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: 0-16171
USAA Income Properties IV Limited Partnership
(Exact name of registrant as specified in its charter)
Delaware 74-2449334
(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 IV Limited Partnership
Condensed Consolidated Balance Sheets
<CAPTION>
June 30,
1997 December 31,
(Unaudited) 1996
<S> <C> <C>
Assets
Rental properties, net $ 45,365,342 45,409,746
Temporary investments, at cost
which approximates market value -
Money market fund 1,097,639 977,512
Cash 66,601 226,365
Cash and cash equivalents 1,164,240 1,203,877
Accounts receivable 49,045 32,715
Deferred charges and other assets, at amortized cost 373,884 260,706
$ 46,952,511 46,907,044
Liabilities and Partners' Equity
Mortgages payable $ 16,300,890 16,419,083
Note payable to affiliate 7,200,000 6,000,000
Accounts payable, including amounts due
to affiliates of $15,713 and $29,663 80,459 89,097
Accrued expenses and other liabilities 309,489 269,410
Total liabilities 23,890,838 22,777,590
Minority interest in joint venture 3,912,740 4,098,771
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 37,431 43,804
Cumulative distributions (130,278) (127,834)
(91,847) (83,030)
Limited Partners (60,495 interests):
Capital contributions, net of
offering costs 28,432,650 28,432,650
Cumulative net income 3,705,664 4,336,617
Cumulative distributions (12,897,534) (12,655,554)
19,240,780 20,113,713
Total Partners' equity 19,148,933 20,030,683
$ 46,952,511 46,907,044
See accompanying notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
June 30, June 30,
1997 1996
<S> <C> <C>
Income
Rental income $ 1,023,300 991,558
Interest income 17,822 28,659
Total income 1,041,122 1,020,217
Expenses
Direct expenses, $16,269 and $20,059
to affiliate (note 1) 241,872 160,474
Depreciation 565,836 453,384
General and administrative, $48,698 and
$26,331 to affiliates (note 1) 77,934 40,050
Management fee to affiliate (note 1) 811 10,875
Interest, $161,556 and $149,180 535,643 528,440
to affiliate (note 1)
Minority interest in joint venture earnings (52,364) 49,440
Total expenses 1,369,732 1,242,663
Net loss $ (328,610) (222,446)
Net loss per limited partnership interest $ (5.38) (3.64)
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
<S> <C> <C>
Income
Rental income $ 2,029,736 1,952,601
Interest income 30,127 57,371
Total income 2,059,863 2,009,972
Expenses
Direct expenses, $39,152 and $45,085
to affiliate (note 1) 460,211 269,568
Depreciation 1,086,096 928,309
General and administrative, $117,168 and
$63,312 to affiliates (note 1) 180,238 121,465
Management fee to affiliate (note 1) 14,368 22,540
Interest, $313,578 and $298,361 1,062,819 1,058,120
to affiliate (note 1)
Minority interest in joint venture earnings (106,543) 92,588
Total expenses 2,697,189 2,492,590
Net loss $ (637,326) (482,618)
Net loss per limited partnership interest $ (10.43) (7.90)
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
USAA INCOME PROPERTIES IV LIMITED PARTNERSHIP
Condensed Consolidated 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 loss $ (637,326) (482,618)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 1,086,096 928,309
Amortization 30,368 9,884
(Increase) decrease in accounts receivable (16,330) 38,347
(Increase) decrease in deferred charges and
other assets (143,546) 88,371
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 31,441 (233,339)
Minority interest in joint venture earnings (106,543) 92,588
Cash provided by operating activities 244,160 441,542
Cash flows used in investing activities-
Additions to rental properties (1,041,692) (623)
Cash flows from financing activities:
Repayment of mortgages payable (118,193) (107,674)
Distributions to co-venturer (79,488) (132,480)
Distributions to partners (244,424) (351,360)
Proceeds from issuance of note payable 1,200,000 --
Cash provided by (used in) financing activities 757,895 (591,514)
Net decrease in cash and cash equivalents (39,637) (150,595)
Cash and cash equivalents at beginning of period 1,203,877 2,278,982
Cash and cash equivalents at end of period $ 1,164,240 2,128,387
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
Notes to Condensed Consolidated Financial Statements
June 30, 1997
(Unaudited)
1. Transactions with Affiliates
A summary of transactions with affiliates follows for the
six-month period ended June 30, 1997:
Quorum
USAA Real Estate
Real Estate Services
Company Corporation
Reimbursement of
expenses (a) $ 69,786 18,185
Management fees 14,368 20,967
Lease commissions -- 47,382
Interest expense (b) 313,578 --
Total $ 397,732 86,534
(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 note
payable.
2. Other
Reference is made to the consolidated 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 $66,601 and
temporary investments of $1,097,639. 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 consisted primarily
of deferred rent resulting from recognition of income as required
by generally accepted accounting principles and lease
commissions. Accounts payable consisted of amounts due to
affiliates for reimbursable expenses and management fees, and
amounts due to third parties for expenses incurred for
operations. Accrued expenses and other liabilities consisted
primarily of security deposits, property tax accruals and prepaid
rent.
During the quarter ended June 30, 1997, the Partnership
distributed $120,990 to Limited Partners and $1,222 to the
General Partner for a total of $122,212. 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.
A significant amount of the working capital reserve was used
during 1996 and will be needed in 1997 for leasing costs at the
Partnership properties. During the first quarter of 1997, the
Partnership borrowed $1,200,000 from USAA Real Estate Company
(the Adviser) to fund working capital needs in 1997. The
$6,000,000 note payable was thereby increased to $7,200,000 with
a decrease in the interest rate from 10% to 9%. The maturity
date of the note payable was extended from September 1, 1997 to
March 1, 1999.
During the second quarter, the $168,500 tenant improvement
allowance provided to Linear Technology in conjunction with its
1995 lease renewal was paid from the working capital reserve of
the Partnership.
At June 30, 1997, the Kodak Building was 61% occupied by Eastman
Kodak. Eastman Kodak's lease is scheduled to expire February
1998. Discussions continue with Eastman Kodak regarding early
renewal of their lease; however, Eastman Kodak is not interested
in expanding into the space vacated by Invitrogen. The lease
with Invitrogen Corporation was scheduled to expire December 31,
1996; however, Invitrogen remained in the building until February
1997 paying holdover rent (200% of December 1996 rent) for
January and February. Discussions are currently underway with a
prospective tenant for the vacant space at the Kodak Building.
6
<PAGE>
Water infiltration has been discovered at the Kodak Building,
that has caused damage to a portion of the ground floor tiles,
exterior walls and slab joints. Remediation alternatives are
being sought with costs estimated to be approximately $120,000 to
be funded from the working capital reserve of the Partnership.
At June 30, 1997, 1881 Pine Street was 90% leased. During the
first quarter of 1997, a sixty-two month lease was signed at 1881
Pine Street for 8,350 rentable square feet. The lease commenced
May 1, 1997 and will terminate on June 30, 2002. The lease
provides for an annual rental rate beginning at $16.00 per square
foot. In addition, this tenant will pay its pro rata share of
operating expenses in excess of a 1997 base year. The
Partnership provided approximately $133,600 of tenant
improvements, which was paid out of the working capital reserve
of the Partnership.
During 1995, the lease with Hewlett-Packard Company, the single
tenant at the Apollo Building in Chelmsford, Massachusetts was
renewed for an additional 41 months. The new monthly rental rate
of approximately $.57 per square foot net for the 291,454 square
foot building began January 1, 1997. This rate is lower than the
rate paid in 1996 of approximately $.76 per square foot net and
reflects the market conditions in the area surrounding the
property at the time of the lease renewal. An allowance for
tenant improvements was provided for a total of $565,000 to be
paid from the working capital reserve. During 1997, Hewlett-
Packard used approximately $115,000 of the allowance.
Approximately $82,000 of the allowance remains. Hewlett-Packard
has announced plans to relocate its workstation group out of
Massachusetts and to sublease the top floor of the Apollo
Building.
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
7
<PAGE>
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, 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 decreased as of June 30, 1997 as compared to
December 31, 1996 due to depreciation offset by tenant
improvements at 1881 Pine Street, Linear and at the Apollo
Building for Hewlett-Packard. Accounts receivable was higher at
June 30, 1997 due to a receivable from a tenant at the Apollo
Building. Deferred charges and other assets increased as a
result of lease commissions paid at 1881 Pine Street. The note
payable to affiliate increased as of June 30, 1997 due to
borrowing from the Adviser to fund working capital needs. See
"Liquidity and Capital Resources". Accrued expenses and other
liabilities increased primarily due to an increase in accrued
property taxes at 1881 Pine Street and was offset by a decrease
in prepaid revenue.
8
<PAGE>
Rental income 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. Rental income at 1881 Pine Street
increased by approximately $310,000 and $529,000 for the three-
month and six-month periods ended June 30, 1997, respectively,
due to increased occupancy from 0% at June 30, 1996 to 90% at
June 30, 1997. Offsetting this increase in rental income was a
decrease in rental income at the Apollo Building. The 1995 lease
renewal became effective January 1, 1997, decreasing monthly
rental income from approximately $.76 per square foot to
approximately $.57 per square foot resulting in a decrease for
the three-month and six-month periods ended June 30, 1997 of
approximately $194,000 and $383,000, respectively. A decrease in
rental income at the Kodak Building also contributed by
approximately $86,000 and $72,000 for the three-month and six-
month periods ended June 30, 1997, respectively, due to a
decrease in occupancy from 100% at December 31, 1996 to 61% at
June 30, 1997.
Interest income decreased due to lower cash balances 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.
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 due to operating expenses
at 1881 Pine Street. Expenses were minimal for the three-month
and six-month periods ended June 30, 1996 due to the building
being 100% vacant. For the three-month and six-month periods
ended June 30, 1997, 1881 Pine Street incurred expenses for
utilities, heating and air conditioning repairs, cleaning
and other building services. Also contributing to the increase
was an increase in the property tax accrual. 1881 Pine Street
was under a redevelopment real estate tax incentive program,
which expired December 31, 1996. The 1996 tax payment was
approximately $23,000 compared to an estimate for 1997 taxes of
approximately $212,000.
Depreciation 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 tenant improvements at 1881
Pine Street, Linear and Apollo offset by a decrease at Kodak
caused by tenant improvements for Invitrogen being fully
depreciated in April 1996.
General and administrative expenses 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
lease commission expense at 1881 Pine Street for the new leases
and at Apollo for the lease renewal. The management fee is based
on cash flow from operations of the Partnership adjusted for cash
reserves and fluctuated accordingly. The decrease in the
management fee for the three-month and six-month periods ended
June 30, 1997 was due to an increase in expenses at 1881 Pine
Street.
9
<PAGE>
Minority interest in joint venture earnings 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 a net loss for the joint venture property for the three-month
and six-month periods ended June 30, 1997. Rental income at the
Apollo Building decreased based on the lease renewal effective
January 1, 1997.
10
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Sequentially
Exhibit Numbered
No. Description Page
4 Restated Certificate and Agreement of
Limited Partnership dated as of June 8,
1987, attached as Exhibit A to the
Partnership's Prospectus dated June 8,
1987 filed pursuant to Rule 424(b),
Registration No. 33-11892 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 IV 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 IV
LIMITED PARTNERSHIP (Registrant)
BY: USAA PROPERTIES IV, 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> 1,164,240
<SECURITIES> 0
<RECEIVABLES> 49,045
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 45,365,342
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,952,511
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,148,933
<TOTAL-LIABILITY-AND-EQUITY> 46,952,511
<SALES> 0
<TOTAL-REVENUES> 2,029,736
<CGS> 0
<TOTAL-COSTS> 1,546,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,062,819
<INCOME-PRETAX> (637,326)
<INCOME-TAX> 0
<INCOME-CONTINUING> (637,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (637,326)
<EPS-PRIMARY> (10.43)
<EPS-DILUTED> 0
</TABLE>
