<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 June 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
- --------------------------------------------------------------------------------
(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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<PAGE> 2
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1999
INDEX
<TABLE>
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Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Net Assets in Liquidation - June 30, 1999
(Unaudited) and December 31, 1998 (Audited).......................................... 3
Statements of Changes of Net Assets in Liquidation -
Three and Six Months Ended June 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................................. 14
PART II. OTHER INFORMATION.................................................................... 15
</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>
June 30, December 31,
1999 1998
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(unaudited)
<S> <C> <C>
ASSETS (Liquidation Basis):
Properties $ 9,288,000 $ 9,180,000
Investment in Cooper Village Partners 2,560,000 2,543,000
Cash and cash equivalents 661,000 906,000
Accounts receivable, net 2,000 3,000
Other assets 1,000 8,000
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Total Assets 12,512,000 12,640,000
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LIABILITIES (Liquidation Basis):
Accounts payable and accrued liabilities 156,000 292,000
Accrued expenses for liquidation 131,000 131,000
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Total Liabilities 287,000 423,000
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Net Assets in Liquidation $12,225,000 $12,217,000
=========== ===========
</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 Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net assets in liquidation
at beginning of period $ 12,263,000 $ 12,718,000 $ 12,217,000 $ 12,716,000
Increase (decrease) during period:
Operating activities:
Property operating income, net 274,000 166,000 491,000 431,000
Equity in earnings of Cooper
Village Partners 65,000 67,000 144,000 132,000
Interest income 7,000 19,000 14,000 45,000
Leasing commissions (10,000) (6,000) (19,000) (6,000)
General and administrative
expenses (123,000) (137,000) (217,000) (246,000)
------------ ------------ ------------ ------------
213,000 109,000 413,000 356,000
------------ ------------ ------------ ------------
Liquidating activities:
Distributions to partners (251,000) (753,000) (405,000) (998,000)
------------ ------------ ------------ ------------
Net increase (decrease)in assets
in liquidation (38,000) (644,000) 8,000 (642,000)
------------ ------------ ------------ ------------
Net assets in liquidation at
end of period $ 12,225,000 $ 12,074,000 $ 12,225,000 $ 12,074,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
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
5
<PAGE> 6
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
Segment Reporting (Cont'd.)
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.
Sale of the Properties
In November 1998, the Partnership entered into a definitive 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, 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.
Immediately thereafter, on July 29, 1999, the Partnership entered into
a Purchase and Sale Agreement and Joint Escrow Instructions to sell all
of the Partnership's properties except Cooper Village shopping center
to Rubin Pachulsky Dew Properties, LLC ("Rubin Pachulsky Dew") for an
aggregate purchase price of $10,350,000. Rubin Pachulsky Dew deposited
$251,825 into escrow, which deposit is nonrefundable except in the
event of the Partnership's breach of the sale agreement. 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.
Except for a few technical exceptions, such as the Partnership's breach
of the sale agreement or title issues that cannot be corrected or
insured against, Rubin Pachulsky Dew's purchase is not subject to any
conditions. It is currently scheduled to close on September 14, 1999,
and both buyer and seller have agreed to use their best efforts to
close the transaction sooner.
Rubin Pachulsky Dew will hire Birtcher or an affiliate as property
manager for the properties for a fee that is approximately the same as
the current fee paid to the General Partner for property management. In
addition, Rubin Pachulsky Dew will hire Birtcher or an affiliate as
asset manager for the properties, and pay an incentive fee
approximately equal to 10% of the profits, if any, after Rubin
Pachulsky Dew has received a 15% return on its investment. The
incentive fee, if earned, is not payable until the last property is
sold or four years from date of
6
<PAGE> 7
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(1) Accounting Policies (Cont'd.)
Sale of the Properties (Cont'd.)
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.
Cooper Village
On May 28, 1999, the Partnership signed a Purchase and Sale Agreement
and Joint Escrow Instructions to sell its 42% in Cooper Village
Shopping Center (co-owned with an affiliated partnership) to Old Vine
Corporation ("Old Vine") for a sale price of $2,784,600. Old Vine is a
local shopping center operator that is not affiliated in any way with
the Partnership or the General Partner, or any of the General Partner's
principals or affiliates. On July 15, 1999, the purchase price was
reduced to $2,593,500, primarily because an existing tenant that
occupied 8,447 square feet unexpectedly broke its lease and vacated
its space.
Old Vine has completed its due diligence review. During this review an
environmental issue with regard to the dry cleaning space at the center
was discovered. Laboratory analysis indicated that one of the soil
samples contained concentrations of tetrachloroethane above the
laboratory reporting limit. The Partnership has ordered additional
borings and soil sample assessments, to determine the necessity and
cost of remediation. The Partnership expects to receive the results of
the additional tests within three weeks, together with a recommendation
regarding applicable regulatory requirements and an estimate of the
cost of any remediation that might be necessary. Old Vine has indicated
its continued interest in purchasing the property pending the results
of the additional laboratory tests, and has not asked escrow to refund
its deposit. If Old Vine purchases the property, it intends to hire
Birtcher or one of is affiliates to perform certain onsite property
management services (not accounting or asset management), pursuant to a
contract that will be cancelable at any time upon 30 days notice.
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.
7
<PAGE> 8
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(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 June
30, 1999 and 1998, the Partnership incurred approximately $28,000 and
$34,000, respectively, of such expenses. For the six months there
ended, these reimbursements amounted to $46,000 and $56,000,
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 $12,000, respectively, for the three months ended June 30, 1999 and
1998 and $29,000 and $26,000 for the six months there ended. In
addition, an affiliate of the General Partner received $11,000 and
$11,000 for the three months ended June 30, 1999 and 1998,
respectively, as reimbursement of costs of on-site property management
personnel and other reimbursable costs. Such reimbursements amounted to
$21,000 and $20,000, respectively, for the six 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 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 June
30, 1999 and 1998, amounted to $11,000 and $13,000, respectively. For
the six months there ended, these fees amounted to $22,000 and $26,000,
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 June 30, 1999 and 1998, amounted to
$6,000 and $3,000, respectively. For the six months there ended,
leasing fees amounted to $6,000 and $7,000, respectively.
In addition to the aforementioned, the General Partner was also paid
$14,000 and $15,000 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 June 30, 1999 and
1998, respectively. For the six months there ended, these costs and
reimbursements amounted to $28,000 and $29,000, respectively.
8
<PAGE> 9
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(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.
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
9
<PAGE> 10
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
NOTES TO FINANCIAL STATEMENTS - UNAUDITED (Cont'd.)
(3) Commitments and Contingencies (Cont'd.)
Litigation (Cont'd.)
Madison Partnership and ISA Partnership Litigation (Cont'd.)
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 dismissed, the
Partnership intends to present a vigorous defense.
(4) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of June 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, 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.
10
<PAGE> 11
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
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 definitive 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, 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.
Immediately thereafter, on July 29, 1999, the Partnership entered into
a Purchase and Sale Agreement and Joint Escrow Instructions to sell all
of the Partnership's properties except Cooper Village shopping center
to Rubin Pachulsky Dew Properties, LLC ("Rubin Pachulsky Dew") for an
aggregate purchase price of $10,350,000. Rubin Pachulsky Dew deposited
$251,825 into escrow, which deposit is nonrefundable except in the
event of the Partnership's breach of the sale agreement. 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.
Except for a few technical exceptions, such as the Partnership's breach
of the sale agreement or title issues that cannot be corrected or
insured against, Rubin Pachulsky Dew's purchase is not subject to any
conditions. It is currently scheduled to close on September 14, 1999,
and both buyer and seller have agreed to use their best efforts to
close the transaction sooner.
Rubin Pachulsky Dew will hire Birtcher or an affiliate as property
manager for the properties for a fee that is approximately the same as
the current fee paid to the General Partner for property management. In
addition, Rubin Pachulsky Dew will
11
<PAGE> 12
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.)
hire Birtcher or an affiliate as asset manager for the properties, and
pay an incentive fee approximately equal to 10% of the profits, if any,
after Rubin Pachulsky Dew has received a 15% return on its investment.
The incentive fee, if earned, is not payable until the last 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.
Cooper Village
On May 28, 1999, the Partnership signed a Purchase and Sale Agreement
and Joint Escrow Instructions to sell its 42% in Cooper Village
shopping center (co-owned with an affiliated partnership) to Old Vine
Corporation ("Old Vine") for a sale price of $2,784,600. Old Vine is a
local shopping center operator that is not affiliated in any way with
the Partnership or the General Partner, or any of the General Partner's
principals or affiliates. On July 15, 1999, the purchase price was
reduced to $2,593,500, primarily because an existing tenant that
occupied 8,447 square feet unexpectedly broke its lease and vacated its
space.
Old Vine has completed its due diligence review. During this review an
environmental issue with regard to the dry cleaning space at the center
was discovered. Laboratory analysis indicated that one of the soil
samples contained concentrations of tetrachloroethane above the
laboratory reporting limit. The Partnership has ordered additional
borings and soil sample assessments, to determine the necessity and
cost of remediation. The Partnership expects to receive the results of
the additional tests within three weeks, together with a recommendation
regarding applicable regulatory requirements and an estimate of the
cost of any remediation that might be necessary. Old Vine has indicated
its continued interest in purchasing the property pending the results
of the additional laboratory tests, and has not asked escrow to refund
its deposit. If Old Vine purchases the property, it intends to hire
Birtcher or one of is affiliates to perform certain onsite property
management services (not accounting or asset management), pursuant to a
contract that will be cancelable at any time upon 30 days notice.
Although there can be no assurance that the proposed sales of the
properties will be completed, if the sales are completed at the stated
prices, the limited partners will receive total aggregate sale proceeds
of approximately $201 per $1,000 originally invested in the
Partnership.
The General Partner's estimate of sales 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 properties are sold, which could affect the
amount of sales proceeds available for distribution. Therefore, the
actual proceeds to be received by the limited partners may vary
materially, up or down, from the estimate.
12
<PAGE> 13
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.)
Regular distributions through June 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.
Other Matters
The Partnership is in the process of liquidating its remaining assets.
It is anticipated that a sale of those assets will occur on or before
January 1, 2000. It is the opinion of the General Partner that the
value of those 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 June 30, 1999, the investor
services system used to track the limited partners' interests,
distributions and tax information has been tested and appears to be
free of year 2000 bugs. The Partnership's properties are under review
utilizing the Building Owners and Managers Association ("BOMA")
industry standards as a guideline for necessary corrections and the
Partnership's accounting systems are undergoing a software upgrade to
correct any year 2000 issues to be completed in August 1999. The cost
of the upgrades are being 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
database programs at nominal cost.
Results of Operations for the Three Months Ended June 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 June 30, 1999, the Partnership generated
$274,000 of net operating income from operation of its properties
(exclusive of Cooper Village Partners). The increase in net operating
income in 1999 when compared to the same period in 1998, was primarily
attributable to the write off of uncollectable rent from a tenant at
The Forum in 1998.
Interest income resulted from the temporary investment of Partnership
working capital. For the three months ended June 30, 1999, interest
income was approximately $7,000.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Results of Operations for the Three Months Ended June 30, 1999
(Cont'd.)
General and administrative expenses for the three months ended June 30,
1999, included charges of $46,000 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 June 30, 1999, are direct charges of $77,000 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 decrease in general and administrative expenses for the three
months ended June 30, 1999, as compared to the corresponding period in
1998, was primarily attributable to decreases in the General Partner's
liability insurance, asset management fees, consulting and appraisal
fees during 1999. The aforementioned decreases were partially offset by
an increase in legal fees incurred.
Accrued expenses for liquidation as of June 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
Not applicable because the Partnership does not have any financial
instruments subject to market risk.
14
<PAGE> 15
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
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 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
15
<PAGE> 16
REAL ESTATE INCOME PARTNERS III,
LIMITED PARTNERSHIP
--------------------------------
ITEM 1. LEGAL PROCEEDINGS (Cont'd.)
Madison Partnership and ISA Partnership Litigation (Cont'd.)
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 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:
None filed in the period ended June 30, 1999
16
<PAGE> 17
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
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: August 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: August 15, 1999 By: /s/ Brent R. Donaldson
----------------------------------------
Brent R. Donaldson
President
Liquidity Fund Asset Management, Inc.
17
<PAGE> 18
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 661,000
<SECURITIES> 0
<RECEIVABLES> 2,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 664,000
<PP&E> 9,288,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,512,000
<CURRENT-LIABILITIES> 287,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 12,225,000
<TOTAL-LIABILITY-AND-EQUITY> 12,512,000
<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>
