<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------
For Quarter Ended September 30, 1998
---------------------------------------------------------------
Commission file number 0-16027
----------------------------------------------------------
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3341425
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27611 La Paz Road, P.O. Box 30009, Laguna Niguel, California 92607-0009
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 643-7700
- --------------------------------------------------------------------------------
(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 12(g), 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve 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
--- ---
<PAGE> 2
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Net Assets in Liquidation - September 30, 1998
(Unaudited) and December 31, 1997 (Audited)........................................... 3
Statements of Changes of Net Assets in Liquidation Three Months
Ended September 30, 1998 and 1997 and Nine months
Ended September 30, 1998(Unaudited)................................................... 4
Statement of Operations (Unaudited) -
Three Months Ended March 31, 1997..................................................... 5
Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997..................................................... 6
Notes to Financial Statements (Unaudited)............................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................... 14
PART II. OTHER INFORMATION..................................................................... 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
STATEMENTS OF NET ASSETS IN LIQUIDATION
---------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS (Liquidation Basis): (unaudited)
- ---------------------------
<S> <C> <C>
Properties $ 8,918,000 $ 8,820,000
Investment in Cooper Village Partners 2,760,000 2,733,000
Cash and cash equivalents 966,000 1,774,000
Accounts receivable, net 1,000 33,000
Other assets 14,000 11,000
----------- -----------
Total Assets 12,659,000 13,371,000
----------- -----------
LIABILITIES (Liquidation Basis):
- --------------------------------
Accounts payable and accrued liabilities 240,000 337,000
Accrued expenses for liquidation 318,000 318,000
----------- -----------
Total Liabilities 558,000 655,000
----------- -----------
Net Assets in Liquidation $12,101,000 $12,716,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
----------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30, Nine Months Ended
-------------------------------- September 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net assets in liquidation at beginning
of period $ 12,074,000 $ 18,124,000 $ 12,716,000
Increase (decrease) during period:
Operating activities:
Property operating income, net 281,000 413,000 712,000
Equity in earnings of Cooper
Village Partners 51,000 35,000 182,000
Interest income 10,000 22,000 56,000
Leasing commissions (10,000) (8,000) (16,000)
General and administrative expenses (118,000) (214,000) (364,000)
------------ ------------ ------------
214,000 248,000 570,000
------------ ------------ ------------
Liquidating activities-distributions
to partners (187,000) (245,000) (1,185,000)
------------ ------------ ------------
Net increase (decrease) in assets
in liquidation 27,000 3,000 (615,000)
------------ ------------ ------------
Net assets in liquidation at end
of period $ 12,101,000 $ 18,127,000 $ 12,101,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
(UNAUDITED)
----------------------------------------------------
<TABLE>
<CAPTION>
For the
Three Months
Ended
March 31, 1997
--------------
<S> <C>
REVENUES
- --------
Rental income $ 270,000
Interest income 61,000
Loss on sale of property (109,000)
---------
Total revenues 222,000
---------
EXPENSES
- --------
Operating expenses 227,000
Real estate taxes 124,000
Amortization 247,000
General and administrative 321,000
---------
Total expenses 919,000
---------
Loss before equity in
earnings of Cooper Village Partners (697,000)
Equity in earnings of Cooper
Village Partners 66,000
---------
NET LOSS $(631,000)
=========
NET LOSS ALLOCABLE TO:
General Partner $ (6,000)
=========
Limited Partners $(625,000)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
(UNAUDITED)
----------------------------------------------------
<TABLE>
<CAPTION>
For the
Three Months
Ended
March 31, 1997
--------------
<S> <C>
Cash flows from operating activities:
Net loss $ (631,000)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Amortization 247,000
Equity in earnings of Cooper Village Partners (66,000)
Loss on sale of property 109,000
Changes in:
Accounts receivable 24,000
Prepaid expenses and other assets 106,000
Accrued rent receivable 575,000
Accounts payable and accrued liabilities (218,000)
------------
Net cash provided by operating activities 146,000
Cash flows from investing activities:
Investments in real estate (114,000)
Proceeds from sale of property 12,860,000
Distributions received from Cooper Village Partners 51,000
------------
Net cash provided by investing activities 12,797,000
Cash flows from financing activities-Distributions (11,946,000)
------------
Net increase in cash and cash equivalents 997,000
Cash and cash equivalents, beginning of period 807,000
------------
Cash and cash equivalents, end of period $ 1,804,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
- -----------------------------------------
(1) Accounting Policies
The financial statements of Real Estate Income Partners III, Limited
Partnership (the "Partnership") included herein have been prepared by
the General Partner, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements include all adjustments which are of a normal recurring
nature and, in the opinion of the General Partner, are necessary for a
fair presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, pursuant
to the rules and regulations of the Securities and Exchange Commission.
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Partnership's
annual report on Form 10-K for the year ended December 31, 1997.
Liquidation Basis of Accounting
On February 18, 1997, the Partnership mailed a Consent Solicitation to
the Limited Partners which sought their consent to dissolve the
Partnership and sell and liquidate all of its remaining properties as
soon as practicable, consistent with selling the Partnership's
properties to the best advantage under the circumstances. A majority in
interest of the Limited Partners consented by March 13, 1997. As a
result, the Partnership adopted the liquidation basis of accounting as
of March 31, 1997. The liquidation basis of accounting is appropriate
when liquidation appears imminent, the Partnership can no longer be
classified as a going concern and the net realizable values of the
Partnership's assets are reasonably determinable. The difference between
the adoption of the liquidation basis of accounting as of March 13, 1997
and March 31, 1997 was not material.
Under the liquidation basis of accounting, assets are stated at their
estimated net realizable values and liabilities are stated at their
anticipated settlement amounts. The valuation of assets and liabilities
necessarily requires many estimates and assumptions, and there are
substantial uncertainties in carrying out the dissolution of the
Partnership. The actual values upon dissolution and costs associated
therewith could be higher or lower than the amounts recorded.
The Partnership adopted the liquidation basis of accounting on March 31,
1997. Comparison of results of operations to prior years through March
31, 1997, therefore, is not practical. The Statements of Net Assets in
Liquidation and Statement of Changes of Net Assets in Liquidation
reflect the Partnership in the process of liquidation. Prior financial
statements reflect the Partnership as a going concern.
Sale of the Properties
On April 30, 1998, the General Partner accepted an offer to purchase all
of the Partnership's properties for $12,560,000, subject to customary
contingencies, including due diligence review by the purchaser and
7
<PAGE> 8
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
Liquidation Basis of Accounting (Cont'd.)
Sale of the Properties (Cont'd.)
negotiation of a definitive Purchase and Sale Agreement (the "Purchase
Offer"). At that time, the buyer, Abbey Investments, Inc. ("Abbey"),
anticipated closing the transaction in approximately 60-90 days.
Since that time, the General Partner and the buyer have been working to
finalize a definitive Purchase and Sale Agreement, and that negotiation
culminated in an executed agreement dated as of November 9, 1998.
A major tenant at The Forum went out of business and vacated its space
in January 1998. This space has not been leased. As a consequence, the
buyer has reduced its offer based upon lower than expected revenue and
the anticipated cost to reconfigure, build out and lease this space. As
a result, the parties have agreed to a final purchase price of
$12,300,000. Based upon an aggregate price of $12,300,000 (including the
Partnership's interest in Cooper Village Partners), the purchase price
would be allocated as follows:
<TABLE>
<CAPTION>
PROPERTIES PURCHASE PRICE DISPOSITION
FEES EARNED
------------------------------------------------------------------------
<S> <C> <C>
Creek Edge Business Center $4,321,000 $108,025
The Forum 5,300,000 $132,500
Cooper Village Shopping Center (42%) 2,679,000 -0-
----------- --------
Total $12,300,000 $240,525
=========== ========
</TABLE>
Based upon a final purchase price of $12,300,000, the Limited Partners
would receive a final distribution of approximately $192 per $1,000
original investment.
Deposit. Abbey will deposit into an interest-bearing escrow an initial
deposit of $71,800 (including Cooper Village). This deposit plus all
interest earned is refundable to Abbey (less one-half of any escrow
charges) until the Partnership has satisfied all of its presale
obligations or those obligations are waived by Abbey, or until January
23, 1999. Thereafter, the deposit is nonrefundable and it and all
interest earned shall be applied to the payment of the purchase price.
Conditions. The close of the sale is subject to, among other things,
Abbey's approval of title conditions, review of operating documents and
reports, physical inspection of the properties, and receipt of tenant
estoppel certificates. Escrow fees and costs will be shared equally; in
general, other costs will be borne in accordance with how those cost are
shared in each county in which the real property is located.
Default. If the Partnership defaults in its obligations under the
Purchase and Sale Agreements, Abbey may either (i) terminate the
8
<PAGE> 9
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
Liquidation Basis of Accounting (Cont'd.)
Sale of the Properties (Cont'd.)
agreements, take back its deposit plus any interest earned, and receive
from the Partnership Abbey's actual out-of-pocket expenses, including
reasonable attorneys fees and costs or (ii) seek specific performance of
the agreements. If Abbey defaults after the contingency period, the
Partnership is entitled to keep the deposit plus any interest earned.
Abbey and the Partnership have also agreed to refer any disputes to a
retired judge or other private arbitrator should a dispute arise.
Disposition fees. Pursuant to the Partnership Agreement, the General
Partner will earn a Disposition Fee of 2.5% of the sale price of certain
properties, as set forth in the table above. The amount of the fee will
vary depending upon the final sale price of each property. The General
Partner will not receive any other fees or distribution of proceeds from
the sale of the properties to Abbey.
Management agreement. At closing, Abbey will enter into a property
management agreement with Birtcher Property Services ("BPS") to manage
all of the Partnership's properties, plus the properties currently owned
by Damson/Birtcher Realty Income Fund-I and Damson/Birtcher Realty
Income Fund-II. BPS is an affiliate of Birtcher Investors. BPS has no
relationship or affiliation with Liquidity Fund or any of its
affiliates.
The property management agreement has a three year term, during which
time BPS will be Abbey's exclusive agent to lease, operate and maintain
the properties. For these services, Abbey will pay BPS an annual asset
management fee based on performance of the properties measured by the
net operating income they generate. The asset management fee will never
be greater than an amount equal to 1% of the final sales price of each
property as set forth in the Purchase and Sale Agreements. In addition,
Abbey will pay BPS a property management fee equal to 3% of gross rents
collected, and leasing fees of 6.5% of total lease consideration (less
third-party brokerage commissions, which are expected to be 5-6%) for
new leases and 2% (0% if third-party brokers are involved) for renewals.
BPS will be responsible for all of its costs and expenses associated
with performing pursuant to the management agreement. The agreement
(covering all of the Partnership's properties plus those of
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III) may be terminated without cause by Abbey at any time six months
after closing. Termination requires 60 days notice and payment of a
termination fee that approximates a 1% asset management fee, plus a 3%
property management fee, for the remainder of the term that is equal to
$2.7 million, less $100,000 for each month of the contract term that has
expired.
9
<PAGE> 10
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
Earnings Per Unit
The Partnership Agreement does not designate investment interests in
units. All investment interests are calculated on a "percent of
Partnership" basis, in part to accommodate reduced rates on sales
commissions for subscriptions in excess of certain specified amounts.
A Limited Partner who was charged a reduced sales commission or no sales
commission was credited with proportionately larger Invested Capital and
therefore had a disproportionately greater interest in the capital and
revenues of the Partnership than a Limited Partner who paid commissions
at a higher rate. As a result, the Partnership has no set unit value as
all accounting, investor reporting and tax information is based upon
each investor's relative percentage of Invested Capital. Accordingly,
earnings or loss per unit is not presented in the accompanying financial
statements.
(2) Transactions with Affiliates
The Partnership has no employees and, accordingly, the General Partner
and its affiliates perform services on behalf of the Partnership in
connection with administering the affairs of the Partnership. The
General Partner and affiliates are reimbursed for their general and
administrative costs actually incurred and associated with services
performed on behalf of the Partnership. For the three months ended
September 30, 1998 and 1997, the Partnership incurred approximately
$13,000 and $34,000, respectively, of such expenses. For the nine months
there ended, these reimbursements amounted to $69,000 and $104,000,
respectively.
An affiliate of the General Partner provides property management
services with respect to the Partnership's properties and receives a fee
for such services not to exceed 6% of the gross receipts from the
properties under management provided leasing services are performed,
otherwise not to exceed 3%. Such fees amounted to approximately $14,000
and $24,000, respectively, for the three months ended September 30, 1998
and 1997, and $40,000 and $78,000 for the nine months there ended. In
addition, an affiliate of the General Partner received $9,000 and
$18,000 for the three months ended September 30, 1998 and 1997,
respectively, as reimbursement of costs of on-site property management
personnel and other reimbursable costs. Such reimbursements amounted to
$29,000 and $45,000, respectively, for the nine months there ended.
As previously reported, on June 24, 1993, the Partnership completed its
solicitation of written consents from its Limited Partners. A majority
in interest of the Partnership's Limited Partners approved each of the
proposals contained in the Information Statement dated May 5, 1993.
Those proposals were implemented by the Partnership as contemplated by
the Information Statement as amendments to the Partnership Agreement,
and are reflected in these financial statements as such.
10
<PAGE> 11
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(2) Transactions with Affiliates (Cont'd.)
The amended Partnership Agreement provides for the Partnership's payment
to the General Partner of an annual asset management fee equal to .55%
for 1998 and .65% for 1997 of the aggregate appraised value of the
Partnership's properties as determined by independent appraisal
undertaken in January of each year. Such fees for the three months ended
September 30, 1998 and 1997, amounted to $13,000 and $25,000,
respectively. For the nine months there ended, these fees amounted to
$40,000 and $78,000, respectively. In addition, the amended Partnership
Agreement provides for payment to the General Partner of a leasing fee
for services rendered in connection with leasing space in a Partnership
property after the expiration or termination of leases. Fees for leasing
services for the three months ended September 30, 1998 and 1997,
amounted to $1,000 and $9,000, respectively. For the nine months there
ended, leasing fees amounted to $8,000 and $21,000, respectively.
In addition to the aforementioned, the General Partner was also paid
$12,000 and $14,000 related to the Partnership's portion (42%) of asset
management fees, property management fees, leasing fees and
reimbursement of on-site personnel and other reimbursable expenses for
Cooper Village Partners for the three months ended September 30, 1998
and 1997, respectively. For the nine months there ended, these costs and
reimbursements amounted to $42,000 and $41,000, respectively.
On January 24, 1997 the Partnership sold Northtech for a sale price of
$13,600,000. The Partnership realized approximately $13,079,000 from the
sale, after accounting for closing costs and prorations of approximately
$521,000. The purchaser of Northtech for three years had a preexisting
relationship with an affiliate of Birtcher Investors, pursuant to which
the purchaser had contracted with Birtcher to locate, acquire and manage
real property for the purchaser's account. No broker was paid a
commission as part of the transaction. Since the sale price exceeded the
January 1, 1993 appraised value ($12,900,000), pursuant to the 1993
amendment of the Partnership Agreement, the General Partner earned and
was paid a property disposition fee of approximately $340,000 in
connection with the sale. The purchaser paid a net investment advisory
fee of approximately $52,000 to the affiliate of Birtcher Investors and
retained Birtcher Property Services to manage the property. On September
1, 1997, the purchaser terminated its relationship with Birtcher
Property Services.
On October 1, 1997, the Partnership sold Martinazzi Square for
$6,100,000. The Partnership realized approximately $5,824,000 after
accounting for brokerage commissions, closing costs and prorations of
$276,000. Since the sale price exceeded the January 1, 1993 appraised
value ($5,400,000), pursuant to the 1993 amendment of the Partnership
agreement the General Partner earned, and was paid, a property
disposition fee of $153,000 in connection with the sale.
11
<PAGE> 12
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(3) Commitments and Contingencies
Litigation
On March 25, 1997, a limited partner named Bigelow/Diversified Secondary
Partnership Fund 1990 filed a purported class action lawsuit in the
Court of Common Pleas of Philadelphia County against Damson/Birtcher
Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher
Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P.,
Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack
and Brent R. Donaldson alleging breach of fiduciary duty and breach of
contract and seeking to enjoin the Consent Solicitation dated February
18, 1997. On April 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. On June 10, 1997, the court dismissed the
plaintiff's complaint on the basis of lack of personal jurisdiction and
forum non conveniens.
On June 13, 1997, the Partnership, its affiliated partnership,
Damson/Birtcher Realty Income Fund-II, and their general partner,
Birtcher/Liquidity Properties, filed a complaint for declaratory relief
in the Court of Chancery in Delaware against Bigelow/Diversified
Secondary Partnership Fund 1990 L.P. The complaint seeks a declaration
that the vote that the limited partners of the Partnership and
Damson/Birtcher Realty Income Fund-II took pursuant to the respective
consent solicitations dated February 18, 1997 were effective to dissolve
the respective partnerships and complied with applicable law, that the
actions of the General Partner in utilizing the consent solicitations to
solicit the vote of the limited partners did not breach any fiduciary or
contractual duty to such limited partners, and an award of costs and
fees to the plaintiffs. The parties have initiated discovery. The
defendant has answered the complaint. No motions are pending at this
time.
In September 1998, Bigelow/Diversified Secondary Partnership 1990
informed the Partnership that it was filing suit in the Delaware
Chancery Court against Damson/Birtcher Partners, Birtcher Investors,
Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF
Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald
Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson
alleging a purported class action on behalf of the limited partners of
Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income
Fund-II and Real Estate Income Partners III alleging breach of fiduciary
duty and incorporating the allegations set forth in the previously
dismissed March 25, 1998 complaint filed in the Court of Chancery of
Philadelphia County. One of the stated purposes of the Delaware
complaint is to enjoin the pending transaction with Abbey. Plaintiff has
engaged in preliminary discovery and the parties have held settlement
discussions. No motions are pending at this time.
(4) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of September 30, 1998, include
estimates of costs to be incurred in carrying out the dissolution and
liquidation of the Partnership. These costs include estimates of legal
12
<PAGE> 13
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(4) Accrued Expenses for Liquidation (Cont'd.)
fees, accounting fees, tax preparation and filing fees, other
professional services and the general partner's liability insurance. The
actual costs could vary significantly from the related provisions due to
the uncertainty related to the length of time required to complete the
liquidation and dissolution and the complexities which may arise in
disposing of the Partnership's remaining assets.
13
<PAGE> 14
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
-------------------------------
The Partnership completed its acquisition program in December 1988 and
is principally engaged in the operation of its properties. The
Partnership's original objective had been to hold its properties as
long-term investments. However, an Information Statement, dated May 5,
1993, mandated that the General Partner seek a vote of the Limited
Partners no later than December 31, 1996, regarding prompt liquidation
of the Partnership in the event that properties with appraised values as
of January 1993, which constituted at least one-half of the aggregate
appraised values of all Partnership properties as of that date were not
sold or under contract for sale by the end of 1996. Given the mandate of
the May 5, 1993 Information Statement, at December 31, 1995, the General
Partner decided to account for the Partnership's properties as assets
held for sale instead of for investment. In a Consent Solicitation dated
February 18, 1997, the Partnership solicited and received the consent of
the Limited Partners as of March 13, 1997, to dissolve the Partnership
and gradually settle and close the Partnership's business and dispose of
and convey the Partnership's property as soon as practicable, consistent
with obtaining reasonable value for the properties. The Partnership's
properties were held for sale throughout 1997 and are currently held for
sale.
On April 30, 1998, the General Partner accepted an offer to purchase all
of the Partnership's properties for $12,560,000, subject to customary
contingencies, including due diligence review by the purchaser and
negotiation of a definitive Purchase and Sale Agreement (the "Purchase
Offer"). At that time, the buyer anticipated closing the transaction in
approximately 60-90 days.
Since that time, the General Partner and the buyer have been working to
finalize a definitive Purchase and Sale Agreement, and that negotiation
culminated in executed agreement dated as of November 9, 1998.
The prospective buyer (the "Purchaser") is Abbey Investments, Inc., an
affiliate of The Abbey Company. The Abbey Company is a Southern
California-based real estate operating company founded in 1990. The
Purchaser is not affiliated in any way with the Partnership or the
General Partner, or any of the General Partner's principals or
affiliates.
A major tenant at The Forum went out of business and vacated its space
in January 1998. This space has not been leased. As a consequence, the
buyer has reduced its offer based upon lower than expected revenue and
the anticipated cost to reconfigure, build out and lease this space. As
a result, the parties have agreed to a final purchase price of
$12,300,000. Based upon an aggregate price of $12,300,000 (including the
Partnership's interest in Cooper Village Partners), the purchase price
would be allocated as follows:
<TABLE>
<CAPTION>
PROPERTIES PURCHASE PRICE DISPOSITION
FEES EARNED
---------------------------------------------------------- -------------
<S> <C> <C>
Creek Edge Business Center $4,321,000 $108,025
The Forum 5,300,000 $132,500
Cooper Village Shopping Center (42%) 2,679,000 -0-
----------- --------
Total $12,300,000 $240,525
=========== ========
</TABLE>
14
<PAGE> 15
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Liquidity and Capital Resources (Cont'd.)
-----------------------------------------
Based upon a final purchase price of $12,300,000, the Limited Partners
would receive a final distribution of approximately $193 per $1,000
original investment.
Deposit. Abbey will deposit into an interest-bearing escrow an initial
deposit of $71,800 (including Cooper Village). This deposit plus all
interest earned is refundable to Abbey (less one-half of any escrow
charges) until the Partnership has satisfied all of its presale
obligations or those obligations are waived by Abbey, or until January
23, 1999. Thereafter, the deposit is nonrefundable and it and all
interest earned shall be applied to the payment of the purchase price.
Conditions. The close of the sale is subject to, among other things,
Abbey's approval of title conditions, review of operating documents and
reports, physical inspection of the properties, and receipt of tenant
estoppel certificates. Escrow fees and costs will be shared equally; in
general, other costs will be borne in accordance with how those cost are
shared in each county in which the real property is located.
Default. If the Partnership defaults in its obligations under the
Purchase and Sale Agreements, Abbey may either (i) terminate the
agreements, take back its deposit plus any interest earned, and receive
from the Partnership Abbey's actual out-of-pocket expenses, including
reasonable attorneys fees and costs or (ii) seek specific performance of
the agreements. If Abbey defaults after the contingency period, the
Partnership is entitled to keep the deposit plus any interest earned.
Abbey and the Partnership have also agreed to refer any disputes to a
retired judge or other private arbitrator should a dispute arise.
Disposition fees. Pursuant to the Partnership Agreement, the General
Partner will earn a Disposition Fee of 2.5% of the sale price of certain
properties, as set forth in the table above. The amount of the fee will
vary depending upon the final sale price of each property. The General
Partner will not receive any other fees or distribution of proceeds from
the sale of the properties to Abbey.
Management agreement. At closing, Abbey will enter into a property
management agreement with Birtcher Property Services ("BPS") to manage
all of the Partnership's properties, plus the properties currently owned
by Damson/Birtcher Realty Income Fund-I and Damson/Birtcher Realty
Income Fund-II. BPS is an affiliate of Birtcher Investors. BPS has no
relationship or affiliation with Liquidity Fund or any of its
affiliates.
The property management agreement has a three year term, during which
time BPS will be Abbey's exclusive agent to lease, operate and maintain
the properties. For these services, Abbey will pay BPS an annual asset
management fee based on performance of the properties measured by the
net operating income they generate. The asset management fee will never
be greater than an amount equal to 1% of the final sales price of each
15
<PAGE> 16
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Liquidity and Capital Resources (Cont'd.)
-------------------------------
property as set forth in the Purchase and Sale Agreements. In addition,
Abbey will pay BPS a property management fee equal to 3% of gross rents
collected, and leasing fees of 6.5% of total lease consideration (less
third-party brokerage commissions, which are expected to be 5-6%) for
new leases and 2% (0% if third-party brokers are involved) for renewals.
BPS will be responsible for all of its costs and expenses associated
with performing pursuant to the management agreement. The agreement
(covering all of the Partnership's properties plus those of
Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners
III) may be terminated without cause by Abbey at any time six months
after closing. Termination requires 60 days notice and payment of a
termination fee that approximates a 1% asset management fee, plus a 3%
property management fee, for the remainder of the term that is equal to
$2.7 million, less $100,000 for each month of the contract term that has
expired.
There can be no assurance that the proposed sale of the properties will
be completed.
Regular distributions through September 30, 1998 represent cash flow
generated from operations of the Partnership's properties and interest
earned on the Partnership's working capital, net of capital reserve
requirements. As described in more detail below, in May 1998, the
Partnership made a special distribution of $575,000 from cash reserves;
in June 1996, the Partnership made a special distribution of $2,159,000
representing 100% of the proceeds from the sale of Flaircentre; on
February 28, 1997, the Partnership made a special distribution of
approximately $11,708,000 representing net proceeds from the sale of
Northtech after a $1,000,000 hold back for Partnership reserves and
payment of $340,000 disposition fees to the General Partner; and on
October 15, 1997, the Partnership made a special distribution of
approximately $5,605,000, representing substantially all of the net
proceeds from the sale of Martinazzi Square Shopping Center. Future cash
distributions will be made principally to the extent of cash flow
attributable to operations and sales of the Partnership's properties and
interest earned on the investment by capital reserves, after payment for
capital improvements to the Partnership's properties and providing for
capital reserves.
On January 24, 1997 the Partnership sold Northtech for a sale price of
$13,600,000. The Partnership realized approximately $13,079,000 from the
sale, after accounting for closing costs and prorations of approximately
$521,000. The purchaser of Northtech for three years had a preexisting
relationship with an affiliate of Birtcher Investors, pursuant to which
the purchaser had contracted with Birtcher to locate, acquire and manage
16
<PAGE> 17
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Liquidity and Capital Resources (Cont'd.)
-------------------------------
real property for the purchaser's account. No broker was paid a
commission as part of the transaction. Since the sale price exceeded the
January 1, 1993 appraised value ($12,900,000), pursuant to the 1993
amendment of the Partnership Agreement, the General Partner earned and
was paid a property disposition fee of approximately $340,000 in
connection with the sale. The purchaser paid a net investment advisory
fee of approximately $52,000 to the affiliate of Birtcher Investors and
retained Birtcher Property Services ("BPS") to manage the property. On
September 1, 1997, the purchaser terminated its relationship with BPS.
The Partnership distributed proceeds of the sale of Northtech to the
Limited Partners on February 28, 1997, together with the Partnership's
normal quarterly distribution. After paying the property disposition fee
and holding back approximately $1,000,000 to replenish and increase the
Partnership's reserves, the Partnership distributed approximately
$11,708,000 to the Limited Partners.
On October 1, 1997, the Partnership sold Martinazzi Square for
$6,100,000. The Partnership realized approximately $5,824,000 after
accounting for brokerage commissions, closing costs and prorations of
$276,000. Since the sale price exceeded the January 1, 1993 appraised
value ($5,400,000), pursuant to the 1993 amendment of the Partnership
agreement the General Partner earned, and was paid, a property
disposition fee of $153,000 in connection with the sale. The Partnership
distributed the net proceeds of $5,605,000 from the sale of Martinazzi
Square Shopping Center to the Limited Partners on October 15, 1997.
The sales of Flaircentre, Northtech, and Martinazzi Square have reduced
the Partnership's real estate assets to Creek Edge and The Forum, plus
its 42% interest in Cooper Village Shopping Center. Since Northtech had
generated over two-thirds of the cash flow that funded the Partnership's
regular operations and distributions for the year ended December 31,
1996, and Martinazzi Square generated approximately $145,000 per quarter
in net operating income, or approximately 31% of the cash flow that
funded the Partnership's regular operations and distributions since the
sale of Northtech in January 1997, future distributions to the Limited
Partners of cash from operations will be significantly reduced.
Results of Operations for the Three Months Ended September 30, 1998
-------------------------------------------------------------------
Because the Partnership adopted the liquidation basis of accounting on
March 31, 1997, a comparison of the results of operations is not
practical. As the Partnership's assets (properties) are sold, the
results of operations will be generated from a smaller asset base, and
are therefore not comparable. The Partnership's operating results have
been reflected on the Statement of Changes of Net Assets in Liquidation
since March 31, 1997 (the date of adoption of the liquidation basis of
accounting).
For the three months ended September 30, 1998, the Partnership generated
17
<PAGE> 18
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Results of Operations for the Three Months Ended September 30, 1998
-------------------------------------------------------------------
(Cont'd.)
$281,000 of net operating income from operation of its properties
(exclusive of Cooper Village Partners). The net operating income for the
three months ended September 30, 1998, as compared with the
corresponding period in 1997, reflects a decrease in rental income due
to the sale of Martinazzi Square in October 1997.
Interest income resulted from the temporary investment of Partnership
working capital. For the three months ended September 30, 1998, interest
income was approximately $10,000.
General and administrative expenses for the three months ended September
30, 1998, included charges of $27,000 from the General Partner and its
affiliates for services rendered in connection with administering the
affairs of the Partnership and operating the Partnership's properties.
Also included in general and administrative expenses for the three
months ended September 30, 1998, are direct charges of $91,000 relating
to audit fees, tax preparation fees, legal and professional fees,
insurance expenses, costs incurred in providing information to the
Limited Partners and other miscellaneous costs.
The decrease in general and administrative expenses for the three months
ended September 30, 1998, as compared to the corresponding period in
1997, was primarily attributable to the decrease in legal, professional
services, asset management fees and administrative costs.
Accrued expenses for liquidation, as reflected in the Statements of Net
Assets in Liquidation since March 31, 1997, are not included in results
of operations for the three month period ended March 31, 1997. The
liquidation basis of accounting was adopted on March 31, 1997 therefore,
it was not appropriate to include such adjustments in the results of
operations for prior periods. Accrued expenses for liquidation as of
September 30, 1998, includes estimates of costs to be incurred in
carrying out the dissolution and liquidation of the Partnership. These
costs include estimates of legal fees, accounting fees, tax preparation
and filing fees, professional services and the general partner's
liability insurance. The actual costs could vary significantly from the
related provisions due to the uncertainty related to the length of time
required to complete the liquidation and dissolution and the
complexities which may arise in disposing of the Partnership's remaining
assets.
18
<PAGE> 19
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
On March 25, 1997, a limited partner named Bigelow/Diversified Secondary
Partnership Fund 1990 filed a purported class action lawsuit in the
Court of Common Pleas of Philadelphia County against Damson/Birtcher
Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher
Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P.,
Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack
and Brent R. Donaldson alleging breach of fiduciary duty and breach of
contract and seeking to enjoin the Consent Solicitation dated February
18, 1997. On April 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. On June 10, 1997, the court dismissed the
plaintiff's complaint on the basis of lack of personal jurisdiction and
forum non conveniens.
On June 13, 1997, the Partnership, its affiliated partnership,
Damson/Birtcher Realty Income Fund-II, and their general partner,
Birtcher/Liquidity Properties, filed a complaint for declaratory relief
in the Court of Chancery in Delaware against Bigelow/Diversified
Secondary Partnership Fund 1990 L.P. The complaint seeks a declaration
that the vote that the limited partners of the Partnership and
Damson/Birtcher Realty Income Fund-II took pursuant to the respective
consent solicitations dated February 18, 1997 were effective to dissolve
the respective partnerships and complied with applicable law, that the
actions of the General Partner in utilizing the consent solicitations to
solicit the vote of the limited partners did not breach any fiduciary or
contractual duty to such limited partners, and an award of costs and
fees to the plaintiffs. The parties have initiated discovery. The
defendant has answered the complaint. No motions are pending at this
time.
In September 1998, Bigelow/Diversified Secondary Partnership 1990
informed the Partnership that it was filing suit in the Delaware
Chancery Court against Damson/Birtcher Partners, Birtcher Investors,
Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF
Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald
Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson
alleging a purported class action on behalf of the limited partners of
Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income
Fund-II and Real Estate Income Partners III alleging breach of fiduciary
duty and incorporating the allegations set forth in the previously
dismissed March 25, 1998 complaint filed in the Court of Chancery of
Philadelphia County. One of the stated purposes of the Delaware
complaint is to enjoin the pending transaction with Abbey. Plaintiff has
engaged in preliminary discovery and the parties have held settlement
discussions. No motions are pending at this time.
19
<PAGE> 20
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 - Financial Data Schedule
b) Reports on Form 8-K:
None filed in the period ended September 30, 1998
20
<PAGE> 21
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
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.
REAL ESTATE INCOME PARTNERS III
<TABLE>
<S> <C>
By: BIRTCHER/LIQUIDITY By: BIRTCHER INVESTORS,
PROPERTIES a California limited partnership
(General Partner)
By: BIRTCHER INVESTMENTS,
a California general partnership,
General Partner of Birtcher Investors
By: BIRTCHER LIMITED,
a California limited partnership,
General Partner of Birtcher Investments
By: BREICORP,
a California corporation,
formerly known as Birtcher
Real Estate Inc., General
Partner of Birtcher Limited
Date: November 10, 1998 By: /s/Robert M. Anderson
---------------------
Robert M. Anderson
Executive Director
BREICORP
By: LF Special Fund I, L.P.,
a California limited partnership
By: Liquidity Fund Asset Management, Inc.,
a California corporation, General
Partner of LF Special Fund I, L.P.
Date: November 10, 1998 By: /s/ Brent R. Donaldson
----------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
</TABLE>
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from statement of
net assets in liquidation of Real Estate Income Partners III and is qualified in
its entirety by reference to such 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 966,000
<SECURITIES> 0
<RECEIVABLES> 1,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 981,000
<PP&E> 8,918,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,659,000
<CURRENT-LIABILITIES> 558,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 12,101,000
<TOTAL-LIABILITY-AND-EQUITY> 12,659,000
<SALES> 0
<TOTAL-REVENUES> 0<F1>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0<F1>
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0<F1>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Statement of operations is not presented in liquidation basis of accounting.
</FN>
</TABLE>
