<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
AMERICAN INDUSTRIAL PROPERTIES REIT
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
Not Applicable
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- - --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- - --------------------------------------------------------------------------------
(3) Filing Party:
- - --------------------------------------------------------------------------------
(4) Date Filed:
- - --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
---------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 12, 1997
---------------
TO THE SHAREHOLDERS OF AMERICAN INDUSTRIAL PROPERTIES REIT:
You are cordially invited to attend a special meeting of shareholders
of American Industrial Properties REIT (the "Trust") to be held at 2200 Ross
Avenue, 9th Floor, Dallas, Texas 75201, on Friday, December 12, 1997 at 9:00
a.m. Dallas time (the "Special Meeting"), for the following purposes:
1. To approve the issuance by the Trust of up to an aggregate of
$75 million of Common Shares in a private placement of
securities (the "Private Placement").
2. To transact such other business as may properly come before
the Special Meeting or any postponements or adjournments
thereof.
Only holders of record of Common Shares of the Trust on November 17,
1997 will be entitled to notice of, and to vote at, the Special Meeting or any
postponements or adjournments thereof.
A copy of the Proxy Statement relating to the Special Meeting
accompanies this Notice of Special Meeting of Shareholders. Each shareholder is
urged to read the Proxy Statement in its entirety.
YOUR VOTE IS IMPORTANT
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING
REGARDLESS OF THE NUMBER OF COMMON SHARES YOU HOLD. YOU ARE INVITED TO ATTEND
THE SPECIAL MEETING IN PERSON, BUT WHETHER OR NOT YOU PLAN TO ATTEND, YOU MAY
ENSURE YOUR REPRESENTATION BY COMPLETING, SIGNING, DATING AND PROMPTLY
RETURNING THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE OR BY FAXING IT
TO (214) 999-9323 OR (214) 999-9348. FAXED PROXIES WILL BE ACCEPTED THROUGH
5:00 P.M. DALLAS TIME ON NOVEMBER 28, 1997. IF YOU ATTEND THE SPECIAL MEETING,
YOU MAY, IF YOU PREFER, REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.
By Order of the Trust Managers,
Marc A. Simpson
Secretary and Chief Financial Officer
6210 N. Beltline Road
Suite 170
Irving, Texas 75063
(972) 756-6000
November __, 1997
<PAGE> 3
AMERICAN INDUSTRIAL PROPERTIES REIT
6210 N. BELTLINE ROAD
SUITE 170
IRVING, TEXAS 75063
(972) 756-6000
---------------
PROXY STATEMENT
---------------
SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 12, 1997
---------------
This Proxy Statement is furnished in connection with the solicitation
of Proxies by the Trust Managers of American Industrial Properties REIT, a
Texas real estate investment trust (the "Trust"), for use at the special
meeting of shareholders to be held at 2200 Ross Avenue, 9th Floor, Dallas,
Texas 75201 at 9:00 a.m. Dallas time on Friday, December 12, 1997 (the "Special
Meeting"). Accompanying this Proxy Statement is the Proxy for the Special
Meeting, which you may use to indicate your vote as to each of the proposals
described in this Proxy Statement. This Proxy Statement and the accompanying
Proxy are first being mailed to shareholders on or about , 1997.
The close of business on November 17, 1997 has been fixed as the
record date for the determination of shareholders entitled to notice of and to
vote at the Special Meeting. As of the record date, the Trust had outstanding
4,657,973 common shares of beneficial interest, $0.10 par value per share (the
"Common Shares"), the only outstanding security of the Trust entitled to vote
at the Special Meeting.
At the Special Meeting, action will be taken: (i) to approve the
issuance by the Trust of up to an aggregate of $75 million of Common Shares in
a private placement (the "Private Placement"); and (ii) to transact such other
business as may properly come before the Special Meeting or any postponements
or adjournments thereof.
The rules and regulations (the "NYSE Rules") of the New York Stock
Exchange ("NYSE") require the approval of the Trust's shareholders for the
issuance of Common Shares which have voting power equal to or in excess of 20%
of the voting power outstanding before such issuance if the price per Common
Share is less than the market value thereof. While the price per Common Share
in the Private Placement is subject to negotiation, it is possible that such
price will be less than $15.125, the closing price per Common Share as reported
on the NYSE on October 24, 1997, but in no event will such sale price be less
than $13.50 per Common Share. Because the Private Placement will result in the
issuance of greater than 20% of the voting power at a price potentially below
the market price, the Trust is soliciting approval of the Trust's shareholders
for the Private Placement.
The Private Placement offers the Trust the opportunity to obtain funds
to finance additional growth through property acquisitions and to enhance its
financial position. If the Private Placement is approved, the Trust will have
the flexibility to issue up to an aggregate of $75 million of Common Shares to
one or more accredited investors. The net proceeds of the Private Placement
will be used to purchase additional properties. The issuance of Common Shares
in the Private Placement will result in dilution to the Trust's current
shareholders. Certain clients and affiliates of Morgan Stanley Asset Management
Inc. ("MSAM") and MS Real Estate Special Situations, Inc. ("MSRE")
(collectively, the "MSAM Purchasers"), ABKB/LaSalle Securities Limited
Partnership ("ABKB") (as agent for and for the benefit of certain clients), and
LaSalle Advisors Limited Partnership ("LaSalle Advisors") (as agent for and for
the benefit of certain clients) shall have certain preemptive rights if the
Private Placement is consummated. There can be no assurance, however, that the
Private Placement will be consummated or if it is consummated that such parties
will exercise their preemptive rights. See "Proposal One -- Approval of Private
Placement."
Pursuant to the NYSE Rules, proposal one requires the approval of the
holders of a majority of the Trust's Common Shares present in person or by
proxy at a meeting at which a quorum is present. A shareholder is entitled to
cast one vote for each Common Share held on the record date on all matters to
be considered at the Special Meeting.
<PAGE> 4
Shareholders are urged to sign the accompanying Proxy, and after
reviewing the information contained in this Proxy Statement, to return the
Proxy in the envelope enclosed for that purpose or to fax their proxies to
(214) 999-9348 or (214) 999-9323. Faxed proxies will be accepted through 5:00
P.M. Dallas time on November 28, 1997. Valid Proxies will be voted at the
Special Meeting and at any postponements or adjournments thereof in the manner
specified therein. If no direction is given, but the Proxy is validly executed,
such Proxy will be voted FOR proposal one. IN THEIR DISCRETION, THE PERSONS
AUTHORIZED UNDER THE PROXIES WILL VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE SPECIAL MEETING.
A shareholder may revoke his, her or its Proxy at any time before it
is voted either by filing with the Secretary of the Trust at its principal
executive office a written notice of revocation, by submitting a duly executed
Proxy bearing a later date, or by attending the Special Meeting and expressing
a desire to vote his, her or its Common Shares in person.
The holders of a majority of the Common Shares issued and outstanding
and entitled to vote, present in person or represented by proxy (2,328,987
Common Shares), shall constitute a quorum for the transaction of business at
the Special Meeting. If such quorum should not be present at the Special
Meeting, the Special Meeting may be adjourned from time to time without notice,
other than announcement at the Special Meeting, until a quorum shall be
present. The approval of the holders of a majority of the Common Shares present
in person or by proxy at the Special Meeting is required to approve proposal
one. The members of the Board of Trust Managers, management of the Trust and
the Majority Shareholders, who collectively own 3,317,865 Common Shares (71.23%
of the Trust's outstanding Common Shares), have advised the Trust that they
intend to vote in favor of proposal one.
Abstentions and broker non-votes (where a nominee holding Common
Shares for a beneficial owner has not received voting instructions from the
beneficial owner with respect to a particular matter and such nominee does not
possess or choose to exercise discretionary authority with respect thereto)
will be included in the determination of the number of Common Shares present at
the Special Meeting for quorum purposes. Abstentions and broker non-votes will
have the same effect as a vote against the proposals. Failure to return the
Proxy or failure to vote at the Special Meeting will have the same effect as a
vote against the proposals.
The Trust's principal executive offices are located at 6210 N.
Beltline Road, Suite 170, Irving, Texas 75063.
THE INFORMATION SET FORTH IN THIS PROXY STATEMENT (INCLUDING
REFERENCES TO THE NUMBER OF COMMON SHARES, PER SHARE AMOUNTS AND THE MARKET
PRICES OF THE COMMON SHARES) HAS BEEN ADJUSTED TO REFLECT THE TRUST'S
ONE-FOR-FIVE REVERSE SHARE SPLIT WHICH WAS APPROVED BY THE TRUST'S SHAREHOLDERS
AND BECAME EFFECTIVE ON OCTOBER 15, 1997.
2
<PAGE> 5
PROPOSAL ONE
APPROVAL OF PRIVATE PLACEMENT
INVESTMENT AGREEMENTS
The Trust is proposing to issue for cash up to $75 million of Common
Shares to one or more accredited investors (the "Investors") pursuant to one or
more Investment Agreements (the "Investment Agreements"). The sale price of the
Common Shares (the "Sales Price") provided in the Investment Agreement will be
based upon arm's length negotiations between management of the Trust,
Prudential Securities Incorporated (the placement agent for the Private
Placement) and the Investors. The Sale Price may be at a discount to the
closing sale price of the Common Shares on the NYSE on the date hereof or on
the closing date of the Private Placement; provided, however, the Trust will
not issue any Common Shares in the Private Placement for less than $13.50 per
Common Share. On October 24, 1997, the closing price of the Common Shares on
the NYSE was $15.125. The Trust will use the net proceeds of the Private
Placement for the acquisition of additional real estate.
In order to protect the Trust's real estate investment trust ("REIT")
status under the Internal Revenue Code of 1986, as amended (the "Code"), and
pursuant to the requirements of the Trust's Third Amended and Restated
Declaration of Trust, the issuance of Common Shares to the Investors in the
Private Placement will be expressly conditioned on the representations and
warranties of the Investors that upon the issuance of Common Shares, and at all
times thereafter, the Investor will not own directly or indirectly more than
9.8% of the number or value of the outstanding Common Shares after applying the
applicable attribution provisions of the Code.
The Investors will not receive preemptive rights in connection with
their purchases.
Any Investor that purchases a significant portion of the Common Shares
in the Private Placement may require that the Trust Managers increase the size
of the Board and appoint the Investor's designee to fill the vacancy caused by
the increase in size of the Board. Smaller Investors may require that it be
granted observation rights with respect to the Trust's Board of Trust Managers,
including the right to obtain full and timely notice of all meetings of the
Trust Managers and to designate a person to attend in person or by telephone
all meetings of the Trust Managers or their committees. If an Investor receives
such observation rights, the Trust shall require the Investor and its designee
to execute a confidentiality agreement.
The Trust Managers contemplate that the Trust may be required to be
covenant that the Trust will not issue any additional debt or senior equity
securities prior to achieving a certain market capitalization threshold
(calculated in a similar manner to "Equity Capitalization" discussed below
under "-- Preemptive Rights") without the consent of the Investor, unless the
proceeds of such debt or senior equity securities will be used to acquire real
estate.
The Trust Managers expect that as a condition to closing the Private
Placement, the Trust will be required to enter into a registration rights
agreement with the Investor granting the Investor the right to demand that the
Trust register the Common Shares acquired in the Private Placement or, if the
Trust is registering Common Shares for its own account or for the account of
any of its security holders, that the Trust also register the Common Shares
issued in the Private Placement.
Although the Trust Managers expect that the Trust will close the
Private Placement prior to December 31, 1997, there can be no assurance that
the Private Placement will, in fact, be consummated or if consummated, when it
will be consummated.
PREEMPTIVE RIGHTS
The Common Share Purchase Agreement dated as of June 20, 1997 between
the Trust and the MSAM Purchasers (the "MSAM Agreement") provides that if the
Trust issues additional Common Shares after the effective date of the MSAM
Agreement (specifically excluding any conversion by USAA Real Estate Company,
Inc. ("Realco") of the Modified Notes (as defined below), any issuances to
Realco or its affiliates in connection with the merger of such affiliates with
and into the Trust and any issuance pursuant to the Trust's Employee and Trust
Manager Incentive Share Plan) (each such non- excluded issuance, a "Subsequent
Offering"), the MSAM Purchasers shall have the right to purchase, on the same
terms and conditions as the other purchasers in the Subsequent Offering, a
proportionate number
3
<PAGE> 6
of Common Shares so that the MSAM Purchasers maintain their same percentage
ownership of Common Shares (the "MSAM Preemptive Rights"). With respect to each
Subsequent Offering in the amount of $10 million or more, the MSAM Preemptive
Rights are limited so that the amount of Common Shares that the MSAM Purchasers
may acquire in the aggregate pursuant to the MSAM Preemptive Rights shall be
reduced by 5% of the total number of Common Shares outstanding (on a
fully-diluted basis) after each such Subsequent Offering. The MSAM Preemptive
Rights shall terminate when the value of the outstanding Common Shares and
Common Share equivalents based on ten days' average closing prices on the NYSE
(the "Equity Capitalization") equals $150 million.
The Common Share Purchase Agreements dated as of July 3, 1997 between
the Trust and ABKB (as agent for and for the benefit of particular clients) and
the Common Share Purchase Agreement dated as of July 3, 1997 between the Trust
and LaSalle Advisors (as agent for and for the benefit of a particular client)
(collectively, the "ABKB Agreements") provide ABKB and LaSalle Advisors with
the same preemptive rights as those held by the MSAM Purchasers (the "ABKB
Preemptive Rights").
If the Private Placement is consummated, the MSAM Purchasers, pursuant
to the MSAM Preemptive Rights, and ABKB and LaSalle Advisors, pursuant to the
ABKB Preemptive Rights, shall have the right to acquire additional Common
Shares, each as described above.
REASONS FOR THE PRIVATE PLACEMENT
The purpose of the Private Placement is to obtain funds to finance
additional growth through property acquisitions. The Private Placement should
also enhance the Trust's financial structure and should afford the Trust
additional flexibility to finance additional growth by taking advantage of the
lower prevailing interest rates in today's financial markets or by raising
additional equity capital in the capital markets due to the Trust's improved
capital structure.
The Trust Managers also considered certain potential negative factors
associated with the Private Placement. First, the Sale Price may be at a
discount to the closing price of the Common Shares on the NYSE on either the
date hereof or the closing date of the Private Placement, or both. Second, the
sale of Common Shares in the Private Placement will reduce the percentage
ownership of the Trust's existing shareholders. Third, the Investment Agreement
may contain certain restrictive covenants including potentially limiting the
Trust's ability to issue any additional debt or senior equity securities prior
to achieving a certain Equity Capitalization threshold without the consent of
the Investors, unless the proceeds of such debt or senior equity securities
will be used to acquire real estate.
After weighing the aforementioned factors, the Trust Managers
determined that the advantage of possible additional growth the Trust might
achieve with the proceeds of the Private Placement outweighs the negative
factors and that the Private Placement is in the best interests of the Trust
and its shareholders. The Trust Managers believe the additional growth that the
Trust may achieve upon completion of the Private Placement will provide the
shareholders with the best opportunity for long-term growth of their investment
in the Trust.
SHAREHOLDER VOTE
The affirmative vote of the holders of a majority of the Common Shares
present in person or represented by proxy and entitled to vote at the Special
Meeting, provided a quorum is present, is required to approve the Private
Placement. The Trust Managers have unanimously approved the proposal, subject
to shareholder approval. Realco, the MSAM Purchasers, ABKB, LaSalle Advisors
and management of the Trust have advised the Trust that they intend to vote
their collective 3,317,865 Common Shares (71.23%% of the outstanding Common
Shares) in favor of proposal one. See "Security Ownership of Certain Beneficial
Owners and Management."
RECOMMENDATION OF THE TRUST MANAGERS
THE TRUST MANAGERS UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS VOTE
FOR PROPOSAL ONE.
4
<PAGE> 7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Shares by (i) each Trust Manager, (ii) the
Trust's Chief Executive Officer and each executive officer of the Trust, (iii)
all Trust Managers and executive officers of the Trust as a group, and (iv) to
the Trust's knowledge, by any person owning beneficially more than 5% of the
outstanding shares of such class, in each case at October 24, 1997. The
percentage ownership of each person assumes (i) the conversion of the Modified
Notes held by Realco into 544,962 Common Shares, (ii) the purchase of an
additional 199,169 Common Shares by clients and affiliates of MSAM pursuant to
the MSAM Agreement, (iii) the exercise of vested options to purchase an
aggregate 39,000 Common Shares, and (iv) the exercise of vested warrants to
purchase 40,000 Common Shares. Except as otherwise noted, each person named in
the table has sole voting and investment power with respect to all Common
Shares shown as beneficially owned by such person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
---------------- ----------------------- --------
<S> <C> <C>
Theodore R. Bigman . . . . . . . . . . . . . 2,000(1) *
William H. Bricker . . . . . . . . . . . . . 2,400(1) *
T. Patrick Duncan . . . . . . . . . . . . . 600 *
Robert E. Giles . . . . . . . . . . . . . . . 2,750(1) *
Edward B. Kelley . . . . . . . . . . . . . . 1,000 *
Russell C. Platt . . . . . . . . . . . . . 2,000(1) *
Stanley J. Kraska, Jr. . . . . . . . . . . . 2,000(1)(2) *
Charles W. Wolcott . . . . . . . . . . . . . 26,600(3) *
Marc A. Simpson . . . . . . . . . . . . . . . 6,900(4) *
David B. Warner . . . . . . . . . . . . . . . 5,200(4) *
Lewis D. Friedland . . . . . . . . . . . . . 7,000(5) *
USAA Real Estate Company . . . . . . . . . . 1,185,403(6) 21.62%
8000 Robert F. McDermott Freeway
IH-10 West, Suite 600
San Antonio, Texas 78230-3884
ABKB/LaSalle Securities Limited Partnership
LaSalle Advisors Limited Partnership
William K. Morrill, Jr.
Stanley J. Kraska, Jr.
Keith R. Pauley . . . . . . . . . . . . . . . 1,224,489(7) 22.34%
200 East Randolph Drive
Chicago, Illinois 60603
Morgan Stanley, Dean Witter, Discover & Co.
The Morgan Stanley Real Estate Special
Situations Fund I, L.P.
The Morgan Stanley Real Estate Special
Situations Fund II, L.P.
Morgan Stanley Asset Management Inc. . . . . 1,632,653(8)(9) 29.79%
1221 Avenue of the Americas
New York, New York 10020
All Trust Managers and executive officers as a
group (11 persons) . . . . . . . . . . . . . . . . 58,450 1.07%
- - --------------
</TABLE>
* Ownership is less than 1% of outstanding Common Shares.
(1) Includes 2,000 Common Shares that may be purchased upon exercising
vested options.
(2) See note (7) below.
5
<PAGE> 8
(3) Includes 10,000 Common Shares that may be purchased upon exercising
vested options.
(4) Includes 4,000 Common Shares that may be purchased upon exercising
vested options.
(5) Includes 7,000 Common Shares that may be purchased upon exercising
vested options.
(6) Includes (i) 544,962 Common Shares into which the Modified Notes held
by Realco may be converted (assuming a $10.00 per share conversion
price) and (ii) 4,000 Common Shares that may be purchased upon
exercising vested options acquired from Messrs. Duncan and Kelley. As
Trust Managers of the Trust, Messrs. Duncan and Kelley each received
vested options to purchase 2,000 Common Shares, which they then
transferred to Realco pursuant to Realco's internal policies.
(7) Based upon the Schedule 13D filed jointly by the listed reporting
persons with the Commission on July 21, 1997, (i) ABKB has sole voting
and dispositive power over 782,449 Common Shares; (ii) LaSalle
Advisors has sole voting and dispositive power over 442,040 Common
Shares; and (iii) each of Messrs. Morrill, Kraska and Pauley, as a
managing director of both ABKB and LaSalle Advisors, has sole voting
and dispositive power over the 782,449 Common Shares controlled by
ABKB and the 442,040 Common Shares controlled by LaSalle Advisors (an
aggregate 1,224,489 Common Shares). Messrs. Morrill, Kraska and Pauley
disclaim, however, beneficial ownership of the 1,224,489 Common
Shares, but state that as a group, the reporting persons have the sole
power to vote and dispose of 1,224,489 Common Shares.
(8) Includes 199,169 Common Shares that may be acquired by certain clients
and affiliates of MSAM in connection with the MSAM Agreement.
(9) Based upon the Schedule 13D filed jointly by the listed reporting
persons with the Commission on July 18, 1997, (i) Morgan Stanley, Dean
Witter, Discover & Co. has sole voting and dispositive power over
125,589 Common Shares and shared voting and dispositive power over
1,307,895 Common Shares; (ii) MSAM has shared voting and dispositive
power over 1,307,895 Common Shares; (iii) The Morgan Stanley Real
Estate Special Situations Fund I, L.P. has shared voting and
dispositive power over 376,766 Common Shares; and (iv) The Morgan
Stanley Real Estate Special Situations Fund II, L.P. has shared voting
and dispositive power over 465,332 Common Shares. Pursuant to
separate investment management agreements between MSAM and certain of
its clients, MSAM has been granted voting and dispositive power with
respect to the Common Shares held by each client.
PRINCIPAL ACCOUNTANTS
Representatives of Ernst & Young LLP, the Trust's principal
accountants for the fiscal year ended December 31, 1996 and for the fiscal year
ending December 31, 1997, will be present at the Special Meeting to respond to
appropriate questions from shareholders and to make a statement if they desire.
PROPOSALS BY SHAREHOLDERS
A proper proposal submitted by a shareholder for presentation at the
Trust's Annual Meeting to be held in 1998 and received at the Trust's principal
executive office no later than January 12, 1998 will be included in the Proxy
Statement and Proxy relating to such Annual Meeting.
OTHER MATTERS
The Trust Managers are aware of no other matter that will be presented
for action at the Special Meeting. IF SUCH PROPOSALS OR ANY OTHER MATTERS
REQUIRING A VOTE OF THE SHAREHOLDERS PROPERLY COMES BEFORE THE SPECIAL MEETING,
THE PERSONS AUTHORIZED UNDER THE PROXIES WILL VOTE AND ACT ACCORDING TO THEIR
BEST JUDGMENT.
EXPENSES
The expense of preparing, printing and mailing proxy materials to the
Trust's shareholders will be borne by the Trust. The Trust has engaged The
Herman Group, Inc. to assist in the mailing of proxies to shareholders. Proxies
may be solicited personally or by telephone by officers and employees of the
Trust, none of whom will receive additional compensation therefor. In addition
to mailing this material to Trust shareholders, the Trust has asked banks and
brokers to forward copies to persons for whom they hold shares of the Trust and
to request authority for execution of the Proxies. The Trust will reimburse the
banks and brokers for their reasonable out-of-pocket expenses in doing so. The
expense of preparing, printing and mailing the Proxy Statement and all
supplemental materials, as well as the cost of the solicitors and attorneys,
are anticipated to be approximately $75,000 and will be borne by the Trust. Of
these expenses, the estimated fees for The Herman Group, Inc. are $5,000. The
Herman Group, Inc. also will be reimbursed for reasonable out-of-pocket
expenses.
6
<PAGE> 9
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Trust
and its subsidiaries for the six months ended June 30, 1997 and 1996
(unaudited) and for each of the five years in the period ended December 31,
1996 (audited). This information should be read in conjunction with the
discussion set forth below under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Trust and accompanying Notes included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ---- ----
(in thousands except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Operating data:
Total revenues . . . . . . . . . . . $ 5,252 $ 5,985 $11,478 $11,779 $11,226 $10,641 $ 15,139
Loss from operations (a) . . . . . . (2,073) (2,268) (4,732) (4,338) (4,311) (5,121) (18,719)
Net income (loss) (a) . . . . . . . 882 (901) 1,255 (4,584) (4,655) (7,867) (17,593)
Per share: (b)
Loss from operations (a) . . . . . $ (1.00) $ (1.25) $ (2.60) $ (2.40) $ (2.35) $ (2.85) $ (10.30)
Net income (loss) (a) . . . . . . . 0.45 (0.50) 0.70 (2.55) (2.55) (4.35) (9.70)
Distributions paid . . . . . . . . - 0.20 0.20 0.20 - 0.80 1.00
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . $73,285 $83,158 $78,936 $89,382 $92,550 $88,297 $110,446
Total debt . . . . . . . . . . . . . 46,997 62,702 53,216 62,815 65,613 57,078 68,578
Shareholders' equity . . . . . . . . 23,565 17,984 22,683 19,248 24,196 28,851 38,171
</TABLE>
- - ---------------
(a) Loss from real estate operations and net loss for 1995, 1994 and 1992
include provisions for possible losses on real estate of $600, $650
and $14,094, respectively. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for discussion of
extraordinary gains and losses of $5,810, ($55), ($344), ($2,530) and
$1,910 in 1996, 1995, 1994, 1993 and 1992, respectively, and $2,643
and $1,367 for the six months ended June 30, 1997 and 1996,
respectively.
(b) The share amounts have been restated to reflect the impact of the one
for five reverse Common Share split which was approved by the Trust's
shareholders and became effective on October 15, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Trust and accompanying Notes included
elsewhere in this Proxy Statement. The statements contained in this Proxy
Statement that are not historical facts are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may differ materially from those included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including, but
not limited to, changes in general economic conditions in the markets that
could impact demand for the Trust's properties and changes in financial markets
and interest rates impacting the Trust's ability to meet its financing needs
and obligations.
RESULTS OF OPERATIONS
Comparison of 1996 to 1995
The sale of two properties in late 1996 and the purchase of a property
in August 1995 resulted in a net decrease in 1996 property revenue and net
operating income of $67,000 and $51,000, respectively, when compared to 1995.
On a same property basis, property revenues decreased from $10,209,000 in 1995
to $10,186,000 in 1996, a decrease of 0.2%, comprised of a 2.9% increase in
revenue related to industrial properties and a 6.2% decrease in revenue at the
Trust's retail property. The decrease in revenue at the Trust's retail property
stemmed principally from lower percentage rents ($115,000) and slower leasing
of vacancies and is partially attributable to the opening of a new regional
mall in Denver during the third quarter of 1996. Overall leased occupancy of
the Trust's portfolio was 94.2% at December 31, 1996 compared to 93.7% at
December 31, 1995.
7
<PAGE> 10
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, Trust administration and
overhead expenses or provision for possible losses on real estate) decreased
from $6,704,000 in 1995 to $6,494,000 in 1996, a decrease of 3.1%. This overall
decrease is comprised of a 0.5% increase related to industrial properties and a
10.7% decrease related to the Trust's retail property. The decrease in the
Trust's retail property is a result of the decrease in revenue explained above.
Same property operating expenses increased by 5.3%, reflecting an increase in
repairs and maintenance expenses and tenant refit costs of $98,000 in 1996. On
a same property basis, loss from operations increased from $4,964,000 in 1995
to $5,351,000 in 1996 (see following explanation).
Loss from operations increased from $4,338,000 in 1995 to $4,732,000
in 1996 as a result of the decrease in net operating income explained above, a
decrease in total interest expense of $584,000 (due to the larger accrual of
default rate interest on the Trust's $45.2 million in 8.8% unsecured notes
payable (the "MLI Notes") in 1995), the provision of $600,000 for possible
losses on real estate in 1995, an increase in litigation, refinancing and proxy
costs of $568,000 (due to the shareholder litigation in 1996), an increase in
Trust administration and overhead expenses of $406,000 (due to the accrual of
$240,000 in incentive compensation, higher legal fees and increased Trust
Manager compensation in 1996) and a decrease in interest income (due to higher
invested balances in 1995 from the nonpayment of interest to the Trust's
unsecured lender).
During 1996, the Trust sold two industrial properties and recognized a
gain on sale of $177,000, compared to the sale of one property in 1995
resulting in a loss on sale of $191,000. In 1996, the Trust recognized an
extraordinary gain on extinguishment of debt of $5,810,000, or $3.20 per share,
pursuant to settlement of litigation with The Manufacturers Life Insurance
Company and The Manufacturers Life Insurance Company (U.S.A.) (collectively,
"MLI").
Comparison of 1995 to 1994
Property revenues increased from $11,080,000 in 1994 to $11,410,000 in
1995, resulting from the stabilization in occupancy of the Trust's portfolio
and improving rental rates in selected markets. Property operating expenses
decreased from $3,952,000 in 1994 to $3,851,000 in 1995, primarily due to the
net effect of a sale of a property in February 1995 and the purchase of a
property in August 1995. Property net operating income increased from
$7,128,000 in 1994 to $7,559,000 in 1995, an increase of 6.0%. On a same
property basis, net operating income increased from $6,927,000 in 1994 to
$7,474,000 in 1995, an increase of 7.9%. Overall leased occupancy of the
portfolio was 93.7% at December 31, 1995 compared to 93.2% at December 31,
1994.
Loss from operations increased from $4,311,000 in 1994 to $4,338,000
in 1995 as a result of the increase in net operating income and an increase in
interest income of $223,000 (due to higher invested balances resulting from the
nonpayment of interest to the Trust's unsecured lender), a decrease in total
administrative expenses of $128,000 (as a result of two proxy contests in 1994
versus one in 1995), a net increase in interest expense of $1,215,000 (due to
the November 1994 refinancing transaction and the default rate interest accrued
by the Trust in 1995 of $724,000), a decrease in depreciation and amortization
of $356,000 (due to the Trust's property transactions in 1995), and a decrease
in provision for possible losses on real estate of $50,000 (due to the timing
of writedowns related to properties held for sale).
During 1995, the Trust recognized a loss of $191,000 on the sale of
its Quadrant property and an extraordinary loss of $55,000 related to the
prepayment of an outstanding mortgage loan. In 1994, the Trust recognized an
extraordinary loss of $344,000 on the partial in-substance defeasance of Zero
Coupon Notes due 1997.
During 1995, the Trust incurred approximately $980,000 in expenses
related to litigation, a proxy contest in connection with issues before the
shareholders at the Trust's annual meeting and attempted recapitalization
costs, compared to approximately $1,027,000 in 1994. During 1994, the Trust had
no litigation expenses but incurred costs related to two proxy contests.
The Trust recorded a provision for possible loss on real estate
related to its Patapsco property at December 31, 1995 of $600,000. This
provision follows a $650,000 provision made at December 31, 1994. The Trust
began marketing this property in early 1995.
8
<PAGE> 11
Comparison of Six Months Ended June 30, 1997 to June 30, 1996
The overall occupancy of the Trust's portfolio on June 30, 1997 was
93.7%, compared to 93.9% on June 30, 1996 and 91.1% on March 31, 1997. When
comparing the six months ended June 30, 1997 with the same period in 1996,
property revenues decreased from $5,846,000 in 1996 to $5,221,000 in 1997 and
property operating expenses decreased from $1,907,000 in 1996 to $1,841,000 in
1997, primarily as a result of the sale of two properties during the fourth
quarter of 1996 and one property during the first quarter of 1997. When
comparing the six months ended June 30, 1997 to the same period in 1996 on a
same property basis, revenue increased 6.7% and net operating income increased
5.6% for the Trust's industrial properties whereas revenue decreased 14.3% and
net operating income decreased 24.6% for the Trust's retail property. The
decline in the performance of the Trust's retail property was primarily related
to nonrecurring collections of approximately $80,000 in lease termination fees
and $76,000 in percentage rents in 1996, bad debt writeoffs of approximately
$20,000 in 1997 and a decline in average occupancy from 86.2% in 1996 to 84.8%
in 1997. The Trust is continuing its efforts to increase leasing at this
property.
The Trust had a net loss from operations of $2,073,000 for the six
months ended June 30, 1997 compared to $2,268,000 for the same period in 1996.
This change was primarily related to the decrease in property net operating
income of $559,000 explained above, a decrease in interest income of $108,000
(resulting from a decrease in investable funds due to the settlement of
litigation in 1996), a decrease in litigation and proxy costs of $451,000 (due
to the settlement of litigation matters during 1996, offset by the costs of the
Trust's shareholder meeting in June 1997), a net decrease in interest expense
of $314,000 (due to the paydown/forgiveness of debt during 1996 and 1997,
offset by the accrual of $647,000 in interest expense relating to the expected
future conversion of the Modified Notes held by Realco into Common Shares), and
a decrease in administration and overhead expenses of $79,000 (due to $240,000
in incentive compensation expense in January 1996, offset by the addition of
two Trust Managers in December 1996 and the use of compensation and computer
consultants during 1997).
Analysis of Cash Flows
Comparison of 1996 to 1995
Cash flow used in operating activities in 1996 was $5,658,000. This
deficit reflects the results of property operations, interest expense,
administrative expenses and an increase in restricted cash of $707,000 as a
result of the Trust's property financing in 1996. Interest expense reflects
several items of nonrecurring nature, including a decrease in accrued interest
of $2,986,000 related to the settlement of the MLI litigation in 1996, the
accrual of $369,000 of default rate interest which was ultimately forgiven and
approximately $535,000 related to principal which was forgiven in November 1996
and February 1997. In addition, administrative expenses includes $1,548,000 of
litigation, refinancing and proxy costs which relate to special situations and
should not be considered to be recurring expenses. Management believes that, in
the future, cash flow provided by operations will increase due to the
elimination of the nonrecurring items described above and the Trust's plans to
attract capital and pursue a growth strategy.
Cash flow provided by investing activities in 1996 was $5,173,000,
representing proceeds from the sale of two properties and amounts expended on
capitalized improvements and leasing commissions. The sale of the two
properties was necessary to raise capital with which to make payments under the
Trust's option to retire certain indebtedness at a discount.
Cash flow used in financing activities in 1996 was $3,199,000. This
amount reflects proceeds from the mortgage financing on nine properties, the
payment of amounts on the option to retire certain indebtedness at a discount,
the sale of Common Shares to Realco, and the first quarter distribution to
shareholders.
Comparison of Six Months Ended June 30, 1997 to June 30, 1996
Net cash used in operating activities was $515,000 for the six months
ended June 30, 1997. This is primarily the net result of the operational items
discussed above, a decrease in accounts payable, other liabilities and tenant
security deposits of $623,000 (due principally to the payment of property taxes
during the first quarter) and an offsetting increase in accrued interest of
$636,000 (due to the accrual of $647,000 in interest related to the conversion
of the Modified Notes by Realco). Included in net cash used in operating
activities is approximately $437,000 in litigation
9
<PAGE> 12
and proxy costs, which management believes is of a nonrecurring nature.
Management believes that, in the future, cash flow provided by operations will
increase due to the elimination of such nonrecurring items and the Trust's
plans to pursue a growth strategy.
Net cash provided by investing activities was $1,599,000 for the six
months ended June 30, 1997 resulting from the expenditure of $430,000 for
capitalized leasing commissions and improvements to real estate properties and
$2,029,000 received from the sale of the Trust's Burnsville property in March
1997.
Net cash used in financing activities was $3,841,000, resulting from
the payment of principal on mortgage notes payable. Included in this amount is
approximately $1,924,000 related to the payment of the mortgage loan on the
Trust's Burnsville property which was sold in March 1997.
Funds from Operations
In March 1995, the National Association of Real Estate Investment
Trusts ("NAREIT") issued its White Paper on Funds From Operations ("FFO") which
clarified the treatment of certain items in determining FFO and recommended
additional supplemental disclosures. The Trust has adopted the recommendations
of NAREIT and restated its FFO calculation for prior years. The changes
promulgated by NAREIT eliminate the add back of depreciation and amortization
of non-real estate items, including the amortization of deferred financing
costs, in determining FFO. The revised definition of FFO is net income (loss)
computed in accordance with generally accepted accounting principles, excluding
gains or losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In addition, NAREIT recommends that
extraordinary items or significant nonrecurring items that distort
comparability should not be considered in arriving at FFO. Accordingly, the
Trust does not include the nonrecurring interest accrual related to the
expected future conversion of the Modified Notes held by Realco into Common
Shares or the default rate interest accrued on the MLI Notes in the
determination of FFO. Funds Available for Distribution ("FAD") is also
presented as it more accurately portrays the ability of the Trust to make
distributions because it reflects capital expenditures. The Trust believes FFO
and FAD are appropriate measures of performance relative to other real estate
investment trusts ("REITs"). FFO provides investors with an understanding of
the ability of the Trust to incur and service debt and make capital
expenditures. There can be no assurance that FFO and FAD presented by the Trust
is comparable to similarly titled measures of other REITs. While other REITs
may not always use a similar definition, this information does add
comparability to those which have adopted the NAREIT definitions.
FFO and FAD should not be considered as an alternative to net income
or other measurements under generally accepted accounting principles as an
indicator of the Trust's operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital improvements or
principal payments on indebtedness.
10
<PAGE> 13
The following table shows the Trust's cash flows from its operating,
investing and financing activities, prepared in accordance with generally
accepted accounting principles.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities . . . . . . . . . . . . . . . . $(5,658) $ 3,848 $ (594) $ (515) $ (4,445)
Net cash (used in) provided by investing $ 5,173 $ 144 $ (1,476) $ 1,599 $ (618)
activities . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . $(3,199) $(3,217) $ 7,870 $(3,841) $ (476)
</TABLE>
FFO and FAD are calculated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . $ 1,255 $(4,584) $(4,655)
Exclude effects of:
Extraordinary (gain) loss on extinguishment of (5,810) 55 -
debt . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sales of real estate . . . . . . (177) 191 -
Provision for possible losses on real estate . . - 600 650
Real estate depreciation and amortization . . . 2,890 2,771 3,102
Default rate interest accrual . . . . . . . . . 369 724 -
Extraordinary loss on partial in-substance
defeasance of Zero Coupon Notes . . . . . . . . . - - 344
------- ------- -------
Funds from operations . . . . . . . . . . . . . . . $(1,473) $ (243) $ (559)
======== ======= =======
Funds from operations . . . . . . . . . . . . . . . $(1,473) $ (243) $ (559)
Capitalized improvements and
leasing commissions (a) . . . . . . . . . . . . . (1,372) (1,023) (1,476)
Non-cash effect of straight-line rents on FFO . . . 193 161 156
------- ------- -------
Funds available for distribution) . . . . . . . . . $(2,652) $(1,105) $(1,879)
======= ======= =======
</TABLE>
- - ---------------
The breakdown of capitalized improvements and leasing commissions is as
follows for each of the two years ending December 31, 1996 and 1995:
<TABLE>
<CAPTION>
FYE 12/31/96 FYE 12/31/95
-------------- ---------------
Amount PSF Amount PSF
------ --- ------ ---
<S> <C> <C>
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>
11
<PAGE> 14
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . $ 882 $ (901)
Exclude effects of:
Gain on sale of real estate . . . . . . (312) -
Extraordinary gain on extinguishment of
debt . . . . . . . . . . . . . . . . . . (2,643) (1,367)
Real estate depreciation and
amortization . . . . . . . . . . . . . . 1,389 1,404
Nonrecurring interest accrual assuming
future conversion of debt to equity . . 647 -
Default rate interest accrual . . . . . - 369
------- --------
Funds from operations . . . . . . . . . . . . . . $ (37) $ (495)
======= ========
Funds from operations . . . . . . . . . . . . . . $ (37) $ (495)
Capitalized improvements and
leasing commissions . . . . . . . . . . . . . . (430) (618)
Non-cash effect of straight-line rents on FFO . . 45 109
------- --------
Funds available for distribution . . . . . . . . $ (422) $ (1,004)
======= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Trust entered into the MSAM Agreement and in July
1997 entered into the ABKB Agreements whereby the Trust agreed to sell up to
$20 million and $15 million, respectively, of Common Shares at $12.25 per
share. The MSAM Agreement and the ABKB Agreements originally contemplated the
issuance of convertible debt so as to allow the Trust to accept this capital in
advance of shareholder approval for the transactions and for an increase in the
authorized shares of the Trust at the June 30, 1997 annual meeting of
shareholders. Ultimately, a decision was made to fund the transactions after
June 30, thereby eliminating the expense associated with issuance and
conversion of convertible debt. The Trust has currently received proceeds
totaling $17,560,176 and $15,000,000 under the respective agreements. The Trust
will utilize these proceeds to purchase additional properties as part of its
growth plans. Through October 8, 1997, the Trust had expended approximately
$19.7 million of such proceeds in connection with the acquisition of
properties. In addition, the Trust may seek to raise other capital through
private placements of equity or acquisition debt or a combination of both
during 1997 to fund purchases of additional properties.
The principal sources of funds for the Trust's liquidity requirements
are funds generated from operations of the Trust's real estate assets and
unrestricted cash reserves. As of June 30, 1997, the Trust had $1,253,000 in
unrestricted cash on hand. The Trust presently anticipates that these cash
reserves will provide sufficient funds for all currently known liabilities and
commitments relating to the Trust's operations during 1997.
In May 1995, the Trust filed a lawsuit against The Manufacturers Life
Insurance Company, holder of the MLI Notes, alleging breach of the Note
Purchase Agreement between The Manufacturers Life Insurance Company and the
Trust and unlawful attempts to coerce the Trust into relinquishing certain of
its rights under that agreement. The Trust settled its MLI litigation in May
1996 and paid $5,200,000 in settlement of all past due interest on the MLI
Notes, thereby allowing the Trust to record an extraordinary gain of
$1,367,000. The Trust was also granted an option to repay the approximate
$45,239,000 in principal amount outstanding on the MLI Notes for $36,800,000
(the "Option Price"). In November 1996, the Trust completed a mortgage
financing on nine properties in the amount of $26,453,000. Net proceeds of
$24,805,000 were applied to the Option Price. In addition, the Trust sold two
properties during the fourth quarter of 1996, generating net proceeds of
$6,545,000 which were also applied to the Option Price. In accordance with the
MLI settlement agreement, $4,220,000 in debt was forgiven, allowing the Trust
to record an extraordinary gain of $4,443,000 (including accrued interest
forgiven). The MLI Notes were purchased by Realco in February 1997. Realco has
the option to convert the principal amount of the Modified Notes into
12
<PAGE> 15
Common Shares at the conversion rate of $10.00 per share (if converted on or
before December 31, 1997) or $11.25 per share (if converted between January 1,
1998 and December 31, 2000). If conversion of this debt were to occur in 1997,
Realco would own approximately 21.9% of the outstanding Common Shares (assuming
no other issuances of Common Shares other than the issuance of 199,169 Common
Shares to certain clients and affiliates of MSAM).
The Trust declared a distribution of $0.20 per Common Share in
February 1996. The MLI settlement agreement prohibited the payment of
distributions while the agreement was in effect. The Modified Notes owned by
Realco provided that the Trust could not pay distributions until the debt is
paid in full; however, this restriction terminated on June 30, 1997 when the
shareholders approved Realco's conversion right and approved an increase in the
number of authorized Common Shares. The Trust intends to evaluate future
distributions on a quarterly basis.
The nature of the Trust's operating properties, which generally
provide for leases with a term of between three and five years, results in an
approximate turnover rate of 20% to 25% of the Trust's tenants and related
revenue annually. Such turnover requires capital outlays related to tenant
improvements and leasing commissions in order to maintain or improve the
Trust's occupancy levels. These costs amounted to $1,372,000 in the year ended
December 31, 1996 and $1,023,000 in the year ended December 31, 1995 and
$430,000 for the six months ended June 30, 1997. These costs have historically
been funded out of the Trust's operating cash flow and cash reserves. The Trust
has made no commitments for additional capital expenditures beyond those
related to normal leasing and re-leasing activity and related escrows. No
capital improvements or renovations of significance are anticipated in the near
future for any of the Trust's properties, with the possible exception of a
large retail lease at the Trust's retail property. Such a lease, if agreed to,
could result in expenditures for tenant improvements in excess of $500,000.
At June 30, 1997, the Trust had $41,547,000 in mortgage debt
outstanding, all of which is comprised of fixed rate debt with a weighted
average interest rate of 8.61%.
On a long term basis, the Trust expects to meet liquidity requirements
generated by property operating expenses, debt service and future distributions
with funds generated by the operations of its real properties. Should such
funds not cover these needs, the possibility of future distributions may be
reduced or eliminated. The Trust currently intends to maintain a debt to total
market capitalization ratio between 30% and 40%, thereby reducing the risk of
financial default. The Trust may increase this leverage in order to fund growth
opportunities in anticipation of reducing this leverage through future equity
offerings. Should the Trust be unable to complete anticipated equity offerings,
the risk of financial default would increase.
TRANSACTIONS WITH REALCO
During 1996, there were a series of transactions involving Realco. On
November 25, 1996, Realco entered into independently negotiated agreements to
purchase an aggregate of 451,521 Common Shares from certain shareholders for
$13.75 per share, pending approval of the settlement of the Shareholder
Litigation, which the Trust had initiated, alleging that certain significant
shareholders of the Trust had made material misrepresentations in their filings
with the Securities and Exchange Commission. The $13.75 price per share was
negotiated between the selling shareholders and Realco without any involvement
by the Trust. The majority of these Common Shares were purchased from two
shareholders, one of which was involved in the Shareholder Litigation. The
other selling shareholder was unwilling to wait for the settlement of the
Shareholder Litigation and Realco did not want to purchase Common Shares until
the settlement of the litigation. In order to facilitate the settlement of the
litigation, Realco advanced approximately $2,770,000 to the Trust on November
25, 1996. The proceeds of this loan, which bore interest at 9%, were used by a
subsidiary of the Trust to acquire 199,620 Common Shares from the selling
shareholder not involved in the Shareholder Litigation. On December 19, 1996,
the Trust sold 184,920 Common Shares, representing the remainder of its
authorized Common Shares, to Realco for $13.75 per share, the same price at
which Realco had independently agreed to purchase the Common Shares from the
other shareholders. On December 20, 1996, after approval of the settlement of
the Shareholder Litigation, Realco closed the purchase of 451,521 Common
Shares, including the acquisition of 199,620 Common Shares held by a subsidiary
of the Trust in return for cancellation of the related loan discussed above,
resulting in Realco's current ownership of 636,441 Common Shares, or 13.66% of
the outstanding Common Shares of the Trust as of June 30, 1997. Pursuant to
internal policies at Realco, Messrs. Duncan and Kelley transferred to Realco
the 4,000 options they received as Trust Managers. As of October 3, 1997,
Realco owned 640,441 Common Shares (including the 4,000 Common Shares that may
be purchased upon exercise of the vested options).
On December 18, 1996, the Trust entered into an agreement granting
Realco the right to commence negotiations to purchase the MLI Notes and, if
Realco was successful in acquiring these notes, setting forth the terms
13
<PAGE> 16
of the modifications to the MLI Notes, including the right to convert the
principal amount of these notes into Common Shares of the Trust at $10.00 per
share during 1997 and $11.25 per share thereafter. On February 26, 1997, Realco
acquired the MLI Notes for $5,481,152. The MLI Notes were then modified to
reduce the outstanding principal balance from $9,419,213 to $7,040,721, to
release all security for the notes, to provide for monthly payments of interest
at 8.8% and to extend the maturity date from March 31, 1997 to December 31,
2000. In addition, Realco has the option to convert the principal amount of the
notes into Common Shares of the Trust at the conversion rate of $10.00 per
share (if converted on or before December 31, 1997) or $11.25 per share (if
converted between January 1, 1998 and December 31, 2000). Subsequent to the
modification, the Trust made a principal payment of $1,591,103, resulting in a
current principal balance of $5,449,618. The modification of this debt resulted
in a reduction of approximately $1,591,000 of the potential $3,969,000 discount
remaining under the Option Agreement on this debt. The Trust Managers viewed
this as a reasonable cost of this transaction as it (i) removed the risk of
losing the entire potential discount if payment was not made by March 31, 1997;
(ii) removed the necessity to liquidate certain properties; (iii) allowed for
release of all collateral securing this obligation; (iv) allowed the Trust to
recognize an extraordinary gain of approximately $2,643,000 or $1.30 per share
in the first quarter of 1997; and (v) allowed for the possibility of conversion
of this obligation into Common Shares, thereby improving the Trust's financial
position.
The Trust currently anticipates it will reflect approximately
$1,022,000, representing the difference between the market trading price of
$11.90 per share on February 26, 1997 and the $10.00 conversion price, as
interest expense between February 26, 1997 and September 30, 1997. The date of
February 26, 1997 is used to measure market value as this is deemed to be the
date of issuance of the Modified Notes, which contain the convertibility
option. This will result in additional interest expense of approximately
$272,000 in the first quarter of 1997 and approximately $375,000 in each of the
second and third quarters of 1997.
The closing sale price of the Trust's Common Shares on the NYSE on the
above dates was as follows: $10.65 per share on November 25, 1996, $10.00 per
share on December 18 and December 19, 1996, $9.40 per share on December 20,
1996, $11.90 per share on February 26, 1997.
RECENT DEVELOPMENTS
On August 20, 1997, a purported class action lawsuit (the "Lawsuit"),
which was filed in the Superior Court of the State of Arizona and which has
been removed to the United States District Court for the District of Arizona,
was served upon Realco, the General Partners the RELPS (as defined below),
certain other affiliated entities and the individual members of the boards of
directors of each of the General Partners. The Trust was also named as a
defendant. The Lawsuit alleges, among other things, breaches of fiduciary duty
in connection with the transactions contemplated by the Merger Agreements
entered into as of June 30, 1997, by and between the Trust and each of USAA
Real Estate Income Investments I, A California Limited Partnership, USAA Real
Estate Income Investments II Limited Partnership, USAA Income Properties III
Limited Partnership and USAA Income Properties IV Limited Partnership
(collectively, the "RELPS"). The Lawsuit seeks, among other things, to enjoin
the consummation of the merger and damages, including attorney's fees and
expenses. The defendants in the Lawsuit believe that the plaintiffs' claims are
without merit and intend to defend vigorously against the Lawsuit. However, no
assurance can be given that the plaintiffs in the Lawsuit will not be
successful. If such plaintiffs were to successfully enjoin the consummation of
the merger, a condition to the obligations of the Trust and the RELPS to
consummate the merger would not be satisfied, which would entitle the General
Partner of any RELP or the Trust Managers to terminate the Merger Agreement and
abandon the merger.
Pursuant to the terms of the Merger Agreement, for a period of six
years from and after the Effective Time, the Trust must indemnify the partners
or agents of any RELP who at any time prior to the Effective Time were entitled
to indemnification under the Partnership Agreement of the RELP. Such persons
are entitled to indemnification to the same extent as they would have been
entitled to indemnification under the Partnership Agreement. If the Merger
occurs and if the court were to determine that the General Partners, their
affiliated entities and/or the members of the boards of directors of the
General Partners were liable for damages in connection with the Lawsuit, to the
extent the General Partners and the directors would have been entitled to
indemnification under the Partnership Agreements, the Trust would be required
to indemnify such parties for costs and expenses related to the Lawsuit.
Depending upon the amount of such costs and expenses, it could have a material
adverse effect on the Trust.
On August 29, 1997, the Trust purchased two light industrial
properties with a total of 137,265 net rentable square feet for $6.4 million.
The properties are located in suburban areas of Dallas, Texas.
On October 3, 1997, the Trust, as general partner in a limited
partnership, purchased a portfolio of eight properties with 783,780 net
rentable square feet located in Dallas and suburban areas of Dallas, Texas. The
purchase
14
<PAGE> 17
price of the portfolio was $36.8 million. The purchase price was partially
financed by a borrowing of approximately $20.7 million under the acquisition
line discussed below and approximately $2.8 million in limited partnership
units ("OP Units") issued to the limited partner of the partnership. The OP
Units are convertible by the limited partner, after a one year lockout period,
into Shares of the Trust on a one-for-one basis.
Also on October 3, 1997, the Trust entered into a secured acquisition
line with Prudential Securities Capital Corporation in the amount of $35
million. The terms of this lime include a variable interest rate based on the
30-day LIBOR rate plus 200 basis points and a maximum loan to value of 70%. The
terms also state that borrowings mature in one year and, if not repaid, allow
the lender to move such borrowings into a securitized mortgage pool.
15
<PAGE> 18
AMERICAN INDUSTRIAL PROPERTIES REIT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Financial Statements (audited):
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements (audited) . . . . . . . . . . . . . . . . . . F-7
Financial Statement Schedule:
Schedule III - Consolidated Real Estate and Accumulated Depreciation . . . . . . . . . . F-14
Notes to Schedule III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15
Consolidated Financial Statements for the quarter
ended June 30, 1997 (unaudited):
Consolidated Statements of Operations for the three months and six months ended
June 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-16
Consolidated Balance Sheets as of June 30, 1997 (unaudited) and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-18
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . F-19
</TABLE>
All other financial statements and schedules not listed have been
omitted because the required information is either included in the
Financial Statements and the Notes thereto as included herein or is
not applicable or required.
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
Trust Managers and Shareholders
American Industrial Properties REIT:
We have audited the accompanying consolidated balance sheets of American
Industrial Properties REIT (the "Trust") as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the consolidated financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Trust as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein.
/s/
Ernst & Young LLP
Dallas, Texas
February 13, 1997
except for Note 14, as to
which the date is October 15, 1997
F-2
<PAGE> 20
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
REVENUES
Rents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,592 $ 8,676 $ 8,397
Tenant reimbursements . . . . . . . . . . . . . . . . . . 2,728 2,734 2,683
Interest income . . . . . . . . . . . . . . . . . . . . . 158 369 146
---------- ---------- ----------
11,478 11,779 11,226
---------- ---------- ----------
EXPENSES
Property operating expenses:
Property taxes . . . . . . . . . . . . . . . . . . . . 1,421 1,397 1,421
Property management fees . . . . . . . . . . . . . . . 430 428 442
Utilities . . . . . . . . . . . . . . . . . . . . . . 476 478 501
General operating . . . . . . . . . . . . . . . . . . 849 795 705
Repairs and maintenance . . . . . . . . . . . . . . . 529 431 656
Other property operating expenses . . . . . . . . . . 317 322 227
Depreciation and amortization . . . . . . . . . . . . . . 2,909 2,777 3,133
Interest on 8.8% notes payable . . . . . . . . . . . . . 4,003 4,707 4,001
Interest on mortgages payable . . . . . . . . . . . . . . 1,898 1,778 850
Amortization of original issue discount on Zero Coupon
Notes due 1997 . . . . . . . . . . . . . . . . . . . . -- -- 419
Administrative expenses:
Trust administration and overhead . . . . . . . . . . 1,830 1,424 1,505
Litigation, refinancing and proxy costs . . . . . . . 1,548 980 1,027
Provision for possible losses on real estate . . . . . . -- 600 650
---------- ---------- ----------
16,210 16,117 15,537
---------- ---------- ----------
Loss from operations . . . . . . . . . . . . . . . . . . (4,732) (4,338) (4,311)
Gain (loss) on sales of real estate . . . . . . . . . . . 177 (191) --
---------- ---------- ----------
Loss before extraordinary items . . . . . . . . . . . . . (4,555) (4,529) (4,311)
Extraordinary gain (loss) on extinguishment of debt . . . 5,810 (55) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997 . . . . . . . . . . . . . . -- -- (344)
---------- ---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . $ 1,255 $ (4,584) $ (4,655)
========== ========== ==========
PER SHARE DATA(A)
Loss from operations . . . . . . . . . . . . . . . . . . $ (2.60) $ (2.40) $ (2.35)
Gain (loss) on sales of real estate . . . . . . . . . . . 0.10 (0.10) --
Extraordinary gain (loss) on extinguishment of debt . . . 3.20 (0.05) --
Extraordinary loss on partial in-substance defeasance of
Zero Coupon Notes due 1997 . . . . . . . . . . . . . . -- -- (0.20)
---------- ---------- ----------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . $ 0.70 $ (2.55) $ (2.55)
========== ========== ==========
Distributions Paid . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.20 $ 0.00
========== ========== ==========
Weighted average shares outstanding . . . . . . . . . . . 1,821,648 1,815,080 1,815,080
========== ========== ==========
</TABLE>
- - ---------------------
(a) The Share amounts and number of Shares outstanding have been restated
to reflect the impact of the one for five reverse Share split which
was approved by the Trust's shareholders and became effective on
October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 21
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Real estate:
Held for investment ................................................... $ 84,693 $ 97,091
Held for sale ......................................................... 9,779 4,806
--------- ---------
Total real estate ..................................................... 94,472 101,897
Accumulated depreciation .............................................. (23,973) (23,441)
--------- ---------
Net real estate ....................................................... 70,499 78,456
Cash and cash equivalents:
Unrestricted .......................................................... 4,010 7,694
Restricted ............................................................ 1,366 659
--------- ---------
Total cash and cash equivalents ....................................... 5,376 8,353
Other assets, net ....................................................... 3,061 2,573
--------- ---------
Total Assets .................................................. $ 78,936 $ 89,382
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ................................................ $ 43,797 $ 17,576
8.8% notes payable .................................................... 9,419 45,239
Accrued interest ...................................................... 602 5,178
Accounts payable, accrued expenses and other
liabilities ........................................................ 1,964 1,620
Tenant security deposits .............................................. 471 521
--------- ---------
Total Liabilities ............................................. 56,253 70,134
--------- ---------
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized
10,000,000 Shares; issued and outstanding 2,000,000
Shares at 1996 and 1,815,080 Shares at 1995(a) ..................... 1,000 908
Additional paid-in capital ............................................ 127,056 124,605
Accumulated distributions ............................................. (58,456) (58,093)
Accumulated loss from operations and extraordinary gains
(losses) ........................................................... (48,065) (49,143)
Accumulated net realized gain on sales of real estate ................. 1,148 971
--------- ---------
Total Shareholders' Equity .................................... 22,683 19,248
--------- ---------
Total Liabilities and Shareholders' Equity .................... $ 78,936 $ 89,382
========= =========
</TABLE>
- - --------------------
(a) The number of Shares outstanding have been restated to reflect the
impact of the one for five reverse Share split which was approved by
the Trust's shareholders and became effective on October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 22
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (IN THOUSANDS,
EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
Shares of Beneficial ADDITIONAL RETAINED
Interest PAID-IN EARNINGS
---------------------
NUMBER(A) AMOUNT CAPITAL (DEFICIT) TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ............ 1,815,080 $ 908 $ 124,605 $ (96,662) $ 28,851
Net loss ............................ -- -- -- (4,655) (4,655)
--------- --------- --------- --------- ---------
Balance at December 31, 1994 .......... 1,815,080 908 124,605 (101,317) 24,196
Net loss ............................ -- -- -- (4,584) (4,584)
Distributions to shareholders ....... -- -- -- (364) (364)
--------- --------- --------- --------- ---------
Balance at December 31, 1995 .......... 1,815,080 908 124,605 (106,265) 19,248
Issuance of additional shares ....... 184,920 92 2,451 -- 2,543
Net income .......................... -- -- -- 1,255 1,255
Distributions to shareholders ....... -- -- -- (363) (363)
--------- --------- --------- --------- ---------
Balance at December 31, 1996 .......... 2,000,000 $ 1,000 $ 127,056 $(105,373) $ 22,683
========= ========= ========= ========= =========
</TABLE>
- - ------------------------
(a) The number of Shares outstanding have been restated to reflect the
impact of the one for five reverse Share split which was approved by
the Trust's shareholders and became effective on October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 23
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ 1,255 $ (4,584) $ (4,655)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Extraordinary (gains) losses ........................... (5,810) 55 344
(Gains) losses on real estate .......................... (177) 791 650
Depreciation ........................................... 2,577 2,479 2,622
Amortization of deferred financing costs ............... 70 70 --
Other amortization ..................................... 332 298 511
Amortization of original issue discount ................ -- -- 419
Changes in operating assets and liabilities:
(Increase) decrease in other assets and restricted
cash .............................................. (1,270) 126 (858)
Increase (decrease) in accounts payable, other
liabilities and tenant security deposits .......... 351 (61) 373
(Decrease) increase in accrued interest ................ (2,986) 4,674 --
-------- -------- --------
Net Cash (Used In) Provided By Operating
Activities ...................................... (5,658) 3,848 (594)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales of real estate .................... 6,545 2,476 --
Capitalized improvements and leasing commissions .......... (1,372) (1,023) (1,476)
Acquisition of real estate ................................ -- (1,309) --
-------- -------- --------
Net Cash Provided By (Used In) Investing
Activities ...................................... 5,173 144 (1,476)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable ............ (31,832) (2,798) (1,283)
Proceeds from mortgage financing .......................... 26,453 -- 14,500
Proceeds from sale of common shares ....................... 2,543 -- --
Distributions to shareholders ............................. (363) (364) --
Prepayment penalty on extinguishment of debt .............. -- (55) --
Partial in-substance defeasance of Zero Coupon Notes ...... -- -- (3,106)
Partial repurchase of Zero Coupon Notes ................... -- -- (2,241)
-------- -------- --------
Net Cash (Used In) Provided By Financing
Activities ...................................... (3,199) (3,217) 7,870
-------- -------- --------
Net (Decrease) Increase in Unrestricted Cash and
Cash Equivalents ................................ (3,684) 775 5,800
Unrestricted Cash and Cash Equivalents at Beginning of
Year ...................................................... 7,694 6,919 1,119
-------- -------- --------
Unrestricted Cash and Cash Equivalents at End of Year ....... $ 4,010 $ 7,694 $ 6,919
======== ======== ========
Cash Paid for Interest ...................................... $ 8,817 $ 1,741 $ 4,718
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 24
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES:
General.
American Industrial Properties REIT (the "Trust") is a self-administered
Texas real estate investment trust which, as of December 31, 1996, owns and
operates thirteen commercial real estate properties consisting of twelve
industrial properties and one retail property. The Trust was formed September
26, 1985 and commenced operations on November 27, 1985. Pursuant to the
Trust's 1993 Annual Meeting of Shareholders, amendments to the Trust's
Declaration of Trust and Bylaws were approved which, among other things,
changed the name of the Trust to American Industrial Properties REIT and
converted the Trust from a finite life entity to a perpetual life entity.
Principles of Consolidation.
The consolidated financial statements of the Trust include the accounts of
American Industrial Properties REIT and its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly from such
estimates and assumptions.
Real Estate.
The Trust carries its real estate held for investment at depreciated cost
unless the asset is determined to be impaired. Real estate classified as held
for sale is carried at the lower of depreciated cost or fair market value less
costs to sell. In accordance with Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, issued in March 1995, the Trust records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the expected undiscounted cash
flows estimated to be generated by those assets are less than the related
carrying amounts. If an asset held for investment is determined to be
impaired, the impairment would be measured based upon the excess of the asset's
carrying value over the fair value. In addition, the Trust records impairment
losses on assets held for sale when the estimated sales proceeds, after
estimated selling costs, are less than the carrying value of the related asset
(see Note 2).
Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital improvements is
computed using the straight-line method over forty years. Depreciation of
tenant improvements is computed using the straight-line method over ten years.
Cash and Cash Equivalents.
Cash equivalents include demand deposits and all highly liquid instruments
purchased with an original maturity of three months or less. Restricted
amounts reflect escrow deposits held by third parties for the payment of taxes
and insurance and reserves held by third parties for property repairs or tenant
improvements.
F-7
<PAGE> 25
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Assets.
Other assets primarily consists of deferred rent receivable, prepaid
commissions and loan fees. Leasing commissions are capitalized and amortized
on a straight line basis over the life of the lease. Loan fees are capitalized
and amortized to interest expense on a level yield basis over the term of the
related loan.
Rents and Tenant Reimbursements.
Rental income, including contractual rent increases or delayed rent starts,
is recognized on a straight-line basis over the lease term. The Trust has
recorded deferred rent receivable (representing the excess of rental revenue
recognized on a straight line basis over actual rents received under the
applicable lease provisions) of $599,000 and $810,000 at December 31, 1996 and
1995, respectively.
Several tenants in the Trust's retail property are also required to pay as
rent a percentage of their gross sales volume, to the extent such percentage
rent exceeds their base rents. Such percentage rents amounted to $154,000,
$269,000 and $245,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. In addition to paying base and percentage rents, most tenants
are required to reimburse the Trust for operating expenses in excess of a
negotiated base amount.
Tamarac Square, the Trust's only retail property, has rental revenues in
excess of 10% of the total revenues of the Trust. Rental revenues and tenant
reimbursements from Tamarac totaled $3,308,000, $3,525,000, and $3,441,000 in
1996, 1995, and 1994, respectively.
Income Tax Matters.
The Trust operates as a real estate investment trust ("REIT") for federal
income tax purposes. Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a deduction for dividends
paid during the year. The Trust had a taxable loss in each of the years ending
December 31, 1996, 1995, and 1994. Accordingly, no provision for income taxes
has been reflected in the financial statements.
The Trust has a net operating loss carryforward from 1996 and prior years
of approximately $34,800,000. Subject to certain restrictions, the losses may
be carried forward for up to 15 years. The present losses will expire
beginning in the year 2004. Management intends to operate the Trust in such a
manner as to continue to qualify as a REIT and to continue to distribute cash
flow in excess of taxable income.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from that reported for financial reporting
purposes due primarily to differences in the basis of the assets and the
estimated useful lives used to compute depreciation.
Concentrations.
The Trust owns industrial properties in Baltimore, Dallas, Houston, Los
Angeles, Milwaukee, and Minneapolis, and one retail property in Denver. The
principal competitive factors in these markets are price, location, quality of
space, and amenities. In each case, the Trust owns a small portion of the
total similar space in the market and competes with owners of other space for
tenants. Each of these markets is highly competitive, and other owners of
property may have competitive advantages not available to the Trust. The
Trust's retail property, Tamarac Square, represents approximately 29% of the
rent and tenant reimbursement revenues for the year ended December 31, 1996,
and approximately 41% of net real estate at December 31, 1996.
F-8
<PAGE> 26
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reverse Share Split.
On October 15, 1997, the Trust's shareholders approved a one for five
reverse Share split. All references to the number of Shares, per Share amounts
and the market prices of the Shares have been restated to reflect the impact of
the reverse Share split.
Reclassification.
Certain amounts in prior years financial statements have been reclassified
to conform with the current year presentation.
NOTE 2 -- REAL ESTATE AND PROVISIONS FOR POSSIBLE LOSSES ON REAL ESTATE:
At December 31, 1996 and 1995, real estate was comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Held for investment:
Land $ 15,149,000 $ 17,526,000
Buildings and improvements 69,544,000 79,565,000
------------ ------------
84,693,000 97,091,000
------------ ------------
Held for sale:
Land 1,728,000 897,000
Buildings and improvements 8,051,000 3,909,000
------------ ------------
9,779,000 4,806,000
------------ ------------
Total $ 94,472,000 $101,897,000
============ ============
</TABLE>
During 1996, the Trust reclassified four properties from held for
investment to held for sale in anticipation of the need to raise capital to
complete the discounted purchase of certain indebtedness. Two of these
properties were sold in the fourth quarter of 1996 for net proceeds of
$6,545,000, resulting in a net gain of $177,000, and two remain classified as
held for sale at December 31, 1996. The net operating income of the properties
held for sale at December 31, 1996 was approximately $827,000 in 1996. During
1995, the Trust sold one industrial property for net proceeds of $2,476,000,
resulting in a net loss of $191,000, and acquired a 72,000 square foot
industrial distribution property in Arlington, Texas for total consideration of
approximately $1,309,000. One property was classified as held for sale at
December 31, 1995. This property, on which provisions for possible losses on
real estate were recorded of $600,000 and $650,000 in 1995 and 1994,
respectively, was reclassified to held for investment in 1996.
If unforeseen factors should cause a reclassification of the Trust's real
estate from held for investment to held for sale, significant adjustments to
reduce the depreciated cost of the real estate to net realizable value could be
required.
NOTE 3 -- MORTGAGES PAYABLE:
At December 31, 1996, the Trust's properties were subject to liens securing
mortgage notes payable totaling $43,797,000. Of this amount $1,927,000
represented a note with a variable interest rate of prime plus 2% (at December
31, 1996, the prime rate was 8.25%) and $41,870,000 represented notes with
fixed interest rates ranging from 8.40% to 11.0%.
Principal payments due during each of the next five years are as follows:
$675,000 in 1997, $2,632,000 in 1998, $1,973,000 in 1999, $818,000 in 2000,
$13,776,000 in 2001 and $23,923,000 thereafter.
F-9
<PAGE> 27
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-10
<PAGE> 28
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- ENVIRONMENTAL MATTERS:
The Trust has been notified of the existence of limited underground
petroleum based contamination at a portion of Tamarac Square, the Trust's
Denver retail property. The source of the contamination is apparently related
to underground storage tanks ("USTs") located on adjacent property. The owner
of the adjacent property has agreed to remediate the property to comply with
state standards and has indemnified the Trust against costs related to its
sampling activity. The responsible party for the adjacent USTs has submitted a
corrective Action Plan to the Colorado Department of Public Health and
Environment. Implementation of the plan is ongoing. The responsible party is
negotiating to obtain access agreements from impacted landowners, including the
Trust.
With the exception of Tamarac Square, the Trust has not been notified, and
is not otherwise aware, of any material non-compliance, liability or claim
relating to hazardous or toxic substances in connection with any of its
properties.
NOTE 7 -- SHAREHOLDER TRANSACTIONS:
In January 1996, the Trust filed a lawsuit in federal court in Dallas,
Texas against a major shareholder of the Trust, alleging violations of federal
and state securities laws. The defendants filed a counterclaim against the
Trust and its Trust Managers and, in February 1996, another shareholder filed a
claim against the Trust and its Trust Managers. The litigation related to
these claims was consolidated in April 1996. In December 1996, a settlement of
this litigation was approved by the Court. This settlement provided, among
other things, that certain amendments to the Trust's Bylaws be made and that
the Trust pay the shareholders a total of $955,000. Of this amount, $625,000
was paid by the Trust's directors and officers liability insurance.
On November 25, 1996, USAA Real Estate Company ("USAA REALCO") entered into
independently negotiated agreements to purchase an aggregate of 451,521 Shares
from certain shareholders for $13.75 per share, pending approval of the
settlement of the shareholder litigation discussed above. On December 19,
1996, the Trust sold 184,920 Shares, representing the remainder of its
authorized Shares, to USAA REALCO for $13.75 per share, the same price at which
USAA REALCO had independently agreed to purchase the Shares from other
shareholders. On December 20, 1996, after approval of the settlement of the
shareholder litigation, USAA REALCO closed the purchase of the 451,521 Shares,
resulting in USAA REALCO's current ownership of 636,441 Shares, or 31.82% of
the outstanding Shares of the Trust.
On December 18, 1996, the Trust entered into an agreement with USAA REALCO
contemplating the purchase by USAA REALCO of certain outstanding indebtedness
of the Trust. This agreement set forth the modifications which would occur if
USAA REALCO acquired the indebtedness, including the right to convert the
principal amount of this indebtedness into Shares of the Trust at either $10.00
or $11.25 per share, depending upon the date of conversion. On February 26,
1997, USAA REALCO acquired this debt (see Note 14).
The closing sale price of the Trust's Shares on the New York Stock Exchange
on the above dates was as follows: $10.65 per share on November 25, 1996,
$10.00 per share on December 18 and December 19, 1996, $9.40 per share on
December 20, 1996, and $11.90 per share on February 26, 1997.
NOTE 8 -- LITIGATION:
During 1996, the Trust concluded two significant litigation matters (see
Notes 4 and 7). Although the Trust is not currently involved in any
significant litigation, the Trust may, on occasion and in the normal course of
business, be involved in legal actions relating to the ownership and operations
of its properties. In management's opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have a materially
adverse effect on the consolidated financial position of the Trust.
F-11
<PAGE> 29
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- RETIREMENT AND PROFIT SHARING PLAN:
During 1993, the Trust adopted a retirement and profit sharing plan which
qualifies under section 401(k) of the Internal Revenue Code. All existing
Trust employees at adoption and subsequent employees who have completed six
months of service are eligible to participate in the plan. Subject to certain
limitations, employees may contribute up to 15% of their salary. The Trust may
make annual discretionary contributions to the plan. Contributions by the
Trust related to the years ended December 31, 1996, 1995 and 1994 were $30,000,
$25,000 and $20,000, respectively.
NOTE 10 -- OPERATING LEASES:
The Trust's properties are leased to others under operating leases with
expiration dates ranging from 1997 to 2011. Future minimum rentals on
noncancellable tenant leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997 $ 7,592,000
1998 6,179,000
1999 4,328,000
2000 2,844,000
2001 2,091,000
Thereafter 2,217,000
-----------
$25,251,000
===========
</TABLE>
NOTE 11 -- DISTRIBUTIONS:
The Trust's distributions of $363,000 ($0.20 per share) in 1996 and
$364,000 ($0.20 per share) in 1995 represent a return of capital to
shareholders (to the extent of the shareholder's basis in the Shares.) The
Trust did not pay any distributions in 1994.
NOTE 12 -- PER SHARE DATA:
Per share data is based on a weighted average number of Shares outstanding
of 1,821,648 for the year ending December 31, 1996 and 1,815,080 or the years
ended December 31, 1995 and 1994.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
Accounts receivable, accounts payable and accrued expenses and other
liabilities are carried at amounts that reasonably approximate their fair
values. The fair values of the Trust's mortgage notes payable are estimated
using discounted cash flow analyses, based on the Trust's incremental borrowing
rates for similar types of borrowing arrangements. The carrying values of such
mortgage notes payable reasonably approximate their fair values.
NOTE 14 -- SUBSEQUENT EVENT:
On February 26, 1997, USAA REALCO, a shareholder owning 31.8% of the
outstanding Shares in the Trust, purchased outstanding indebtedness of the
Trust totaling $9,419,213 pursuant to an earlier agreement with the Trust (see
Note 7). USAA REALCO and the Trust then entered into an agreement modifying
the terms of the indebtedness. The amount of the outstanding debt was reduced
from $9,419,213 to $7,040,721, allowing the Trust to recognize an extraordinary
gain on extinguishment of debt (including accrued interest) of $2,643,000 in
the first quarter of 1997. The Trust made an immediate principal reduction on
the modified notes of $1,591,103, leaving an outstanding principal balance of
$5,449,618.
F-12
<PAGE> 30
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The terms of the modified notes provide for monthly payments of interest at
8.8% and an extension in the maturity date from March 31, 1997 to December 31,
2000. In addition, USAA REALCO has the option to convert the principal amount of
the notes into Shares of the Trust at the conversion rate of $10.00 per share
(if converted prior to December 31, 1997) or $11.25 per share (if converted
between December 31, 1997 and December 31, 2000). In order for USAA REALCO to
convert its debt into Shares, the shareholders must approve an increase in the
authorized Shares of the Trust. An increase in the authorized Shares of the
Trust requires approval by holders of two-thirds of the outstanding Shares. In
addition, the shareholders must approve the right of USAA REALCO to convert its
debt into Shares. The notes provide that if shareholder approval of this
conversion right is not approved by June 30, 1997, interest on the debt will
increase to the lesser of 18% or the highest lawful rate effective July 1, 1997
and the full principal amount will become due and payable on October 31, 1997.
Management believes that the sale of one or more properties would be required to
satisfy this obligation in the event the notes become due and payable.
The Trust anticipates shareholder approval for this transaction will be
received on or about June 30, 1997 and that USAA REALCO will convert the
principal amount of the debt into Shares of the Trust soon thereafter.
Therefore, the Trust currently anticipates it will reflect approximately
$1,022,000, representing the difference between the market trading price of
$11.90 per share on February 26, 1997 and the $10.00 conversion price, as
interest expense between February 26, 1997 and June 30, 1997. The date of
February 26, 1997 is used to measure market value as this is deemed to be the
date of issuance of the modified note, which contains the convertibility option.
This will result in additional interest expense of approximately $272,000 in the
first quarter of 1997 and approximately $750,000 in the second quarter of 1997.
Reverse Share Split. On October 15, 1997, the Trust's shareholders approved
a one for five reverse Share split. All references to the number of Shares, per
Share amounts and the market prices of the Shares have been restated to reflect
the impact of the reverse Share split.
F-13
<PAGE> 31
SCHEDULE III
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
($000's)
<TABLE>
<CAPTION>
INITIAL COST
----------------------------
ENCUM- WRITEDOWNS
BRANCES BUILDINGS & CAPITALIZED AND
DESCRIPTION AT 12/31/96 LAND IMPROVEMENTS IMPROVEMENTS RETIREMENTS ALLOWANCES
- - ------------------------- ----------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES:
TEXAS -
Beltline Business Ctr ........ $ 2,775 $ 1,303 $ 5,213 $ 424 ($ 5) ($ 3,516)
Commerce Park ................ 2,100 1,108 4,431 542 (2,014)
Gateway 5 & 6 ................ 2,850 935 3,741 693 (1,861)
Northgate II ................ 5,175 2,153 8,612 758 (4,122)
Northview .................... 2,194 658 2,631 38
Plaza Southwest............... 3,375 1,312 5,248 979
Westchase..................... 1,327 697 2,787 322 (74) (1,158)
Meridian ..................... 1,163 262 1,047
CALIFORNIA -
Huntington Drive ............. 4,575 1,559 6,237 731
MARYLAND --
Patapsco ..................... 3,112 1,147 4,588 371 (1,250)
MINNESOTA --
Burnsville ................... 1,927 761 3,045 443 (18) (1,563)
WISCONSIN --
Northwest Business
Park ....................... 1,278 1,296 5,184 762 (131)
RETAIL PROPERTY:
COLORADO --
Tamarac Square ............... 11,946 6,799 27,194 4,383 (241)
TRUST HOME OFFICE 31
------- ------- ------- ------- ----- --------
TOTAL ................. $43,797 $19,990 $79,958 $10,477 ($469) ($15,484)
======= ======= ======= ======= ===== ========
<CAPTION>
GROSS AMT. CARRIED
AT DECEMBER 31, 1996
-------------------------------------------------
BUILDINGS & ACCUMULATED DATE OF DATE
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
- - ------------------------- ----- ------------ -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
TEXAS -
Beltline Business Ctr ........ $ 600 $ 2,819 $ 3,419 $ 1,320 1984 1985
Commerce Park ................ 705 3,362 4,067 1,214 1984 1985
Gateway 5 & 6 ................ 563 2,945 3,508 1,208 1984-85 1985
Northgate II ................ 1,329 6,072 7,401 2,365 1982-83 1985
Northview .................... 658 2,669 3,327 215 1980 1993
Plaza Southwest .............. 1,312 6,227 7,539 1,737 1970-74 1985
Westchase .................... 465 2,109 2,574 773 1983 1985
Meridian .................... 262 1,047 1,309 35 1981 1995
CALIFORNIA -
Huntington Drive ............. 1,559 6,968 8,527 2,004 1984-85 1985
MARYLAND --
Patapsco ..................... 897 3,959 4,856 1,155 1980-84 1985
MINNESOTA --
Burnsville ................... 432 2,236 2,668 941 1984 1986
WISCONSIN --
Northwest Business
Park ....................... 1,296 5,815 7,111 1,668 1983-86 1986
RETAIL PROPERTY:
COLORADO --
Tamarac Square ............... 6,799 31,336 38,135 9,307 1976-79 1985
TRUST HOME OFFICE 31 31 31 N/A VARIOUS
------- ------- ------- -------
TOTAL ................. $16,877 $77,595 $94,472 $23,973
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this schedule.
F-14
<PAGE> 32
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO SCHEDULE III
December 31, 1996
($000)
RECONCILIATION OF REAL ESTATE:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year .................. $101,897 $103,843 $103,710
Additions during period:
Improvements ............................... 982 752 1,024
Acquisitions ............................... -- 1,309 --
-------- -------- --------
102,879 105,904 104,734
Deductions during period:
Dispositions ............................... 8,407 3,402 --
Writedowns ................................. -- 600 650
Asset retirements .......................... -- 5 241
-------- -------- --------
Balance at end of year ........................ $ 94,472 $101,897 $103,843
======== ======== ========
</TABLE>
RECONCILIATION OF ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year .................. $ 23,441 $ 21,859 $ 19,315
Additions during period:
Depreciation expense for period ............ 2,577 2,479 2,622
-------- -------- --------
26,018 24,338 21,937
Deductions during period:
Accumulated depreciation of real estate
sold ........................................ 2,045 897 --
Asset retirements .......................... -- -- 78
-------- -------- --------
Balance at end of year ........................ $ 23,973 $ 23,441 $ 21,859
======== ======== ========
</TABLE>
TAX BASIS:
The income tax basis of real estate, net of accumulated tax depreciation, is
approximately $89,033 at December 31, 1996.
DEPRECIABLE LIFE:
Depreciation is provided by the straight-line method over the estimated useful
lives which are as follows:
<TABLE>
<S> <C>
Buildings and capital improvements ..................... 40 years
Tenant improvements .................................... 10 years
</TABLE>
F-15
<PAGE> 33
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Rents $ 1,925 $ 2,268 $ 3,895 $ 4,418
Tenant reimbursements 659 761 1,326 1,428
Interest income 2 52 31 139
----------- ----------- ----------- -----------
2,586 3,081 5,252 5,985
----------- ----------- ----------- -----------
EXPENSES
Property operating expenses:
Property taxes 332 366 687 742
Property management fees 96 111 194 217
Utilities 86 110 183 217
General operating 203 191 422 421
Repairs and maintenance 90 116 179 165
Other property operating expenses 98 73 176 145
Depreciation and amortization 697 707 1,390 1,408
Interest on 8.8% notes payable 495 1,029 885 2,349
Interest on mortgages payable 947 403 1,961 811
Administrative expenses:
Trust administration and overhead 395 333 811 890
Litigation and proxy costs 201 400 437 888
----------- ----------- ----------- -----------
3,640 3,839 7,325 8,253
----------- ----------- ----------- -----------
Loss from operations (1,054) (758) (2,073) (2,268)
Extraordinary gain on
extinguishment of debt -- 1,367 2,643 1,367
Gain on sale of real estate -- -- 312 --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (1,054) $ 609 $ 882 $ (901)
=========== =========== =========== ===========
PER SHARE DATA (A)
Loss from operations $ (0.55) $ (0.40) $ (1.00) $ (1.25)
Extraordinary gain on
extinguishment of debt -- 0.75 1.30 0.75
Gain on sale of real estate -- -- 0.15 --
----------- ----------- ----------- -----------
Net Income (Loss) $ (0.55) $ 0.35 $ 0.45 $ (0.50)
=========== =========== =========== ===========
Distributions Paid $ -- $ 0.20 $ -- $ 0.20
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,000,000 1,815,080 2,000,000 1,815,080
=========== =========== =========== ===========
</TABLE>
(a) The Share amount and the number of Shares outstanding have been restated to
reflect the impact of the one for five reverse Share split which was
approved by the Trust's shareholders and became effective on October 15,
1997.
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 34
American Industrial Properties REIT
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Real estate:
Held for investment $ 92,074 $ 84,693
Held for sale -- 9,779
----------- -----------
92,074 94,472
Accumulated depreciation (24,249) (23,973)
----------- -----------
Net real estate 67,825 70,499
Cash and cash equivalents:
Unrestricted 1,253 4,010
Restricted 1,104 1,366
----------- -----------
Total cash and cash equivalents 2,357 5,376
Other assets, net 3,103 3,061
----------- -----------
Total Assets $ 73,285 $ 78,936
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 41,547 $ 43,797
8.8% notes payable 5,450 9,419
Accrued interest 973 602
Accounts payable, accrued expenses and other liabilities 1,286 1,964
Tenant security deposits 464 471
----------- -----------
Total Liabilities 49,720 56,253
----------- -----------
Shareholders' Equity:
Preferred shares, $0.10 par value; 50,000,000 shares
authorized; none issued or outstanding -- --
Shares of beneficial interest, $0.10 par value; 500,000,000 Shares
authorized; 2,000,000 Shares issued and outstanding (a) 1,000 1,000
Additional paid-in capital 127,056 127,056
Accumulated distributions (58,456) (58,456)
Accumulated loss from operations and extraordinary
gains (losses) (47,495) (48,065)
Accumulated net realized gain on sales of real estate 1,460 1,148
----------- -----------
Total Shareholders' Equity 23,565 22,683
----------- -----------
Total Liabilities and Shareholders' Equity $ 73,285 $ 78,936
=========== ===========
</TABLE>
(a) The number of Shares outstanding have been restated to reflect the impact
of the one for five reverse Share split which was approved by the Trust's
shareholders and became effective on October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 35
American Industrial Properties REIT
Consolidated Statements of Cash Flows
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 882 $ (901)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary gain on extinguishment of debt (2,643) (1,367)
Gain on sale of real estate (312) --
Depreciation 1,218 1,244
Amortization of deferred financing costs 98 36
Other amortization 172 164
Changes in operating assets and liabilities:
Decrease (increase) in other assets and restricted cash 57 (141)
Decrease in accounts payable, other
liabilities and tenant security deposits (623) (186)
Increase (decrease) in accrued interest 636 (3,294)
----------- -----------
Net Cash Used In Operating Activities (515) (4,445)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized improvements and leasing commissions (430) (618)
Net proceeds from sales of real estate 2,029 --
----------- -----------
Net Cash Provided By (Used In) Investing Activities 1,599 (618)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgage notes payable (3,841) (113)
Distributions to shareholders -- (363)
----------- -----------
Net Cash Used In Financing Activities (3,841) (476)
----------- -----------
Net Decrease in Unrestricted Cash and Cash Equivalents (2,757) (5,539)
Unrestricted Cash and Cash Equivalents at Beginning of Period 4,010 7,694
----------- -----------
Unrestricted Cash and Cash Equivalents at End of Period $ 1,253 $ 2,155
=========== ===========
Cash Paid for Interest $ 2,112 $ 6,454
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 36
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not
include all of the disclosures required by generally accepted
accounting principles or those contained in the Trust's Annual Report
on Form 10-K. Accordingly, these financial statements should be read in
conjunction with the audited financial statements of the Trust for the
year ended December 31, 1996, included in the Trust's Annual Report on
Form 10-K.
The financial information included herein has been prepared in
accordance with the Trust's customary accounting practices and has not
been audited. In the opinion of management, the information presented
reflects all adjustments necessary for a fair presentation of interim
results. All such adjustments are of a normal and recurring nature.
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
Note 2 - Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements of
the Trust include the accounts of American Industrial Properties REIT
and its wholly-owned subsidiaries. Significant intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may differ
significantly from such estimates and assumptions.
Real Estate. The Trust carries its real estate held for investment at
depreciated cost unless the asset is determined to be impaired. Real
estate classified as held for sale is carried at the lower of
depreciated cost or fair market value less costs to sell. In accordance
with Statement of Financial Accounting Standards No. 121, Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, the Trust records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the
assets might be impaired and the expected undiscounted cash flows
estimated to be generated by those assets are less than the related
carrying amounts. If an asset held for investment is determined to be
impaired, the impairment would be measured based upon the excess of the
asset's carrying value over the fair value. In addition, the Trust
records impairment losses on assets held for sale when the estimated
sales proceeds, after estimated selling costs, is less than the
carrying value of the related asset. At June 30, 1997, all of the
Trust's properties were classified as held for investment. Should
unforeseen factors cause certain properties to be reclassified to held
for sale, significant adjustments to reduce the net book value of such
properties could be required.
Property improvements are capitalized while maintenance and repairs are
expensed as incurred. Depreciation of buildings and capital
improvements is computed using the straight-line method over forty
years. Depreciation of tenant improvements is computed using the
straight-line method over ten years.
F-19
<PAGE> 37
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(unaudited)
Other Assets. Other assets consists primarily of deferred rent
receivable, prepaid leasing commissions and loan fees. Deferred rent
receivable arises as the Trust recognizes rental income, including
contractual rent increases or delayed rent starts, on a straight-line
basis over the lease term. The Trust has recorded deferred rent
receivable of $553,000 and $599,000 at June 30, 1997 and December 31,
1996, respectively. Leasing commissions are capitalized and amortized
on a straight-line basis over the life of the lease. Loan fees are
capitalized and amortized to interest expense on a level yield basis
over the term of the related loan.
Income Taxes. The Trust operates as a real estate investment trust
("REIT") for federal income tax purposes. Under the REIT provisions,
the Trust is required to distribute 95% of REIT taxable income and is
allowed a deduction for dividends paid during the year. No provisions
for Federal income taxes have been required or recorded to date.
Reverse Share Split. On October 15, 1997, the Trust's shareholders
approved a one for five reverse Share split. All references to the
number of Shares, per Share amounts and the market prices of the Shares
have been restated to reflect the impact of the reverse Share split.
Earnings per share. Earnings per share is computed based upon the
weighted average number of common shares outstanding. The computation
of earnings per share does not include common share equivalents as the
inclusion of such does not result in dilution (based upon application
of the "treasury stock" method) or, in periods where there is a net
loss, is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("Statement 128"). Statement 128 specifies the computation,
presentation and disclosure requirements for basic earnings per share
and diluted earnings per share. Management believes that adoption of
Statement 128 will not have a material effect on the Trust's earnings
per share.
Share Compensation. The Trust accounts for its share compensation
arrangements under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and
intends to continue to do so. See Note 5 for a discussion of the
Trust's share compensation arrangements.
NOTE 3 - ZERO COUPON NOTES
In December 1993 and November 1994, the Trust deposited United States
Government investment securities into an irrevocable trust to complete
in-substance defeasance of certain of its Zero Coupon Notes due
November 1997. The debt, which aggregated $15,606,000 at June 30, 1997,
was accounted for as if extinguished in December 1993 and November
1994. The funds in the trust, which will be used solely to satisfy the
principal and interest of the defeased debt, will be sufficient to
satisfy all future debt service requirements for the defeased debt
instruments.
F-20
<PAGE> 38
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(unaudited)
NOTE 4 - SHAREHOLDER TRANSACTIONS
On February 26, 1997, USAA Real Estate Company ("REALCO"), the owner at
that time of approximately 31.8% of the Trust's outstanding Shares of
Beneficial Interest (the "Shares"), purchased outstanding indebtedness
of the Trust totaling $9,419,213. Pursuant to an earlier agreement with
the Trust, the notes were then modified by REALCO to, among other
things, reduce the principal amount of these notes from $9,419,213 to
$7,040,721, resulting in an extraordinary gain on extinguishment of
debt (including certain accrued interest) to the Trust of $2,643,000.
At the time the notes were modified, the Trust made a principal payment
of $1,591,103, reducing the outstanding principal amount to $5,449,618.
According to the modification terms, interest continues to accrue at
8.8%, payable monthly, and the maturity of the notes is extended from
March 31, 1997 to December 31, 2000. Pursuant to shareholder approval
on June 30, 1997, REALCO has the option to convert the principal amount
of the notes into Shares of the Trust at the conversion rate of $10.00
per share (if converted prior to December 31, 1997) or $11.25 per share
(if converted between December 31, 1997 and December 31, 2000). The
Trust currently expects REALCO to elect this conversion in the fourth
quarter of 1997. As a result, the Trust will reflect approximately
$1,022,000, based upon the difference between the market trading price
of $11.90 per share on February 26, 1997 and the $10.00 conversion
price, as interest expense between February 26, 1997 and September 30,
1997. The date of February 26, 1997 is used to measure market value as
this is deemed to be the date of issuance of the modified note, which
contains the convertibility option. Based upon these assumptions, the
Trust recorded additional interest expense of $375,000 in the second
quarter of 1997 ($647,000 for the six months ended June 30, 1997) and
expects to record the remaining $375,000 in interest expense in the
third quarter of 1997.
On June 30, 1997, the shareholders of the Trust approved an increase in
the authorized number of shares of beneficial interest from 10,000,000
to 500,000,000 and approved the authorization of 50,000,000 preferred
shares. The preferences or rights of the preferred shares, which have a
par value per share of $0.10, will be set as such shares are issued.
NOTE 5 - INCENTIVE COMPENSATION
On June 30, 1997, the shareholders of the Trust approved an Employee
and Trust Manager Incentive Share Plan (the "Plan"). The Plan, which is
to be administered by the Compensation Committee of the Board of Trust
Managers (the "Committee"), reserves a total of 160,000 common shares
for issuance under the Plan pursuant to the exercise of incentive and
non-qualified share options and the grant of restricted share awards.
On June 30, 1997, the Committee awarded a total of 125,000 options to
management with an exercise price of $15.00 (the closing trading price
of common shares on June 30, 1997), an expiration date of June 30,
2007, and vesting of 20% annually, beginning on June 30, 1997. As
provided in the Plan, the Committee also awarded 2,000 options to each
Trust Manager with an exercise price of $15.00, an expiration date of
June 30, 2007, and immediate vesting.
The Trust has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because the alternative fair
value accounting provided for under Statement 123 requires use of
option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Trust's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
F-21
<PAGE> 39
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(unaudited)
NOTE 6 - SUBSEQUENT EVENTS
In July 1997, the Trust sold a total of 1,433,483 Shares to clients and
affiliates of Morgan Stanley Asset Management, Inc. (collectively
"MSAM"). Pursuant to an earlier agreement, the Shares were issued at
$12.25 per Share, generating total proceeds of $17,560,176. Also in
July 1997, the Trust sold to certain clients of ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership
(collectively, "ABKB") a total of 1,224,489 Shares at $12.25 per Share
for total proceeds of $15,000,000. The agreement with MSAM allows them
to purchase an additional 199,169 Shares at $12.25 per Share. In
connection with these transactions, the Board of Trust Managers was
expanded from five to eight members, with two MSAM representatives and
one ABKB representative appointed as Trust Managers.
On July 7, 1997, the Trust signed definitive merger agreements with
USAA Real Estate Income Investments I, A California Limited
Partnership, USAA Real Estate Income Investments II Limited
Partnership, a Texas limited partnership, USAA Income Properties III
Limited Partnership, a Delaware limited partnership, and USAA Income
Properties IV Limited Partnership, a Delaware limited partnership
(collectively, the "RELPs") pursuant to which the RELPs will be merged
into the Trust (the "Merger"). If the Merger is accomplished, the Trust
will acquire nine real estate properties consisting of three office
buildings totaling 550,000 square feet, two industrial properties
totaling 320,000 square feet, three office/research and development
properties totaling 156,000 square feet, and one retail property
totaling 77,000 square feet. In addition, the Trust will acquire a
55.84% joint venture interest in a 291,000 square foot office property.
The agreed value of the interests in these properties, including
assumption of $31,704,000 in related debt, is $89,622,000. Pursuant to
the terms of the agreements, the Trust will issue an aggregate of
4,412,829 shares of beneficial interest at $13.125 per share (for a
total value of $57,918,385) to the limited partners in the RELPs in
exchange for their limited partnership interests in the RELPs. The
Merger, which has been approved by the Trust's Board of Trust Managers
and the Board of Directors of each of the general partners of the
RELPs, is subject to due diligence by both parties and certain other
conditions, including approval by the shareholders of the Trust and the
limited partners of each of the RELPs.
Reverse Share Split. On October 15, 1997, the Trust's shareholders
approved a one for five reverse Share split. All references to the
number of Shares, per Share amounts and the market prices of the Shares
have been restated to reflect the impact of the reverse Share split.
<PAGE> 40
AMERICAN INDUSTRIAL PROPERTIES REIT
SPECIAL MEETING TO BE HELD DECEMBER 12, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUST MANAGERS OF
AMERICAN INDUSTRIAL PROPERTIES REIT
The undersigned hereby appoints Charles W. Wolcott and Marc A. Simpson,
and each of them, jointly and severally, as Proxies, each with full power of
substitution, to vote all of the undersigned's common shares of beneficial
interest in the Trust, held of record on November 17, 1997, at the Special
Meeting of Shareholders or at any postponements or adjournments thereof, on the
proposals set forth below, as directed.
1. Approval of the issuance by the Trust of up to an aggregate of $75
million of Common Shares in a private placement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
POSTPONEMENTS OR ADJOURNMENTS THEREOF.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH
THE DIRECTION MADE ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL ONE. THE PROXIES WILL VOTE WITH RESPECT TO THE SECOND PROPOSAL
ACCORDING TO THEIR BEST JUDGMENT. Please sign exactly as your name appears on
your share certificate.
By signing and returning this Proxy, the undersigned acknowledges
receipt of the Notice of Special Meeting and Proxy statement delivered
herewith.
Dated , 1997
---------------------------------
--------------------------------------------
Signature
--------------------------------------------
Signature (if held jointly)
--------------------------------------------
Title
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as an attorney,
executor, administrator, trustee or guardian,
please give full title of such. If a
corporation, please sign in corporate name by
President or other authorized officer. If a
partnership, please sign in partnership name
by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
PRE-PAID ENVELOPE OR DELIVER TO: The Herman Group, Inc., 2121 San Jacinto
Street, 26th Floor, Dallas, Texas 75201. Facsimile copies of the Proxy,
properly completed and duly executed, will be accepted at (214) 999-9323 or
(214) 999-9348. If you have any questions, please call The Herman Group, Inc.
at (800) 555-6433.
