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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 30,1999
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Commission file number 0-16027
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REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3341425
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(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
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(Address of principal executive offices) (Zip Code)
(949) 643-7700
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(Registrant's telephone number, including area code)
N/A
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(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
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REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30,1999
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Net Assets in Liquidation - September 30,1999
(Unaudited) and December 31, 1998 (Audited)........................... 3
Statements of Changes of Net Assets in Liquidation -
Three and Nine months Ended September 30,1999 and 1998 (Unaudited).... 4
Notes to Financial Statements (Unaudited)............................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 11
Item 3. Quantitative and Qualitative Market Risk Disclosures.................. 16
PART II. OTHER INFORMATION..................................................... 16
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
STATEMENTS OF NET ASSETS IN LIQUIDATION
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<CAPTION>
September 30, December 31,
1999 1998
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(unaudited)
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ASSETS (Liquidation Basis):
- ---------------------------
Properties $ 4,432,000 $ 9,180,000
Investment in Cooper Village Partners 2,797,000 2,543,000
Cash and cash equivalents 5,417,000 906,000
Cash held in escrow 148,000 --
Accounts receivable, net 10,000 3,000
Other assets 10,000 8,000
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Total Assets 12,814,000 12,640,000
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LIABILITIES (Liquidation Basis):
- --------------------------------
Accounts payable and accrued liabilities 93,000 292,000
Accrued expenses for liquidation 131,000 131,000
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Total Liabilities 224,000 423,000
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Net Assets in Liquidation $12,590,000 $12,217,000
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</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net assets in liquidation
at beginning of period $ 12,225,000 $ 12,074,000 $ 12,217,000 $ 12,716,000
Increase (decrease) during period:
Operating activities:
Property operating income, net 308,000 281,000 799,000 712,000
Equity in earnings of Cooper
Village Partners excluding
$190,000 gain from sale of
Partnership's interest in
Cooper Village Shopping
Center 47,000 51,000 191,000 182,000
Interest income 17,000 10,000 31,000 56,000
Leasing commissions (10,000) (10,000) (30,000) (16,000)
General and administrative
expenses (133,000) (118,000) (349,000) (364,000)
------------ ------------ ------------ ------------
229,000 214,000 642,000 570,000
------------ ------------ ------------ ------------
Liquidating activities:
Gain on sale of real estate 197,000 -- 197,000 --
Gain from sale of Partnership's
interest in Cooper Village
Shopping Center 190,000 -- 190,000 --
Distributions to partners (251,000) (187,000) (656,000) (1,185,000)
------------ ------------ ------------ ------------
136,000 (187,000) (269,000) (1,185,000)
------------ ------------ ------------ ------------
Net increase (decrease)in assets
in liquidation 365,000 27,000 373,000 (615,000)
------------ ------------ ------------ ------------
Net assets in liquidation at
end of period $ 12,590,000 $ 12,101,000 $ 12,590,000 $ 12,101,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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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, 1998.
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.
Segment Reporting
The Partnership adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires, among other items, that a
public business enterprise report a measure of segment profit or loss,
certain specific revenue and expense items, segment assets, information
about the revenues derived from the enterprise's products or services
and major customers. SFAS 131 also requires that the enterprise report
descriptive information about the way that the operating segments were
determined and the products and services provided by the operating
segments. Given that the Partnership is in the process of liquidation,
the Partnership has identified only one operating business segment
which is the business of asset liquidation. The adoption of SFAS 131
did not have an impact on the Partnership's financial reporting.
5
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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 30,1999 and 1998, the Partnership incurred approximately
$12,000 and $13,000, respectively, of such expenses. For the nine
months there ended, these reimbursements amounted to $59,000 and
$69,000, 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 $18,000
and $14,000, respectively, for the three months ended September 30,1999
and 1998 and $47,000 and $40,000 for the nine months there ended. In
addition, an affiliate of the General Partner received $10,000 and
$9,000 for the three months ended September 30,1999 and 1998,
respectively, as reimbursement of costs of on-site property management
personnel and other reimbursable costs. Such reimbursements amounted to
$31,000 and $29,000, 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.
The amended Partnership Agreement provides for the Partnership's
payment to the General Partner of an annual asset management fee equal
to .45% for 1999 and .55% for 1998 of the aggregate appraised value of
the Partnership's properties as determined by independent
6
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REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(2) Transactions with Affiliates (Cont'd.)
appraisal undertaken in January of 1998 and by the General Partner's
estimate of fair value in January 1999. Such fees for the three months
ended September 30,1999 and 1998, amounted to $11,000 and $13,000,
respectively. For the nine months there ended, these fees amounted to
$32,000 and $40,000, 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 30,1999 and 1998,
amounted to $6,000 and $1,000, respectively. For the nine months there
ended, leasing fees amounted to $12,000 and $8,000, respectively.
In addition to the aforementioned, the General Partner was also paid
$14,000 and $12,000 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 30,1999
and 1998, respectively. For the nine months there ended, these costs
and reimbursements amounted to $42,000 and $42,000, respectively.
(3) Commitments and Contingencies
Litigation
-----------
So far as is known to the General Partner, neither the Partnership nor
its properties are subject to any material pending legal proceedings,
except for the following:
Bigelow Diversified Secondary Partnership Fund 1990 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 was 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 defendant has answered the
complaint. No motions are pending at this time.
7
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REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(3) Commitments and Contingencies
Litigation (Cont'd.)
Bigelow Diversified Secondary Partnership Fund 1990 litigation
--------------------------------------------------------------
(Cont'd.)
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, 1997 complaint filed in the Court of
Chancery of Philadelphia County. Plaintiff has engaged in preliminary
discovery and the parties have held settlement discussions. No motions
are pending at this time.
Madison Partnership and ISA Partnership Litigation
--------------------------------------------------
On April 2, 1999, Madison Partnership Liquidity Investors XVI, LLC and
ISA Partnership Liquidity Investors filed a purported class and
derivative action in the California Superior Court in Orange County,
California against Damson Birtcher Partners,Birtcher/Liquidity
Properties, Birtcher Partners, Birtcher Investors, Birtcher
Investments, Birtcher Limited, Breicorp LP Special Fund II, L.P.,
Liquidity Fund Asset Management, Inc., Robert M. Anderson, Brent R.
Donaldson, Arthur B. Birtcher, Ronald E. Birtcher, and Richard G.
Wollack, Defendants, and Damson/Birtcher Realty Income Fund-I,
Damson/Birtcher Realty Income Fund-II, and Real Estate Income Partners
III, Nominal Defendants. The complaint asserts claims for breach of
fiduciary duty and breach of contract. The gravamen of the complaint is
that the General Partners of these limited partnerships have not
undertaken all reasonable efforts to expedite liquidation of the
Partnerships' properties and to maximize the returns to the
Partnerships' limited partners. The complaint seeks unspecified
monetary damages, attorneys' fees and litigation expenses, and an order
for dissolution of the Partnerships and appointment of an independent
liquidating trustee. The Partnership has moved to dismiss the case on
the grounds that the pending Bigelow class action, discussed above,
raises essentially the same claims. If the case is not stayed or
dismissed, the Partnership intends to present a vigorous defense.
(4) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of September 30,1999, include
estimates of costs to be incurred in carrying out the dissolution and
liquidation of the Partnership. These costs include estimates of legal
fees (exclusive of litigation costs), accounting fees, tax preparation,
filing fees and other professional services. 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.
8
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REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(5) Gain on Sale of Real Estate
The gain on sale of real estate ($197,000) reflects the sale of The
Forum office park on September 23, 1999 for $5,350,000. The Partnership
also recognized a gain from the sale of the Partnership's interest in
Cooper Village Shopping Center ($190,000).
During the three month period ended September 30, 1999, the Partnership
sold two of its three remaining properties (including its 42% interest
in Cooper Village Shopping Center) in two separate transactions, as set
forth below:
Cooper Village
--------------
On September 21, 1999, the Partnership sold its 42% interest in Cooper
Village Shopping Center (co-owned with an affiliated partnership), in
Mesa, Arizona to Old Vine Corporation ("Old Vine"), a local shopping
center operator that is not affiliated in any way with the Partnership,
its General Partner or any of its principals or affiliates.
The sale price for the Partnership's 42% interest was $2,593,500.
The buyer was represented by a third-party broker in the transaction.
The Partnership's allocation of the broker commission paid was $33,000
from the sale proceeds. The General Partner was not paid any property
disposition fee in connection with the sale. Old Vine has hired an
affiliate of Birtcher to perform certain onsite property management
services (not accounting or asset management), pursuant to a contract
that is cancelable at any time upon 30 days notice.
The proceeds from the sale of Cooper Village Shopping Center will be
distributed to the Partnership and its affiliated partnership during
the fourth quarter of 1999.
The Forum
---------
On September 23, 1999, the Partnership sold The Forum, in Wauwatosa,
Wisconsin to Rubin Pachulsky Dew Properties, LLC ("Rubin Pachulsky
Dew") for $5,350,000. Rubin Pachulsky Dew is a third-party real estate
investment entity that is not affiliated in any way with the
Partnership, its General Partner or any of its principals or
affiliates.
Rubin Pachulsky Dew was represented by a third-party broker in the
transaction. The broker was paid $53,500 from the sale proceeds. Since
the sale price of The Forum exceeded the January 1, 1993 appraised
value ($4,440,000), pursuant to the 1993 Amendment of the Partnership
Agreement, the General Partner earned and was paid a property
disposition fee of $133,750 in connection with the sale.
Rubin Pachulsky Dew has hired an affiliate of Birtcher as property
manager for The Forum for a fee that is approximately the same as the
fee that the Partnership previously paid to the General Partner for
property management. In addition, Rubin Pachulsky Dew has hired an
affiliate of Birtcher to provide certain asset management services for
The Forum, and will pay an incentive fee approximately equal to 10% of
the profits, if any, after Rubin Pachulsky Dew has received a 15%
cumulative annual, return on its investment. The incentive fee, if
earned, is not payable until the property is sold or four years from
date of purchase, whichever comes first. The property management
agreement is cancelable at any time upon 60 days notice, but the
incentive fee will survive termination of the contract.
9
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REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(5) Gain on Sale of Real Estate (Cont'd.)
A portion of the proceeds from the sale of The Forum to Rubin Pachulsky
Dew continues to be held in escrow. A sum equal to two and one-half
percent of the purchase price has been held back as a potential source
of payment for any claims that may arise related to a Partnership
breach of certain representations and warranties related to the sale
and for any litigation costs that may arise for a one-year period. The
remaining cash held in escrow relates to holdbacks for tax prorations.
The cash held in escrow has been included in the gain on sale of real
estate.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
Since the completion of its acquisition program in December 1988, the
Partnership has been primarily 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
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 1998 and continue to be held for sale.
In November 1998, the Partnership entered into a Purchase and Sale
Agreement with Abbey Investments, Inc. to sell all of the Partnership's
remaining properties for $12,300,000. However, in January 1999, the
agreement was terminated because Abbey had requested a material
reduction in the purchase price (approximately 11%), which the
Partnership did not agree to.
On April 30, 1999, the Partnership and Praedium Performance Fund IV
("Praedium") executed a Purchase and Sale Agreement to sell all of the
Partnership's properties except its interest in Cooper Village to
Praedium for $9,350,000. Praedium deposited $34,500 into escrow,
pending completion of its due diligence inspection and review.
Praedium's contingency period expired on June 14, 1999. During and
after the contingency period, Praedium, in a series of negotiations
with the Partnership, sought reductions in the purchase price of the
properties. During this time, the General Partner negotiated with
Praedium, and also sought other purchasers for the properties, both
individually and as a group. Finally, in late July 1999, the
Partnership declined Praedium's offer to purchase the properties for a
materially reduced purchase price and terminated its dealings with
Praedium.
Sale of the Properties
During the three month period ended September 30, 1999, the Partnership
sold two of its three remaining properties (including its 42% interest
in Cooper Village Shopping Center) in two separate transactions, as set
forth below:
Cooper Village
--------------
On September 21, 1999, the Partnership sold its 42% interest in Cooper
Village Shopping Center (co-owned with an affiliated partnership), in
Mesa, Arizona to Old Vine Corporation ("Old Vine"), a local shopping
center operator that is not affiliated in any way with the Partnership,
its General Partner or any of its principals or affiliates.
The sale price for the Partnership's 42% interest was $2,593,500.
11
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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.)
Sale of the Properties (Cont'd.)
Cooper Village (Cont'd.)
--------------
The buyer was represented by a third-party broker in the transaction.
The Partnership's allocation of the broker commission paid was $33,000
from the sale proceeds. The General Partner was not paid any property
disposition fee in connection with the sale. Old Vine has hired an
affiliate of Birtcher to perform certain onsite property management
services (not accounting or asset management), pursuant to a contract
that is cancelable at any time upon 30 days notice.
The proceeds from the sale of Cooper Village Shopping Center will be
distributed to the Partnership and its affiliated partnership during
the fourth quarter of 1999.
The Forum
---------
On September 23, 1999, the Partnership sold The Forum, in Wauwatosa,
Wisconsin to Rubin Pachulsky Dew Properties, LLC ("Rubin Pachulsky
Dew") for $5,350,000. Rubin Pachulsky Dew is a third-party real estate
investment entity that is not affiliated in any way with the
Partnership, its General Partner or any of its principals or
affiliates.
Rubin Pachulsky Dew was represented by a third-party broker in the
transaction. The broker was paid $53,500 from the sale proceeds. Since
the sale price of The Forum exceeded the January 1, 1993 appraised
value ($4,440,000), pursuant to the 1993 Amendment of the Partnership
Agreement, the General Partner earned and was paid a property
disposition fee of $133,750 in connection with the sale.
Rubin Pachulsky Dew has hired an affiliate of Birtcher as property
manager for The Forum for a fee that is approximately the same as the
fee that the Partnership previously paid to the General Partner for
property management. In addition, Rubin Pachulsky Dew has hired an
affiliate of Birtcher to provide certain asset management services for
The Forum, and will pay an incentive fee approximately equal to 10% of
the profits, if any, after Rubin Pachulsky Dew has received a 15%
cumulative annual, return on its investment. The incentive fee, if
earned, is not payable until the property is sold or four years from
date of purchase, whichever comes first. The property management
agreement is cancelable at any time upon 60 days notice, but the
incentive fee will survive termination of the contract.
A portion of the proceeds from the sale of The Forum to Rubin Pachulsky
Dew continues to be held in escrow. A sum equal to two and one-half
percent of the purchase price has been held back as a potential source
of payment for any claims that may arise related to a Partnership
breach of certain representations and warranties related to the sale
and for any litigation costs that may arise for a one-year period. The
remaining cash held in escrow relates to holdbacks for tax prorations.
The cash held in escrow has been included in the gain on sale of real
estate.
Summary of Sale Proceeds
------------------------
The Partnership realized approximately $7,438,000, or approximately
$117 per $1,000 originally invested in the Partnership, in
distributable cash proceeds from the sale of the two properties, after
deducting for holdbacks (approximately $148,000), and closing costs and
prorations totaling approximately $358,000.
The General Partner's estimate of distributable cash proceeds does not
take into account the expenditure of Partnership cash reserves,
operating expenses or net income or loss of the Partnership for any
period prior to the time the remaining property is sold or, the ongoing
litigation, which could affect the amount of sales proceeds ultimately
available for distribution. Therefore, the actual proceeds to be
received by the limited partners may vary materially, up or down, from
the estimate.
12
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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.)
-------------------------------
Summary of Sale Proceeds (Cont'd.)
------------------------
Currently, two lawsuits are pending against the Partnership and its
General Partner and certain of its affiliates that seek, among things,
unspecified monetary damages. Since these cases are in the preliminary
discovery phase, there is unavoidable uncertainty regarding their
ultimate resolution. The Partnership Agreement mandates that the
General Partner provide for all of the Partnership's liabilities and
obligations, including contingent liabilities, before distributing
liquidation proceeds to its partners. Therefore, the Partnership will
not distribute liquidation proceeds until the uncertainty surrounding
these lawsuits is sufficiently resolved. The amount and timing of any
distribution of liquidation proceeds will be determined by the General
Partner in light of these and other relevant considerations.
Status of Creek Edge Business Center
------------------------------------
The Partnership entered into a purchase agreement as of November 15,
1999, to sell Creek Edge Business Center to WelshInvest I, LLC
("Buyer"), for a purchase price of $5,300,000. An affiliate of Buyer
("Welsh") has had a pre-existing relationship with various affiliates
of Birtcher Investors for more than 20 years, pursuant to which Welsh
initially sold Creek Edge to the Partnership, and subsequently
contracted with an affiliate of Birtcher to perform property management
services at Creek Edge on behalf of the Partnership. An affiliate of
Welsh acted as buyer's broker in the transaction, and will be paid a
brokerage commission not to exceed $159,000 upon closing. It is not
anticipated that Buyer will hire the General Partner or any affiliate
to perform asset management or property management services for this
property after close of the sale. Buyer has deposited $50,000 into
escrow, and will deposit $50,000 in addition, on December 5, 1999.
Closing is currently scheduled for December 15, 1999.
Other Matters
-------------
Partner Regular distributions through September 30, 1999 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. 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.
The Partnership is in the process of liquidating its remaining assets.
Only one of the Partnership's properties (Creek Edge) remains unsold at
September 30, 1999. The balance of the Partnership's assets consists
primarily of cash and receivables. Further, it is
13
<PAGE> 14
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.)
-------------------------------
Other Matters (Cont'd.)
-------------
anticipated that the Creek Edge property will be sold on or before
January 1, 2000. It is therefore the opinion of the General Partner
that the value of the remaining assets is not subject to any valuation
risk as a result of year 2000 issues, other than general economic
climate issues that may arise. Based on current information, the cost
of addressing potential year 2000 problems is not expected to have a
material adverse impact on the Partnership's financial position,
results of operations or cash flows in future periods.
As of September 30, 1999, the Partnership's accounting systems and the
investor services system used to track the limited partners' interests,
distributions and tax information have been tested and appear to be
free of year 2000 bugs. The Partnership's remaining property is under
review utilizing the Building Owners and Managers Association ("BOMA")
industry standards as a guideline for necessary corrections. The cost
of the upgrades to the Partnership's accounting systems were borne by
the General Partner and will not be reimbursed by the Partnership. In
addition, the General Partner has made inquiries of its banks, all of
which indicate that any problems have been addressed adequately by
those institutions.
Even if attempts to correct any deficiencies in the Partnership's
software are unsuccessful, the General Partner anticipates that in the
short run it could convert its systems to standard spreadsheet or data
base programs at nominal cost.
Results of Operations for the Three Months Ended September 30, 1999
-------------------------------------------------------------------
Because the Partnership is in the process of liquidating its remaining
assets, 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 Statements of Changes of Net Assets in Liquidation.
For the three months ended September 30, 1999 the Partnership generated
$308,000 of net operating income from its operations. The increase in
net operating income for the three months ended September 30, 1999 as
compared to the same period in 1998, was primarily attributable to a
decrease in tenant bad debts and real estate taxes at The Forum. These
decreases in charges were partially offset by lost revenue from the
sale of The Forum in September 1999.
Interest income resulted from the temporary investment of Partnership
working capital. For the three months ended September 30,1999, interest
income was approximately $17,000.
The gain on sale of real estate ($197,000) reflects the sale of The
Forum office park on September 23, 1999 for $5,350,000. The Partnership
also recognized a gain from the sale of the Partnership's interest in
Cooper Village Shopping Center ($190,000).
General and administrative expenses for the three months ended
September 30, 1999, included charges of $28,000 from the General
Partner and its affiliates for services
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.)
Results of Operations for the Three Months Ended September 30,1999
-------------------------------------------------------------------
(Cont'd.)
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, 1999, are direct charges of $105,000 relating to audit
fees, tax preparation fees, legal and professional fees, costs incurred
in providing information to the Limited Partners and other
miscellaneous costs.
The increase in general and administrative expenses for the three
months ended September 30, 1999, as compared to the corresponding
period in 1998, was primarily attributable to an increase in legal and
professional fees incurred.
Accrued expenses for liquidation as of September 30, 1999, include
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 and other
professional services. 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.
15
<PAGE> 16
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
Not applicable because the Partnership does not have any financial
instruments subject to market risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bigelow Diversified Secondary Partnership Fund 1990 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, 1997 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
16
<PAGE> 17
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
ITEM 1. LEGAL PROCEEDINGS (Cont'd.)
Bigelow Diversified Secondary Partnership Fund 1990 Litigation
--------------------------------------------------------------
(Cont'd.)
with Abbey. Plaintiff has engaged in preliminary discovery and the
parties have held settlement discussions. No motions are pending at
this time.
Madison Partnership and ISA Partnership Litigation
--------------------------------------------------
On April 2, 1999, Madison Partnership Liquidity Investors XVI, LLC and
ISA Partnership Liquidity Investors filed a purported class and
derivative action in the California Superior Court in Orange County,
California against Damson Birtcher Partners, Birtcher/Liquidity
Properties, Birtcher Partners, Birtcher Investors, Birtcher
Investments, Birtcher Limited, Breicorp LP Special Fund II, L.P.,
Liquidity Fund Asset Management, Inc., Robert M. Anderson, Brent R.
Donaldson, Arthur B. Birtcher, Ronald E. Birtcher, and Richard G.
Wollack, Defendants, and Damson/Birtcher Realty Income Fund-I,
Damson/Birtcher Realty Income Fund-II, and Real Estate Income Partners
III, Nominal Defendants. The complaint asserts claims for breach of
fiduciary duty and breach of contract. The gravamen of the complaint is
that the General Partners of these limited partnerships have not
undertaken all reasonable efforts to expedite liquidation of the
Partnerships' properties and to maximize the returns to the
Partnerships' limited partners. The complaint seeks unspecified
monetary damages, attorneys' fees and litigation expenses, and an order
for dissolution of the Partnerships and appointment of an independent
liquidating trustee. The Partnership has moved to dismiss the case on
the grounds that the pending Bigelow class action, discussed above,
raises essentially the same claims. If the case is not stayed or
dismissed, the Partnership intends to present a vigorous defense.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 - Financial Data Schedule
b) Reports on Form 8-K:
Form 8-K filed on October 15, 1999 reporting the sales of The
Forum office park and Cooper Village shopping center
incorporated by reference.
17
<PAGE> 18
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.
<TABLE>
<S> <C>
REAL ESTATE INCOME PARTNERS III
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 15, 1999 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 15, 1999 By: /s/ Brent R. Donaldson
-----------------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
</TABLE>
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,417,000
<SECURITIES> 158,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,585,000
<PP&E> 4,432,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,814,000
<CURRENT-LIABILITIES> 224,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 12,590,000
<TOTAL-LIABILITY-AND-EQUITY> 12,814,000
<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
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0<F1>
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>STATEMENT OF OPERATION IS NOT PRESENTED IN LIQUIDATION BASIS OF ACCOUNTING.
</FN>
</TABLE>
