<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 0-13227
USAA Real Estate Income Investments I Limited Partnership
(Exact name of registrant as specified in its charter)
California 74-2325025
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 Robert F. McDermott Fwy., IH 10 West, Suite 600,
San Antonio, Texas 78230-3884
(Address of principal executive offices) (Zip Code)
(210) 498-7391
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
1
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PART I
Item 1. Financial Statements
<TABLE>
USAA Real Estate Income Investments I Limited Partnership
Condensed Balance Sheets
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
<S> <C> <C>
Assets
Rental properties, net $ 9,527,836 9,964,683
Temporary investments, at cost which
approximates market value-
Money market fund 1,012,287 926,892
Cash 50,037 46,204
Cash and cash equivalents 1,062,324 973,096
Accounts receivable, net of allowance for
doubtful accounts of $12,000 in 1997 59,623 72,175
Deferred charges, at amortized cost, and
other assets 354,644 386,325
$ 11,004,427 11,396,279
Liabilities and Partners' Equity
Accounts payable, including amounts due
to affiliates of $30,742 and $27,907 $ 54,089 83,582
Accrued expenses and other liabilities 135,076 35,634
Security deposits 65,320 66,616
Total liabilities 254,485 185,832
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 91,832 89,818
Cumulative distributions (191,011) (184,391)
(98,179) (93,573)
Limited Partners (54,610 units):
Capital contributions, net of offering costs 25,666,700 25,666,700
Cumulative net income 9,091,446 8,892,025
Cumulative distributions (23,910,025) (23,254,705)
10,848,121 11,304,020
Total Partners' equity 10,749,942 11,210,447
$ 11,004,427 11,396,279
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
<TABLE>
USAA Real Estate Income Investments I Limited Partnership
Condensed Statements of Income
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1996
<S> <C> <C>
Income
Rental income $ 447,074 424,233
Interest income 13,998 14,355
Total income 461,072 438,588
Expenses
Direct expenses, $22,641 and $28,221 to
affiliate (note 1) 181,700 147,524
Depreciation 146,351 138,584
General and administrative, $30,627 and
$31,529 to affiliates (note 1) 51,525 49,985
Management fee to affiliate (note 1) 17,339 19,629
Total expenses 396,915 355,722
Net income $ 64,157 82,866
Net income per limited partnership unit $ 1.16 1.50
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1997 1996
<S> <C> <C>
Income
Rental income $ 1,294,973 1,229,804
Interest from mortgage loan from affiliate -- 52,124
Interest income 40,395 75,645
Total income 1,335,368 1,357,573
Expenses
Direct expenses, $81,562 and $85,677 to
affiliate (note 1) 452,263 413,618
Depreciation 438,771 420,385
General and administrative, $104,673 and
$103,519 to affiliates (note 1) 189,531 202,249
Management fee to affiliate (note 1) 53,368 54,788
Total expenses 1,133,933 1,091,040
Net income $ 201,435 266,533
Net income per limited partnership unit $ 3.65 4.83
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
<TABLE>
USAA Real Estate Income Investments I Limited Partnership
Condensed Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
(Unaudited)
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 201,435 266,533
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 438,771 420,385
Amortization 33,951 33,573
Decrease in accounts receivable 12,552 936
Increase in deferred charges and other assets (2,270) (6,503)
Increase in accounts payable, accrued expenses
and other liabilities 68,653 169,384
Cash provided by operating activities 753,092 884,308
Cash flows from investing activities:
Additions to rental properties (1,924) (84,342)
Proceeds from mortgage loan receivable -- 5,440,000
Cash (used in) provided by investing activities (1,924) 5,355,658
Cash flows used in financing activities-
Distributions to Partners (661,940) (5,496,440)
Net increase in cash and cash equivalents 89,228 743,526
Cash and cash equivalents at beginning of period 973,096 366,837
Cash and cash equivalents at end of period $ 1,062,324 1,110,363
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
USAA Real Estate Income Investments I Limited Partnership
Notes to Condensed Financial Statements
September 30, 1997
(Unaudited)
1. Transactions with Affiliates
A summary of transactions with affiliates follows for the
nine-month period ended September 30, 1997:
Quorum
USAA Real Estate
Real Estate Services
Company Corporation
Reimbursement of
expenses (a) $ 90,427 41,550
Management fees 53,368 40,012
Lease commissions -- 14,246
Total $ 143,795 95,808
(a) Reimbursement of expenses represents amounts paid or
accrued as reimbursement of expenses incurred on behalf of
the Partnership at actual cost and does not include any
mark-up or items normally considered as overhead.
2. Other
Reference is made to the financial statements in the Annual
Report filed as part of the Form 10-K for the year ended
December 31, 1996 with respect to significant accounting and
financial reporting policies as well as to other pertinent
information concerning the Partnership. Information furnished
in this report reflects all normal recurring adjustments which
are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
Further, the operating results presented for these interim
periods are not necessarily indicative of the results that may
occur for the remaining three months of 1997 or any other
future period.
The financial information included in this interim report as
of September 30, 1997 and for the three-month and nine-month
periods ended September 30, 1997 and 1996 has been prepared by
management without audit by independent certified public
accountants who do not express an opinion thereon. The
Partnership's annual report includes audited financial
statements.
Certain 1996 balances have been reclassified to conform to the
1997 presentation.
5
<PAGE>
PART I
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
At September 30, 1997, the Partnership had cash of $50,037 and
temporary investments of $1,012,287. These funds were held in
the working capital reserve for the payment of obligations of the
Partnership. Accounts receivable consisted of amounts due from
tenants at both of the Partnership properties. Deferred charges
and other assets consisted of deferred rent that resulted from
recognition of income as required by generally accepted
accounting principles and lease commissions. Accounts payable
included amounts due to affiliates for management fees and
reimbursable expenses and to third parties for expenses incurred
for operations. Accrued expenses and other liabilities consisted
of property tax accruals, security deposits and prepaid revenue
from tenants.
During the quarter ended September 30, 1997, the Partnership
distributed $218,440 to Limited Partners and $2,207 to the
General Partner for a total of $220,647. Management evaluates
reserves and the availability of funds for distribution to the
Partners on a continuing basis based on anticipated leasing
activity and cash flows available from the Partnership
investments. As a result of this analysis, quarterly
distributions were increased from $3.00 to $4.00 per limited
partnership unit in the fourth quarter of 1996.
Due to the change in tenancy, the name of the Systech building
was changed to 10505 Sorrento Valley Road. The balance of
approximately $22,000 of the Partnership's commitment for the
final phase of tenant improvements at this property was expended
in January 1997. The funding of these improvements was from the
working capital reserve of the Partnership.
Systech Computer Corporation currently leases approximately
22,600 of the 54,094 square feet of space at 10505 Sorrento
Valley Road. The terms of Systech Computer Corporation's lease
amendment in July 1996 provided the tenant with an option to
terminate their lease effective March 31, 1998 or to continue to
lease approximately 7,600 square feet through February 2000. Due
to changes in their business requirements, they have recently
expressed a need for additional space.
Integrated Systems, Inc. ("ISI") leases the remaining space in
the building. While ISI is obligated by their lease through
February 2000 for the space they currently occupy as well as the
13,201 square feet that was to be vacated by Systech Computer
Corporation in March 1998, discussions are underway with the
tenants regarding their space requirements. At this time, it is
not known what actions will transpire.
6
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On June 10, 1997, the Partnership signed a letter of intent with
American Industrial Properties REIT [NYSE: IND] (the "Trust")
contemplating the merger of four real estate limited
partnerships, including the Partnership, into the Trust. The
four real estate limited partnerships are USAA Real Estate Income
Investments I Limited Partnership, USAA Real Estate Income
Investments II Limited Partnership, USAA Income Properties III
Limited Partnership and USAA Income Properties IV Limited
Partnership (collectively, the "RELPs"). Each of the RELPs is
affiliated with USAA Real Estate Company, which currently owns
approximately 13.74% of the outstanding shares of the Trust.
On July 7, 1997, the Trust signed definitive merger agreements
with each of the RELPs pursuant to which the RELPs will be merged
into the Trust (the "Merger"). According to the Merger
Agreement, the Trust will issue an aggregate of 4,412,829 shares
of beneficial interest at $13.125 per share (for a total value of
$57,918,385) in exchange for the limited partnership interests in
the RELPs. The number of Shares and the per Share amount have
been restated to reflect the impact of the one for five reverse
split approved by the Trust shareholders on October 15, 1997.
The number of Shares to be issued to each RELP will be equal to
the net asset value for each RELP (as agreed by the Trust and
each RELP) divided by $13.125. The number of Shares to be
received by a Limited Partner in each RELP will be computed in
accordance with such partner's percentage interest in the RELP.
The general partner of each RELP has waived any right it may have
to receive Shares to which it may be entitled in exchange for its
general partnership interest. The Merger is a taxable
transaction to the partners in the RELPs. Prudential Securities,
Inc., on behalf of the Trust, and Houlihan, Lokey, Howard & Zukin
on behalf of the RELPs, have rendered opinions to their
respective parties that the transaction is fair from a financial
point of view.
The Merger, which has been approved by the Trust's Board of Trust
Managers and the Board of Directors of each of the general
partners of the RELPs, is subject to due diligence by both
parties and certain other conditions, including approval by the
shareholders of the Trust and the Limited Partners of each of the
RELPs. Accordingly, there can be no assurance that the merger
will ultimately be consummated. A meeting of the Limited
Partners is tentatively scheduled for early January 1998 to
consider a vote on the proposed transaction.
On August 20, 1997, a purported class action lawsuit (the
"Lawsuit"), which was filed in the Superior Court of the State of
Arizona, was served upon USAA Real Estate Company, USAA
Properties I, Inc. ("RELP GP I"), USAA Properties II, Inc. ("RELP
GP II"), USAA Properties III, Inc. ("RELP GP III"), USAA
Properties IV, Inc. ("RELP GP IV", together with RELP GP I, RELP
GP II and RELP GP III, the "RELP GPs"), certain other affiliated
entities and the individual members of the boards of directors of
each of the RELP GPs. The Trust was also named as a defendant.
7
<PAGE>
The Lawsuit was subsequently removed to federal court and has
been transferred to the Western District of Texas, San Antonio
Division. The suit alleges among other things, breaches of
fiduciary duty in connection with the transactions contemplated
by merger agreements entered into by the RELPs and the Trust,
dated as of June 30, 1997, whereby each RELP would be merged with
and into the Trust.
The Lawsuit seeks, among other things, to enjoin the consummation
of the Merger and damages, including attorneys' fees and
expenses. The defendants believe that the plaintiffs' claims are
without merit and intend to defend vigorously against the
Lawsuit.
Future liquidity is expected to result from cash generated from
operations of the properties, interest on temporary investments
and ultimately through the sale of the properties.
Results of Operations
For the three-month and nine-month periods ended September 30,
1997 and 1996, income was generated from rental income from the
income producing properties and interest earned on the funds
invested in temporary investments. Interest income and
participation income earned on the mortgage loan prior to the
January 31, 1996 payoff of the mortgage loan receivable is also
included in income for the nine-month period ended September 30,
1996. Expenses incurred during the same periods were associated
with operations of the Partnership's properties and various other
costs required for administration of the Partnership.
The decrease in rental properties from December 31, 1996 to
September 30, 1997 was primarily attributable to depreciation on
the Partnership properties. The decrease in accounts receivable
during the same time period reflects the $12,000 allowance for
doubtful accounts for Volusia Point. Amortization of lease
commissions caused the decrease in deferred charges. The
decrease in accounts payable reflected timing in payment of
property operating expenses and the reissue of stale dated
distribution checks to Limited Partners. An increase in prepaid
revenue and accrued property taxes for Volusia Point and 10505
Sorrento Valley Road accounted for the increase in accrued
expenses and other liabilities.
Rental income increased from the three-month and nine-month
periods ended September 30, 1996 to the same three-month and nine-
month periods in 1997 primarily due to the increase in
reimbursement of property operating expenses at 10505 Sorrento
Valley Road subsequent to the tenants' base year. The increase
in rental income for this nine-month period was further impacted
by approximately $13,000 as a result of the increase in
reimbursement of current and prior year operating expenses from
tenants at Volusia Point. The decrease in interest income from
the mortgage loan for the nine-month period ended September 30,
1997 was the result of the January 31, 1996 payoff of the
8
<PAGE>
receivable. Interest income was higher for the nine-month period
in 1996 as a result of interest earned on the cash temporarily
held by the Partnership after the payoff of the mortgage loan
receivable and prior to distribution of those proceeds to Limited
Partners.
The increases in direct expenses from the three-month and nine-
month periods ended September 30, 1996 to the three-month and
nine-month periods ended September 30, 1997 reflect increases in
utility and janitorial charges at 10505 Sorrento Valley Road in
conjunction with the increase in physical occupancy at that
property during the third quarter of 1996. The increase in
depreciation during the three-month and nine-month periods ended
September 30, 1997 over the same periods ended September 30, 1996
was due to the addition of tenant improvements at 10505 Sorrento
Valley Road, and was partially offset by a decrease in
depreciation at Volusia Point as some tenant improvements were
fully depreciated in 1996.
General and administrative expenses were higher during the nine-
month period ended September 30, 1996 than during the same period
in 1997 due to legal fees associated with the lease restructuring
that occurred at 10505 Sorrento Valley Road during 1996. Savings
on audit fees further impacted this decrease in general and
administrative expenses from 1996 to 1997. The portfolio
management fee is based on cash flow from operations of the
Partnership, adjusted for cash reserves, and fluctuated
accordingly.
9
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit.
Sequentially
Exhibit Numbered
No. Description Page
4 Restated Certificate and Agreement of Limited
Partnership dated as of October 18, 1984,
incorporated as Exhibit A to the Partnership's
Prospectus dated November 16, 1984, filed
pursuant to Rule 424(b), Regis. No. 2-92845
and incorporated herein by this reference. __
27 Financial Data Schedule 12
(b) A Current Report on Form 8-K was filed July 21, 1997
regarding the signed definitive merger agreements between the
Partnership and American Industrial Properties REIT (the "Trust")
pursuant to which the Partnership will be merged into the Trust.
A Current Report on Form 8-K was filed September 2, 1997
regarding a purported class action lawsuit served upon the
Partnership seeking to enjoin the consummation of the Merger
with the Trust.
10
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FORM 10-Q
SIGNATURES
USAA REAL ESTATE INCOME INVESTMENTS I LIMITED PARTNERSHIP
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.
USAA REAL ESTATE INCOME INVESTMENTS I
LIMITED PARTNERSHIP (Registrant)
BY: USAA INVESTORS I, INC.,
General Partner
November 12, 1997 BY: /s/Edward B. Kelley
Edward B. Kelley
Chairman, President and
Chief Executive Officer
November 12, 1997 BY: /s/Martha J. Barrow
Martha J. Barrow
Vice President -
Administration and
Finance/Treasurer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,062,324
<SECURITIES> 0
<RECEIVABLES> 59,623
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 9,527,836
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,004,427
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,749,942
<TOTAL-LIABILITY-AND-EQUITY> 11,004,427
<SALES> 0
<TOTAL-REVENUES> 1,294,973
<CGS> 0
<TOTAL-COSTS> 891,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 201,435
<INCOME-TAX> 0
<INCOME-CONTINUING> 201,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 201,435
<EPS-PRIMARY> 3.65
<EPS-DILUTED> 0
</TABLE>
