UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to ______
Commission File Number 1-9016
American Industrial Properties REIT
(Exact name of registrant as specified in its charter)
Texas 75-6335572
(State of organization) (I.R.S. Employer
Identification Number)
6220 North Beltline, Suite 205
Irving, Texas 75063
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code:
(972) 550-6053
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Shares of Beneficial Interest New York Stock Exchange
Par Value $0.10 Per Share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulations S-K is not contained
herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-
affiliates of the registrant was $23,750,000 as of February 27,
1997. The aggregate market value has been computed by
reference to the closing price at which the stock was sold on
the New York Stock Exchange on February 27, 1997.
10,000,000 Shares of Beneficial Interest were outstanding
as of February 27, 1997.
AMERICAN INDUSTRIAL PROPERTIES REIT
For The Year Ended December 31, 1996
TABLE OF CONTENTS
FORM 10-K
Securities and Exchange Commission Item Number and Description
Page
PART I.
Item 1.Business 1
General 1
Business Objectives and Strategy 2
Recent Developments 2
Revenue and Loss from Real Estate Operations 3
Geographic Analysis of Revenue 4
Competition 4
Employees 4
Item 2.Properties 4
Item 3.Legal Proceedings 8
Item 4.Submission of Matters to a Vote of Shareholders11
PART II.
Item 5.Market for Registrant's Common Equity and
Related Shareholder Matters 11
Item 6.Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Results of Operations 12
Liquidity and Capital Resources 15
Item 8.Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 16
PART III.
Item 10. Trust Managers and Executive Officers
of the Trust 17
Item 11.Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management 20
Item 13. Certain Relationships and
Related Transactions 21
PART IV.
Item 14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K 21
SIGNATURES 26
Index to Consolidated Financial Statements and
Financial Statement Schedule F-1
PART I.
ITEM 1. Business
General
American Industrial Properties REIT (the "Trust"), a Texas
real estate investment trust, was organized on September 26,
1985 by the issuance of 13,400 Shares of Beneficial Interest
(the "Shares"). On November 27, 1985, the Trust completed an
initial public offering and issued an additional 9,062,000
Shares and commenced operations. The Trust's investment
objective is to maximize the total return to its shareholders
through the acquisition, leasing, management and disposition of
industrial real estate properties.
The Trust is currently engaged in the operation of developed
industrial real estate properties and one retail real estate
property. The industrial properties are leased for office,
office-showroom, warehouse, distribution, research and
development, and light assembly purposes. The retail property
is leased to retail merchandise establishments, restaurants,
and a cinema. The Trust leases space in its properties to a
variety of tenants. No single tenant accounts for more than
10% of the Trust's consolidated gross revenue. On December 31,
1996, the Trust's portfolio consisted of twelve industrial
properties located in California, Maryland, Minnesota, Texas,
and Wisconsin, and one retail property, Tamarac Square, located
in Colorado. Rents and tenant reimbursements related to
Tamarac Square were approximately 29%, 30% and 31% of the
Trust's total revenues in 1996, 1995 and 1994, respectively.
The Trust was initially advised by an external advisor (the
"Advisor") under an advisory agreement that provided for the
payment of an annual advisory fee and reimbursements for
certain expenses as well as transaction fees for asset
acquisitions and dispositions. In June 1993, the Trust
terminated its agreement with the Advisor and converted to self-
administration. The name of the Trust was changed to American
Industrial Properties REIT and its ticker symbol on the New
York Stock Exchange was changed to "IND" to reflect the Trust's
industrial property focus. In October 1993, shareholders voted
to remove the finite life term of the Trust as contained in the
original Declaration of Trust, thereby making the Trust a
perpetual life entity.
As part of its initial capitalization in 1985, the Trust
issued $179,698,000 (face amount at maturity) of Zero Coupon
Notes due 1997 (the "Notes"). As part of its effort to retire
the outstanding Notes, which were accreting at 12%, the Trust
utilized net proceeds from property sales and issuance of
certain unsecured notes payable to reduce the amount of
outstanding Notes to $19,491,000 (face amount at maturity) at
December 31, 1993. On December 31, 1993, the Trust partially
in-substance defeased $12,696,000 (face amount at maturity) of
the outstanding Notes with proceeds from disposal of short term
investments. During the first half of 1994, the Trust
purchased $239,000 (face amount at maturity) of Notes and
submitted the Notes to the Trustee for cancellation. In
November 1994, $3,669,000 (face amount at maturity) of the
outstanding Notes were partially in-substance defeased with the
proceeds from a refinancing of certain of the Trust's
properties. In December 1994, the Trust purchased the
remaining non-defeased Notes outstanding of approximately
$2,887,000 (face amount at maturity) in the open market and
submitted the Notes to the Trustee for cancellation. As a
result of the 1994 defeasance, the liens securing the Notes on
each of the Trust's properties were released.
In connection with the retirement of certain Notes, the Trust
issued $53,234,000 in unsecured promissory notes in February
1992 to The Manufacturers Life Insurance Company ("MLI"). The
terms of these unsecured notes included an 8.8% fixed rate of
interest, semi-annual interest only payments commencing May
1993, the deferral of interest due prior to May 1993, full
principal maturity on November 27, 1997 and a mandatory
principal payment on or before November 27, 1993. On December
31, 1992, the Trust used $11,648,000 of the net sales proceeds
from its 1992 sales of real estate to make a principal and
interest payment on the 8.8% unsecured notes which included the
mandatory principal payment due November 27, 1993. See "Recent
Developments" below.
To further its business objectives and strategy, the Trust
may sell certain properties and reinvest such proceeds in
properties in targeted markets. In December 1993, the Trust
purchased an industrial distribution property in Dallas, Texas.
In February 1995, the Trust sold its industrial distribution
property in Ft. Lauderdale, Florida and in August 1995, the
Trust purchased an industrial distribution property in
Arlington, Texas. In November 1996 and December 1996, the
Trust sold industrial distribution properties in Seattle,
Washington and Minneapolis, Minnesota, respectively.
The Trust has historically qualified as a real estate
investment trust ("REIT") for federal income tax purposes and
intends to maintain its REIT qualification in the future. In
order to preserve its REIT status, the Trust must meet certain
criteria with respect to assets, income, and shareholder
ownership. In addition, the Trust is required to distribute at
least 95% of taxable income (as defined) to its shareholders.
Business Objectives and Strategy
With the settlement of the litigation described under "Recent
Developments" below and in "Item 3. Legal Proceedings" in 1996,
the Trust intends to pursue a growth strategy which will
maximize the total return to its shareholders. In February
1997, the Trust engaged Prudential Securities Incorporated as
its exclusive financial advisor to provide consultation and
advice on attracting debt and/or equity capital to implement
this strategy. The Trust intends to focus on the industrial
and light industrial sectors of the real estate market,
believing that these sectors are underserved and capable of
providing significantly higher returns than other more
competitive sectors. The Trust's growth strategy will focus on
major markets in the South and Southwest regions of the United
States, with the goal of achieving a significant presence in
the industrial markets of targeted cities. In pursuing its
growth strategy, the Trust intends to utilize research-driven
investment analysis, disciplined buy/sell decisions and state-
of-the-art operating systems.
The Trust presently intends to raise debt and equity capital
to fund its growth strategy through traditional mortgage debt
transactions and, in the event the Trust's shareholders approve
an increase in the authorized capital of the Trust, private
equity placements and/or public equity offerings.
Recent Developments
During 1996, the Trust settled two significant litigation
matters in which it was involved (see "Item 3. Legal
Proceedings"). The first matter, in which the Trust had
brought suit against MLI, was settled in May 1996. In
connection with the settlement, the Trust entered into a
Settlement Agreement whereby the Trust was granted the option
to repay the $45,239,000 principal amount due and owing under
the MLI Notes for $36,800,000 (the "Option Price"). In
addition, the notes became secured by first or second liens on
various properties owned by the Trust and by pledges of
ownership interests in certain Trust entities owning
properties. In accordance with the terms of the Settlement
Agreement, the Trust paid $5,200,000 to MLI to satisfy all
accrued interest through April 12, 1996, allowing the Trust to
recognize an extraordinary gain of $1,367,000 in the second
quarter of 1996. According to the Settlement Agreement,
$25,000,000 was to be paid on the Option Price by November 23,
1996. The remaining amount due could be extended to March 31,
1997 and to June 30, 1997 by the additional payment of $250,000
and $150,000, respectively. Through a mortgage financing in
November 1996 and the sale of two properties during November
and December 1996, the Trust made total payments of $31,350,000
on the Option Price. In accordance with the Settlement
Agreement, the Trust recorded an extraordinary gain on
extinguishment of debt (including certain accrued interest) in
the fourth quarter of 1996 of $4,443,000.
The second litigation matter, in which the Trust had filed a
lawsuit against a significant shareholder and the shareholder
had countersued the Trust and filed third party claims against
the existing Trust Managers, was settled in December 1996. The
settlement resulted in the acquisition by USAA Real Estate
Company ("USAA REALCO"), a subsidiary of United Services
Automobile Association, an insurance and financial services
company based in San Antonio, Texas, of the Shares owned by
this shareholder and certain other shareholders. USAA REALCO
also purchased the Trust's remaining 924,600 authorized but
unissued Shares in December 1996 for $2,542,650 or $2.75 per
share. USAA REALCO currently owns 3,182,206 Shares,
representing 31.82% of the total outstanding Shares of the
Trust.
In February 1997, USAA REALCO purchased the MLI Notes from
MLI. The notes were 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 approximately $2,643,000 in the first quarter
of 1997. At the time the notes were modified, the Trust made a
principal payment of $1,591,103, reducing the outstanding
principal amount to $5,449,618. According to the modification
terms, interest continues to accrue at 8.8%, payable monthly,
and the maturity of the notes is extended from March 31, 1997
to December 31, 2000. In addition, 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 of
the Trust. In addition, the shareholders must approve the
right of USAA REALCO to convert its debt into Shares. If the
shareholders approve the conversion right of USAA REALCO and
approve an increase in the authorized Shares of the Trust, and
USAA REALCO converts the modified notes into Shares prior to
December 31, 1997 at $2.00 per Share (assuming a principal
balance of $5,449,618), USAA REALCO will receive 2,724,809
Shares upon conversion, or 21.41% of the outstanding Shares
(assuming no other issuances of Shares). Upon such an event,
USAA REALCO will own approximately 46.42% of the outstanding
Shares. The notes provide that if shareholder approval of this
conversion right is not obtained 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.
Revenue and Loss from Real Estate Operations
The breakdown of revenue and loss from real estate operations
for each of the years ended December 31, 1996, 1995, and 1994
is as follows (in thousands):
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Rents and reimbursements from
unaffiliated tenants:
Industrial $8,012 $7,885 $7,639
Retail 3,308 3,525 3,441
Rents and tenant 11,320 11,410 11,080
reimbursements
Interest income 158 369 146
Total revenue 11,478 11,779 11,226
Property operating expenses (4,022) (3,851) (3,952)
Depreciation and amortization (2,909) (2,777) (3,133)
Interest expense and
amortization of original
issuediscount on Zero Coupon
Notes due 1997 (5,901) (6,485) (5,270)
Administrative expenses (3,378) (2,404) (2,532)
Provisions for possible losses
on real estate - (600) (650)
Loss from real estate
operations $(4,732) $(4,338) $(4,311)
</TABLE>
Geographic Analysis of Revenue
The geographic breakdown of the Trust's rents and tenant
reimbursements for each of the years ended December 31, 1996,
1995, and 1994 is as follows (in thousands):
<TABLE>
Market 1996 1995 1994
<S> <C> <C> <C>
Baltimore industrial $541 $577 $583
Dallas industrial(a) 2,863 2,575 2,259
Ft. Lauderdale industrial(b) - 71 384
Houston industrial 1,461 1,387 1,197
Los Angeles industrial 908 922 936
Milwaukee industrial 910 906 982
Minneapolis industrial(c) 805 824 721
Seattle industrial(d) 524 623 577
Denver retail 3,308 3,525 3,441
Total rents and tenant
reimbursements $11,320 $11,410 $11,080
_____________________
(a)One property was purchased in August 1995.
(b)The Ft. Lauderdale property was sold
in February 1995.
(c)One property was sold in December 1996.
(d)The Seattle property was sold in November 1996.
</TABLE>
Competition
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.
Employees
The Trust currently employs six people on a full-time basis.
Information regarding executive officers of the Trust is set
forth in "Item 10. Trust Managers and Executive Officers of the
Trust" of Part III of this Form 10-K and is incorporated herein
by reference.
ITEM 2. Properties
As of December 31, 1996, the Trust owned 13 real estate
properties consisting of 12 industrial developments and one
enclosed specialty retail mall. The Trust sold one industrial
property in each of February 1995, November 1996 and December
1996. The Trust purchased an industrial property in August
1995. A description of the properties owned by the Trust as of
December 31, 1996, as well as related leased occupancy and
mortgage indebtedness, is presented below.
Baltimore Industrial
Patapsco Industrial Center
Patapsco Industrial Center is a five-building, two phase
industrial park located in Linthicum Heights, Maryland, a
suburb of Baltimore. The project comprises approximately
95,000 square feet of net rentable space. As of December
31, 1996, leased occupancy was 86%.
Patapsco Industrial Center is subject to a mortgage with a
principal amount outstanding of $3,112,500 as of December
31, 1996.
Dallas Industrial
Beltline Business Center
Beltline Business Center consists of three industrial
buildings located in Irving, Texas, a suburb of Dallas, that
are 100% finished for office space and, together, comprise
approximately 61,000 square feet of net rentable space. The
Trust's corporate offices, comprising approximately 2,500
square feet of space, are located in this property. As of
December 31, 1996, leased occupancy (including space
utilized by the Trust) was 93%.
Beltline Business Center is subject to a mortgage with a
principal amount outstanding of $2,775,000 as of December
31, 1996.
Gateway 5 and 6
Gateway 5 and 6 consists of two industrial buildings
located in Irving, Texas comprising approximately 79,000
square feet of net rentable space. As of December 31, 1996,
leased occupancy was 100%.
Gateway 5 and 6 is subject to a mortgage with a principal
amount outstanding of $2,850,000 as of December 31, 1996.
Meridian Street Warehouse
The Meridian Street Warehouse, purchased in August 1995,
is an industrial distribution property in Arlington, Texas
comprising approximately 72,000 square feet of net rentable
space. As of December 31, 1996, leased occupancy was 100%.
The Meridian Street Warehouse is subject to a mortgage
with a principal amount outstanding of $1,162,500 as of
December 31, 1996.
Northgate II
Northgate II consists of four industrial buildings located
within a 21-building industrial park in Dallas, Texas. The
project consists of approximately 236,000 square feet of net
rentable space. As of December 31, 1996, leased occupancy
was 100%.
Northgate II is subject to a mortgage with a principal
amount outstanding of $5,175,000 as of December 31, 1996.
Northview Distribution Center
Northview Distribution Center consists of two industrial
buildings located in Dallas, Texas. The project consists of
approximately 175,000 square feet of net rentable space. As
of December 31, 1996, leased occupancy was 100%.
Northview Distribution Center is subject to a mortgage
with a principal amount outstanding of $2,194,000 as of
December 31, 1996.
Houston Industrial
Plaza Southwest
Plaza Southwest consists of five industrial buildings in
Houston, Texas comprising approximately 149,000 square feet
of net rentable space. As of December 31, 1996, leased
occupancy was 87%.
Plaza Southwest is subject to a mortgage with a principal
amount outstanding of $3,375,000 as of December 31, 1996.
Commerce Park
Commerce Park consists of two industrial buildings in
Houston, Texas comprising approximately 87,000 square feet
of net rentable space. As of December 31, 1996, leased
occupancy was 97%.
Commerce Park is subject to a mortgage with a principal
amount outstanding of $2,100,000 as of December 31, 1996.
Westchase Park
Westchase Park consists of two industrial buildings in
Houston, Texas comprising approximately 47,000 square feet
of net rentable space. As of December 31, 1996, leased
occupancy was 100%.
Westchase Park is subject to a mortgage with a principal
amount outstanding of $1,327,500 as of December 31, 1996.
Los Angeles Industrial
Huntington Drive Center
Huntington Drive Center consists of a two-story office
building and an industrial building comprising approximately
62,000 square feet of net rentable space located in
Monrovia, California, a suburb of Los Angeles. As of
December 31, 1996, leased occupancy was 100%.
Huntington Drive Center is subject to a mortgage with a
principal amount outstanding of $4,575,000 as of December
31, 1996.
Milwaukee Industrial
Northwest Business Park
Northwest Business Park consists of three industrial
buildings comprising approximately 143,000 square feet of
net rentable space located in Menomonee Falls, Wisconsin, a
suburb of Milwaukee. As of December 31, 1996, leased
occupancy was 87%. The Trust is currently soliciting offers
for the sale of Northwest Business Park. If an acceptable
offer is received, it is likely that the Trust will sell
this property during 1997.
Phase I of Northwest Business Park is subject to a
mortgage with a principal amount outstanding of $1,278,000
as of December 31, 1996.
Minneapolis Industrial
Burnsville
Burnsville consists of one industrial building comprising
approximately 46,000 square feet of net rentable space
located in Burnsville, Minnesota, a suburb of Minneapolis.
As of December 31, 1996, leased occupancy was 100%. The
Trust is currently soliciting offers for the sale of
Burnsville and anticipates a sale of this property in the
first quarter of 1997.
Burnsville is subject to a mortgage with a principal
amount outstanding of $1,927,000 as of December 31, 1996.
Denver Retail
Tamarac Square
Tamarac Square, located in Denver Colorado, consists of an
enclosed specialty retail mall of approximately 139,000 net
rentable square feet with an adjacent convenience center of
approximately 33,000 net rentable square feet, two free-
standing buildings of approximately 8,000 net rentable
square feet each, a separate free-standing building of
approximately 9,000 net rentable square feet and two ground
leases comprising approximately 4.91 acres. During 1993,
the Trust completed a $2 million renovation of Tamarac
Square. As of December 31, 1996, leased occupancy was 87%.
Tamarac Square is subject to a mortgage with a principal
amount outstanding of $11,946,000 as of December 31, 1996.
The Trust has been notified of the existence of limited
underground petroleum based contamination at a portion of
Tamarac Square. The source of the contamination is
apparently related to underground storage tanks ("USTs")
located on adjacent property. The owner of the adjacent
property has agreed to remediate the property to comply with
state standards, and has indemnified the Trust against costs
related to its sampling activity. The responsible party for
the adjacent USTs has submitted a corrective Action Plan to
the Colorado Department of Public Health and Environment.
Implementation of the plan is ongoing. The responsible
party is negotiating to obtain access agreements from
impacted landowners, including the Trust.
ITEM 3. Legal Proceedings
The Manufacturers Life Insurance Company
On May 1, 1995, the Trust filed a lawsuit against The
Manufacturers Life Insurance Company ("MLI"), the holder of the
Trust's $45,239,000 8.8% unsecured notes payable, in the 134th
Judicial District Court in Dallas, Texas. The suit alleged
that MLI, which on April 21, 1995, had declared the Trust in
default for non-monetary violations of the Note Purchase
Agreement, had breached the Note Purchase Agreement between MLI
and the Trust and had unlawfully sought to coerce the Trust
into relinquishing certain of its rights. Specifically, the
suit alleged, among other things, that MLI and certain other
entities had engaged in acts of bad faith and conspiracy in an
attempt to force the Trust to consent to the transfer of the
Trust's notes held by MLI to a third party. The suit was
subsequently amended to name Fidelity Management and Research
Company, Fidelity Galileo Fund L.P., Belmont Capital Partners
II, L.P., Fidelity Puritan Trust, and Fidelity Management Trust
Company (together, the "Fidelity Entities") as additional
defendants and to specify damages to the Trust of up to
$20,000,000, plus an unspecified amount for punitive damages.
Based on the facts surrounding this lawsuit, the Trust
elected not to make a scheduled semi-annual interest payment on
May 27, 1995. MLI thereafter declared the entire principal
amount and all accrued interest on the unsecured notes due and
payable and began accruing interest, effective June 13, 1995,
at the 11.7% default rate specified in the Note Purchase
Agreement. On October 3, 1995, The Manufacturers Life
Insurance Company (U.S.A.), Inc. ("MLI-USA") intervened in the
lawsuit asserting ownership of one of the notes. On the same
day, MLI and MLI-USA filed counterclaims against the Trust
seeking recovery of all amounts due under the notes.
Effective May 22, 1996, the Trust settled this lawsuit and
entered into a Settlement Agreement whereby the Trust was
granted the option to repay the $45,239,000 principal amount
due and owing under the MLI Notes for $36,800,000 (the "Option
Price"). In addition, the notes became secured by first or
second liens on various properties owned by the Trust and by
pledges of ownership interests in certain Trust entities owning
properties. In accordance with the terms of the Settlement
Agreement, the Trust paid $5,200,000 to MLI to satisfy all
accrued interest through April 12, 1996, allowing the Trust to
recognize an extraordinary gain of $1,367,000. According to
the Settlement Agreement, $25,000,000 was to be paid on the
Option Price by November 23, 1996. The remaining amount due
could be extended to March 31, 1997 and to June 30, 1997 by the
additional payment of $250,000 and $150,000, respectively.
Through a mortgage financing in November 1996 and the sale of
two properties during November and December 1996, the Trust
made total payments of $31,350,000 on the Option Price. In
accordance with the Settlement Agreement, the Trust recorded an
extraordinary gain on extinguishment of debt (including certain
accrued interest) in the fourth quarter of 1996 of $4,443,000.
In February 1997, these notes were purchased by USAA REALCO
(see " Item 1. Recent Developments").
Paul O. Koether and Pure World, Inc.
On January 8, 1996, the Trust filed a lawsuit in federal
court in Dallas, Texas, against Pure World, Inc. and Paul O.
Koether, significant shareholders in the Trust. The suit
alleged, among other things, violations under federal and state
securities law for material misrepresentations and omissions
made by the defendants in filings made with the Securities and
Exchange Commission, including the failure to disclose meetings
and correspondence between the defendants and MLI regarding the
proposed purchase of the MLI Notes. The Trust sought
injunctive relief preventing future discussions with MLI
regarding the purchase of the MLI Notes, further attempts to
gain control of the Trust by the defendants and any further
purchases of Shares of the Trust by the defendants until proper
disclosures were made. In addition, the Trust sought a
declaratory judgment regarding enforcement of the share
ownership restrictions contained in the Trust's Bylaws and
injunctive relief preventing the voting of Shares accumulated
in excess of the share ownership limitations contained in the
Bylaws. The Trust also sought recovery of distributions paid
on Shares accumulated in excess of these share ownership
limitations.
On January 30, 1996, the defendants filed an answer,
counterclaims and third party claims against the existing Trust
Managers of the Trust. In their counterclaims and third party
claims, the defendants requested that certain Bylaw amendments
be stricken, that the court issue an injunction until an
additional independent Trust Manager is appointed, that a
receiver be appointed for the assets and business of the Trust,
that the Trust recover certain funds from the Trust Managers,
and that the defendants recover an unspecified amount of
damages and attorneys' fees. The Trust filed a motion to
dismiss, which the court granted in part, requiring the
defendants to replead their counterclaim.
On February 22, 1996, a separate class action and derivative
complaint was filed against the Trust and its existing Trust
Managers by Robert Strougo, a shareholder of the Trust. The
suit alleged, among other claims, interference with
shareholders' franchise rights and breach of fiduciary duty and
sought recovery of unspecified damages and attorneys' fees.
The Court later granted the Trust's and the Trust Managers'
motion to dismiss the class action claim, ruling that such
claim was improper. In April 1996, the remaining shareholder
derivative claims of this litigation were consolidated with the
Pure World litigation.
On March 26, 1996, the Court denied Pure World's motion for
partial summary judgment to appoint a receiver for the Trust.
On September 9, 1996, the Court granted Pure World's motion for
partial summary judgment, ruling that the provisions of Article
IX of the Trust's Bylaws limiting share ownership to 9.8% of
the Trust's Shares were invalid under the Texas REIT Act.
On November 26, 1996, the Trust and the Trust Managers
entered into a settlement resolving the litigation, pending
Court approval. The Trust Managers believed that the
settlement was in the best interests of the Trust and its
shareholders because the settlement and dismissal of the
shareholder litigation avoided further expense, disposed of
burdensome and potentially protracted litigation, permitted
continued operation of the business of the Trust unhindered by
the distractions, interference and expense of litigation and
terminated all controversy involving the settled claims. The
Trust Managers further believed that the settlement would
enhance the Trust's ability to obtain additional equity capital
to allow the Trust to pursue its growth strategy, with a view
to increasing shareholder value. The Trust and the Trust
Managers denied any wrongdoing on their respective parts and
their participation in the settlement did not constitute any
admission to the contrary.
As approved by the Court on December 19, 1996, the terms of
the settlement provided for the following:
1. The Trust and/or the Trust Managers caused the Bylaws of
the Trust to be amended as follows: (a) to provide that Trust
Manager nominees who have not been previously elected as Trust
Managers by the shareholders of the Trust (as well as Trust
Managers who have been previously elected as Trust Managers by
the shareholders of the Trust) shall be elected at the annual
meeting of shareholders by the affirmative vote of the holders
of a majority of the outstanding Shares of the Trust; (b) to
provide that a vacancy on the Board of Trust Managers may be
filled by a majority of the remaining Trust Managers, though
less than a quorum, or by vote of the holders of a majority of
the outstanding Shares of the Trust; (c) to provide that the
cash compensation of a Trust Manager shall not be increased by
more than 20% over the prior year without the approval of the
holders of a majority of the Shares at the annual meeting of
shareholders of the Trust; (d) to provide that in the event
the Trust receives an offer to purchase all or substantially
all of the assets of the Trust, or if the Trust receives a
proposal for a merger transaction in which the Trust will not
be the surviving entity, the Board of Trust Managers will
create a committee consisting entirely of Independent Trust
Managers (as defined in the Trust's Declaration of Trust) who
shall, consistent with their fiduciary duties, review any such
offer and make a recommendation to the Board of Trust Managers;
(e) to provide that when making a determination of whether to
declare a dividend, the Trust Managers shall make their
decision consistent with their fiduciary duties as Trust
Managers; and (f) to provide that each of the foregoing
provisions may be amended only by the vote of the holders of a
majority of the outstanding Shares of the Trust.
2. The Trust Managers repealed Article XIII of the Bylaws,
and will repeal Article IX of the Bylaws, limiting share
ownership to 9.8%, not later than December 1, 1997. In the
event the Trust Managers desire to retain a 9.8% limitation on
share ownership, the Trust Managers shall present a proposal to
the Trust's shareholders to amend the Declaration of Trust to
provide for a 9.8% limitation on share ownership consistent
with industry standards.
3. The Trust increased the number of Trust Managers on the
Board of Trust Managers to five, with the additional two Trust
Managers being Independent Trust Managers, as defined in the
Trust's Declaration of Trust. Pursuant to the terms of the
Share Purchase Agreement dated December 13, 1996 (the "USAA
Share Purchase Agreement"), by and between the Trust and USAA
REALCO, the Trust Managers unanimously voted to appoint Edward
B. Kelley and T. Patrick Duncan to fill the vacancies created
by the increase in the number of Trust Managers
4. In connection with the settlement, USAA REALCO purchased
all Shares of the Trust previously held by Pure World, Jonathan
Tratt, Stanley D.I. Horwitz, David Bradley, Keith Sexton and
C.J. Scott in privately negotiated transactions. All Shares
previously held by Black Bear Realty, Ltd. and Turkey Vulture
Fund XIII, Ltd., affiliates of Richard Osborne (the "Osborne
Shares") (totaling 998,100 Shares), were purchased by the Trust
through American Industrial Properties REIT, Inc., a Maryland
corporation and affiliate of the Trust ("AIP Inc.") for an
aggregate price of $2,744,775 ($2.75 per share). The proceeds
of a loan to AIP Inc. from USAA REALCO were utilized to acquire
the Osborne Shares, which loan was evidenced by a Promissory
Note dated November 25, 1996, by AIP Inc. for the benefit of
USAA REALCO. The Trust satisfied the loan from USAA REALCO
under the terms of the Promissory Note by transferring the
Osborne Shares to USAA REALCO in December 1996 and paying
$17,106 in accrued interest. Under the terms of the Promissory
Note, interest accrued on a daily basis for 60 days from the
inception of the note at a rate equal to 9% per annum. All of
the above entities selling Shares to USAA REALCO or AIP Inc.,
along with Messrs. Koether and Osborne, have agreed not to
purchase any of the Trust's Shares or otherwise attempt to
influence the Trust or its shareholders for a period of five
(5) years.
5. Pure World was also paid $825,000 in consideration for
the releases and standstill agreement given by Pure World and
Mr. Koether in connection with the Settlement Agreement, for
the undertaking of Pure World to sell its Shares of the Trust
to USAA REALCO, and for attorneys' fees incurred by Pure World
in connection with this litigation and prior disputes. The
Trust also paid Pure World all dividends previously withheld
from Pure World, plus accrued interest. Pure World's counsel
applied with the Court for, and was granted, an award of
attorneys' fees and expenses in the amount of $390,000, which
amount was included in the $825,000 total. AIP Inc. also paid
$25,000 to Black Bear Realty, Ltd. and other affiliates of Mr.
Osborne in consideration of the standstill agreement given upon
transfer of the Osborne Shares.
6. Strougo's counsel applied to the Court for, and was
granted, an award of attorneys' fees of $120,000, and
reimbursement of expenses incurred in connection with this
litigation in the amount of $10,000.
7. The liability insurer providing director and officer
insurance for the Trust Managers reimbursed the Trust $625,000
for amounts paid to Pure World and Strougo in settlement of
this litigation.
8. While final approval of the settlement was pending, the
Court stayed the shareholder litigation and the effect of its
November 12, 1996 order granting Pure World's application for
preliminary injunction (except as to Shares acquired between
September 9, 1996 and November 20, 1996). In connection with
approving the Settlement, the Court dissolved the injunction.
ITEM 4. Submission of Matters to a Vote of Shareholders
Due to the pending settlement of the Trust's litigation with
Paul Koether, Pure World, Inc. and Robert Strougo described
above, the Trust canceled its Annual Meeting of Shareholders
scheduled for December 18, 1996. It is anticipated that the
meeting will be rescheduled during the second quarter of 1997.
PART II.
ITEM 5. Market for Registrant's Common Equity and Related
Shareholder Matters
The Trust's Shares are listed and traded on the New York
Stock Exchange (the "NYSE") under the symbol "IND". The
following table sets forth for the periods indicated the high
and low closing sales price of the Trust's Shares, and the cash
distributions declared per Share:
<TABLE>
<S> <C> <C> <C>
Quarter Ended High Low Distributions
December 31, 1996 2 3/8 1 7/8 $.00
September 30, 1996 2 1 5/8 .00
June 30, 1996 1 7/8 1 3/8 .00
March 31, 1996 2 1/4 1 3/8 .04
December 31, 1995 2 1/2 1 5/8 .04
September 30, 1995 2 1 3/8 .00
June 30, 1995 1 5/8 1 1/8 .00
March 31, 1995 1 1/2 1 1/4 .00
</TABLE>
A distribution of $0.04 per share was declared on October 2,
1995, payable on October 23, 1995 to shareholders of record on
October 11, 1995 and a distribution of $0.04 per share was
declared on January 22, 1996, payable on February 13, 1996 to
shareholders of record on February 2, 1996. The Trust's
litigation settlement with The Manufacturers Life Insurance
Company in May 1996 (see "Item 3. Legal Proceedings") prohibits
the Trust from making distributions while the agreement is in
place. The modified notes owned by USAA REALCO provide that
the Trust may not make distributions until the debt is paid in
full; however, this restriction terminates in the event the
shareholders approve USAA REALCO's conversion right and approve
an increase in the authorized Shares of the Trust, or if USAA
REALCO, in its sole discretion, permits distributions to be
made prior to the modified notes being fully paid. To the
extent allowable, the Trust intends to evaluate future
distributions on a quarterly basis.
On December 19, 1996, the Trust sold its remaining
authorized, but previously unissued Shares (924,600 Shares) in
a private placement to USAA REALCO for an aggregate sales price
of $2,542,650 ($2.75 per share). This transaction was
determined to be exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, because the sale of the
unissued Shares by the Trust to USAA REALCO did not involve a
public offering.
As of February 27, 1997, the closing sale price per Share on
the NYSE was $2.375. On such date, there were 10,000,000
outstanding Shares held by 1,748 shareholders of record.
ITEM 6. Selected Financial Data
The following table sets forth selected financial data for
the Trust and its subsidiaries for each of the five years in
the period ended December 31, 1996. This information should be
read in conjunction with the discussion set forth in "Item 7.
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 Form 10-K.
<TABLE>
Year Ended December 31,
1996 1995 1994 1993 1992
(in thousands except share and per share data)
<S> <C> <C> <C> <C> <C>
Operating data:
Total revenues $11,478 $11,779 $11,226 $10,641 $15,139
Loss from real estate (4,732) (4,338) (4,311) (5,121) (18,719)
operations(a)
Net income (loss)(a) 1,255 (4,584) (4,655) (7,867) (17,593)
Per share:
Loss from real estate
operations(a) $(0.52) $(0.48) $(0.47) $(0.57) $(2.06)
Net income (loss)(a) 0.14 (0.51) (0.51) (0.87) (1.94)
Distributions paid 0.04 0.04 - 0.16 0.20
Balance sheet data:
Total assets $78,936 $89,382 $92,550 $88,297 $110,446
Total debt 53,216 62,815 65,613 57,078 68,578
Shareholders' equity 22,683 19,248 24,196 28,851 38,171
(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.
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with
"Item 6. Selected Financial Data" and the Consolidated
Financial Statements of the Trust and accompanying Notes
included elsewhere in this Form 10-K. The statements contained
in this report that are not historical facts are forward-
looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results
may differ materially from those included in the forward-
looking statements. These forward-looking statements involve
risks and uncertainties including, but not limited to, changes
in general economic conditions in the markets that could impact
demand for the Trust's properties and changes in financial
markets and interest rates impacting the Trust's ability to
meet its financing needs and obligations.
Results of Operations
Comparison of 1996 to 1995
The sale of two properties in late 1996 and the purchase of a
property in August 1995 affected the 1996 operating results
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 from lower
percentage rents 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 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 higher repairs and maintenance expenses and tenant
refit costs in 1996.
Loss from real estate 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 (due to the larger accrual of default rate interest on
the MLI Notes in 1995), the provision of $600,000 for possible
losses on real estate in 1995, an increase in litigation,
refinancing and proxy costs (due to the shareholder litigation
in 1996), an increase in Trust administration and overhead
expenses (due to the accrual at year end 1996 of incentive
compensation) 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. See "Item 3. Legal
Proceedings."
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 real estate 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 the accrual of $369,000 of default
rate interest which was ultimately forgiven and which would not
be reflected on a recurring basis. 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.
Cash flow provided by investing activities in 1996 was
$5,173,000, representing proceeds from the sale of two
properties and amounts expended on capitalized improvements and
leasing commissions. The sale of the two properties was
necessary to raise capital with which to make payments under
the Trust's option to retire certain indebtedness at a
discount.
Cash flow used in financing activities in 1996 was
$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 Shares to USAA REALCO, and the first quarter distribution to
shareholders.
Funds from Operations
In March 1995, the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") issued its White Paper on
Funds from Operations ("FFO") which clarified the treatment of
certain items in determining FFO and recommended additional
supplemental disclosures. The Trust has adopted the
recommendations of NAREIT and restated its FFO calculation for
prior years. The changes promulgated by NAREIT eliminate the
add back of depreciation and amortization of non-real estate
items, including the amortization of deferred financing costs,
in determining FFO. The revised definition of FFO is net
income (loss) computed in accordance with generally accepted
accounting principles, excluding gains or losses from debt
restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. In addition,
NAREIT recommends that extraordinary items or significant non-
recurring items that distort comparability should not be
considered in arriving at FFO. Accordingly, the Trust does not
include the default rate interest accrued on its $45.2 million
in unsecured notes payable in the determination of FFO. Funds
Available for Distribution ("FAD") is also presented as it more
accurately portrays the ability of the Trust to make
distributions because it reflects capital expenditures.
Neither FFO or FAD should be considered an alternative to net
income as an indicator of the Trust's operating performance or
to cash flows from operations as a measure of liquidity.
FFO and FAD are calculated as follows:
<TABLE>
Year Ended December 31,
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Net income (loss) $1,255 $(4,584) $(4,655)
Exclude effects of:
Extraordinary (gain) loss on
extinguishment of debt (5,810) 55 -
(Gain) loss on sales of
real estate (177) 191 -
Provision for possible
losses on real estate - 600 650
Real estate depreciation
and amortization 2,890 2,771 3,102
Default rate interest 369 724 -
Extraordinary loss on partial
in-substance defeasance
of Zero Coupon Notes - - 344
Funds from Operations $(1,473) $(243) $(559)
Funds from Operations $(1,473) $(243) $(559)
Capitalized improvements and
leasing commissions(a) (1,372) (1,023) (1,476)
Non-cash effect of straight-
line rents on FFO 193 161 156
Funds Available for
Distribution $(2,652) $(1,105) $(1,879)
Weighted average Shares
outstanding 9,108.2 9,075.4 9,075.4
</TABLE>
______________________________________________
(a) The breakdown of capitalized improvements and
leasing commissions is as follows for each of the two
years ending December 31, 1996:
<TABLE>
FYE 12/31/96 FYE 12/31/95
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.
As described in "Item 3. Legal Proceedings," the Trust
settled its MLI litigation in May 1996 and paid $5,200,000 in
settlement of all past due interest on the MLI Notes, thereby
allowing the Trust to record an extraordinary gain of
$1,367,000. The Trust was also granted an option to repay the
approximate $45,239,000 in principal amount outstanding on the
MLI Notes for $36,800,000 (the "Option Price"). In November
1996, the Trust completed a mortgage financing on nine
properties in the amount of $26,453,000. Net proceeds of
$24,805,000 were applied to the Option Price. In addition, the
Trust sold two properties during the fourth quarter of 1996,
generating net proceeds of $6,545,000 which were also applied
to the Option Price. In accordance with the Settlement
Agreement, $4,220,000 in debt was forgiven, allowing the Trust
to record an extraordinary gain of $4,443,000 (including
accrued interest forgiven). As detailed in "Item 1. Recent
Developments," these notes were purchased by USAA REALCO in
February 1997. USAA REALCO has the option to convert the
principal amount of these 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), assuming shareholder
approval of this conversion right and approval of an increase
in the authorized Shares of the Trust. If conversion of this
debt were to occur in 1997, USAA REALCO would own approximately
46.4% of the outstanding Shares of the Trust.
The Trust declared a distribution of $0.04 per Share in
February 1996. The Settlement Agreement related to the MLI
litigation, signed in May 1996, prohibits the payment of
distributions while the agreement is in effect. The modified
notes owned by USAA REALCO provide that the Trust may not pay
distributions until the debt is paid in full; however, this
restriction terminates in the event the shareholders approve
USAA REALCO's conversion right and approved an increase in the
authorized Shares of the Trust or if USAA REALCO, in its sole
discretion, permits distributions to be paid prior to the
modified notes being fully paid. Should the notes be converted
to equity as described above, this restriction will be removed.
To the extent allowable, the Trust intends to evaluate future
distributions on a quarterly basis.
The Trust currently has borrowings secured by mortgages on
the Trust's properties totaling $43,797,000. Of this amount,
approximately $1,927,000 represents variable rate financing
with a weighted average interest rate of 10.25% and $41,870,000
represents fixed rate financing with a weighted average
interest rate of 8.61%. The overall weighted average interest
rate on the Trust's mortgage debt is 8.68%. Annual debt
service on these borrowings amounts to $4,452,000 and principal
maturity during 1997 will approximate $675,000.
The nature of the Trust's operating properties, which
generally provide for leases with a term of between three and
five years, results in an approximate turnover rate of 20% to
25% of the Trust's tenants and related revenue annually. Such
turnover requires capital outlays related to tenant
improvements and leasing commissions in order to maintain or
improve the Trust's occupancy levels. These costs amounted to
$1,372,000 in the year ended December 31, 1996 and $1,023,000
in the year ended December 31, 1995. These costs have
historically been funded out of the Trust's operating cash flow
and cash reserves. The Trust has made no commitments for
additional capital expenditures beyond those related to normal
leasing and releasing activity and related escrows. No capital
improvements or renovations of significance are anticipated in
the near future for any of the Trust's properties, with the
possible exception of a large retail lease at the Trust's
retail property. Such a lease, if agreed to, could result in
expenditures for tenant improvements in excess of $500,000.
ITEM 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are listed in
the Index to Financial Statements and Financial Statement
Schedule appearing on Page F-1 of this Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III.
ITEM 10. Trust Managers and Executive Officers of the Trust
The persons who serve as Trust Managers and executive
officers of the Trust, their ages and their respective
positions are as follows:
<TABLE>
<S> <C> <C>
Name Age Position(s) and Office(s) Held
William H. Bricker 65 Trust Manager
T. Patrick Duncan 48 Trust Manager
Robert E. Giles 49 Trust Manager
Edward B. Kelley 54 Trust Manager
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 and Chief
Operating Officer
</TABLE>
William H. Bricker, Trust Manager. Mr. Bricker has
served as a Trust Manager since September 1985. Mr.
Bricker has served as President of DS Energy Services
Incorporated and has consulted in the energy field and
international trade since 1987. In May 1987, Mr. Bricker
retired as the Chairman and Chief Executive Officer of
Diamond Shamrock Corporation where he held various
management positions from 1969 through May 1987. Mr.
Bricker is a 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, Trust Manager. Mr. Duncan was
appointed a Trust Manager on December 20, 1996. Mr.
Duncan has been employed by USAA Real Estate Company
since 1986 and currently serves as Senior Vice President
of Real Estate Operations. Mr. Duncan is a director of
USAA Income Investments I and II, USAA Real Estate
Limited Partnerships III and IV and Meridian Industrial
Trust. Mr. Duncan is also a member of the board of
various civic entities in San Antonio, Texas. Mr. Duncan
received degrees from the University of Arizona in
accounting and finance and is a certified public
accountant.
Robert E. Giles, Trust Manager. Mr. Giles was
appointed as a Trust Manager on March 15, 1996. Mr.
Giles is currently the owner and President of Robert E.
Giles Interests, Inc., a real estate consulting and
development firm. 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
holds Bachelor and Master's degrees from the University
of Texas at Austin and the University of Texas at
Arlington, respectively.
Edward B. Kelley, Trust Manager. Mr. Kelley was
appointed a Trust Manager on December 20, 1996. Mr.
Kelley has been President of USAA Real Estate Company
since 1989. Mr. Kelley is a director of USAA Income
Investments I and II and USAA Real Estate Limited
Partnerships III and IV. Mr. Kelley is also a member of
the Board of Trustees of St. Mary's University as well as
various civic entities in San Antonio, Texas and is a
past member of the Board of La Quinta Motor Inns, Baptist
Memorial Hospital System and the National Association of
Industrial and Office Parks. Mr. Kelley received a
Bachelor of Business Administration degree from St.
Mary's University in 1964 and a Master of Business
Administration degree from Southern Methodist University
in 1967. Mr. Kelley is also a Member of the Appraisal
Institute (MAI).
Charles W. Wolcott, Trust Manager, President and Chief
Executive Officer. Mr. Wolcott was hired as the
President and Chief Executive Officer of the Trust in May
1993 and has served as a Trust Manager since August 1993.
Mr. Wolcott was President and Chief Executive Officer for
Trammell Crow Asset Services, a real estate asset and
portfolio management affiliate of Trammell Crow Company,
from 1990 to 1992. He served as Vice President and Chief
Financial and Operating Officer of the Trust from 1988 to
1991. From 1988 to 1990, Mr. Wolcott was a partner in
Trammell Crow Ventures Operating Partnership. Prior to
joining the Trammell Crow Company in 1984, Mr. Wolcott
was President of Wolcott Corporation, a firm engaged in
the development and management of commercial real estate
properties. Mr. Wolcott graduated from the University of
Texas at Austin in 1975 with a Bachelor of Science degree
and received a Master of Business Administration degree
from Harvard University in 1977.
Marc A. Simpson, Vice President and Chief Financial
Officer, Secretary and Treasurer. Mr. Simpson was hired
as the Vice President and Chief Financial Officer,
Secretary and Treasurer of the Trust in March 1994. From
November 1989 to March 1994, Mr. Simpson was a Manager in
the Financial Advisory Services group of Coopers &
Lybrand L.L.P. Prior to that time, he served as
Controller of Pacific Realty Corporation, a real estate
development company. Mr. Simpson graduated with a
Bachelor of Business Administration degree from
Midwestern State University in 1978, and received a
Master of Business Administration degree from Southern
Methodist University in 1990.
David B. Warner, Vice President and Chief Operating
Officer. Mr. Warner was hired as Vice President and
Chief Operating Officer of the Trust in May 1993. From
1989 through the date of his accepting a position with
the Trust, Mr. Warner was a Director 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.
In December 1996, the Trust increased the number of Trust
Managers on the Board of Trust Managers to five, with the
additional two Trust Managers being Independent Trust Managers,
as defined in the Trust's Declaration of Trust. Pursuant to
its Share Purchase Agreement with the Trust, USAA REALCO
requested that Edward B. Kelley and T. Patrick Duncan be
appointed Trust Managers. On December 20, 1996, the Trust
Managers unanimously voted to appoint Messrs. Kelley and Duncan
to fill the vacancies created by the increase in the number of
Trust Managers.
The Trust Managers hold office until their successors, if
any, are duly elected and qualified or until the earlier of
their death, resignation or removal. Executive officers of the
Trust serve at the discretion of the Board of Trust Managers.
The Trust Managers have appointed two committees, the Audit
Committee and the Compensation Committee. Both the Audit and
Compensation Committees include only Trust Managers who are
independent of management and who are free from any
relationship that would interfere with the exercise of their
independent judgment. The Audit Committee appoints the
independent public accountants for the Trust subject to
ratification by the shareholders at the Annual Meeting and
consults with the independent public accountants on the Trust's
audited financial statements and on the efficacy of the Trust's
internal control systems. The Compensation Committee
establishes guidelines for compensation and benefits of the
executive officers of the Trust based upon achievement of
objectives and other factors, including review of compensation
to executive officers of comparable entities and
recommendations of independent compensation consultants. Mr.
Bricker was the sole independent Trust Manager and member of
these committees until March 1996, at which time Mr. Giles was
appointed to both committees. In January 1997, Mr. Duncan was
appointed to the Compensation Committee and Mr. Kelley was
appointed to the Audit Committee. The Trust does not have a
Nominating Committee.
ITEM 11. Executive Compensation
In March 1996, the Trust increased the annual fee paid to its
independent Trust Managers from $20,000 to $40,000 due to the
time requirements and exposure created by the litigation
involving the Trust (see "Item 3. Legal Proceedings"). In
addition, the Trust Managers receive $1,000 for each meeting of
the Trust Managers or a committee of the Trust Managers
attended in person and are reimbursed for their expenses
incurred in connection with their duties as Trust Managers. In
addition to the annual fee, Mr. Bricker received $16,000 and
Mr. Giles received $11,000 in 1996 for attendance at Trust
Manager and committee meetings. Mr. Wolcott did not receive
any compensation for his services as a Trust Manager.
The following table sets forth certain information regarding
the compensation paid to the Trust's executive officers during
the three years ended December 31, 1996:
<TABLE>
Summary Compensation Table
<S> <C> <C> <C> <C>
Fiscal Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation
Charles W. Wolcott 1996 $195,000 $100,000(a) $8,039(d)
President and Chief 1995 $189,000 $72,000(b) $7,040(e)
Executive Officer 1994 $180,000 $62,100(c) $7,222(f)
Marc A. Simpson 1996 $110,000 $55,000(a) $8,039(d)
Vice-President and Chief 1995 $105,000 $40,000(b) $6,838(e)
Financial Officer 1994 $81,859 $34,500(c) $4,095(f)
David B. Warner 1996 $110,000 $55,000(a) $8,039(d)
Vice-President and Chief 1995 $100,000 $43,000(b) $6,312(e)
Operating Officer 1994 $92,000 $34,500(c) $4,429(f)
________________
(a)Represents bonus payments for 1996 paid in January 1997.
(b)Represents bonus payments for 1995 paid in January 1996.
(c)Represents bonus payments for 1994 paid in February 1995.
(d)Represents company contribution to the Retirement and Profit
Sharing Plan in January 1997.
(e)Represents company contribution to the Retirement and Profit
Sharing Plan in January 1996.
(f)Represents company contribution to the Retirement and Profit
Sharing Plan in February 1995.
</TABLE>
The Trust has adopted a Retirement and Profit Sharing Plan
(the "Plan") for the benefit of employees of the Trust.
Employees who were employed by the Trust on November 1, 1993,
and who have attained the age of 21 are immediately eligible to
participate in the Plan. All other employees of the Trust are
eligible to participate in the Plan after they have completed
six months of service with the Trust and attained the age of
21.
On March 13, 1996, the Trust entered into Bonus and Severance
Agreements with each of Messrs. Wolcott, Simpson and Warner.
These agreements formalized the Trust's policy of providing an
annual incentive bonus of up to fifty percent 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 therein),
the employee will be entitled to receive an amount equal to one
times the employee's annual base salary, continuation of health
and welfare benefits for up to one year and the prorated amount
of any annual incentive bonus earned through the date of
termination. The agreements are effective through March 13,
1999.
Compensation Committee Interlocks and Insider Participation
During the 1996 fiscal year, William H. Bricker and Robert E.
Giles were members of the Compensation Committee. Mr. Bricker
was the sole member of the Compensation Committee until Mr.
Giles was appointed in March 1996.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information as to the
number of Trust Shares beneficially owned by (a) each person
(including any "group" as that term is used in Section 13(d) of
the Securities Exchange Act of 1934, as amended) who is known
by the Trust to own beneficially 5% or more of the Shares, (b)
each Trust Manager, (c) each executive officer of the Trust,
and (d) all executive officers of the Trust and Trust Managers
as a group.
<TABLE>
Amt of Shares
Benefcly Owned
as of Percentage
February of Shares
Names of Beneficial Owners 27, 1997 Outstanding
<S> <C> <C>
William H. Bricker 2,000 (1)
T. Patrick Duncan 3,000 (1)
Robert E. Giles 3,750 (1)
Edward B. Kelley 5,000 (1)
Charles W. Wolcott 73,900 (1)
Marc A. Simpson 14,500 (1)
David B. Warner 6,000 (1)
USAA Real Estate Company
8000 R.F. McDermott Fwy.
Suite 600
San Antonio, Tx 78230-3884
Attn: Randal R. Seewald 3,182,206 31.822%(2)
All Trust Managers and
Executive Officers as a
group 108,150 1.082%
______________
(1)Ownership is less than 1% of the outstanding Shares.
(2)Information obtained from Schedule 13D filed by
USAA Real Estate Company with the Securities and
Exchange
Commission on December 19, 1996.
</TABLE>
ITEM 13. Certain Relationships and Related Transactions
As detailed in "Item 1. Recent Developments," USAA REALCO
currently owns 3,182,206 Shares, representing 31.82% of the
outstanding Shares of the Trust. In February 1997, USAA REALCO
purchased certain outstanding indebtedness of the Trust having
a then current principal balance of $9,419,213. 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
in the first quarter of 1997. At the time the notes were
modified, the Trust made a principal payment of $1,591,103,
reducing the outstanding principal amount to $5,449,618.
According to the modification terms, interest continues to
accrue at 8.8%, payable monthly, and the maturity of the notes
is extended from March 31, 1997 to December 31, 2000. In
addition, 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 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.
Pursuant to its rights under the USAA Share Purchase
Agreement, USAA REALCO requested that Edward B. Kelley and T.
Patrick Duncan, who are also executive officers of USAA REALCO,
be appointed Trust Managers. On December 20, 1996, the Trust
Managers unanimously voted to appoint Messrs. Kelley and Duncan
as Trust Managers.
PART IV.
ITEM 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement
Schedule:
See Index to Consolidated Financial Statements and
Financial Statement Schedule appearing on page F-1 of this
Form 10-K
(3) Exhibits:
Exhibit No. Description
3.1 Second Amended and Restated Declaration of
Trust (incorporated herein by reference from
Exhibit 4.1 to the Trust's Form 10-Q for the
quarter ended September 30, 1993; File No. 1-
9016)
3.2 Fourth Amended and Restated Bylaws of the
Trust (incorporated herein by reference from
Exhibit 3.1 to Form 8-K of the Trust dated
October 3, 1995; File No. 1-9016)
3.3 Amendment to Fourth Amended and Restated
Bylaws of the Trust (incorporated herein by
reference from Exhibit No. 99.1 to Form 8-K of
the Trust dated November 13, 1995; File No. 1-
9016)
3.4 Amendment to the Bylaws of American Industrial
Properties REIT, dated September 20, 1996,
adding Article XIII to the Bylaws
(incorporated herein by reference from Exhibit
No. 99.1 to Form 8-K of the Trust dated
September 20, 1996; File No. 1-9016)
3.5 Amendments to Fourth Amended and Restated
Bylaws (incorporated herein by reference from
Exhibit No. 99.3 to Form 8-K of the Trust
dated December 23, 1996; File No. 1-9016)
4.1 Indenture dated November 15, 1985 between the
Trust and IBJ Schroder Bank & Trust Company
(incorporated herein by reference from Exhibit
10.4 to Form S-4 of American Industrial
Properties REIT, Inc. dated March 16, 1994;
File No. 33-74292)
10.1 401(k) Retirement and Profit Sharing Plan
(incorporated herein by reference from Exhibit
10.5 to Amendment No. 1 to Form S-4 of
American Industrial Properties REIT, Inc.
dated March 4, 1994; File No. 33-74292)
10.2 Amendments to 401(k) Retirement and Profit
Sharing Plan (incorporated herein by reference
from Exhibit 10.4 to Form 10-K of the Trust
dated March 27, 1995)
10.3 Note Purchase Agreement dated February 27,
1992 between the Trust and Manufacturers Life
Insurance Company (incorporated herein by
reference from Exhibit 10.6 to Form S-4 of
American Industrial Properties REIT, Inc.
dated January 31, 1994; File No. 33-74292)
10.4 Addendum to $19,143,646.92 Unsecured
Promissory Note due November 27, 1997
(incorporated herein by reference from Exhibit
10.6 to Form 10-K of the Trust dated March 27,
1995)
10.5 Settlement Agreement by and between American
Industrial Properties REIT, Patapsco #1
Limited Partnership, Patapsco #2 Limited
Partnership, The Manufacturers Life Insurance
Company and The Manufacturers Life Insurance
Company (U.S.A.) dated as of May 22, 1996
(incorporated herein by reference from Exhibit
99.1 to Form 8-K of the Trust dated May 22,
1996; File No. 1-9016)
10.6 Agreement and Assignment of Partnership
Interest, Amended and Restated Agreement and
Certificate of Limited Partnership and
Security Agreement for Patapsco Center -
Linthicum Heights, Maryland (incorporated
herein by reference from Exhibit 10.8 to
Amendment No. 1 to Form S-4 of American
Industrial Properties REIT, Inc. dated March
4, 1994; File No. 33-74292)
10.7 Note dated November 15, 1994 in the original
principal amount of $12,250,000 with AIP
Properties #1 L.P. as Maker and AMRESCO
Capital Corporation as Payee (incorporated
herein by reference from Exhibit 99.1 to Form
8-K of the Trust dated November 22, 1994; File
No. 1-9016)
10.8 Mortgage, Deed of Trust and Security Agreement
dated November 15, 1994 between AIP Properties
#1 L.P. and AMRESCO Capital Corporation
(incorporated herein by reference from Exhibit
99.2 to Form 8-K of the Trust dated November
22, 1994; File No. 1-9016)
10.9 Loan Modification Agreement modifying the note
dated November 15, 1994 in the original
principal amount of $12,250,000 (incorporated
herein by reference from Exhibit 99.2 to Form
8-K of the Trust dated June 23, 1995; File No.
1-9016)
10.10 Note dated November 15, 1994 in the original
principal amount of $2,250,000 with AIP
Properties #2 L.P. as Maker and AMRESCO
Capital Corporation as Payee (incorporated
herein by reference from Exhibit 99.3 to Form
8-K of the Trust dated November 22, 1994; File
No. 1-9016)
10.11 Mortgage, Deed of Trust and Security Agreement
dated November 15, 1994 between AIP Properties
#2 L.P. and AMRESCO Capital Corporation
(incorporated herein by reference from Exhibit
99.4 to Form 8-K of the Trust dated November
22, 1994; File No. 1-9016)
10.12 Loan Modification Agreement modifying the note
dated November 15, 1994 in the original
principal amount of $2,250,000 (incorporated
herein by reference from Exhibit 99.1 to Form
8-K of the Trust dated June 23, 1995; File No.
1-9016)
10.13 Share Purchase Agreement dated as of December
13, 1996, by and between American Industrial
Properties REIT and USAA Real Estate Company
(incorporated herein by reference from Exhibit
No. 99.4 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.14 Promissory Note dated November 25, 1996, by
and between American Industrial Properties,
Inc. and USAA Real Estate Company
(incorporated herein by reference from Exhibit
No. 99.5 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.15 Letter Agreement dated December 18, 1996, by
and between American Industrial Properties,
Inc. and USAA Real Estate Company
(incorporated herein by reference from Exhibit
No. 99.6 to Form 8-K of the Trust dated
December 23, 1996; File No. 1-9016)
10.16 Share Purchase Agreement dated as of December
20, 1996, by and between American Industrial
Properties REIT, American Industrial
Properties REIT, Inc. and USAA Real Estate
Company (incorporated herein by reference from
Exhibit No. 99.7 to Form 8-K of the Trust
dated December 23, 1996; File No. 1-9016)
10.17 Registration Rights Agreement dated as of
December 19, 1996, by and between American
Industrial Properties REIT and USAA Real
Estate Company (incorporated herein by
reference from Exhibit No. 99.8 to Form 8-K of
the Trust dated December 23, 1996; File No. 1-
9016)
10.18 Registration Rights Agreement dated as of
December 20, 1996, by and between American
Industrial Properties REIT and USAA Real
Estate Company (incorporated herein by
reference from Exhibit No. 99.9 to Form 8-K of
the Trust dated December 23, 1996; File No. 1-
9016)
10.19 Deed of Trust and Security Agreement dated
November 15, 1996 between AIP Properties #3,
L.P. and Life Investors Insurance Company of
America (Huntington Drive Center)
(incorporated herein by reference from Exhibit
99.1 to Form 8-K of the Trust dated November
20, 1996; File No. 1-9016)
10.20 Note dated November 15, 1996 in the original
principal amount of $4,575,000 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee
(Huntington Drive Center) (incorporated herein
by reference from Exhibit 99.2 to Form 8-K of
the Trust dated November 20, 1996; File No. 1-
9016)
10.21 Deed of Trust and Security Agreement dated
November 15, 1996 between AIP Properties #3,
L.P. and Life Investors Insurance Company of
America (Patapsco Industrial Center)
(incorporated herein by reference from Exhibit
99.3 to Form 8-K of the Trust dated November
20, 1996; File No. 1-9016)
10.22 Note dated November 15, 1996 in the original
principal amount of $3,112,500 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee (Patapsco
Industrial Center) (incorporated herein by
reference from Exhibit 99.4 to Form 8-K of the
Trust dated November 20, 1996; File No. 1-
9016)
10.23 Deed of Trust and Security Agreement dated
November 15, 1996 between AIP Properties #3,
L.P. and Life Investors Insurance Company of
America (Woodlake Distribution Center)
(incorporated herein by reference from Exhibit
99.5 to Form 8-K of the Trust dated November
20, 1996; File No. 1-9016)
10.24 Note dated November 15, 1996 in the original
principal amount of $1,537,500 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee (Woodlake
Distribution Center) (incorporated herein by
reference from Exhibit 99.6 to Form 8-K of the
Trust dated November 20, 1996; File No. 1-
9016)
10.25 Deed of Trust and Security Agreement dated
November 15, 1996 between AIP Properties #3,
L.P. and Life Investors Insurance Company of
America (All Texas properties except Woodlake)
(incorporated herein by reference from Exhibit
99.7 to Form 8-K of the Trust dated November
20, 1996; File No. 1-9016)
10.26 Note dated November 15, 1996 in the original
principal amount of $1,162,500 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee (Meridian
Street Warehouse) (incorporated herein by
reference from Exhibit 99.8 to Form 8-K of the
Trust dated November 20, 1996; File No. 1-
9016)
10.27 Note dated November 15, 1996 in the original
principal amount of $2,775,000 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee (Beltline
Business Center) (incorporated herein by
reference from Exhibit 99.9 to Form 8-K of the
Trust dated November 20, 1996; File No. 1-
9016)
10.28 Note dated November 15, 1996 in the original
principal amount $3,375,000 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee (Plaza
Southwest) (incorporated herein by reference
from Exhibit 99.10 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.29 Note dated November 15, 1996 in the original
principal amount of $2,100,000 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee (Commerce
Park North) (incorporated herein by reference
from Exhibit 99.11 to Form 8-K of the Trust
dated November 20, 1996; File No. 1-9016)
10.30 Note dated November 15, 1996 in the original
principal amount of $2,850,000 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee (Gateway
5 & 6) (incorporated herein by reference from
Exhibit 99.12 to Form 8-K of the Trust dated
November 20, 1996; File No. 1-9016)
10.31 Note dated November 15, 1996 in the original
principal amount of $5,175,000 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee
(Northgate II) (incorporated herein by
reference from Exhibit 99.13 to Form 8-K of
the Trust dated November 20, 1996; File No. 1-
9016)
10.32 Note dated November 15, 1996 in the original
principal amount of $1,327,500 with AIP
Properties #3, L.P. as Maker and Life
Investors Insurance Company as Payee
(Westchase Park) (incorporated herein by
reference from Exhibit 99.14 to Form 8-K of
the Trust dated November 20, 1996; File No. 1-
9016)
10.33 Bonus and Severance Agreement dated March 13,
1996, between the Trust and Charles W. Wolcott
(incorporated herein by reference from Exhibit
10.12 to Form 10-K of the Trust dated March
29, 1996)
10.34 Bonus and Severance Agreement dated March 13,
1996, between the Trust and Marc A. Simpson
(incorporated herein by reference from Exhibit
10.13 to Form 10-K of the Trust dated March
29, 1996)
10.35 Bonus and Severance Agreement dated March 13,
1996, between the Trust and David B. Warner
(incorporated herein by reference from Exhibit
10.14 to Form 10-K of the Trust dated March
29, 1996)
10.36 Renewal, Extension, Modification and Amendment
Agreement dated as of February 26, 1997
between the Trust and USAA Real Estate Company
(incorporated herein by reference from Exhibit
10.1 to Form 8-K of the Trust dated March 4,
1997; File No. 1-9016)
10.37 Amendment No. 1 to Share Purchase Agreement
dated as of December 13, 1996 (incorporated
herein by reference from Exhibit 10.2 to Form
8-K of the Trust dated March 4, 1997; File No.
1-9016)
21.1 *Listing of Subsidiaries
27.1 *Financial Data Schedule
__________
* Filed herewith
(b) Reports on Form 8-K:
The following information summarizes the events reported
on Form 8-K during the quarter ended December 31, 1996:
Date Filed Date of Earliest Event
with SEC Reported on Form 8-K Description
November 21, 1996 November 20, 1996 Item 5
Closing of
financing
transaction
December 24, 1996 December 23, 1996 Item 5.
Settlement of
litigation and
purchase of
Shares by USAA
REALCO
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 5, 1997.
AMERICAN INDUSTRIAL PROPERTIES REIT
/s/ Charles W. Wolcott
Charles W. Wolcott,
Trust Manager, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated:
Signatures Title Date
/s/ WILLIAM H. BRICKER Trust Manager March 5, 1997
William H. Bricker
/s/ T. PATRICK DUNCAN Trust Manager March 5, 1997
T. Patrick Duncan
/s/ ROBERT E. GILES Trust Manager March 5, 1997
Robert E. Giles
/s/ CHARLES W. WOLCOTT Trust Manager, March 5, 1997
Charles W. Wolcott President and
Chief Executive
Officer (Principal
Executive Officer)
/s/ MARC A. SIMPSON Vice President March 5, 1997
Marc A. Simpson Chief Financial
Officer, Secretary
and Treasurer
(Principal Accounting
and Financial Officer)
American Industrial Properties REIT
Index to Consolidated Financial Statements and
Financial Statement Schedule
Page
Report of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995, and 1994 F-3
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-4
Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
Schedule III - Consolidated Real Estate and
Accumulated Depreciation F-14
Notes to Schedule III F-15
All other financial statements and schedules not listed have
been omitted because the required information is either
included in the Financial Statements and the Notes thereto as
included herein or is not applicable or required.
REPORT OF INDEPENDENT AUDITORS
Trust Managers and Shareholders
American Industrial Properties REIT:
We have audited the accompanying consolidated balance sheets of
American Industrial Properties REIT (the "Trust") as of
December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31,
1996. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the
Trust's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Trust as of December 31,
1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents
fairly, in all material respects the information set forth
therein.
/s/ Ernst & Young
Dallas, Texas
February 13, 1997
except for Note 14, as to
which the date is February 26, 1997
American Industrial Properties REIT
Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
Year Ended December 31,
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) -
Extraordinary gain (loss) on
extinguishment of debt 5,810 (55) -
Extraordinary loss on partial
in-substance defeasance of
Zero Coupon Notes due 1997 - - (344)
NET INCOME (LOSS) $ 1,255 $ (4,584) $ (4,655)
PER SHARE DATA
Loss from operations $ (0.52) $ (0.48) $ (0.47)
Gain (loss) on sales
of real estate 0.02 (0.02) -
Extraordinary gain (loss) on
extinguishment of debt 0.64 (0.01) -
Extraordinary loss on partial
in-substance defeasance of
Zero Coupon Notes due 1997 - - (0.04)
Net Income (Loss) $ 0.14 $ (0.51) $ (0.51)
Distributions Paid $ 0.04 $ 0.04 $ 0.00
Weighted average shares
outstanding 9,108,241 9,075,400 9,075,400
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
Dec 31, Dec 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
Retained earnings (deficit) (105,373) (106,265)
Total Shareholders' Equity 22,683 19,248
Total Liabilities and
Shareholders' Equity $ 78,936 $ 89,382
The accompanying notes are an integral part of these financial statements.
</TABLE>
American Industrial Properties REIT
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except number of shares)
<TABLE>
Shares of Beneficial Addt'l Retained
Interest Paid-In Earnings
Number Amount Capital (Deficit) Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 9,075,400 $908 $124,605 ($96,662) $28,851
Net loss (4,655) (4,655)
Balance at December 31, 1994 9,075,400 908 124,605 (101,317) 24,196
Net loss (4,584) (4,584)
Distributions to shareholders (364) (364)
Balance at December 31, 1995 9,075,400 908 124,605 (106,265) 19,248
Issuance of additional shares 924,600 92 2,451 2,543
Net income 1,255 1,255
Distributions to shareholders (363) (363)
Balance at December 31, 1996 10,000,000 $1,000 $127,056 ($105,373) $22,683
</TABLE>
American Industrial Properties REIT
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
Year Ended December 31,
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 (563) 183 (256)
Increase (decrease) in accounts
payable, other liabilities and
tenant security deposits 351 (61) 373
Net Cash (Used In) Provided By
Operating Activities (1,965) (769) 8
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 - -
(Decrease) increase in
accrued interest (2,986) 4,674 -
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 (6,185) 1,457 7,870
Net (Decrease) Increase in Cash
and Cash Equivalents (2,977) 832 6,402
Cash and Cash Equivalents
at Beginning of Year 8,353 7,521 1,119
Cash and Cash Equivalents
at End of Year $ 5,376 $ 8,353 $ 7,521
Cash Paid for Interest $ 8,817 $ 1,741 $ 4,718
The accompanying notes are an integral part of these financial statements.
</TABLE>
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 at lower of depreciated
cost or net realizable value. 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 undiscounted cash flows estimated to be generated by those
assets are less than the related carrying amounts. In
addition, the Trust records impairment losses on assets held
for sale when the estimated sales proceeds, after estimated
selling costs, are less than the carrying value of the related
asset (see Note 2).
Property improvements are capitalized while maintenance and
repairs are expensed as incurred. Depreciation of buildings
and capital improvements is computed using the straight-line
method over forty years. Depreciation of tenant improvements
is computed using the straight-line method over ten years.
Cash and Cash Equivalents.
Cash equivalents include demand deposits and all highly
liquid instruments purchased with an original maturity of three
months or less. Restricted amounts reflect escrow deposits
held by third parties for the payment of taxes and insurance
and reserves held by third parties for property repairs or
tenant improvements.
Other Assets.
Other assets primarily consists of deferred rent receivable,
prepaid commissions and loan fees. Leasing commissions are
capitalized and amortized on a straight line basis over the
life of the lease. Loan fees are capitalized and amortized to
interest expense on a level yield basis over the term of the
related loan.
Rents and Tenant Reimbursements.
Rental income, including contractual rent increases or
delayed rent starts, is recognized on a straight-line basis
over the lease term. The Trust has recorded deferred rent
receivable (representing the excess of rental revenue
recognized on a straight line basis over actual rents received
under the applicable lease provisions) of $599,000 and $810,000
at December 31, 1996 and 1995, respectively.
Several tenants in the Trust's retail property are also
required to pay as rent a percentage of their gross sales
volume, to the extent such percentage rent exceeds their base
rents. Such percentage rents amounted to $154,000, $269,000
and $245,000 for the years ended December 31, 1996, 1995, and
1994, respectively. In addition to paying base and
percentage rents, most tenants are required to reimburse the
Trust for operating expenses in excess of a negotiated base
amount.
Tamarac Square, the Trust's only retail property, has rental
revenues in excess of 10% of the total revenues of the Trust.
Rental revenues and tenant reimbursements from Tamarac totaled
$3,308,000, $3,525,000, and $3,441,000 in 1996, 1995, and 1994,
respectively.
Income Tax Matters.
The Trust operates as a real estate investment trust ("REIT")
for federal income tax purposes. Under the REIT provisions,
the Trust is required to distribute 95% of REIT taxable income
and is allowed a deduction for dividends paid during the year.
The Trust had a taxable loss in each of the years ending
December 31, 1996, 1995, and 1994. Accordingly, no provision
for income taxes has been reflected in the financial
statements.
The Trust has a net operating loss carryforward from 1996 and
prior years of approximately $34,800,000. Subject to certain
restrictions, the losses may be carried forward for up to 15
years. The present losses will expire beginning in the year
2004. Management intends to operate the Trust in such a manner
as to continue to qualify as a REIT and to continue to
distribute cash flow in excess of taxable income.
Earnings and profits, which will determine the taxability of
distributions to shareholders, will differ from that reported
for financial reporting purposes due primarily to differences
in the basis of the assets and the estimated useful lives used
to compute depreciation.
Concentrations.
The Trust owns industrial properties in Baltimore, Dallas,
Houston, Los Angeles, Milwaukee, and Minneapolis, and one
retail property in Denver. The principal competitive factors in
these markets are price, location, quality of space, and
amenities. In each case, the Trust owns a small portion of the
total similar space in the market and competes with owners of
other space for tenants. Each of these markets is highly
competitive, and other owners of property may have competitive
advantages not available to the Trust. The Trust's retail
property, Tamarac Square, represents approximately 29% of the
rent and tenant reimbursement revenues for the year ended
December 31, 1996, and approximately 41% of net real estate at
December 31, 1996.
Reclassification.
Certain amounts in prior years financial statements have been
reclassified to conform with the current year presentation.
Note 2 -- Real Estate and Provisions for Possible Losses on
Real Estate:
At December 31, 1996 and 1995, real estate was comprised of
the following:
<TABLE>
1996 1995
<S> <C> <C>
Held for investment:
Land $15,149,000 $17,526,000
Bldgs and improvements 69,544,000 79,565,000
84,693,000 97,091,000
Held for sale:
Land 1,728,000 897,000
Bldgs and improvements 8,051,000 3,909,000
9,779,000 4,806,000
Total $94,472,000 $101,897,000
</TABLE>
During 1996, the Trust reclassified four properties from held
for investment to held for sale in anticipation of the need to
raise capital to complete the discounted purchase of certain
indebtedness. Two of these properties were sold in the fourth
quarter of 1996 for net proceeds of $6,545,000, resulting in a
net gain of $177,000, and two remain classified as held for
sale at December 31, 1996. The net operating income of the
properties held for sale at December 31, 1996 was approximately
$827,000 in 1996. During 1995, the Trust sold one industrial
property for net proceeds of $2,476,000, resulting in a net
loss of $191,000, and acquired a 72,000 square foot industrial
distribution property in Arlington, Texas for total
consideration of approximately $1,309,000. One property was
classified as held for sale at December 31, 1995. This
property, on which provisions for possible losses on real
estate were recorded of $600,000 and $650,000 in 1995 and 1994,
respectively, was reclassified to held for investment in 1996.
If unforeseen factors should cause a reclassification of the
Trust's real estate from held for investment to held for sale,
significant adjustments to reduce the depreciated cost of the
real estate to net realizable value could be required.
Note 3 -- Mortgages Payable:
At December 31, 1996, the Trust's properties were subject to
liens securing mortgage notes payable totaling $43,797,000. Of
this amount $1,927,000 represented a note with a variable
interest rate of prime plus 2% (at December 31, 1996, the prime
rate was 8.25%) and $41,870,000 represented notes with fixed
interest rates ranging from 8.40% to 11.0%.
Principal payments due during each of the next five years are
as follows: $675,000 in 1997, $2,632,000 in 1998, $1,973,000
in 1999, $818,000 in 2000, $13,776,000 in 2001 and $23,923,000
thereafter.
The Bylaws of the Trust, the settlement agreement relating to
the 8.8% Notes Payable, and certain mortgages payable contain
various borrowing restrictions and operating performance
covenants. The Trust is in compliance with all such
restrictions and covenants as of December 31, 1996.
Note 4 -- 8.8% Notes Payable:
In February 1992, the Trust issued $53,234,000 of unsecured
notes payable due November 1997 (the "8.8% Notes Payable"),
proceeds of which were used to retire certain other
indebtedness. In May 1995, the Trust initiated litigation
against the holder of these notes and elected not to make
scheduled interest payments thereafter. In June 1995, the
noteholder declared the entire principal amount and all accrued
interest on the notes due and payable and, effective June 13,
1995, began accruing interest on the principal amount at the
11.7% default rate provided for in the Note Purchase Agreement.
In May 1996, the Trust settled this litigation and, as a
result, the notes became secured by first or second liens on
various properties and by pledges of ownership interests in
certain Trust entities owning properties. The Trust paid
$5,200,000 to satisfy all accrued interest payable through
April 12, 1996, allowing the Trust to recognize an
extraordinary gain of $1,367,000 in the second quarter of 1996.
As part of the settlement, the Trust obtained an option to
pay the remaining $45,239,000 in outstanding principal
indebtedness for $36,800,000 (the "Option Price"). As a result
of a mortgage financing on nine properties and the sale of two
other properties in the fourth quarter of 1996, the Trust made
payments of $31,350,000 during 1996 on the Option Price,
decreasing the remaining required payment under the option to
$5,450,000. The Trust paid $250,000 to extend the date by
which the Option Price must be paid to March 31, 1997. This
amount reduced the principal amount outstanding on the 8.8%
Notes Payable but did not reduce the Option Price. The
principal amount of indebtedness outstanding on the 8.8% Notes
Payable is $9,419,000. In connection with the settlement of
the litigation and the terms of the option, the Trust recorded
an extraordinary gain on extinguishment of debt of $1,367,000
in the second quarter of 1996 and $4,443,000 in the fourth
quarter of 1996.
In February 1997, the notes were sold to a major shareholder
of the Trust (see Note 14).
Note 5 -- Zero Coupon Notes:
As part of its original capitalization in 1985, the Trust
issued $179,698,000 (face amount at maturity) of Zero Coupon
Notes due 1997 (the "Notes"). These Notes, which were
collateralized by first and second mortgage liens on each of
the Trust's real estate properties, accreted at 12%, compounded
semiannually. In 1991, the Trust began a program to retire the
outstanding Notes, resulting in a reduction of the outstanding
Notes to $19,491,000 (face amount at maturity) at December 31,
1993. On December 31, 1993, the Trust effected a partial in-
substance defeasance on $12,696,000 (face amount at maturity)
of the Notes and recorded an extraordinary loss of $2,530,000.
In November 1994, the Trust completed a partial in-substance
defeasance on $3,669,000 (face amount at maturity) of Notes and
recorded an extraordinary loss of $344,000. In December 1994,
the Trust purchased the remaining non-defeased Notes
outstanding in the open market and submitted the Notes to the
Trustee for cancellation. The legal defeasance of the Notes
resulted in the release of the Zero Coupon Note mortgage liens
which encumbered each of the Trust's properties.
The accreted value of the Notes defeased at December 31, 1996
and 1995 was $14,725,000 and $13,104,000, respectively.
Note 6 -- Environmental Matters:
The Trust has been notified of the existence of limited
underground petroleum based contamination at a portion of
Tamarac Square, the Trust's Denver retail property. The source
of the contamination is apparently related to underground
storage tanks ("USTs") located on adjacent property. The owner
of the adjacent property has agreed to remediate the property
to comply with state standards, and has indemnified the Trust
against costs related to its sampling activity. The
responsible party for the adjacent USTs has submitted a
corrective Action Plan to the Colorado Department of Public
Health and Environment. Implementation of the plan is ongoing.
The responsible party is negotiating to obtain access
agreements from impacted landowners, including the Trust.
With the exception of Tamarac Square, the Trust has not been
notified, and is not otherwise aware, of any material non-
compliance, liability or claim relating to hazardous or toxic
substances in connection with any of its properties.
Note 7 -- Shareholder Transactions:
In January 1996, the Trust filed a lawsuit in federal court
in Dallas, Texas against a major shareholder of the Trust,
alleging violations of federal and state securities laws. The
defendants filed a counterclaim against the Trust and its Trust
Managers and, in February 1996, another shareholder filed a
claim against the Trust and its Trust Managers. The litigation
related to these claims was consolidated in April 1996.
In December 1996, a settlement of this litigation was
approved by the Court. This settlement provided, among other
things, that certain amendments to the Trust's Bylaws be made
and that the Trust pay the shareholders a total of $955,000.
Of this amount, $625,000 was paid by the Trust's directors and
officers liability insurance.
In connection with the settlement, USAA Real Estate Company
("USAA REALCO") purchased the Shares held by several
shareholders. Prior to these purchases, the Trust had sold to
USAA REALCO 924,600 authorized but unissued Shares for
$2,542,650. Upon completion of the purchases from the
shareholders, USAA REALCO owned a total of 3,182,206 Shares,
representing 31.82% of the total Shares of the Trust
outstanding.
On December 18, 1996, the Trust executed an agreement with
USAA REALCO contemplating the purchase by USAA REALCO of
certain outstanding indebtedness of the Trust. On February 26,
1997, USAA REALCO purchased this debt (see Note 14).
Note 8 -- Litigation:
During 1996, the Trust concluded two significant litigation
matters (see Notes 4 and 7). Although the Trust is not
currently involved in any significant litigation, the Trust
may, on occasion and in the normal course of business, be
involved in legal actions relating to the ownership and
operations of its properties. In management's opinion, the
liabilities, if any, that may ultimately result from such legal
actions are not expected to have a materially adverse effect on
the consolidated financial position of the Trust.
Note 9 -- Retirement and Profit Sharing Plan:
During 1993, the Trust adopted a retirement and profit
sharing plan which qualifies under section 401(k) of the
Internal Revenue Code. All existing Trust employees at
adoption and subsequent employees who have completed six months
of service are eligible to participate in the plan. Subject to
certain limitations, employees may contribute up to 15% of
their salary. The Trust may make annual discretionary
contributions to the plan. Contributions by the Trust related
to the years ended December 31, 1996, 1995 and 1994 were
$30,000, $25,000 and $20,000, respectively.
Note 10 -- Operating Leases:
The Trust's properties are leased to others under operating
leases with expiration dates ranging from 1997 to 2011. Future
minimum rentals on noncancellable tenant leases at December 31,
1996 are as follows:
<TABLE>
<C> <C>
Year Amount
1997 $ 7,592,000
1998 6,179,000
1999 4,328,000
2000 2,844,000
2001 2,091,000
Thereafter 2,217,000
$25,251,000
</TABLE>
Note 11 -- Distributions:
The Trust's distributions of $363,000 ($0.04 per share) in
1996 and $364,000 ($0.04 per share) in 1995 represent a return
of capital to shareholders (to the extent of the shareholder's
basis in the Shares.) The Trust did not pay any distributions
in 1994.
Note 12 -- Per Share Data:
Per share data is based on a weighted average number of
Shares outstanding of 9,108,241 for the year ending December
31, 1996 and 9,075,400 or the years ended December 31, 1995 and
1994.
Note 13 -- Fair Value of Financial Instruments:
Accounts receivable, accounts payable and accrued expenses
and other liabilities are carried at amounts that reasonably
approximate their fair values. The fair values of the Trust's
mortgage notes payable are estimated using discounted cash flow
analyses, based on the Trust's incremental borrowing rates for
similar types of borrowing arrangements. The carrying values
of such mortgage notes payable reasonably approximate their
fair values.
Note 14 -- Subsequent Event:
On February 26, 1997, USAA REALCO, a shareholder owning 31.8%
of the outstanding Shares in the Trust, purchased outstanding
indebtedness of the Trust totaling $9,419,213 pursuant to an
earlier agreement with the Trust. USAA REALCO and the Trust
then entered into an agreement modifying the terms of the
indebtedness. The amount of the outstanding debt was reduced
from $9,419,213 to $7,040,721, allowing the Trust to recognize
an extraordinary gain on extinguishment of debt (including
accrued interest) of $2,643,000 in the first quarter of 1997.
The Trust made an immediate principal reduction on the modified
notes of $1,591,103, leaving an outstanding principal balance
of $5,449,618.
The terms of the modified notes provide for monthly payments
of interest at 8.8% and an extension in the maturity date from
March 31, 1997 to December 31, 2000. In addition, USAA REALCO
has the option to convert the principal amount of the notes
into Shares of the Trust at the conversion rate of $2.00 per
share (if converted prior to December 31, 1997) or $2.25 per
share (if converted between December 31, 1997 and December 31,
2000). In order for USAA REALCO to convert its debt into
Shares, the shareholders must approve an increase in the
authorized Shares of the Trust. An increase in the authorized
Shares of the Trust requires approval by holders of two-thirds
of the outstanding Shares. In addition, the shareholders must
approve the right of USAA REALCO to convert its debt into
Shares. The notes provide that if shareholder approval of this
conversion right is not approved by June 30, 1997, interest on
the debt will increase to the lesser of 18% or the highest
lawful rate effective July 1, 1997 and the full principal
amount will become due and payable on October 31, 1997.
Management believes that the sale of one or more properties
would be required to satisfy this obligation in the event the
notes become due and payable.
SCHEDULE III
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
($000's)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Encum Initial Cost Writedowns
brances Bldgs & Captlzd and
Description at Land Imprvmn Imprvmn Retire Allowances
12/31/96 ts ts ments
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 Pk 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)
The accompanying notes are an integral part of this schedule.
</TABLE>
SCHEDULE III
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
($000's)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross Amt Carried
At December 31, 1996
Bldings & Accum. Date of Date
Description Land Imprvmnts Total Deprec Cnstrctn Acqurd
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 Pk 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>
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO SCHEDULE III
December 31, 1996
($000)
Reconciliation of Real Estate:
<TABLE>
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>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $23,441 $21,859 $19,315
Additions during period:
Depreciation expense for 2,577 2,479 2,622
period
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:
Buildings and capital improvements 40 years
Tenant improvements 10 years
Exhibit 21.1
American Industrial Properties REIT, a Texas real estate investment trust
100% American Industrial Properties REIT,Inc., a Maryland corporation
100% AIP Tamarac, Inc., a Texas corporation
99% LP 1% GP AIP Properties #1, L.P., a Delaware limited partnership
100% AIP Northview, Inc., a Texas corporation
99% LP 1% GP AIP Properties #2, L.P., a Delaware limited partnership
100% AIP Properties #3 GP, Inc., Texas corporation
99% LP 1% GP AIP Properties #3, L.P., a Delaware limited partnership
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,376
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 94,472
<DEPRECIATION> (23,973)
<TOTAL-ASSETS> 78,936
<CURRENT-LIABILITIES> 56,253
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 21,683
<TOTAL-LIABILITY-AND-EQUITY> 78,936
<SALES> 0
<TOTAL-REVENUES> 11,478
<CGS> 0
<TOTAL-COSTS> 10,309
<OTHER-EXPENSES> (177)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,901
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,810
<CHANGES> 0
<NET-INCOME> 1,255
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
