-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KDvWJDpz2gOZP31ebz9tBrFz6NG2NbnIiRGOmXhzjEPObe9nVnii0k0QDMLOfvl/ rU9l8hIl0SpN4ZcI/aUmEA== 0000778437-97-000014.txt : 19970520 0000778437-97-000014.hdr.sgml : 19970520 ACCESSION NUMBER: 0000778437-97-000014 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970516 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INDUSTRIAL PROPERTIES REIT INC CENTRAL INDEX KEY: 0000778437 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 756335572 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-09016 FILM NUMBER: 97610885 BUSINESS ADDRESS: STREET 1: 6220 N BELTLINE RD STREET 2: STE 205 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2145506053 MAIL ADDRESS: STREET 1: 6220 N BELTLINE ROAD STREET 2: SUITE 205 CITY: IRVING STATE: TX ZIP: 75063 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN INDUSTRIAL PROPERTIES REIT DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: TRAMMELL CROW REAL ESTATE INVESTORS DATE OF NAME CHANGE: 19931203 10-K405/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A Amendment No. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ______ to ______ Commission File Number 1-9016 American Industrial Properties REIT (Exact name of registrant as specified in its charter) Texas 75-6335572 (State of organization) (I.R.S.Employer Identification Number) 6220 North Beltline, Suite 205 Irving, Texas 75063 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (972) 550-6053 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Shares of Beneficial Interest New York Stock Exchange Par Value $0.10 Per Share Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A Amendment No. 1 or any amendment to this Form 10- K/A Amendment No. 1. The aggregate market value of the voting stock held by non- affiliates of the registrant was $23,750,000 as of February 27, 1997. The aggregate market value has been computed by reference to the closing price at which the stock was sold on the New York Stock Exchange on February 27, 1997. 10,000,000 Shares of Beneficial Interest were outstanding as of February 27, 1997. DOCUMENTS INCORPORATED BY REFERENCE: NONE EXPLANATORY NOTE: THE REGISTRANT IS AMENDING THE FOLLOWING ITEMS TO ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 IN ORDER THAT SUCH ITEMS ARE IDENTICAL TO THE CORRESPONDING TEXT SET FORTH IN THE REGISTRANT'S PROXY STATEMENT FILED MAY 14, 1997 IN CONNECTION WITH THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 30, 1997. Item 6 SELECTED FINANCIAL DATA The following table sets forth selected financial data for the Trust and its subsidiaries for each of the five years in the period ended December 31, 1996. This information should be read in conjunction with the discussion set forth below under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Trust and accompanying Notes included elsewhere in this Proxy Statement. Year Ended December 31, 1996 1995 1994 1993 1992 (in thousands except share and per share data) Operating data: Total revenues $ 11,478 $ 11,779 $11,226 $ 10,641 $ 15,139 Loss from real estate operations (a) (4,732) (4,338) (4,311) (5,121) (18,719) Net income (loss) (a) 1,255 (4,584) (4,655) (7,867) (17,593) Per share: Loss from real estate operations (a) $(0.52) $(0.48) $(0.47) $(0.57) $(2.06) Net income (loss) (a) 0.14 (0.51) (0.51) (0.87) (1.94) Distributions paid 0.04 0.04 - 0.16 0.20 Balance sheet data: Total assets $ 78,936 $ 89,382 $92,550 $ 88,297 $110,446 Total debt 53,216 62,815 65,613 57,078 68,578 Shareholders' equity 22,683 19,248 24,196 28,851 38,171
(a)Loss from real estate operations and net loss for 1995, 1994, and 1992 include provisions for possible losses on real estate of $600,000, $650,000, and $14,094,000, respectively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATOINS" for discussion of extraordinary gains and losses of $5,810, ($55), ($344), ($2,530) and $1,910 in 1996, 1995, 1994, 1993 and 1992, respectively. Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Trust and accompanying Notes included elsewhere in this Proxy Statement. The statements contained in this Proxy Statement that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results may differ materially from those included in the forward-looking statements. These forward- looking statements involve risks and uncertainties including, but not limited to, changes in general economic conditions in the markets that could impact demand for the Trust's properties and changes in financial markets and interest rates impacting the Trust's ability to meet its financing needs and obligations. Results of Operations Comparison of 1996 to 1995 The sale of two properties in late 1996 and the purchase of a property in August 1995 resulted in a net decrease in 1996 property revenue and net operating income of $67,000 and $51,000, respectively, when compared to 1995. On a same property basis, property revenues decreased from $10,209,000 in 1995 to $10,186,000 in 1996, a decrease of 0.2%, comprised of a 2.9% increase in revenue related to industrial properties and a 6.2% decrease in revenue at the Trust's retail property. The decrease in revenue at the Trust's retail property stemmed principally from lower percentage rents ($115,000) and slower leasing of vacancies and is partially attributable to the opening of a new regional mall in Denver during the third quarter of 1996. Overall leased occupancy of the Trust's portfolio was 94.2% at December 31, 1996 compared to 93.7% at December 31, 1995. On a same property basis, net operating income (which is defined as property revenues less property operating expenses and which does not include depreciation and amortization, interest expense, Trust administration and overhead expenses or provision for possible losses on real estate) decreased from $6,704,000 in 1995 to $6,494,000 in 1996, a decrease of 3.1%. This overall decrease is comprised of a 0.5% increase related to industrial properties and a 10.7% decrease related to the Trust's retail property. The decrease in the Trust's retail property is a result of the decrease in revenue explained above. Same property operating expenses increased by 5.3%, reflecting an increase in repairs and maintenance expenses and tenant refit costs of $98,000 in 1996. On the same property basis, loss from operations increased from $4,964,000 in 1995 to $5,351,000 in 1996 (see following explanation). Loss from operations increased from $4,338,000 in 1995 to $4,732,000 in 1996 as a result of the decrease in net operating income explained above, a decrease in total interest expense of $584,000 (due to the larger accrual of default rate interest on the MLI Notes in 1995), the provision of $600,000 for possible losses on real estate in 1995, an increase in litigation, refinancing and proxy costs of $568,000 (due to the shareholder litigation in 1996), an increase in Trust administration and overhead expenses of $406,000 (due to the accrual of $240,000 in incentive compensation, higher legal fees and increased Trust Manager compensation in 1996) and a decrease in interest income (due to higher invested balances in 1995 from the nonpayment of interest to the Trust's unsecured lender). During 1996, the Trust sold two industrial properties and recognized a gain on sale of $177,000, compared to the sale of one property in 1995 resulting in a loss on sale of $191,000. In 1996, the Trust recognized an extraordinary gain on extinguishment of debt of $5,810,000, or $0.64 per share, pursuant to settlement of litigation with MLI. Comparison of 1995 to 1994 Property revenues increased from $11,080,000 in 1994 to $11,410,000 in 1995, resulting from the stabilization in occupancy of the Trust's portfolio and improving rental rates in selected markets. Property operating expenses decreased from $3,952,000 in 1994 to $3,851,000 in 1995, primarily due to the net effect of a sale of a property in February 1995 and the purchase of a property in August 1995. Property net operating income increased from $7,128,000 in 1994 to $7,559,000 in 1995, an increase of 6.0%. On a same property basis, net operating income increased from $6,927,000 in 1994 to $7,474,000 in 1995, an increase of 7.9%. Overall leased occupancy of the portfolio was 93.7% at December 31, 1995 compared to 93.2% at December 31, 1994. Loss from operations increased from $4,311,000 in 1994 to $4,338,000 in 1995 as a result of the increase in net operating income and an increase in interest income of $223,000 (due to higher invested balances resulting from the non-payment of interest to the Trust's unsecured lender), a decrease in total administrative expenses of $128,000 (as a result of two proxy contests in 1994 versus one in 1995), a net increase in interest expense of $1,215,000 (due to the November 1994 refinancing transaction and the default rate interest accrued by the Trust in 1995 of $724,000), a decrease in depreciation and amortization of $356,000 (due to the Trust's property transactions in 1995), and a decrease in provision for possible losses on real estate of $50,000 (due to the timing of writedowns related to properties held for sale). During 1995, the Trust recognized a loss of $191,000 on the sale of its Quadrant property and an extraordinary loss of $55,000 related to the prepayment of an outstanding mortgage loan. In 1994, the Trust recognized an extraordinary loss of $344,000 on the partial in-substance defeasance of Zero Coupon Notes due 1997. During 1995, the Trust incurred approximately $980,000 in expenses related to litigation, a proxy contest in connection with issues before the shareholders at the Trust's annual meeting and attempted recapitalization costs, compared to approximately $1,027,000 in 1994. During 1994, the Trust had no litigation expenses but incurred costs related to two proxy contests. The Trust recorded a provision for possible loss on real estate related to its Patapsco property at December 31, 1995 of $600,000. This provision follows a $650,000 provision made at December 31, 1994. The Trust began marketing this property in early 1995. Analysis of Cash Flows Cash flow used in operating activities in 1996 was $5,658,000. This deficit reflects the results of property operations, interest expense, administrative expenses and an increase in restricted cash of $707,000 as a result of the Trust's property financing in 1996. Interest expense reflects several items of non-recurring nature, including a decrease in accrued interest of $2,986,000 related to the settlement of the MLI litigation in 1996, the accrual of $369,000 of default rate interest which was ultimately forgiven and approximately $535,000 related to principal which was forgiven in November 1996 and February 1997. In addition, administrative expenses includes $1,548,000 of litigation, refinancing and proxy costs which relate to special situations and should not be considered to be recurring expenses. Management believes that, in the future, cash flow provided by operations will increase due to the elimination of the non- recurring items described above and the Trust's plans to attract capital and pursue a growth strategy. Cash flow provided by investing activities in 1996 was $5,173,000, representing proceeds from the sale of two properties and amounts expended on capitalized improvements and leasing commissions. The sale of the two properties was necessary to raise capital with which to make payments under the Trust's option to retire certain indebtedness at a discount. Cash flow used in financing activities in 1996 was $3,199,000. This amount reflects proceeds from the mortgage financing on nine properties, the payment of amounts on the option to retire certain indebtedness at a discount, the sale of Common Shares to USAA REALCO, and the first quarter distribution to shareholders. Funds from Operations In March 1995, NAREIT issued its White Paper on FFO which clarified the treatment of certain items in determining FFO and recommended additional supplemental disclosures. The Trust has adopted the recommendations of NAREIT and restated its FFO calculation for prior years. The changes promulgated by NAREIT eliminate the add back of depreciation and amortization of non- real estate items, including the amortization of deferred financing costs, in determining FFO. The revised definition of FFO is net income (loss) computed in accordance with generally accepted accounting principles, excluding gains or losses from debt restructuring and sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. In addition, NAREIT recommends that extraordinary items or significant non- recurring items that distort comparability should not be considered in arriving at FFO. Accordingly, the Trust does not include the default rate interest accrued on its $45.2 million in unsecured notes payable in the determination of FFO. Funds Available for Distribution ("FAD") is also presented as it more accurately portrays the ability of the Trust to make distributions because it reflects capital expenditures. The Trust believes FFO and FAD are appropriate measures of performance relative to other REITs. FFO provides investors with an understanding of the ability of the Trust to incur and service debt and make capital expenditures. There can be no assurance that FFO and FAD presented by the Trust is comparable to similarly titled measures of other REITs. While other REITs may not always use a similar definition, this information does add comparability to those which have adopted the NAREIT definitions. FFO and FAD should not be considered as an alternative to net income or other measurements under generally accepted accounting principles as an indicator of the Trust's operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. FFO and FAD are calculated as follows: Year Ended December 31, 1996 1995 1994 (in thousands) Net income (loss) $1,255 $(4,584) $(4,655) Exclude effects of: Extraordinary (gain) loss on extinguishment of debt (5,810) 55 - (Gain) loss on sales of real estate (177) 191 - Provision for possible losses on real estate - 600 650 Real estate depreciation and amortization 2,890 2,771 3,102 Default rate interest 369 724 - Extraordinary loss on partial in- substance defeasance of Zero Coupon Notes - - 344 Funds from Operations $(1,473) $(243) $(559) Funds from Operations $(1,473) $(243) $(559) Capitalized improvements and leasing commissions (a) (1,372) (1,023) (1,476) Non-cash effect of straight-line rents on FFO 193 161 156 Funds Available for Distribution $(2,652) $(1,105) $(1,879) Weighted average Shares outstanding 9,108.2 9,075.4 9,075.4
(a)The breakdown of capitalized improvements and leasing commissions is as follows for each of the two years ending December 31, 1996: FYE 12/31/96 FYE 12/31/95 Amount PSF Amount PSF Tenant improvements - new tenants $287 $3.32 $343 $2.58 Tenant improvements - renewing tenants 282 1.93 184 1.30 Leasing costs - new tenants 245 1.71 168 1.16 Leasing costs - renewing tenants 144 0.58 107 0.55 Expansions and major renovations 414 0.26 221 0.13 Total $1,372 $1,023
Liquidity and Capital Resources The principal sources of funds for the Trust's liquidity requirements are funds generated from operations of the Trust's real estate assets and unrestricted cash reserves. As of December 31, 1996, the Trust had $4,010,000 in unrestricted cash on hand. The Trust presently anticipates that these cash reserves will provide sufficient funds for all currently known liabilities and commitments relating to the Trust's operations during 1997. In May 1995, the Trust filed a lawsuit against The Manufacturers Life Insurance Company, holder of the Trust's $45,239,000 8.8% unsecured notes payable, alleging breach of the Note Purchase Agreement between The Manufacturers Life Insurance Company and the Trust and unlawful attempts to coerce the Trust into relinquishing certain of its rights under that agreement. The Trust settled its MLI litigation in May 1996 and paid $5,200,000 in settlement of all past due interest on the MLI Notes, thereby allowing the Trust to record an extraordinary gain of $1,367,000. The Trust was also granted an option to repay the approximate $45,239,000 in principal amount outstanding on the MLI Notes for $36,800,000 (the "Option Price"). In November 1996, the Trust completed a mortgage financing on nine properties in the amount of $26,453,000. Net proceeds of $24,805,000 were applied to the Option Price. In addition, the Trust sold two properties during the fourth quarter of 1996, generating net proceeds of $6,545,000 which were also applied to the Option Price. In accordance with the MLI Agreement, $4,220,000 in debt was forgiven, allowing the Trust to record an extraordinary gain of $4,443,000 (including accrued interest forgiven). These notes were purchased by USAA REALCO in February 1997. As discussed under "PROPOSAL FIVE -- CONVERSION OF USAA REALCO DEBT INTO COMMON SHARES," USAA REALCO has the option to convert the principal amount of these notes into Common Shares at the conversion rate of $2.00 per share (if converted prior to December 31, 1997) or $2.25 per share (if converted between December 31, 1997 and December 31, 2000), assuming shareholder approval of this conversion right and approval of an increase in the number of authorized Common Shares of the Trust. If conversion of this debt were to occur in 1997, USAA REALCO would own approximately 46.42% of the outstanding Common Shares of the Trust (assuming no other issuances of Common Shares). The Trust declared a distribution of $0.04 per Common Share in February 1996. The MLI Agreement related to the MLI litigation, signed in May 1996, prohibited the payment of distributions while the agreement is in effect. The Modified Notes owned by USAA REALCO provide that the Trust may not pay distributions until the debt is paid in full; however, this restriction terminates in the event the shareholders approve USAA REALCO's conversion right and approve an increase in the authorized Common Shares of the Trust or if USAA REALCO, in its sole discretion, permits distributions to be paid prior to the Modified Notes being fully paid. Should the notes be converted into equity as described above, this restriction will be removed. To the extent allowable, the Trust intends to evaluate future distributions on a quarterly basis. The Trust currently has borrowings secured by mortgages on the Trust's properties totaling $43,797,000. Of this amount, approximately $1,927,000 represents variable rate financing with a weighted average interest rate of 10.25% and $41,870,000 represents fixed rate financing with a weighted average interest rate of 8.61%. The overall weighted average interest rate on the Trust's mortgage debt is 8.68%. Annual debt service on these borrowings amounts to $4,452,000 and principal maturity during 1997 will approximate $675,000. The nature of the Trust's operating properties, which generally provide for leases with a term of between three and five years, results in an approximate turnover rate of 20% to 25% of the Trust's tenants and related revenue annually. Such turnover requires capital outlays related to tenant improvements and leasing commissions in order to maintain or improve the Trust's occupancy levels. These costs amounted to $1,372,000 in the year ended December 31, 1996 and $1,023,000 in the year ended December 31, 1995. These costs have historically been funded out of the Trust's operating cash flow and cash reserves. The Trust has made no commitments for additional capital expenditures beyond those related to normal leasing and releasing activity and related escrows. No capital improvements or renovations of significance are anticipated in the near future for any of the Trust's properties, with the possible exception of a large retail lease at the Trust's retail property. Such a lease, if agreed to, could result in expenditures for tenant improvements in excess of $500,000. Transactions with USAA REALCO During 1996, there were a series of transactions involving USAA REALCO. On November 25, 1996, USAA REALCO entered into independently negotiated agreements to purchase an aggregate of 2,257,606 Common Shares from certain shareholders for $2.75 per share, pending approval of the settlement of certain shareholder litigation, which the Trust had initiated, alleging that certain significant shareholders of the Trust had made material misrepresentations in their filings with the SEC. The $2.75 price per share was negotiated between the selling shareholders and USAA REALCO without any involvement by the Trust. The majority of these Common Shares were purchased from two shareholders, one of which was involved in the shareholder litigation. The other selling shareholder was unwilling to wait for the settlement of the litigation and USAA REALCO did not want to purchase Common Shares until the settlement of the litigation. In order to facilitate the settlement of the litigation, USAA REALCO advanced approximately $2,770,000 to the Trust on November 25, 1996. The proceeds of this loan, which bore interest at 9%, were used by a subsidiary of the Trust to acquire 998,100 Common Shares from the selling shareholder not involved in the shareholder litigation. On December 19, 1996, the Trust sold 924,600 Common Shares, representing the remainder of its authorized Common Shares, to USAA REALCO for $2.75 per share, the same price at which USAA REALCO had independently agreed to purchase the Common Shares from the other shareholders. On December 20, 1996, after approval of the settlement of the shareholder litigation, USAA REALCO closed the purchase of the 2,257,606 Common Shares, including the acquisition of 998,100 Common Shares held by a subsidiary of the Trust in return for cancellation of the related loan discussed above, resulting in USAA REALCO's current ownership of 3,182,206 Common Shares, or 31.82% of the outstanding Common Shares of the Trust. On December 18, 1996, the Trust entered into an agreement granting USAA REALCO the right to commence negotiations to purchase the MLI Notes and, if USAA REALCO was successful in acquiring these notes, setting forth the terms of the modifications to the MLI Notes, including the right to convert the principal amount of these notes into Common Shares of the Trust at $2.00 per share during 1997 and $2.25 per share thereafter. On February 26, 1997, USAA REALCO acquired the MLI Notes for $5,481,152. The MLI Notes were then modified to reduce the outstanding principal balance from $9,419,213 to $7,040,721, to release all security for the notes, to provide for monthly payments of interest at 8.8% and to extend the maturity date from March 31, 1997 to December 31, 2000. In addition, USAA REALCO has the option to convert the principal amount of the notes into Common Shares of the Trust at the conversion rate of $2.00 per share (if converted prior to December 31, 1997) or $2.25 per share (if converted between December 31, 1997 and December 31, 2000). In order for USAA REALCO to convert its debt into Common Shares, the shareholders must approve an increase in the authorized Common Shares of the Trust. An increase in the authorized Common Shares of the Trust requires approval by holders of two-thirds of the outstanding Common Shares. In addition, the shareholders must approve the right of USAA REALCO to convert its debt into Common Shares. The modified notes provide that if shareholder approval of this conversion right is not approved by June 30, 1997, interest on the debt will increase to the lesser of 18% or the highest lawful rate effective July 1, 1997 and the full principal amount will become due and payable on October 31, 1997. Management believes that the sale of one or more properties would be required to satisfy this obligation in the event the notes become due and payable. Subsequent to the modification, the Trust made a principal payment of $1,591,103, resulting in a current principal balance of $5,449,618. The modification of this debt resulted in a reduction of approximately $1,591,000 of the potential $3,969,000 discount remaining under an option agreement on this debt. The Trust Managers viewed this as a reasonable cost of this transaction as it (i) removed the risk of losing the entire potential discount if payment was not made by March 31, 1997, (ii) removed the necessity to liquidate certain properties, (iii) allowed for release of all collateral securing this obligation, (iv) allowed the Trust to recognize an extraordinary gain of approximately $2,643,000 or $0.26 per share in the first quarter of 1997, and (v) allowed for the possibility of conversion of this obligation into Common Shares, thereby improving the Trust's financial position. The Trust anticipates that shareholder approval for this transaction will be received on or about June 30, 1997 and that USAA REALCO will convert the principal amount of the debt into Common Shares of the Trust soon thereafter. The Trust currently anticipates it will reflect approximately $1,022,000, representing the difference between the market trading price of $2.38 per share on February 26, 1997 and the $2.00 conversion price, as interest expense between February 26, 1997 and June 30, 1997. The date of February 26, 1997 is used to measure market value as this is deemed to be the date of issuance of the modified notes, which contain the convertibility option. This will result in additional interest expense of approximately $272,000 in the first quarter of 1997 and approximately $750,000 in the second quarter of 1997. The closing sale price of the Trust's Common Shares on the NYSE on the above dates was as follows: $2.13 per share on November 25, 1996, $2.00 per share on December 18 and December 19, 1996, $1.88 per share on December 20, 1996, and $2.38 per share on February 26, 1997. Item 8. Financial Statements and Supplementary Data The financial statement and supplementary data are listed in the Index to Financial Statements and Financial Statement Schedule appearing on page F-1 of this Form 10-K/A Amendment No. 1. ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) (1) and (2) Financial Statements and Financial Statement Schedule: See Index to Consolidated Financial Statements and Financial Statement Schedule appearing on page F-1 of this Form 10-K (3) Exhibits: Exhibit No. Description 3.1 Second Amended and Restated Declaration of Trust (incorporated herein by reference from Exhibit 4.1 to the Trust's Form 10-Q for the quarter ended September 30, 1993; File No. 1-9016) 3.2 Fourth Amended and Restated Bylaws of the Trust (incorporated herein by reference from Exhibit 3.1 to Form 8-K of the Trust dated October 3, 1995; File No. 1-9016) 3.3 Amendment to Fourth Amended and Restated Bylaws of the Trust (incorporated herein by reference from Exhibit No. 99.1 to Form 8-K of the Trust dated November 13, 1995; File No. 1-9016) 3.4 Amendment to the Bylaws of American Industrial Properties REIT, dated September 20, 1996, adding Article XIII to the Bylaws (incorporated herein by reference from Exhibit No. 99.1 to Form 8-K of the Trust dated September 20, 1996; File No. 1-9016) 3.5 Amendments to Fourth Amended and Restated Bylaws (incorporated herein by reference from Exhibit No. 99.3 to Form 8-K of the Trust dated December 23, 1996; File No. 1-9016) 4.1 Indenture dated November 15, 1985 between the Trust and IBJ Schroder Bank & Trust Company (incorporated herein by reference from Exhibit 10.4 to Form S-4 of American Industrial Properties REIT, Inc. dated March 16, 1994; File No. 33-74292) 10.1 401(k) Retirement and Profit Sharing Plan (incorporated herein by reference from Exhibit 10.5 to Amendment No. 1 to Form S-4 of American Industrial Properties REIT, Inc. dated March 4, 1994; File No. 33-74292) 10.2 Amendments to 401(k) Retirement and Profit Sharing Plan (incorporated herein by reference from Exhibit 10.4 to Form 10-K of the Trust dated March 27, 1995) 10.3 Note Purchase Agreement dated February 27, 1992 between the Trust and Manufacturers Life Insurance Company (incorporated herein by reference from Exhibit 10.6 to Form S-4 of American Industrial Properties REIT, Inc. dated January 31, 1994; File No. 33-74292) 10.4 Addendum to $19,143,646.92 Unsecured Promissory Note due November 27, 1997 (incorporated herein by reference from Exhibit 10.6 to Form 10-K of the Trust dated March 27, 1995) 10.5 Settlement Agreement by and between American Industrial Properties REIT, Patapsco #1 Limited Partnership, Patapsco #2 Limited Partnership, The Manufacturers Life Insurance Company and The Manufacturers Life Insurance Company (U.S.A.) dated as of May 22, 1996 (incorporated herein by reference from Exhibit 99.1 to Form 8-K of the Trust dated May 22, 1996; File No. 1-9016) 10.6 Agreement and Assignment of Partnership Interest, Amended and Restated Agreement and Certificate of Limited Partnership and Security Agreement for Patapsco Center - Linthicum Heights, Maryland (incorporated herein by reference from Exhibit 10.8 to Amendment No. 1 to Form S-4 of American Industrial Properties REIT, Inc. dated March 4, 1994; File No. 33-74292) 10.7 Note dated November 15, 1994 in the original principal amount of $12,250,000 with AIP Properties #1 L.P. as Maker and AMRESCO Capital Corporation as Payee (incorporated herein by reference from Exhibit 99.1 to Form 8-K of the Trust dated November 22, 1994; File No. 1-9016) 10.8 Mortgage, Deed of Trust and Security Agreement dated November 15, 1994 between AIP Properties #1 L.P. and AMRESCO Capital Corporation (incorporated herein by reference from Exhibit 99.2 to Form 8-K of the Trust dated November 22, 1994; File No. 1-9016) 10.9 Loan Modification Agreement modifying the note dated November 15, 1994 in the original principal amount of $12,250,000 (incorporated herein by reference from Exhibit 99.2 to Form 8-K of the Trust dated June 23, 1995; File No. 1-9016) 10.10 Note dated November 15, 1994 in the original principal amount of $2,250,000 with AIP Properties #2 L.P. as Maker and AMRESCO Capital Corporation as Payee (incorporated herein by reference from Exhibit 99.3 to Form 8-K of the Trust dated November 22, 1994; File No. 1-9016) 10.11 Mortgage, Deed of Trust and Security Agreement dated November 15, 1994 between AIP Properties #2 L.P. and AMRESCO Capital Corporation (incorporated herein by reference from Exhibit 99.4 to Form 8-K of the Trust dated November 22, 1994; File No. 1-9016) 10.12 Loan Modification Agreement modifying the note dated November 15, 1994 in the original principal amount of $2,250,000 (incorporated herein by reference from Exhibit 99.1 to Form 8-K of the Trust dated June 23, 1995; File No. 1-9016) 10.13 Share Purchase Agreement dated as of December 13, 1996, by and between American Industrial Properties REIT and USAA Real Estate Company (incorporated herein by reference from Exhibit No. 99.4 to Form 8-K of the Trust dated December 23, 1996; File No. 1- 9016) 10.14 Promissory Note dated November 25, 1996, by and between American Industrial Properties, Inc. and USAA Real Estate Company (incorporated herein by reference from Exhibit No. 99.5 to Form 8-K of the Trust dated December 23, 1996; File No. 1-9016) 10.15 Letter Agreement dated December 18, 1996, by and between American Industrial Properties, Inc. and USAA Real Estate Company (incorporated herein by reference from Exhibit No. 99.6 to Form 8-K of the Trust dated December 23, 1996; File No. 1-9016) 10.16 Share Purchase Agreement dated as of December 20, 1996, by and between American Industrial Properties REIT, American Industrial Properties REIT, Inc. and USAA Real Estate Company (incorporated herein by reference from Exhibit No. 99.7 to Form 8-K of the Trust dated December 23, 1996; File No. 1-9016) 10.17 Registration Rights Agreement dated as of December 19, 1996, by and between American Industrial Properties REIT and USAA Real Estate Company (incorporated herein by reference from Exhibit No. 99.8 to Form 8-K of the Trust dated December 23, 1996; File No. 1-9016) 10.18 Registration Rights Agreement dated as of December 20, 1996, by and between American Industrial Properties REIT and USAA Real Estate Company (incorporated herein by reference from Exhibit No. 99.9 to Form 8-K of the Trust dated December 23, 1996; File No. 1-9016) 10.19 Deed of Trust and Security Agreement dated November 15, 1996 between AIP Properties #3, L.P. and Life Investors Insurance Company of America (Huntington Drive Center) (incorporated herein by reference from Exhibit 99.1 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.20 Note dated November 15, 1996 in the original principal amount of $4,575,000 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Huntington Drive Center) (incorporated herein by reference from Exhibit 99.2 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.21 Deed of Trust and Security Agreement dated November 15, 1996 between AIP Properties #3, L.P. and Life Investors Insurance Company of America (Patapsco Industrial Center) (incorporated herein by reference from Exhibit 99.3 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.22 Note dated November 15, 1996 in the original principal amount of $3,112,500 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Patapsco Industrial Center) (incorporated herein by reference from Exhibit 99.4 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.23 Deed of Trust and Security Agreement dated November 15, 1996 between AIP Properties #3, L.P. and Life Investors Insurance Company of America (Woodlake Distribution Center) (incorporated herein by reference from Exhibit 99.5 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.24 Note dated November 15, 1996 in the original principal amount of $1,537,500 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Woodlake Distribution Center) (incorporated herein by reference from Exhibit 99.6 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.25 Deed of Trust and Security Agreement dated November 15, 1996 between AIP Properties #3, L.P. and Life Investors Insurance Company of America (All Texas properties except Woodlake) (incorporated herein by reference from Exhibit 99.7 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.26 Note dated November 15, 1996 in the original principal amount of $1,162,500 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Meridian Street Warehouse) (incorporated herein by reference from Exhibit 99.8 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.27 Note dated November 15, 1996 in the original principal amount of $2,775,000 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Beltline Business Center) (incorporated herein by reference from Exhibit 99.9 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.28 Note dated November 15, 1996 in the original principal amount $3,375,000 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Plaza Southwest) (incorporated herein by reference from Exhibit 99.10 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.29 Note dated November 15, 1996 in the original principal amount of $2,100,000 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Commerce Park North) (incorporated herein by reference from Exhibit 99.11 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.30 Note dated November 15, 1996 in the original principal amount of $2,850,000 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Gateway 5 & 6) (incorporated herein by reference from Exhibit 99.12 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.31 Note dated November 15, 1996 in the original principal amount of $5,175,000 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Northgate II) (incorporated herein by reference from Exhibit 99.13 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.32 Note dated November 15, 1996 in the original principal amount of $1,327,500 with AIP Properties #3, L.P. as Maker and Life Investors Insurance Company as Payee (Westchase Park) (incorporated herein by reference from Exhibit 99.14 to Form 8-K of the Trust dated November 20, 1996; File No. 1-9016) 10.33 Bonus and Severance Agreement dated March 13, 1996, between the Trust and Charles W. Wolcott (incorporated herein by reference from Exhibit 10.12 to Form 10-K of the Trust dated March 29, 1996) 10.34 Bonus and Severance Agreement dated March 13, 1996, between the Trust and Marc A. Simpson (incorporated herein by reference from Exhibit 10.13 to Form 10-K of the Trust dated March 29, 1996) 10.35 Bonus and Severance Agreement dated March 13, 1996, between the Trust and David B. Warner (incorporated herein by reference from Exhibit 10.14 to Form 10-K of the Trust dated March 29, 1996) 10.36 Renewal, Extension, Modification and Amendment Agreement dated as of February 26, 1997 between the Trust and USAA Real Estate Company (incorporated herein by reference from Exhibit 10.1 to Form 8-K of the Trust dated March 4, 1997; File No. 1-9016) 10.37 Amendment No. 1 to Share Purchase Agreement dated as of December 13, 1996 (incorporated herein by reference from Exhibit 10.2 to Form 8-K of the Trust dated March 4, 1997; File No. 1-9016) 21.1 * Listing of Subsidiaries 27.1 * Financial Data Schedule __________ * Filed herewith (b)Reports on Form 8-K: The following information summarizes the events reported on Form 8-K during the quarter ended December 31, 1996: Date Filed Date of Earliest Event with SEC Reported on Form 8-K Description November 21, 1996 November 20, 1996 Item 5. Closing of financing transaction December 24, 1996 December 23, 1996 Item 5. Settlement of litigation and purchase of Shares by USAA REALCO American Industrial Properties REIT Index to Consolidated Financial Statements and Financial Statement Schedule Page Report of Independent Auditors F-2 Consolidated Financial Statements: Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and 1994 F-3 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4 Consolidated Statements of Changes in Shareholders'Equity for the years ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements F-7 Financial Statement Schedule: Schedule III - Consolidated Real Estate and Accumulated Depreciation F-14 Notes to Schedule III F-15 All other financial statements and schedules not listed have been omitted because the required information is either included in the Financial Statements and the Notes thereto as included herein or is not applicable or required. REPORT OF INDEPENDENT AUDITORS Trust Managers and Shareholders American Industrial Properties REIT: We have audited the accompanying consolidated balance sheets of American Industrial Properties REIT (the "Trust") as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Trust as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. /s/Ernst & Young LLP Dallas, Texas February 13, 1997 except for Note 14, as to which the date is February 26, 1997 American Industrial Properties REIT Consolidated Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 1996 1995 1994 REVENUES Rents $ 8,592 $ 8,676 $ 8,397 Tenant reimbursements 2,728 2,734 2,683 Interest income 158 369 146 11,478 11,779 11,226 EXPENSES Property operating expenses: Property taxes 1,421 1,397 1,421 Property management fees 430 428 442 Utilities 476 478 501 General operating 849 795 705 Repairs and maintenance 529 431 656 Other property operating expenses 317 322 227 Depreciation and amortization 2,909 2,777 3,133 Interest on 8.8% notes payable 4,003 4,707 4,001 Interest on mortgages payable 1,898 1,778 850 Amortization of original issue discount on Zero Coupon Notes due 1997 - - 419 Administrative expenses: Trust administration and overhead 1,830 1,424 1,505 Litigation, refinancing and proxy costs 1,548 980 1,027 Provision for possible losses on real estate - 600 650 16,210 16,117 15,537 Loss from operations (4,732) (4,338) (4,311) Gain (loss) on sales of real estate 177 (191) - Extraordinary gain (loss) on extinguishment of debt 5,810 (55) - Extraordinary loss on partial in-substance defeasance of Zero Coupon Notes due 1997 - - (344) NET INCOME (LOSS) $ 1,255 $ (4,584) $ (4,655) PER SHARE DATA Loss from operations $ (0.52) $ (0.48) $ (0.47) Gain (loss) on sales of real estate 0.02 (0.02) - Extraordinary gain (loss) on extinguishment of debt 0.64 (0.01) - Extraordinary loss on partial in-substance defeasance of Zero Coupon Notes due 1997 - - (0.04) Net Income (Loss) $ 0.14 $ (0.51) $ (0.51) Distributions Paid $ 0.04 $ 0.04 $ 0.00 Weighted average shares outstanding 9,108,241 9,075,400 9,075,400
The accompanying notes are an integral part of these financial statements. American Industrial Properties REIT Consolidated Balance Sheets (in thousands, except share and per share data) December 31,December 31, 1996 1995 ASSETS Real estate: Held for investment $84,693 $97,091 Held for sale 9,779 4,806 Total real estate 94,472 101,897 Accumulated depreciation (23,973) (23,441) Net real estate 70,499 78,456 Cash and cash equivalents: Unrestricted 4,010 7,694 Restricted 1,366 659 Total cash and cash equivalents 5,376 8,353 Other assets, net 3,061 2,573 Total Assets $78,936 $89,382 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $43,797 $17,576 8.8% notes payable 9,419 45,239 Accrued interest 602 5,178 Accounts payable, accrued expenses and other liabilities 1,964 1,620 Tenant security deposits 471 521 Total Liabilities 56,253 70,134 Shareholders' Equity: Shares of beneficial interest, $0.10 par value; authorized 10,000,000 Shares; issued and outstanding 10,000,000 Shares at 1996 and 9,075,400 Shares at 1995 1,000 908 Additional paid-in capital 127,056 124,605 Accumulated distributions (58,456) (58,903) Accumulated loss from operations and extraordinary gains (losses) (48,065) (49,143) Accumulated net realized gain on sales of real estate 1,148 971 Total Shareholders' Equity 22,683 19,248 Total Liabilities and Shareholders' Equity $78,936 $89,382
The accompanying notes are an integral part of these financial statements. American Industrial Properties REIT Consolidated Statements of Changes in Shareholders' Equity (in thousands, except number of shares) Shares of Beneficial Addt'l Retained Interest Paid-In Earnings Number Amount Capital (Deficit) Total Balance at January 1, 1994 9,075,400 $908 $124,605 ($96,662) $28,851 Net loss (4,655) (4,655) Balance at December 31, 1994 9,075,400 908 124,605 (101,317) 24,196 Net loss (4,584) (4,584) Distributions to shareholders (364) (364) Balance at December 31, 1995 9,075,400 908 124,605 (106,265) 19,248 Issuance of additional shares 924,600 92 2,451 2,543 Net income 1,255 1,255 Distributions to shareholders (363) (363) Balance at December 31, 1996 10,000,000 $1,000 $127,056 ($105,373) $22,683
American Industrial Properties REIT Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,255 $(4,584) $(4,655) Adjustments to reconcile net loss to net cash (used in ) provided by operating activities: Extraordinary (gains) losses (5,810) 55 344 (Gains) losses on real estate (177) 791 650 Depreciation 2,577 2,479 2,622 Amortization of deferred financing costs 70 70 - Other amortization 332 298 511 Amortization of original issue discount - - 419 Changes in operating assets and liabilities: (Increase) decrease in other assets and restricted cash (1,270) 126 (858) Increase (decrease) in accounts payable, other liabilities and tenant security deposits 351 (61) 373 (Decrease)increase in accrued interest (2,986) 4,674 - Net Cash (Used In) Provided By Operating Activities (5,658) 3,848 (594) CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sales of real estate 6,545 2,476 - Capitalized improvements and leasing commissions (1,372) (1,023) (1,476) Acquisition of real estate - (1,309) - Net Cash Provided By (Used In) Investing Activities 5,173 144 (1,476) CASH FLOWS FROM FINANCING ACTIVITIES: Principal repayments on mortgage notes payable (31,832) (2,798) (1,283) Proceeds from mortgage financing 26,453 - 14,500 Proceeds from sale of common shares 2,543 - - Distributions to shareholders (363) (364) - Prepayment penalty on extinguishment of debt - (55) - Partial in-substance defeasance of Zero Coupon Notes - - (3,106) Partial repurchase of Zero Coupon Notes - - (2,241) Net Cash (Used In) Provided By Financing Activities (3,199) (3,217) 7,870 Net (Decrease) Increase in Unrestricted Cash and Cash Equivalents (3,684) 775 5,800 Unrestricted Cash and Cash Equivalents at Beginning of Year 7,694 6,919 1,119 Unrestricted Cash and Cash Equivalents at End of Year $ 4,010 $ 7,694 $ 6,919 Cash Paid for Interest $ 8,817 $ 1,741 $ 4,718
The accompanying notes are an integral part of these financial statements. American Industrial Properties REIT Notes to Consolidated Financial Statements December 31, 1996 Note 1 -- Significant Accounting Policies: General. American Industrial Properties REIT (the "Trust") is a self-administered Texas real estate investment trust which, as of December 31, 1996, owns and operates thirteen commercial real estate properties consisting of twelve industrial properties and one retail property. The Trust was formed September 26, 1985 and commenced operations on November 27, 1985. Pursuant to the Trust's 1993 Annual Meeting of Shareholders, amendments to the Trust's Declaration of Trust and Bylaws were approved which, among other things, changed the name of the Trust to American Industrial Properties REIT and converted the Trust from a finite life entity to a perpetual life entity. Principles of Consolidation. The consolidated financial statements of the Trust include the accounts of American Industrial Properties REIT and its wholly-owned subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ significantly from such estimates and assumptions. Real Estate. The Trust carries its real estate held for investment at depreciated cost unless the asset is determined to be impaired. Real estate classified as held for sale is carried at the lower of depreciated cost or fair market value less costs to sell. In accordance with Statement of Financial Accounting Standards No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, issued in March 1995, the Trust records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the expected undiscounted cash flows estimated to be generated by those assets are less than the related carrying amounts. If an asset held for investment is determined to be impaired, the impairment would be measured based upon the excess of the asset's carrying value over the fair value. In addition, the Trust records impairment losses on assets held for sale when the estimated sales proceeds, after estimated selling costs, are less than the carrying value of the related asset (see Note 2). Property improvements are capitalized while maintenance and repairs are expensed as incurred. Depreciation of buildings and capital improvements is computed using the straight-line method over forty years. Depreciation of tenant improvements is computed using the straight-line method over ten years. Cash and Cash Equivalents. Cash equivalents include demand deposits and all highly liquid instruments purchased with an original maturity of three months or less. Restricted amounts reflect escrow deposits held by third parties for the payment of taxes and insurance and reserves held by third parties for property repairs or tenant improvements. Other Assets. Other assets primarily consists of deferred rent receivable, prepaid commissions and loan fees. Leasing commissions are capitalized and amortized on a straight line basis over the life of the lease. Loan fees are capitalized and amortized to interest expense on a level yield basis over the term of the related loan. Rents and Tenant Reimbursements. Rental income, including contractual rent increases or delayed rent starts, is recognized on a straight-line basis over the lease term. The Trust has recorded deferred rent receivable (representing the excess of rental revenue recognized on a straight line basis over actual rents received under the applicable lease provisions) of $599,000 and $810,000 at December 31, 1996 and 1995, respectively. Several tenants in the Trust's retail property are also required to pay as rent a percentage of their gross sales volume, to the extent such percentage rent exceeds their base rents. Such percentage rents amounted to $154,000, $269,000 and $245,000 for the years ended December 31, 1996, 1995, and 1994, respectively. In addition to paying base and percentage rents, most tenants are required to reimburse the Trust for operating expenses in excess of a negotiated base amount. Tamarac Square, the Trust's only retail property, has rental revenues in excess of 10% of the total revenues of the Trust. Rental revenues and tenant reimbursements from Tamarac totaled $3,308,000, $3,525,000, and $3,441,000 in 1996, 1995, and 1994, respectively. Income Tax Matters. The Trust operates as a real estate investment trust ("REIT") for federal income tax purposes. Under the REIT provisions, the Trust is required to distribute 95% of REIT taxable income and is allowed a deduction for dividends paid during the year. The Trust had a taxable loss in each of the years ending December 31, 1996, 1995, and 1994. Accordingly, no provision for income taxes has been reflected in the financial statements. The Trust has a net operating loss carryforward from 1996 and prior years of approximately $34,800,000. Subject to certain restrictions, the losses may be carried forward for up to 15 years. The present losses will expire beginning in the year 2004. Management intends to operate the Trust in such a manner as to continue to qualify as a REIT and to continue to distribute cash flow in excess of taxable income. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from that reported for financial reporting purposes due primarily to differences in the basis of the assets and the estimated useful lives used to compute depreciation. Concentrations. The Trust owns industrial properties in Baltimore, Dallas, Houston, Los Angeles, Milwaukee, and Minneapolis, and one retail property in Denver. The principal competitive factors in these markets are price, location, quality of space, and amenities. In each case, the Trust owns a small portion of the total similar space in the market and competes with owners of other space for tenants. Each of these markets is highly competitive, and other owners of property may have competitive advantages not available to the Trust. The Trust's retail property, Tamarac Square, represents approximately 29% of the rent and tenant reimbursement revenues for the year ended December 31, 1996, and approximately 41% of net real estate at December 31, 1996. Reclassification. Certain amounts in prior years financial statements have been reclassified to conform with the current year presentation. Note 2 -- Real Estate and Provisions for Possible Losses on Real Estate: At December 31, 1996 and 1995, real estate was comprised of the following: 1996 1995 Held for investment: Land $15,149,000 $17,526,000 Buildings and improvements 69,544,000 79,565,000 84,693,000 97,091,000 Held for sale: Land 1,728,000 897,000 Buildings and improvements 8,051,000 3,909,000 9,779,000 4,806,000 Total $94,472,000 $101,897,000
During 1996, the Trust reclassified four properties from held for investment to held for sale in anticipation of the need to raise capital to complete the discounted purchase of certain indebtedness. Two of these properties were sold in the fourth quarter of 1996 for net proceeds of $6,545,000, resulting in a net gain of $177,000, and two remain classified as held for sale at December 31, 1996. The net operating income of the properties held for sale at December 31, 1996 was approximately $827,000 in 1996. During 1995, the Trust sold one industrial property for net proceeds of $2,476,000, resulting in a net loss of $191,000, and acquired a 72,000 square foot industrial distribution property in Arlington, Texas for total consideration of approximately $1,309,000. One property was classified as held for sale at December 31, 1995. This property, on which provisions for possible losses on real estate were recorded of $600,000 and $650,000 in 1995 and 1994, respectively, was reclassified to held for investment in 1996. If unforeseen factors should cause a reclassification of the Trust's real estate from held for investment to held for sale, significant adjustments to reduce the depreciated cost of the real estate to net realizable value could be required. Note 3 -- Mortgages Payable: At December 31, 1996, the Trust's properties were subject to liens securing mortgage notes payable totaling $43,797,000. Of this amount $1,927,000 represented a note with a variable interest rate of prime plus 2% (at December 31, 1996, the prime rate was 8.25%) and $41,870,000 represented notes with fixed interest rates ranging from 8.40% to 11.0%. Principal payments due during each of the next five years are as follows: $675,000 in 1997, $2,632,000 in 1998, $1,973,000 in 1999, $818,000 in 2000, $13,776,000 in 2001 and $23,923,000 thereafter. The Bylaws of the Trust, the settlement agreement relating to the 8.8% Notes Payable, and certain mortgages payable contain various borrowing restrictions and operating performance covenants. The Trust is in compliance with all such restrictions and covenants as of December 31, 1996. Note 4 -- 8.8% Notes Payable: In February 1992, the Trust issued $53,234,000 of unsecured notes payable due November 1997 (the "8.8% Notes Payable"), proceeds of which were used to retire certain other indebtedness. In May 1995, the Trust initiated litigation against the holder of these notes and elected not to make scheduled interest payments thereafter. In June 1995, the noteholder declared the entire principal amount and all accrued interest on the notes due and payable and, effective June 13, 1995, began accruing interest on the principal amount at the 11.7% default rate provided for in the Note Purchase Agreement. In May 1996, the Trust settled this litigation and, as a result, the notes became secured by first or second liens on various properties and by pledges of ownership interests in certain Trust entities owning properties. The Trust paid $5,200,000 to satisfy all accrued interest payable through April 12, 1996, allowing the Trust to recognize an extraordinary gain of $1,367,000 in the second quarter of 1996. As part of the settlement, the Trust obtained an option to pay the remaining $45,239,000 in outstanding principal indebtedness for $36,800,000 (the "Option Price"). As a result of a mortgage financing on nine properties and the sale of two other properties in the fourth quarter of 1996, the Trust made payments of $31,350,000 during 1996 on the Option Price, decreasing the remaining required payment under the option to $5,450,000. The Trust paid $250,000 to extend the date by which the Option Price must be paid to March 31, 1997. This amount reduced the principal amount outstanding on the 8.8% Notes Payable but did not reduce the Option Price. The principal amount of indebtedness outstanding on the 8.8% Notes Payable is $9,419,000. In connection with the settlement of the litigation and the terms of the option, the Trust recorded an extraordinary gain on extinguishment of debt of $1,367,000 in the second quarter of 1996 and $4,443,000 in the fourth quarter of 1996. In February 1997, the notes were sold to a major shareholder of the Trust (see Note 14). Note 5 -- Zero Coupon Notes: As part of its original capitalization in 1985, the Trust issued $179,698,000 (face amount at maturity) of Zero Coupon Notes due 1997 (the "Notes"). These Notes, which were collateralized by first and second mortgage liens on each of the Trust's real estate properties, accreted at 12%, compounded semiannually. In 1991, the Trust began a program to retire the outstanding Notes, resulting in a reduction of the outstanding Notes to $19,491,000 (face amount at maturity) at December 31, 1993. On December 31, 1993, the Trust effected a partial in-substance defeasance on $12,696,000 (face amount at maturity) of the Notes and recorded an extraordinary loss of $2,530,000. In November 1994, the Trust completed a partial in-substance defeasance on $3,669,000 (face amount at maturity) of Notes and recorded an extraordinary loss of $344,000. In December 1994, the Trust purchased the remaining non-defeased Notes outstanding in the open market and submitted the Notes to the Trustee for cancellation. The legal defeasance of the Notes resulted in the release of the Zero Coupon Note mortgage liens which encumbered each of the Trust's properties. The accreted value of the Notes defeased at December 31, 1996 and 1995 was $14,725,000 and $13,104,000, respectively. Note 6 -- Environmental Matters: The Trust has been notified of the existence of limited underground petroleum based contamination at a portion of Tamarac Square, the Trust's Denver retail property. The source of the contamination is apparently related to underground storage tanks ("USTs") located on adjacent property. The owner of the adjacent property has agreed to remediate the property to comply with state standards and has indemnified the Trust against costs related to its sampling activity. The responsible party for the adjacent USTs has submitted a corrective Action Plan to the Colorado Department of Public Health and Environment. Implementation of the plan is ongoing. The responsible party is negotiating to obtain access agreements from impacted landowners, including the Trust. With the exception of Tamarac Square, the Trust has not been notified, and is not otherwise aware, of any material non-compliance, liability or claim relating to hazardous or toxic substances in connection with any of its properties. Note 7 -- Shareholder Transactions: In January 1996, the Trust filed a lawsuit in federal court in Dallas, Texas against a major shareholder of the Trust, alleging violations of federal and state securities laws. The defendants filed a counterclaim against the Trust and its Trust Managers and, in February 1996, another shareholder filed a claim against the Trust and its Trust Managers. The litigation related to these claims was consolidated in April 1996. In December 1996, a settlement of this litigation was approved by the Court. This settlement provided, among other things, that certain amendments to the Trust's Bylaws be made and that the Trust pay the shareholders a total of $955,000. Of this amount, $625,000 was paid by the Trust's directors and officers liability insurance. On November 25, 1996, USAA Real Estate Company ("USAA REALCO") entered into independently negotiated agreements to purchase an aggregate of 2,257,606 shares from certain shareholders for $2.75 per share, pending approval of the settlement of the shareholder litigation discussed above. On December 19, 1996, the Trust sold 924,600 shares, representing the remainder of its authorized shares, to USAA REALCO for $2.75 per share, the same price at which USAA REALCO had independently agreed to purchase the shares from other shareholders. On December 20, 1996, after approval of the settlement of the shareholder litigation, USAA REALCO closed the purchase of the 2,257,606 shares, resulting in USAA REALCO's current ownership of 3,182,206 shares, or 31.82% of the outstanding shares of the Trust. On December 18, 1996, the Trust entered into an agreement with USAA REALCO contemplating the purchase by USAA REALCO of certain outstanding indebtedness of the Trust. This agreement set forth the modifications which would occur if USAA REALCO acquired the indebtedness, including the right to convert the principal amount of this indebtedness into shares of the Trust at either $2.00 or $2.25 per share, depending upon the date of conversion. On February 26, 1997, USAA REALCO acquired this debt (see Note 14). The closing sale price of the Trust's shares on the New York Stock Exchange on the above dates was as follows: $2.13 per share on November 25, 1996, $2.00 per share on December 18 and December 19, 1996, $1.88 per share on December 20, 1996, and $2.38 per share on February 26, 1997. Note 8 -- Litigation: During 1996, the Trust concluded two significant litigation matters (see Notes 4 and 7). Although the Trust is not currently involved in any significant litigation, the Trust may, on occasion and in the normal course of business, be involved in legal actions relating to the ownership and operations of its properties. In management's opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a materially adverse effect on the consolidated financial position of the Trust. Note 9 -- Retirement and Profit Sharing Plan: During 1993, the Trust adopted a retirement and profit sharing plan which qualifies under section 401(k) of the Internal Revenue Code. All existing Trust employees at adoption and subsequent employees who have completed six months of service are eligible to participate in the plan. Subject to certain limitations, employees may contribute up to 15% of their salary. The Trust may make annual discretionary contributions to the plan. Contributions by the Trust related to the years ended December 31, 1996, 1995 and 1994 were $30,000, $25,000 and $20,000, respectively. Note 10 -- Operating Leases: The Trust's properties are leased to others under operating leases with expiration dates ranging from 1997 to 2011. Future minimum rentals on noncancellable tenant leases at December 31, 1996 are as follows: Year Amount 1997 $ 7,592,000 1998 6,179,000 1999 4,328,000 2000 2,844,000 2001 2,091,000 Thereafter 2,217,000 $25,251,000
Note 11 -- Distributions: The Trust's distributions of $363,000 ($0.04 per share) in 1996 and $364,000 ($0.04 per share) in 1995 represent a return of capital to shareholders (to the extent of the shareholder's basis in the Shares.) The Trust did not pay any distributions in 1994. Note 12 -- Per Share Data: Per share data is based on a weighted average number of Shares outstanding of 9,108,241 for the year ending December 31, 1996 and 9,075,400 or the years ended December 31, 1995 and 1994. Note 13 -- Fair Value of Financial Instruments: Accounts receivable, accounts payable and accrued expenses and other liabilities are carried at amounts that reasonably approximate their fair values. The fair values of the Trust's mortgage notes payable are estimated using discounted cash flow analyses, based on the Trust's incremental borrowing rates for similar types of borrowing arrangements. The carrying values of such mortgage notes payable reasonably approximate their fair values. Note 14 -- Subsequent Event: On February 26, 1997, USAA REALCO, a shareholder owning 31.8% of the outstanding Shares in the Trust, purchased outstanding indebtedness of the Trust totaling $9,419,213 pursuant to an earlier agreement with the Trust (see Note 7). USAA REALCO and the Trust then entered into an agreement modifying the terms of the indebtedness. The amount of the outstanding debt was reduced from $9,419,213 to $7,040,721, allowing the Trust to recognize an extraordinary gain on extinguishment of debt (including accrued interest) of $2,643,000 in the first quarter of 1997. The Trust made an immediate principal reduction on the modified notes of $1,591,103, leaving an outstanding principal balance of $5,449,618. The terms of the modified notes provide for monthly payments of interest at 8.8% and an extension in the maturity date from March 31, 1997 to December 31, 2000. In addition, USAA REALCO has the option to convert the principal amount of the notes into Shares of the Trust at the conversion rate of $2.00 per share (if converted prior to December 31, 1997) or $2.25 per share (if converted between December 31, 1997 and December 31, 2000). In order for USAA REALCO to convert its debt into Shares, the shareholders must approve an increase in the authorized Shares of the Trust. An increase in the authorized Shares of the Trust requires approval by holders of two-thirds of the outstanding Shares. In addition, the shareholders must approve the right of USAA REALCO to convert its debt into Shares. The notes provide that if shareholder approval of this conversion right is not approved by June 30, 1997, interest on the debt will increase to the lesser of 18% or the highest lawful rate effective July 1, 1997 and the full principal amount will become due and payable on October 31, 1997. Management believes that the sale of one or more properties would be required to satisfy this obligation in the event the notes become due and payable. The Trust anticipates shareholder approval for this transaction will be received on or about June 30, 1997 and that USAA REALCO will convert the principal amount of the debt into shares of the Trust soon thereafter. Therefore, the Trust currently anticipates it will reflect approximately $1,022,000, representing the difference between the market trading price of $2.38 per share on February 26, 1997 and the $2.00 conversion price, as interest expense between February 26, 1997 and June 30, 1997. The date of February 26, 1997 is used to measure market value as this is deemed to be the date of issuance of the modified note, which contains the convertibility option. This will result in additional interest expense of approximately $272,000 in the first quarter of 1997 and approximately $750,000 in the second quarter of 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 16, 1997. AMERICAN INDUSTRIAL PROPERTIES REIT /s/ Charles W. Wolcott Charles W. Wolcott, Trust Manager, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signatures Title Date /s/ WILLIAM H. BRICKER Trust Manager May 16, 1997 William H. Bricker /s/ T. PATRICK DUNCAN Trust Manager May 16, 1997 T. Patrick Duncan /s/ CHARLES W. WOLCOTT Trust Manager, May 16, 1997 Charles W. Wolcott President and Chief Executive Officer (Principal Executive Officer) /s/ MARC A. SIMPSON Vice President May 16, 1997 Marc A. Simpson Chief Financial Officer, Secretary and Treasurer (Principal Accounting and Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----