<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: 0-17094
USAA Real Estate Income Investments II Limited Partnership
(Exact name of registrant as specified in its charter)
Texas 74-2473951
(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 II LIMITED PARTNERSHIP
Condensed Balance Sheets
<CAPTION>
September 30,
1997 June 30,
(Unaudited) 1997
<S> <C> <C>
Assets
Rental properties, net $ 9,099,107 9,177,883
Investment in joint venture 2,135,201 2,139,009
Temporary investments, at cost
which approximates market value -
Money market fund 906,117 848,892
Cash 36,152 33,288
Cash and cash equivalents 942,269 882,180
Deferred charges and other assets 358,783 333,315
$ 12,535,360 12,532,387
Liabilities and Partners' Equity
Accounts payable, including amounts due
to affiliates of $7,858 and $6,722 $ 14,295 16,822
Accrued expenses and other liabilities 141,201 129,354
Total liabilities 155,496 146,176
Partners' equity:
General Partner:
Capital contribution 1,000 1,000
Cumulative net income 805,139 779,387
Cumulative distributions (842,879) (816,492)
(36,740) (36,105)
Limited Partners (27,141 interests):
Capital contributions, net of offering
costs 12,756,270 12,756,270
Cumulative net income 7,246,242 7,014,471
Cumulative distributions (7,585,908) (7,348,425)
12,416,604 12,422,316
Total Partners' equity 12,379,864 12,386,211
$ 12,535,360 12,532,387
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
<TABLE>
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
Condensed Statements of Income
Three months ended September 30, 1997 and 1996
(Unaudited)
<CAPTION>
1997 1996
<S> <C> <C>
Income
Rental income $ 351,330 352,621
Equity in earnings of joint venture 39,842 37,152
Interest income 11,660 9,488
Total income 402,832 399,261
Expenses
Direct expenses, $3,717 and $3,878
to affiliate (note 1) 20,928 22,370
Depreciation 78,776 78,362
General and administrative, $26,788
and $25,713 to affiliates (note 1) 45,605 45,930
Total expenses 145,309 146,662
Net income $ 257,523 252,599
Net income per limited partnership interest $ 8.54 8.38
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
<TABLE>
USAA REAL ESTATE INCOME INVESTMENTS II LIMITED PARTNERSHIP
Condensed Statements of Cash Flows
Three months ended September 30, 1997 and 1996
(Unaudited)
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 257,523 252,599
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 78,776 78,362
Amortization 632 632
Earnings from joint venture (39,842) (37,152)
Distributions from joint venture 43,650 43,650
Increase in accounts receivable -- (3,171)
Increase in deferred charges and other assets (26,100) (26,941)
Increase (decrease) in accounts payable and
other liabilities 9,320 (55,137)
Other adjustments -- 500
Cash provided by operating activities 323,959 253,342
Cash flows used in financing activities -
Payment of distributions (263,870) (263,871)
Net increase (decrease) in cash and cash equivalents 60,089 (10,529)
Cash and cash equivalents at beginning of period 882,180 835,558
Cash and cash equivalents at end of period $ 942,269 825,029
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
USAA Real Estate Income Investments II Limited Partnership
Notes to Condensed Financial Statements
September 30, 1997
(Unaudited)
1. Transactions with Affiliates
A summary of transactions with affiliates follows for the
three months ended September 30, 1997:
Quorum
USAA Real Estate
Real Estate Services
Company Corporation
Reimbursement
of expenses (a) $ 16,972 468
Management fees - 3,249
Lease commissions - 9,816
Total $ 16,972 13,533
(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 June
30, 1997 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 periods presented. Further, the
operating results presented for these interim periods are not
necessarily indicative of the results which may occur for the
remaining nine months of this fiscal year or any other future
period.
The financial information included in this interim report as
of September 30, 1997 and for the three-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 $36,152 and
temporary investments of $906,117. These funds were held in the
working capital reserve for the payment of obligations of the
Partnership. Deferred charges and other assets included an
acquisition fee paid in 1988 to USAA Investors II, Inc., the
General Partner, in connection with the acquisition of the
interest in the joint venture which owns Sequoia Plaza - Building
I. Deferred charges also included deferred rent resulting from
recognition of income as required by generally accepted
accounting principles. Accounts payable included amounts due to
affiliates for reimbursable expenses and to third parties for
expenses incurred for operations. Accrued expenses and other
liabilities consisted primarily of a security deposit, prepaid
rent and property tax accruals.
During the quarter ended September 30, 1997, the Partnership
distributed $237,483 to Limited Partners and $26,387 to the
General Partner for a total of $263,870. 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.
The Continental Plastic Buildings in Elk Grove Village, Illinois
remain 100% occupied with a lease expiration of February 2011.
The tenant is planning to remodel parts of the property to
include upgrades to the lobby, office space and landscaping. The
cost of these improvements will be paid by the tenant and are
estimated at approximately $250,000.
CST Office Products, Inc. currently occupies 100% of the
Lakeland, Florida property with a lease expiration of July 1999.
Preliminary discussions with CST have commenced regarding renewal
of the lease.
As previously reported, Logicon, the major tenant at Sequoia
Plaza I in Arlington, Virginia completed a merger with Northrop
Grumman Corporation. Subsequently, Northrop Grumman and Lockheed
Martin have announced a merger agreement to combine the
companies. Current indications are that the space occupied by
Logicon will not be impacted. This lease with Logicon expires
April 2008.
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.
6
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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
Agreements, 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 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
Limited Partners of each of the RELPs and by the shareholders of
the Trust. Accordingly, there can be no assurance that the merger
will ultimately be consummated. There has been a meeting of the
Limited Partners tentatively scheduled for early January 1998 to
consider a vote on the proposed transaction.
The Partnership has a 7.275% interest in the Combined Capital
Resources Joint Venture (the "joint venture"), the owner of
Sequoia Plaza I. The joint venture interest will not be included
in the Merger but will be purchased by USAA Real Estate Company
("Realco") or an affiliate of Realco for $2.25 million if the
Merger is approved by the Limited Partners of the Partnership.
This purchase price was determined using the January 1, 1997
external appraisal of Sequoia Plaza I at a total value of $29.7
million and adjusted by an appreciation factor.
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.
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.
7
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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 plantiffs' 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 and ultimately through the sale of
such properties, equity in earnings of the joint venture,
interest on temporary investments, and the possible participation
in the profits from the sale of the underlying assets of the
joint venture.
Results of Operations
For the three months ended September 30, 1997 and 1996, income
was generated from rental income from the income-producing
properties, earnings from the joint venture investment and
interest income earned on the funds invested in temporary
investments.
Expenses incurred during the same periods were associated with
operation of the Partnership's properties and various other costs
required for administration of the Partnership.
Rental properties at September 30, 1997 decreased from June 30,
1997 due to depreciation. The increase in deferred charges and
other assets at September 30, 1997 was due to an increase in
deferred rent at Continental Plastic. Accrued expenses and other
liabilities increased at September 30, 1997 as a result of an
increase in the accrual for property taxes for the CST Office
Products Building.
Equity in earnings increased for the three-month period ended
September 30, 1997 as compared to the three-month period ended
September 30, 1996 as a result of an increase in net income of
Sequoia I, the joint venture property.
Interest income increased as a result of higher cash balances for
the period ended September 30, 1997 as compared to the same
period ended September 30, 1996.
Direct expenses decreased for the three-month period ended
September 30, 1997 as compared to the same period ended September
30, 1996 due to slight decreases in several expenses at the CST
Office Products Building, including parking lot sweeping,
landscaping, property insurance and property tax services.
8
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PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Sequentially
Exhibit Numbered
No. Description Page
4 Amended and Restated Agreement of
Limited Partnership dated as of February
11, 1988, attached as Exhibit A to
the Partnership's Prospectus dated
February 11, 1988, filed pursuant to
Rule 424(b), Registration No. 33-16479
and incorporated herein by this reference. --
27 Financial Data Schedule 11
(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.
9
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FORM 10-Q
SIGNATURES
USAA REAL ESTATE INCOME INVESTMENTS II 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 II
LIMITED PARTNERSHIP (Registrant)
BY: USAA Investors II, 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
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 942,269
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 9,099,107
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,535,360
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 12,379,864
<TOTAL-LIABILITY-AND-EQUITY> 12,535,360
<SALES> 0
<TOTAL-REVENUES> 351,330
<CGS> 0
<TOTAL-COSTS> 99,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 257,523
<INCOME-TAX> 0
<INCOME-CONTINUING> 257,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,523
<EPS-PRIMARY> 8.54
<EPS-DILUTED> 0
</TABLE>
