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, 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: 0-13772
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,
1997 December 31,
(Unaudited) 1996
<S> <C> <C>
Assets
Rental properties, net $ 40,627,652 39,262,249
Temporary investments, at cost
which approximates market value-
Money market fund 1,390,304 9,301,147
Cash 5,132,002 118,000
Cash and cash equivalents 6,522,306 9,419,147
Accounts receivable, net of allowance for doubtful
accounts of $90,000 627,677 555,959
Deferred rent 2,981,111 2,882,064
Deferred charges and other assets, at
amortized cost 1,871,847 1,646,751
$ 52,630,593 53,766,170
Liabilities and Partners' Equity
Mortgages payable to affiliates $ 26,000,000 26,000,000
Accounts payable, including amounts due
to affiliates of $97,602 and $101,194 420,218 414,274
Accrued expenses and other liabilities 980,786 344,651
Total liabilities 27,401,004 26,758,925
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 1,712 14,982
Cumulative distributions (273,707) (269,199)
(270,995) (253,217)
Limited Partners (111,549 units):
Capital contributions, net of offering
costs 52,428,030 52,428,030
Cumulative net income 169,499 1,483,181
Cumulative distributions (27,096,945) (26,650,749)
25,500,584 27,260,462
Total Partners' equity 25,229,589 27,007,245
$ 52,630,593 53,766,170
See accompanying notes to condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
Condensed Statements of Operations
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
June 30, June 30,
1997 1996
<S> <C> <C>
Income
Rental income $ 1,311,410 2,561,957
Gain on disposal of rental property -- 157,852
Interest income, $37,208 from affiliate for 1997 99,884 155,290
Total income 1,411,294 2,875,099
Expenses
Direct expenses, $98,969 and $24,856
to affiliate (note 1) 878,649 222,860
Depreciation 434,031 369,781
General and administrative, $86,573 and
$41,059 to affiliates (note 1) 166,253 89,390
Management fee to affiliate (note 1) 56,083 (12,685)
Interest, $584,145 and $469,845
to affiliates (note 1) 584,145 555,892
Total expenses 2,119,161 1,225,238
Net income (loss) $ (707,867) 1,649,861
Net income (loss) per limited partnership unit $ (6.28) 14.64
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
<S> <C> <C>
Income
Rental income $ 2,489,832 5,180,821
Gain on disposal of rental property -- 157,852
Interest income, $37,208 from affiliate for 1997 205,948 322,880
Total income 2,695,780 5,661,553
Expenses
Direct expenses, $192,899 and $49,359
to affiliate (note 1) 1,608,039 447,299
Depreciation 831,597 738,932
General and administrative, $180,764 and
$100,584 to affiliates (note 1) 333,719 239,313
Management fee to affiliate (note 1) 87,506 66,137
Interest, $1,161,871 and $1,008,211
to affiliates (note 1) 1,161,871 1,180,304
Total expenses 4,022,732 2,671,985
Net income (loss) $ (1,326,952) 2,989,568
Net income (loss) per limited partnership unit $ (11.78) 26.53
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, 1997 and 1996
(Unaudited)
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,326,952) 2,989,568
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 831,597 738,932
Amortization 100,010 51,300
Gain on disposal of rental property -- (157,852)
Loss on early retirement of assets -- 10,600
Increase in accounts receivable (71,718) (73,326)
Increase in deferred charges and other assets (424,153) (257,717)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 642,079 (2,043,219)
Cash provided by (used in) operating activities (249,137) 1,258,286
Cash flows from investing activities:
Additions to rental properties (2,197,000) (617,415)
Proceeds from disposal of real estate property -- 220,400
Cash used in investing activities (2,197,000) (397,015)
Cash flows from financing activities:
Repayment of mortgages payable -- (1,363,637)
Distributions to partners (450,704) (647,885)
Cash used in financing activities (450,704) (2,011,522)
Net decrease in cash and cash equivalents (2,896,841) (1,150,251)
Cash and cash equivalents at beginning of period 9,419,147 12,775,043
Cash and cash equivalents at end of period $ 6,522,306 11,624,792
See accompanying notes to condensed financial statements.
</TABLE>
4
<PAGE>
Notes to Condensed Financial Statements
June 30, 1997
(Unaudited)
1. Transactions with Affiliates
<TABLE>
A summary of transactions with affiliates follows for the
six-month period ended June 30, 1997:
<CAPTION>
Quorum
USAA USAA Las Colinas Real Estate
Capital Real Estate Management Services
Corporation Company Company Corporation
<S> <C> <C> <C> <C>
Reimbursement
of expenses (a) $ -- 142,329 -- 111,308
Interest income (37,208) -- -- --
Management fees -- 87,506 -- 81,591
Lease commissions -- -- -- 38,435
Interest expense (b) -- 450,020 711,851 --
Total $ (37,208) 679,855 711,851 231,334
</TABLE>
(a)Reimbursement of expenses represents amounts paid or
accrued as reimbursement of expenses incurred on behalf of
the Partnership at actual cost and does not include any
mark-up or items normally considered as overhead.
(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, 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 which
may occur for the remaining six months of 1997 or any other
future period.
The financial information included in this interim report as
of June 30, 1997 and for the three months and six months ended
June 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 June 30, 1997, the Partnership had cash of $5,132,002 and
temporary investments of $1,390,304. 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 amounts payable to third parties for
expenses incurred for operations. Accrued expenses and other
liabilities consisted primarily of accrued property taxes,
prepaid rent and security deposits.
During the quarter ended June 30, 1997, the Partnership
distributed $223,098 to Limited Partners and $2,254 to the
General Partner for a total of $225,352. Management evaluates
reserves and the availability of funds for distribution to
Partners on a continuing basis based on anticipated leasing
activity and cash flows available from the Partnership
investments. Based on the amount of funds needed for tenant
improvements, lease commissions and renovation costs at Manhattan
Towers and Skygate Commons, future distributions may be
suspended. In addition, the Partnership may need to borrow funds
to cover any shortage in the working capital reserve.
During the second quarter, the Partnership was awarded favorable
summary judgement against the defaulted tenant for one of the two
out parcels vacated by the tenant at Curlew Crossing in 1996.
The other will go to trial in the third quarter.
As of June 30, 1997, Manhattan Towers was 98% leased. During the
second quarter, a fifty-six month lease was signed at Manhattan
Towers with TRW, Inc. for 155,118 square feet at a net monthly
base rent of $141,200 to commence in August 1997. In addition,
TRW will pay its pro rata share of operating expenses of the
property. TRW will occupy one of the two towers at the property.
The Partnership provided a tenant improvement allowance for a
total of approximately $2.7 million, or approximately $17 per
square foot, to be paid out of the working capital reserve of the
Partnership.
Also at Manhattan Towers, the parking garage water damage
remediation work is in progress and is scheduled to be complete
during the third quarter. The cost of the repairs is estimated
to be approximately $1.1 million and will be funded from the
working capital reserve of the Partnership. Renovations at the
property are also in progress, which include lobby area,
6
<PAGE>
corridors and parking lot as well as exterior landscaping and
signage. The cost for renovations is estimated to be
approximately $1.4 million and will be funded from the working
capital reserve of the Partnership.
As part of a marketing campaign to lease the two vacant buildings
of the three building complex at the Phoenix, Arizona property,
the name of the property has been changed from Ramada World
Headquarters Building to Skygate Commons. Renovation to the two
vacant buildings began during the first quarter of 1997 which
includes improvements to comply with the Americans With
Disabilities Act, and heating, air conditioning and exterior
renovations. The total cost of the renovations will be
approximately $900,000 to be paid from the working capital
reserve of the Partnership. In addition, the construction of
additional parking on the adjacent land is planned in an attempt
to increase the property's competitiveness in the market. The
cost for the parking lot is estimated at $95,000 to be funded
from the working capital reserve of the Partnership.
During April, a five-year lease was signed at Skygate Commons
with FHP International Corporation for one of the two vacant
buildings or 22,120 square feet at an annual rental rate
beginning at $14.75 per square foot. The lease commenced July
1997 and terminates June 2002. The Partnership provided a tenant
improvement allowance of $331,800 to be paid from the working
capital reserve of the Partnership. As of June 30, 1997, Skygate
Commons was 89% leased.
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 31.8% of the outstanding shares of the Trust.
On July 7, 1997, the Trust signed definitive merger agreements
with the RELPs pursuant to which the RELPs will be merged into
the Trust (the "Merger"). The Trust will issue an aggregate of
22,064,147 shares of beneficial interest at $2.625 per share (for
a total value of $57,918,385) in exchange for the limited
partnership interests in the RELPs. The number of Shares to be
issued to each RELP will be equal to the net asset value for each
RELP (as agreed by the Trust and each RELP) divided by $2.625.
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.
7
<PAGE>
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 definitive
merger agreements will be reached or that the mergers will
ultimately be consummated. The Merger is a taxable transaction
to the partners in the RELPs and will be subject to the
completion of a joint proxy statement/prospectus filed on Form S-
4 with the Securities and Exchange Commission. No date has been
scheduled for the shareholder meeting for the Trust or limited
partner meetings for each of the RELPs to vote on the proposed
transaction. Prudential Securities Inc., on behalf of the Trust,
and Houlihan Lokey Howard & Zukin on behalf of the RELPs, have
rendered opinions to their respective parties that the
transaction is fair from a financial point of view.
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, 1997 and
1996, 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 increased as of June 30, 1997 as compared to
December 31, 1996 due to renovation costs and tenant improvements
at Manhattan Towers and Skygate Commons offset by depreciation.
The decrease in cash and cash equivalents at June 30, 1997 was
due to payment for renovations and tenant improvements. Accounts
receivable increased at June 30, 1997 primarily due to an
increase in receivables from tenants at Skygate Commons. The
increase in deferred charges and other assets at June 30, 1997
was due to lease commissions paid at Manhattan Towers and Skygate
Commons. The decrease in accounts payable reflected timing in
the payment of renovation costs at Manhattan Towers. The
increase in accrued expenses and other liabilities was a result
of an increase in prepaid rent, property tax accruals and
security deposits.
Rental income was lower for the three-month and six-month periods
ended June 30, 1997 as compared to the three-month and six-month
periods ended June 30, 1996. Rental rates for the new leases at
Manhattan Towers, since the expiration of the Hughes lease in
August 1996, are lower than the rate charged to Hughes,
8
<PAGE>
reflecting market conditions in the area surrounding the
property.
The gain on disposal of rental property in 1996 was a result of
the land condemned by the Florida Department of Transportation in
connection with the widening of Curlew Road.
Interest income decreased for the three-month and six-month
periods ended June 30, 1997 as compared to the three-month and
six-month periods ended June 30, 1996 due to lower cash balances.
During the second quarter of 1997, the Partnership invested in
short-term commercial paper with USAA Capital Corporation, an
affiliate of the General Partner.
Direct expenses were higher for the three-month and six-month
periods ended June 30, 1997 as compared to the three-month and
six-month periods ended June 30, 1996 as a result of assuming
control of the daily operations at both Manhattan Towers and
Skygate Commons. Prior to the Hughes lease expiration on August
31, 1996, at Manhattan Towers, Hughes was responsible for all
operating expenses under terms of their triple net lease.
Operating expenses at Manhattan Towers for the periods ended June
30, 1997 accounted for approximately 63% of the increase in
operating expenses. Prior to substantial completion of the
tenant improvements for Hospitality Franchise Systems, Inc.
("HFS") at Skygate Commons on October 31, 1996, HFS was
responsible for all operating expenses. Operating expenses at
Skygate Commons for the periods ended June 30, 1997 accounted for
the remaining increase in direct expenses. Operating expenses
included utilities, cleaning, landscaping, repairs and
maintenance, property taxes, property insurance, management fees
and other building service expenses.
Depreciation expense increased for the three-month and six-month
periods ended June 30, 1997 as compared to the three-month and
six-month periods ended June 30, 1996 due to depreciation on the
tenant improvements at Manhattan Towers and at Skygate Commons
for HFS.
General and administrative expenses were higher for the three-
month and six-month periods ended June 30, 1997 as compared to
the three-month and six-month periods ended June 30, 1996. Legal
fees at Curlew Crossing related to the 1996 default by a tenant
of two out parcels accounted for approximately 40% of the
increase for the three-month period ended June 30, 1997 and
approximately 24% of the increase for the six-month period ended
June 30, 1997. Lease commission expense at Manhattan Towers
accounted for the remaining increase in general and
administrative expenses.
The management fee is based on cash flow from operations of the
Partnership adjusted for cash reserves and fluctuated
accordingly.
9
<PAGE>
Interest expense increased for the three-month period ended June
30, 1997 as compared to the three-month period ended June 30,
1996. The payment terms of the Manhattan Towers loan for the
three months and six months ended June 30, 1997 included monthly
interest only payments at an interest rate of 9.57% on a
principal balance of $15,000,000. Terms of the mortgage loan for
the three months and six months ended June 30, 1996 included
monthly principal payments in the set amount of $227,272.72 and
interest payments set monthly at the London Interbank Offered
Rate (LIBOR) plus .625% which was approximately 6% for the June
1996 interest payment. The interest rate on the Curlew Crossing
mortgage loan was decreased to 8.25% in April 1996 compared to
10.25% paid in March 1996. Interest expense on the Curlew
Crossing mortgage loan for the six-month period ended June 30,
1997 decreased by approximately $58,000 offset by the increase in
interest expense for the Manhattan Towers loan of approximately
$40,000.
10
<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 13
(b) A Current Report on Form 8-K was filed June 13, 1997
regarding the agreement signed between the Partnership and
American Industrial Properties REIT (the "Trust")
contemplating a merger of the Partnership into the Trust.
11
<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, 1997 BY: /s/Edward B. Kelley
Edward B. Kelley
Chairman, President and
Chief Executive Officer
August 12, 1997 BY: /s/Martha J. Barrow
Martha J. Barrow
Vice President -
Administration and
Finance/Treasurer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,522,306
<SECURITIES> 0
<RECEIVABLES> 627,677
<ALLOWANCES> 90,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 40,627,652
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,630,593
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 25,229,589
<TOTAL-LIABILITY-AND-EQUITY> 52,630,593
<SALES> 0
<TOTAL-REVENUES> 2,489,832
<CGS> 0
<TOTAL-COSTS> 2,439,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,161,871
<INCOME-PRETAX> (1,326,952)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,326,952)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,326,952)
<EPS-PRIMARY> (11.78)
<EPS-DILUTED> 0
</TABLE>
