000 Common Shares remain available for
grant pursuant to the Plan. The Plan provides that if the number of outstanding
Common Shares is decreased by means of a reverse share split, then, from and
after the record date of such reverse share split, the number of Common Shares
subject to the Plan and each outstanding option award shall be decreased in
proportion to such decrease in outstanding Common Shares and the
then-applicable exercise price of each outstanding option award shall be
correspondingly increased.
If this proposal is approved, the number of Common Shares issuable upon
the exercise of outstanding options and the number of Common Shares available
for grant under the Plan will be adjusted to 139,000 and 160,000, respectively,
and the exercise prices of the outstanding options will be adjusted to prices
of $14 11/16 to $15 per share. However, if proposal two amending the Plan is
approved, the number of Common Shares authorized for issuance under the Plan
will be increased to 10% of the Common Shares issued and outstanding. After
effecting the Reverse Share Split, the number of Common Shares available for
issuance, assuming proposal two is approved, would be approximately 465,797 or
10% of 4,657,973 (before adjustments to eliminate fractional shares). See
"Proposal Two -- Approval of Amendment to Employee and Trust Manager Incentive
Share Plan."
CONVERSION OF MODIFIED NOTES. Pursuant to the Renewal, Extension,
Modification and Amendment Agreement dated as of February 26, 1997 between the
Trust and Realco, Realco has the right to convert the debt owed by the Trust to
Realco (the "Modified Notes") into Common Shares for $2.00 before December 31,
1997, and $2.25 per share after December 31, 1997 (but before December 31,
2000). The Modified Notes currently have a principal balance of $5,449,618 and
mature on December 31, 2000. The Modified Notes are not prepayable. The
Modified Notes accrue interest at a non-default rate of 8.8% per annum, with
accrued interest payable monthly in arrears. If Realco had converted the
Modified Notes into Common Shares on July 28, 1997, without giving effect to
the Reverse Share Split, and the aggregate principal balance of the Modified
Notes was $5,449,618, it would have received 2,724,809 Common Shares upon
conversion.
If Realco converts the Modified Notes prior to the Effective Date, the
Common Shares it receives upon conversion will be subject to the Reverse Share
Split as all other Common Shares, including settlement of fractional shares. If
Realco converts the Modified Notes after the Effective Date, it will receive
544,961 whole Common Shares (at an effective conversion price of $10.00 per
share) and cash in lieu of any fractional share it would otherwise be entitled
to receive. The cash payment for any fractional share will equal the closing
price of the Common Shares on the NYSE on the date of conversion multiplied by
the fractional share that it would otherwise be entitled to receive.
MSAM AGREEMENT. Pursuant to the Common Share Purchase Agreement dated as
of June 20, 1997 among the Trust, MS Real Estate Special Situations, Inc. and
Morgan Stanley Asset Management Inc. ("MSAM") (as agent and attorney-in-fact on
behalf of certain clients listed on Exhibit A thereto) (the "MSAM Agreement"),
the Buyers (as defined in the MSAM Agreement) agreed to purchase, and the Trust
agreed to sell, 8,163,265 Common Shares. As of July 28, 1997, the Buyers had
purchased 7,167,418 of the 8,163,265 Common Shares in two tranches. The
remaining 995,847 Common Shares are to be purchased at such time as the Trust
issues additional Common Shares. If the remaining 995,847 Common Shares are
purchased prior to the Effective Date, such shares will be converted in the
Reverse Share
6
<PAGE> 9
Split as all other Common Shares. If the closing of the purchase of the
remaining Common Shares occurs after the Effective Date, the Buyers will
purchase 199,169 whole Common Shares.
EXCHANGE OF CERTIFICATES AND SETTLEMENT OF FRACTIONAL SHARES
EXCHANGE OF CERTIFICATES. If this proposal is approved and the Reverse
Share Split is effected, shareholders will be required to exchange their share
certificates for new share certificates representing the post-Reverse Share
Split Common Shares. The Trust's transfer agent, Boston EquiServe, will act as
the Trust's exchange agent (the "Exchange Agent") for holders of Common Shares
in the exchange of their share certificates. The Exchange Agent will furnish
shareholders of record on the Effective Date the necessary materials and
instructions for the surrender and exchange of share certificates. Shareholders
will not have to pay a transfer fee or any other fee in connection with the
exchange of certificates. All such costs will be paid by the Trust.
As soon as practicable after the Effective Date, the Exchange Agent will
send a letter of transmittal to each shareholder of record on the Effective
Date advising such shareholder of the procedure for surrendering share
certificates in exchange for new share certificates representing the ownership
of the new number of whole Common Shares after the Reverse Share Split. No
certificates representing fractional shares shall be issued. Shareholders who
surrender certificates, other than Odd Lot Holders, will receive a new share
certificate reflecting ownership of the whole number of post-Reverse Share
Split Common Shares that he, she or it owns and a cash payment in lieu of any
fractional share (as described below). Odd Lot Holders will receive a cash
payment for (i) settlement of any fractional share resulting from the Reverse
Share Split and (ii) redemption of their Common Shares in connection with the
Odd Lot Redemption. See "-- Odd Lot Redemption" below. SHARE CERTIFICATES
SHOULD NOT BE SENT TO THE TRUST OR THE EXCHANGE AGENT PRIOR TO RECEIPT OF SUCH
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
After the Effective Date, each share certificate representing pre-Reverse
Share Split Common Shares will be deemed to evidence ownership of the whole
number of post-Reverse Share Split Common Shares, and the right to receive the
amount of cash for any fractional share, into which the Common Shares evidenced
by such certificate have been converted. Holders of any such unexchanged share
certificates will not be entitled to receive, however, any dividends or other
distributions payable by the Trust to holders of record after the Effective
Date until the share certificates representing the pre-Reverse Share Split
Common Shares have been surrendered. Such dividends and distributions, if any,
will be accumulated, and at the time of surrender of the certificates for
pre-split Common Shares, all such unpaid dividends or distributions, as well as
cash payment for fractional shares, will be paid without interest.
SETTLEMENT OF FRACTIONAL SHARES. No certificates or scrip representing
fractional shares in the post-Reverse Share Split Common Shares will be issued,
and no such fractional share interest will entitle the holder thereof to any
rights (including, but not limited to, voting and dividend rights) as a
shareholder of the Trust. In lieu of any such fractional share, each
shareholder who would otherwise be entitled to receive a fractional share of a
post-Reverse Share Split Common Share (because such shareholder owned a number
of pre-Reverse Share Split Common Shares not evenly divisible by five), will be
paid cash in lieu of such fractional share. The amount of the cash payment
shall equal the closing price of the Common Shares as reported on the NYSE on
the Effective Date for each such Common Share held prior to the Effective Date.
For example, if a shareholder owns 504 Common Shares prior to the Reverse Share
Split, he, she or it will own 100 whole Common Shares after the Reverse Share
Split. Additionally, the shareholder will be entitled to a cash payment (in
lieu of a fractional share) equal to the closing price of the Common Shares on
the NYSE on the Effective Date multiplied by four. The Trust will deposit
sufficient cash from its cash reserves with the Exchange Agent for settlement
of all fractional shares.
ALL SHAREHOLDERS ARE ENCOURAGED TO SURRENDER THEIR OLD SHARE CERTIFICATES
TO THE EXCHANGE AGENT AS PROMPTLY AS POSSIBLE AFTER RECEIPT OF THE LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
ODD LOT REDEMPTION
Article Fifteen of the Declaration of Trust provides that upon resolution
adopted by the Board of Trust Managers, the Trust shall be entitled to purchase
or redeem, directly or indirectly, its own Common Shares, subject to any
limitations of the Texas REIT Act. Pursuant to this provision, the Board of
Trust Managers has unanimously
7
<PAGE> 10
approved the Odd Lot Redemption pursuant to which the Trust shall redeem the
Common Shares owned by all Odd Lot Holders of record as of the Effective Date
(after giving effect to the Reverse Share Split). The Board of Trust Managers
believes that the Odd Lot Redemption will allow the Trust to reduce its
administrative expenses and improve its administrative efficiency. For these
reasons, the Board of Trust Managers believes that the Odd Lot Redemption is in
the best interests of the Trust and its shareholders.
Any shareholder who owns less than 250 Common Shares on the Effective
Date will be an Odd Lot Holder after the Reverse Share Split and, as a result
thereof, will have all his, her or its Common Shares redeemed by the Trust. All
rights of an Odd Lot Holder as a shareholder of the Trust will terminate on the
effective date of the Odd Lot Redemption (the "Redemption Date"). The Odd Lot
Redemption will occur only if the Reverse Share Split is approved by the
shareholders. If this proposal is not approved, the Odd Lot Redemption will not
occur.
SHAREHOLDERS WHO CURRENTLY OWN LESS THAN 250 COMMON SHARES MAY PURCHASE
ADDITIONAL COMMON SHARES IN THE OPEN MARKET BEFORE THE CLOSE OF BUSINESS ON
OCTOBER 29, 1997. IF A SHAREHOLDER OWNS AT LEAST 250 COMMON SHARES AT THE CLOSE
OF BUSINESS ON OCTOBER 29, 1997, HE, SHE OR IT WILL NOT BE SUBJECT TO THE ODD
LOT REDEMPTION AND, THEREFORE, WILL CONTINUE TO BE A SHAREHOLDER OF THE TRUST.
A SHAREHOLDER WHO CURRENTLY OWNS LESS THAN 250 COMMON SHARES AND WHO DOES NOT
BUY SUFFICIENT ADDITIONAL COMMON SHARES TO REACH THE THRESHOLD OF 250 COMMON
SHARES BEFORE THE CLOSE OF BUSINESS ON OCTOBER 29, 1997 WILL BE SUBJECT TO THE
ODD LOT REDEMPTION. SHAREHOLDERS WHO ARE SUBJECT TO THE ODD LOT REDEMPTION WILL
CEASE TO BE SHAREHOLDERS OF THE TRUST AS OF THE REDEMPTION DATE.
The Trust will effect the Odd Lot Redemption in accordance with the
provisions of the Texas REIT Act and the rules and regulations of the NYSE. The
Redemption Date will be as soon as practicable after the Effective Date, but in
no event will the Redemption Date be less than 20 or more than 60 days after
the Effective Date. The redemptive price (the "Redemptive Price") to be paid by
the Trust to Odd Lot Holders will equal the closing price of the Common Shares
on the NYSE on October 30, 1997 (the day following the Effective Date). Prior
to the Redemption Date, each Odd Lot Holder as of the Effective Date will
receive written notice from the Trust that the Odd Lot Holder's Common Shares
are being redeemed by the Trust, the number of shares to be redeemed, the
Redemption Date, the Redemptive Price and other information relating to the
process of the Odd Lot Redemption. Odd Lot Holders should submit their share
certificates to the Exchange Agent upon receipt of the letter of transmittal
from the Exchange Agent. See "-- Exchange of Certificates and Settlement of
Fractional Shares." Instead of receiving a new share certificate, however, each
Odd Lot Holder shall receive a cash payment for (i) any fractional share he,
she or it would otherwise be entitled to receive in connection with the Reverse
Share Split and (ii) the Odd Lot of post-Reverse Share Split Common Shares
being redeemed by the Trust in connection with the Odd Lot Redemption.
Based on the Trust's records as of July 28, 1997, the Board of Trust
Managers anticipates that the Odd Lot Redemption will reduce the number of
shareholders of the Trust by approximately 40% and the number of outstanding
Common Shares by 1.2%. Although the Odd Lot Redemption will have the effect of
increasing the proportionate equity interests of the Trust's shareholders who
are not subject to the Odd Lot Redemption, any such increase in percentage
ownership should be minimal.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SHARE SPLIT AND THE ODD LOT
REDEMPTION
The Trust has not sought and will not seek an opinion of counsel or a
ruling from the Internal Revenue Service (the "IRS") regarding the federal
income tax consequences of the Reverse Share Split and the Odd Lot Redemption.
The following summary of the federal income tax consequences of the Reverse
Share Split and Odd Lot Redemption is based on current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing, temporary and
currently proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, existing administrative rulings and practices
of the IRS and judicial decisions. No assurance can be given that future
legislative, judicial or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of the statements in this
summary. This summary is for general information only, does not purport to
address all aspects of the possible federal income tax consequences of the
Reverse Share Split and Odd Lot Redemption, and should not be considered as tax
or investment advice. This summary does not discuss the federal income tax
consequences of the Reverse Share Split
8
<PAGE> 11
and Odd Lot Redemption to certain shareholders that are subject to special tax
rules, such as banks, insurance companies, regulated investment companies,
personal holding companies, foreign entities, nonresident alien individuals,
broker-dealers, tax-exempt entities and persons who do not hold the Common
Shares as a capital asset. Additionally, this summary does not address any
consequences of the Reverse Share Split and Odd Lot Redemption under any state,
local or foreign tax laws. ACCORDINGLY, EACH SHAREHOLDER SHOULD CONSULT HIS,
HER OR ITS TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE
REVERSE SHARE SPLIT AND THE ODD LOT REDEMPTION, INCLUDING THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX AND OTHER LAWS.
The Reverse Share Split is intended to qualify as a recapitalization
under Section 368(a)(1)(E) of the Code. Consequently, no gain or loss should be
recognized by the Trust. No gain or loss should be recognized by a shareholder
who receives only Common Shares and who does not receive cash in lieu of a
fractional share. A shareholder's aggregate basis in the post-Reverse Share
Split Common Shares (including any fractional share deemed received) will be
the same as the aggregate basis of the Common Shares before the Reverse Share
Split. The holding period of the post-Reverse Share Split Common Shares
(including any fractional share deemed received) will include the holding
period of the Common Shares surrendered in exchange therefor.
The receipt by a shareholder of cash in lieu of a fractional share will
be a taxable transaction for federal income tax purposes. A shareholder who
receives cash in lieu of a fractional share will be treated as if the Trust had
issued a fractional share to him and immediately redeemed such fractional share
for cash. Such shareholder generally should recognize gain or loss, as the case
may be, measured by the difference between the amount of cash received and the
shareholder's basis allocable to the fractional share as if it had actually
been issued (as described above). Such gain or loss will be capital gain or
loss as long as the shareholder held his, her or its Common Shares as a capital
asset, and will be long-term capital gain or loss if the shareholder's holding
period (as described above) exceeds one year.
The Odd Lot Redemption should be a taxable transaction in which an Odd
Lot Holder generally will recognize gain or loss. The federal income tax
treatment of the Odd Lot Redemption with respect to an Odd Lot Holder will
depend upon the particular facts relating to that shareholder at the Redemption
Date. Under Section 302 of the Code, the Odd Lot Redemption should be treated
as a sale or exchange of Common Shares if the Odd Lot Redemption (i) is a
"substantially disproportionate" redemption with respect to the Odd Lot Holder,
(ii) is "not essentially equivalent to a dividend" with respect to the Odd Lot
Holder because there is a "meaningful reduction" in the Odd Lot Holder's equity
interest in the Trust, or (iii) results in a complete termination of the Odd
Lot Holder's equity interest in the Trust. In general, the Odd Lot Redemption
will be considered "substantially disproportionate" with respect to an Odd Lot
Holder if the percentage of Common Shares owned by the Odd Lot Holder
immediately after the Odd Lot Redemption is less than 80% of the percentage of
Common Shares owned by such Odd Lot Holder immediately before the Redemption
Date. Whether the Odd Lot Redemption will result in a "meaningful reduction"
with respect to an Odd Lot Holder depends upon the particular Odd Lot Holder's
facts and circumstances. In determining whether an Odd Lot Holder's interest in
the Trust has been reduced or terminated, the constructive ownership rules of
Section 318 of the Code shall apply.
If an Odd Lot Holder satisfies one of the tests under Section 302 of the
Code and as long as the Odd Lot Holder held the Common Shares as a capital
asset, he, she or it should recognize capital gain or loss equal to the
difference between the amount realized upon the Odd Lot Redemption and his, her
or its tax basis in the Common Shares redeemed. If the Odd Lot Holder's holding
period in the redeemed Common Shares exceeds one year, any such capital gain or
loss will be long-term capital gain or loss. If the Odd Lot Holder does not
satisfy one of the tests under Section 302, the Odd Lot Redemption will be
treated as a distribution under Section 301 of the Code. The amount of such
distribution will be equal to the amount of cash received in the Odd Lot
Redemption. The amount of such distribution will be treated as a dividend for
federal income tax purposes to the extent of the Trust's current and
accumulated "earnings and profits" (as determined for federal income tax
purposes). To the extent the cash received in the Odd Lot Redemption exceeds
such earnings and profits, the amount of such excess will be applied against
and reduce the Odd Lot Holder's basis in the Common Shares and, to the extent
of any excess over the amount of such basis, will be treated as gain from the
sale or exchange of the Common Shares.
SHAREHOLDER VOTE
The affirmative vote of the holders of two-thirds of the outstanding
Common Shares (15,526,578 Common Shares) is required to approve the Reverse
Share Split. Abstentions and broker non-votes will have the same effect as
9
<PAGE> 12
a vote against the proposal. The Trust Managers have unanimously approved the
proposal, subject to shareholder approval. Realco, MSAM, ABKB/LaSalle
Securities Limited Partnership ("ABKB"), LaSalle Advisors Limited Partnership
("LaSalle Advisors") and management of the Trust have advised the Trust that
they intend to vote their collective 16,589,323 Common Shares (71.2% of the
outstanding Common Shares) in favor of proposal one. See "Security Ownership of
Certain Beneficial Owners and Management."
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL ONE.
PROPOSAL TWO
APPROVAL OF AMENDMENT TO THE EMPLOYEE AND
TRUST MANAGER INCENTIVE SHARE PLAN
The Trust adopted the Plan on June 30, 1997 to retain and attract Trust
Managers, officers and other key employees of the Trust. In connection with the
adoption of the Plan, 800,000 Common Shares were reserved for issuance under
the Plan pursuant to the exercise of incentive and non-qualified share options
(collectively, "Options") and the grant of restricted share awards. Through
July 28, 1997, options for a total of 695,000 Common Shares had been awarded
under the Plan. Accordingly, there remain only 105,000 Common Shares available
for issuance under the Plan. If the Reverse Share Split is approved by the
shareholders, the number of Common Shares reserved for issuance under the Plan
shall be decreased to 160,000 and the number of Common Shares available for
issuance under the Plan shall be decreased to 21,000.
On July 30, 1997, the Board of Trust Managers unanimously voted to amend
the Plan, subject to the approval of shareholders, to increase the maximum
number of Common Shares available for issuance under the Plan to 10% of the
total number of Common Shares outstanding at any time. Based upon the number of
Common Shares outstanding on July 28, 1997, the Plan would have a total of
2,328,986 Common Shares authorized for issuance under the Plan, an increase of
1,528,986 Common Shares over the number of currently authorized Common Shares.
If the Reverse Share Split is approved, assuming no other issuance of Common
Shares and before adjustments for the elimination of fractional shares, 465,797
Common Shares would be authorized for issuance under the Plan (of which 139,000
Common Shares would already be issued or relate to options previously granted).
The Board of Trust Managers believes that providing an increased
availability of Common Shares for issuance under the Plan is important in order
for the Trust to provide long-term incentives to retain key employees, officers
and Trust Managers.
ADMINISTRATION AND ELIGIBILITY. The Plan is administered by the
Compensation Committee, which is comprised of Trust Managers who are not
employees of the Trust ("Non-Employee Trust Managers"). The Compensation
Committee has complete authority to interpret all provisions of the Plan, to
prescribe the form of agreements, to adopt, amend and rescind rules and
regulations pertaining to the administration of the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan. The
Plan may be amended or terminated by the Trust Managers, provided, however,
that the Trust Managers may choose to require that the Trust's shareholders
approve any amendment to this Plan in order to satisfy the requirements of
Section 422 of the Code or provisions and rules promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or for any
other reason. No amendment to the Plan may, without a participant's consent,
adversely affect any rights of such participant under any outstanding award
granted under the Plan.
Under the terms of the Plan, any person who is a full-time employee or a
Trust Manager of the Trust or of an Affiliate (as defined in the Plan) of the
Trust or a person designated by the Compensation Committee as eligible because
such person performs bona fide consulting or advisory services for the Trust or
an Affiliate of the Trust (other than services in connection with the offer or
sale of securities in a capital-raising transaction) and has a direct and
significant effect on the financial development of the Trust or an Affiliate of
the Trust, shall be eligible to receive awards under the Plan. As of July 28,
1997, approximately seven persons (other than Trust Managers) were eligible to
receive benefits under the Plan.
10
<PAGE> 13
OPTIONS. The exercise price of Common Shares covered by Options granted
under the Plan is determined by the Compensation Committee, but Options must
have an exercise price equal to not less than 100% of the fair market value of
a Common Share on the date of the grant. In some instances, the exercise price
for Options granted to persons who directly or indirectly own 10% or more of
the outstanding shares of the Trust may be required to be 110% of the fair
market value of a Common Share on the date of the grant. Options are not be
transferable without the consent of the Compensation Committee or other than by
will or the laws of descent and distribution or pursuant to qualified domestic
relations orders, and are exercisable only by the optionee, Compensation
Committee-approved assignees, or his or her guardian, legal representative or
similar party, or executors, administrators or beneficiaries of the optionee.
The Compensation Committee selects the employees (and any consultants or
advisors) to whom options will be granted, the number of shares subject to each
option and the other terms and conditions of options, but in all cases
consistent with the Plan. Each option is evidenced by an option agreement. The
option agreement specifies whether the option is intended to be an Incentive
Share Option ("ISO") or Non-Qualified Share Option ("NQO"). The Compensation
Committee may provide that options will be exercisable from time to time, in
installments or otherwise, of and for such periods (up to ten years from the
date of the grant) as the Compensation Committee may determine in its
discretion. The exercise price of options is be payable in cash or, if the
Compensation Committee permits, by issuance of a full recourse promissory note
by the optionee (other than officers and Trust Managers) or the surrender of
Common Shares owned by the optionee.
SHARE APPRECIATION RIGHTS. The Compensation Committee also may grant
awards of Share Appreciation Rights ("SARs"). A SAR entitles the holder to
receive from the Trust, in cash or (if the Compensation Committee so permits)
Common Shares, at the time of exercise, the excess of the fair market value at
the date of exercise of a Common Share over a specified price fixed by the
Compensation Committee in the award, multiplied by the number of Common Shares
as to which the holder of the right is exercising the right.
RESTRICTED SHARES. The Compensation Committee also may grant awards of
Restricted Shares (as defined in the Plan). Each award of Restricted Shares
will specify the number of Common Shares to be issued to the recipient, the
date of issuance, any consideration for such Common Shares and the restrictions
imposed on the Common Shares (including the conditions of release or lapse of
such restrictions). Restricted Shares generally may not be sold, assigned,
transferred or pledged until the restrictions have lapsed and the rights to the
Common Shares have vested.
AWARDS TO NON-EMPLOYEE TRUST MANAGERS. After the shareholders approved
the Plan at the June 30, 1997 meeting, the Trust granted to each Non-Employee
Trust Manager an option to purchase 10,000 Common Shares at the fair market
value of the Common Shares on June 30, 1997 ($3 per share). On an annual basis
beginning in 1997, each Non-Employee Trust Manager shall receive a
Non-Qualified Share Option to purchase 5,000 Common Shares. Each of these
Non-Employee Trust Manager options is fully exercisable upon the date of grant
and generally terminates (unless sooner terminated under the terms of the Plan)
ten years after the date of grant. If a Non-Employee Trust Manager ceases to be
a member of the Board of Trust Managers for any reason other than death or
disability, these options will terminate on the first anniversary of the date
the Non-Employee Trust Manager ceases to be a member of the Board of Trust
Managers. If a Non-Employee Trust Manager dies or becomes disabled while a
member of the Board of Trust Managers, these options will terminate on the
second anniversary of the date the Non-Employee Trust Manager dies or becomes
disabled.
DIVIDEND EQUIVALENT RIGHTS. The Compensation Committee may grant Dividend
Equivalent Rights (as defined in the Plan) under the Plan. Each right may, but
need not, be related to a specific option granted under the Plan and may be
granted simultaneously with or subsequent to the grant of the option. A right
will entitle the recipient to receive a cash payment from the Trust equal to
the dividend declared and paid on a Common Share for a period to be determined
by the Compensation Committee at the time of grant. The payment may, if the
Compensation Committee so provides, be made in Common Shares in lieu of cash.
If the right relates to an option, the payment period shall not extend beyond
the date of exercise of the option.
With respect to Dividend Equivalent Rights which do not relate to a
specific option, there are no limits on the number of such rights which may be
granted under the Plan or on the total amount of cash payments which may be
made
11
<PAGE> 14
with respect to such rights. The cash payment may be made as dividends on
Common Shares are paid or delayed until the occurrence of a date or event
specified by the Compensation Committee.
TERMS AND CONDITIONS TO WHICH ALL AWARDS ARE SUBJECT. If there is a share
dividend, share split, reverse share split or reclassification of Common Shares
or outstanding Common Shares are converted into or exchanged for other
securities as a result of a merger, consolidation or sale of substantially all
of the Trust's assets, appropriate adjustments will be made in: (i) the number
and class of Common Shares subject to the Plan, each outstanding award and the
entitlements of Non-Employee Trust Managers; and (ii) the exercise price of
each outstanding award. Further, new awards may be substituted for awards
previously granted, or the Trust's obligations respecting outstanding awards
may be assumed by an employer entity other than the Trust. In connection with
any merger, consolidation or sale of substantial assets in which the Trust is
involved (other than a merger, consolidation or sale in which the Trust is the
continuing entity and which does not result in any reclassification of the
Trust's then-outstanding shares), the Compensation Committee may decide to pay
cash to plan participants other than Non-Employee Trust Managers and other
persons then subject to Section 16(b) who hold awards that have not been
outstanding for at least six months. Any such cash award shall be in an amount
which, in the sole discretion of the Compensation Committee, is an amount by
which the fair market value (at the effective time of the transaction) of the
consideration the plan participant would have received if the award had been
exercised before the effective time of the merger or other transaction exceeds
the exercise price of the award. Further, upon the occurrence of such a
transaction, the Compensation Committee may provide that the vesting of any
award shall be automatically accelerated to a date prior to the consummation of
such transaction.
If a participant's employment with the Trust is terminated, generally the
participant will forfeit any award that has not vested on or before the date of
termination. The Compensation Committee will establish the effect of employment
termination on vested awards when awards are granted.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN. The grant or exercise of an
ISO will not be a taxable event for the employee or the Trust. If the employee
disposes of the Common Shares acquired upon the exercise of an ISO at least two
years after the date the ISO is granted and at least one year after the Common
Shares are transferred to him or her, the employee will realize long-term
capital gain in an amount equal to the excess, if any, of his or her selling
price for the Common Shares over the exercise price. In such a case, the Trust
will not be entitled to any tax deduction resulting from the issuance or sale
of the Common Shares. If the employee disposes of the Common Shares acquired
upon the exercise of an ISO prior to the expiration of two years from the date
the ISO is granted, or one year from the date the Common Shares are transferred
to him or her, any gain realized will be taxable at such time as (a) ordinary
income to the extent of the difference between the exercise price and the
lesser of the fair market value of the Common Shares on the date the ISO was
exercised or the gross amount realized from such disposition, and (b) capital
gain to the extent of any excess, which gain shall be treated as short-term or
long-term capital gain depending upon the holding period of the Common Shares.
In such a case, and if the Trust satisfies the applicable reporting
requirements, the Trust may claim an income tax deduction (as compensation) for
the amount taxable to the employee as ordinary income.
For the exercise of an option to qualify for the foregoing tax treatment
as an ISO, the employee generally must be an employee of the Trust or a
subsidiary of the Trust from the date the option is granted through the date
that is three months prior to the date of exercise of the option. In the case
of an employee who is disabled, the three-month period for exercise following
termination of employment is extended to one year. In the case of an employee
who dies, both the time for exercising ISOs after termination of employment and
the holding period for Common Shares received pursuant to the exercise of the
option is waived.
Generally, the difference between the fair market value of the Common
Shares at the time the ISO is exercised and the exercise price will constitute
an item of adjustment for purposes of determining alternative minimum taxable
income and, under certain circumstances, may be subject, in the year in which
the ISO is exercised, to the alternative minimum tax.
If an employee uses Common Shares that he or she owns to pay, in whole or
in part, the exercise price for Common Shares acquired pursuant to an ISO, (a)
the holding period for the newly issued Common Shares equal in value to the old
Common Shares that were surrendered upon the exercise shall include the period
during which the old Common Shares were held, (b) the individual's basis in
such newly issued Common Shares will be the same as his or her basis in the old
Common Shares surrendered and (c) no gain or loss will be recognized by the
individual on the old Common Shares surrendered. If an employee uses Common
Shares previously acquired pursuant to the exercise of an
12
<PAGE> 15
ISO to pay all or part of the exercise price under an ISO, however, such tender
will constitute a disposition of such previously acquired Common Shares for
purposes of the one-year (or two-year) holding period requirement applicable to
such ISO and such tender may be treated as a taxable disqualifying disposition
of the exchanged Common Shares.
An individual will not realize any income at the time a NQO is granted.
Generally, an optionee will realize ordinary income at the time the NQO is
exercised in a total amount equal to the excess of the then fair market value
of the Common Shares acquired over the exercise price. Section 83 of the Code
provides, however, that if a Trust Manager, officer or principal shareholder
(i.e., an owner of more than 10% of the outstanding Common Shares) receives
Common Shares pursuant to the exercise of a NQO, he or she is not required to
recognize any income until the date on which such shares can be sold at a
profit without liability under Section 16(b) of the Exchange Act. At such time,
the Trust Manager, officer or principal shareholder will realize income equal
to the amount by which the then fair market value of the Common Shares acquired
pursuant to the exercise of such NQO exceeds the price paid for such Common
Shares. Alternatively, a Trust Manager, officer or principal shareholder who
would not otherwise be taxed at the time the Common Shares are transferred may
file a written election, within 30 days of such transfer, with the IRS to be
taxed as of the date of transfer, on the difference between the then fair
market value of the Common Shares and the price paid for such Common Shares.
All income realized by an optionee upon the exercise of a NQO will be
taxed as ordinary income. If the applicable reporting requirements are
satisfied, the Trust should be entitled to a tax deduction (as compensation)
for the amount taxable to an individual (including a Trust Manager, officer and
principal shareholder) upon the exercise of a NQO, as described above, in the
same year as those amounts are taxable to the individual.
Common Shares issued pursuant to the exercise of a NQO generally will
constitute a capital asset in the hands of an individual (including a Trust
Manager, officer or principal shareholder) and will be eligible for capital
gain or loss treatment upon any subsequent disposition. The holding period will
commence upon the date the optionee exercises the NQO. The basis in the Common
Shares generally will be equal to the exercise price plus the amount included
in income at exercise by the optionee. If an optionee uses Common Shares that
he or she owns to pay, in whole or in part, the exercise price for the Common
Shares acquired pursuant to the exercise of a NQO, (a) the holding period for
the newly issued Common Shares equal in value to the old Common Shares that
were surrendered upon the exercise shall include the period during which the
old Common Shares were held, (b) the individual's basis in such newly issued
Common Shares will be the same as his or her basis in the surrendered Common
Shares, (c) no gain or loss will be realized by the individual on the old
Common Shares surrendered, (d) the individual will realize ordinary income in
an amount equal to the fair market value of the additional number of Common
Shares received over and above the number of old Common Shares surrendered, and
(e) the individual's basis in the additional Common Shares will be equal to the
amount included in the individual's income with respect to those Common Shares
and the individual's holding period will begin upon the individual's
acquisition of such Common Shares.
An award of Restricted Shares will create no immediate tax consequences
for the employee or the Trust, unless the employee makes an election pursuant
to Section 83(b) of the Code to be taxed as of the date of transfer on the
difference between the then fair market value of the underlying Common Shares
and the price he or she paid for such Common Shares. Alternatively, the
employee will realize ordinary income as and when the Restricted Shares become
vested and are no longer subject to a substantial risk of forfeiture (which
risk of forfeiture includes the restrictions imposed by Section 16(b) of the
Exchange Act), in an amount equal to the difference between the fair market
value of the underlying Common Shares as of such date and the price paid for
such Restricted Shares. Once the employee has realized ordinary income with
respect to the Common Shares, any subsequent increase in the value of the
Common Shares generally will be taxed when the Common Shares are sold as
long-term or short-term capital gain, depending upon how long the Common Shares
are held. The individual's holding period with respect to the Common Shares
will begin on the date he or she realized ordinary income with respect to the
Common Shares and his or her basis in the Common Shares will be equal to their
then fair market value. Assuming the Company satisfies the applicable reporting
requirements, the Trust will be entitled to tax deduction when, and to the
extent, ordinary income is realized by the employee with respect to such Common
Shares. Any dividends or other distributions paid on the Common Shares
generally will be taxable when distributed to the individual.
An individual will be subject to tax, at ordinary income rates, on the
amount of cash and the fair market value of any property received upon the
exercise of any SARs. The Trust should be entitled to a tax deduction equal to
the amount includible in the individual's income.
13
<PAGE> 16
The employee will recognize taxable income for the amount of cash
received under a Dividend Equivalent Right for the year such amounts are paid.
The Trust is permitted a compensation deduction equal to such amount.
The foregoing provides only a general description of the federal income
tax consequences of transactions contemplated by the Plan. Participants should
consult a tax advisor as to their individual circumstances.
SHAREHOLDER VOTE
The affirmative vote of the holders of a majority of the Common Shares
present in person or represented by proxy, and entitled to vote at the Annual
Meeting is required to amend the Plan. The Trust Managers have unanimously
approved the proposal, subject to shareholder approval. Realco, MSAM, ABKB,
LaSalle Advisors and management of the Trust have advised the Trust that they
intend to vote their collective 16,589,323 Common Shares (71.2% of the
outstanding Common Shares) in favor of proposal two. See "Security Ownership of
Certain Beneficial Owners and Management."
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL TWO.
PROPOSAL THREE
ELECTION OF TRUST MANAGERS
The number of Trust Managers to be elected at the Annual Meeting is
eight. The election of Trust Managers requires the affirmative vote of a
majority of the outstanding Common Shares represented in person or by proxy at
the Annual Meeting. The term of each person elected as a Trust Manager will
continue until his successor is duly elected and qualified. Unless such
authority is withheld, it is the intention of the persons named in the enclosed
proxy to vote such proxy FOR the election of such eight nominees. All nominees
currently serve as Trust Managers of the Trust. Any current Trust Manager not
receiving the affirmative vote of a majority of the outstanding Common Shares
shall nevertheless remain a Trust Manager unless another proper nominee
receives the requisite vote. The following table sets forth the name, age and
year of election to the Board of Trust Managers of each person who is a nominee
for Trust Manager of the Trust.
<TABLE>
<CAPTION>
NAME AGE TRUST MANAGER SINCE
- ------------------- --- -------------------
<S> <C> <C>
Theodore R. Bigman 34 July 1997
William H. Bricker 65 September 1985
T. Patrick Duncan 48 December 1996
Robert E. Giles 49 March 1996
Edward B. Kelley 56 December 1996
Stanley J. Kraska, Jr. 37 July 1997
Russell C. Platt 37 July 1997
Charles W. Wolcott 44 August 1993
</TABLE>
The following information with respect to the principal occupation or
employment, other affiliations and business experience of each nominee during
the last five years has been furnished to the Trust by each such nominee:
Theodore R. Bigman has served as a Trust Manager since July 8, 1997, when
he was appointed as an independent Trust Manager at the request of MSAM
pursuant to the MSAM agreement. Mr. Bigman is a principal at msam. Having
joined the company in 1995, Mr. Bigman is the senior portfolio manager of the
U.S. Real Estate Portfolio. Prior to joining msam, he was a Director at CS
First Boston, where he worked for eight years in the real
14
<PAGE> 17
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 of the Trust since
September 1985. Mr. Bricker has served as President of DS Energy Services
Incorporated and has consulted in the energy field and on international trade
since 1987. In May 1987, Mr. Bricker retired as the Chairman and Chief
Executive Officer of Diamond Shamrock Corporation where he held various
management positions from 1969 through May 1987. Mr. Bricker is a Director of
the LTV Corporation, the Eltech Systems Corporation and the National Paralysis
Foundation. He received his Bachelor of Science and Master of Science degrees
from Michigan State University.
T. Patrick Duncan has served as a Trust Manager since December 1996, when
he was appointed as an independent Trust Manager at the request of Realco
pursuant to the share purchase agreement between the trust and Realco dated as
of December 13, 1996 (the "Realco Share Purchase Agreement"). Mr. Duncan joined
Realco in November 1986 as Chief Financial Officer. With over 24 years of
experience, Mr. Duncan serves as Senior Vice President of Real Estate
operations with responsibilities which include the direction of all
acquisitions, sales, management and leasing of real estate for USAA-affiliated
companies. Mr. Duncan received degrees from the University of Arizona in
Accounting and Finance. He is a Certified Public Accountant, Certified
Commercial Investment Manager, and holds a Texas Real Estate Broker's License.
Mr. Duncan is also a member of the Board of Directors of Meridian Industrial
Trust, and a member of the Board of Directors of the general partner of USAA
Real Estate Income Investments I, a California Limited Partnership, USAA Real
Estate Income Investments II Limited Partnership, USAA Income Properties III
Limited Partnership and USAA Income Properties IV Limited Partnership, and a
Member of the Board of Directors of USAA Equity Advisors, Inc.
Robert E. Giles has served as a Trust Manager since March 1996. Mr. Giles
is currently the Owner and President of Robert E. Giles Interests, Inc., a real
estate consulting and development firm based in Houston, Texas. Mr. Giles also
serves as President of Title Network, LTD., a national title insurance agency.
Mr. Giles was a Vice President with the J.E. Roberts Companies, Inc. from 1994
to 1995. From 1990 to 1994, Mr. Giles was President and a Director of National
Loan Bank, a publicly-held company created through the merger of Chemical Bank
and Texas Commerce Bank. Mr. Giles received his Bachelor of Arts degree from
University of Texas - Austin in 1970 and received a Master of Arts degree from
University of Texas - Arlington in 1973.
Edward B. Kelley has served as a Trust Manager since December 1996, when
he was appointed as an independent trust manager at the request of Realco
pursuant to the terms of the Realco Share Purchase Agreement. Mr. Kelley is
President of Realco. He joined Realco in april 1989 as Executive Vice President
and Chief Operating Officer before assuming his new title in August 1989. Mr.
Kelley received his Bachelor of Business Administration degree from St. Mary's
University in 1964 and a Masters in Business Administration from Southern
Methodist University in 1967, and is a Member of the Appraisal Institute (MAI).
Mr. Kelley is Chairman of the Board of Directors of the General Partner of 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 a
member of the Board of Directors of USAA Equity Advisors, Inc.
Stanley J. Kraska, Jr. has served as a Trust Manager since July 10, 1997,
when he was appointed as an independent Trust Manager at the request of ABKB
and Lasalle Advisors pursuant to the terms of the Common Share Purchase
Agreements between the Trust and ABKB (as agent for and for the benefit of
particular clients) dated as of July 3, 1997 and the Common Share Purchase
Agreement between the Trust and Lasalle Advisors (as agent for and for the
benefit of a particular client) dated as of July 3, 1997 (collectively, the
"ABKB agreements"). Mr. Kraska has been employed by ABKB or its affiliates
since February 1988. He currently serves as Managing Director, with
responsibility for private placement investment. Mr. Kraska graduated from
Dartmouth College in 1982 with a Bachelor of Arts Degree and received a Master
of Business Administration degree from Harvard University in 1986.
Russell C. Platt has served as a Trust Manager since July 8, 1997, when
he was appointed as an independent Trust Manager at the request of MSAM
pursuant to the terms of the MSAM Agreement. Mr. Platt joined Morgan Stanley in
1982. He is a managing director of the firm and has primary responsibility for
managing the real estate securities investment business for MSAM. MSAM manages
approximately $1.3 billion in real estate securities worldwide for
institutional and individual investors. He also serves as a member of the
Investment Committee of the Morgan Stanley Real Estate Fund, a privately held
limited partnership engaged in the acquisition of real estate assets,
15
<PAGE> 18
portfolios and real estate operating companies with gross assets of
approximately $4 billion. He graduated from Williams College in 1982 with a
Bachelor of Arts in Economics and received a Master of Business Administration
from Harvard University in 1986. He is a member of the advisory boards of the
National Multi-Housing Council, the Wharton Real Estate Center and the MIT
Center for Real Estate. He is also a member of the Urban Land Institute, NAREIT
and the Pension Real Estate Association.
Charles W. Wolcott currently serves as Trust Manager, President and Chief
Executive Officer. Mr. Wolcott was hired as the President and Chief Executive
Officer of the Trust in May 1993 and has served as a Trust Manager since August
1993. Mr. Wolcott was President and Chief Executive Officer for Trammell Crow
Asset Services, a real estate asset and portfolio management affiliate of
Trammell Crow Company, from 1990 to 1992. He served as Vice President and Chief
Financial and Operating Officer of the Trust from 1988 to 1991. From 1988 to
1990, Mr. Wolcott was a partner in Trammell Crow Ventures Operating
Partnership. Prior to joining the Trammell Crow Company in 1984, Mr. Wolcott
was President of Wolcott Corporation, a firm engaged in the development and
management of commercial real estate properties. Mr. Wolcott graduated from the
University of Texas at Austin in 1975 with a Bachelor of Science degree and
received a Master of Business Administration degree from Harvard University in
1977.
The Trust Managers have no reason to believe that any of the nominees
will not serve if elected, but if any of them should become unavailable to
serve as a Trust Manager, and if the Trust Managers designate a substitute
nominee, the persons named in the accompanying proxy will vote for the
substitute nominee designated by the Trust Managers, unless a contrary
instruction is given in the proxy. The Trust Managers did not appoint a
nominating committee to nominate Trust Managers for election.
No family relationship exists among any of the Trust Managers or
executive officers of the Trust. The agreements between the Trust and each of
Realco, MSAM, Lasalle Advisors and ABKB are the only arrangements or
understandings that exist between any Trust Manager or Executive Officer or any
other person pursuant to which any Trust Manager or Executive Officer was
selected as a Trust Manager or Executive Officer of the Trust. Pursuant to the
terms of the Realco Share Purchase Agreement, Realco retains the right to
nominate an additional two Trust Managers to the Board of Trust Managers.
Twelve regularly scheduled or special Trust Manager meetings were held
during the 1996 Fiscal Year. Each Trust Manager attended 100% of all 1996
Fiscal Year Trust Manager and Trust Manager committee meetings held during his
1996 term as a Trust Manager.
PROPOSAL FOUR
RATIFICATION OF INDEPENDENT AUDITORS
The shareholders are asked to ratify the appointment by the Trust
Managers of Ernst & Young LLP as the Trust's independent auditors for the 1997
Fiscal Year. The selection was based upon the recommendation of the Audit
Committee.
Representatives of Ernst & Young LLP will be present at the Annual
Meeting to respond to appropriate questions from shareholders and to make a
statement if they desire.
SHAREHOLDER VOTE
The affirmative vote of the holders of a majority of the Common Shares
present in person or represented by proxy, and entitled to vote at the Annual
Meeting is required to adopt this proposal. The Trust Managers have unanimously
approved the proposal, subject to shareholder approval. Realco, MSAM, ABKB,
LaSalle Advisors and management of the Trust have advised the Trust that they
intend to vote their collective 16,589,323 Common Shares (71.2% of the
outstanding Common Shares) in favor of proposal four. See "Security Ownership
of Certain Beneficial Owners and Management."
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE FOR
PROPOSAL FOUR.
16
<PAGE> 19
MANAGEMENT
EXECUTIVE OFFICERS
Set forth below is information regarding the names and ages of the
executive officers of the Trust, all positions held with the Trust by each
individual, and a description of the business experience of each individual for
at least the past five years.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Charles W. Wolcott 44 Trust Manager, President and Chief
Executive Officer
Marc A. Simpson 42 Vice President and Chief Financial
Officer, Secretary and Treasurer
David B. Warner 38 Vice President - Real Estate
Operations
Lewis D. Friedland 37 Vice President and Chief
Investment Officer
</TABLE>
Information regarding the business experience of Mr. Wolcott is provided
under "Proposal Three -- Election of Trust Managers."
Marc A. Simpson currently serves as Vice President and Chief Financial
Officer, Secretary and Treasurer. Mr. Simpson was hired as the Vice President
and Chief Financial Officer, Secretary and Treasurer of the Trust in March
1994. From November 1989 through March 1994, Mr. Simpson was a Manager in the
Financial Advisory Services Group of Coopers & Lybrand L.L.P. Prior to that
time, he served as Controller of Pacific Realty Corporation, a real estate
development company. Mr. Simpson graduated with a Bachelor of Business
Administration from Midwestern State University in 1978, and received a Master
of Business Administration from Southern Methodist University in 1990.
David B. Warner currently serves as Vice President - Real Estate
Operations. Mr. Warner was hired as Vice President - Real Estate Operations of
the Trust in May 1993. From 1989 through the date he accepted a position with
the Trust, Mr. Warner was a Trust Manager of the Equity Investment Group for
the Prudential Realty Group. From 1985 to 1989, he served in the Real Estate
Banking Group of NCNB Texas National Bank. Mr. Warner graduated from the
University of Texas at Austin in 1981 with a degree in finance and received a
Master of Business Administration from the same institution in 1984.
Lewis D. Friedland currently serves as Vice President and Chief
Investment Officer. He was hired as the President and Chief Investment Officer
of the Trust in 1997. Prior to joining the Trust, Mr. Friedland was a founding
partner of Crimson Partners, an investment firm formed in 1992 that engaged in
the acquisition and development of real estate assets. Prior to founding this
firm, he was a Division Partner and Managing Director of Trammell Crow Company
where he was responsible for that firm's development, leasing, and property
management activities in Richmond, 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.
COMMITTEES OF THE TRUST MANAGERS
AUDIT COMMITTEE. The Audit Committee of the Trust Managers met once
during the 1996 Fiscal Year. The Audit Committee reviews and approves the scope
and results of any outside audit of the Trust, and the fees therefor, and makes
recommendations to the Trust Managers or management concerning auditing and
accounting matters and the efficacy of the Trust's internal control systems.
The Audit Committee selects the Trust's independent auditors. During the 1996
Fiscal Year, Messrs. Bricker and Giles served on the Audit Committee. Current
members of the Audit Committee are Messrs. Bricker, Kelley and Giles.
COMPENSATION COMMITTEE. The Compensation Committee met two times during
the 1996 Fiscal Year. The Compensation Committee establishes guidelines for
compensation and benefits of the executive officers of the Trust based upon
achievement of objectives and other factors. The Compensation Committee is also
responsible for acting upon all matters concerning, and exercising such
authority as is delegated to it under the provisions of, any benefit,
17
<PAGE> 20
retirement or pension plan. During the 1996 Fiscal Year, Messrs. Bricker and
Giles served on the Compensation Committee. Current members of the Compensation
Committee are Messrs. Bricker, Duncan and Giles.
INVESTMENT COMMITTEE. The Investment Committee was formed in 1997 and
consists of Messrs. Duncan, Giles, Kraska, Platt and Wolcott. The Investment
Committee reviews potential real property acquisitions and makes
recommendations to the Board of Trust Managers.
ELECTION OF TRUST MANAGERS AND EXECUTIVE OFFICERS
Trust Managers are elected at each annual meeting of the shareholders of
the Trust and remain in office until their successors have been duly elected
and qualified, or until their earlier death, resignation or removal. Executive
officers serve at the discretion of the Trust Managers.
Pursuant to the terms of the MSAM Agreement, MSAM has the right to
nominate for election two Trust Managers to the Board of Trust Managers until
the value of the Common Shares and Common Share equivalents based on ten days'
average closing prices on the NYSE (the "Equity Capitalization") equals $150
million, at which time MSAM shall cause one of its designees to not seek
re-election at the next annual meeting, or at the Trust's option, to
immediately resign. When the Equity Capitalization of the Trust reaches $250
million, MSAM shall cause its remaining designee to not seek re-election at the
next annual meeting, or at the Trust's option, to immediately resign. Pursuant
to the terms of the ABKB Agreements, ABKB and LaSalle Advisors collectively
have the right to nominate for election one Trust Manager to the Board of Trust
Managers until the Equity Capitalization of the Trust equals $250 million, at
which time ABKB and LaSalle Advisors shall cause their designee to not seek
re-election at the next annual meeting, or at the Trust's option, to
immediately resign.
EXECUTIVE AND TRUST MANAGER COMPENSATION
The following table summarizes the compensation paid by the Trust to the
executive officers of the Trust for the three years ended December 31, 1996:
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 1995 105,000 40,000(2) 6,838(5)
CFO, Secretary and 1994 81,859(7) 34,500(3) 4,095(6)
Treasurer
David B. Warner 1996 110,000 55,000(1) 8,039(4)
Vice President - 1995 100,000 43,000(2) 6,312(5)
Real Estate Operations 1994 92,000 34,500(3) 4,429(6)
</TABLE>
(1) Represents bonus payments for 1996 paid in January 1997.
(2) Represents bonus payments for 1995 paid in January 1996.
(3) Represents bonus payments for 1994 paid in February 1995.
(4) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1997.
(5) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan in January 1996.
(6) Represents the Trust's contribution to the Retirement and Profit Sharing
Plan paid in February 1995.
(7) Mr. Simpson's annualized salary for 1994 was $100,000.
In March 1996, the Trust increased the annual fee paid its Non-Employee
Trust Managers to $40,000 plus $1,000 for each Trust Manager or committee
meeting attended in person. Additionally, the Trust Managers are reimbursed for
their expenses incurred in connection with their duties as Trust Managers. In
addition to the annual fee,
18
<PAGE> 21
Mr. Bricker received $16,000 and Mr. Giles received $11,000 in 1996 for
attendance at Trust Manager and committee meetings. The Trust Managers voted to
reduce their compensation effective July 1, 1997 to an annual retainer of
$25,000 plus $1,000 for each Trust Manager meeting attended in person, $500 for
each Trust Manager meeting attended via teleconference, $500 for each committee
meeting attended in person and $250 for each committee meeting attended via
teleconference. Each Non-Employee Trust Manager has the right to receive his
annual retainer in cash and/or Common Shares. Section 3.9 of the Fourth Amended
and Restated Bylaws of the Trust has been amended by the Trust Managers to
limit the increase in cash compensation paid to the Trust Managers to 20% over
the prior year without the approval of the holders of a majority of the shares
cast at the annual meeting of shareholders.
EMPLOYMENT AGREEMENTS
On March 13, 1996, the Trust entered into Bonus and Severance Agreements
with each of Messrs. Wolcott, Simpson and Warner. The agreements are effective
through March 13, 1999. Effective as of May 12, 1997, the Trust entered into a
Bonus and Severance Agreement with Lewis D. Friedland, which is effective
through May 12, 2000. These agreements formalized the Trust's policy of
providing an annual incentive bonus 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.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Compensation for the executive officers of the Trust is administered
under the direction of the Compensation Committee of the Trust Managers. The
following is the Compensation Committee's report, in its role as reviewer of
the Trust's pay programs, on 1996 compensation practices for the executive
officers of the Trust. The report and the performance graph that appears
immediately after such report shall not be deemed to be soliciting material or
to be filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), or the
Exchange Act or incorporated by reference in any document so filed.
BASE SALARY. The Compensation Committee determines base salaries for
executive officers by evaluating the responsibilities of the position held and
the experience of the individual, and by reference to the competitive
marketplace for executive talent, including a comparison to base salaries for
comparable positions at other real estate investment trusts, to historical
levels of salary paid by the Trust, and to recommendations of independent
compensation consultants to the Trust. Salary adjustments are based on a
periodic evaluation of the performance of the Trust and of each executive
officer, and also take into account new responsibilities as well as changes in
the competitive marketplace. Mr. Wolcott, who has served as President and Chief
Executive Officer of the Trust since the commencement of his employment with
the Trust in May of 1993, received a base salary of $195,000 for the 1996
Fiscal Year. Mr. Warner, who has served as the Vice President - Real Estate
Operations of the Trust since May 1993, received a base salary of $110,000 for
the 1996 Fiscal Year. Mr. Simpson, who has served as Secretary, Treasurer and
Chief Financial Officer of the Trust since March 1994, received a base salary
of $110,000 for the 1996 Fiscal Year. The Compensation Committee was advised by
a compensation consultant from Kenneth Leventhal & Company (now part of Ernst &
Young LLP) that base compensation levels for the Trust for the 1996 Fiscal Year
were below the REIT industry as a whole, which was consistent with the Trust's
desire to bring its operating performance up to the standards of the REIT
industry and to focus on the incentive portion of compensation during a period
of repositioning the Trust's operations.
PERFORMANCE-BASED BONUS PLAN. Each year, in order to encourage the
accomplishment of the short-term goals of the Trust, the Compensation Committee
reviews and approves a performance-based bonus plan for executive officers
based in part on increases in Funds From Operations ("FFO") per share as
defined by the National Association of Real Estate Investment Trusts ("NAREIT")
and adjusted by the Compensation Committee as described below. The NAREIT
definition of FFO is net income (loss) computed in accordance with generally
accepted accounting principles, excluding gains or losses from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Additionally, extraordinary items or significant nonrecurring items
that distort comparability are not considered in determining FFO. The
Compensation Committee also believes FFO, when used as a performance
measurement, should be adjusted to exclude certain nonrecurring costs such
19
<PAGE> 22
as litigation and contested proxy costs, as well as effects from other
transactions which distort comparability between periods such as property sales
and acquisitions. The Compensation Committee noted that other REITs do not
adjust the NAREIT definition of FFO as adjusted by the Compensation Committee.
However, the Compensation Committee believes that in light of the large amount
of expenses incurred by the Trust due to litigation and proxy contests, an
adjustment to FFO was appropriate when determining bonuses. During 1996, each
executive officer was eligible to receive a bonus of 40% of base salary based
on realization of the first stage of principal discount provided for under the
settlement agreement executed with The Manufacturers Life Insurance Company and
The Manufacturers Life Insurance Company (U.S.A.) (collectively, "MLI"). In
addition, each executive officer was eligible to receive a bonus of 10% of base
salary based on achievement of $0.11 per share in adjusted FFO. With respect to
the 1996 Fiscal Year, the Compensation Committee awarded a $100,000 bonus to
Mr. Wolcott, a $55,000 bonus to Mr. Warner and a $55,000 bonus to Mr. Simpson.
OTHER COMPENSATION. Other compensation payable to the executives of the
Trust includes contributions to the Employee Retirement and Profit Sharing Plan
of the Trust and insurance premiums paid by the Trust under the Trust's
medical, dental, life and long-term disability plans.
1996 Compensation Committee,
William H. Bricker
Robert E. Giles
NOTICE OF INDEMNIFICATION
Pursuant to the Texas REIT Act, the Trust hereby reports to its
shareholders that the Trust indemnified Messrs. Bricker and Wolcott in
connection with the litigation involving the Trust, Pure World, Inc. and Robert
Strougo (the "Shareholder Litigation"). The Trust previously acquired director
and officer liability insurance for its Trust Managers, which policy reimbursed
the Trust for sums in excess of $200,000 paid by the Trust to indemnify Trust
Managers for expenses incurred in connection with actions such as the
Shareholder Litigation. In connection with the Shareholder Litigation, the
Trust paid the $200,000 retention under the director and officer liability
insurance policy.
20
<PAGE> 23
PERFORMANCE GRAPH
The rules and regulations of the Commission require the presentation of a
line graph comparing, over a period of five years, the cumulative total
shareholder return to a performance indicator of a broad equity market index
and either a nationally recognized industry index or a peer group index
constructed by the Trust. The chart below compares the performance of the
Common Shares with the performance of the Standard & Poors 500 Index and the
NAREIT Equity REIT Index. The comparison assumes $100 was invested on December
31, 1990 in the Common Shares and in each of the foregoing indices and assumes
reinvestment of dividends.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
DECEMBER
----------------------------------------------------
1990 1992 1993 1994 1995 1996
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S & P INDEX 100 107.67 118.43 119.97 164.88 202.74
EQUITY REIT 100 120.66 143.23 147.52 164.48 229.82
AIP REIT 100 117.66 141.68 86.58 128.31 147.43
</TABLE>
21
<PAGE> 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Shares by (i) each Trust Manager, (ii) the
Trust's Chief Executive Officer and each executive officer of the Trust, (iii)
all Trust Managers and executive officers of the Trust as a group, and (iv) to
the Trust's knowledge, by any person owning beneficially more than 5% of the
outstanding shares of such class, in each case at July 28, 1997. The percentage
ownership of each person assumes (i) the conversion of the Modified Notes held
by Realco into 2,724,809 Common Shares, (ii) the purchase of an additional
995,847 Common Shares by clients and affiliates of MSAM and (iii) the exercise
of vested options to purchase an aggregate 195,000 Common Shares. Except as
otherwise noted, each person named in the table has sole voting and investment
power with respect to all Common Shares shown as beneficially owned by such
person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
- ---------------- ----------------------- --------
<S> <C> <C>
Theodore R. Bigman................................. 10,000(1) *
William H. Bricker ................................ 12,000(1) *
T. Patrick Duncan ................................. 3,000 *
Robert E. Giles.................................... 13,750(1) *
Edward B. Kelley................................... 5,000 *
Russell C. Platt................................. 10,000(1) *
Stanley J. Kraska, Jr.............................. 10,000(1)(2) *
Charles W. Wolcott................................. 133,000(3) *
Marc A. Simpson.................................... 34,500(4) *
David B. Warner.................................... 26,000(4) *
Lewis D. Friedland................................. 35,000(5) *
USAA Real Estate Company........................... 5,927,015(6) 21.79%
8000 Robert F. McDermott Freeway
IH-10 West, Suite 600
San Antonio, Texas 78230-3884
ABKB/LaSalle Securities Limited Partnership
LaSalle Advisors Limited Partnership
William K. Morrill, Jr.
Stanley J. Kraska, Jr.
Keith R. Pauley.................................... 6,122,449(7) 22.50%
200 East Randolph Drive
Chicago, Illinois 60603
Morgan Stanley, Dean Witter, Discover & Co.
The Morgan Stanley Real Estate Special
Situations Fund I, L.P.
The Morgan Stanley Real Estate Special
Situations Fund II, L.P.
Morgan Stanley Asset Management Inc................ 8,163,265(8)(9) 30.01%
1221 Avenue of the Americas
New York, New York 10020
All Trust Managers and executive officers as a
group
(11 persons).................................... 292,250 1.07%
</TABLE>
- --------------
* Ownership is less than 1% of outstanding Common Shares.
22
<PAGE> 25
(1) Includes 10,000 Common Shares that may be purchased upon exercising
vested options.
(2) See footnote (7) below.
(3) Includes 50,000 Common Shares that may be purchased upon exercising
vested options.
(4) Includes 20,000 Common Shares that may be purchased upon exercising
vested options.
(5) Includes 35,000 Common Shares that may be purchased upon exercising
vested options.
(6) Includes (i) 2,724,809 Common Shares into which the Modified Notes held
by Realco may be converted (assuming a $2.00 per share conversion price)
and (ii) 20,000 Common Shares that may be purchased upon exercising
vested options acquired from Messrs. Duncan and Kelley. As Trust Managers
of the Trust, Messrs. Duncan and Kelley each received vested options to
purchase 10,000 Common Shares, which they then transferred to Realco
pursuant to Realco's internal policies.
(7) Based upon the Schedule 13D filed jointly by the listed reporting persons
with the Commission on July 21, 1997, (i) ABKB has sole voting and
dispositive power over 3,912,245 Common Shares; (ii) LaSalle Advisors has
sole voting and dispositive power over 2,210,204 Common Shares; and (iii)
each of Messrs. Morrill, Kraska and Pauley, as a managing director of
both ABKB and LaSalle Advisors, has sole voting and dispositive power
over the 3,912,245 Common Shares controlled by ABKB and the 2,210,204
Common Shares controlled by LaSalle Advisors (an aggregate 6,122,449
Common Shares). Messrs. Morrill, Kraska and Pauley disclaim, however,
beneficial ownership of the 6,122,449 Common Shares, but state that as a
group, the reporting persons have the sole power to vote and dispose of
6,122,449 Common Shares.
(8) Includes 995,847 Common Shares that may be acquired by certain clients
and affiliates of MSAM in connection with the MSAM Agreement.
(9) Based upon the Schedule 13D filed jointly by the listed 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
Common Shares and shared voting and dispositive power over 6,539,476 of
such Common Shares; (ii) MSAM has shared voting and dispositive power
over 6,539,476 of such Common 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 Common Shares; and (iv) The Morgan Stanley
Real Estate Special Situations Fund II, L.P. has shared voting and
dispositive power over 2,326,660 of such Common Shares. Pursuant to
separate investment agreements between MSAM and the clients named on
Exhibit A to the MSAM Agreement, MSAM has been granted voting and
dispositive power with respect to the Common Shares held by each client.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4 and 5 (and any amendments
thereto) furnished to the Trust with respect to the 1996 Fiscal Year or written
representations from certain reporting persons that no forms were required, no
person failed to disclose on a timely basis, as disclosed in such forms,
reports required by Section 16(a) of the Exchange Act.
PROPOSALS BY SHAREHOLDERS
A proper proposal submitted by a shareholder for presentation at the
Trust's 1997 Annual Meeting and received at the Trust's principal executive
office no later than June 1, 1998 will be included in the Proxy Statement and
Proxy related to the 1997 Annual Meeting.
OTHER MATTERS
The Trust Managers are aware of no other matter that will be presented
for action at the Annual Meeting. IF SUCH PROPOSALS OR ANY OTHER MATTERS
REQUIRING A VOTE OF THE SHAREHOLDERS PROPERLY COMES BEFORE THE ANNUAL MEETING,
THE PERSONS AUTHORIZED UNDER THE PROXIES WILL VOTE AND ACT ACCORDING TO THEIR
BEST JUDGMENT.
23
<PAGE> 26
EXPENSES
The expense of preparing, printing and mailing proxy materials to the
Trust's shareholders will be borne by the Trust. The Trust has engaged The
Herman Group, Inc. to assist in the solicitation of proxies from shareholders.
Proxies may also be solicited personally or by telephone by officers and
employees of the Trust, none of whom will receive additional compensation
therefor. In addition to mailing this material to Trust shareholders, the Trust
has asked banks and brokers to forward copies to persons for whom they hold
shares of the Trust and to request authority for execution of the Proxies. The
Trust will reimburse the banks and brokers for their reasonable out-of-pocket
expenses in doing so. The expense of preparing, printing and mailing the Proxy
Statement and all supplemental materials, as well as the cost of the solicitors
and attorneys, are anticipated to be approximately $175,000 and will be borne
by the Trust. Of these expenses, the estimated fees for The Herman Group, Inc.
are $5,000. The Herman Group, Inc. also will be reimbursed for reasonable
out-of-pocket expenses.
ANNUAL REPORT TO SHAREHOLDERS
The Trust's 1996 Annual Report (which does not form a part of the proxy
solicitation material) was mailed on or about March 13, 1997 to all
shareholders of record as of March 10, 1997. A copy of the Trust's Annual
Report on Form 10-K, as filed with the Commission, will be furnished to
shareholders, without exhibits and without charge, upon written request to:
Investor Relations, American Industrial Properties REIT, 6210 N. Beltline Road,
Suite 170, Irving, Texas 75063.
24
<PAGE> 27
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Trust and
its subsidiaries for the three months ending March 31, 1997 and 1996 and for
each of the five years in the period ended December 31, 1996. This information
should be read in conjunction with the discussion set forth below under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Trust and
accompanying Notes included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(in thousands except share and per share data)
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues......................... $ 2,666 $ 2,904 $11,478 $11,779 $11,226 $10,641 $ 15,139
Loss from real estate operations (a)... (1,019) (1,510) (4,732) (4,338) (4,311) (5,121) (18,719)
Net income (loss) (a).................. 1,936 (1,510) 1,255 (4,584) (4,655) (7,867) (17,593)
Per share:
Loss from real estate operations (a). $ 0.10 $ (0.17) $ (0.52) $ (0.48) $ (0.47) $ (0.57) $ (2.06)
Net income (loss) (a).................. 0.19 (0.17) 0.14 (0.51) (0.51) (0.87) (1.94)
Distributions paid..................... - 0.04 0.04 0.04 - 0.16 0.20
BALANCE SHEET DATA:
Total assets........................... $74,245 $78,936 $78,936 $89,382 $92,550 $88,297 $110,446
Total debt............................. 40,626 56,253 53,216 62,815 65,613 57,078 68,578
Shareholders' equity................... 24,619 22,683 22,683 19,248 24,196 28,851 38,171
</TABLE>
- --------------
(a) Loss from real estate operations and net loss for 1995, 1994 and 1992
include provisions for possible losses on real estate of $600,000,
$650,000 and $14,094,000, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for discussion
of extraordinary gains and losses of $5,810, ($55), ($344), ($2,530) and
$1,910 in 1996, 1995, 1994, 1993 and 1992, respectively, and $2,643 for
the three months ended March 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Trust and accompanying Notes included
elsewhere in this Proxy Statement. The statements contained in this Proxy
Statement that are not historical facts are forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results may differ materially from those included in the
forward-looking statements. These forward-looking statements involve risks and
uncertainties including, but not limited to, changes in general economic
conditions in the markets that could impact demand for the Trust's properties
and changes in financial markets and interest rates impacting the Trust's
ability to meet its financing needs and obligations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 to the Three Months Ended
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 Trust's 8.8%
unsecured notes (the "MLI Notes") to MLI 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).
25
<PAGE> 28
The Trust's FFO improved by $429,000 when comparing the quarter ended
March 31, 1997 to the same quarter in 1996. This increase is attributable to a
net decrease (excluding the accrual of certain interest expense items noted
above) in interest expense of $269,000 (due to the paydown or forgiveness of
debt in 1996 and 1997), and the aforementioned decrease in litigation and proxy
costs, decrease in net operating income and decrease in administrative
expenses. Funds Available for Distribution ("FAD") improved by $453,000 due
primarily to the same factors affecting FFO.
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.
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.
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
26
<PAGE> 29
in litigation, refinancing and proxy costs of $568,000 (due to the Shareholder
Litigation in 1996), an increase in Trust administration and overhead expenses
of $406,000 (due to the accrual of $240,000 in incentive compensation, higher
legal fees and increased Trust Manager compensation in 1996) and a decrease in
interest income (due to higher invested balances in 1995 from the nonpayment of
interest to the Trust's unsecured lender).
During 1996, the Trust sold two industrial properties and recognized a
gain on sale of $177,000, compared to the sale of one property in 1995
resulting in a loss on sale of $191,000. In 1996, the Trust recognized an
extraordinary gain on extinguishment of debt of $5,810,000, or $0.64 per share,
pursuant to settlement of litigation with MLI.
Comparison of 1995 to 1994
Property revenues increased from $11,080,000 in 1994 to $11,410,000 in
1995, resulting from the stabilization in occupancy of the Trust's portfolio
and improving rental rates in selected markets. Property operating expenses
decreased from $3,952,000 in 1994 to $3,851,000 in 1995, primarily due to the
net effect of a sale of a property in February 1995 and the purchase of a
property in August 1995. Property net operating income increased from
$7,128,000 in 1994 to $7,559,000 in 1995, an increase of 6.0%. On a same
property basis, net operating income increased from $6,927,000 in 1994 to
$7,474,000 in 1995, an increase of 7.9%. Overall leased occupancy of the
portfolio was 93.7% at December 31, 1995 compared to 93.2% at December 31,
1994.
Loss from operations increased from $4,311,000 in 1994 to $4,338,000 in
1995 as a result of the increase in net operating income and an increase in
interest income of $223,000 (due to higher invested balances resulting from the
non-payment of interest to the Trust's unsecured lender), a decrease in total
administrative expenses of $128,000 (as a result of two proxy contests in 1994
versus one in 1995), a net increase in interest expense of $1,215,000 (due to
the November 1994 refinancing transaction and the default rate interest accrued
by the Trust in 1995 of $724,000), a decrease in depreciation and amortization
of $356,000 (due to the Trust's property transactions in 1995), and a decrease
in provision for possible losses on real estate of $50,000 (due to the timing
of writedowns related to properties held for sale).
During 1995, the Trust recognized a loss of $191,000 on the sale of its
Quadrant property and an extraordinary loss of $55,000 related to the
prepayment of an outstanding mortgage loan. In 1994, the Trust recognized an
extraordinary loss of $344,000 on the partial in-substance defeasance of Zero
Coupon Notes due 1997.
During 1995, the Trust incurred approximately $980,000 in expenses related
to litigation, a proxy contest in connection with issues before the
shareholders at the Trust's annual meeting and attempted recapitalization
costs, compared to approximately $1,027,000 in 1994. During 1994, the Trust had
no litigation expenses but incurred costs related to two proxy contests.
The Trust recorded a provision for possible loss on real estate related to
its Patapsco property at December 31, 1995 of $600,000. This provision follows
a $650,000 provision made at December 31, 1994. The Trust began marketing this
property in early 1995.
Analysis of Cash Flows
Cash flow used in operating activities in 1996 was $1,965,000. This
deficit reflects the results of property operations, interest expense and
administrative expenses. Interest expense reflects several items of
nonrecurring nature, including the accrual of $369,000 of default rate interest
which was ultimately forgiven and approximately $535,000 related to principal
which was forgiven in November 1996 and February 1997. In addition,
administrative expenses includes $1,548,000 of litigation, refinancing and
proxy costs which relate to special situations and should not be considered to
be recurring expenses. Management believes that, in the future, cash flow
provided by operations will increase due to the elimination of the nonrecurring
items described above and the Trust's plans to attract capital and pursue a
growth strategy.
Cash flow provided by investing activities in 1996 was $5,173,000,
representing proceeds from the sale of two properties and amounts expended on
capitalized improvements and leasing commissions. The sale of the two
properties was necessary to raise capital with which to make payments under the
Trust's option to retire certain indebtedness at a discount.
27
<PAGE> 30
Cash flow used in financing activities in 1996 was $6,185,000. This amount
reflects proceeds from the mortgage financing on nine properties, the payment
of amounts on the option to retire certain indebtedness at a discount, the sale
of Common Shares to Realco, and the first quarter distribution to shareholders.
Funds from Operations
In March 1995, NAREIT issued its White Paper on FFO which clarified the
treatment of certain items in determining FFO and recommended additional
supplemental disclosures. The Trust has adopted the recommendations of NAREIT
and restated its FFO calculation for prior years. The changes promulgated by
NAREIT eliminate the add back of depreciation and amortization of non-real
estate items, including the amortization of deferred financing costs, in
determining FFO. The revised definition of FFO is net income (loss) computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In addition, NAREIT recommends that
extraordinary items or significant nonrecurring items that distort
comparability should not be considered in arriving at FFO. Accordingly, the
Trust does not include the default rate interest accrued on its $45.2 million
in unsecured notes payable in the determination of FFO. FAD is also presented
as it more accurately portrays the ability of the Trust to make distributions
because it reflects capital expenditures. The Trust believes FFO and FAD are
appropriate measures of performance relative to other REITs. FFO provides
investors with an understanding of the ability of the Trust to incur and
service debt and make capital expenditures. There can be no assurance that FFO
and FAD presented by the Trust is comparable to similarly titled measures of
other REITs. While other REITs may not always use a similar definition, this
information does add comparability to those which have adopted the NAREIT
definitions.
FFO and FAD should not be considered as an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of the Trust's operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital improvements or
principal payments on indebtedness.
28
<PAGE> 31
FFO and FAD are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- -----------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss) .................................... $ 1,936 $(1,510) $ 1,255 $(4,584) $(4,655)
Exclude effects of:
Extraordinary (gain) loss on extinguishment of
debt ......................................... (2,643) -- (5,810) 55 --
(Gain) loss on sales of real estate .......... (312) -- (177) 191 --
Provision for possible losses on real estate . -- -- -- 600 650
Real estate depreciation and amortization .... 693 700 2,890 2,771 3,102
Default rate interest ........................ -- 327 369 724 --
Extraordinary loss on partial in-substance
defeasance of Zero Coupon Notes .............. -- -- -- -- 344
------- ------- ------- ------- -------
Funds from Operations ................................ $ (54) $ (483) $(1,473) $ (243) $ (559)
======= ======= ======= ======= =======
Funds from Operations ................................ $ (54) $ (483) $(1,473) $ (243) $ (559)
Capitalized improvements and leasing commissions (a) . (176) (194) (1,372) (1,023) (1,476)
Non-cash effect of straight-line rents on FFO ........ 44 38 193 161 156
------- ------- ------- ------- -------
Funds Available for Distribution ..................... $ (186) $ (639) $(2,652) $(1,105) $(1,879)
======= ======= ======= ======= =======
Weighted average Shares outstanding .................. 10,000.0 9,075.4 9,108.2 9,075.4 9,075.4
</TABLE>
- ---------------
(a) The breakdown of capitalized improvements and leasing commissions is as
follows for each of the two years ending December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FYE 12/31/96 FYE 12/31/95
------------------- -----------------
Amount PSF Amount PSF
------ --- ------ ---
<S> <C> <C> <C> <C>
Tenant improvements - new tenants $287 $3.32 $343 $2.58
Tenant improvements - renewing tenants 282 1.93 184 1.30
Leasing costs - new tenants 245 1.71 168 1.16
Leasing costs - renewing tenants 144 0.58 107 0.55
Expansions and major renovations 414 0.26 221 0.13
------ ------
Total $1,372 $1,023
====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Trust's liquidity requirements are
funds generated from operations of the Trust's real estate assets and
unrestricted cash reserves. As of December 31, 1996, the Trust had $4,010,000
in unrestricted cash on hand. The Trust presently anticipates that these cash
reserves will provide sufficient funds for all currently known liabilities and
commitments relating to the Trust's operations during 1997.
In May 1995, the Trust filed a lawsuit against The Manufacturers Life
Insurance Company, holder of the Trust's $45,239,000 8.8% unsecured notes
payable, alleging breach of the Note Purchase Agreement between The
Manufacturers Life Insurance Company and the Trust and unlawful attempts to
coerce the Trust into relinquishing certain of its rights under that agreement.
The Trust settled its MLI litigation in May 1996 and paid $5,200,000 in
settlement of all past due interest on the MLI Notes, thereby allowing the
Trust to record an extraordinary gain of $1,367,000. The Trust also was 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
29
<PAGE> 32
the Option Price. In addition, the Trust sold two properties during the fourth
quarter of 1996, generating net proceeds of $6,545,000 which were also applied
to the Option Price. In accordance with the MLI settlement agreement,
$4,220,000 in debt was forgiven, allowing the Trust to record an extraordinary
gain of $4,443,000 (including accrued interest forgiven). These notes were
purchased by Realco in February 1997. Realco has the option to convert the
principal amount of these notes into Common Shares at the conversion rate of
$2.00 per share (if converted prior to December 31, 1997) or $2.25 per share
(if converted between December 31, 1997 and December 31, 2000).
The Trust declared a distribution of $0.04 per Common Share in February
1996. The MLI settlement agreement related to the MLI litigation, signed in May
1996, prohibited the payment of distributions while the agreement is in effect.
The Modified Notes owned by Realco provide that the Trust may not pay
distributions until the debt is paid in full; however, this restriction
terminated when the shareholders approved Realco's conversion right and
approved an increase in the authorized Common Shares of the Trust at the June
30, 1997 shareholder meeting.
As of December 31, 1996, the Trust had borrowings secured by mortgages on
the Trust's properties totaling $43,797,000. Of this amount, approximately
$1,927,000 represented variable rate financing with a weighted average interest
rate of 10.25% and $41,870,000 represented fixed rate financing with a weighted
average interest rate of 8.61%. At December 31, 1996, the overall weighted
average interest rate on the Trust's mortgage debt was 8.68%. Annual debt
service on these borrowings amounts to $4,452,000 and principal maturity during
1997 will approximate $675,000.
The nature of the Trust's operating properties, which generally provide
for leases with a term of between three and five years, results in an
approximate turnover rate of 20% to 25% of the Trust's tenants and related
revenue annually. Such turnover requires capital outlays related to tenant
improvements and leasing commissions in order to maintain or improve the
Trust's occupancy levels. These costs amounted to $1,372,000 in the year ended
December 31, 1996 and $1,023,000 in the year ended December 31, 1995. These
costs have historically been funded out of the Trust's operating cash flow and
cash reserves. The Trust has made no commitments for additional capital
expenditures beyond those related to normal leasing and releasing activity and
related escrows. No capital improvements or renovations of significance are
anticipated in the near future for any of the Trust's properties, with the
possible exception of a large retail lease at the Trust's retail property. Such
a lease, if agreed to, could result in expenditures for tenant improvements in
excess of $500,000.
Pursuant to the MSAM Agreement, certain clients and affiliates of MSAM
have purchased 7,167,418 Common Shares and have the right to purchase an
additional 995,847 Common Shares (all at a price of $2.45 per share).
Additionally, pursuant to the ABKB Agreements, ABKB and LaSalle Advisors
purchased an aggregate 6,122,449 Common Shares at $2.45 per share.
The initial capitalization of the Trust in 1985 included $179,698,000
(face amount at maturity) of Zero Coupon Notes due 1997. Pursuant to the
retirement of these Zero Coupon Notes, the Trust partially in-substance
defeased certain Zero Coupon Notes in December 1993 and November 1994. At March
31, 1997, the face amount at maturity and the accreted value of the defeased
notes were $16,365,000 and $15,158,000, respectively.
At March 31, 1997, the Trust had $41,710,000 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 Common Shares from certain shareholders for
$2.75 per share, pending approval of the settlement of certain shareholder
litigation, which the Trust had initiated, alleging that certain significant
shareholders of the Trust had made material misrepresentations in their filings
with the SEC. The $2.75 price per share was negotiated between the selling
shareholders and Realco without any involvement by the Trust. The majority of
these Common Shares were purchased from two shareholders, one of which was
involved in the shareholder litigation. The other selling shareholder was
unwilling to wait for the settlement of the litigation and Realco did not want
to purchase Common Shares until the settlement of the litigation. In order to
facilitate the settlement of the litigation, Realco advanced approximately
$2,770,000 to the Trust on November 25, 1996. The
30
<PAGE> 33
proceeds of this loan, which bore interest at 9%, were used by a subsidiary of
the Trust to acquire 998,100 Common Shares from the selling shareholder not
involved in the shareholder litigation. On December 19, 1996, the Trust sold
924,600 Common Shares, representing the remainder of its authorized Common
Shares, to Realco for $2.75 per share, the same price at which Realco had
independently agreed to purchase the Common Shares from the other shareholders.
On December 20, 1996, after approval of the settlement of the shareholder
litigation, Realco closed the purchase of the 2,257,606 Common Shares,
including the acquisition of 998,100 Common Shares held by a subsidiary of the
Trust in return for cancellation of the related loan discussed above, resulting
in Realco's ownership of 3,182,206 Common Shares.
On December 18, 1996, the Trust entered into an agreement granting Realco
the right to commence negotiations to purchase the MLI Notes and, if Realco was
successful in acquiring these notes, setting forth the terms of the
modifications to the MLI Notes, including the right to convert the principal
amount of these notes into Common Shares of the Trust at $2.00 per share during
1997 and $2.25 per share thereafter. On February 26, 1997, Realco acquired the
MLI Notes for $5,481,152. The MLI Notes were then modified to reduce the
outstanding principal balance from $9,419,213 to $7,040,721, to release all
security for the notes, to provide for monthly payments of interest at 8.8% and
to extend the maturity date from March 31, 1997 to December 31, 2000. In
addition, Realco has the option to convert the principal amount of the notes
into Common Shares of the Trust at the conversion rate of $2.00 per share (if
converted prior to December 31, 1997) or $2.25 per share (if converted between
December 31, 1997 and December 31, 2000). Subsequent to the modification, the
Trust made a principal payment of $1,591,103, resulting in a current principal
balance of $5,449,618. The modification of this debt resulted in a reduction of
approximately $1,591,000 of the potential $3,969,000 discount remaining under
an option agreement on this debt. The Trust Managers viewed this as a
reasonable cost of this transaction as it (i) removed the risk of losing the
entire potential discount if payment was not made by March 31, 1997, (ii)
removed the necessity to liquidate certain properties, (iii) allowed for
release of all collateral securing this obligation, (iv) allowed the Trust to
recognize an extraordinary gain of approximately $2,643,000 or $0.26 per share
in the first quarter of 1997, and (v) allowed for the possibility of conversion
of this obligation into Common Shares, thereby improving the Trust's financial
position.
31
<PAGE> 34
AMERICAN INDUSTRIAL PROPERTIES REIT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors .................................................F-2
Consolidated Financial Statements (audited):
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 ......................................F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 ...............F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 ...................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 .......................................F-6
Notes to Consolidated Financial Statements .................................F-7
Financial Statement Schedule:
Schedule III - Consolidated Real Estate and Accumulated Depreciation .......F-14
Notes to Schedule III .....................................................F-15
Consolidated Financial Statements for three months ended March 31, 1997 and
1996 (unaudited):
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 (unaudited) ...............................F-16
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996 ................................................F-17
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 (unaudited) ...............................F-18
Notes to Consolidated Financial Statements (unaudited) .....................F-19
</TABLE>
All other financial statements and schedules not listed have been omitted
because the required information is either included in the Financial
Statements and the Notes thereto as included herein or is not applicable
or required.
F-1
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
Trust Managers and Shareholders
American Industrial Properties REIT:
We have audited the accompanying consolidated balance sheets of American
Industrial Properties REIT (the "Trust") as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the consolidated financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Trust as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Dallas, Texas
February 13, 1997
except for Note 14, as to
which the date is February 26, 1997
F-2
<PAGE> 36
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Rents................................................... $ 8,592 $ 8,676 $ 8,397
Tenant reimbursements................................... 2,728 2,734 2,683
Interest income......................................... 158 369 146
--------- --------- ---------
11,478 11,779 11,226
--------- --------- ---------
EXPENSES
Property operating expenses:
Property taxes....................................... 1,421 1,397 1,421
Property management fees............................. 430 428 442
Utilities............................................ 476 478 501
General operating.................................... 849 795 705
Repairs and maintenance.............................. 529 431 656
Other property operating expenses.................... 317 322 227
Depreciation and amortization........................... 2,909 2,777 3,133
Interest on 8.8% notes payable.......................... 4,003 4,707 4,001
Interest on mortgages payable........................... 1,898 1,778 850
Amortization of original issue discount on Zero Coupon
Notes due 1997....................................... -- -- 419
Administrative expenses:
Trust administration and overhead.................... 1,830 1,424 1,505
Litigation, refinancing and proxy costs.............. 1,548 980 1,027
Provision for possible losses on real estate............ -- 600 650
--------- --------- ---------
16,210 16,117 15,537
--------- --------- ---------
Loss from operations.................................... (4,732) (4,338) (4,311)
Gain (loss) on sales of real estate..................... 177 (191) --
--------- --------- ---------
Loss before extraordinary items......................... (4,555) (4,529) (4,311)
Extraordinary gain (loss) on extinguishment of debt..... 5,810 (55) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997........................... -- -- (344)
--------- --------- ---------
NET INCOME (LOSS)......................................... $ 1,255 $ (4,584) $ (4,655)
========= ========= =========
PER SHARE DATA
Loss from operations.................................... $ (0.52) $ (0.48) $ (0.47)
Gain (loss) on sales of real estate..................... 0.02 (0.02) --
Extraordinary gain (loss) on extinguishment of debt..... 0.64 (0.01) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997........................... -- -- (0.04)
--------- --------- ---------
Net Income (Loss)....................................... $ 0.14 $ (0.51) $ (0.51)
========= ========= =========
Distributions Paid...................................... $ 0.04 $ 0.04 $ 0.00
========= ========= =========
Weighted average shares outstanding..................... 9,108,241 9,075,400 9,075,400
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 37
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Real estate:
Held for investment....................................... $ 84,693 $ 97,091
Held for sale............................................. 9,779 4,806
-------- --------
Total real estate......................................... 94,472 101,897
Accumulated depreciation.................................. (23,973) (23,441)
-------- --------
Net real estate........................................... 70,499 78,456
Cash and cash equivalents:
Unrestricted.............................................. 4,010 7,694
Restricted................................................ 1,366 659
-------- --------
Total cash and cash equivalents........................... 5,376 8,353
Other assets, net........................................... 3,061 2,573
-------- --------
Total Assets...................................... $ 78,936 $ 89,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................... $ 43,797 $ 17,576
8.8% notes payable........................................ 9,419 45,239
Accrued interest.......................................... 602 5,178
Accounts payable, accrued expenses and other
liabilities............................................ 1,964 1,620
Tenant security deposits.................................. 471 521
-------- --------
Total Liabilities................................. 56,253 70,134
-------- --------
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
10,000,000 Shares; issued and outstanding 10,000,000
Shares at 1996 and 9,075,400 Shares at 1995............ 1,000 908
Additional paid-in capital................................ 127,056 124,605
Accumulated distributions................................. (58,456) (58,093)
Accumulated loss from operations and extraordinary gains
(losses)............................................... (48,065) (49,143)
Accumulated net realized gain on sales of real estate..... 1,148 971
-------- --------
Total Shareholders' Equity........................ 22,683 19,248
-------- --------
Total Liabilities and Shareholders' Equity........ $ 78,936 $ 89,382
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 38
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS
NUMBER AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................... 9,075,400 $ 908 $124,605 $ (96,662) $28,851
Net loss................................... -- -- -- (4,655) (4,655)
---------- ------ -------- --------- -------
Balance at December 31, 1994................. 9,075,400 908 124,605 (101,317) 24,196
Net loss................................... -- -- -- (4,584) (4,584)
Distributions to shareholders.............. -- -- -- (364) (364)
---------- ------ -------- --------- -------
Balance at December 31, 1995................. 9,075,400 908 124,605 (106,265) 19,248
Issuance of additional shares.............. 924,600 92 2,451 -- 2,543
Net income................................. -- -- -- 1,255 1,255
Distributions to shareholders.............. -- -- -- (363) (363)
---------- ------ -------- --------- -------
Balance at December 31, 1996................. 10,000,000 $1,000 $127,056 $(105,373) $22,683
========== ====== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,255 $(4,584) $(4,655)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Extraordinary (gains) losses........................... (5,810) 55 344
(Gains) losses on real estate.......................... (177) 791 650
Depreciation........................................... 2,577 2,479 2,622
Amortization of deferred financing costs............... 70 70 --
Other amortization..................................... 332 298 511
Amortization of original issue discount................ -- -- 419
Changes in operating assets and liabilities:
(Increase) decrease in other assets and restricted
cash.............................................. (1,270) 126 (858)
Increase (decrease) in accounts payable, other
liabilities and tenant security deposits.......... 351 (61) 373
(Decrease) increase in accrued interest................ (2,986) 4,674 --
-------- ------- -------
Net Cash (Used In) Provided By Operating
Activities...................................... (5,658) 3,848 (594)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales of real estate.................... 6,545 2,476 --
Capitalized improvements and leasing commissions.......... (1,372) (1,023) (1,476)
Acquisition of real estate................................ -- (1,309) --
-------- ------- -------
Net Cash Provided By (Used In) Investing
Activities...................................... 5,173 144 (1,476)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable............ (31,832) (2,798) (1,283)
Proceeds from mortgage financing.......................... 26,453 -- 14,500
Proceeds from sale of common shares....................... 2,543 -- --
Distributions to shareholders............................. (363) (364) --
Prepayment penalty on extinguishment of debt.............. -- (55) --
Partial in-substance defeasance of Zero Coupon Notes...... -- -- (3,106)
Partial repurchase of Zero Coupon Notes................... -- -- (2,241)
-------- ------- -------
Net Cash (Used In) Provided By Financing
Activities...................................... (3,199) (3,217) 7,870
-------- ------- -------
Net (Decrease) Increase in Unrestricted Cash and
Cash Equivalents................................ (3,684) 775 5,800
Unrestricted Cash and Cash Equivalents at Beginning of
Year...................................................... 7,694 6,919 1,119
-------- ------- -------
Unrestricted Cash and Cash Equivalents at End of Year....... $ 4,010 $ 7,694 $ 6,919
======== ======= =======
Cash Paid for Interest...................................... $ 8,817 $ 1,741 $ 4,718
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 40
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
General.
American Industrial Properties REIT (the "Trust") is a self-administered
Texas real estate investment trust which, as of December 31, 1996, owns and
operates thirteen commercial real estate properties consisting of twelve
industrial properties and one retail property. The Trust was formed September
26, 1985 and commenced operations on November 27, 1985. Pursuant to the Trust's
1993 Annual Meeting of Shareholders, amendments to the Trust's Declaration of
Trust and Bylaws were approved which, among other things, changed the name of
the Trust to American Industrial Properties REIT and converted the Trust from a
finite life entity to a perpetual life entity.
Principles of Consolidation.
The consolidated financial statements of the Trust include the accounts of
American Industrial Properties REIT and its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly from such estimates
and assumptions.
Real Estate.
The Trust carries its real estate held for investment at depreciated cost
unless the asset is determined to be impaired. Real estate classified as held
for sale is carried at the lower of depreciated cost or fair market value less
costs to sell. In accordance with Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, issued in March 1995, the Trust records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the expected undiscounted cash
flows estimated to be generated by those assets are less than the related
carrying amounts. If an asset held for investment is determined to be impaired,
the impairment would be measured based upon the excess of the asset's carrying
value over the fair value. In addition, the Trust records impairment losses on
assets held for sale when the estimated sales proceeds, after estimated selling
costs, are less than the carrying value of the related asset (see Note 2).
Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital improvements is
computed using the straight-line method over forty years. Depreciation of
tenant improvements is computed using the straight-line method over ten years.
Cash and Cash Equivalents.
Cash equivalents include demand deposits and all highly liquid instruments
purchased with an original maturity of three months or less. Restricted amounts
reflect escrow deposits held by third parties for the payment of taxes and
insurance and reserves held by third parties for property repairs or tenant
improvements.
F-7
<PAGE> 41
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Assets.
Other assets primarily consists of deferred rent receivable, prepaid
commissions and loan fees. Leasing commissions are capitalized and amortized on
a straight line basis over the life of the lease. Loan fees are capitalized and
amortized to interest expense on a level yield basis over the term of the
related loan.
Rents and Tenant Reimbursements.
Rental income, including contractual rent increases or delayed rent
starts, is recognized on a straight-line basis over the lease term. The Trust
has recorded deferred rent receivable (representing the excess of rental
revenue recognized on a straight line basis over actual rents received under
the applicable lease provisions) of $599,000 and $810,000 at December 31, 1996
and 1995, respectively.
Several tenants in the Trust's retail property are also required to pay as
rent a percentage of their gross sales volume, to the extent such percentage
rent exceeds their base rents. Such percentage rents amounted to $154,000,
$269,000 and $245,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. In addition to paying base and percentage rents, most tenants are
required to reimburse the Trust for operating expenses in excess of a
negotiated base amount.
Tamarac Square, the Trust's only retail property, has rental revenues in
excess of 10% of the total revenues of the Trust. Rental revenues and tenant
reimbursements from Tamarac totaled $3,308,000, $3,525,000, and $3,441,000 in
1996, 1995, and 1994, respectively.
Income Tax Matters.
The Trust operates as a real estate investment trust ("REIT") for federal
income tax purposes. Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a deduction for dividends
paid during the year. The Trust had a taxable loss in each of the years ending
December 31, 1996, 1995, and 1994. Accordingly, no provision for income taxes
has been reflected in the financial statements.
The Trust has a net operating loss carryforward from 1996 and prior years
of approximately $34,800,000. Subject to certain restrictions, the losses may
be carried forward for up to 15 years. The present losses will expire beginning
in the year 2004. Management intends to operate the Trust in such a manner as
to continue to qualify as a REIT and to continue to distribute cash flow in
excess of taxable income.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from that reported for financial reporting
purposes due primarily to differences in the basis of the assets and the
estimated useful lives used to compute depreciation.
Concentrations.
The Trust owns industrial properties in Baltimore, Dallas, Houston, Los
Angeles, Milwaukee, and Minneapolis, and one retail property in Denver. The
principal competitive factors in these markets are price, location, quality of
space, and amenities. In each case, the Trust owns a small portion of the total
similar space in the market and competes with owners of other space for
tenants. Each of these markets is highly competitive, and other owners of
property may have competitive advantages not available to the Trust. The
Trust's retail property, Tamarac Square, represents approximately 29% of the
rent and tenant reimbursement revenues for the year ended December 31, 1996,
and approximately 41% of net real estate at December 31, 1996.
F-8
<PAGE> 42
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassification.
Certain amounts in prior years financial statements have been reclassified
to conform with the current year presentation.
NOTE 2 -- REAL ESTATE AND PROVISIONS FOR POSSIBLE LOSSES ON REAL ESTATE:
At December 31, 1996 and 1995, real estate was comprised of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Held for investment:
Land $15,149,000 $ 17,526,000
Buildings and improvements 69,544,000 79,565,000
----------- ------------
84,693,000 97,091,000
----------- ------------
Held for sale:
Land 1,728,000 897,000
Buildings and improvements 8,051,000 3,909,000
----------- ------------
9,779,000 4,806,000
----------- ------------
Total $94,472,000 $101,897,000
=========== ============
</TABLE>
During 1996, the Trust reclassified four properties from held for
investment to held for sale in anticipation of the need to raise capital to
complete the discounted purchase of certain indebtedness. Two of these
properties were sold in the fourth quarter of 1996 for net proceeds of
$6,545,000, resulting in a net gain of $177,000, and two remain classified as
held for sale at December 31, 1996. The net operating income of the properties
held for sale at December 31, 1996 was approximately $827,000 in 1996. During
1995, the Trust sold one industrial property for net proceeds of $2,476,000,
resulting in a net loss of $191,000, and acquired a 72,000 square foot
industrial distribution property in Arlington, Texas for total consideration of
approximately $1,309,000. One property was classified as held for sale at
December 31, 1995. This property, on which provisions for possible losses on
real estate were recorded of $600,000 and $650,000 in 1995 and 1994,
respectively, was reclassified to held for investment in 1996.
If unforeseen factors should cause a reclassification of the Trust's real
estate from held for investment to held for sale, significant adjustments to
reduce the depreciated cost of the real estate to net realizable value could be
required.
NOTE 3 -- MORTGAGES PAYABLE:
At December 31, 1996, the Trust's properties were subject to liens
securing mortgage notes payable totaling $43,797,000. Of this amount $1,927,000
represented a note with a variable interest rate of prime plus 2% (at December
31, 1996, the prime rate was 8.25%) and $41,870,000 represented notes with
fixed interest rates ranging from 8.40% to 11.0%.
Principal payments due during each of the next five years are as follows:
$675,000 in 1997, $2,632,000 in 1998, $1,973,000 in 1999, $818,000 in 2000,
$13,776,000 in 2001 and $23,923,000 thereafter.
The Bylaws of the Trust, the settlement agreement relating to the 8.8%
Notes Payable, and certain mortgages payable contain various borrowing
restrictions and operating performance covenants. The Trust is in compliance
with all such restrictions and covenants as of December 31, 1996.
F-9
<PAGE> 43
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- 8.8% NOTES PAYABLE:
In February 1992, the Trust issued $53,234,000 of unsecured notes payable
due November 1997 (the "8.8% Notes Payable"), proceeds of which were used to
retire certain other indebtedness. In May 1995, the Trust initiated litigation
against the holder of these notes and elected not to make scheduled interest
payments thereafter. In June 1995, the noteholder declared the entire principal
amount and all accrued interest on the notes due and payable and, effective
June 13, 1995, began accruing interest on the principal amount at the 11.7%
default rate provided for in the Note Purchase Agreement.
In May 1996, the Trust settled this litigation and, as a result, the notes
became secured by first or second liens on various properties and by pledges of
ownership interests in certain Trust entities owning properties. The Trust paid
$5,200,000 to satisfy all accrued interest payable through April 12, 1996,
allowing the Trust to recognize an extraordinary gain of $1,367,000 in the
second quarter of 1996.
As part of the settlement, the Trust obtained an option to pay the
remaining $45,239,000 in outstanding principal indebtedness for $36,800,000
(the "Option Price"). As a result of a mortgage financing on nine properties
and the sale of two other properties in the fourth quarter of 1996, the Trust
made payments of $31,350,000 during 1996 on the Option Price, decreasing the
remaining required payment under the option to $5,450,000. The Trust paid
$250,000 to extend the date by which the Option Price must be paid to March 31,
1997. This amount reduced the principal amount outstanding on the 8.8% Notes
Payable but did not reduce the Option Price. The principal amount of
indebtedness outstanding on the 8.8% Notes Payable is $9,419,000. In connection
with the settlement of the litigation and the terms of the option, the Trust
recorded an extraordinary gain on extinguishment of debt of $1,367,000 in the
second quarter of 1996 and $4,443,000 in the fourth quarter of 1996.
In February 1997, the notes were sold to a major shareholder of the Trust
(see Note 14).
NOTE 5 -- ZERO COUPON NOTES:
As part of its original capitalization in 1985, the Trust issued
$179,698,000 (face amount at maturity) of Zero Coupon Notes due 1997 (the
"Notes"). These Notes, which were collateralized by first and second mortgage
liens on each of the Trust's real estate properties, accreted at 12%,
compounded semiannually. In 1991, the Trust began a program to retire the
outstanding Notes, resulting in a reduction of the outstanding Notes to
$19,491,000 (face amount at maturity) at December 31, 1993. On December 31,
1993, the Trust effected a partial in-substance defeasance on $12,696,000 (face
amount at maturity) of the Notes and recorded an extraordinary loss of
$2,530,000. In November 1994, the Trust completed a partial in-substance
defeasance on $3,669,000 (face amount at maturity) of Notes and recorded an
extraordinary loss of $344,000. In December 1994, the Trust purchased the
remaining non-defeased Notes outstanding in the open market and submitted the
Notes to the Trustee for cancellation. The legal defeasance of the Notes
resulted in the release of the Zero Coupon Note mortgage liens which encumbered
each of the Trust's properties.
The accreted value of the Notes defeased at December 31, 1996 and 1995 was
$14,725,000 and $13,104,000, respectively.
F-10
<PAGE> 44
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- ENVIRONMENTAL MATTERS:
The Trust has been notified of the existence of limited underground
petroleum based contamination at a portion of Tamarac Square, the Trust's
Denver retail property. The source of the contamination is apparently related
to underground storage tanks ("USTs") located on adjacent property. The owner
of the adjacent property has agreed to remediate the property to comply with
state standards and has indemnified the Trust against costs related to its
sampling activity. The responsible party for the adjacent USTs has submitted a
corrective Action Plan to the Colorado Department of Public Health and
Environment. Implementation of the plan is ongoing. The responsible party is
negotiating to obtain access agreements from impacted landowners, including the
Trust.
With the exception of Tamarac Square, the Trust has not been notified, and
is not otherwise aware, of any material non-compliance, liability or claim
relating to hazardous or toxic substances in connection with any of its
properties.
NOTE 7 -- SHAREHOLDER TRANSACTIONS:
In January 1996, the Trust filed a lawsuit in federal court in Dallas,
Texas against a major shareholder of the Trust, alleging violations of federal
and state securities laws. The defendants filed a counterclaim against the
Trust and its Trust Managers and, in February 1996, another shareholder filed a
claim against the Trust and its Trust Managers. The litigation related to these
claims was consolidated in April 1996. In December 1996, a settlement of this
litigation was approved by the Court. This settlement provided, among other
things, that certain amendments to the Trust's Bylaws be made and that the
Trust pay the shareholders a total of $955,000. Of this amount, $625,000 was
paid by the Trust's directors and officers liability insurance.
On November 25, 1996, USAA Real Estate Company ("USAA REALCO") entered
into independently negotiated agreements to purchase an aggregate of 2,257,606
Shares from certain shareholders for $2.75 per share, pending approval of the
settlement of the shareholder litigation discussed above. On December 19, 1996,
the Trust sold 924,600 Shares, representing the remainder of its authorized
Shares, to USAA REALCO for $2.75 per share, the same price at which USAA REALCO
had independently agreed to purchase the Shares from other shareholders. On
December 20, 1996, after approval of the settlement of the shareholder
litigation, USAA REALCO closed the purchase of the 2,257,606 Shares, resulting
in USAA REALCO's current ownership of 3,182,206 Shares, or 31.82% of the
outstanding Shares of the Trust.
On December 18, 1996, the Trust entered into an agreement with USAA REALCO
contemplating the purchase by USAA REALCO of certain outstanding indebtedness
of the Trust. This agreement set forth the modifications which would occur if
USAA REALCO acquired the indebtedness, including the right to convert the
principal amount of this indebtedness into Shares of the Trust at either $2.00
or $2.25 per share, depending upon the date of conversion. On February 26,
1997, USAA REALCO acquired this debt (see Note 14).
The closing sale price of the Trust's Shares on the New York Stock
Exchange on the above dates was as follows: $2.13 per share on November 25,
1996, $2.00 per share on December 18 and December 19, 1996, $1.88 per share on
December 20, 1996, and $2.38 per share on February 26, 1997.
NOTE 8 -- LITIGATION:
During 1996, the Trust concluded two significant litigation matters (see
Notes 4 and 7). Although the Trust is not currently involved in any significant
litigation, the Trust may, on occasion and in the normal course of business, be
involved in legal actions relating to the ownership and operations of its
properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a materially
adverse effect on the consolidated financial position of the Trust.
F-11
<PAGE> 45
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- RETIREMENT AND PROFIT SHARING PLAN:
During 1993, the Trust adopted a retirement and profit sharing plan which
qualifies under section 401(k) of the Internal Revenue Code. All existing Trust
employees at adoption and subsequent employees who have completed six months of
service are eligible to participate in the plan. Subject to certain
limitations, employees may contribute up to 15% of their salary. The Trust may
make annual discretionary contributions to the plan. Contributions by the Trust
related to the years ended December 31, 1996, 1995 and 1994 were $30,000,
$25,000 and $20,000, respectively.
NOTE 10 -- OPERATING LEASES:
The Trust's properties are leased to others under operating leases with
expiration dates ranging from 1997 to 2011. Future minimum rentals on
noncancellable tenant leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997 $ 7,592,000
1998 6,179,000
1999 4,328,000
2000 2,844,000
2001 2,091,000
Thereafter 2,217,000
-------------
$ 25,251,000
=============
</TABLE>
NOTE 11 -- DISTRIBUTIONS:
The Trust's distributions of $363,000 ($0.04 per share) in 1996 and
$364,000 ($0.04 per share) in 1995 represent a return of capital to
shareholders (to the extent of the shareholder's basis in the Shares.) The
Trust did not pay any distributions in 1994.
NOTE 12 -- PER SHARE DATA:
Per share data is based on a weighted average number of Shares outstanding
of 9,108,241 for the year ending December 31, 1996 and 9,075,400 or the years
ended December 31, 1995 and 1994.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
Accounts receivable, accounts payable and accrued expenses and other
liabilities are carried at amounts that reasonably approximate their fair
values. The fair values of the Trust's mortgage notes payable are estimated
using discounted cash flow analyses, based on the Trust's incremental borrowing
rates for similar types of borrowing arrangements. The carrying values of such
mortgage notes payable reasonably approximate their fair values.
NOTE 14 -- SUBSEQUENT EVENT:
On February 26, 1997, USAA REALCO, a shareholder owning 31.8% of the
outstanding Shares in the Trust, purchased outstanding indebtedness of the
Trust totaling $9,419,213 pursuant to an earlier agreement with the Trust (see
Note 7). USAA REALCO and the Trust then entered into an agreement modifying the
terms of the indebtedness. The amount of the outstanding debt was reduced from
$9,419,213 to $7,040,721, allowing the Trust to recognize an extraordinary gain
on extinguishment of debt (including accrued interest) of $2,643,000 in the
first quarter of 1997. The Trust made an immediate principal reduction on the
modified notes of $1,591,103, leaving an outstanding principal balance of
$5,449,618.
F-12
<PAGE> 46
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The terms of the modified notes provide for monthly payments of interest
at 8.8% and an extension in the maturity date from March 31, 1997 to December
31, 2000. In addition, USAA REALCO has the option to convert the principal
amount of the notes into Shares of the Trust at the conversion rate of $2.00
per share (if converted prior to December 31, 1997) or $2.25 per share (if
converted between December 31, 1997 and December 31, 2000). In order for USAA
REALCO to convert its debt into Shares, the shareholders must approve an
increase in the authorized Shares of the Trust. An increase in the authorized
Shares of the Trust requires approval by holders of two-thirds of the
outstanding Shares. In addition, the shareholders must approve the right of
USAA REALCO to convert its debt into Shares. The notes provide that if
shareholder approval of this conversion right is not approved by June 30, 1997,
interest on the debt will increase to the lesser of 18% or the highest lawful
rate effective July 1, 1997 and the full principal amount will become due and
payable on October 31, 1997. Management believes that the sale of one or more
properties would be required to satisfy this obligation in the event the notes
become due and payable.
The Trust anticipates shareholder approval for this transaction will be
received on or about June 30, 1997 and that USAA REALCO will convert the
principal amount of the debt into Shares of the Trust soon thereafter.
Therefore, the Trust currently anticipates it will reflect approximately
$1,022,000, representing the difference between the market trading price of
$2.38 per share on February 26, 1997 and the $2.00 conversion price, as
interest expense between February 26, 1997 and June 30, 1997. The date of
February 26, 1997 is used to measure market value as this is deemed to be the
date of issuance of the modified note, which contains the convertibility
option. This will result in additional interest expense of approximately
$272,000 in the first quarter of 1997 and approximately $750,000 in the second
quarter of 1997.
F-13
<PAGE> 47
SCHEDULE III
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
($000'S)
<TABLE>
<CAPTION>
INITIAL COST
ENCUM- ---------------------- WRITEDOWNS
BRANCES BUILDINGS & CAPITALIZED AND
DESCRIPTION AT 12/31/96 LAND IMPROVEMENTS IMPROVEMENTS RETIREMENTS ALLOWANCES
----------- ----------- ------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 2,775 $ 1,303 $ 5,213 $ 424 ($ 5) ($ 3,516)
Commerce Park............ 2,100 1,108 4,431 542 (2,014)
Gateway 5 & 6............ 2,850 935 3,741 693 (1,861)
Northgate II............. 5,175 2,153 8,612 758 (4,122)
Northview................ 2,194 658 2,631 38
Plaza Southwest.......... 3,375 1,312 5,248 979
Westchase................ 1,327 697 2,787 322 (74) (1,158)
Meridian................. 1,163 262 1,047
CALIFORNIA --
Huntington Drive......... 4,575 1,559 6,237 731
MARYLAND --
Patapsco................. 3,112 1,147 4,588 371 (1,250)
MINNESOTA --
Burnsville............... 1,927 761 3,045 443 (18) (1,563)
WISCONSIN --
Northwest Business
Park................... 1,278 1,296 5,184 762 (131)
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 11,946 6,799 27,194 4,383 (241)
TRUST HOME OFFICE.......... 31
------- ------- ------- ------- ----- --------
TOTAL............. $43,797 $19,990 $79,958 $10,477 ($469) ($15,484)
======= ======= ======= ======= ===== ========
<CAPTION>
GROSS AMT. CARRIED
AT DECEMBER 31, 1996
-----------------------------------------------
BUILDINGS & ACCUMULATED DATE OF DATE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ------- ------------ ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS --
Beltline Business Ctr.... $ 600 $ 2,819 $ 3,419 $ 1,320 1984 1985
Commerce Park............ 705 3,362 4,067 1,214 1984 1985
Gateway 5 & 6............ 563 2,945 3,508 1,208 1984-85 1985
Northgate II............. 1,329 6,072 7,401 2,365 1982-83 1985
Northview................ 658 2,669 3,327 215 1980 1993
Plaza Southwest.......... 1,312 6,227 7,539 1,737 1970-74 1985
Westchase................ 465 2,109 2,574 773 1983 1985
Meridian................. 262 1,047 1,309 35 1981 1995
CALIFORNIA --
Huntington Drive......... 1,559 6,968 8,527 2,004 1984-85 1985
MARYLAND --
Patapsco................. 897 3,959 4,856 1,155 1980-84 1985
MINNESOTA --
Burnsville............... 432 2,236 2,668 941 1984 1986
WISCONSIN --
Northwest Business
Park................... 1,296 5,815 7,111 1,668 1983-86 1986
RETAIL PROPERTY:
COLORADO --
Tamarac Square........... 6,799 31,336 38,135 9,307 1976-79 1985
TRUST HOME OFFICE.......... 31 31 31 N/A various
------- ------- ------- -------
TOTAL............. $16,877 $77,595 $94,472 $23,973
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this schedule.
F-14
<PAGE> 48
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO SCHEDULE III
DECEMBER 31, 1996
($000)
RECONCILIATION OF REAL ESTATE:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year .................. $101,897 $103,843 $103,710
Additions during period:
Improvements ............................... 982 752 1,024
Acquisitions ............................... -- 1,309 --
-------- -------- --------
102,879 105,904 104,734
Deductions during period:
Dispositions ............................... 8,407 3,402 --
Writedowns ................................. -- 600 650
Asset retirements .......................... -- 5 241
-------- -------- --------
Balance at end of year ........................ $ 94,472 $101,897 $103,843
======== ======== ========
</TABLE>
RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year .................. $ 23,441 $ 21,859 $ 19,315
Additions during period:
Depreciation expense for period ............ 2,577 2,479 2,622
-------- -------- --------
26,018 24,338 21,937
Deductions during period:
Accumulated depreciation of real estate
sold ......................................... 2,045 897 --
Asset retirements .......................... -- -- 78
-------- -------- --------
Balance at end of year ........................ $ 23,973 $ 23,441 $ 21,859
======== ======== ========
</TABLE>
TAX BASIS:
The income tax basis of real estate, net of accumulated tax depreciation, is
approximately $89,033 at December 31, 1996.
DEPRECIABLE LIFE:
Depreciation is provided by the straight-line method over the estimated useful
lives which are as follows:
<TABLE>
<S> <C>
Buildings and capital improvements ...................... 40 years
Tenant improvements ..................................... 10 years
</TABLE>
F-15
<PAGE> 49
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
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>
F-16
<PAGE> 50
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
<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>
F-17
<PAGE> 51
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-18
<PAGE> 52
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.
F-19
<PAGE> 53
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(unaudited)
Other Assets. Other assets consists primarily of deferred rent receivable,
prepaid leasing commissions and loan fees. Deferred rent receivable arises
as the Trust recognizes rental income, including contractual rent
increases or delayed rent starts, on a straight-line basis over the lease
term. The Trust has recorded deferred rent receivable of $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.
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.
F-20
<PAGE> 54
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(unaudited)
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 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-21
<PAGE> 55
AMERICAN INDUSTRIAL PROPERTIES REIT
ANNUAL MEETING TO BE HELD OCTOBER 29, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUST MANAGERS OF AMERICAN
INDUSTRIAL PROPERTIES REIT
The undersigned hereby appoints Charles W. Wolcott and Marc A. Simpson,
and each of them, jointly and severally, as Proxies, each with full power of
substitution, to vote all of the undersigned's common shares of beneficial
interest in the Trust, held of record on September 26, 1997, at the Annual
Meeting of Shareholders or at any postponements or adjournments thereof, on the
proposals set forth below and on the reverse side, as directed.
1. Approval of a one for five reverse share split.
|_| FOR |_| AGAINST |_| ABSTAIN
2. Approval of the amendment to the Employee and Trust Manager Incentive
Share Plan increasing the number of Common Shares authorized for issuance
under the Plan to an amount equal to 10% of the Trust's outstanding Common
Shares.
|_| FOR |_| AGAINST |_| ABSTAIN
3. Election of Trust Managers.
Nominees: Theodore R. Bigman, William H. Bricker, T. Patrick Duncan,
Robert E. Giles, Edward B. Kelley, Stanley J. Kraska, Jr.,
Russell C. Platt, Charles W. Wolcott
|_| FOR all Nominees |_| WITHHOLD AUTHORITY
(Instruction: To withhold authority to vote for any individual nominee,
strike a line through that nominee's name above.)
4. Ratification of selection of Ernst & Young LLP as independent auditors.
|_| FOR |_| AGAINST |_| ABSTAIN
5. Postponement or adjournment of the Annual Meeting for the solicitation of
additional votes, if necessary.
|_| FOR |_| AGAINST |_| ABSTAIN
6. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY
POSTPONEMENTS OR ADJOURNMENTS THEREOF.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH
THE DIRECTION MADE ABOVE AND ON THE REVERSE SIDE OF THIS PROXY CARD. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS ONE THROUGH
FIVE. THE PROXIES WILL VOTE WITH RESPECT TO THE SIXTH PROPOSAL ACCORDING
TO THEIR BEST JUDGMENT. Please sign exactly as your name appears on your
share certificate.
By signing and returning this Proxy, the undersigned acknowledges
receipt of the Notice of Annual Meeting and Proxy Statement delivered
herewith.
Dated , 1997
-------------------------
---------------------------------------
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.
