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 June 30, 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: 0-13772
USAA Income Properties III Limited Partnership
(Exact name of registrant as specified in its charter)
Delaware 74-2356253
(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
<PAGE>
PART I
Item 1. Financial Statements
<TABLE>
USAA Income Properties III Limited Partnership
Condensed Balance Sheets
<CAPTION>
June 30,
1996 December 31,
(Unaudited) 1995
<S> <C> <C>
Assets
Rental properties, net $ 38,931,082 39,125,747
Temporary investments, at cost
which approximates market value-
Money market fund 11,591,903 12,202,023
Cash 32,889 573,020
Cash and cash equivalents 11,624,792 12,775,043
Accounts receivable, net of allowance for doubtful
accounts of $30,000 and $12,000 493,197 419,871
Deferred charges and other assets, at
amortized cost 3,512,067 3,305,650
$ 54,561,138 55,626,311
Liabilities and Partners' Equity
Mortgages payable to affiliates $ 26,454,545 27,818,182
Accounts payable, including amounts due
to affiliates of $13,927 and $65,139 25,259 138,535
Accrued expenses and other liabilities 913,883 2,843,826
Total liabilities 27,393,687 30,800,543
Partners' equity
General Partner:
Capital contribution 1,000 1,000
Cumulative net income (loss) 12,077 (17,819)
Cumulative distributions (264,692) (258,214)
(251,615) (275,033)
Limited Partners (111,549 units):
Capital contributions, net of offering
costs 52,428,030 52,428,030
Cumulative net income (loss) 1,195,589 (1,764,083)
Cumulative distributions (26,204,553) (25,563,146)
27,419,066 25,100,801
Total Partners' equity 27,167,451 24,825,768
Commitment (note 3)
$ 54,561,138 55,626,311
See accompanying notes to condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
USAA Income Properties III Limited Partnership
Condensed Statements of Income
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Income
Rental income $ 2,467,655 2,467,310
Less direct expenses, including depre-
ciation of $369,781 and $369,568 (498,339) (293,840)
Gain on disposal of rental property 157,852 --
Net operating income 2,127,168 2,173,470
Interest income 155,290 175,397
Total income 2,282,458 2,348,867
Expenses
General and administrative (note 1) 89,390 99,164
Management fee (note 1) (12,685) (8,501)
Interest (note 1) 555,892 704,721
Total expenses 632,597 795,384
Net income $ 1,649,861 1,553,483
Net income per limited partnership unit $ 14.64 13.79
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Income
Rental income $ 4,931,258 4,778,495
Less direct expenses, including depre-
ciation of $738,932 and $739,136 (936,668) (883,664)
Gain on disposal of rental property 157,852 --
Net operating income 4,152,442 3,894,831
Interest income 322,880 302,743
Total income 4,475,322 4,197,574
Expenses
General and administrative (note 1) 239,313 207,592
Management fee (note 1) 66,137 92,943
Interest (note 1) 1,180,304 1,406,346
Total expenses 1,485,754 1,706,881
Net income $ 2,989,568 2,490,693
Net income per limited partnership unit $ 26.53 22.10
See accompanying notes to condensed financial statements.
</TABLE>
3
<PAGE>
<TABLE>
USAA Income Properties III Limited Partnership
Condensed Statements of Cash Flows
Six months ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,989,568 2,490,693
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 738,932 739,136
Amortization 51,300 33,171
Loss on early retirement of assets 10,600 --
Increase in accounts receivable (73,326) (208,376)
Decrease (increase) in deferred charges
and other assets (257,717) 32,323
Increase (decrease) in accounts payable,
accrued expenses and other liabilities (2,043,219) 2,449,324
Gain on disposal of rental property (157,852) --
Other adjustments 7,119
Cash provided by operating activities 1,258,286 5,543,390
Cash flows from investing activities:
Additions to rental properties (617,415) --
Proceeds from disposal of real estate property 220,400 --
Cash used in investing activities (397,015) --
Cash flows from financing activities:
Repayment of mortgages payable (1,363,637) (1,363,637)
Distributions to partners (647,885) (845,069)
Cash used in financing activities (2,011,522) (2,208,706)
Net increase (decrease) in cash and cash equivalents (1,150,251) 3,334,684
Cash and cash equivalents at beginning of period 12,775,043 8,173,815
Cash and cash equivalents at end of period $ 11,624,792 11,508,499
See accompanying notes to condensed financial statements.
</TABLE>
4
<PAGE>
Notes to Condensed Financial Statements
June 30, 1996
(Unaudited)
1. Transactions with Affiliates
A summary of transactions with affiliates follows for the six-
month period ended June 30, 1996:
Quorum
USAA Las Colinas Real Estate
Real Estate Management Services
Company Corporation Corporation
Reimbursement
of expenses (a) $ 88,782 -- 29,631
Management fees 66,137 -- 19,728
Lease commissions -- -- 11,802
Interest expense (b) 508,299 499,912 --
Total $ 663,218 499,912 61,161
(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.
(b) Represents interest expense at market rate on a
mortgage loan.
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, 1995 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 which may occur for the remaining
six months of 1996 or any other future period.
The financial information included in this interim report as
of June 30, 1996 and for the three months and six months
ended June 30, 1996 and 1995 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.
5
<PAGE>
3. Commitment
On March 30, 1995, a twelve-year lease was signed with
Hospitality Franchise Systems, Inc. (HFS), the major
subtenant at the Ramada property, for the ten-story building
which contains approximately 100,000 square feet. Upon
execution of this lease, HFS contributed $3,000,000 to be
used toward the cost of improvements to the property. The
total cost of improvements, lease commissions and other
renovations will be approximately $5 million. The
Partnership shall pay approximately $2 million of these
costs to be funded from the working capital reserve. As of
June 30, 1996, the Partnership was obligated to fund
approximately $1.2 million related to its commitment for
improvements. Improvements are estimated to be
substantially complete in September 1996.
6
<PAGE>
PART I
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
At June 30, 1996, the Partnership had cash of $32,889 and
temporary investments of $11,591,903. 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. Deferred charges and other assets included deferred
rent resulting from recognition of income as required by
generally accepted accounting principles and lease commissions.
Accounts payable included amounts due to affiliates for
reimbursable expenses and management fees, and amounts payable to
third parties for expenses incurred for operations. Accrued
expenses and other liabilities consisted primarily of prepaid
rent and a deposit held as a contribution toward tenant
improvement costs.
During the quarter ended June 30, 1996, the Partnership
distributed $223,098 to Limited Partners and $2,253 to the
General Partner for a total of $225,351. Due to the expiration
of the Hughes lease in August 1996 and the commencement of the
lease with Hospitality Franchise Systems, Inc. ("HFS") in 1995,
tenant improvements and lease commissions will be required at
both the Parkview Plaza and HFS properties, and will be funded
from the Partnership's working capital reserve. Based on current
projections of the decrease in expected future cash flows that
will result from payment for tenant improvements and lease
commissions, distributions to Partners were reduced in May 1996.
The $11,000,000 mortgage on Curlew Crossing matured March 31,
1996. The lender, USAA Real Estate Company (the Adviser),
renewed the loan for a period of two years at 8.25% to reflect
market rates at the time of maturity. This rate is a decrease
from the 10.25% paid in March 1996. Interest is payable monthly
with the principal due March 31, 1998.
In April, the Partnership received $220,400 as a result of land
condemned at Curlew Crossing by the Florida Department of
Transportation ("FDOT"). The amount received from the FDOT is a
good faith deposit to the Partnership; however, the amount to be
recovered for damages as a result of the condemnation is yet to
be determined in an eminent domain proceeding. This land was
condemned for the purpose of widening Curlew Road. As a result
of the condemnation, two tenants defaulted on their leases due to
a dispute over whether they have a right to terminate their
leases as a result of the condemnation which caused parking
problems.
7
<PAGE>
The Parkview Plaza mortgage loan matures on August 31, 1996.
Prior to loan maturity, management plans to pursue alternative
financing with third-party lenders; however, if third-party
financing is not obtained, it is anticipated that the loan will
be refinanced by an affiliate of the General Partner.
The Hughes lease at Parkview Plaza will expire August 31, 1996.
As part of the marketing campaign to re-lease the property, the
name of the property has been changed to Manhattan Towers. Along
with this name change, the property will undergo some renovations
to the lobby area as well as exterior landscaping, to be funded
from the working capital reserve of the Partnership. Hughes may
be interested in negotiating a short-term lease for approximately
50,000 square feet of the 301,457 square feet available at the
property and negotiations with existing subtenants are ongoing.
Rental rates for new leases will be lower than the current rate
charged to Hughes, reflecting the current market conditions in
the area surrounding the property.
As of June 30, 1996, the Partnership was obligated to fund
approximately $1.2 million related to its commitment for
improvements for HFS at the property. Substantial completion of
the improvements is projected to occur in September 1996 with
final completion scheduled for October 1996. During the tenant
improvement phase, the basic rent due from HFS is at a reduced
rate and HFS is responsible for all operating expenses. Upon
substantial completion of the improvements, the rental rate will
increase to approximately $14.61 per square foot annually and HFS
will then pay its proportionate share of operating expenses which
exceed $7.00 per square foot annually.
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 six-month periods ended June 30, 1996 and
1995, income was generated from rental income from the income-
producing real estate properties and interest income earned on
the funds in temporary investments.
Expenses incurred during the same periods were associated with
the operation of the Partnership's properties, interest on the
mortgages payable and various other costs required for
administration of the Partnership.
Rental properties decreased from December 31, 1995 to June 30,
1996 due to depreciation, offset by tenant improvements at Ramada
for HFS. The decrease in cash and cash equivalents was due to
payment for tenant improvements for HFS. Accounts receivable
increased at June 30, 1996 as a result of an increase in
receivables at Curlew Crossing. The increase in deferred charges
and other assets was primarily due to an increase in deferred
rent. The decrease in accrued expenses and other liabilities was
primarily due to applying the contribution from HFS against
tenant improvement costs.
8
<PAGE>
Rental income for the six-month period ended June 30, 1996
increased compared to the six-month period ended June 30, 1995
due to the write-down of a deferred rent receivable on Parkview
Plaza in 1993. Rental income is recognized under the operating
method, whereby aggregate rentals are reported on a straight-line
basis as income over the life of the lease. The deferred rent
receivable remaining after the original maturity date of the
mortgage loan (March 31, 1995) with Sakura Bank was written off
in 1993; therefore, income recognized after March 31, 1995 is
actual rent received.
Direct expenses reflected an increase for the three-month period
ended June 30, 1996 as compared to the three-month period ended
June 30, 1995. During the three-month period ended June 30,
1995, rent tax was reclassified from an expense to a receivable
causing a decrease in direct expenses for the three-month period
ended June 30, 1995. The increase in direct expenses for the
six-month period ended June 30, 1996 as compared to the six-month
period ended June 30, 1995 was primarily a result of a decrease
in tenant reimbursable expenses at Parkview Plaza. The gain on
disposal of rental property was a result of the land condemnation
at Curlew Crossing. See "Liquidity and Capital Resources".
Interest income decreased for the three months ended June 30,
1996 as a result of lower cash balances for this three-month
period as compared to the three-month period ended June 30, 1995.
Higher cash balances for the six months ended June 30, 1996 as
compared to the six months ended June 30, 1995 caused the
increase in interest income for the six months ended June 30,
1996.
General and administrative expenses decreased for the three-month
period ended June 30, 1996 as compared to the three-month period
ended June 30, 1995 primarily due to a decrease in printing
charges. The increase in general and administrative expenses for
the six-month period ended June 30, 1996 as compared to the six-
month period ended June 30, 1995 was primarily a result of lease
commission amortization on the HFS lease. The management fee is
based on cash flow from operations of the Partnership adjusted
for cash reserves and fluctuated accordingly.
The decrease in interest expense for the three-month and six-
month periods ended June 30, 1996 as compared to the same periods
ended June 30, 1995 reflected decreases in the interest rates on
the mortgage loans. The interest rate on the Curlew Crossing
loan at June 30, 1996 was 8.25% compared to 11% at June 30, 1995.
The interest rate on the Parkview Plaza mortgage loan was
approximately 6.7% at June 30, 1995 and approximately 6.1% at
June 30, 1996.
9
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Sequentially
Exhibit Numbered
No. Description Page
4.1 Restated Certificate and Agreement of
Limited Partnership dated as of May 6, 1985,
attached as Exhibit A to the Partnership's
Prospectus dated May 6, 1985, filed pursuant
to Rule 424(b) Registration No. 2-96113, and
incorporated herein by this reference. --
4.2 Certificate of Amendment to Restated Certificate
and Agreement of Limited Partnership of USAA
Income Properties III Limited Partnership dated
February 14, 1990, attached as Exhibit
3(b) to the Partnership's Annual Report
on Form 10-K for the year ended December 31,
1989, Registration No. 2-96113, and incorporated
herein by this reference. --
27 Financial Data Schedule 12
(b) During the quarter ended June 30, 1996, there were
no Current Reports on Form 8-K filed.
10
<PAGE>
FORM 10-Q
SIGNATURES
USAA INCOME PROPERTIES III 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 INCOME PROPERTIES III
LIMITED PARTNERSHIP (Registrant)
BY: USAA PROPERTIES III, Inc.,
General Partner
August 12, 1996 BY: /s/Edward B. Kelley
Edward B. Kelley
Chairman, President and
Chief Executive Officer
August 12, 1996 BY: /s/Martha J. Barrow
Martha J. Barrow
Vice President -
Administration and
Finance/Treasurer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,624,792
<SECURITIES> 0
<RECEIVABLES> 493,197
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 38,931,082
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,561,138
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 27,167,451
<TOTAL-LIABILITY-AND-EQUITY> 54,561,138
<SALES> 0
<TOTAL-REVENUES> 4,931,258
<CGS> 0
<TOTAL-COSTS> 936,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,180,304
<INCOME-PRETAX> 2,989,568
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,989,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,989,568
<EPS-PRIMARY> 26.53
<EPS-DILUTED> 0
</TABLE>
