UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 1-9016
AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)
Texas 75-6335572
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6220 North Beltline Road, Suite 205
Irving, Texas 75063-2656
(Address of principal executive (Zip Code)
offices)
(972) 550-6053
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
10,000,000 Shares of Beneficial Interest were outstanding as
of May 12, 1997.
American Industrial Properties REIT
Form 10-Q
For the Quarter Ended March 31, 1997
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996
(unaudited) 3
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996
(unaudited) 5
Notes to Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in the Rights of the Company's
Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
American Industrial Properties REIT
Consolidated Statements of Operations
(unaudited, in thousands except share and per share data)
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
1997 1996
REVENUES
Rents $ 1,970 $ 2,150
Tenant reimbursements 667 667
Interest income 29 87
2,666 2,904
EXPENSES
Property operating expenses:
Property taxes 355 376
Property management fees 98 106
Utilities 97 107
General operating 219 230
Repairs and maintenance 89 49
Other property operating expenses 78 72
Depreciation and amortization 693 701
Interest on 8.8% notes payable 390 1,320
Interest on mortgages payable 1,014 408
Administrative expenses:
Trust administration and overhead 416 557
Litigation and proxy costs 236 488
3,685 4,414
Loss from operations (1,019) (1,510)
Gain on sale of real estate 312 -
Extraordinary gain on
extinguishment of debt 2,643 -
NET INCOME (LOSS) $ 1,936 $(1,510)
PER SHARE DATA
Loss from operations $ (0.10) $ (0.17)
Gain on sale of real estate 0.03 -
Extraordinary gain on
extinguishment of debt 0.26 -
Net Income (Loss) $ 0.19 $ (0.17)
Distributions Paid $ - $ 0.04
Number of shares outstanding 10,000,000 9,075,400
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
March 31, December 31,
1997 1996
(unaudited)
<S> <C> <C>
ASSETS
Real estate:
Held for investment $ 91,940 $ 84,693
Held for sale - 9,779
91,940 94,472
Accumulated depreciation (23,637) (23,973)
Net real estate 68,303 70,499
Cash and cash equivalents:
Unrestricted 1,725 4,010
Restricted 1,138 1,366
Total cash and cash equivalents 2,863 5,376
Other assets, net 3,079 3,061
Total Assets $ 74,245 $ 78,936
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 41,710 $ 43,797
8.8% notes payable 5,450 9,419
Accrued interest 600 602
Accounts payable, accrued
expenses and other liabilities 1,419 1,964
Tenant security deposits 447 471
Total Liabilities 49,626 56,253
Shareholders' Equity:
Shares of beneficial interest,
$0.10 par value; authorized
issued and outstanding
10,000,000 Shares 1,000 1,000
Additional paid-in capital 127,056 127,056
Accumulated distributions (58,456) (58,456)
Accumulated loss from
operations and extraordinary
gains (losses) (46,441) (48,065)
Accumulated net realized gain
on sales of real estate 1,460 1,148
Total Shareholders' Equity 24,619 22,683
Total Liabilities
and Shareholders' Equity $ 74,245 $ 78,936
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Consolidated Statements of Cash Flows
(unaudited, in thousands)
<TABLE>
Three Months Ended
March 31,
<S> <C> <C>
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,936 $ (1,510)
Adjustments to reconcile net income
(loss) to net cash
used in operating activities:
Extraordinary gain on
extinguishment of debt (2,643) -
Gain on sale of real estate (312) -
Depreciation 606 620
Amortization of deferred financing costs 49 17
Other amortization 87 81
Changes in operating assets
and liabilities:
Decrease (increase) in other assets
and restricted cash 61 (48)
Decrease in accounts payable, other
liabilities and tenant security deposits (507) (508)
Increase in accrued interest 263 1,320
Net Cash Used In Operating Activities (460) (28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized improvements
and leasing commissions (176) (194)
Net proceeds from sales of real estate 2,029 -
Net Cash Provided By (Used In)
Investing Activities 1,853 (194)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on
mortgage notes payable (3,678) (56)
Distributions to shareholders - (363)
Net Cash Used In Financing Activities (3,678) (419)
Net Decrease in Unrestricted
Cash and Cash Equivalents (2,285) (641)
Unrestricted Cash and Cash Equivalents
at Beginning of Period 4,010 7,694
Unrestricted Cash and Cash Equivalents
at End of Period $ 1,725 $ 7,053
Cash Paid for Interest $ 1,092 $ 408
</TABLE>
The accompanying notes are an integral part of these financial statements.
American Industrial Properties REIT
Notes to Consolidated Financial Statements
March 31, 1997
(unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements are
presented in accordance with the requirements of Form 10-Q
and consequently do not include all of the disclosures
required by generally accepted accounting principles or
those contained in the Trust's Annual Report on Form 10-K.
Accordingly, these financial statements should be read in
conjunction with the audited financial statements of the
Trust for the year ended December 31, 1996, included in the
Trust's Annual Report on Form 10-K.
The financial information included herein has been prepared
in accordance with the Trust's customary accounting
practices and has not been audited. In the opinion of
management, the information presented reflects all
adjustments necessary for a fair presentation of interim
results. All such adjustments are of a normal and recurring
nature.
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
Note 2 - Significant Accounting Policies
Principles of Consolidation. The consolidated financial
statements of the Trust include the accounts of American
Industrial Properties REIT and its wholly-owned
subsidiaries. Significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ significantly
from such estimates and assumptions.
Real Estate. The Trust carries its real estate held for
investment at depreciated cost unless the asset is
determined to be impaired. Real estate classified as held
for sale is carried at the lower of depreciated cost or fair
market value less costs to sell. In accordance with
Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, the Trust records impairment
losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired
and the expected undiscounted cash flows estimated to be
generated by those assets are less than the related carrying
amounts. If an asset held for investment is determined to be
impaired, the impairment would be measured based upon the
excess of the asset's carrying value over the fair value.
In addition, the Trust records impairment losses on assets
held for sale when the estimated sales proceeds, after
estimated selling costs, is less than the carrying value of
the related asset. At March 31, 1997, all of the Trust's
properties were classified as held for investment. Should
unforeseen factors cause certain properties to be
reclassified to held for sale, significant adjustments to
reduce the net book value of such properties could be
required.
Property improvements are capitalized while maintenance and
repairs are expensed as incurred. Depreciation of buildings
and capital improvements is computed using the straight-line
method over forty years. Depreciation of tenant
improvements is computed using the straight-line method over
ten years.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
March 31, 1997
(unaudited)
Other Assets. Other assets consists primarily of deferred
rent receivable, prepaid leasing commissions and loan fees.
Deferred rent receivable arises as the Trust recognizes
rental income, including contractual rent increases or
delayed rent starts, on a straight-line basis over the lease
term. The Trust has recorded deferred rent receivable of
$554,000 and $599,000 at March 31, 1997 and December 31,
1996, respectively. Leasing commissions are capitalized and
amortized on a straight-line basis over the life of the
lease. Loan fees are capitalized and amortized to interest
expense on a level yield basis over the term of the related
loan.
Income Taxes. The Trust operates as a real estate
investment trust ("REIT") for federal income tax purposes.
Under the REIT provisions, the Trust is required to
distribute 95% of REIT taxable income and is allowed a
deduction for dividends paid during the year. No provisions
for Federal income taxes have been required or recorded to
date.
Note 3 - Zero Coupon Notes
In December 1993 and November 1994, the Trust partially in-
substance defeased certain of its Zero Coupon Notes due 1997
totaling $16,365,000 (face amount at maturity). At March
31, 1997, the accreted value of these Zero Coupon Notes was
$15,158,000.
Note 4 - Shareholder Transactions
On February 26, 1997, USAA Real Estate Company ("USAA
REALCO"), the owner of approximately 31.8% of the Trust's
outstanding Shares of Beneficial Interest (the "Shares"),
purchased outstanding indebtedness of the Trust totaling
$9,419,213. Pursuant to an earlier agreement with the
Trust, the notes were then modified by USAA REALCO to, among
other things, reduce the principal amount of these notes
from $9,419,213 to $7,040,721, resulting in an extraordinary
gain on extinguishment of debt (including certain accrued
interest) to the Trust of $2,643,000. At the time the notes
were modified, the Trust made a principal payment of
$1,591,103, reducing the outstanding principal amount to
$5,449,618. According to the modification terms, interest
continues to accrue at 8.8%, payable monthly, and the
maturity of the notes is extended from March 31, 1997 to
December 31, 2000. In addition, USAA REALCO has the option
to convert the principal amount of the notes into Shares of
the Trust at the conversion rate of $2.00 per share (if
converted prior to December 31, 1997) or $2.25 per share (if
converted between December 31, 1997 and December 31, 2000).
In order for USAA REALCO to convert its debt into Shares, an
increase in the authorized Shares of the Trust, which
requires approval by holders of two-thirds of the
outstanding Shares, is necessary. In addition, the right of
USAA REALCO to convert its debt into Shares requires
approval by the shareholders. The notes provide that if
shareholder approval of this conversion right is not
received by June 30, 1997, interest on the debt will
increase to the lesser of 18% or the highest lawful rate
effective July 1, 1997 and the full principal amount will
become due and payable on October 31, 1997. Management
believes that the sale of one or more of the Trust's
properties would be required to satisfy this obligation in
the event the notes become due and payable.
American Industrial Properties REIT
Notes to Consolidated Financial Statements (continued)
March 31, 1997
(unaudited)
The Trust anticipates shareholder approval for this
transaction will be received on or about June 30, 1997 and
that USAA REALCO will convert the principal amount of the
debt into Shares of the Trust soon thereafter. Therefore,
the Trust currently anticipates it will reflect
approximately $1,022,000, representing the difference
between the market trading price of $2.38 per share on
February 26, 1997 and the $2.00 conversion price, as
interest expense between February 26, 1997 and June 30,
1997. The date of February 26, 1997 is used to measure
market value as this is deemed to be the date of issuance of
the modified note, which contains the convertibility option.
Based upon these assumptions, the Trust recorded additional
interest expense of $272,000 in the first quarter of 1997
and expects to record approximately $750,000 in additional
interest expense in the second quarter of 1997.
Note 5 - Subsequent Events
On May 1, 1997, the Trust entered into an agreement with
Morgan Stanley Asset Management, Inc. ("MSAM") whereby
certain clients and affiliates of MSAM will purchase up to
$20,000,000 of senior convertible debt issued by the Trust.
This debt will automatically be converted into Shares of the
Trust at $2.45 per share if the shareholders of the Trust
approve proposals authorizing such conversion and increasing
the number of authorized common shares to enable such
conversion to occur. The debt is non-interest bearing
unless shareholder approval of these proposals is not
received by June 30, 1997, at which time the debt begins to
bear interest at 10% and the debt matures in two years. The
obligation of the affiliates and clients of MSAM to invest
this amount is contingent on various conditions, including
completion of due diligence investigation by MSAM.
The Trust is currently pursuing a growth strategy and is
seeking shareholder approval of various capital transactions
at its Annual Meeting of Shareholders to be held on June 30,
1997. Among other items, the Trust is seeking approval for
the following:
1) An increase in authorized Shares from 10,000,000 to
500,000,000;
2) Authorization of 50,000,000 preferred shares;
3) Conversion of debt held by USAA REALCO into Shares;
4) Conversion of $20,000,000 of debt by certain
clients and affiliates of MSAM;
5) Issuance by the Trust of up to $15,000,000 of
convertible debt on similar terms and conditions as
the MSAM debt; and
6) An employee and Trust Manager incentive share plan.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The table below provides a reconciliation of net loss, funds
from operations ("FFO") and funds available for distribution
("FAD") for the quarter ended March 31, 1997 and 1996. The
determination of FFO is based on the definition adopted by the
National Association of Real Estate Investment Trusts ("NAREIT")
which is net income (loss) computed in accordance with generally
accepted accounting principles, excluding gains or losses from
debt restructuring and sales of property, plus real estate
related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. In addition,
NAREIT recommends that extraordinary items or significant non-
recurring items that distort comparability should not be
considered in arriving at FFO. Accordingly, the Trust does not
include the interest expense accrued related to the expected
future conversion of certain debt into equity or the default rate
interest accrued on its $45.2 million in unsecured notes payable
in the determination of FFO. FAD is also presented as it more
accurately portrays the ability of the Trust to make
distributions because it reflects capital expenditures. The
Trust believes FFO and FAD are appropriate measures of
performance relative to other REITs. FFO provides investors with
an understanding of the ability of the Trust to incur and service
debt and make capital expenditures. There can be no assurance
that FFO and FAD presented by the Trust is comparable to
similarly titled measures of other REITs. While other REITs may
not always use a similar definition, this information does add
comparability to those which have adopted the NAREIT definitions.
FFO and FAD should be 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.
<TABLE>
(000)
Quarter Ended
March 31,
1997 1996
<S> <C> <C>
Net income (loss) $1,936 $(1,510)
Exclude effects of:
Gain on sale of real estate (312) -
Extraordinary gain on
extinguishment of debt (2,643) -
Real estate depreciation and
amortization 693 700
Additional interest accrual
assuming future conversion of debt
to equity 272 -
Default rate interest accrual - 327
Funds from operation ("FFO") (54) (483)
Capitalized improvements and (176) (194)
leasing commissions
GAAP straight line rent adjustment 44 38
Funds available for
distribution("FAD") $(186) $(639)
</TABLE>
Quarter Ended March 31, 1997 and 1996
The Trust had net income of $1,936,000 for the quarter ended
March 31, 1997 compared to a net loss of $1,510,000 for the same
quarter in 1996. This change was primarily related to the
extraordinary gain of $2,643,000 realized by the Trust on
extinguishment of debt and the gain on sale of real estate of
$312,000 in the first quarter of 1997, a decrease in interest
expense of $324,000 (due to the default rate interest accrued on
the MLI notes in 1996 and not incurred in 1997, paydown of debt
during 1996 and 1997, and the accrual in 1997 of approximately
$272,000 related to the expected future conversion of debt to
equity), a decrease in litigation and proxy costs of $252,000
(due to the settlement of litigation matters in 1996), a decrease
in net operating income of $176,000 (due to the sale of two
properties in 1996 and the sale of a third property during the
first quarter of 1997), and a decrease in administrative expenses
of $141,000 (due to the accrual of incentive compensation in the
first quarter of 1996).
The Trust's FFO improved by $429,000 when comparing the
quarter ended March 31, 1997 to the same quarter in 1996. This
increase is attributable to a net decrease (excluding the accrual
of certain interest expense items noted above) in interest
expense of $269,000 (due to the paydown or forgiveness of debt in
1996 and 1997), and the aforementioned decrease in litigation and
proxy costs, decrease in net operating income and decrease in
administrative expenses. FAD improved by $453,000 due primarily
to the same factors affecting FFO.
The overall occupancy of the Trust's portfolio on March 31,
1997 was 91.1%, compared to 93.9% on March 31, 1996. When
comparing the three months ended March 31, 1997 to the same
period in 1996 on a same property basis, revenue was up 10.6% and
net operating income was up 11.7% for the Trust's industrial
properties whereas revenue was down 11.1% and net operating
income was down 20.6% for the Trust's retail property. The
decline in the performance of the Trust's retail property was
primarily related to a nonrecurring collection of approximately
$76,000 in percentage rents during the first quarter of 1996 and
a bad debt writeoff of approximately $20,000 in the first quarter
of 1997. Occupancy at the Trust's retail property was 83.6% at
March 31, 1997 compared to 84.9% at March 31, 1996. The Trust is
currently working toward the repositioning of the property and
its tenants as a means of increasing occupancy.
Net cash used in operating activities was $460,000 for the
first quarter of 1997. This is primarily the net result of the
operational items discussed above and a decrease in accounts
payable, other liabilities and tenant security deposits of
$507,000 (due principally to the payment of property taxes during
the first quarter), offset by an increase in accrued interest of
$263,000. Included in net cash used in operating activities is
approximately $236,000 in litigation and proxy costs, which
management believes is of a nonrecurring nature. Management
believes that, in the future, cash flow provided by operations
will increase due to the elimination of such nonrecurring items
and the Trust's plans to pursue a growth strategy.
Net cash used in operating activities during the first
quarter of 1996 was $28,000. This was generated by the results
of operations, a decrease in accounts payable, other liabilities
and tenant security deposits of $508,000 (due principally to the
payment of property taxes during the first quarter) and an
increase in accrued interest of $1,320,000 due to the non-payment
of interest on the Trust's $45.2 million in 8.8% notes payable.
Included in net cash used in operating activities is
approximately $488,000 in litigation and proxy costs, which
management believes is of a nonrecurring nature.
Liquidity and Capital Resources
On May 1, 1997, the Trust entered into an agreement with
Morgan Stanley Asset Management, Inc. ("MSAM") whereby certain
clients and affiliates of MSAM will purchase up to $20,000,000 of
senior convertible debt issued by the Trust. This debt will
automatically be converted into Shares of the Trust at $2.45 per
share if the shareholders of the Trust approve proposals
authorizing such conversion and increasing the number of
authorized common shares to enable such conversion to occur. The
debt is non-interest bearing unless shareholder approval of these
proposals is not received by June 30, 1997, at which time the
debt begins to bear interest at 10% and the debt matures in two
years. The obligation of the affiliates and clients of MSAM to
invest this amount is contingent on various conditions, including
completion of due diligence investigation by MSAM.
The Trust is currently pursuing a growth strategy and is
seeking shareholder approval of various capital transactions at
its Annual Meeting of Shareholders to be held on June 30, 1997.
Among other items, the Trust is seeking approval for the
following:
1) An increase in authorized Shares from 10,000,000 to
500,000,000;
2) Authorization of 50,000,000 preferred shares;
3) Conversion of debt held by USAA REALCO into Shares;
4) Conversion of $20,000,000 of debt by certain
clients and affiliates of MSAM;
5) Issuance by the Trust of up to $15,000,000 of
convertible debt on similar terms and conditions as
the MSAM debt; and
6) An employee and Trust Manager incentive share plan.
The Trust believes that these transactions would improve the
Trust's capital structure and allow it to compete more
effectively in the current real estate and capital markets.
Although the Trust believes that it can make reasonable and
prudent purchases of real estate properties with additional
capital, there is no assurance that such investments will be
available to the Trust or that the yield on such investments will
result in an adequate return to shareholders.
The debt agreement currently in effect with USAA REALCO
prohibits the Trust from making distributions to shareholders
until the debt is paid in full or if USAA REALCO, in its sole
discretion, permits such distributions. To the extent allowable,
any future distributions to shareholders will be evaluated by the
Trust Managers based on the liquidity of the Trust, performance
of the Trust's portfolio, cash flow of the Trust and other
circumstances existing at such time.
The initial capitalization of the Trust in 1985 included
$179,698,000 (face amount at maturity) of Zero Coupon Notes due
1997. Pursuant to the retirement of these Zero Coupon Notes, the
Trust partially in-substance defeased certain Zero Coupon Notes
in December 1993 and November 1994. At March 31, 1997, the face
amount at maturity and the accreted value of the defeased Notes
were $16,365,000 and $15,158,000, respectively.
At March 31, 1997, the Trust had $41,710,000 in mortgage
debt outstanding, all of which is comprised of fixed rate debt
with a weighted average interest rate of 8.61%.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings.
The Trust is not currently subject to any significant
litigation and is not aware of any material pending litigation.
Item 2.Changes in the Rights of the Company's Security Holders
In February 1997, USAA REALCO, the owner of approximately
31.8% of the Trust's outstanding Shares, purchased certain
outstanding debt of the Trust. Pursuant to an earlier agreement
with the Trust, the notes were then modified by USAA REALCO to,
among other things, reduce the principal amount of these notes
from $9,419,213 to $7,040,721, resulting in an extraordinary gain
on extinguishment of debt (including certain accrued interest) to
the Trust of $2,643,000 in the first quarter of 1997. At the
time the notes were modified, the Trust made a principal payment
of $1,591,103, reducing the outstanding principal amount to
$5,449,618. According to the modification terms, interest
continues to accrue at 8.8%, payable monthly, and the maturity of
the notes is extended from March 31, 1997 to December 31, 2000.
In addition, USAA REALCO has the option to convert the principal
amount of the notes into Shares of the Trust at the conversion
rate of $2.00 per share (if converted prior to December 31, 1997)
or $2.25 per share (if converted between December 31, 1997 and
December 31, 2000). In order for USAA REALCO to convert its debt
into Shares, an increase in the authorized Shares of the Trust,
which requires approval by holders of two-thirds of the
outstanding Shares of the Trust, is necessary. In addition, the
right of USAA REALCO to convert its debt into Shares requires
approval by the shareholders. If the shareholders approve the
conversion right of USAA REALCO and approve an increase in the
authorized Shares of the Trust, and USAA REALCO converts the
modified notes into Shares prior to December 31, 1997 at $2.00
per Share (assuming a principal balance of $5,449,618), USAA
REALCO will receive 2,724,809 Shares upon conversion, or 21.41%
of the outstanding Shares (assuming no other issuances of
Shares). Upon such an event, USAA REALCO will own approximately
46.42% of the outstanding Shares. The notes provide that if
shareholder approval of this conversion right is not obtained by
June 30, 1997, interest on the debt will increase to the lesser
of 18% or the highest lawful rate effective July 1, 1997 and the
full principal amount will become due and payable on October 31,
1997. Management believes that the sale of one or more of the
Trust's properties would be required to satisfy this obligation
in the event the notes become due and payable.
This transaction was determined to be exempt from
registration under Section 4(2) of the Securities Act of 1933, as
amended, because the transaction did not involve a public
offering.
Item 6.Exhibits and Reports on Form 8-K.
(a)Exhibits
Exhibit No. Description
27.1 * Financial Data Schedule
99.1 * Agreement dated May 1, 1997 between
the Trust, MS Real Estate Special
Situations, Inc. and Morgan Stanley
Asset Management, Inc.
* Filed herewith
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 26, 1997,
reporting an Item 5 transaction.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN INDUSTRIAL PROPERTIES REIT
(Registrant)
Date: May 15, 1997 /s/ MARC A. SIMPSON
Marc A. Simpson
Vice President and Chief Financial Officer
(principal accounting and financial officer)
May 1, 1997
Mr. Charles W. Wolcott
President and Chief Executive Officer
American Industrial Properties REIT
6220 N. Beltline Road, Suite 205
Irving, Texas 75063
Re: Agreement among MS Real Estate Special
Situations Inc. ("MSRE"), Morgan Stanley Asset Management Inc.
("MSAM") and American Industrial Properties REIT ("AIP")
Dear Charles:
This letter sets forth the agreement among MSRE, MSAM and
AIP regarding an investment in AIP. If you agree to the terms set
forth below, please sign below where indicated.
1. Issuance of Debt. Subject to the terms and conditions
set forth herein, MSRE on behalf of itself and MSAM on behalf of
the clients (the "Clients") identified on Schedule A hereto
(collectively, the "Purchasers") agree, severally and not
jointly, to commit to purchase at one or more closings up to
$20,000,000 in aggregate amount of senior convertible debt
securities (the "Debt") of AIP, subject to the Purchaser Share
Ownership Limitation (as defined in Paragraph 14).
2. Funding and Use of Proceeds. AIP will use the net
proceeds from each issuance of the Debt for the acquisition of
certain real estate properties that AIP will identify and
disclose to MSRE and MSAM before the Debt, the proceeds of which
will be used to acquire the specified properties, is acquired.
Each property acquisition must be approved by (i) MSAM prior to
the meeting of shareholders referred to in Paragraph 4 below, or
after such shareholder meeting, (ii) the Investment Committee of
the Board of Trust Managers, which Investment Committee shall
consist of three Trust Managers, including one designee of each
of MSAM and USAA Real Estate Company ("Realco"). If MSAM or the
Investment Committee of the Board of Trust Managers, as the case
may be, approves the purchase of a property, the Purchasers
shall purchase Debt from AIP in amounts necessary to enable AIP
to purchase such property; provided, however, in no event will
the Purchasers be required to acquire more than the aggregate
amount of the Debt.
3. Interest Rate. The Debt is non-interest bearing,
except as provided in Paragraph 10 below.
4. Conversion Date and Conversion Price. At the meeting
of shareholders to be held on or about June 30, 1997, AIP
shareholders will vote on (i) a proposal to increase the total
authorized common shares of beneficial interest of AIP (the
"Common Shares") to 500,000,000 ("Proposal One") and (ii) a
proposal to approve the issuance to the Purchasers of the Common
Shares upon conversion of the Debt and if Proposal One is not
approved, the authorization of an additional number of Common
Shares necessary to enable the Purchasers to convert the Debt
into the number of Common Shares referred to below. Immediately
upon approval of the shareholders ("Shareholder Authorization"),
the Debt will be converted into up to 8,163,265 Common Shares, at
$2.45 per Common Share; it being understood that the actual
number of shares to be issued upon the conversion of the Debt
will depend upon the aggregate amount of the Debt then
outstanding.
5. Registration Rights. AIP will grant the Purchasers
demand and "piggyback" registration rights with regard to the
Common Shares that are to be issued upon conversion of the Debt.
Such registration rights will be granted pursuant to a
registration rights agreement between AIP and the Purchasers
substantially in the same form of the Registration Rights
Agreement between AIP and Realco. AIP will pay all expenses in
connection with the registration of the Purchasers' Common Shares
then owned or are entitled to be acquired upon conversion of the
Debt.
6. Preemptive Rights. In the event AIP issues additional
Common Shares (specifically excluding any conversion by Realco of
debt owned by it into Common Shares, any issuances under any AIP
employee benefit plan and issuances of Common Shares to the
partners in Realco affiliated entities in connection with any
merger of such entities with and into AIP) after the issuance of
the Debt, the Purchasers shall have the right to purchase a
proportionate share (on a fully-diluted basis) of any share
issues (the "Preemptive Rights"). Notwithstanding the foregoing,
with respect to each Common Share offering and sale by AIP in the
amount of $10 million or more, the amount of shares Purchasers
may purchase under such Preemptive Rights shall be reduced by 5%
of the total shares outstanding (on a fully-diluted basis) after
each such sale. The Purchasers' Preemptive Rights will
immediately terminate once AIP achieves a Minimum Equity
Capitalization. For purposes of this Agreement, "Minimum Equity
Capitalization" shall mean $150 million as calculated using the
average closing price of AIP's Common Shares for the most recent
10 trading days multiplied by the current number of issued and
outstanding Common Shares and Common Share equivalents; provided,
however, that "Minimum Equity Capitalization" shall not in any
event include operating partnership unite in excess of $50
million.
7. No Additional Debt or Senior Equity. Except as
permitted by Paragraph 8 below, AIP will not issue any additional
debt or senior equity securities prior to achieving a Minimum
Equity Capitalization (as defined above) without the consent of
MSAM; provided, however, AIP may issue debt securities if the
proceeds of such debt securities will be used to acquire real
estate.
8. Additional Private Placement. Notwithstanding
Paragraphs 6 and 7 above, prior to the earlier of (i) June 15,
1997 or (ii) the execution of definitive agreements (as described
in Paragraph 13 below), AIP shall have the right to privately
place senior convertible debt on terms no more favorable than the
terms of the Debt.
9. Appointment of Trust Manager. (a) Effective
immediately after the shareholder meeting, AIP shall increase the
number of its Trust Managers from five to seven, and MSAM shall
have the right to instruct AIP to appoint two Trust Managers
selected by MSAM to fill the vacancies caused by the increase in
the number of Trust Managers. Additionally, until such time as
AIP achieves the equity capitalization described in (b) below,
AIP shall use its best efforts to have such designees elected as
Trust Managers (which efforts shall include, without limitation,
including MSAM's nominee in management's slate for nomination and
election and solicitation of proxies on his or her behalf);
provided that if the Trust Managers selected by MSAM are not
elected by the shareholders of AIP, MSAM shall have full board
observation rights including full and timely notice of all
meetings of the Trust Managers and each of its committees, copies
of all written and other materials disseminated to Trust Managers
and the right to designate a person to attend in person or by
telephone all meetings of the Trust Managers or their committees.
If MSAM receives observation rights pursuant to this Paragraph,
MSAM and its designees shall each execute a confidentiality
agreement in form and substance reasonably acceptable to AIP.
MSAM shall also have observation rights prior to receiving the
required Trust Manager appointment in the event any Debt is to be
purchased prior to the shareholder meeting.
(b) At such time as AIP achieves the Minimum Equity
Capitalization, MSAM shall cause one of its designees to resign
from the AIP Board of Trust Managers. At such time as AIP
achieves equity capitalization of $250 million (calculated in the
same manner as Minimum Equity Capitalization), MSAM shall cause
its remaining designee to resign from the AIP Board of Trust
Managers. Upon achievement of the Minimum Equity Capitalization,
unless Realco purchases an additional $20 million of AIP equity
securities from AIP for cash or real property (including amounts
attributable to any merger of any Realco affiliated entities with
and into AIP), Realco shall be required to cause one of its
designees to resign from the Board of Trust Managers.
(c) AIP agrees to obtain all necessary agreements and
waivers from Realco necessary to effectuate the terms of this
Paragraph 9 as a condition precedent to any funding of the Debt.
10. Absence of Authorized Shares. In the event the AIP
shareholders do not authorize an increase in the authorized
Common Shares as described in Paragraph 4 above, the Debt will
commence bearing interest as of such date at a rate per annum of
10%, which interest shall be payable in kind quarterly in arrears
and the Debt will mature and be fully payable by AIP in cash, two
years from the date of execution of definitive agreements as
described below. Interest on notes received as interest on the
Debt will be payable in cash. Any such notes will be issued on
the same terms as the Debt.
11. Expenses. Upon execution of this agreement by the
parties hereto, AIP will be obligated to reimburse MSAM for all
legal fees incurred by MSAM relating to this transaction, up to a
maximum of $50,000. Otherwise, AIP and MSAM shall pay their own
respective expenses incident to the consummation of this
Agreement and the transactions contemplated hereby.
12. Binding Agreement. Subject to the terms and conditions
set forth herein, AIP, MSRE and MSAM severally acknowledge that
this Agreement constitutes the legally valid and binding
obligation of AIP, MSRE and MSAM, respectively, enforceable
against AIP, MSRE and MSAM, respectively, in accordance with its
terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other
similar laws and equitable principles relating to or limiting
creditors' rights generally.
13. Definitive Agreement. Upon execution of this
agreement, the parties hereto shall promptly begin preparation of
definitive agreements to further document the agreements
hereunder, including, but not limited to, an investment
agreement, a note and a registration rights agreement, the terms
of which shall be governed by the laws of the State of New York
(collectively, the "Purchase Agreements"). The parties agree
that the Purchase Agreements shall be in substantially the same
forms as the agreements between AIP and Realco (copies of which
agreements have previously been provided to counsel to MSAM and
MSRE) with such modifications required to reflect the terms of
this agreement and as the parties may otherwise agree.
14. Conditions. (a) The obligation of the Purchasers to
each purchase of the Debt is subject to the following conditions
being satisfied on or before each Closing Date (as defined in the
definitive Purchase Agreements):
(i) the Purchase Agreements described in paragraph 13
shall be in execution form;
(ii) the Purchasers and AIP shall have received at
each closing customary closing certificates, schedules, opinions
and other closing documents in form and substance satisfactory to
MSAM and AIP;
(iii) Since December 31, 1996, there shall have been
no material adverse change or any development involving a
material adverse change in the condition (financial or otherwise)
of AIP and its subsidiaries, taken a whole, or in the earnings,
business, prospects or operations of AIP and its subsidiaries,
taken as a whole; and
(iv) MSAM shall have completed its due diligence
investigation of AIP and its subsidiaries, which investigation
shall be in scope, and with results reasonably satisfactory to
MSAM, and MSAM shall have been given access to the management,
records, books of account, contracts and properties of AIP and
its subsidiaries and shall have received such financial, business
and other information regarding AIP and its subsidiaries as it
shall have reasonably requested.
(b) MSAM covenants that it shall complete its
environmental, lease and engineering due diligence on or before
May 5, 1997. Upon completion of such due diligence, MSAM shall
give written notice to AIP of completion of the due diligence and
shall state whether anything they discovered while conducting
such due diligence shall cause it to terminate its obligation to
acquire the Debt under Paragraph 14(a)(iv) above.
(c) Notwithstanding anything contained in this
agreement to the contrary, at no time will the Purchasers be
required to acquire Debt to the extent that such purchase would
result in the Purchasers owning, in the aggregate, in excess of
37.8% of AIP's Common Shares outstanding immediately after such
purchase, assuming solely the conversion of the Debt owned by the
Purchasers and not on a fully-diluted basis.
15. Indemnification. In partial consideration of the
commitment of the Purchasers hereunder, AIP agrees to indemnify
and hold harmless each Purchaser and any of their respective
affiliates, directors, officers, agents and employees and each
other person, if any, controlling each Purchaser or any of their
affiliates (an "Indemnified Person") from and against any losses,
claims, damages or liabilities (or actions in respect thereof) to
which such Indemnified Person may become subject in connection
with the matters which are the subject of the commitment made
hereunder (including any use or proposed use of the proceeds from
the sale of the Debt) and will reimburse any Indemnified Person
for all reasonable expenses (including the reasonable fees of
counsel) as they are incurred by any such Indemnified Person in
connection with investigating, preparing or defending any such
action or claim pending or threatened, whether or not such
Indemnified Person is a party hereto. AIP shall not be
responsible for any losses, claims, damages, liabilities or
expenses resulting from such Indemnified Person's gross
negligence or willful misconduct. AIP also agrees that no
Indemnified Person shall have any liability (whether direct or
indirect, in contract or tort or otherwise) to AIP for or in
connection with the commitment hereunder except for losses,
claims, damages, liabilities or expenses to the extent that a
court of competent jurisdiction or arbitration panel shall have
finally determined that such losses, claims, damages, liabilities
or expenses resulted from such Indemnified Persons's gross
negligence or willful misconduct. In the event that the
foregoing indemnity is unavailable or insufficient to hold an
Indemnified Person harmless, AIP shall contribute to amounts paid
or payable by such Indemnified Person in respect of such losses,
claims, damages, liabilities and expenses in such proportion as
appropriately reflects the relative benefits received by, and
fault of AIP, on the one hand, and the Purchasers, on the other
hand in connection with the matters as to which such losses,
claims, damages, liabilities or expenses relate. The agreement
of AIP in this paragraph shall be in addition to any liability
AIP may otherwise have and shall survive termination of this
Agreement.
16. Termination. The commitment of the Purchasers
hereunder shall terminate on June 1, 1997 unless (i) the
Purchasers and AIP shall have extended the term hereof in
writing, or (ii) the Purchaser and AIP shall have executed the
Purchase Agreements; provided that such commitment shall
terminate at 5:00 (New York time) on May 2, 1997 if this
agreement has not been accepted by AIP at or prior to such time
and date. Notwithstanding Paragraph 9 above, MSAM's right to
designate two Trust Managers shall terminate upon termination of
the commitment hereunder. If any MSAM designees are serving as
Trust Managers at the time of termination of the commitment, MSAM
shall take all action necessary to cause its designees to resign
from the Board.
17. Limitation of Liability. AIP acknowledges and
understands that MSAM is acting as agent on behalf of the Clients
and that MSAM shall not have any liability to AIP, and shall not
be obligated to purchase any portion of the Debt with respect to
which any Client was obligated to but did not purchase.
18. REIT Qualification. The convertibility of the Debt
into Common Shares is expressly conditioned on the assurance from
the Purchasers that upon issuance of the Debt and at all times
thereafter the ownership of the Purchasers is such that neither
the Debt nor the Common Shares into which the Debt may be
converted will result in any Purchaser actually or constructively
owning directly or indirectly more than 9.8% of the number or
value of the Common Shares of AIP after application of the
provisions of Section 544 of the Internal Revenue Code of 1986 as
amended (the "Code") as modified by Section 856(h) of the Code
(based upon the most recent report filed by AIP with the
Securities and Exchange Commission).
19. Pension-Held REIT. For purposes of Section 856(h)(3)
of the Code, AIP hereby represents that at any time during the
shorter of (i) the two-year period ending immediately prior to
the First Note Closing Date (as defined in the Purchase
Agreements) or (ii) the period during which AIP was in existence,
to the best of AIP's knowledge, no "qualified trust" has held,
directly or indirectly, more than 10% of the interests in the
Company. In addition, AIP covenants and agrees that (i) it will
duly and promptly notify MSAM upon becoming aware that any
"qualified trust" holds or is expected to hold, directly or
indirectly, more than 10% of the interests in the Company, and
(ii) it will provide MSAM such information and/or verification as
MSAM shall reasonably request in order to verify whether the
Company constitutes a "pension-held REIT" as defined under
Section 856(h)(3)(C) of the Code.
20. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of
New York.
21. Arbitration. In the event of a dispute hereunder which
cannot be resolved by the parties, such dispute shall be settled
by arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association and judgment on the
award rendered by the arbitration panel may be entered in any
court or tribunal of competent jurisdiction. Any arbitration
occurring under this Paragraph 21 shall be held in New York, New
York in the first instance, in Dallas, Texas in the second
instance, and continuing in that order with respect to each
dispute occurring hereunder.
Sincerely,
Morgan Stanley Asset Management, Inc.
As Attorney-in-fact for each of the Clients
listed on Schedule A hereto
By: /s/ Russell Platt
Title:
MS Real Estate Special Situations, Inc.
By: /s/ Russell Platt
Title:
AGREED TO AND ACCEPTED BY:
American Industrial Properties REIT
/s/ Charles W. Wolcott
Charles W. Wolcott
President and Chief Executive Officer
Dated: May 1, 1997
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