ITEM 1. BUSINESS
THE COMPANY GENERAL
First Industrial Securities, L.P. (the "Company") is a Delaware limited partnership which owns 19 bulk warehouses and light industrial properties (the "Properties"). The markets in which the Properties are located include: Chicago, Minneapolis, Grand Rapids, Detroit, and Central Pennsylvania. The Properties contain an aggregate of approximately 2.1 million square feet of gross leasable area ("GLA") which, as of December 31, 1996, was 97% leased to 32 tenants. At December 31, 1996, the Company had no employees. The Company's executive offices are located at 150 N. Wacker Drive, Suite 150, Chicago, Illinois 60606, and its telephone number is (312) 704-9000.
The Company was formed in 1995 in connection with the issuance of a class of preferred stock (the "Series A Preferred Shares") of First Industrial Realty Trust, Inc. ("FI"). The 1% general partner of the Company is First Industrial Securities Corporation ("Securities Corporation"), which is a wholly owned subsidiary of FI. The 99% limited partner of the Company is First Industrial, L.P. (the "Operating Partnership"), of which FI is the sole general partner.
In connection with the issuance of the Series A Preferred Shares, FI contributed to Securities Corporation the gross proceeds from the issuance of the Series A Preferred Shares in exchange for preferred stock of Securities Corporation, and Securities Corporation contributed such proceeds to the Company in exchange for a preferred limited partnership interest in the Company. The Operating Partnership and First Industrial Pennsylvania, L.P. contributed the Properties to the Company in exchange for limited partnership interests in the Company (the "Contribution"). The Pennsylvania Partnership subsequently distributed its limited partnership interest to the Operating Partnership, which is its sole limited partner.
THE GUARANTEE AND LIMITED PARTNERSHIP AGREEMENT
The Company has guaranteed the payment of dividends on, and payments on liquidation or redemption of, the Series A Preferred Shares under a guarantee (the "Guarantee") contained in a Guarantee and Payment Agreement (the "Guarantee Agreement"). The Guarantee Agreement is administered by American National Bank and Trust Company, as guarantee agent (together with any subagents which it may appoint, the "Guarantee Agent"). The Guarantee Agent may enforce the Guarantee directly against the Company only at the direction of the holders of at least 25% of the outstanding Series A Preferred Shares. No holder of Series A Preferred Shares may seek directly to enforce the Guarantee. The Guarantee and the Guarantee Agreement will terminate upon confirmation to the Company from Fitch Investors Service, L.P. and Standard & Poor's Ratings Group that, immediately following such a termination, the Series A Preferred Shares would be rated at least BBB, whether or not the Series A Preferred Shares are so rated prior to such termination.
The limited partnership agreement of the Company (the "Limited Partnership Agreement") and the Guarantee Agreement contain covenants generally restricting the Company's activities to the ownership and operation of the Properties and, under certain circumstances, other industrial properties. These covenants shall cease to have any effect upon the termination of the Guarantee. Under its Articles of Incorporation, Securities Corporation's sole purpose will be to act as general partner of the Company and to pay dividends on its common and preferred stock. These and other restrictions are intended to assure that even in the event of FI, the Operating Partnership or other affiliates of FI becoming subject to federal bankruptcy proceedings, neither Securities Corporation nor the Company nor their assets will be treated as subject to such bankruptcy proceedings under the doctrine of substantive consolidation or other doctrines (except to the extent liabilities are imposed by non-insolvency regulatory statutes on affiliates) and that activities of FI, the Operating Partnership and other affiliates will not cause Securities Corporation or the Company to become insolvent or unable to pay their debts as they mature (including the Guarantee).
ITEM 2.
ITEM 2. THE PROPERTIES
GENERAL
At December 31, 1996, the Company owned 19 in-service properties containing approximately 2.1 million square feet of GLA in four states. The Properties are generally located in business parks which have convenient access to interstate highways and air transportation. The median age of the Properties as of December 31, 1996 was approximately nine years.
The Company classifies its Properties into two industrial categories: bulk warehouse and light industrial. The Company's bulk warehouse properties are generally used for bulk storage of materials and manufactured goods and its light industrial properties are generally used for the design, assembly, packaging and distribution of goods and, in some cases, the provision of services. Each of the Properties is wholly owned by the Company. The following table summarizes certain information as of December 31, 1996 with respect to the Properties.
PROPERTY SUMMARY
DETAIL PROPERTY LISTING
The following table lists all of the Properties as of December 31, 1996, none of which were subject to mortgage liens as of such date.
PROPERTY LISTING
TENANT AND LEASE INFORMATION
Many of the Company's leases have an initial term of between three and five years and provide for periodic rental increases that are either fixed or based on changes in the Consumer Price Index. Industrial tenants typically have net or semi-net leases and pay as additional rent their percentage of the property's operating costs, including the costs of common area maintenance, property taxes and insurance. As of December 31, 1996, 97% of the GLA of the Properties was leased.
The following table sets forth, as of December 31, 1996, the base rent, and the total GLA leased, by tenants responsible for more than one percent of the aggregate December 1996 base rent.
The following table shows scheduled lease expirations for all leases for the Company's Properties as of December 31, 1996.
- ------------------------- (1) Lease expirations as of December 31, assuming tenants do not exercise existing renewal, termination, or purchase options. (2) Includes minimum contractual rent increases during the term of the lease.
MATERIAL PROPERTIES
At December 31, 1996, three of the Company's Properties (the "Material Properties") represent ten percent or more of the aggregate book value of the Properties as of December 31, 1996, or ten percent or more of the aggregate rental revenues as of December 31, 1996.
The following table shows the occupancy rate and average annual base rent per square foot for each of the Material Properties for the periods indicated:
- ----------------------- (1) As of December 31 of the year indicated (2) The Company acquired this property on September 30, 1994. Information for periods prior to January 1, 1994, is not available. (3) The Company acquired this property on November 14, 1994. Information for periods prior to January 1, 1994, is not available.
The following table sets forth certain information concerning the tenants and leases at the Material Properties as of December 31, 1996.
- --------------------------------
(1) The tenant currently has the right to terminate the lease on 9 months prior notice beginning December 31, 1998, without an early termination fee. (2) The tenant has subleased 87,571 sq. ft. of this property to CP&P, Incorporated, which is a fast food paper and plastic supplier.
PROPERTY MANAGEMENT
The Company's properties are managed by the Operating Partnership, of which FI is the sole general partner.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary course of business. All such proceedings, taken together, are not expected to have a material impact on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following sets forth selected financial and operating data for the Company and its Predecessor Businesses (herein after defined). The following data should be read in conjunction with the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. "Predecessor Businesses" include the historical statements of operations of the Properties from the date of acquisition (or, if the Property was developed, the date placed in service) by the Operating Partnership or the Pennsylvania Partnership for the period January 1, 1995 to December 15, 1995 (or the earlier date of contribution to the Company) and the year ended December 31, 1994.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with "Selected Financial and Operating Data" and the historical Financial Statements and Combined Financial Statements and Notes thereto appearing elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
The results of operations for the year ended December 31, 1996 include the operations of the Company. The results of operations for the year ended December 31, 1995 include the operations of the Predecessor Businesses from January 1, 1995, to December 15, 1995 and the operations of the Company from August 14, 1995, to December 31, 1995. The results of operations for the year ended December 31, 1994, include the operations of the Predecessor Businesses from January 1, 1994 through December 31, 1994.
At December 31, 1996 and 1995, the Company owned 19 in-service Properties containing approximately 2.1 million square feet. At December 31, 1994, the Company owned 12 in-service properties with approximately 1.4 million square feet. Acquisition and construction of seven Properties containing approximately .7 million square feet were made between December 31, 1994 and December 31, 1995.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996, TO YEAR ENDED DECEMBER 31,
Revenues increased by $2.2 million or 24.2%, due primarily to the Properties acquired or developed after December 31, 1994.
Property expenses, which include real estate taxes, repairs and maintenance, property management, utilities, insurance and other expenses, increased by $.8 million or 32.6% due primarily to Properties acquired or developed after December 31, 1994.
Interest expense decreased from $2.4 million to $0 due to the repayment of indebtedness collateralized by the Properties at the time of the Contribution.
Depreciation and amortization increased by $.2 million due primarily to the additional depreciation and amortization related to the Properties acquired and developed after December 31, 1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995, TO YEAR ENDED DECEMBER 31,
Revenues increased by $6.3 million or 215.3%, due primarily to the Properties acquired or developed after December 31, 1993.
Property expenses, which include real estate taxes, repairs and maintenance, property management, utilities, insurance and other expenses, increased by $1.8 million or 232.0% due primarily to Properties acquired or developed after December 31, 1993.
Interest expense increased from $.8 million to $2.4 million due primarily to additional debt incurred in connection with the acquisition and completion of development of additional Properties after December 31, 1993. As of December 31, 1995, the Company had no debt outstanding.
Depreciation and amortization increased by $1.0 million due primarily to the additional depreciation and amortization related to the Properties acquired and developed after December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996 and 1995, the Company had no outstanding indebtedness.
Net cash provided by operating activities was $7.5 million for the year ended December 31, 1996 compared to $3.6 million for the year ended December 31, 1995. This increase is primarily due to increased net operating income due to the Properties acquired or developed after December 31, 1994 and reduced interest expense due to the repayment of indebtedness collateralized by the Properties at the time of Contribution. Net cash provided by operating activities was $3.6 million for the year ended December 31, 1995 compared to $2.1 million for the year ended December 31, 1994. This increased is primarily due to increased net operating income due to the Properties acquired or developed after December 31, 1993.
Net cash used in investing activities was $.9 million for the year ended December 31, 1996 compared to $22.7 million and $52.6 million for the years ended December 31, 1995 and December 31, 1994, respectively. The significantly higher net cash used in investing activities for the years ended December 31, 1995 and December 31, 1994 reflect the acquisition and development of additional Properties.
Net cash used in financing activities for the year ended December 31, 1996 was $6.2 million, comprised of preferred limited partnership distributions to Securities Corporation and pro rata general and limited partnership distributions to Securities Corporation and the Operating Partnership, respectively. Net cash provided by financing activities for the year ended December 31, 1995 was $20.2 million composed primarily of increased borrowings related to the purchase and development of additional Properties and Security Corporation's capital contributions, which were partially offset by the repayment of indebtedness collateralized by the Properties at the time of Contribution. Net cash provided by financing activities for the year ended December 31, 1994 was $50.5 million, reflecting primarily debt and equity transactions relating to FI's initial public offering in June 1994 ("Initial Offering") and an increase in indebtedness due to the Properties acquired subsequent to the Initial Offering.
In 1996, the Company paid preferred limited partnership distributions of $3.9 million to Securities Corporation. In 1996, the Company paid pro rata general and limited partnership distributions to Securities Corporation and the Operating Partnership, respectively, in the aggregate amount of $2.3 million.
The Company has considered its short-term liquidity needs and the adequacy of its estimated cash flow from operations and other expected liquidity sources to meet these needs. The Company believes that its principal short-term liquidity needs are to fund normal recurring expenses and to pay the preferred limited partnership distribution and other partnership distributions. The Company anticipates that these needs will be met with cash flows provided by operating activities.
The Company expects to fund its long-term liquidity requirements for non-recurring capital improvements with its cash flow from operations and in part with a deferred maintenance escrow established in connection with the issuance of the Series A Preferred Shares.
INFLATION
Inflation has not had a significant impact on the Company because of the relatively low inflation rates in the Company's markets of operation. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from
inflation. In addition, many of the leases are for terms less than five years which may enable the Company to replace existing leases with new leases at higher base rentals if rents of existing leases are below the then-existing market rate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedule on page of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10
ITEM 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND EXECUTIVE COMPENSATION
The directors and executive officers of Securities Corporation, the general partner of the Company are as follows:
The independent director receives an annual director's fee of $10,000. No other director or executive officer of Securities Corporation receives any separate compensation as such.
The following biographical descriptions set forth certain information with respect to the directors and executive officers of Securities Corporation:
Michael T. Tomasz. Mr. Tomasz has been President, Chief Executive Officer and Director of Securities Corporation since its inception and has been President, Chief Executive Officer and Director of FI since April 1994. Between 1986 and 1994, he was managing partner of the Chicago office of The Shidler Group and was involved in the acquisition, financing, leasing, managing and disposition of over $270 million of commercial property.
Michael W. Brennan. Mr. Brennan has been Chief Operating Officer of Securities Corporation since its inception and has been Chief Operating Officer of FI since December 1995 and a Director of FI since March, 1996, prior to which time he was Senior Vice President, Asset Management of FI since April 1994. He was a partner of The Shidler Group between 1988 and 1994 and the President of the Brennan/Tomasz/Shidler Investment Corporation and was in charge of asset management, leasing, project finance, accounting and treasury functions for The Shidler Group's Chicago operations.
Michael J. Havala. Mr. Havala has been Chief Financial Officer and Director of Securities Corporation since its inception and has been the Chief Financial Officer of FI since April 1994. Between 1989 and 1994 he was Chief Financial Officer for The Shidler Group's Midwest region with responsibility for accounting, finance and treasury functions.
Patrick J. Galvin. Mr. Galvin has been Director of Securities Corporation since 1995. He has been a senior partner in the law firm of Galvin, Galvin & Leeney in Hammond, Indiana since 1986. He is admitted to the practice of law in the States of Indiana and Illinois and the District of Columbia and is a member of the American Bar Asociation. Mr. Galvin holds a Bachelor of Arts degree from the University of Notre Dame and received J.D. and L.L.M. in taxation degrees from the Georgetown University Law Center. He serves on the Board of Directors of Mercantile National Bank of Indiana.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Securities Corporation owns a 1% general partner interest and the preferred limited partner interest in the Company. The Operating Partnership owns a 99% limited partner interest in the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Properties are managed by the Operating Partnership pursuant to a property management agreement. Management fees incurred are based on 3.25% of gross receipts. These fees totaled approximately $386,000 for the period January 1, 1996 to December 31, 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
(1 & 2) See Index to Financial Statements and Financial Statement Schedule on page of this Form 10-K
(3) Exhibits:
Exhibit No. Description ----------- ----------- 4.1 The Limited Partnership Agreement of First Industrial Securities, L.P. (incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
4.2 Amended and Restated Articles of Incorporation of First Industrial Securities Corporation (incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01).
4.3 Articles Supplementary of First Industrial Securities Corporation (incorporated by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
4.4 Bylaws of First Industrial Securities Corporation (incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
10.1 Guarantee and Payment Agreement (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
10.2 Agency and Advance Agreement (incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
10.3 Guarantee Agency Agreement (incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
10.4 Property Management Agreement (incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
10.5 Contribution Agreement by and between First Industrial Pennsylvania, L.P. and First Industrial Securities, L.P. (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
10.6 Contribution Agreement by and between First Industrial, L.P. and First Industrial Securities, L.P. (incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
10.7 Contribution Agreement by and between First Industrial, L.P. and First Industrial Securities, L.P. relating to over-allotment (incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 33-97014-01)
27 * Financial Data Schedule
* Filed herewith.
(b) REPORTS ON FORM 8-K None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST INDUSTRIAL SECURITIES, L.P. BY: FIRST INDUSTRIAL SECURITIES CORPORATION, ITS SOLE GENERAL PARTNER
Date: March 27, 1997 By:/s/ Michael T. Tomasz ------------------------------------- Michael T. Tomasz President and Chief Executive Officer (Principal Executive Officer)
Date: March 27, 1997 By:/s/ Michael J. Havala ------------------------------------ Michael J. Havala Chief Financial Officer (Principal Financial and Accounting 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.
Signature Title Date --------- ----- ----
/s/ Michael T. Tomasz President, Chief Executive Officer March 27, 1997 --------------------- and Director Michael T. Tomasz
/s/ Michael J. Havala Chief Financial Officer and Director March 27, 1997 --------------------- Michael J. Havala
/s/ Patrick J. Galvin Director March 27, 1997 --------------------- Patrick J. Galvin
EXHIBIT INDEX
Exhibit No. Description ----------- ------------------------ 27 Financial Data Schedule
FIRST INDUSTRIAL SECURITIES, L.P.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of First Industrial Securities, L.P.
We have audited the financial statements and the financial statement schedule of First Industrial Securities, L.P. (the "Company") and the combined financial statements of the Predecessor Businesses as listed on page of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement 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 financial statements referred to above present fairly, in all material respects, the financial position of First Industrial Securities, L.P. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended December 31, 1996 and for the period August 14, 1995 through December 31, 1995 and the combined results of operations and cash flows of the Predecessor Businesses for the period January 1, 1995 through December 15, 1995 and for the year ended December 31, 1994, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois February 12, 1997
FIRST INDUSTRIAL SECURITIES, L.P. BALANCE SHEETS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the financial statements.
FIRST INDUSTRIAL SECURITIES, L.P. STATEMENTS OF OPERATIONS AND PREDECESSOR BUSINESSES COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the financial statements.
FIRST INDUSTRIAL SECURITIES, L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND PREDECESSOR BUSINESSES COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the financial statements.
FIRST INDUSTRIAL SECURITIES, L.P. STATEMENTS OF CASH FLOWS AND PREDECESSOR BUSINESSES COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of the financial statements.
FIRST INDUSTRIAL SECURITIES, L.P. AND PREDECESSOR BUSINESS NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
1. ORGANIZATION
First Industrial Securities, L.P. ("the Company") is a Delaware limited partnership formed on August 14, 1995, the 1% general partner of which is First Industrial Securities Corporation ("Securities Corporation"), a wholly owned subsidiary of First Industrial Realty Trust, Inc. ("FI"), and the 99% limited partner of which is First Industrial, L.P. (the "Operating Partnership"), of which FI is the sole general partner. Securities Corporation also owns a preferred limited partnership interest in the Company.
The limited partnership agreement of the Company (the "Limited Partnership Agreement") and the Guarantee Agreement contain covenants generally restricting the Company's activities to the ownership and operation of the properties and, under certain circumstances, other industrial properties. These covenants shall cease to have any effect upon the termination of the Guarantee. Under its Articles of Incorporation, Securities Corporation's sole purpose will be to act as general partner of the Company and to pay dividends on its common and preferred stock. These and other restrictions are intended to assure that even in the event of FI, the Operating Partnership or other affiliates of FI becoming subject to federal bankruptcy proceedings, neither Securities Corporation nor the Company nor their assets will be treated as subject to such bankruptcy proceedings under the doctrine of substantive consolidation or other doctrines (except to the extent liabilities are imposed by non-insolvency regulatory statutes on affiliates) and that activities of FI, the Operating Partnership and other affiliates will not cause Securities Corporation or the Company to become insolvent or unable to pay their debts as they mature (including the Guarantee).
2. FORMATION TRANSACTIONS
The Initial Capitalization
The Company was capitalized with a capital contribution of $1 on August 28, 1995 by Securities Corporation.
The Contribution Transactions
On November 17, 1995, FI completed a public offering of 1,500,000 shares of $.01 par value 9 1/2% Series A Cumulative Preferred Stock at $25.00 per share, and on December 14, 1995, FI issued 150,000 shares of $.01 par value 9 1/2% Series A Cumulative Preferred Stock for $25.00 per share pursuant to the underwriters' exercise of their over-allotment option (together the "Series A Preferred Shares"). The issuance of 1,650,000 Series A Preferred Shares is thus referred to as the "Offering". Gross proceeds to FI from the Offering were $41,250. FI contributed to Securities Corporation the gross proceeds from the Offering in exchange for preferred stock of Securities Corporation, and Securities Corporation contributed such proceeds to the Company in exchange for a preferred limited partnership interest in the Company. The Operating Partnership and First Industrial Pennsylvania, L.P. (the "Pennsylvania Partnership"), a Delaware limited partnership and a subsidiary of the Operating Partnership, contributed to the Company, in return for limited partnership interests, 14 properties and 5 properties (described below) on November 17, 1995 and December 14, 1995, respectively, encumbered by liens collateralizing debt under the 1994 Acquisition Facility (herein after defined). An amount of such debt equal to the gross proceeds of
FIRST INDUSTRIAL SECURITIES, L.P. AND PREDECESSOR BUSINESS
NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
the Offering was repaid by the Company and such liens on the properties described below have been released. The Pennsylvania Partnership contributed its limited partnership interest in the Company to the Operating Partnership. The foregoing is herein collectively referred to as the "Contribution Transactions". The Company commenced operations on November 17, 1995.
The Properties
Upon consummation of the Offering and the Contribution Transactions (collectively, the "Formation Transactions"), the Company owned 19 properties located in four states containing an aggregate of approximately 2.1 million square feet (unaudited) of gross leasable area ("GLA"). Of the properties:
(a) Four were acquired by the Operating Partnership prior to FI's initial public offering (the "Initial Offering") in June, 1994;
(b) Two were acquired concurrently with the consummation of the Initial Offering; and
(c) Thirteen were acquired or developed by either the Operating Partnership or the Pennsylvania Partnership subsequent to the Initial Offering.
The Guarantee
In connection with the Offering, the Company entered into a Guarantee and Payment Agreement (the "Guarantee Agreement") pursuant to which the Company guaranteed the payment of dividends on, and payments on liquidation or redemption of, the Series A Preferred Shares.
The guarantee was created through the execution of the Guarantee Agreement between the Company and Securities Corporation, for the benefit of a guarantee agent. The Guarantee Agreement is administered and enforced for the benefit for the holders of the Series A Preferred Shares by the guarantee agent. The guarantee agent may enforce the guarantee directly against the Company only with the approval of the holders of at least 25% of the outstanding Series A Preferred Shares. No holder may seek directly to enforce the guarantee.
Under the terms of the Guarantee Agreement, the Company was required to deposit approximately $414 into a restricted cash escrow account with the guarantee agent. These funds were set aside to pay for certain repair and maintenance items of the contributed properties.
3. BASIS OF PRESENTATION
The Statements of Operations for the Company present the operations of the Company for the year ended December 31, 1996 and for the period August 14, 1995 to December 31, 1995. The Combined Statements of Operations for the Predecessor Business present the historical operations
FIRST INDUSTRIAL SECURITIES, L.P. AND PREDECESSOR BUSINESS NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
of the properties from the date of acquisition (or, if the property was developed, the date placed in service) by the Predecessor Businesses through the dates of the Contribution Transactions.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In order to conform with the generally accepted accounting principles, management, in preparation of the financial statements, is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 31, 1996 and 1995, and the reported amounts of revenues and expenses for the year ended December 31, 1996, the period August 14, 1995 to December 31, 1995, the period January 1, 1995 to December 15, 1995 and the year ended December 31, 1994. Actual results could differ from those estimates.
Revenue Recognition:
Rental income is recognized on a straight-line method under which contractual rent increases are recognized evenly over the lease term. Tenant recovery income includes payments from tenants for taxes, insurance and other property operating expenses and are recognized as revenues in the period the related expenses are incurred by the Company.
The Company evaluates and, if applicable, provides for an allowance for doubtful accounts against the portion of accounts receivable which is estimated to be uncollectible. Accounts receivable in the balance sheets are shown net of an allowance for doubtful accounts of $50 and $0 as of December 31, 1996 and 1995, respectively.
General and Administrative
Expenses incurred related to the operations of the properties are reflected in property management expense, therefore, there is no allocation of FI's general and administrative expense.
Investment in Real Estate and Depreciation:
Effective from the Company's inception, the Company adopted Financial Accounting Standards Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Real estate assets are carried at the lower depreciated cost or fair value as determined by the Company. The Company reviews its properties on a quarterly basis for impairment and provides an allowance if impairments are determined. First, to determine if impairment may exist, the Company reviews its properties and identifies those which have had either an event of change or event of circumstance warranting further assessment of recoverability. Then, the Company estimates the fair value of those properties on an individual basis by capitalizing the expected net operating income and discounting the expected cash flows of the properties. Such amounts are then compared to the property's depreciated cost to determine whether an impairment exists.
FIRST INDUSTRIAL SECURITIES, L.P. AND PREDECESSOR BUSINESS NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
Interest expense, real estate taxes and other directly related expenses incurred during construction periods are capitalized and depreciated commencing with the date placed in service, on the same basis as the related assets. Depreciation expense is computed using the straight-line method based on the following useful lives:
Construction expenditures for tenant improvements and leasing commissions are capitalized and amortized over the terms of each specific lease. Maintenance and repairs are charged to expense when incurred. Expenditures for improvements are capitalized.
When assets are sold or retired, their costs and accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss.
Cash and Cash Equivalents:
Cash and cash equivalents include all cash and liquid investments with an initial maturity of three months or less. The carrying amount approximates fair value due to the short maturity of these investments.
Income Taxes:
No federal income taxes are payable by the Company or the Predecessor Businesses, and none have been provided for in the accompanying financial statements and combined financial statements. Prior to the Offering, the Predecessor Businesses were owned by the Operating Partnership and the Pennsylvania Partnership. In accordance with partnership taxation, each of the partners are responsible for reporting their share of taxable income or loss.
Fair Value of Financial Investments:
The Company's financial instruments include short-term investments, tenant accounts receivable, accounts payable and other accrued expenses. The fair value of these financial instruments was not materially different from their carrying amount or contract values.
Reclassifications:
Certain amounts in the 1995 financial statements were reclassified to conform with the current year presentation.
FIRST INDUSTRIAL SECURITIES, L.P. AND PREDECESSOR BUSINESS NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
5. RELATED PARTY TRANSACTIONS
The 19 properties owned by the Company are managed by the Operating Partnership, of which FI is the sole general partner. Management fees incurred are based on 3.25% of gross receipts. Such fees totaled $386 and $36 for the year ended December 31, 1996 and the period August 14, 1995 to December 31, 1995, respectively. At December 31, 1996 and December 31, 1995, $42 and $36 of accrued management fees were due to the Operating Partnership, respectively.
6. THE ACQUISITION FACILITY PAYABLE
On June 30, 1994, the Operating Partnership entered into a revolving credit facility (the "1994 Acquisition Facility") under which the Operating Partnership may borrow to finance the acquisition of additional properties and for other corporate purposes, including working capital. The combined financial statements of the Predecessor Business assume a loan balance proportional to the total lender's estimated value of the properties compared to the total lender's estimated value of all properties collateralizing the 1994 Acquisition Facility. Borrowings under the 1994 Acquisition Facility bear interest at a floating rate based on a "Corporate Base Rate" plus .5% or LIBOR plus 2.0%. Under the 1994 Acquisition Facility, interest only payments are due monthly. The borrowings under the 1994 Acquisition Facility are cross-collateralized by certain other properties acquired and held by the Operating Partnership and the Pennsylvania Partnership. In connection with the Contribution Transactions, the outstanding balance under the 1994 Acquisition Facility allocable to the Predecessor Businesses was repaid and the liens on the properties collateralizing such facility were released.
7. FUTURE RENTAL REVENUES
The Company's properties are leased to tenants under net and semi-net operating leases. Minimum lease payments receivable, excluding tenant reimbursements of expenses, under noncancelable operating leases in effect as of December 31, 1996 are approximately as follows:
Three of the Company's properties represent ten percent or more of the aggregate book value of the assets as of December 31, 1996, or ten percent or more of the Company's aggregate rental revenues as of December 31, 1996.
FIRST INDUSTRIAL SECURITIES, L.P. AND PREDECESSOR BUSINESS NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
8. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Supplemental disclosure of noncash investing and financing activities:
Exchange of Limited Partnership Interest for Assets and Liabilities
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in legal actions arising from the ownership of their properties. In management's opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company or the Predecessor Businesses.
Two properties have leases granting the tenants options to purchase the property. Such options are exercisable at various times and at an appraised fair market value or at a fixed purchased price generally in excess of the Company's purchase price. The Company has no notice of any exercise of any tenant purchase option.
FIRST INDUSTRIAL SECURITIES, L.P. AND PREDECESSOR BUSINESS NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST INDUSTRIAL SECURITIES, L.P.
SCHEDULE III: REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
NOTES: (a) Initial cost for each respective property is total acquisition costs associated with its purchase.
(b) Depreciation is computed based upon the following estimated lives:
(c) At December 31, 1996, aggregate cost of land, buildings and improvements for federal income tax purposes was approximately $76 million.
There were no encumbrances on the properties at December 31, 1996
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FIRST INDUSTRIAL SECURITIES, L.P. SCHEDULE III: REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) AS OF DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
The changes in total real estate assets for the years ended December 31, 1996 and 1995 are as follows:
The changes in accumulated depreciation for the years ended December 31, 1996 and 1995 are as follows:
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