<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): January 20, 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)
6210 NORTH BELTLINE ROAD, SUITE 170, IRVING, TEXAS 75063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (972) 756-6000
<PAGE> 2
The undersigned Registrant hereby amends its Current Report on Form 8-K
dated January 20, 1998, which was filed with the Securities and Exchange
Commission on January 20, 1998, to include the financial statements required by
Item 7 (a) and the pro forma financial information required by Item 7 (b).
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/A.
(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/A.
<PAGE> 3
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> 4
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report...................................... F-2
Balance Sheets as of December 31, 1997 and 1996................... F-3
Statements of Income for the years ended December 31, 1997,
1996 and 1995................................................... F-4
Statements of Partners' Equity for the years ended
December 31, 1997, 1996 and 1995................................ F-5
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995............................................. F-6
Notes to Financial Statements..................................... F-7
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report...................................... F-14
Balance Sheets as of June 30, 1997 and 1996....................... F-15
Statements of Income for the years ended June 30, 1997, 1996
and 1995........................................................ F-16
Statements of Partners' Equity for the years ended June 30,
1997, 1996 and 1995............................................. F-17
Statements of Cash Flows for the years ended June 30, 1997,
1996 and 1995................................................... F-18
Notes to Financial Statements..................................... F-19
INTERIM UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheet as of December 31, 1997 (unaudited)....... F-26
Condensed Statements of Income for the six months ended
December 31, 1997 (unaudited)................................... F-27
Condensed Statements of Cash Flows for the six months ended
December 31, 1997 (unaudited)................................... F-28
Notes to Condensed Financial Statements........................... F-29
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report...................................... F-31
Balance Sheets as of December 31, 1997 and 1996................... F-32
Statements of Operations for the years ended December 31, 1997,
1996 and 1995................................................... F-33
Statements of Partners' Equity for the years ended December 31,
1997, 1996 and 1995............................................. F-34
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995................................................... F-35
Notes to Financial Statements..................................... F-36
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
ANNUAL AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report...................................... F-44
Balance Sheets as of December 31, 1997 and 1996................... F-45
Statements of Operations for the years ended December 31, 1997,
1996 and 1995................................................... F-46
Statements of Partners' Equity for the years ended December 31,
1997, 1996 and 1995............................................. F-47
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995................................................... F-48
Notes to Financial Statements..................................... F-49
PRO FORMA FINANCIAL INFORMATION........................................ F-59
Pro forma condensed consolidated balance sheet as of
December 31, 1997.............................................. F-61
Pro forma condensed consolidated statements of operations for
the year ended December 31, 1997............................... F-63
</TABLE>
F-1
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
Trust Managers and Shareholders
American Industrial Properties REIT:
We have audited the accompanying balance sheets of USAA Real Estate Income
Investments I Limited Partnership (Partnership) as of December 31, 1997 and
1996, and the related statements of income, partners' equity, and cash flows for
each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USAA Real Estate Income
Investments I Limited Partnership at December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the years in the three year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 9, subsequent to December 31, 1997, the Partners approved a
merger with and into the American Industrial Properties REIT effective as of
December 31, 1997. These financial statements do not include any adjustments
related to the merger of the Partnership.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Antonio, Texas
February 12, 1998
F-2
<PAGE> 6
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Rental properties, net (note 3) $ 9,401,871 9,964,683
Temporary investments at cost which
approximates market value -
Money market fund 840,352 926,892
Cash 31,887 46,204
------------ ------------
Cash and cash equivalents 872,239 973,096
Accounts receivable 72,319 72,175
Deferred charges, at amortized cost, and other
assets 396,221 386,325
------------ ------------
$ 10,742,650 11,396,279
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to
affiliates of $43,448 and $27,907 (note 6) $ 99,537 83,582
Accrued expenses 46,118 35,634
Security deposits 65,320 66,616
------------ ------------
Total liabilities 210,975 185,832
------------ ------------
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 91,856 89,818
Cumulative distributions (193,217) (184,391)
------------ ------------
(100,361) (93,573)
------------ ------------
Limited Partners (54,610 units):
Capital contributions, net of offering costs 25,666,700 25,666,700
Cumulative net income 9,093,801 8,892,025
Cumulative distributions (24,128,465) (23,254,705)
------------ ------------
10,632,036 11,304,020
------------ ------------
Total Partners' equity 10,531,675 11,210,447
------------ ------------
$ 10,742,650 11,396,279
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 7
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income $1,727,793 1,678,468 1,420,968
Interest from mortgage loan (notes 4 and 6) -- 52,124 612,757
Interest income, including $18 in 1995 from
affiliate (note 6) 57,160 89,058 26,283
---------- ---------- ----------
Total income 1,784,953 1,819,650 2,060,008
---------- ---------- ----------
EXPENSES
Direct expenses, including $108,437, $109,061,
and $59,639 to affiliate (note 6) 643,841 572,686 539,300
Depreciation 584,923 572,255 543,494
General and administrative, including
$142,033, $135,424, and $142,286 to
affiliates (note 6) 284,020 250,744 252,165
Management fee (note 6) 68,355 67,893 77,792
---------- ---------- ----------
Total expenses 1,581,139 1,463,578 1,412,751
---------- ---------- ----------
Net income $ 203,814 356,072 647,257
========== ========== ==========
Net income per limited partnership unit $ 3.69 6.46 11.73
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 8
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1994 $ (87,609) 16,894,400 16,806,791
Net income 6,472 640,785 647,257
Cash distributions (8,826) (873,760) (882,586)
----------- ----------- -----------
Balances at December 31, 1995 (89,963) 16,661,425 16,571,462
Net income 3,561 352,511 356,072
Cash distributions (7,171) (5,709,916) (5,717,087)
----------- ----------- -----------
Balances at December 31, 1996 (93,573) 11,304,020 11,210,447
Net income 2,038 201,776 203,814
Cash distributions (8,826) (873,760) (882,586)
----------- ----------- -----------
Balances at December 31, 1997 $ (100,361) 10,632,036 10,531,675
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 9
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 203,814 356,072 647,257
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 584,923 572,255 543,494
Amortization 45,316 44,937 34,290
Increase in accounts receivable (144) (26,974) (9,297)
Increase in deferred charges and other assets (55,212) (20,531) (168,240)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 25,143 55,947 (32,205)
---------- ---------- ----------
Cash provided by operating activities 803,840 981,706 1,015,299
---------- ---------- ----------
Cash flows from investing activities:
Additions to rental properties (22,111) (98,360) (561,552)
Proceeds from mortgage loan receivable -- 5,440,000 --
---------- ---------- ----------
Cash provided by (used in) investing activities (22,111) 5,341,640 (561,552)
---------- ---------- ----------
Cash flows used in financing activities -
Payment of distributions (882,586) (5,717,087) (882,586)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (100,857) 606,259 (428,839)
Cash and cash equivalents at beginning of year 973,096 366,837 795,676
---------- ---------- ----------
Cash and cash equivalents at end of year $ 872,239 973,096 366,837
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 10
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. Organization, Summary of Significant Accounting Policies and Other
USAA Real Estate Income Investments I Limited Partnership
(Partnership) is engaged solely in the business of real estate
investment; therefore, presentation of information about industry
segments is not applicable. The General Partner, USAA Investors I, Inc.,
is a wholly-owned subsidiary of USAA Real Estate Company, which is a
wholly-owned subsidiary of USAA Capital Corporation, which is a
wholly-owned subsidiary of United Services Automobile Association
(USAA).
Subsequent to year-end, the Partnership approved a merger with and into
the American Industrial Properties REIT (Trust) effective as of December
31, 1997. The accompanying financial statements do not include any
adjustments related to the merger. See Note 9.
At December 31, 1997, the Partnership owned a shopping center located in
Daytona Beach, Florida and an office building located in San Diego,
California. The Partnership's revenue is subject to changes in the
economic environments of these areas.
Rental properties are valued at cost. The carrying amount of a property
is not changed for temporary fluctuations in value unless the carrying
value is believed to be permanently impaired. In 1995, the Partnership
adopted the provisions of Financial Accounting Standards Board Statement
No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," (Statement 121). Statement 121
provides guidance for determining impairment of long-lived assets
utilizing undiscounted future cash flows. The assessment for and
measurement of impairment is based upon the undiscounted future cash
flows and fair value, respectively, of the individual real estate
properties. Based on the provisions of Statement 121, the Partnership's
long-lived assets, real estate and improvements are not considered
impaired. The adoption of Statement 121 had no financial statement
impact.
Depreciation is provided over the estimated useful lives of properties
using the straight-line method. The estimated lives of the buildings and
improvements are 30 years (19 - 39 years for Federal income tax
purposes).
(Continued)
F-7
<PAGE> 11
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization, Summary of Significant Accounting Policies and Other,
continued
Rental income is recognized under the operating method, whereby
aggregate rentals are reported as income on the straight-line basis over
the life of the lease. Rental income recognized was $1,724, $15,873 and
$65,461 more than the amount due per the lease agreements for the years
ended December 31, 1997, 1996 and 1995, respectively. Deferred rent
results from the recognition of income as required by generally accepted
accounting principles.
No provision or credit for income taxes has been made as the liability
for such taxes is that of the Partners rather than the Partnership. The
Partnership files its tax return on an accrual basis.
For purposes of the Statements of Cash Flows, all highly liquid
marketable securities that have a maturity at purchase of three months
or less and money market mutual funds are considered to be cash
equivalents.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
For financial reporting purposes, net income (loss) was allocated 1% to
the General Partner and 99% to the Limited Partners. Net income (loss)
per limited partnership unit was based upon the limited partnership
units outstanding at the end of the period and the net income (loss)
allocated to the Limited Partners.
Cash distributions per limited partnership unit were $16.00 during 1997,
$104.56 during 1996, and $16.00 during 1995. The distributions of
$16.00, $13.00 and $16.00 per limited partnership unit paid during the
years ended December 31, 1997, 1996 and 1995, respectively, were based
on the limited partnership units outstanding at each quarter end and the
cash distributions allocated to Limited Partners. The additional
distribution of $91.56 per limited partnership unit that was paid in
March 1996 was based on the limited partnership units outstanding at
January 31, 1996, the date of the mortgage loan payoff. See note 4.
(Continued)
F-8
<PAGE> 12
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Partnership Agreement
As part of the merger with the Trust, the Partnership Agreement was
amended to permit the dissolution of the Partnership. Pursuant to the
terms of the Partnership Agreement existing prior to the merger, all net
cash flows were distributed in the ratio of 1% to the General Partner
and 99% to the Limited Partners within 60 days after the close of each
fiscal quarter. Generally, net taxable income or losses not arising from
the sale or refinancing of properties of the Partnership was allocated
99% to the Limited Partners and 1% to the General Partner.
Residual proceeds were allocated first to the Limited Partners until the
Limited Partners received an amount equal to their adjusted capital
contributions plus an amount which when added to all prior distributions
to Limited Partners equaled a 9% per annum cumulative return on their
adjusted capital contributions; second, to all Partners, in an amount
equal to their respective positive capital account balances to the
extent such balances exceeded the amounts provided for in the preceding
clauses; third, in the case of any sale of a property, a real estate
brokerage commission to the Advisor as provided in the Partnership
Agreement; and fourth, the balance, 90% to the Limited Partners and 10%
to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations were allocated 99% to the Limited Partners and 1% to the
General Partner. Net taxable gain or loss from the sale or other
disposition of a property was allocated as described in the Partnership
Agreement.
3. Rental Properties
Rental properties at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Buildings and improvements $ 13,732,388 13,710,277
Land 2,282,163 2,282,163
------------ ------------
16,014,551 15,992,440
Less accumulated depreciation (6,612,680) (6,027,757)
------------ ------------
$ 9,401,871 9,964,683
============ ============
</TABLE>
(Continued)
F-9
<PAGE> 13
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Mortgage Loan Receivable from Affiliate
On January 31, 1986, the Partnership funded a first mortgage loan in the
amount of $5,440,000 with interest at 10% due January 31, 1996 to Plaza on
the Lake Investors, Ltd. USAA Real Estate Company, the parent of the
General Partner, held a second mortgage note on Plaza on the Lake. On
February 9, 1987, as allowed in the loan documents, upon default of the
borrower, USAA Real Estate Company accepted a deed on the property
effective January 1, 1987, and replaced Plaza on the Lake Investors, Ltd.
as the borrower on the first lien held by the Partnership. All terms and
conditions contained in the original documents remained as originally
written.
On January 31, 1996, in accordance with the terms of the mortgage loan
agreement between USAA Real Estate Income Investments I Limited
Partnership and USAA Real Estate Company, the principal balance of the
$5,440,000 mortgage loan receivable was received by the Partnership and
the underlying note paid in full. Approximately $5,000,000 of the proceeds
from the loan payoff, or $91.56 per Limited Partnership unit, was
distributed to the Limited Partners during the first quarter of 1996.
In addition to the interest income, the Partnership received 3.2% of the
gross revenues of the property through year six and 3.84% in years seven
through ten. The Partnership recorded interest income on the mortgage loan
receivable of $52,124 and $612,757, which includes $5,921 and $68,757 in
participation income, for the years ended December 31, 1996 and 1995,
respectively.
The following is summarized financial information for the year ended
December 31, 1995 for Plaza on the Lake, the underlying property of the
mortgage loan receivable.
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Rental income $ 1,594,840
Net loss (77,393)
Net rental property at period end 7,659,893
Total assets at period end 8,169,336
Mortgage payable at period end 5,440,000
Total liabilities at period end $ 5,782,150
</TABLE>
Financial information for Plaza on the Lake for fiscal years 1997 and 1996
is not included as the mortgage loan receivable was paid in full in
January 1996.
(Continued)
F-10
<PAGE> 14
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Minimum Future Rentals
Operating leases with tenants have remaining terms from one to eleven
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily
represent rental income under generally accepted accounting principles.
Rental income reported in the Statements of Income is recognized under the
operating method, whereby aggregate rentals are reported as income on the
straight-line basis over the life of the lease. Approximate minimum future
rentals are as follows:
<TABLE>
<S> <C>
1998 $ 1,233,000
1999 1,129,000
2000 425,000
2001 266,000
2002 255,000
Thereafter 852,000
-------------
$ 4,160,000
=============
</TABLE>
6. Transactions With Affiliates
USAA Real Estate Company (as the Advisor) received real estate brokerage
commissions of up to 1% of the aggregate selling prices of properties
sold, management fees of up to 4% of gross revenues from operations or 9%
of the Partnership's adjusted cash flow, and an annual mortgage servicing
fee of up to 1/4 of 1% of amounts funded by the Partnership in mortgage
loans which are serviced by the Advisor.
Through January 1995, a portion of the Partnership's working capital
reserve and other available funds were invested in USAA Mutual Fund, Inc.,
an affiliate of the General Partner, and earned interest thereon at market
rates.
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, received fees of up to 6%
of the cash receipts of Partnership properties for managing and providing
leasing services for the properties.
(Continued)
F-11
<PAGE> 15
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Transactions With Affiliates, continued
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
Mortgage
Reimbursement Interest Management Lease Servicing
of Expenses (1) Income Fees Commissions Fees Total
-------------- --------- ---------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1997 $ -- -- -- -- -- --
1996 -- -- -- -- -- --
1995 -- (18) -- -- -- (18)
USAA Real Estate Company:
1997 123,585 -- 68,355 -- -- 191,940
1996 117,027 (52,124) 67,893 -- 1,115 133,911
1995 112,413 (612,757) 77,791 -- 13,600 (408,953)
Quorum Real Estate
Services Corporation:
1997 57,191 -- 51,246 18,448 -- 126,885
1996 60,609 -- 48,992 17,282 -- 126,883
1995 19,550 -- 40,089 16,273 -- 75,912
</TABLE>
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at
actual cost and does not include any mark-up or items normally
considered as overhead.
7. Major Customer Information
During the years ended December 31, 1997, 1996 and 1995, the Partnership
recorded rental income of approximately $533,112, $493,000 and $414,000,
respectively, from a major tenant in the computer industry. This income
represented approximately 31%, 35% and 37% of total rental income for
1997, 1996 and 1995, respectively.
8. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts payable and
accrued expenses and other liabilities approximates fair value because of
the short-term nature of these instruments.
(Continued)
F-12
<PAGE> 16
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
9. Subsequent Events
Subsequent to year-end, the limited partners of USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income Investments
II Limited Partnership, USAA Income Properties III Limited Partnership
and USAA Income Properties IV Limited Partnership (collectively, the
"RELPs") approved the merger of the RELPs with and into the Trust
effective as of December 31, 1997.
According to the Merger Agreement, the Trust will issue an aggregate of
4,412,829 shares of beneficial interest at $13.125 per share (for a
total value of $57,918,385) in exchange for the limited partnership
interests in the RELPs. The number of Shares to be issued to each RELP
will be equal to the net asset value for each RELP (as agreed by the
Trust and each RELP) divided by $13.125. Each Partnership unit will be
exchanged for 15.90 shares of the Trust.
The accompanying financial statements do not include any adjustments
relating to the merger.
F-13
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Partners
USAA Real Estate Income Investments II Limited Partnership
We have audited the accompanying balance sheets of USAA Real Estate Income
Investments II Limited Partnership as of June 30, 1997 and 1996 and the related
statements of income, partners' equity, and cash flows for each of the years in
the three-year period ended June 30, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USAA Real Estate Income
Investments II Limited Partnership as of June 30, 1997 and 1996, and the results
of its operations and its cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
July 25, 1997, except
for Note 10 as to which
the date is August 20, 1997
F-14
<PAGE> 18
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Rental properties, net (note 3)............................. $ 9,177,883 $ 9,493,829
Investment in joint venture (note 4)........................ 2,139,009 2,147,966
Temporary investments, at cost which approximates market
value --
Money market fund......................................... 848,892 804,821
Cash........................................................ 33,288 30,737
----------- -----------
Cash and cash equivalents................................. 882,180 835,558
Deferred charges and other assets........................... 333,315 230,824
----------- -----------
$12,532,387 $12,708,177
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to affiliates of
$6,722 and $7,981......................................... $ 16,822 $ 113,426
Accrued expenses and other liabilities...................... 129,354 172,579
----------- -----------
Total liabilities................................. 146,176 286,005
----------- -----------
Partners' equity:
General Partner:
Capital contribution................................... 1,000 1,000
Cumulative net income.................................. 779,387 677,435
Cumulative distributions............................... (816,492) (710,943)
----------- -----------
(36,105) (32,508)
----------- -----------
Limited Partners (27,141 interests):
Capital contributions, net of offering costs........... 12,756,270 12,756,270
Cumulative net income.................................. 7,014,471 6,096,899
Cumulative distributions............................... (7,348,425) (6,398,489)
----------- -----------
12,422,316 12,454,680
----------- -----------
Total Partners' equity............................ 12,386,211 12,422,172
----------- -----------
$12,532,387 $12,708,177
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 19
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income (notes 5 and 7).......................... $1,403,483 $1,210,320 $1,130,023
Equity in earnings of joint venture (note 4)........... 151,093 147,059 153,787
Interest income, $316 to affiliate in 1995 (note 6).... 38,954 74,952 98,629
---------- ---------- ----------
Total income................................. 1,593,530 1,432,331 1,382,439
---------- ---------- ----------
EXPENSES
Direct expenses, $15,751, $15,126 and $15,122 to
affiliated (note 6).................................. 96,681 91,298 107,583
Depreciation........................................... 315,104 262,935 239,039
General and administrative, $118,196, $83,473 and
$89,155 to affiliates (note 6)....................... 162,221 131,642 164,260
---------- ---------- ----------
Total expenses......................................... $ 574,006 $ 485,875 $ 510,882
---------- ---------- ----------
Net income............................................. $1,019,524 $ 946,456 $ 871,557
========== ========== ==========
Net income per limited partnership unit................ $ 33.81 $ 31.38 $ 28.90
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 20
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balances at June 30, 1994............................ $ (29,601) $12,480,855 $12,451,254
Net income......................................... 87,156 784,401 871,557
Cash distributions................................. (100,271) (902,438) (1,002,709)
--------- ----------- -----------
Balances at June 30, 1995............................ (42,716) 12,362,818 12,320,102
Net income......................................... 94,646 851,810 946,456
Cash distributions................................. (84,438) (759,948) (844,386)
--------- ----------- -----------
Balances at June 30, 1996............................ (32,508) 12,454,680 12,422,172
Net income......................................... 101,952 917,572 1,019,524
Cash distributions................................. (105,549) (949,936) (1,055,485)
--------- ----------- -----------
Balances at June 30, 1997............................ $ (36,105) $12,422,316 $12,386,211
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 21
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 1,019,524 $ 946,456 $ 871,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 315,104 262,935 239,039
Amortization................................... 2,528 2,528 2,528
Earnings from joint venture.................... (151,093) (147,059) (153,787)
Distributions from joint venture............... 160,050 189,150 185,513
Decrease in accounts receivable................ -- 6,000 9,000
(Increase) decrease in deferred charges and
other assets................................. (105,019) (2,235) 49,024
(Decrease) increase in accounts payable,
accrued expenses and other liabilities....... (139,829) 111,621 47,737
Other adjustments.............................. 842 -- --
----------- ----------- -----------
Cash provided by operating activities........ 1,102,107 1,369,396 1,250,611
----------- ----------- -----------
Cash flows used in investing activities --
Additions to rental properties.................... -- (1,696,823) (64,685)
Cash flows used in financing activities --
Distributions to partners......................... (1,055,485) (844,386) (1,002,709)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 46,622 (1,171,813) 183,217
Cash and cash equivalents at beginning of period.... 835,558 2,007,371 1,824,154
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 882,180 $ 835,558 $ 2,007,371
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 22
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. ORGANIZATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER
USAA Real Estate Income Investments II Limited Partnership is engaged
solely in the business of real estate investment; therefore, presentation of
information about industry segments is not applicable.
The Partnership owns industrial buildings in Lakeland, Florida and Elk
Grove Village, Illinois and an equity investment in an office building in
Arlington, Virginia.
The General Partner, USAA Investors II, Inc., is a wholly-owned subsidiary
of USAA Real Estate Company, which is a wholly-owned subsidiary of USAA Capital
Corporation, which is a wholly-owned subsidiary of United Services Automobile
Association (USAA).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value is
believed to be permanently impaired. In 1995, the Partnership adopted the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("Statement 121"). Statement 121 provides guidance for determining
impairment of long-lived assets utilizing undiscounted future cash flows. The
assessment for and measurement of impairment is based upon the undiscounted cash
flows and fair value, respectively, of the individual properties. Based on the
provisions of Statement 121, the Partnership's long-lived assets, real estate
and improvements are not considered impaired. The adoption of this Statement had
no financial statement impact.
The Partnership's investment in Combined Capital Resources Joint Venture is
accounted for on the equity method. The Partnership has a 7.275% interest and
USAA Real Estate Equities, Inc. has a 92.725% interest. Both partners have joint
control of the joint venture.
For purposes of the Statement of Cash Flows, all highly liquid marketable
securities that have a maturity at purchase of three months or less and money
market mutual funds are considered to be cash equivalents. Depreciation is
provided over the estimated useful lives of the properties using the
straight-line method. The estimated lives of the buildings and improvements are
30 years (31.5 years for Federal income tax purposes).
Acquisition fees related to the investment in joint venture are being
amortized over the remaining life of the building (note 4).
Rental income is recognized under the operating method, whereby aggregate
rentals are reported on the straight-line basis over the life of the lease.
Rental income recognized was $104,047 and $2,185 more than the amount per lease
agreements for the years ended June 30, 1997 and 1996, respectively. Rental
income recognized was $48,746 less than the amount per lease agreements for the
year ended June 30, 1995.
Deferred charges consisted primarily of deferred rent resulting from
recognition of income as required by generally accepted accounting principles.
No provision or credit for income taxes has been made, as the liability for
such taxes is that of the Partners rather than the Partnership. The Partnership
files its tax return each calendar year on an accrual basis.
F-19
<PAGE> 23
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
For financial reporting purposes, net income is allocated 10% to the
General Partner and 90% to the Limited Partners. Net income per limited
partnership interest is based upon the limited partnership interests outstanding
at the end of the period and net income allocated to the Limited Partners.
Cash distributions per limited partnership interest were $35.00 for the
year ended June 30, 1997, $28.00 for the year ended June 30, 1996 and $33.25 for
the year ended June 30, 1995 and were based on the limited partnership interests
outstanding at each quarter end and the cash distributions allocated to Limited
Partners.
Certain 1996 and 1995 balances have been reclassified to conform to the
1997 presentation.
2. PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, Net Cash from
Operations shall be allocated and paid 10% to the General Partner and 90% to the
Limited Partners. Any Net Cash from Operations received by a Limited Partner
shall count toward his 6% cumulative Preferred Return (10% as to that portion of
Partnership funds invested in mortgage loans), as defined in the Partnership
Agreement. Net Proceeds from Sales or Refinancings shall be allocated and paid
1% to the General Partner and 99% to the Limited Partners until the Limited
Partners have been returned their Original Invested Capital plus their Preferred
Return. Second, Net Proceeds from Sales or Refinancings shall be allocated and
paid to the General Partner in payment of any unpaid Subordinated Disposition
Fee. Third, Net Proceeds from Sales or Refinancings shall be allocated and paid
90% to the Limited Partners and 10% to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations will be allocated 90% to the Limited Partners and 10% to the General
Partner. Net gain or net loss from the sale or other disposition of a Property
shall be allocated as described in the Partnership Agreement.
3. RENTAL PROPERTIES
Rental properties at June 30 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Buildings and improvements........................ $ 8,913,171 $ 8,914,013
Land.............................................. 2,276,850 2,276,850
----------- -----------
11,190,021 11,190,863
Less accumulated depreciation..................... (2,012,138) (1,697,034)
----------- -----------
$ 9,177,883 $ 9,493,829
=========== ===========
</TABLE>
4. INVESTMENT IN JOINT VENTURE
On September 28, 1988, the Partnership entered into the Combined Capital
Resources Joint Venture (the joint venture) with USAA Real Estate Company
("REALCO"), an affiliate of the General Partner, for the ownership and operation
of income-producing properties and participating first mortgage loans. The joint
venture was structured in a manner which granted joint control of the joint
venture to both partners, but which gave REALCO the responsibility of conducting
the ordinary and usual day-to-day management of the joint venture property.
The initial joint venture investment was a participating first mortgage on
the Sequoia Plaza I in an amount of $30,927,000 which was originally extended by
REALCO on May 23, 1988. On June 30, 1989, the Partnership invested $2,250,000 in
this participating first mortgage which was paid directly to REALCO with the
understanding that such sum would be the Partnership's capital contribution to
the joint venture and would reduce REALCO's contribution. As a result, REALCO's
contribution became $28,677,000. REALCO's joint venture interest is 92.725% and
the Partnership's joint venture interest is 7.275%.
F-20
<PAGE> 24
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On March 27, 1990, REALCO sold its joint venture interest to USAA Real
Estate Equities, Inc., a real estate investment trust, which is majority-owned
by REALCO. All other terms and conditions contained in the joint venture
agreement remained as originally written and amended.
On August 20, 1991, the Combined Capital Resources Joint Venture acquired
the underlying mortgaged property through foreclosure. This transaction
converted the joint venture's investment from a mortgage loan to real property.
As the fair value of the asset approximated the mortgage loan and other
receivables, no loss was recorded on this transaction. This event did not have a
material negative impact on the Partnership's cash flow but has reduced the
equity in earnings from the joint venture due to depreciation expense on the
property.
The following is the unaudited summary financial information for the
Combined Capital Resources Joint Venture as of June 30, 1997 and 1996 and for
the three years ended June 30, 1997.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 474,762 $ 487,379
Property, net............................................. 26,888,892 27,501,449
Other receivables......................................... 21,500 123,058
Deferred rent and other assets, net....................... 2,046,589 1,766,585
----------- -----------
$29,431,743 $29,878,471
=========== ===========
LIABILITIES AND EQUITY
Accounts Payable.......................................... $ 27,975 $ 54,276
----------- -----------
Equity:
USAA Real Estate Equities, Inc.......................... 27,264,759 27,676,229
USAA Real Estate Income Investments II Limited
Partnership.......................................... 2,139,009 2,147,966
----------- -----------
Total equity.................................... 29,403,768 29,824,195
----------- -----------
$29,431,743 $29,878,471
=========== ===========
</TABLE>
OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues(a).................................... $4,023,186 $3,946,260 $4,068,973
Operating expenses............................. (921,397) (939,074) (971,684)
Other expenses................................. (244,192) (225,152) (218,975)
Depreciation................................... (780,718) (760,608) (764,227)
---------- ---------- ----------
Net income................................... $2,076,879 $2,021,426 $2,114,087
========== ========== ==========
EQUITY IN NET INCOME:
USAA Real Estate Equities, Inc............... $1,925,786 $1,874,367 $1,960,300
USAA Real Estate Income Investments II
Limited Partnership....................... 151,093 147,059 153,787
---------- ---------- ----------
$2,076,879 $2,021,426 $2,114,087
========== ========== ==========
CASH DISTRIBUTIONS:
USAA Real Estate Equities, Inc............... $2,039,950 $2,410,850 $2,364,487
USAA Real Estate Income Investments II
Limited Partnership....................... 160,050 189,150 185,513
---------- ---------- ----------
$2,200,000 $2,600,000 $2,550,000
========== ========== ==========
</TABLE>
- ---------------
(a) For the years ended June 30, 1997, 1996 and 1995, the joint venture recorded
$3,560,658 of revenue from a single tenant which represented 89%, 90% and
88%, respectively, of total revenue.
5. MINIMUM FUTURE RENTALS
Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily represent
rental income under generally accepted accounting principles. Rental
F-21
<PAGE> 25
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
income reported in the Statements of Income is recognized under the operating
method, whereby aggregate rentals are reported as income over the life of the
lease. The Partnership's rental properties are leased for two to fourteen years
under triple-net leases whereby the tenants pay all operating expenses.
Approximate minimum future rentals are as follows:
<TABLE>
<S> <C>
1998............................................ $ 1,208,000
1999............................................ 1,208,000
2000............................................ 754,000
2001............................................ 784,000
2002............................................ 854,000
Thereafter...................................... 8,023,000
-----------
$12,831,000
===========
</TABLE>
For the years ended June 30, 1997, 1996 and 1995, the Partnership received
$113,467, $101,239 and $88,139, respectively of contingent rental income.
6. TRANSACTIONS WITH AFFILIATES
USAA Investors II, Inc. (the General Partner) may receive, in the
aggregate, property acquisition fees and loan origination and commitment fees of
up to 5% of the gross offering proceeds; real estate brokerage commissions of up
to 2% of the selling prices of properties sold; 10% of all distributions of Net
Cash from Operations and an annual mortgage servicing fee of up to 1/4 of 1% of
amounts funded by the Partnership in mortgage loans which are serviced by the
General Partner.
Through January 1995, the Partnership had funds invested in USAA Mutual
Fund, Inc. and earned interest thereon at market rates.
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property management and
leasing services for the properties and may receive a fee up to 6% of property
cash receipts for those services.
A summary of transactions with affiliates follows for the three years ended
June 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
REIMBURSEMENT MANAGEMENT LEASE INTEREST
OF EXPENSES(1) FEES COMMISSIONS INCOME TOTAL
-------------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1997............................... $ -- $ -- $ -- $ -- $ --
1996............................... -- -- -- -- --
1995............................... -- -- -- (316) (316)
USAA Real Estate Company:
1997............................... 78,288 -- -- -- 78,288
1996............................... 71,029 -- -- -- 71,029
1995............................... 89,155 -- -- -- 89,155
Quorum Real Estate Services
Corporation:
1997............................... 3,255 12,496 39,908 -- 55,659
1996............................... 3,016 12,110 12,444 -- 27,570
1995............................... 2,823 12,299 -- -- 15,122
</TABLE>
- ---------------
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual
cost and does not include any mark-up or items normally considered as
overhead.
F-22
<PAGE> 26
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. MAJOR CUSTOMER INFORMATION
The Partnership owns two single-tenant industrial complexes. The lease
agreements between the Partnership and these tenants (a manufacturer in the
packaging industry and a manufacturer of business forms) are absolute triple net
lease arrangements whereby the lessee is required to make all payments for
expenses related to the use and occupation of the leased premises including real
estate taxes and assessments, property and liability insurance, repairs and
maintenance, utilities and other operating costs associated with the property.
Accordingly, net operating income for 1997, 1996 and 1995 reflects only rental
income and excludes all expenses directly related to the operations of the
properties as payments for such expenses are made directly by the respective
lessees.
For the years ended June 30, 1997, 1996 and 1995, the Partnership recorded
$547,220, $532,581 and $536,194 of rental income from a single tenant, a
manufacturer of business forms, which represents 39%, 44% and 47%, respectively
of total rental income.
For the years ended June 30, 1997, 1996 and 1995, the Partnership recorded
$856,263, $677,739 and $593,829 of rental income from this single tenant which
represented 61%, 56% and 53%, respectively of total rental income.
Continental Plastic Containers, Inc. ("CPC") is the single tenant at the
Continental Plastic Buildings in Elk Grove Village, Illinois. CPC is a
manufacturer in the packaging industry and a wholly-owned subsidiary of Plastic
Containers, Inc. ("PCI"). PCI is the corporate guarantor for the lease between
the Partnership and CPC. PCI is a public company currently filing periodic
reports with the Securities Exchange Commission. The following is the summary
financial information for CPC as of December 31, 1996 and 1995 and for the three
years ended December 31, 1996.
CONTINENTAL PLASTIC CONTAINERS, INC.
SUMMARIZED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 10,522,000 $ --
Investment securities..................................... 1,000,000 --
Property, net............................................. 98,778,000 137,637,000
Other receivables, net.................................... 27,029,000 32,673,000
Inventories............................................... 18,727,000 19,317,000
Other assets, net......................................... 42,999,000 23,677,000
------------ ------------
$199,055,000 $213,304,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities....................................... $ 38,838,000 $ 57,319,000
Long-term obligations..................................... 129,002,000 105,212,000
Other liabilities......................................... 23,155,000 19,417,000
------------ ------------
Total liabilities................................. 190,995,000 181,948,000
Stockholders' Equity...................................... 8,060,000 31,356,000
------------ ------------
Total liabilities and stockholders' equity........ $199,055,000 $213,304,000
============ ============
</TABLE>
F-23
<PAGE> 27
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
OPERATIONS
Net sales................................................. $262,200,000 $271,088,000
Cost of goods sold........................................ (219,210,000) (231,845,000)
Other income (expenses)................................... (48,525,000) (41,950,000)
Income tax benefit........................................ 1,896,000 2,526,000
Extraordinary item -- loss on early extinguishment of
debt................................................... (7,305,000) (230,000)
Cumulative effect of accounting change.................... -- --
------------ ------------
Net loss.......................................... $(10,944,000) $ (411,000)
============ ============
</TABLE>
For the years ended June 30, 1997, 1996 and 1995, the Partnership recorded
$856,263, $677,739 and $593,829 of rental income from this single tenant which
represented 61%, 56% and 53%, respectively of total rental income.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts payable and
accrued expenses and other liabilities approximate fair value because of the
short-term nature of these instruments.
9. PROPOSED MERGER TRANSACTION
On June 10, 1997, the Partnership signed a letter of intent with American
Industrial Properties REIT [NYSE: IND] (the "Trust") contemplating the merger of
four real estate limited partnerships, including the Partnership, into the
Trust. The four real estate limited partnerships are USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income Investments II
Limited Partnership, USAA Income Properties III Limited Partnership and USAA
Income Properties IV Limited Partnership (collectively, the "RELPs"). Each of
the RELPs is affiliated with USAA Real Estate Company, which currently owns
approximately 13.66% of the outstanding shares of the Trust.
On July 7, 1997, the Trust signed definitive merger agreements with each of
the RELPs pursuant to which the RELPs will be merged into the Trust (the
"Merger"). According to the Merger Agreement, the Trust will issue an aggregate
of 4,412,829 shares of beneficial interest at $13.125 per share (for a total
value of $57,918,385) in exchange for the limited partnership interests in the
RELPs. The number of Shares to be issued to each RELP will be equal to the net
asset value for each RELP (as agreed by the Trust and each RELP) divided by
$13.125. The number of Shares to be received by a Limited Partner in each RELP
will be computed in accordance with such partner's percentage interest in the
RELP. The general partner of each RELP has waived any right it may have to
receive Shares to which it may be entitled in exchange for its general
partnership interest.
The Merger, which has been approved by the Trust's Board of Trust Managers
and the Board of Directors of each of the general partners of the RELPs, is
subject to due diligence by both parties and certain other conditions, including
approval by the shareholders of the Trust and the limited partners of each of
the RELPs. Accordingly, there can be no assurance that the mergers will
ultimately be consummated. The Merger is a taxable transaction to the partners
in the RELPs and will be subject to the completion of a joint proxy
statement/prospectus filed on Form S-4 with the Securities and Exchange
Commission. No date has been scheduled for the shareholder meeting for the Trust
or limited partner meetings for each of the RELPs to vote on the proposed
transaction. Prudential Securities Inc., on behalf of the Trust, and Houlihan
Lokey Howard & Zukin on behalf of the RELPs, have rendered opinions to their
respective parties that the transaction is fair from a financial point of view.
F-24
<PAGE> 28
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership has a 7.275% interest in the Combined Capital Resources
Joint Venture (the "joint venture"), the owner of Sequoia Plaza I. The joint
venture interest will not be included in the Merger but will be purchased by
USAA Real Estate Company ("Realco") or an affiliate of Realco for $2.25 million
if the Merger is approved by the Limited Partners of the Partnership. This
purchase price was determined using the January 1, 1997 external appraisal of
Sequoia Plaza I at a total value of $29.7 million and adjusted by an
appreciation factor.
10. SUBSEQUENT EVENT
On August 20, 1997, a purported class action lawsuit (the "Lawsuit"), which
was filed in the Superior Court of the State of Arizona, was served upon USAA
Real Estate Company, USAA Properties I, Inc. ("RELP GP I"), USAA Properties II,
Inc. ("RELP GP II"), USAA Properties III, Inc. ("RELP GP III"), USAA Properties
IV, Inc. ("RELP GP IV", together with RELP GP I, RELP GP II and RELP GP III, the
"RELP GPs"), certain other affiliated entities and the individual members of the
boards of directors of each of the RELP GPs. The Trust was also named as a
defendant. The suit alleges among other things, breaches of fiduciary duty in
connection with the transactions contemplated by merger agreements entered into
by USAA Real Estate Income Investments I Limited Partnership, USAA Real Estate
Income Investments II Limited Partnership, USAA Income Properties III Limited
Partnership and USAA Income Properties IV Limited Partnership (collectively the
"RELPS") and the Trust, dated as of June 30, 1997, whereby each RELP would be
merged with and into the Trust (collectively, the "Merger").
The Lawsuit seeks, among other things, to enjoin the consummation of the
Merger and damages, including attorneys' fees and expenses. The defendants
believe that the plaintiffs' claims are without merit and intend to defend
vigorously against the Lawsuit.
F-25
<PAGE> 29
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
DECEMBER 31, 1997
UNAUDITED
<TABLE>
<S> <C>
ASSETS
Rental properties, net (note 2) $ 9,020,332
Investment in joint venture 2,093,133
Temporary investments, at cost which approximates market value -
Money market fund 934,077
Cash 85,152
------------
Cash and cash equivalents 1,019,229
Accounts receivable 1,031
Deferred charges and other assets 385,780
------------
$ 12,519,505
============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable, including amounts due to affiliates of $12,465 $ 56,270
Accrued expenses and other liabilities 113,761
------------
Total liabilities 170,031
Partners' equity:
General Partner:
Capital contribution 1,000
Cumulative net income 828,487
Cumulative distributions (869,266)
------------
(39,779)
Limited Partners (27,141 interests):
Capital contributions, net of offering costs 12,756,270
Cumulative net income 7,456,375
Cumulative distributions (7,823,392)
------------
12,389,253
Total Partners' equity 12,349,474
$ 12,519,505
============
</TABLE>
F-26
<PAGE> 30
USAA INCOME PROPERTIES II LIMITED PARTNERSHIP
CONDENSED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<S> <C>
INCOME
Rental income $691,699
Equity in earnings of joint venture 77,799
Interest income 28,339
--------
Total income 797,837
EXPENSES
Direct expenses, $6,933 to affiliate (note 3) 38,729
Depreciation 157,551
General and administrative, $59,627 to affiliates (note 3) 110,553
--------
Total expenses 306,833
Net income $491,004
========
Net income per limited partnership interest $ 16.28
========
</TABLE>
F-27
<PAGE> 31
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
UNAUDITED
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 491,004
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 157,551
Amortization 1,264
Earnings from joint venture (77,799)
Distributions from joint venture 123,675
Increase in accounts receivable (1,031)
Increase in deferred charges and other assets (53,729)
Increase in accounts payable, accrued expenses
and other liabilities 23,855
Cash provided by operating activities 664,790
Cash flows used in financing activities -
Distributions to partners (527,741)
-----------
Net decrease in cash and cash equivalents 137,049
Cash and cash equivalents at beginning of period 882,180
-----------
Cash and cash equivalents at end of period $ 1,019,229
===========
</TABLE>
F-28
<PAGE> 32
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
UNAUDITED
1. Basis of Presentation
The financial information of USAA Real Estate Income Investments II
Limited Partnership (the Partnership) included in this interim report
as of December 31, 1997 and for the six month period ended December 31,
1997 has been prepared by management without audit by independent
certified public accountants who do not express an opinion thereon.
Reference is made to the financial statements in the Annual Report
filed as part of the Form 10-K for the Partnership for the year ended
June 30, 1997 with respect to significant accounting and reporting
policies as well as to other pertinent information concerning the
Partnership.
Information furnished in this report reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the period presented. Further, the
operating results presented for this interim period are not necessarily
indicative of future results.
Subsequent to year-end, the Partnership approved a merger with and into
the American Industrial Properties REIT (Trust) effective December 31,
1997. As part of the merger, the Partnership Agreement was amended. The
accompanying condensed financial statements do not include any
adjustments related to this merger. See Note 4.
2. Rental Properties
Rental properties at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Buildings and improvements $ 8,913,170
Land 2,276,850
------------
11,190,020
Less accumulated depreciation (2,169,688)
------------
$ 9,020,332
============
</TABLE>
(Continued)
F-29
<PAGE> 33
USAA REAL ESTATE INCOME INVESTMENTS II
LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
UNAUDITED
3. Transactions with Affiliates
A summary of transactions with affiliates follows for the six months
ended December 31, 1997:
<TABLE>
<CAPTION>
Quorum
USAA Real Estate
Real Estate Services
Company Corporation
------- -----------
<S> <C> <C>
Reimbursement of expenses (a) $39,995 1,060
Management fees -- 5,873
Lease commissions -- 19,632
------- -------
Total $39,995 26,565
======= =======
</TABLE>
(a) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the partnership
at actual cost and does not include any mark up or items
normally considered as overhead.
4. Subsequent Events
Subsequent to year-end, the limited partners of USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income Investments
II Limited Partnership, USAA Income Properties III Limited Partnership
and USAA Income Properties IV Limited Partnership (collectively, the
"RELPs") approved the merger of the RELPs with and into the Trust
effective as of December 31, 1997.
According to the Merger Agreement, the Trust will issue an aggregate of
4,412,829 shares of beneficial interest at $13.125 per share (for a
total value of $57,918,385) in exchange for the limited partnership
interests in the RELPs. The number of Shares to be issued to each RELP
will be equal to the net asset value for each RELP (as agreed by the
Trust and each RELP) divided by $13.125. Each Partnership unit will be
exchanged for 28.63 shares of the Trust.
The accompanying financial statements do not include any adjustments
resulting from the merger.
F-30
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
Trust Managers and Shareholders
American Industrial Properties REIT:
We have audited the accompanying consolidated balance sheets of USAA Income
Properties III Limited Partnership (Partnership) as of December 31, 1997 and
1996, and the related statements of operations, partners' equity, and cash flows
for each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USAA Income Properties III
Limited Partnership at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 10, subsequent to December 31, 1997, the Partners approved
a merger with and into the American Industrial Properties REIT effective as of
December 31, 1997. These financial statements do not include any adjustments
related to the dissolution of the Partnership.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Antonio, Texas
February 9, 1998
F-31
<PAGE> 35
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Rental properties, net (notes 3 and 6) $ 43,369,098 39,262,249
Temporary investments, at cost which
approximates market value -
Money market fund 3,114,470 9,301,147
Cash 82,988 118,000
------------ ------------
Cash and cash equivalents 3,197,458 9,419,147
Accounts receivable, net of allowance for doubtful
accounts of $90,000 in 1996 302,859 555,959
Deferred rent 3,116,607 2,882,064
Deferred charges and other assets, at amortized cost 2,005,911 1,646,751
------------ ------------
$ 51,991,933 53,766,170
============ ============
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable to affiliates (notes 6 and 7) $ 26,000,000 26,000,000
Accounts payable, including amounts due
to affiliates of $37,542 and $101,194 1,060,324 414,274
Other deposits held -- 18,485
Accrued expenses and other liabilities 629,182 326,166
------------ ------------
Total liabilities 27,689,506 26,758,925
------------ ------------
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net earnings (3,052) 14,982
Cumulative distributions (278,214) (269,199)
------------ ------------
(280,266) (253,217)
------------ ------------
Limited Partners (111,549 units):
Capital contributions, net of offering costs 52,428,030 52,428,030
Cumulative net earnings (302,196) 1,483,181
Cumulative distributions (27,543,141) (26,650,749)
------------ ------------
24,582,693 27,260,462
------------ ------------
Total Partners' equity 24,302,427 27,007,245
------------ ------------
$ 51,991,933 53,766,170
============ ============
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 36
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Rental income $ 6,615,673 8,367,557 10,132,791
Gain on disposal of rental property -- 157,852 --
Interest income, including $158,387 for 1997
and $1,262 for 1995 to affiliate (note 7) 373,093 592,123 648,218
----------- ----------- -----------
Total income 6,988,766 9,117,532 10,781,009
----------- ----------- -----------
EXPENSES
Direct expenses, including $416,138, $149,322
$94,176 to affiliate (note 7) 3,716,921 1,471,616 704,015
Depreciation 1,925,122 1,509,109 1,477,439
General and administrative, including $316,998,
$230,958, and $185,309 to affiliates (note 7) 736,395 459,834 366,291
Management fee to affiliate (note 7) 70,739 60,523 168,389
Interest, including $2,343,000, $2,105,667,
and $2,420,902 to affiliate (note 7) 2,343,000 2,336,385 2,766,034
----------- ----------- -----------
Total expenses 8,792,177 5,837,467 5,482,168
----------- ----------- -----------
Net income (loss) $(1,803,411) 3,280,065 5,298,841
=========== =========== ===========
Net income (loss) per limited partnership unit $ (16.01) 29.11 47.03
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 37
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1994 $ (311,119) 21,528,184 21,217,065
Net income 52,988 5,245,853 5,298,841
Distributions (16,902) (1,673,236) (1,690,138)
----------- ----------- -----------
Balances at December 31, 1995 (275,033) 25,100,801 24,825,768
Net income 32,801 3,247,264 3,280,065
Distributions (10,985) (1,087,603) (1,098,588)
----------- ----------- -----------
Balances at December 31, 1996 (253,217) 27,260,462 27,007,245
Net loss (18,034) (1,785,377) (1,803,411)
Distributions (9,015) (892,392) (901,407)
----------- ----------- -----------
Balances at December 31, 1997 $ (280,266) 24,582,693 24,302,427
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 38
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,803,411) 3,280,065 5,298,841
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,925,122 1,509,109 1,477,439
Amortization 273,555 105,325 84,471
Decrease (increase) in accounts receivable 253,100 (136,088) (335,001)
Increase in deferred charges and other assets (867,258) (573,994) (334,751)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 930,581 (2,977,932) 2,820,522
Gain on disposal of rental property -- (157,852) --
Loss on early retirement of fixed assets -- 10,598 --
Other adjustments -- -- 7,118
----------- ----------- -----------
Cash provided by operating activities 711,689 1,059,231 9,018,639
----------- ----------- -----------
Cash flows from investing activities:
Additions to rental properties (6,031,971) (1,718,757) --
Proceeds from disposal of rental properties -- 220,400 --
----------- ----------- -----------
Cash used in investing activities (6,031,971) (1,498,357) --
----------- ----------- -----------
Cash flows from financing activities:
Repayment of mortgages payable -- (1,818,182) (2,727,273)
Distributions to partners (901,407) (1,098,588) (1,690,138)
----------- ----------- -----------
Cash used in financing activities (901,407) (2,916,770) (4,417,411)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (6,221,689) (3,355,896) 4,601,228
Cash and cash equivalents at beginning of year 9,419,147 12,775,043 8,173,815
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,197,458 9,419,147 12,775,043
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 39
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. Organization, Summary of Significant Accounting Policies and Other
USAA Income Properties III Limited Partnership (Partnership) is engaged
solely in the business of real estate investment; therefore, presentation
of information about industry segments is not applicable. The General
Partner, USAA Properties III, Inc., is a wholly-owned subsidiary of USAA
Real Estate Company (Realco), which is a wholly-owned subsidiary of USAA
Capital Corporation, which is a wholly-owned subsidiary of United Services
Automobile Association (USAA).
Subsequent to year-end, the Partnership approved a merger with and into
the American Industrial Properties REIT (Trust) effective as of December
31, 1997. The accompanying financial statements do not include any
adjustments related to this merger. See Note 10.
The Partnership owns Curlew Crossing Shopping Center in Clearwater,
Florida and office buildings in Phoenix, Arizona and Manhattan Beach,
California. The Partnership's revenue is subject to changes in the
economic environments of these areas.
Rental properties are valued at cost. The carrying amount of a property is
not changed for temporary fluctuations in value unless the carrying value
is believed to be permanently impaired. In 1995, the Partnership adopted
the provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," ("Statement 121"). Statement 121 provides guidance for
determining impairment of long-lived assets utilizing undiscounted future
cash flows. The assessment for and measurement of impairment is based upon
the undiscounted cash flows and fair value, respectively, of the
individual properties. Based on the provisions of Statement 121, the
Partnership's long-lived assets, real estate and improvements are not
considered impaired. The adoption of Statement 121 had no financial
statement impact.
Depreciation is provided over the estimated useful lives of the properties
using the straight-line method. The estimated useful lives of the
buildings and improvements are 30 years (19 - 39 years for Federal income
tax purposes).
(Continued)
F-36
<PAGE> 40
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization, Summary of Significant Accounting Policies and Other,
continued
Rental income is recognized under the operating method, whereby aggregate
rentals are reported on a straight-line basis as income over the life of
the lease. Rental income recognized was $234,543 more, $1,048,477 more and
$874,036 more than the amount due per the lease agreements for the years
ended December 31, 1997, 1996 and 1995, respectively. Deferred rent
results from recognition of income as required by generally accepted
accounting principles.
A land lease receivable, arising from the sale of improvements at a rental
property, was accounted for in accordance with generally accepted
accounting principles, whereby the carrying amount of the receivable was
reduced by a portion of the payment received on the ground lease.
No provision or credit for income taxes has been made as the liability for
such taxes is that of the Partners rather than the Partnership. The
Partnership files its tax return on an accrual basis.
For the purposes of the Statements of Cash Flows, all highly liquid
marketable securities that have a maturity at purchase of three months or
less, and money market mutual funds are considered to be cash equivalents.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
For financial reporting purposes, net income (loss) is allocated 1% to the
General Partner and 99% to the Limited Partners. Net income (loss) per
limited partnership unit is based upon the limited partnership units
outstanding at the end of each year and the net income (loss) allocated to
the Limited Partners.
Cash distributions per limited partnership unit were $8.00, $9.75, and
$15.00 for the years ended December 31, 1997, 1996 and 1995, respectively,
and were based on the limited partnership units outstanding at each
quarter end and the cash distributions allocated to Limited Partners.
(Continued)
F-37
<PAGE> 41
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Partnership Agreement
As part of the merger with the Trust, the Partnership Agreement was
amended to permit the dissolution of the Partnership. Pursuant to the
terms of the Partnership Agreement existing prior to the merger, all
Distributable Cash was distributed in the ratio of 1% to the General
Partner and 99% to the Limited Partners within 60 days after the close of
each fiscal quarter.
Generally, net taxable income or losses not arising from the sale or
refinancing of properties of the Partnership and Distributable Cash was
allocated 99% to the Limited Partners and 1% to the General Partner. Cash
Distributions from the sale or refinancing of property were allocated
first to the Limited Partners until the Limited Partners received an
amount equal to their adjusted capital contributions; second, to the
Limited Partners until the Limited Partners received a cumulative amount
from cash distributions from operations, sales or refinancings equal to 6%
per annum of their adjusted capital contributions; third, to all Partners,
in an amount equal to their respective positive capital account balances
to the extent such balances exceeded the amounts provided for in the
Partnership Agreement; and fourth, the balance, 90% to the Limited
Partners and 10% to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations were allocated 99% to the Limited Partners and 1% to the
General Partner. Net gain or net loss from the sale or other disposition
of a property was allocated as described in the Partnership Agreement.
3. Rental Properties
Rental properties at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Buildings and improvements $ 60,071,429 54,041,957
Land 8,972,896 8,970,396
------------ ------------
69,044,325 63,012,353
Less accumulated depreciation (25,675,227) (23,750,104)
------------ ------------
$ 43,369,098 39,262,249
============ ============
</TABLE>
(Continued)
F-38
<PAGE> 42
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Minimum Future Rentals
Operating leases with tenants have remaining terms from one year to 25
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily
represent rental income under generally accepted accounting principles.
Rental income reported in the Statements of Income is recognized under the
operating method, whereby aggregate rentals are reported on a
straight-line basis as income over the life of the lease. Approximate
minimum future rentals are as follows:
1998 $ 6,738,000
1999 6,601,000
2000 6,264,000
2001 6,266,000
2002 4,636,000
Thereafter 18,992,000
------------
$ 49,497,000
5. Triple Net Leases
During 1995, lease agreements between the Partnership and tenants at two
properties were absolute triple net lease arrangements whereby the lessee
was required to make all payments for expenses related to the use and
occupation of the leased premises including real estate taxes and
assessments, property and liability insurance, repairs and maintenance,
utilities and other operating costs associated with the property.
Accordingly, net operating income for 1995 reflects only rental income and
excludes all expenses directly related to the operations of the properties
as payments for such expenses are made directly by the respective lessees.
(Continued)
F-39
<PAGE> 43
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Mortgages Payable
Mortgages payable to affiliates at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
First mortgage note payable, interest at
8.25%, due March 31, 1998, interest only
payable monthly; secured by rental property
with a depreciated cost of approximately $7,301,000 $11,000,000 11,000,000
First mortgage note payable,interest at 9.57%,
due September 1, 1998, interest only payable
monthly; secured by rental property with a
depreciated cost of approximately $22,376,000 15,000,000 15,000,000
----------- ----------
$26,000,000 26,000,000
=========== ==========
</TABLE>
Cash payments for interest expense were $2,343,000, $2,105,667 and
$2,420,902 for 1997, 1996 and 1995, respectively.
7. Transactions with Affiliates
USAA Real Estate Company (the Adviser) received property acquisition fees
of up to 4% of the gross offering proceeds, real estate brokerage
commissions of up to 1% of the aggregate selling prices of property sold
and management fees equal to 4% of Cash Receipts from Operations not to
exceed 9% of adjusted cash flow from the Partnership.
Through January 1995, the Partnership had funds invested in USAA Mutual
Fund, Inc. and earned interest thereon at the rates the Fund paid to
non-affiliated investors.
During 1997, the Partnership purchased short-term commercial paper from
USAA Capital Corporation and earned interest thereon at the rates the Fund
paid to non-affiliated investors.
(Continued)
F-40
<PAGE> 44
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
7. Transactions with Affiliates, continued
An affiliate of the General Partner, Las Colinas Management Company,
received monthly payments of principal of $227,272.72 plus interest at
one-month LIBOR plus .625% through August 31, 1996. On August 31, 1996,
the mortgage loan was converted to interest only payments at an interest
rate of 9.57%
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property
management and leasing services for the properties and may receive fees of
up to 6% of the property cash receipts for those services.
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
Reimbursement Interest Management Lease Interest
of Expenses(1) Income Fees Commissions Expense Total
--------------- -------- ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
USAA Mutual Fund, Inc.:
1997 $ -- -- -- -- -- --
1996 -- -- -- -- -- --
1995 -- (1,262) -- -- -- (1,262)
USAA Real Estate Company:
1997 237,968 -- 70,739 -- 907,500 1,216,207
1996 200,417 -- 60,523 -- 964,529 1,225,469
1995 162,493 -- 168,389 -- 1,191,014 1,521,896
Las Colinas Management Co.:
1997 -- -- -- -- 1,435,500 1,435,500
1996 -- -- -- -- 1,141,138 1,141,138
1995 -- -- -- -- 1,229,888 1,229,888
USAA Capital Corporation:
1997 -- (158,387) -- -- -- (158,387)
1996 -- -- -- -- -- --
1995 -- -- -- -- -- --
Quorum Real Estate Services Corporation:
1997 233,979 -- 182,159 79,030 -- 495,168
1996 85,876 -- 63,446 30,541 -- 179,863
1995 47,548 -- 46,628 22,816 -- 116,992
</TABLE>
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at
actual cost and does not include any mark-up or items normally
considered as overhead.
(Continued)
F-41
<PAGE> 45
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Major Customer Information
During 1997, the Partnership recorded approximately $839,000 and
$1,586,000 of rental income from two major tenants which represented
approximately 13% and 24% respectively of total rental income for 1997.
During 1996, the Partnership recorded approximately $1,644,000 and
$4,869,000 of rental income from two major tenants which represented
approximately 21% and 62% respectively of total rental income for 1996.
During 1995, the Partnership recorded approximately $1,246,000 and
$6,679,000 of rental income from two major tenants which represented
approximately 13% and 69% respectively of total rental income for 1995.
9. Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturities of these instruments.
The fair value of mortgages payable at December 31, 1997, which
approximates the carrying amount, and was estimated by discounting the
future cash flows using interest rates currently being offered for
mortgage loans and notes with similar characteristics and maturities.
The carrying amount of the mortgages payable at December 31, 1996
approximates fair value since these two mortgages payable were
re-negotiated during 1996 to interest rates currently being offered for
mortgage loans with similar characteristics and maturities.
10. Subsequent Events
Subsequent to year-end, the limited partners of USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income Investments II
Limited Partnership, USAA Income Properties III Limited Partnership and
USAA Income Properties IV Limited Partnership (collectively, the "RELPs")
approved the merger of the RELPs with and into the Trust effective as of
December 31, 1997.
F-42
<PAGE> 46
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Subsequent Events, continued
According to the Merger Agreement, the Trust will issue an aggregate of
4,412,829 shares of beneficial interest at $13.125 per share (for a total
value of $57,918,385) in exchange for the limited partnership interests in
the RELPs. The number of Shares to be issued to each RELP will be equal to
the net asset value for each RELP (as agreed by the Trust and each RELP)
divided by $13.125. Each Partnership unit will be exchanged for 16.60
shares of the Trust.
The accompanying financial statements do not include any adjustments
relating to the merger.
F-43
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
Trust Managers and Shareholder's
American Industrial Properties REIT:
We have audited the accompanying balance sheets of USAA Income Properties IV
Limited Partnership (Partnership) as of December 31, 1997 and 1996, and the
related statements of operations, partners' equity, and cash flows for each of
the years in the three year period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USAA Income Properties IV
Limited Partnership at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 10, subsequent to December 31, 1997, the Partners approved
a merger with and into the American Industrial Properties REIT effective as of
December 31, 1997. These financial statements do not include any adjustments
related to the dissolution of the Partnership.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
San Antonio, Texas
February 9, 1998
F-44
<PAGE> 48
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Rental properties, net (notes 3, 4 and 7) $ 20,795,676 20,743,237
Investment in joint venture 4,679,011 5,183,456
Temporary investments, at cost which
approximates market value -
Money market fund 410,130 753,756
Cash 14,074 33,233
------------ -----------
Cash and cash equivalents 424,204 786,989
Accounts receivable 69,790 5,600
Deferred charges and other assets 745,499 634,161
------------ -----------
$ 26,714,180 27,353,443
============ ===========
LIABILITIES AND PARTNERS' EQUITY
Mortgage payable (note 7) $ 1,064,787 1,131,500
Note payable to affiliate (notes 4, 7 and 8) 7,200,000 6,000,000
Accounts payable, including amounts due
to affiliates of $27,516 and $29,082 131,625 88,517
Other liabilities 48,459 102,743
------------ -----------
Total liabilities 8,444,871 7,322,760
------------ -----------
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 31,079 43,804
Cumulative distributions (132,722) (127,834)
------------ -----------
(100,643) (83,030)
------------ -----------
Limited Partners (60,495 interests):
Capital contributions, net of offering costs 28,432,650 28,432,650
Cumulative net income 3,076,816 4,336,617
Cumulative distributions (13,139,514) (12,655,554)
------------ -----------
18,369,952 20,113,713
------------ -----------
Total Partners' equity 18,269,309 20,030,683
------------ -----------
$ 26,714,180 27,353,443
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE> 49
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
INCOME
Rental income $ 2,153,163 1,227,447 1,687,107
Equity in earnings (loss) of joint venture (264,333) 234,212 215,804
Interest income, including $23 for 1995
to affiliate (note 8) 49,474 75,275 121,801
----------- ---------- ----------
Total income 1,938,304 1,536,934 2,024,712
----------- ---------- ----------
EXPENSES
Direct expenses, including $70,999, $55,629
and $63,487 to affiliate (note 8) 936,891 524,608 317,618
Depreciation 1,177,352 905,195 959,962
General and administrative, including
$142,046, $140,202 and $110,121
to affiliates (note 8) 313,953 232,296 206,651
Management fee to affiliate (note 8) 36,414 50,134 90,376
Interest, including $640,241 for 1997 and
$600,000 for 1996 and 1995 to affiliate
(notes 7 and 8) 746,220 712,094 717,615
----------- ---------- ----------
Total expenses 3,210,830 2,424,327 2,292,222
----------- ---------- ----------
Net loss $(1,272,526) (887,393) (267,510)
=========== ========== ==========
Net loss per limited
partnership interest $ (20.82) (14.52) (4.42)
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 50
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1994 $ (56,357) 22,754,318 22,697,961
Net loss (2,675) (264,835) (267,510)
Distributions (9,166) (907,425) (916,591)
--------- ----------- -----------
Balances at December 31, 1995 (68,198) 21,582,058 21,513,860
Net loss (8,874) (878,519) (887,393)
Distributions (5,958) (589,826) (595,784)
--------- ----------- -----------
Balances at December 31, 1996 (83,030) 20,113,713 20,030,683
Net loss (12,725) (1,259,801) (1,272,526)
Distributions (4,888) (483,960) (488,848)
--------- ----------- -----------
Balances at December 31, 1997 $(100,643) 18,369,952 18,269,309
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 51
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $(1,272,526) (887,393) (267,510)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 1,177,352 905,195 959,962
Amortization 68,776 37,838 41,764
Loss (earnings) from joint venture 264,333 (234,212) (215,804)
Loss on early retirement of assets -- 49,396 --
Distribution from joint venture 240,112 502,560 558,400
Decrease (increase) in accounts receivable (64,190) 2,000 1,398
(Increase) decrease in deferred charges
and other assets (180,114) (146,487) 71,983
Increase (decrease) in accounts payable,
accrued expenses and other liabilities (11,176) 114,810 876
----------- ---------- ----------
Cash provided by operating activities 222,567 343,707 1,151,069
----------- ---------- ----------
Cash flows used in investing activities -
Additions to rental properties (1,229,791) (833,056) (215,021)
----------- ---------- ----------
Cash flows from financing activities:
Repayment of mortgages payable (66,713) (60,598) (55,077)
Proceeds from issuance of note payable 1,200,000 -- --
Distributions to partners (488,848) (595,784) (916,591)
----------- ---------- ----------
Cash provided by (used in) financing activities 644,439 (656,382) (971,668)
----------- ---------- ----------
Net decrease in cash and cash equivalents (362,785) (1,145,731) (35,620)
Cash and cash equivalents at beginning
of year 786,989 1,932,720 1,968,340
----------- ---------- ----------
Cash and cash equivalents at end of year $ 424,204 786,989 1,932,720
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 52
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. Organization, Summary of Significant Accounting Policies and Other
USAA Income Properties IV Limited Partnership (Partnership) is engaged
solely in the business of real estate investment; therefore, presentation
of information about industry segments is not applicable. The General
Partner, USAA Properties IV, Inc., is a wholly-owned subsidiary of USAA
Real Estate Company (Realco), which is a wholly-owned subsidiary of USAA
Capital Corporation, which is a wholly-owned subsidiary of United
Services Automobile Association (USAA).
Subsequent to year-end, the Partnership approved a merger with and into
the American Industrial Properties REIT (Trust) effective as of December
31, 1997. The accompanying financial statements do not include any
adjustments related to this merger. See Note 11.
The Partnership owns office buildings in Milpitas, California, San Diego,
California, St. Louis, Missouri, and a joint venture interest in a
research and development property in Chelmsford, Massachusetts. The
Partnership's revenue is subject to changes in the economic environments
of these areas.
Rental properties are valued at cost. The carrying amount of a property
is not changed for temporary fluctuations in value unless the carrying
value is believed to be permanently impaired. In 1995, the Partnership
adopted the provisions of Financial Accounting Standards Board Statement
No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," ("Statement 121"). Statement 121
provides guidance for determining impairment of long-lived assets
utilizing undiscounted future cash flows. The assessment for and
measurement of impairment is based upon the undiscounted future cash
flows and fair value, respectively, of the individual real estate
properties. Based on the provisions of Statement 121, the Partnership's
long-lived assets, real estate and improvements are not considered
impaired. The adoption of Statement 121 had no financial statement
impact.
Depreciation is provided over the estimated useful lives of the
properties using the straight-line method. The estimated lives of the
buildings and improvements is 30 years (31.5 - 39 years for Federal
income tax purposes).
(Continued)
F-49
<PAGE> 53
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization, Summary of Significant Accounting Policies and Other,
continued
Rental income is recognized under the operating method, whereby aggregate
rentals are reported on a straight-line basis as income over the life of
the lease. Rental income recognized was $15,391, $36,947 and $77,507 less
than the amount due per the lease agreements for the years ended December
31, 1997, 1996 and 1995, respectively. Deferred rent results from the
recognition of income as required by generally accepted accounting
principles.
No provision or credit for income taxes has been made as the liability
for such taxes is that of the Partners rather than the Partnership. The
Partnership files its tax return on an accrual basis.
For purposes of the Statements of Cash Flows, all highly liquid
marketable securities that have a maturity at purchase of three months or
less, and money market mutual funds are considered to be cash
equivalents.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Prior financial statements of the Partnership were prepared on a
consolidated basis with USAA Chelmsford Associates Joint Venture. For all
periods presented in the accompanying financial statements, the
Partnership's 55.84% interest in USAA Chelmsford Associates Joint Venture
is accounted for using the equity method (note 4).
For financial reporting purposes, net income was allocated 1% to the
General Partner and 99% to the Limited Partners. Net income per limited
partnership interest was based upon the limited partnership interests
outstanding at the end of the period and net income allocated to the
Limited Partners.
Cash distributions per limited partnership interest were $8.00, $9.75,
and $15.00 for the years ended December 31, 1997, 1996 and 1995,
respectively, and were based on the limited partnership interests
outstanding at each quarter end and the cash distributions allocated to
Limited Partners.
(Continued)
F-50
<PAGE> 54
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Partnership Agreement
As part of the merger with the Trust the Partnership Agreement was
amended to permit the dissolution of the Partnership. Pursuant to the
terms of the Partnership Agreement existing prior to the merger, Net Cash
from Operations was allocated and paid 1% to the General Partner and 99%
to the Limited Partners. Any Net Cash from Operations received by a
Limited Partner counted toward his 6% cumulative Preferred Return, as
defined in the Partnership Agreement. Net Proceeds from Sales or
Refinancings was allocated and paid 1% to the General Partner and 99% to
the Limited Partners until the Limited Partners had been returned their
Original Invested Capital from Net Proceeds from Sales or Refinancings,
plus their Preferred Return. Second, Net Proceeds from Sales or
Refinancings were allocated and paid to the Adviser in payment of any
unpaid Subordinated Disposition Fee. Third, Net Proceeds from Sales or
Refinancings were allocated and paid 90% to the Limited Partners and 10%
to the General Partner.
Generally, all items of income, gain, loss, deduction and credit from
operations were allocated 99% to the Limited Partners and 1% to the
General Partner. Net gain or net loss from the sale or other disposition
of a property was allocated as described in the Partnership Agreement. As
part of the merger, the partnership agreement was amended to permit the
dissolution of the partnership.
3. Rental Properties
Rental properties at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Buildings and improvements $ 25,355,327 24,125,536
Land 4,215,016 4,215,016
------------ -----------
29,570,343 28,340,552
Less accumulated depreciation (8,774,667) (7,597,315)
------------ -----------
$ 20,795,676 20,743,237
============ ===========
</TABLE>
(Continued)
F-51
<PAGE> 55
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Investment in Joint Venture
On May 31, 1988, the Partnership entered into the USAA Chelmsford
Associates Joint Venture with USAA Real Estate Company, the parent
company of the Partnership's General Partner, for the ownership and
operation of the Apollo Computer Research and Development Headquarters
Building. The Partnership contributed $9,000,000 for its 55.4% joint
venture interest. The contribution consisted of $3,000,000 in remaining
offering proceeds and $6,000,000 in proceeds from a note payable to USAA
Real Estate Company (note 7). The Partnership accounts for its investment
in the joint venture using the equity method.
Summary financial information for the joint venture as of December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995
follows:
<TABLE>
<CAPTION>
ASSETS
1997 1996
----------- ----------
<S> <C> <C>
Cash $ 268,475 416,888
Property, net 23,388,785 24,288,391
Accounts receivable 4,610 27,115
Other assets -- 4,663
----------- ----------
$23,661,870 27,737,057
=========== ==========
LIABILITIES AND EQUITY
Liabilities:
Mortgage payable $15,113,227 15,287,583
Accounts payable and accrued liabilities 168,577 167,247
----------- ----------
15,281,804 15,454,830
----------- ----------
Equity:
USAA Income Properties IV
Limited Partnership 4,679,011 5,183,456
Co-venturer - affiliate 3,701,055 4,098,771
----------- ----------
Total equity 8,380,066 9,282,227
----------- ----------
$23,661,870 24,737,057
=========== ==========
</TABLE>
(Continued)
F-52
<PAGE> 56
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Investment in Joint Venture, continued
<TABLE>
<CAPTION>
OPERATIONS
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 2,036,144 2,789,770 2,771,135
Operating expenses (43,555) (28,054) (63,018)
Other expenses (62,738) (9,802) (8,967)
Depreciation (1,014,192) (929,510) (895,877)
Interest expense (1,387,819) (1,402,970) (1,416,805)
----------- ---------- ----------
Net income (loss) $ (472,160) 419,434 386,468
=========== ========== ==========
Equity in net income (loss):
USAA Income Properties IV
Limited Partnership $ (264,333) 234,212 215,804
Co-venturer - affiliate (207,827) 185,222 170,664
----------- ---------- ----------
$ (472,160) 419,434 386,468
=========== ========== ==========
Cash distributions:
USAA Income Properties IV
Limited Partnership $ 240,112 502,560 558,401
Co-venturer - affiliate 189,889 397,440 441,599
----------- ---------- ----------
$ 430,001 900,000 1,000,000
=========== ========== ==========
</TABLE>
5. Minimum Future Rentals
Operating leases with tenants have remaining terms from one year to five
years. Minimum future rentals are cash payments to be received under
non-cancelable leases over the lease terms and do not necessarily
represent rental income under generally accepted accounting principles.
Rental income reported in the Statements of Operations is recognized
under the operating method, whereby aggregate rentals are reported on a
straight-line basis as income over the life of the lease. Approximate
minimum future rentals are as follows:
(Continued)
F-53
<PAGE> 57
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Minimum Future Rentals, continued
<TABLE>
<S> <C>
1998 $ 2,200,000
1999 2,218,000
2000 2,059,000
2001 1,802,000
2002 835,000
Thereafter 118,000
-------------
$ 9,232,000
=============
</TABLE>
6. Triple Net Leases
During 1997, 1996 and 1995, the Partnership had ownership interests in
one office building occupied by a single tenant. The lease agreement
between the tenant and the Partnership is an absolute triple net lease
arrangement whereby the lessee is required to make all payments for
expenses related to the use and occupation of the leased premises
including real estate taxes and assessments, property and liability
insurance, repairs and maintenance, utilities and other operating costs
associated with the property. Accordingly, net operating income reflected
only rental income and excluded all expenses directly related to the
operations of the property as payments for such expenses are made
directly by the lessee.
7. Mortgage and Note Payable
Mortgage payable at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
9.625% first mortgage note, payable in
monthly installments of $14,391,
including interest, due August 1, 2008;
secured by rental property with a
depreciated cost of approximately $5,943,000. $ 1,064,787 $ 1,131,500
============= ==============
</TABLE>
(Continued)
F-54
<PAGE> 58
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
7. Mortgage and Note Payable, continued
On May 31, 1988, $6,000,000 of the total $9,000,000 Partnership
investment in USAA Chelmsford Associates Joint Venture was borrowed from
USAA Real Estate Company (note 4). The original unsecured demand note
payable had a maturity date of September 1, 1997 and included monthly
interest only payments at 10%. During 1997, the note was increased to
$7,200,000 and was extended to March 1, 1999 with a decrease in the
interest rate from 10% to 9%.
Aggregate maturities of mortgages and note payable for 1998 through 2002
are $73,426, $7,280,814, $88,925, $97,891 and $107,740, respectively.
Cash payments for interest expense were $746,219, $712,094 and $717,616
for 1997, 1996 and 1995, respectively.
8. Transactions with Affiliates
USAA Real Estate Company (the Adviser) received property acquisition fees
of up to 5% of gross offering proceeds, real estate brokerage commissions
of up to 2% of the aggregate selling prices of properties sold and
management fees of 9% of adjusted cash flow from operations.
Through January 1995, a portion of the Partnership's working capital
reserve and other available funds were invested in USAA Mutual Fund, Inc.
and earned interest thereon at market rates.
Quorum Real Estate Services Corporation (also known as USAA Realty
Company), an affiliate of the General Partner, provides property
management and leasing services for the properties and may receive fees
of up to 6% of property cash receipts for those services.
(Continued)
F-55
<PAGE> 59
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Transactions with Affiliates, continued
A summary of transactions with affiliates follows:
<TABLE>
<CAPTION>
Reimbursement Interest Management Lease Interest
of Expenses (1) Income Fees Commissions Expense Total
--------------- -------- ---------- ----------- -------- ------
USAA Mutual Fund, Inc.:
<S> <C> <C> <C> <C> <C> <C>
1997 $ -- -- -- -- -- --
1996 -- -- -- -- -- --
1995 -- (23) -- -- -- (23)
USAA Real Estate Company:
1997 118,558 -- 36,414 -- 640,241 795,213
1996 109,255 -- 50,134 -- 600,000 759,389
1995 100,634 -- 90,376 -- 600,000 791,010
Quorum Real Estate Services Corporation:
1997 42,658 -- 28,341 23,488 -- 94,487
1996 33,042 -- 22,587 30,947 -- 86,576
1995 36,559 -- 26,928 9,487 -- 72,974
</TABLE>
(1) Reimbursement of expenses represents amounts paid or accrued as
reimbursement of expenses incurred on behalf of the Partnership at actual cost
and does not include any mark-up or items normally considered as overhead.
9. Major Customer Information
During 1997, the Partnership recorded approximately $727,706, $518,120
and $292,679 of rental income from leases which represented approximately
34%, 24% and 14% of total rental income, respectively.
(Continued)
F-56
<PAGE> 60
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
9. Major Customer Information, continued
During 1996, the Partnership recorded approximately $420,000, $384,000
and $292,000 of rental income from leases which represented approximately
34%, 31% and 24% of total rental income, respectively.
During 1995, the Partnership recorded approximately $543,000, $464,000,
$414,000 and $234,000 of rental income from leases which represented
approximately 32%, 25%, 23% and 14% of total rental income, respectively.
In addition, see note 4 regarding rental income from the single tenant of
the building owned by USAA Chelmsford Associates Joint Venture.
10. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents approximates fair value
due to the short maturity of these instruments.
The fair value of mortgages and note payable at December 31, 1997 and
1996 approximated $8,106,000 and $7,105,000, respectively, and was
estimated by discounting the future cash flows using interest rates
currently being offered for mortgage loans and notes with similar
characteristics and maturities.
11. Subsequent Events
Subsequent to year-end, the limited partners of USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income Investments II
Limited Partnership, USAA Income Properties III Limited Partnership and
USAA Income Properties IV Limited Partnership (collectively, the "RELPs")
approved the merger of the RELPs with and into the Trust effective as of
December 31, 1997.
According to the Merger Agreement, the Trust will issue an aggregate of
4,412,829 shares of beneficial interest at $13.125 per share (for a total
value of $57,918,385) in exchange for the limited partnership interests
in the RELPs. The number of Shares to be issued to each RELP will be
equal to the net asset value for each RELP (as agreed by the Trust and
each RELP) divided by $13.125. Each Partnership unit will be exchanged
for 15.14 shares of the Trust.
(Continued)
F-57
<PAGE> 61
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
11. Subsequent Events, continued
The accompanying financial statements do not include any adjustments
relating to the merger.
F-58
<PAGE> 62
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 million 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-59
<PAGE> 63
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 unaudited
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. 1 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 by
reference 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 by reference
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 by reference 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 by reference 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-60
<PAGE> 64
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-61
<PAGE> 65
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-62
<PAGE> 66
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 7188 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-63
<PAGE> 67
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-64
<PAGE> 68
(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-65
