<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996 or
--------------------------------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------------------- ---------------------
Commission file number 0-18407
---------------------------------------------------------
Wells Real Estate Fund III, L.P.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1800833
- ----------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3885 Holcomb Bridge Road, Norcross, Georgia 30092
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 449-7800
----------------------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
<PAGE>
Form 10-Q
---------
Wells Real Estate Fund III, L.P.
--------------------------------
INDEX
-----
Page No.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Balance Sheets - September 30, 1996
and December 31, 1995.................................... 3
Statements of Income for the Three Months and Nine Months
Ended September 30, 1996 and 1995........................ 4
Statement of Partner's Capital for the
Nine Months Ended September 30, 1996
and the Year Ended December 31, 1995..................... 5
Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995................. 6
Condensed Notes to Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................. 14
PART II. OTHER INFORMATION................................................. 22
2
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WELLS REAL ESTATE FUND III, L.P.
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
Assets September 30, 1996 December 31, 1995
------ ------------------ ------------------
<S> <C> <C>
Real estate, at cost: (Note 2)
Land $ 576,350 $ 576,350
Building and improvements, less accumulated
depreciation of $573,635 in 1996 and $367,097
in 1995 2,991,966 3,110,696
----------- -----------
Total real estate 3,568,316 3,687,046
----------- -----------
Cash and cash equivalents 437,011 500,327
Investment in joint ventures (Note 3) 13,070,476 13,446,045
Due from affiliates 174,390 336,216
Accounts receivable 60,585 60,841
Prepaid expenses and other assets 26,103 29,096
----------- -----------
Total assets $17,336,881 $18,059,571
=========== ===========
Liabilities and Partners' Capital
---------------------------------
Liabilities:
Accounts payable $ 10,409 $ 5,035
Partnership distributions payable 316,403 617,810
Due to affiliates 15,570 6,269
----------- -----------
Total liabilities 342,382 629,114
----------- -----------
Partners' capital:
General Partners 0 0
Limited Partners:
Class A - 19,635,965 units outstanding 16,994,499 17,430,457
Class B - 2,544,540 units outstanding 0 0
----------- -----------
Total partners' capital 16,994,499 17,430,457
----------- -----------
Total liabilities and partners' capital $17,336,881 $18,059,571
=========== ===========
</TABLE>
See accompanying condensed notes to financial statements
3
<PAGE>
WELLS REAL ESTATE FUND III, L.P.
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ---------------------------------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Revenues:
Rental Income (Note 2) $147,242 $ 145,389 $439,225 $ 437,339
Equity in income of
joint ventures (Note 3) 137,437 262,983 521,120 851,535
Interest Income 3,883 4,322 13,544 16,160
-------- --------- -------- ----------
288,562 412,694 973,889 1,305,034
-------- --------- -------- ----------
Expenses:
Management and leasing fees 9,376 10,240 31,451 29,092
Operating costs - rental property 67,241 58,841 95,557 156,074
Depreciation 39,577 24,279 118,731 73,165
Legal and Accounting (8,738) 642 13,606 6,840
Computer costs 479 1,167 3,196 5,143
Partnership administration 11,503 11,518 49,350 43,773
-------- --------- -------- ----------
119,438 106,687 311,891 314,027
-------- --------- -------- ----------
Net income $169,124 $ 306,007 $661,998 $ 991,007
======== ========= ======== ==========
Net income allocated to
General Partners $ 0 $ 0 $ 0 $ 0
Net income allocated to
Class A Limited Partners $169,124 $ 443,885 $661,998 $1,269,228
Net loss allocated to
Class B Limited Partners $ 0 $(137,877) $ 0 $ (406,017)
Net income per Class A
Limited Partner Unit $0.01 $ 0.02 $0.03 $ 0.06
Net loss per Class B
Limited Partner Unit $ 0 $ (0.05) $ 0 $ (0.16)
Cash distribution per Class A
Limited Partner Unit $0.02 $ 0.02 $0.06 $ 0.06
</TABLE>
See accompanying condensed notes to consolidated financial statements.
4
<PAGE>
WELLS REAL ESTATE FUND III, L.P.
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
LIMITED PARTNERS
--------------------------------
CLASS A CLASS B TOTAL
------- ------- GENERAL PARTNERS'
UNITS AMOUNTS UNITS AMOUNT PARTNER CAPITAL
---------- ------------ --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 19,635,965 $17,897,016 2,544,540 $ 179,381 $ 0 $18,076,397
Net income 0 1,104,316 0 24,183 15,205 1,143,704
Partnership distributions 0 (1,570,875) 0 (203,564) (15,205) (1,789,644)
---------- ----------- --------- --------- -------- -----------
BALANCE, DECEMBER 31, 1995 19,635,965 17,430,457 2,544,540 0 0 17,430,457
Net income 0 661,998 0 0 0 661,998
Partnership distributions 0 (1,097,956) 0 0 0 (1,097,956)
---------- ----------- --------- --------- -------- -----------
BALANCE, SEPTEMBER 30, 1996 19,635,965 $16,994,499 2,544,540 $ 0 $ 0 $16,994,499
========== =========== ========= ========= ======== ===========
</TABLE>
See accompanying condensed notes to financial statements
5
<PAGE>
WELLS REAL ESTATE FUND III, L.P.
(A GEORGIA PUBLIC LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 661,998 $ 991,007
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in income of joint ventures (521,120) (851,535)
Distributions received from joint ventures 1,058,515 1,131,461
Partnership distributions paid (1,399,363) (1,239,061)
Depreciation 118,731 73,165
Changes in assets and liabilities:
Decrease in accounts receivable 256 22,382
Decrease in prepaids and
other assets 2,992 3,870
Increase (decrease) in accounts payable 5,374 (18,235)
Increase (decrease) due to affiliates 9,301 (156)
----------- -----------
Net cash (used in) provided by
operating activities (63,316) 112,898
=========== ===========
Net (decrease) increase in cash and cash
equivalents (63,316) 112,898
Cash and cash equivalents, beginning of year 500,327 318,250
----------- -----------
Cash and cash equivalents, end of period $ 437,011 $ 431,148
=========== ===========
</TABLE>
See accompanying condensed notes to financial statements
6
<PAGE>
WELLS REAL ESTATE FUND III, L.P.
(A Georgia Public Limited Partnership)
Condensed Notes to Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) General
------------
Wells Real Estate Fund III, L.P. (the "Partnership") is a Georgia public
limited partnership having Leo F. Wells, III and Wells Capital, Inc., a
Georgia corporation, as General Partners. The Partnership was formed on
July 31, 1988, for the purpose of acquiring, developing, constructing,
owning, operating, improving, leasing and otherwise managing for investment
purposes income-producing commercial properties.
On October 24, 1988, the Partnership commenced a public offering of its
limited partnership units pursuant to a Registration Statement filed on
Form S-11 under the Securities Act of 1933. The Partnership terminated its
offering on October 23, 1990, and received gross proceeds of $22,206,319
representing subscriptions from 2,700 Limited Partners, composed to two
classes of limited partnership interests, Class A and Class B limited
partnership units.
As of September 30, 1996, the Partnership owned interest in the following
properties: (i) the Greenville Property, an office building in Greenville,
North Carolina, (ii) the Atrium, an office building in Houston Texas (iii)
the Brookwood Grill, a restaurant located in Roswell, Georgia, (iv) the
Stockbridge Village Shopping Center, a retail shopping center located in
Stockbridge, Georgia, southeast of Atlanta, (v) the G.E. Office Building
located in Richmond, Virginia, and (vi) an office/retail center in Roswell,
Georgia. All of the foregoing properties were acquired on an all cash
basis.
(b) Basis of Presentation
--------------------------
The financial statements of Wells Real Estate Fund III, L.P. (the
"Partnership") have been prepared in accordance with instructions to Form
10-Q and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These quarterly statements have not been examined by independent
accountants, but in the opinion of the General Partners, the statements for
the unaudited interim periods presented include all adjustments, which are
of a normal and recurring nature, necessary to present a fair presentation
of the results for such periods. For further information, refer to the
financial statements and footnotes included in the Partnership's Form 10-K
for the year ended December 31, 1995.
7
<PAGE>
(c) Employees
--------------
The Partnership has no direct employees. The employees of Wells Capital,
Inc., a General Partner of the Partnership, perform a full range of real
estate services including leasing and property management, accounting,
asset management and investor relations for the Partnership.
(d) Insurance
--------------
Wells Management Company, Inc., an affiliate of the General Partners,
carries comprehensive liability and extended coverage with respect to all
the properties owned directly or indirectly by the Partnership. In the
opinion of management of the registrant, the properties are adequately
insured.
(e) Competition
----------------
The Partnership will experience competition for tenants from owners and
managers of competing projects which may include the General Partners and
their affiliates. As a result, the Partnership may be required to provide
free rent, reduced charges for tenant improvements and other inducements,
all of which may have an adverse impact on results of operations. At the
time the Partnership elects to dispose of its properties, the Partnership
will also be in competition with sellers of similar properties to locate
suitable purchasers for its properties.
(2) Real Estate and Rental Income
-----------------------------
The following describes the properties in which the Partnership owns an
interest as of September 30, 1996:
The Greenville Property
-----------------------
On September 30, 1990, the Partnership acquired a 2.34 acre tract of land
located in Greenville, North Carolina (the "Greenville Property") for a
purchase price of the land of $576,350, including acquisition expenses, for
the purpose of developing, constructing and operating a two-story office
building containing approximately 34,300 rentable square feet.
The occupancy rate at the Greenville Property for the quarters ended
September 30 was 100% in 1996, 100% in 1995 and 1994, 95% in 1993, and 94%
in 1992.
The average effective annual rental per square foot at the Greenville
Property was $17.07 for 1996, $17.01 for 1995, $16.73 for 1994, $16.74 for
1993, and $14.91 for 1992.
Two tenants occupy ten percent or more of the rentable square footage -
International Business Machines Corporation ("IBM"), a business machine
corporation, and Team YASNY (McDonald's) a fast-food restaurant chain. The
8
<PAGE>
Partnership entered into a net lease with IBM for a portion of the first
floor and the entire second floor of the Greenville Property representing
approximately 23,300 rentable square feet or approximately 67% of the
Greenville Property. The initial term of the IBM lease is nine years and
ten months and commenced in April of 1991. IBM has the option to extend
the initial term of the lease for two consecutive five-year periods based
on the prevailing market values and rates for those periods. The annual
base rent payable under the IBM lease is $462,242, net of all expenses of
operation. The annual base rent will increase in the sixth year of the
initial term of the lease to $478,101 and will remain constant for each of
the subsequent years in the initial term of the lease. In addition to the
base rent, IBM is required to pay additional rent equal to its share of all
operating expenses during the lease term.
The lease provides IBM with the right of first refusal to purchase the
Greenville Property should the Partnership receive a bona fide offer from a
third party to purchase the Greenville Property during the term of the
lease. IBM also has the right of first refusal to lease all or a portion
of any space which may from time to time become available. The IBM lease
also provides that the Partnership will not lease or consent to any
sublease to any entity which, as a major part of its business engages in
sales and services similar to those of IBM.
Team YASNY's original lease represented 3,122 rentable square feet. In
1994, Team YASNY expanded and increased their rentable space by an
additional 1,232 square feet for a total of 4,354 rentable square feet.
The Team YASNY lease calls for an annual rent of $51,717 in 1996 and
$53,200 in 1997. The Team YASNY lease expires September 30, 1997.
(3) Investment in Joint Ventures.
-----------------------------
The Partnership also owns the following properties through joint ventures.
The Partnership does not have control over the operations of the joint
ventures; however, it does exercise significant influence. Accordingly,
investment in joint ventures is recorded on the equity method.
FUND II AND FUND III JOINT VENTURE
----------------------------------
On April 3, 1989, the Partnership formed a joint venture, Fund II and Fund
III Associates (the "Fund II-Fund III Joint Venture") with an existing
joint venture (the "Fund II-Fund II-OW Joint Venture") formed by Wells Real
Estate Fund II ("Wells Fund II"), a Georgia public limited partnership
having Leo F. Wells, III and Wells Capital, Inc., a Georgia corporation, as
General Partners, and Wells Real Estate Fund II-OW ("Wells Fund II-OW"), a
Georgia public limited partnership having Leo F. Wells, III and Wells
Capital, Inc., a Georgia corporation, as General Partners. Wells Fund II
and Wells Fund II-OW are affiliated with the Partnership through common
general partners with investment objectives substantially identical to
those of the Partnership. The Partnership owns interests in the following
two properties through the Fund II-Fund III Joint Venture:
9
<PAGE>
The Atrium/Fund II-Fund III Joint Venture
-----------------------------------------
In April 1989, the Fund II-Fund III Joint Venture acquired a four-story
office building located on a 5.6 acre tract of land adjacent to the Johnson
Space Center in metropolitan Houston, in Nassau Bay, Harris County, Texas,
known as "The Atrium at Nassau Bay" (the "Atrium").
The funds used by the Fund II-Fund III Joint Venture to acquire the Atrium
were derived from capital contributions made to the Fund II-Fund III Joint
Venture by the Fund II-Fund II-OW Joint Venture and the Partnership in the
amounts of $8,327,856 and $2,538,000, respectively, for total initial
capital contributions of $10,865,856. As of September 30, 1996, the Fund
II-Fund II-OW Joint Venture and the Partnership had made total capital
contributions to the Fund II-Fund III Joint Venture of approximately
$8,330,000 and $4,448,000, respectively, for the acquisition and
development of the Atrium. The Fund II-Fund II-OW Joint Venture holds an
approximately 66% equity interest in the Fund II-Fund III Joint Venture,
and the Partnership holds an approximately 34% equity interest in the Fund
II-Fund III Joint Venture.
The Atrium was first occupied in 1987 and contains approximately 119,000
net rentable square feet. Each floor of the Atrium was originally leased
under a separate lease to Lockheed Engineering and Science Company, Inc., a
wholly-owned subsidiary of the Lockheed Company, each of which lease had
lease terms of approximately eight years and each of which expired on June
30, 1996.
Since Lockheed vacated the building as of June 30, 1996, the occupancy rate
of the Atrium was 0% for the third quarter of 1996. Although the
Partnership has responded to various potential tenants regarding leasing
the Atrium, no leases have been signed as of September 30, 1996. It is
anticipated that when leases are obtained for the Atrium, rental rates will
be lower than those paid by the previous tenant, and income could decrease
significantly under these new leases. In addition, such leases are likely
to require substantial tenant finish and refurbishment expenditures by the
Partnership which could substantially reduce future cash distributions to
Limited Partners.
The Brookwood Grill Property/Fund II-Fund III Joint Venture
-----------------------------------------------------------
On January 31, 1990, the Fund II-Fund II-OW Joint Venture acquired a 5.8
acre tract of undeveloped real property at the intersection of Warsaw Road
and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the "880
Property"). The Fund II-Fund II-OW Joint Venture paid $1,848,561,
including acquisition expenses, for the 5.8 acre tract of undeveloped
property.
On September 20, 1991, the Fund II-Fund II-OW Joint Venture contributed the
880 Property, along with its interest as landlord under the lease agreement
referred to below, as a capital contribution to the Fund II-Fund III Joint
Venture. As of September 20, 1991, the Fund II-Fund II-OW Joint Venture
10
<PAGE>
had expended approximately $2,128,000 for the land acquisition and
development of the 880 Property.
As of September 20, 1991, a lease agreement was entered into with the
Brookwood Grill of Roswell, Inc. for the development of approximately 1.5
acres and the construction of a 7,440 square foot restaurant. The terms of
the lease call for an initial term of 9 years and 11 months, with two
additional 10-year option periods. The agreement calls for a base rental
of $217,006 per year for Years 1 through 5, with a 15% increase for the
remainder of the initial term. Rental rates for all option periods will be
based on the prevailing market values and rates for those periods. Under
the terms of the lease, the Fund II-Fund III Joint Venture was required to
make certain improvements for the development and construction of the
restaurant building together with parking areas, driveways, landscaping and
other improvements as agreed. The Fund II-Fund III Joint Venture has
expended approximately $1,100,000 for such improvements. In addition to
the base rent described above, the tenant is required to pay "additional
rent" in amounts equal to a 12% per annum return on all amounts expended
for such improvements.
The occupancy rate for the Brookwood Grill, a sole tenant, for the quarters
ended September 30 was 100% for 1996, 1995, 1994, 1993, and 1992. The
average effective annual rental per square foot at the Brookwood Grill is
$30.32 for 1996, 1995, 1994 and 1993, and $24.60 for 1992, the first year
of occupancy.
As of September 30, 1996, the Fund II-Fund II-OW Joint Venture and the
Partnership had made total contributions to the Fund II-Fund III Joint
Venture of approximately $2,128,000 and $1,330,000, respectively, for the
acquisition and development of the Brookwood Grill. The Fund II-Fund II-OW
Joint Venture holds an approximately 62% equity interest in the Brookwood
Grill property, and the Partnership holds an approximately 38% equity
interest in the project.
On January 10, 1995, the Fund II-Fund III Joint Venture contributed the
remaining 4.3 acres of land comprising the 880 Property to a new joint
venture, Fund II, III, VI and VII Associates. This property is described
below.
11
<PAGE>
FUND II, III, VI AND VII ASSOCIATES/HOLCOMB BRIDGE ROAD PROPERTY
----------------------------------------------------------------
On January 10, 1995, the Partnership, Fund II-Fund III Joint Venture, and
Wells Fund VI entered into a Joint Venture Agreement known as Fund II, III,
VI and VII Associates ("Fund II, III, VI and VII Joint Venture"). The Fund
II-Fund III Joint Venture is a joint venture between Wells Real Estate Fund
III, a Georgia public limited partnership having Leo F. Wells, III and
Wells Capital, Inc. as general partners, and an existing joint venture (the
"Fund II-Fund II-OW Joint Venture") formed by Wells Real Estate Fund II
("Wells Fund II"), a Georgia public limited partnership having Leo F.
Wells, III and Wells Capital, Inc. as general partners, and Wells Real
Estate Fund II-OW ("Wells Fund II-OW"), a Georgia public limited
partnership having Leo F. Wells, III and Wells Capital, Inc. as general
partners. The investment objectives of Wells Fund II, Wells Fund II-OW,
Wells Fund III, and Wells Fund VI and VII are substantially identical to
those of the Partnership.
In January, 1995, the Fund II-Fund III Joint Venture contributed to the
Fund II, III, VI and VII Joint venture approximately 4.3 acres of land at
the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton
County, Georgia (the "Holcomb Bridge Road Property") including land
improvements. Development is substantially complete on two buildings
containing a total of approximately 49,500 square feet. Six tenants
occupied the 880 Holcomb Bridge property as of September 30, 1996 for an
occupancy rate of 54%. The average effective annual rental was $6.83 per
square foot for the third quarter of 1996.
As of September 30, 1996, Fund II-Fund III Joint Venture had contributed
$1,729,116 in land and improvements for an equity interest of approximately
25.2%, Wells Fund VI contributed $1,699,846 for an equity interest of
approximately 26.0%, and Wells Fund VII contributed $3,217,154 for an
equity interest of approximately 48.8%. The total costs to develop the
Holcomb Bridge Road Property is currently estimated to be approximately
$5,000,000, excluding land. It is anticipated that of the remaining cost
of approximately $83,000, $16,000 will be contributed by Wells Fund VI and
$67,000 by Wells Fund VII, after which the equity interests in the property
will be 48.8% for Wells Fund VII, 25.5% for Wells Fund VI, and 25.7% for
the Fund II-Fund III Joint Venture. Wells Fund VII and Wells Fund VI have
reserved sufficient funds for this purpose. The Partnership is not
obligated to provide any additional funding for the Holcomb Bridge Road
Property.
FUND III AND FUND IV JOINT VENTURE
----------------------------------
On March 27, 1991, the Partnership and Wells Real Estate Fund IV, L.P.
("Wells Fund IV"), a Georgia public limited partnership having Leo F.
Wells, III and Wells Partners, L.P. as general partners, entered into a
Joint Venture Agreement known as Fund III and Fund IV Associates (the "Fund
III-Fund IV Joint Venture"). As set forth above, Wells Partners, L.P. is a
private limited partnership having Wells Capital, Inc., a general partner
of the Partnership, as its sole general partner. The investment objectives
of Wells Fund IV are substantially identical to those of the Partnership.
The Partnership holds an approximate 57.3% equity interest in the Fund III-
12
<PAGE>
Fund IV Joint Venture which owns and operates the multi-tenant retail
center and an office building described below. As of September 30, 1996,
the Partnership had contributed $8,119,603 and Wells Fund IV had
contributed $6,131,677 for total contributions of $14,251,280 to the Fund
III-Fund IV Joint Venture for the acquisition and development of two
properties as described below.
The Stockbridge Property/Fund III-Fund IV Joint Venture
-------------------------------------------------------
On April 4, 1991, the Fund III-Fund IV Joint Venture purchased 13.62 acres
of real property located in Clayton County, Georgia, for the purchase price
of $3,057,729 including acquisition costs, for the purpose of developing,
constructing and operating a shopping center known as the Stockbridge
Village Shopping Center (the "Stockbridge Property"). The Stockbridge
Property consists of a multi-tenant shopping center containing
approximately 113,011 square feet of which approximately 64,097 square feet
is occupied by the Kroger Company, a retail grocery chain. The lease with
the Kroger Company is for an initial term of 20 years commencing November
14, 1991, with an option to extend for four consecutive five-year periods
at the same rental rate as the original lease. The annual base rent
payable under the Kroger lease during the initial term is $492,692. The
remaining 48,914 square feet is comprised of 12 separate retail spaces and
3 free-standing buildings. The occupancy rates at the Stockbridge Property
for the quarters ended September 30 were 93% in 1996, 100% in 1995, 99% in
1994 and 1993, and 94% in 1992. The average effective annual rental per
square foot at the Stockbridge Property was $9.56 for 1996, $10.16 for
1995, $10.26 for 1994, $9.13 for 1993, and $7.34 for 1992.
As of September 30, 1996, the Partnership had contributed a total of
$4,515,042 and Wells Fund IV had contributed a total of $5,047,132 to fund
the total cost of approximately $9,562,000 for the acquisition and
development of the Stockbridge Property.
The G.E. Building/Richmond/Fund III-Fund IV Joint Venture
---------------------------------------------------------
The G.E. Building is a two-story office building containing approximately
43,000 square feet located in Richmond, Virginia which was acquired by the
Fund III-Fund IV Joint Venture on July 1, 1992 for a purchase price of
$4,687,600.
The entire G.E. Building is currently under a net lease to General Electric
("G.E."), a corporate office for the lighting division. The annual base
rent payable is currently $530,742 with annual base increases of 2%. The
G.E. lease expires March 31, 2000, with an option to extend the lease for
one additional five-year period at the same rental rate as the original
lease. The occupancy rate at the G.E. Building for the quarters ended
September 30 was 100% for 1996, 1995, 1994, 1993, and 1992. The average
effective annual rental per square foot at the G.E. Building is $12.27 for
1996, 1995, 1994, 1993, and 1992. As of September 30, 1996, a total of
$4,689,106 had been incurred for the acquisition of the G.E. Building. Of
13
<PAGE>
this amount, Wells Fund IV contributed $1,084,545 and the Partnership
contributed $3,604,561 to the Fund III-Fund IV Joint Venture.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
The following discussion and analysis should be read in conjunction with
the accompanying financial statements of the Partnership and notes thereto.
This Report contains forward-looking statements, with the meaning of
Section 27A of the Securities Act of 1993 and 21E of the Securities
Exchange Act of 1934, including discussion and analysis of the financial
condition of the Partnership, anticipated capital expenditures required to
complete certain projects, amounts of cash distributions anticipated to be
distributed to Limited Partners in the future and certain other matters.
Readers of this Report should be aware that there are various factors that
could cause actual results to differ materially from any forward-looking
statement made in the Report, which include construction costs which may
exceed estimates, construction delays, lease-up risks, inability to obtain
new tenants upon the expiration of existing leases, and the potential need
to fund tenant improvements or other capital expenditures out of operating
cash flow.
Results in Operations and Changes in Financial Conditions
---------------------------------------------------------
General
-------
Gross revenues of the Partnership were $288,562 for the three months ended
September 30, 1996, as compared to $412,694 for the three months ended
September 30, 1995, and $973,889 for the nine months ended September 30,
1996, as compared to $1,305,034 for the same period in 1995. The decrease
for 1996 over 1995 was due primarily to decreased income from joint
ventures which was primarily due to the increased depreciation expenses
described below.
Expenses of the Partnership decreased for 1996 compared to 1995 for the
three months and nine months ended September 30 due primarily to increased
tenant reimbursements. Depreciation expenses of the Partnership and the
joint ventures increased in 1996 as compared to 1995 due to a change in the
estimated useful lives of all buildings and improvements in which the
Partnership owned an interest as of December 31, 1995, from 40 years to 25
years. Legal and accounting expenses also increased in 1996 compared to
1995.
Net cash used in operating activities decreased from cash provided of
$112,898 in 1995 to a use of cash of $63,316 in 1996. The decrease was due
primarily to decreased distributions received from joint ventures and an
increase in distributions paid. Cash and cash equivalents remained
relatively stable for each of the nine months ending September 30, 1996 and
1995. The Partnership generally distributes cash available less reserves.
As a result, the level of cash remains relatively stable.
14
<PAGE>
The Partnership's cash distributions to the Limited Partners holding Class
A Units were $0.02 per Unit for each of the three months ended September
30, 1996 and 1995 and $0.06 per Unit for each of the nine months ended
September 30, 1996 and 1995. All distributions for 1995 and 1996 were made
from investment income. No cash distributions were made to the Limited
Partners holding Class B Units or the General Partners for the three months
or nine months ended September 30, 1996 and 1995.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE>
PROPERTY OPERATIONS
- -------------------
As of September 30, 1996, the Partnership owned interests in the following
properties:
<TABLE>
<CAPTION>
The Greenville Property
- -----------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $147,242 $146,323 $439,225 $437,339
Expenses:
Depreciation 39,577 24,388 118,731 73,165
Management and leasing expenses 21,995 17,578 57,817 55,407
Other operating expenses 53,182 47,317 69,192 129,760
-------- -------- -------- --------
114,754 89,283 245,740 258,332
-------- -------- -------- --------
Net income $ 32,488 $ 57,040 $193,485 $179,007
======== ======== ======== ========
Occupied % 100% 100% 100% 100%
Partnership's Ownership % 100% 100% 100% 100%
Cash generated to the Partnership $ 73,858 $ 69,356 $318,847 $258,500
Net income allocated to the
Partnership $ 32,488 $ 57,040 $193,485 $179,007
</TABLE>
Rental income remained stable from 1995 to 1996. The increase in depreciation
expenses was due to the change in the estimated useful lives of buildings and
improvements as previously discussed under the "General" section of "Results of
Operations and Changes in Financial Condition". Operating expenses decreased
due to increased tenant reimbursement by IBM received in the second quarter of
1995. Prior year expenses were reimbursed, and IBM is now making monthly
estimated payments toward current year expenses.
16
<PAGE>
The Atrium/Fund II-Fund III Joint Venture
- -----------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30,1996 September 30,1995 September 30,1996 September 30,1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 8,909 $519,836 $1,048,582 $1,559,509
Interest income 6,091 6,658 21,409 21,762
--------- -------- ---------- ----------
15,000 526,494 1,069,991 1,581,271
--------- -------- ---------- ----------
Expenses:
Depreciation 168,691 117,029 505,788 351,087
Management and leasing expenses 0 35,691 71,380 107,071
Other operating expenses (176,240) 64,686 57,310 196,713
--------- -------- ---------- ----------
(7,549) 217,406 634,478 654,871
--------- -------- ---------- ----------
Net income $ 22,549 $309,088 $ 435,513 $ 926,400
========= ======== ========== ==========
Occupied % 0% 100% 0% 100%
Partnership's Ownership % 34.4% 34.4% 34.4% 34.4%
Cash distributed to the Partnership $ 0 $154,593 $ 247,603 $ 463,481
Net income allocated to the
Partnership $ 7,757 $106,326 $ 149,817 $ 318,682
</TABLE>
Rental income decreased for the three and nine months ended September 30, 1996
compared to the same periods in 1995 due to the termination of the Lockheed
lease as of June 30, 1996. The increase in depreciation expenses for the three
months and nine months ended September 30, 1996 over the same periods of 1995 is
due to the change in the estimated useful lives of buildings and improvements
which was made in the fourth quarter 1995. The decrease in operating expenses
for the three month period ended September 30, 1996 compared to September 30,
1995 resulted from a reclassification of prior years' excess reimbursements.
The decrease in the nine month operating expenses for September 30, 1996
compared to September 30, 1995 is due to this reclassification and the vacancy
of the project during the quarter.
The lease with Lockheed Company expired on June 30, 1996, and although the
Partnership has responded to various potential tenants regarding leasing the
Atrium, no leases have been signed as of September 30, 1996. It is anticipated
that when leases are obtained for the Atrium, rental rates will be lower than
those paid by the previous tenant, and income could decrease significantly under
these new leases. In addition, such leases are likely to require substantial
tenant finish and refurbishment expenditures by the Partnership which could
substantially reduce future cash distributions to Limited Partners.
17
<PAGE>
The Brookwood Grill Property/Fund II and Fund III Joint Venture
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental Income $56,797 $60,316 $169,172 $172,691
Equity loss of joint venture (573) 0 (26,996) 0
------- ------- -------- --------
56,224 60,316 142,176 172,691
------- ------- -------- --------
Expenses:
Depreciation 13,503 14,664 40,509 43,994
Management and leasing expenses 7,483 7,833 20,178 22,112
Other operating expenses 13,665 11,919 48,941 30,750
------- ------- -------- --------
34,651 34,416 109,628 96,856
------- ------- -------- --------
Net income $21,573 $25,900 $ 32,548 $ 75,835
======= ======= ======== ========
Occupied % 100% 100% 100% 100%
Partnership Ownership % 37.65% 37.65% 37.65% 37.65%
Cash distributed to the Partnership $16,207 $15,111 $ 39,829 $ 44,631
Net income allocated to the
Partnership $ 8,122 $ 9,751 $ 12,254 $ 28,552
</TABLE>
Rental income decreased slightly for the three months and nine months ended
September 30, 1996 compared to the same periods in 1995 due primarily to a
decrease in billing of expenses to the tenant. Expenses were stable for the
three months ended September 30, 1996 and 1995, but were substantially higher
for the nine month periods ended September 30, 1996 compared to September 30,
1995. The increase in other operating expenses is the result of decreased
property tax reimbursements and a reimbursement to the tenant in first quarter
of 1996 of administrative charges paid in 1995. Although there was a change in
useful lives of assets from forty years to twenty-five years in December 1995,
depreciation expense decreased in 1996 compared to the same periods in 1995 due
to the contribution of land and land improvements by Brookwood Grill to the 880
Holcomb Bridge Property. Net income decreased for both the three and nine month
periods of 1996 compared to 1995 for the reasons cited above and due to the net
loss generated by the Fund II, III, VI, and VII Joint Venture.
18
<PAGE>
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues:
Rental income $82,869 $136,044
Expenses:
Depreciation 54,939 138,881
Management and leasing expenses 8,530 14,610
Other operating expenses 22,279 70,012
------- --------
85,748 223,503
------- --------
Net Loss $(2,879) $(87,459)
======= ========
Occupied % 53.6% 53.6%
Partnership's Ownership % in the
Fund II, III, VI, VII Joint Venture 9.5% 9.5%
Cash distributed to the Fund II-Fund III
Joint Venture* $ 7,022 $ 7,022
Net loss allocated to the Fund II-Fund III
Joint Venture* $ (572) $(26,995)
</TABLE>
* The Partnership holds a 37.65% ownership in the Fund II-Fund III Joint
Venture.
In January 1995, the Fund II-Fund III Joint Venture contributed 4.3 acres of
land and land improvements at 880 Holcomb Bridge Road (the "Holcomb Bridge Road
Property") to the Fund II, III, VI, and VII Joint Venture. Development is being
completed on two buildings with a total of approximately 49,500 square feet. As
of September 30, 1996, six tenants are occupying approximately 26,549 square
feet of space in the retail and office building under leases of varying lengths.
Since the property was not developed as of September 30, 1995, no comparative
figures are available for the quarter.
As of September 30, 1996, the Fund II-Fund III Joint Venture contributed
$1,729,116 in land and improvements for an equity interest of approximately
25.2%, Wells Fund VI contributed $1,699,846 for an equity interest of
approximately 26.0%, and Wells Fund VII contributed $3,217,154 for an equity
interest of approximately 48.8%. The total costs to develop the Holcomb Bridge
Road Property is currently estimated to be approximately $5,000,000, excluding
land. It is anticipated that of the remaining cost of approximately $83,000,
$16,000 will be contributed by Wells Fund VI and $67,000 by Wells Fund VII,
after which the equity interests in the property will be 48.8% for Wells Fund
VII, 25.5% for Wells Fund VI, and 25.7% for the Fund II-Fund III Joint Venture.
Wells Fund VI and Wells Fund VII have reserved sufficient funds for this
purpose.
19
<PAGE>
The Stockbridge Property/Fund III-Fund IV Joint Venture
- -------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $271,532 $300,453 $809,874 $896,724
Interest income 3,526 3,760 10,218 12,302
-------- -------- -------- --------
275,058 304,213 820,092 909,026
-------- -------- -------- --------
Expenses:
Depreciation 84,747 55,355 254,243 165,947
Management and leasing expenses 24,114 29,567 75,434 88,833
Other expenses 26,243 18,715 74,605 49,282
-------- -------- -------- --------
135,104 103,637 404,282 304,062
-------- -------- -------- --------
Net income $139,954 $200,576 $415,810 $604,964
======== ======== ======== ========
Occupied % 93% 100% 93% 100%
Partnership's Ownership % 57.3% 57.3% 57.3% 57.3%
Cash distributed to the Partnership $135,507 $152,800 $404,219 $458,882
Net income allocated to the
Partnership $ 80,217 $114,963 $238,328 $346,745
</TABLE>
Rental income decreased for the three and the nine months ended September 30,
1996, as compared to the same periods in 1995, due to a decrease in occupancy
resulting from the early termination of a lease for 8,025 square feet. Although
no leases have been signed as yet, every effort is being made to re-lease this
space. Expenses of the property increased from $304,062 in 1995 to $404,282 in
1996 due primarily to the increase in depreciation expenses as a result of the
change in the estimated useful lives of buildings and improvements as previously
discussed under the "General" section of "Results of Operations and Changes in
Financial Condition", timing differences in billing tenant expense
reimbursements plus an extraordinary painting expenditure.
20
<PAGE>
The G.E. Building/Richmond/Fund III-Fund IV Joint Venture
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $131,857 $131,857 $395,569 $395,569
Expenses:
Depreciation 49,056 28,159 147,162 84,479
Management and leasing expenses 9,965 9,965 29,895 29,856
Other operating expenses 708 1,440 7,890 6,345
-------- -------- -------- --------
59,729 39,564 184,947 120,680
-------- -------- -------- --------
Net income $ 72,128 $ 92,293 $210,622 $274,889
======== ======== ======== ========
Occupied % 100% 100% 100% 100%
Partnership's Ownership % 57.3% 57.3% 57.3% 57.3%
Cash distributed to the Partnership $ 69,214 $ 68,483 $205,040 $202,949
Net income allocated to the
Partnership $ 41,341 $ 52,899 $120,721 $157,557
</TABLE>
Rental income remained constant for 1996 and 1995. Total expenses increased in
1996, over 1995, and accordingly, net income decreased in 1996, as compared to
1995, due primarily to the increase in depreciation expenses as a result of the
change in the estimated useful lives of buildings and improvements as previously
discussed under the "General" section of "Results of Operations and Change in
Financial Condition".
21
<PAGE>
PART II - OTHER INFORMATION
----------------------------
Item 6(b). No reports on Form 8-K were filed during the third quarter of 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WELLS REAL ESTATE FUND III, L.P.
(Registrant)
Dated: November 11, 1996 By: /s/Leo F. Wells, III
-------------------------------
Leo F. Wells, III, as Individual
General Partner and as President,
Sole Director and Chief Financial
Officer of Wells Capital, Inc.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 437,011
<SECURITIES> 13,070,476
<RECEIVABLES> 234,975
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,103
<PP&E> 4,141,951
<DEPRECIATION> 573,634
<TOTAL-ASSETS> 17,336,881
<CURRENT-LIABILITIES> 342,382
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,994,499
<TOTAL-LIABILITY-AND-EQUITY> 17,336,881
<SALES> 0
<TOTAL-REVENUES> 973,889
<CGS> 0
<TOTAL-COSTS> 311,891
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 661,998
<INCOME-TAX> 661,998
<INCOME-CONTINUING> 661,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 661,998
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
