<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 23, 1998
AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
TEXAS 1-9016 75-6335572
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
6210 NORTH BELTLINE ROAD, SUITE 170, IRVING, TEXAS 75063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (972) 756-6000
<PAGE> 2
ITEM 5. OTHER EVENTS.
CENTRAL PARK OFFICE TECH AND SKYWAY CIRCLE SOUTH
On August 29, 1997, the Trust acquired Central Park Office Tech ("Central
Park") and Skyway Circle South ("Skyway") from CM Property Management, Inc., a
Connecticut corporation. Central Park is a 70,250 square foot light industrial
building located in Richardson, Texas, a headquarters location for several
technology and telecommunications companies. Central Park is situated on 4.80
acres and is 100% leased to 10 tenants, including Lam Research, Corp. and
KLA-Tencor, Corp. both of which are involved in the semiconductor industry.
The Trust purchased Central Park for $4,200,000 in cash. The purchase
price was funded from the cash proceeds received from the private placements of
common shares of beneficial interest, par value $0.10 per share ("Common
Shares"), in July 1997 (the "Private Placements").
Skyway is a 67,015 square foot light industrial building located within the
master planned development of Las Colinas in Irving, Texas. Skyway is situated
on 4.0 acres and is currently 84% leased to five tenants, including Standard
Motor Products, a New York Stock Exchange listed producer of automotive
components.
The Trust purchased Skyway for $2,200,000 in cash. The purchase price was
funded from the cash proceeds received from the Private Placements.
CORPOREX PLAZA I AND PRESIDENTS' PLAZA BUSINESS CENTER
On December 23, 1997, the Trust acquired Corporex Plaza I ("Plaza I") and
Presidents' Plaza Business Center ("Presidents' Plaza") from CPX-Westshore
Corporation, a Florida corporation and Corporex Properties of Tampa, a Florida
corporation. Plaza I is a 93,508 square foot light industrial building located
in Tampa, Florida. Plaza I is situated on 6.546 acres and is 87.9% leased to 22
tenants, including Medig/PRN Life Support Services, Inc. and BBJ Chemical
Compounds, Inc.
Presidents' Plaza is a 41,690 square foot light industrial building located
in Tampa, Florida. Presidents' Plaza is situated on 3.96 acres and is 72.7%
leased to 10 tenants, including Ericsson GE Mobile Communications, Inc. and Blue
Cross/Blue Shield of Florida.
The Trust purchased the two properties for a combined $7,323,112. The
purchase price was funded through (i) $4,700,000 in borrowings under the Trust's
$35 million secured acquisition line with Prudential Securities Credit
Corporation and (ii) the remainder from the cash proceeds received from the
Private Placements.
INVERNESS
On December 30, 1997, the Trust acquired Inverness from Equitable Life
Assurance Society of the United States, a New York corporation. Inverness is a
96,386 square foot light industrial building located in Denver, Colorado.
Inverness is situated on 8.607 acres and is 100% leased to nine tenants,
including Centura Health Corporation and Transtracheal Systems, Inc.
The Trust purchased Inverness for $7,550,000. The purchase price was
funded through (i) $4,900,000 in borrowings under the Trust's $35 million
secured acquisition line with Prudential Securities Credit Corporation and (ii)
the remainder from the cash proceeds received from the Private Placements.
AVION
On December 31, 1997, the Trust acquired Avion from Nanook Partners, a
Delaware limited partnership. Avion is a 69,694 square foot light industrial
building located in Dallas, Texas. Avion is situated on 5.447 acres and is
94.8% leased to seven tenants, including Intellicall, Inc. and EICON
Technology, Inc.
<PAGE> 3
The Trust purchased Avion for $4,750,000. The purchase price was funded
through (i) $3,300,000 in borrowings under the Trust's $35 million secured
acquisition line with Prudential Securities Credit Corporation and (ii) the
remainder from the cash proceeds received from the Private Placements.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements: See Index to Financial Statements and Pro
Forma Financial Information appearing on page F-1 of this Form 8-K.
(b) Pro Forma Financial Information: See Index to Financial Statements
and Pro Forma Financial Information appearing on page F-1 of this Form 8-K.
<PAGE> 4
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 hereunto duly authorized.
AMERICAN INDUSTRIAL PROPERTIES REIT
By: /s/ CHARLES W. WOLCOTT
---------------------------------
Charles W. Wolcott
President and Chief Executive
Officer
March 23, 1998
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
FINANCIAL STATEMENTS
SKYWAY AND CENTRAL PARK INDUSTRIAL PROPERTIES
Report of Independent Auditors F-2
Combined Historical Summary of Gross Income and Direct Operating
Expenses F-3
Notes to Combined Historical Summary of Gross Income and Direct
Operating Expenses F-4
CORPOREX PLAZA I AND PRESIDENTS' PLAZA BUSINESS CENTER
Independent Auditor's Report F-6
Combined Statements of Revenues and Certain Expenses F-7
Notes to Combined Statements of Revenues and Certain Expenses F-8
INVERNESS INDUSTRIAL PROPERTIES
Report of Independent Auditors F-10
Historical Summary of Gross Income and Direct Operating Expenses F-11
Notes to Historical Summary of Gross Income and Direct Operating
Expenses F-12
AVION INDUSTRIAL PROPERTIES
Report of Independent Auditors F-14
Historical Summary of Gross Income and Direct Operating Expenses F-15
Notes to Historical Summary of Gross Income and Direct Operating
Expenses F-16
PRO FORMA FINANCIAL INFORMATION F-18
Pro forma condensed consolidated balance sheet as of
December 31, 1997 F-20
Pro forma condensed consolidated statement of operations for
the year ended December 31, 1997 F-22
</TABLE>
F-1
<PAGE> 6
Report of Independent Auditors
Board of Trust Managers
American Industrial Properties REIT
We have audited the accompanying Combined Historical Summary of Gross Income and
Direct Operating Expenses (the "Combined Historical Summary") of the Skyway and
Central Park Industrial Properties (the "Properties"), as described in Note 1
for the year ended December 31, 1996. This Combined Historical Summary is the
responsibility of the Properties' management. Our responsibility is to express
an opinion on this Combined Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Combined Historical Summary is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Combined Historical Summary. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the Combined
Historical Summary. We believe that our audit provides a reasonable basis for
our opinion.
The Combined Historical Summary has been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the Current Report on Form 8-K of American Industrial Properties
REIT, as described in Note 1 and is not intended to be a complete presentation
of the income and expenses of the Properties.
In our opinion, the Combined Historical Summary referred to above presents
fairly, in all material respects, the gross income and direct operating expenses
of Skyway and Central Park Industrial Properties, as described in Note 1, for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
March 4, 1998
F-2
<PAGE> 7
Skyway and Central Park Industrial Properties
Combined Historical Summary of
Gross Income and Direct Operating Expenses
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------------------------------
(unaudited)
GROSS INCOME
<S> <C> <C>
Rental $ 351,960 $ 705,843
Reimbursements 11,504 37,702
Other - 1,727
---------------------------------
Total gross income 363,464 745,272
DIRECT OPERATING EXPENSES
Repairs and maintenance 19,530 51,676
Utilities and other property operating 36,525 63,363
Real estate taxes 53,828 98,027
Management fees 12,656 25,231
---------------------------------
Total direct operating expenses 122,539 238,297
---------------------------------
Excess of gross income over direct operating expenses $ 240,925 $ 506,975
=================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
Skyway and Central Park Industrial Properties
Notes to Combined Historical Summary of Gross Income
and Direct Operating Expenses
Year Ended December 31, 1996 and
Six Months Ended June 30, 1997 (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The Skyway and Central Park Industrial Properties (the "Properties") are
commercial office buildings containing approximately 67,000 and 70,000 square
feet, respectively, located in Irving, Texas and Richardson, Texas,
respectively. As of December 31, 1996 the Properties were 84% and 87% leased,
respectively.
The accompanying Combined Historical Summary has been prepared for the purpose
of complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Current Report on Form 8-K of American
Industrial Properties REIT. The Combined Historical Summary is not intended to
be a complete presentation of income and expenses of the Properties for the year
ended December 31, 1996, and the six months ended June 30, 1997, as certain
costs such as depreciation, amortization, interest, and other debt service costs
have been excluded. These costs are not considered to be direct operating
expenses.
INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying interim unaudited Combined Historical Summary has been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and was prepared on the same basis as the Combined Historical Summary for the
year ended December 31, 1996. In the opinion of management of the Properties,
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the information for this interim period have been made.
The excess of gross income over direct operating expenses for such interim
period is not necessarily indicative of the excess of gross income over direct
operating expenses for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the Combined Historical Summary in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts included in the Combined Historical
Summary and accompanying notes thereto. Actual results could differ from those
estimates.
F-4
<PAGE> 9
Skyway and Central Park Industrial Properties
Notes to Combined Historical Summary of Gross Income
and Direct Operating Expenses (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Minimum rents are recognized on a straight-line basis; as such, the rental
revenues for leases which contain rent abatements and contractual increases are
recognized on a straight-line basis over the initial term of the related lease.
Property operating cost recoveries from tenants of common area maintenance, real
estate taxes and other recoverable costs, are recognized in the period when the
recoveries are earned.
CAPITALIZATION POLICY
Ordinary repairs and maintenance are expensed as incurred; major replacements
and improvements are capitalized.
3. MANAGEMENT FEES
The Properties are managed by a third party. The management fee is $9,000 per
year for Skyway and 3.5% of cash receipts per year for Central Park.
4. OPERATING LEASES
The Properties operating leases expire over the next 4 years. The minimum future
rentals under operating leases as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 617,811
1998 459,090
1999 266,163
2000 35,347
--------------
1,378,411
==============
</TABLE>
5. SUBSEQUENT EVENT
On August 29, 1997, the Properties were sold for a purchase price of $6.4
million to American Industrial Properties REIT.
F-5
<PAGE> 10
INDEPENDENT AUDITOR'S REPORT
To the Board of Trust Managers
of American Industrial Properties REIT:
We have audited the accompanying combined statement of revenues and certain
expenses (defined as being operating revenues less direct operating expenses)
of Corporex Plaza I and Presidents' Plaza Business Center (the "Properties")
for the year ended December 31, 1996. This financial statement is the
responsibility of the Properties' management. Our responsibility is to express
an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined statement of revenues and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis
for our opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Form 8-K filing of
American Industrial Properties REIT. Material amounts, described in Note 1 to
the combined statement of revenues and certain expenses, that would not be
comparable to those resulting from the proposed future operations of the
Properties are excluded and the statement is not intended to be a complete
presentation of the revenues and expenses of these properties.
In our opinion, such combined statement of revenues and certain expenses
presents fairly, in all material respects, the revenues and certain expenses,
as defined above, of the Properties for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 26, 1998
F-6
<PAGE> 11
CORPOREX PLAZA I AND
PRESIDENTS' PLAZA BUSINESS CENTER
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
<S> <C> <C>
REVENUES:
Rental $ 604,325 $ 830,523
Reimbursements and other 99,601 171,208
------------ ------------
Total gross income 703,926 1,001,731
------------ ------------
CERTAIN EXPENSES:
Real estate taxes 56,430 87,479
Repairs and maintenance 30,174 56,104
Management fees 23,186 34,200
Contract services 24,431 33,999
Utilities 24,292 27,741
General and administrative 39,412 26,596
Bad debt expense 389 27,389
------------ ------------
Total direct operating expenses 198,314 293,508
------------ ------------
EXCESS OF REVENUES OVER
CERTAIN EXPENSES $ 505,612 $ 708,223
============ ============
</TABLE>
See notes to combined statement of revenues and certain expenses.
F-7
<PAGE> 12
CORPOREX PLAZA I AND PRESIDENTS' PLAZA BUSINESS CENTER
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
- -------------------------------------------------------------------------------
1. DESCRIPTION, ORGANIZATION AND BASIS OF PRESENTATION
Corporex Plaza I and Presidents' Plaza Business Center (the "Properties")
are each industrial properties consisting of approximately 94,000 and
42,000, square feet, respectively. These properties are located in Tampa,
Florida.
The accompanying combined statement of revenues and certain expenses has
been prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission for inclusion in the Form 8-K
filing of American Industrial Properties REIT. The combined statement of
revenues and certain expenses are not intended to be a complete
presentation of income and expenses of Corporex Plaza I and Presidents'
Plaza Business Center for the nine months ended September 30, 1997 and the
year ended December 31, 1996, as depreciation, amortization, interest, and
other debt service costs have been excluded. These costs are not
considered to be directly related to the future operations of the
Properties.
INTERIM UNAUDITED FINANCIAL INFORMATION - The accompanying unaudited
statement of revenues and certain expenses for the nine months ended
September 30, 1997 has been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission and was prepared on the same
basis as the combined statement of revenues and certain expenses for the
year ended December 31, 1996. In the opinion of management of the
Properties, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for this
interim period have been made. The excess of revenues over certain expenses
for such interim period is not necessarily indicative of the excess of
revenues over certain expenses for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of the Properties' combined statements
of revenues and certain expenses in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the combined statements of revenues and
certain expenses and accompanying notes. Actual amounts could differ from
those estimates.
REVENUE RECOGNITION - Minimum rents are recognized on a straight-line
basis; as such, the rental revenues for leases that contain rent abatements
and contractual increases are recognized on a straight-line basis over the
initial term of the related lease. Property operating cost recoveries from
tenants of common area maintenance real estate taxes and other recoverable
costs are recognized in the period when the recoveries are earned.
CAPITALIZATION POLICY - Ordinary repairs and maintenance are expensed as
incurred; major replacements and betterments are capitalized.
3. TRANSACTIONS WITH AFFILIATES
Corporex Development Service of Florida, a related party through common
ownership, provides management and leasing services to the Properties.
Amounts charged for such services were $24,075 (unaudited) and $38,124 for
the nine months ended September 30, 1997 and the year ended December 31,
1996, respectively.
F-8
<PAGE> 13
Management fees are based upon 4% of net rental income collected and
charges for leasing services are based upon 1.40% of gross rents under the
lease. These amounts are included within expenses in the accompanying
combined statement of revenue and certain expenses.
4. OPERATING LEASES
The Properties have operating leases with terms ranging from one to ten
years. The minimum future rentals under operating leases as of December 31,
1996, including new leases and lease renewals which have occurred up
through December 23, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1997 $ 781,394
1998 736,157
1999 603,617
2000 487,671
2001 334,583
Thereafter 347,053
----------
Total $3,290,475
==========
</TABLE>
5. SUBSEQUENT EVENT
On December 23, 1997, the Properties were sold for a combined purchase
price of $7,323,112 to a partnership owned by American Industrial Properties
REIT.
*****
F-9
<PAGE> 14
Report of Independent Auditors
Board of Trust Managers
American Industrial Properties REIT
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses of the Inverness Industrial Property (the "Property"), as
described in Note 1 for the year ended December 31, 1996. This Historical
Summary is the responsibility of the Property's management. Our responsibility
is to express an opinion on this Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Historical Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Historical Summary. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The Historical Summary has been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Current Report on Form 8-K of American Industrial Properties REIT, as
described in Note 1 and is not intended to be a complete presentation of the
income and expenses of the Property.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the combined gross income and direct operating expenses of
Inverness Industrial Property, as described in Note 1, for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
January 15, 1998
F-10
<PAGE> 15
Inverness Industrial Property
Historical Summary of
Gross Income and Direct Operating Expenses
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------------------------
(unaudited)
GROSS INCOME
<S> <C> <C>
Rental $ 585,003 $ 774,338
Reimbursements 152,585 155,863
Other 2,382 1,566
-------------------------------
Total gross income 739,970 931,767
DIRECT OPERATING EXPENSES
Repairs and maintenance 22,896 63,993
Utilities and other property operating 17,663 16,695
General and administrative 9,201 6,132
Real estate taxes 108,708 85,393
Management fees 26,855 33,154
-------------------------------
Total direct operating expenses 185,323 205,367
-------------------------------
Excess of gross income over direct operating expenses $ 554,647 $ 726,400
===============================
</TABLE>
See accompanying notes.
F-11
<PAGE> 16
Inverness Industrial Property
Notes to Historical Summary of Gross Income
and Direct Operating Expenses
Year Ended December 31, 1996 and
Nine Months Ended September 30, 1997 (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The Inverness Industrial Property (the "Property") is a commercial office
building containing approximately 96,000 square feet and located in Englewood,
Colorado. As of December 31, 1996 the property was 100% leased to a total of
nine tenants.
The accompanying Historical Summary has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Current Report on Form 8-K of American
Industrial Properties REIT. The Historical Summary is not intended to be a
complete presentation of income and expenses of the Property for the year ended
December 31, 1996, and the nine months ended September 30, 1997, as certain
costs such as depreciation, amortization, interest, and other debt service costs
have been excluded. These costs are not considered to be direct operating
expenses.
INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying interim unaudited Historical Summary has been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission and was
prepared on the same basis as the Historical Summary for the year ended December
31, 1996. In the opinion of management of the Property, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for this interim period have been made. The
excess of gross income over direct operating expenses for such interim period is
not necessarily indicative of the excess of gross income over direct operating
expenses for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the Historical Summary in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts included in the Historical Summary and accompanying
notes thereto. Actual results could differ from those estimates.
F-12
<PAGE> 17
Inverness Industrial Property
Notes to Historical Summary of Gross Income
and Direct Operating Expenses (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Minimum rents are recognized on a straight-line basis; as such, the rental
revenues for leases which contain rent abatements and contractual increases are
recognized on a straight-line basis over the initial term of the related lease.
Property operating cost recoveries from tenants of common area maintenance, real
estate taxes and other recoverable costs, are recognized in the period when the
recoveries are earned.
CAPITALIZATION POLICY
Ordinary reports and maintenance are expensed as incurred; major replacements
and improvements are capitalized.
3. MANAGEMENT FEES
The Property is managed by a third party. The management fee is 3.7% of cash
receipts per year.
4. OPERATING LEASES
The Properties have operating leases with terms ranging from one to 10 years.
The minimum future rentals under operating leases as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 607,234
1998 779,651
1999 782,240
2000 645,520
2001 324,675
Thereafter 1,952,213
-------------
$ 5,091,533
=============
</TABLE>
5. SUBSEQUENT EVENT
On December 30, 1997, the Property was sold for a purchase price of $7.55
million to American Industrial Properties REIT.
F-13
<PAGE> 18
Report of Independent Auditors
Board of Trust Managers
American Industrial Properties REIT
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (the "Historical Summary") of Avion Industrial Property (the
"Property"), as described in Note 1 for the year ended December 31, 1996. This
Historical Summary is the responsibility of the Property's management. Our
responsibility is to express an opinion on this Historical Summary based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Historical Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Historical Summary. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The Historical Summary has been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Current Report on Form 8-K of American Industrial Properties REIT, as
described in Note 1 and is not intended to be a complete presentation of the
income and expenses of the Property.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the gross income and direct operating expenses of Avion
Industrial Property, as described in Note 1, for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
February 28, 1998
F-14
<PAGE> 19
Avion Industrial Property
Historical Summary of
Gross Income and Direct Operating Expenses
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------------------------
(unaudited)
GROSS INCOME
<S> <C> <C>
Rental $ 192,068 $ 396,094
Reimbursements 8,701 42,907
Other 1,355 23
--------------------------------
Total gross income 202,124 439,024
DIRECT OPERATING EXPENSES
Repairs and maintenance 18,002 12,999
Utilities and other property operating 51,011 60,283
Real estate taxes 58,651 78,201
Management fees 15,298 27,317
---------------------------------
Total direct operating expenses 142,962 178,800
---------------------------------
Excess of gross income over direct operating expenses $ 59,162 $ 260,224
=================================
</TABLE>
See accompanying notes.
F-15
<PAGE> 20
Avion Industrial Property
Notes to Historical Summary of Gross Income
and Direct Operating Expenses
Year Ended December 31, 1996 and
Nine Months Ended September 30, 1997 (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Avion Industrial Property (the "Property") is a commercial office building
containing approximately 70,000 square feet located in Dallas, Texas. Its
current rent roll is comprised of six tenants, with one tenant occupying 46% of
the net rentable square feet at September 30, 1997.
The accompanying Historical Summary has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Current Report on Form 8-K of American
Industrial Properties REIT. The Historical Summary is not intended to be a
complete presentation of income and expenses of the Property for the year ended
December 31, 1996, and the nine months ended September 30, 1997, as certain
costs such as depreciation, amortization, interest, and other debt service costs
have been excluded. These costs are not considered to be direct operating
expenses.
INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying interim unaudited Historical Summary has been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission and was
prepared on the same basis as the Historical Summary for the year ended December
31, 1996. In the opinion of management of the Property, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for this interim period have been made. The
excess of gross income over direct operating expenses for such interim period is
not necessarily indicative of the excess of gross income over direct operating
expenses for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the Historical Summary in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts included in the Historical Summary and accompanying
notes thereto. Actual results could differ from those estimates.
F-16
<PAGE> 21
Avion Industrial Property
Notes to Historical Summary of Gross Income
and Direct Operating Expenses (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Minimum rents are recognized on a straight-line basis; as such, the rental
revenues for leases which contain rent abatements and contractual increases are
recognized on a straight-line basis over the initial term of the related lease.
Property operating cost recoveries from tenants of common area maintenance, real
estate taxes and other recoverable costs, are recognized in the period when the
recoveries are earned.
CAPITALIZATION POLICY
Ordinary repairs and maintenance are expensed as incurred; major replacements
and improvements are capitalized.
3. MANAGEMENT FEES
The Property is managed by a third party. The management fee is 5.0% of Gross
Monthly Collections, as defined in the management agreement.
4. OPERATING LEASES
The Property's minimum future rentals under operating leases as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 $ 375,492
1998 441,997
1999 401,863
2000 349,015
2001 342,748
Thereafter 151,501
-------------
$ 2,062,616
=============
</TABLE>
5. SUBSEQUENT EVENT
On December 31, 1997, the Property was sold for approximately $4.75 million to
American Industrial Properties REIT.
F-17
<PAGE> 22
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA)
The following Pro Forma Condensed Consolidated Balance Sheet of the
Trust as of December 31, 1997 has been prepared as if each of the following
transactions had occurred as of December 31, 1997: (i) the acquisition, through
AIP Operating, L.P., a limited partnership in which the Trust has a 99%
controlling ownership interest, of Spring Valley #6 on February 11, 1998 (the
"1998 Acquisition"); (ii) the private placements with three investors of
1,376,245 shares of Common Shares of Beneficial Interest of the Trust (the
"Common Shares") with net proceeds of $18,750 in February 1998 (the "1998
Private Placements"); and (iii) the Trust's repurchase of 6,700 Common Shares,
for an aggregate cost of $89 (the "Common Share Repurchase").
The following Pro Forma Condensed Consolidated Statement of Operations
of the Trust for the year ended December 31, 1997 has been prepared as if each
of the following transactions had occurred as of January 1, 1997: (i) the
acquisition of 15 industrial real estate properties (the "1997 Acquisitions");
(ii) the sale of 2 industrial real estate properties (the "1997 Dispositions");
(iii) the merger (the "Merger") with four publicly traded real estate limited
partnerships (the "RELPs"); and (iv) the 1998 Acquisition.
The Pro Forma Financial Information of the Trust has been prepared
using the purchase method of accounting for the Merger, whereby the assets and
liabilities of the RELPs were adjusted to estimated fair market value, based
upon preliminary estimates, which are subject to change as additional
information is obtained. The allocations of purchase costs are subject to final
determination based upon estimates and other evaluations of fair market value.
Therefore, the allocations reflected in the following Pro Forma Financial
Information may differ from the amounts ultimately determined.
Such Pro Forma Financial Information is based in part upon (i) the
Consolidated Financial Statements of the Trust for the year ended December 31,
1997, incorporated by reference herein; (ii) the Financial Statements of USAA
Real Estate Income Investments I Limited Partnership for the year ended December
31, 1997 filed with Amendment No. 1 to the Trust's Current Report on Form 8-K,
dated January 20, 1998, incorporated by reference herein; (iii) the Financial
Statements of USAA Real Estate Income Investments II Limited Partnership for the
year ended June 30, 1997 and the six months ended December 31, 1997 (unaudited)
filed with Amendment No. 1 to the Trust's Current Report on Form 8-K, dated
January 20, 1998, incorporated by reference herein; (iv) the Financial
Statements of USAA Income Properties III Limited Partnership for the year ended
December 31, 1997 filed with Amendment No. 1 to the Trust's Current Report on
Form 8-K, dated January 20, 1998, incorporated by reference herein; (v) the
Financial Statements of USAA Income Properties IV Limited Partnership for the
year ended December 31, 1997 filed with Amendment No. 1 to the Trust's Current
Report on Form 8-K, dated January 20, 1998, incorporated by reference herein;
(vi) the unaudited Combined Historical
F-18
<PAGE> 23
Summary of Merit Texas Properties Portfolio for the nine months ended September
30, 1997 filed with Amendment No. 1 to the Trust's Current Report on Form 8-K,
dated October 17, 1997, incorporated by reference herein; (vii) the Historical
Summary of Commerce Center for the year ended May 31, 1997 and the three months
ended August 31, 1997 filed with Amendment No. 2 to the Trust's Current Report
on Form 8-K, dated November 25, 1997, incorporated by reference herein; (viii)
the Historical Summary of Spring Valley #6 Industrial Property for the year
ended December 31, 1997 filed with Amendment No. 2 to the Trust's Current Report
on Form 8-K, dated February 11, 1998, incorporated by reference herein; (ix) the
unaudited Combined Historical Summary of Skyway and Central Park Industrial
Properties for the six months ended June 30, 1997 filed with the Trust's Current
Report on Form 8-K, dated March 23, 1998, incorporated herein; (x) the unaudited
Historical Summary of Inverness Industrial Property for the nine months ended
September 30, 1997 filed with the Trust's Current Report on Form 8-K, dated
March 23, 1998, incorporated herein; (xi) the unaudited Combined Statement of
Revenues and Certain Expenses of Corporex Plaza I and Presidents' Plaza Business
Center for the nine months ended September 30, 1997 filed with the Trust's
Current Report on Form 8-K, dated March 23, 1998, incorporated herein; and (xii)
the unaudited Historical Summary of Avion Industrial Property for the nine
months ended September 30, 1997 filed with the Trust's Current Report on Form
8-K, dated March 23, 1998, incorporated herein.
The Pro Forma Financial Information is presented for information purposes
only and is not necessarily indicative of the financial position or results of
operations of the Trust that would have occurred if such transactions had been
completed on the dates indicated, nor does it purport to be indicative of future
financial position or results of operations. In the opinion of the Trust's
management, all material adjustments necessary to reflect the effect of these
transactions have been made.
F-19
<PAGE> 24
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Trust Recent Pro
Historical (A) Transactions (B) Forma
------------ -------------- ---------
ASSETS
<S> <C> <C> <C>
Real estate, net $ 239,791 $ 9,259 (C) $ 249,050
Cash - unrestricted 11,683 (1,974) (C)
18,002 (D)
(89) (E) 27,622
Cash - restricted 2,121 0 2,121
Other assets, net 4,800 65 (C) 4,865
--------- --------- ---------
$ 258,395 $ 25,263 $ 283,658
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable $ 114,226 $ 6,475 (C) $ 120,701
Notes payable to affiliates 7,200 0 7,200
Accrued interest payable 269 0 269
Accounts payable, accrued
expenses and other 7,231 0 7,231
Tenant security deposits 1,254 0 1,254
--------- --------- ---------
130,180 6,475 136,655
Minority interests 6,444 875 (C) 7,319
Shareholders' equity:
Common Shares of beneficial interest
($0.10 par value) 982 138 (D) 1,120
Additional paid-in capital 224,989 17,864 (D) 242,853
Less Common Shares in treasury, at cost (626) (89) (E) (715)
Accumulated distributions (58,456) 0 (58,456)
Accumulated loss from operations
and extraordinary gains (losses) (48,429) 0 (48,429)
Accumulated net realized gain
on sales of real estate 3,311 0 3,311
--------- --------- ---------
121,771 17,913 139,684
--------- --------- ---------
$ 258,395 $ 25,263 $ 283,658
========= ========= =========
</TABLE>
F-20
<PAGE> 25
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
(A) Represents the historical financial position of the Trust as of December
31, 1997.
(B) Represents adjustments for the 1998 Acquisition, the 1998 Private
Placements and the Common Share Repurchase.
(C) Represents adjustments for the 1998 Acquisition, including closing and
transaction costs, of $9,259, comprised of cash of $1,974, borrowings on
the Trust's acquisition line of credit (the "Credit Facility") of $6,475,
deferred loan costs of $65, and the issuance of 58 limited partnership
units in AIP Operating, L.P. with a value of $875. The Credit Facility
bears interest at the 30-day LIBOR rate plus 2%, with a maturity of one
year.
(D) Represents adjustments for the 1998 Private Placements.
(E) Represents adjustments for the Common Share Repurchase.
F-21
<PAGE> 26
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Trust Recent RELPS
Historical (A) Transactions (B) Historical (C)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
INCOME
Rents and tenant reimbursements $ 12,201 $ 8,574 (D) $ 11,888
(730)(E)
Equity in earnings of joint venture - - (108)
Interest and other income 546 25 (D) 527
(164)(E)
-------------------- -------------------- --------------------
12,747 7,705 12,307
-------------------- -------------------- --------------------
EXPENSES
Property operating expenses 4,315 2,649 (D) 5,560
(201)(E)
Depreciation and amortization 3,157 1,370 (D) 4,003
(87)(E)
Interest expense 5,778 3,713 (D) 3,089
(256)(E)
General and administrative 2,504 - 1,518
-------------------- -------------------- --------------------
Total expenses 15,754 7,188 14,170
Income (loss) before
minority interest (3,007) 517 (1,863)
Minority interest - - -
-------------------- -------------------- --------------------
Income (loss) from operations $ (3,007) $ 517 $ (1,863)
==================== ==================== ====================
Income (loss) from operations
per share:
Basic and diluted $ (0.91)
====================
Weighted average number of
Common Shares outstanding 3,317
====================
<CAPTION>
RELPS Pro Forma
Adjustments Adjustments Total
--------------------- -------------------- -------------------
<S> <C> <C> <C>
INCOME
Rents and tenant reimbursements $ 2,036 (F) $ -
(1,894) (G) $ 32,075
Equity in earnings of joint venture 264 (F) -
(156) (H) -
Interest and other income (527) (I) -
407
--------------------- -------------------- --------------------
(277) - 32,482
--------------------- -------------------- --------------------
EXPENSES
Property operating expenses 43 (F) -
(391) (G) 11,975
Depreciation and amortization 1,014 (F) (2,790) (J)
(309) (G) 6,358
Interest expense 1,388 (F) (1,022) (K)
(907) (G) 11,783
General and administrative 63 (F) 335 (L)
(121) (G) 4,299
--------------------- -------------------- --------------------
Total expenses 780 (3,477) 34,415
Income (loss) before
minority interest (1,057) 3,477 (1,933)
Minority interest 208 (F) - 208
--------------------- -------------------- --------------------
Income (loss) from operations $ (849) $ 3,477 $ (1,725)
===================== ==================== ====================
Income (loss) from operations
per share:
Basic and diluted $ (0.15)
====================
Weighted average number of
Common Shares outstanding 11,193 (M)
====================
</TABLE>
F-22
<PAGE> 27
AMERICAN INDUSTRIAL PROPERTIES REIT
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(A) Represents the historical results of operations of the Trust for the year
ended December 31, 1997. Certain reclassifications have been made to the
historical statements of operations of the Trust to conform to the pro
forma financial information presentation. In addition, excludes gain on
sale of real estate of $2,163 and extraordinary gain on extinguishment of
debt of $2,643.
(B) Represents adjustments for the 1997 Acquisitions, the 1997 Dispositions,
the Merger, and the 1998 Acquisition.
(C) Represents the combined historical results of operations of the RELPs
acquired in connection with the Merger.
(D) Represents adjustments for the 1997 Acquisitions and the 1998 Acquisition,
based on historical operating results. Depreciation is based on the
preliminary allocation of the purchase price, with buildings depreciated
using the straight-line method over a 40 year period. Interest expense is
based on the borrowings incurred at the related interest rates, which range
from 7.25% (fixed rate under a mortgage note payable) to 7.70% (the average
30-day LIBOR rate plus 2% during the year ended December 31, 1997).
(E) Represents adjustments to remove the historical results of operations of
the 1997 Dispositions.
(F) Represents adjustments, based on historical operating results, for the
investment in USAA Chelmsford Associates Joint Venture (the "Joint
Venture"), accounted by the RELP on the equity method, which is
consolidated by the Trust due to an amendment to the joint venture
agreement subsequent to the Merger providing the Trust with control over
the major decisions of the Joint Venture.
(G) Represents adjustments to eliminate the historical results of operations of
a real estate property which, in conjunction with the Merger, was sold by
the RELP to an affiliate.
(H) Represents adjustment to eliminate the equity in earnings of a joint
venture. In connection with the Merger, the interest in the joint venture
was sold by the RELP to an affiliate.
(I) Represents adjustments to eliminate interest income as a result of cash
distributions to the RELP limited partners prior to the Merger.
F-23
<PAGE> 28
(J) Represents adjustment to reduce the depreciation of real estate. This
adjustment represents increased depreciation resulting from the allocation
of purchase price, reduced by the use of a 40 year period by the Trust,
rather than a 30 year period, as had been the practice by the RELPs.
(K) Represents adjustment to eliminate interest expense accrued by the Trust
related to the notes payable convertible into Common Shares. The amount of
non-recurring interest expense represents the difference between the market
trading price of $11.88 per Common Share on February 26, 1997, the date of
issuance of the modified notes, which contained the convertibility option,
and the $10.00 conversion price.
(L) Represents adjustments for incremental general and administrative costs
estimated to be incurred by the Trust as a result of the recent growth,
including personnel costs.
(M) The pro forma weighted average shares outstanding includes 9,817 Common
Shares outstanding at December 31, 1997 and 1,376 Common Shares issued in
the 1998 Private Placements. Diluted earnings per share are the same as
basic earnings per share as the Trust has a loss from operations.
F-24
