UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number : 0-14459
REALTY SOUTHWEST FUND III, LTD.
(Exact name of registrant as specified in its charter)
Texas 76-0113542
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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. Yes X . No .
REALTY SOUTHWEST FUND III, LTD.
BALANCE SHEETS
September 30, 1995 and March 31, 1995 (Unaudited)
(In Thousands)
ASSETS
September 30 March 31
Cash and cash equivalents $ 7 $ 29
Accounts receivable - affiliates 29 26
$ 36 $ 55
LIABILITIES AND PARTNERS' DEFICIT
Equity in losses of joint ventures
subject to liquidation $ 7,192 $ 11,202
Accounts payable - affiliates 44 94
Accounts payable and accrued expenses 100 156
Total partners' deficit (7,300) (11,397)
$ 36 $ 55
STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1995 and 1994 (Unaudited)
(In Thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
1995 1994 1995 1994
REVENUES:
Interest and other income $ - $ 2 $ 1 $ 7
Investor servicing fees 2 1 3 3
2 3 4 10
EXPENSES:
General and administrative 33 61 33 161
Operating loss (31) (58) (29) (151)
Partnership's share of
ventures' losses (235) (370) (533) (770)
Gain on sale of joint venture
interest - - 4,592 -
NET INCOME (LOSS) $ (266) $ (428) $ 4,030 $ (921)
Net income (loss) per Limited
Partnership Unit $ (6.36) $(10.17) $91.95 $(21.88)
The above per Limited Partnership Unit information is based upon the 40,000
Limited Partnership Units outstanding during each period.
See accompanying notes.
REALTY SOUTHWEST FUND III, LTD.
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the six months ended September 30, 1995 and 1994 (Unaudited)
(In Thousands)
General Limited
Partner Partners
Balance at March 31, 1994 $(856) $ (8,429)
Net loss (46) (875)
BALANCE AT SEPTEMBER 30, 1994 $(902) $ (9,304)
Balance at March 31, 1995 $(962) $(10,435)
Contributions 67 -
Net income 352 3,678
BALANCE AT SEPTEMBER 30, 1995 $(543) $ (6,757)
STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1995 and 1994 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1995 1994
Cash flows from operating activities:
Net income (loss) $ 4,030 $ (921)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Gain on sale of joint venture interest (4,592) -
Partnership's share of ventures' losses 533 770
Changes in assets and liabilities:
Accounts receivable - affiliates (3) (3)
Accounts payable - affiliates (49) -
Accounts payable and accrued expenses (58) (7)
Total adjustments (4,169) 760
Net cash used for operating
activities (139) (161)
Cash flows from investing activities:
Proceeds from sale of joint
venture interest 50 -
Net cash provided by
investing activities 50 -
Cash flows from financing activities:
Proceeds from general partner contributions 67 -
Net cash provided by
financing activities 67 -
Net decrease in cash and cash equivalents (22) (161)
Cash and cash equivalents,
beginning of period 29 299
Cash and cash equivalents, end of period $ 7 $ 138
See accompanying notes.
1.General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended March 31, 1995.
The Partnership was structured to invest exclusively in multi-family
residential properties located primarily in the states of Texas, California,
Florida and Georgia and to employ substantial leverage in making such
acquisitions. The Partnership originally invested the net proceeds of the
offering, through joint venture partnerships, in twelve rental apartment
properties. As discussed further in the Annual Report, the Partnership's
operating properties have encountered major adverse business developments
which, through September 30, 1995, had resulted in the loss of six of the
original investments to foreclosure and the sale or assignment of interests
in four other joint ventures for amounts which yielded no significant
proceeds to the Partnership. In addition, while the two remaining ventures
have obtained more favorable financing terms, the ability of the remaining
joint ventures to continue their operations may be dependent upon the further
modification of the loan agreements, improved property performance, and the
continued financial support of the joint venture partners. As a result of
these circumstances, and in light of the Partnership's limited cash reserves,
in October 1994 the Managing General Partner announced plans to complete a
liquidation of the Partnership. Such liquidation is expected to be completed
by the end of calendar 1995. In April 1995, the Partnership sold its
interest in the Fieldstone at Brandermill joint venture for a cash payment of
$50,000. As part of the Partnership's liquidation, its two remaining
investment interests (Grayson Square and Summerview) will be sold or
assigned, most likely only for nominal amounts. Since the costs of
liquidation are expected to exceed any sales proceeds received by the
Partnership and the current balance of the Partnership's cash reserves, no
distribution will be made to the Limited Partners. As a result of these
circumstances, there is substantial doubt about the ability of the
Partnership to continue as a going concern. Other than the accrual of
estimated liquidation expenses, the accompanying financial statements do not
include any adjustments to reflect the future effects of the planned
liquidation of the Partnership on the classification of liabilities that
might result from the inability of the Partnership to continue as a going
concern.
2.Investments in Joint Venture Partnerships
As of September 30, 1995, the Partnership has investments in two joint
ventures which own operating investment properties (three at September 30,
1994). As discussed further below, in April 1995 the Partnership sold its
interest in the Fieldstone at Brandermill joint venture to the co-venture
partner for a cash payment of $50,000. While the remaining two investments,
(Grayson Square and Summerview Apartment complexes), are currently operating
in compliance with mortgage debt agreements, as discussed in Note 1,
management does not believe that there is any current value to the
Partnership's position in these properties above the amounts of the
outstanding debt obligations.
The Partnership's investments in the joint ventures are accounted for on
the equity method in the Partnership's financial statements because the
Partnership does not have a voting control interest in the ventures. Under
the equity method, the investments are carried at cost adjusted for the
Partnership's share of the ventures' earnings, losses and distributions.
These joint ventures report their operations on a calendar year basis. The
Partnership's policy is to recognize its share of ventures' operations three
months in arrears.
Summarized operations of the unconsolidated joint ventures, for the periods
indicated, are as follows:
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the three and six months ended June 30, 1995 and 1994
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
REVENUES:
Rental revenue $ 694 $1,280 $1,954 $2,540
Interest and other income 33 47 68 91
727 1,327 2,022 2,631
EXPENSES:
Interest expense 499 535 1,052 1,055
Property operating expenses 210 662 795 1,349
Depreciation and amortization 180 356 500 711
Real estate taxes 78 147 220 293
967 1,700 2,567 3,408
Net loss $ (240) $ (373) $ (545) $ (777)
Net loss:
Partnership's share of
combined operations $ (235)$ (365) $ (533) $ (759)
Co-venturers' share of
combined operations (5) (8) (12) (18)
$ (240)$ (373) $ (545) $ (777)
Reconciliation of Partnership's Share of Operations
Partnership's share of combined
operations, as shown above $ (235)$ (365) $ (533) $ (759)
Amortization of excess basis - (5) - (11)
Partnership's share of
ventures' losses $ (235)$ (370) $ (533) $ (770)
3. Partnership Expenses and Related Party Transactions
Estimated expenses related to the planned liquidation of the Partnership were
accrued at March 31, 1995. Therefore, only adjustments to such estimates are
recorded on the statements of operations subsequent to March 31, 1995. An
additional accrual was recorded during the quarter ended September 30, 1995 for
third party professional fees not known at March 31, 1995. During the quarter
ended September 30, 1995, the Managing General Partner contributed $67,000 to
the Partnership to cover operating expenses.
Included in general and administrative expenses for six months ended
September 30, 1994 is $49,000, representing reimbursements to an affiliate of
the Managing General Partner for providing certain financial, accounting and
investor communication services to the Partnership.
Also included in general and administrative expenses for the six months ended
September 30, 1994 is $1,000 representing fees earned by Mitchell Hutchins
Institutional Investors, Inc. for managing the Partnership's cash assets.
Accounts receivable - affiliates at both September 30, 1995 and March 31,
1995 includes amounts due from a certain joint venture for investor servicing
fees, in accordance with the terms of the joint venture agreement.
4.Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse effect
on the Partnership's financial statements, taken as a whole.
REALTY SOUTHWEST FUND III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As discussed in the Annual Report, the Partnership was structured to invest
exclusively in newly-constructed multi-family residential properties located
primarily in the states of Texas, California, Florida and Georgia and to employ
substantial leverage in making such acquisitions. The performance of the
Partnership's investment properties has been adversely impacted by an
unprecedented and unforeseen oversupply of competing apartments throughout the
country in general and in the local markets in which the properties are
located. As of September 30, 1995, six of the Partnership's twelve original
investment properties had been lost to foreclosure and four investments had
been sold or assigned for amounts which yielded no significant proceeds to the
Partnership.
As previously reported, in October 1994, the Partnership announced its
plans to dispose of its remaining investments and complete a liquidation. The
three remaining investments held as of the beginning of fiscal 1995
(Fieldstone, Grayson Square and Summerview) were operating in compliance with
their debt agreements during the year due to the low variable interest rate on
the Fieldstone debt and, in the case of Grayson Square and Summerview, the debt
restructuring agreements reached during fiscal 1990. However, none of the
properties would support conventional refinancings at their present debt
levels, which are well above the current estimates of property market values in
all cases. Additionally, the lenders have been unwilling to make the
concessions necessary to create viable restructured transactions.
Consequently, management did not believe that the Partnership's investments in
these remaining properties had any material current or future value given the
outstanding debt obligations and, in certain cases, the distribution priorities
of the Partnership's co-venture partners. As a result of these circumstances,
and in light of the Partnership's limited cash reserves, the Managing General
Partner determined that it would be in the best interests of the Limited
Partners to complete a liquidation of the Partnership. As part of the
Partnership's liquidation, its remaining investment interests were expected to
be sold or assigned, most likely only for nominal amounts. In April 1995, the
Partnership completed the sale of its interest in the Fieldstone joint venture
to the co-venture partner for a cash payment of $50,000. As discussed further
below, the Partnership may receive similar amounts in connection with the
dispositions of the Grayson Square and Summerview investments. Since the
operating costs to be incurred by the Partnership through liquidation are
expected to exceed any sales proceeds received by the Partnership and the
current balance of the Partnership's cash reserves, no distribution will be
made to the Limited Partners. Completing the liquidation of the Partnership's
interests in the remaining properties has taken longer than originally
anticipated due to the legal complexities involved in the related joint venture
and financing agreements. Management expects to complete the formal
liquidation of the Partnership by the end of calendar 1995. However, there can
be no assurances that the liquidation will be completed within this time frame.
The debt agreements of the Grayson Square and Summerview joint ventures were
restructured in October 1989 and August 1989, respectively. The principal
balance and accrued interest outstanding under the Grayson Square mortgage loan
totalled approximately $9.3 million as of September 30, 1995. This balance is
approximately $1.4 million higher than the debt level originally issued by the
joint venture in connection with the development of the property, which was
completed in January 1986. Such additional debt has resulted from the past
accumulation of accrued interest which the venture has been unable to pay due to
the lack of sufficient operating cash flow. Interest on the outstanding debt
balance accrues at a blended rate of approximately 8.5% per annum. The
venture's cash flow is not currently sufficient to fully cover this annual
interest expense. As a result, certain amounts continue to accrue and be added
to the outstanding obligation, as allowed under the terms of the debt agreement.
The balance of the debt service reserve fund established at the time of the
fiscal 1990 restructuring should be sufficient to allow the venture to remain in
compliance with its debt agreement for at least the next two years. However, in
the meantime, the total obligation due to the lender will continue to grow,
thereby further subordinating the venture's equity position. Furthermore, as
part of the 1990 negotiated modification agreement, the lender received a 50%
interest in future sale or refinancing proceeds above specified levels.
Analysis of the current cash flow from property operations indicates that the
current value of the property is substantially below the outstanding debt
obligation. As a result of these circumstances, management does not believe
there is any value to the Partnership's interest in the Grayson Square property.
The Partnership has been negotiating with a third party for the sale of the
joint venture operating property for the sum of $100,000, if the lender will
consent to the buyer's assumption of the outstanding mortgage loan. However, no
agreement has been finalized to date with either the lender or the potential
buyer, and there can be no assurances that this transaction will be consummated.
A third party may be willing to pay a nominal amount for the Partnership's
interest in order to obtain management of the property and attempt to negotiate
a discounted repayment of the outstanding mortgage debt obligation, which,
combined with a long-term hold of the property, could result in some return on
an initial investment.
The $10.2 million mortgage loan obligation of the Summerview joint venture
bears interest at a fixed annual rate of 6.75% per annum. Cash flow from the
operations of the apartment complex does not fully cover the current debt
service requirements. For the past few years, the venture has struggled to
remain current on its debt service obligations by extending the payment periods
on its trade payables and deferring certain property maintenance expenses.
During fiscal 1995, the Partnership's co-venture partner contributed
approximately $40,000 to the venture because there was not sufficient cash to
make a required real estate tax payment. Although the venture remained in
compliance with its debt service obligations during fiscal 1995, cash flow
deficits continue to be experienced during the current fiscal year and have
resulted in a technical default under the first mortgage loan agreement.
Analysis of the property's operating cash flow indicates that the current and
future value of the property is substantially below the principal balance of the
debt. The Partnership has been involved in discussions with the co-venturer
regarding the possible sale of the Partnership's joint venture interest for
$25,000; however, an agreement to complete such a transaction is contingent upon
the lenders' consent, which has yet to be granted. If this transaction is not
consummated, the venture may allow the lender to take title to the operating
property through a non-judicial foreclosure proceeding.
At September 30, 1995, the Partnership had cash and cash equivalents of
approximately $7,000. Such cash and cash equivalents will be utilized for the
working capital requirements of the Partnership, including the payment of
liquidation-related expenses. The source of future liquidity is expected to be
through proceeds received from the sale or other disposition of the
Partnership's two remaining operating investment properties. Total expenses
incurred through the final liquidation date are expected to exceed available
cash (including proceeds from asset disposals). The Managing General Partner
intends to contribute the funds necessary to cover these final expenses. During
the quarter ended September 30, 1995, the Managing General Partner contributed
$67,000 to the Partnership to cover operating expenses.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1995
The Partnership recorded a net loss of $266,000 for the quarter ended
September 30, 1995 as compared to a net loss of $428,000 for the same period in
the prior year. The Partnership's net loss decreased by $162,000 due to a
decrease in the Partnership's share of ventures' losses of $135,000 and a
decline in recorded general and administrative expenses. The combined losses of
the Partnership's joint ventures decreased primarily because the current three-
month results do not include the net loss of the Fieldstone joint venture which
the Partnership disposed of during fiscal 1996, as discussed further above. The
operations of the two remaining joint ventures remained relatively stable when
compared to the same period in the prior year except for a decrease in
depreciation expense. The decrease in depreciation expense is mainly due to
certain assets of the Summerview joint venture being fully depreciated. The
decrease in the Partnership's operating loss resulted from a decline in recorded
general and administrative expenses. At March 31, 1995, $206,000 of expenses
representing estimated costs for services to be rendered through the
Partnership's final liquidation date were accrued as a result of management's
announced liquidation plan, as discussed further above. These costs include,
among other things, legal, accounting, tax preparation, securities law
compliance, investor communications, printing and audit expenses. Most of the
expenses incurred during the current three-month period were applied towards
these previously recorded accruals. However, an additional $33,000 was expensed
in the current three-month period representing an adjustment to management's
estimate of audit and tax expenses to be incurred through liquidation.
Six Months Ended September 30, 1995
The Partnership recorded net income of $4,030,000 for the six months ended
September 30, 1995 as compared to a net loss of $921,000 for the same period in
the prior year. This change in operating results is mainly due to a gain of
approximately $4.6 million resulting from the disposition of the Fieldstone
joint venture interest in the first quarter of the current fiscal year.
Although this transaction did not involve any significant proceeds, the
disposition generated a gain because the equity method carrying value of the
investment had been reduced below zero through prior year loss recognition.
Excluding the gain on asset dispositions in the current six-month period,
the Partnership's net loss decreased by $359,000 mainly due to a decrease in the
Partnership's share of ventures' losses of $237,000. The combined losses of the
Partnership's joint ventures decreased primarily because the current six-month
results reflect only three months of losses from the Fieldstone joint venture
due to the sale of the Partnership's interest in April 1995, as discussed
further above. The operating results of the two remaining joint ventures
remained relatively stable when compared to the same period in the prior year
except for a decrease in depreciation expense. The decrease in depreciation
expense is mainly due to certain assets of the Summerview joint venture being
fully depreciated. A decrease in the Partnership's operating loss of $122,000
also contributed to the change in net operating results for the current six-
month period. The decrease in operating loss resulted from a decline in
recorded general and administrative expenses. At March 31, 1995, $206,000 of
expenses representing estimated costs for services to be rendered through the
Partnership's final liquidation date were accrued as a result of management's
announced liquidation plan, as discussed further above. Most of the expenses
incurred during the current six-month period were applied towards these
previously recorded accruals. However, an additional $33,000 was expensed
during the current six-month period representing an adjustment to management's
estimate of audit and tax expenses to be incurred through liquidation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in the Partnership's Annual Report on Form 10-K for the year
ended March 31, 1995, in November 1994, a series of purported class actions (the
"New York Limited Partnership Actions") were filed in the United States District
Court for the Southern District of New York concerning PaineWebber
Incorporated's sale and sponsorship of various limited partnership investments,
including those offered by the Partnership. On May 30, 1995, the court
certified class action treatment of the claims asserted in the litigation.
Refer to the description of the claims in the Form 10-K for further information.
The General Partners continue to believe that the action will be resolved
without material adverse effect on the Partnership's financial statements, taken
as a whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
REALTY SOUTHWEST FUND III, LTD.
SIGNATURES
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.
REALTY SOUTHWEST FUND III, LTD.
By: Realty Southwest
Investment Group III, Inc.
A General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: November 13, 1995
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This schedule contains summary financial information extracted from the
Partnership's audited interim financial statements for the six months
ended ended September 30, 1995 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
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<PERIOD-END> SEP-30-1995
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