FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(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, 1998
[ ] 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 0-18419
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
(Exact name of small business issuer as specified in its charter)
Delaware 31-1266850
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
BALANCE SHEET
(Unaudited)
September 30, 1998
(in thousands, except unit data)
Assets
Cash and cash equivalents $ 968
Receivables and deposits 195
Other assets 208
Investment properties:
Land $ 1,525
Buildings and related personal property 12,942
14,467
Less accumulated depreciation (3,909) 10,558
$11,929
Liabilities and Partners' Capital (Deficit)
Liabilities
Tenant security deposit liabilities $ 14
Accrued property taxes 78
Other liabilities 113
Mortgage notes payable 11,461
Partners' Capital (Deficit)
General partner's $ (58)
Class A limited partners' (850,900 units
issued and outstanding) 302
Class B limited partners' (8,600 units
issued and outstanding) 19 263
$11,929
See Accompanying Notes to Financial Statements
b)
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues:
Rental income $ 324 416 $ 1,151 $ 1,327
Other income 27 9 537 29
Total revenues 351 425 1,688 1,356
Expenses:
Operating 139 117 287 338
General and administrative 21 18 73 52
Depreciation 107 107 317 319
Interest 268 272 804 821
Property taxes 25 26 75 75
Total expenses 560 540 1,556 1,605
Net income (loss) $ (209) $ (115) $ 132 $ (249)
Net income (loss) allocated
to general partner (1%) $ (2) $ (1) $ 1 $ (2)
Net income (loss) allocated to Class A
limited partners (98.01%) (205) (113) 130 (245)
Net income (loss) allocated to Class B
limited partners (.99%) (2) (1) 1 (2)
$ (209) $ (115) $ 132 $ (249)
Net income (loss) per Class A limited
partnership unit $ (.24) $ (.13) $ .15 $ (.29)
See Accompanying Notes to Financial Statements
c)
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands)
General Limited Partners'
Partner's Class A Class B Total
Original capital contributions $ 1 $8,420 $ 86 $8,507
Partner's (deficit) capital at
December 31, 1997 $ (59) $ 172 $ 18 $ 131
Net income for the nine
months ended September 30, 1998 1 130 1 132
Partners' (deficit) capital at
September 30, 1998 $ (58) $ 302 $ 19 $ 263
See Accompanying Notes to Financial Statements
d)
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net income (loss) $ 132 $ (249)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 317 319
Amortization of loan costs and leasing
commissions 13 10
Change in accounts:
Receivables and deposits 54 4
Other assets (9) (7)
Accounts payable (17) (16)
Tenant security deposit liabilities 7 2
Accrued property taxes 22 21
Other liabilities (52) (30)
Net cash provided by operating activities 467 54
Cash flows from investing activities:
Property improvements and replacements (30) --
Lease commissions paid (111) (11)
Net cash used in investing activities (141) (11)
Cash flows from financing activities:
Mortgage principal payments (195) (177)
Net cash used in financing activities (195) (177)
Net increase (decrease) in cash and cash equivalents 131 (134)
Cash and cash equivalents at beginning of period 837 964
Cash and cash equivalents at end of period $ 968 $ 830
Supplemental disclosure of cash flow information:
Cash paid for interest $ 803 $ 820
See Accompanying Notes to Financial Statements
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements for Brunner Companies Income
Properties LP. III (the "Partnership"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of 104 Management, Inc. (the "General Partner"), an Ohio
corporation, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Partnership's annual report on
Form 10-KSB for the fiscal year ended December 31, 1997.
Certain reclassifications have been made to the 1997 information to conform to
the 1998 presentation.
NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
The partnership agreement provides for certain payments to affiliates for
services and for reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership. The following payments were made to affiliates of the
General Partner during the nine months ended September 30, 1998 and 1997 (in
thousands):
1998 1997
Property management fees
(included in operating expense) $53 $42
Reimbursement for services of affiliates
(included in general and administrative expense) 35 19
Additionally, the Partnership paid approximately $109,000 and $11,000 during the
nine months ended September 30, 1998 and 1997, respectively, to an affiliate of
the General Partner for lease commissions at the Partnership's commercial
properties. These lease commissions are included in other assets and are
amortized over the terms of the respective leases.
For the period from January 1, 1997 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency affiliated with the
General Partner, but with an insurer unaffiliated with the General Partner. An
affiliate of the General Partner acquired, in the acquisition of a business,
certain financial obligations from an insurance agency which was later acquired
by the agent who placed the master policy. The agent assumed the financial
obligations to the affiliate of the General Partner which received payments on
these obligations from the agent. The amount of the Partnership's insurance
premiums that accrued to the benefit of the affiliate of the General Partner by
virtue of the agent's obligations was not significant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership's investment properties consist of two retail centers. The
following table sets forth the average physical occupancy of the properties for
each of the nine months ended September 30, 1998 and 1997:
Average Occupancy
1998 1997
Gateway Plaza
Mt. Sterling, Kentucky 55% 56%
Highpoint Village
Bellefontaine, Ohio 93% 95%
Wal-Mart, an anchor tenant, vacated Gateway Plaza in May of 1996. This former
tenant was liable for its rental payments through the year 2008 when its lease
was scheduled to expire. However, during May of 1998, the Partnership entered
into a buyout agreement with Wal-Mart whereby the lease was terminated and Wal-
Mart paid a lease termination fee in lieu of the remaining lease obligation. As
a result of the Wal-Mart lease termination, the Partnership has negotiated a new
lease with J. C. Penney. The term of the new lease is fifteen years, and allows
J. C. Penney to relocate into 50,000 square feet of the Wal-Mart space. The
Partnership will pay approximately $300,000 toward the costs incurred by J. C.
Penney to retrofit the new space. J. C. Penney moved into its new space on
November 1, 1998. The average rental rate for the term of the new lease is
$4.10 per square foot. The General Partner is currently trying to locate a
tenant(s) to occupy the remaining Wal-Mart space. Occupancy at Gateway increased
to 72% when J. C. Penney moved into their new space.
The Partnership's net income was approximately $132,000 for the nine months
ended September 30, 1998, compared to a net loss of approximately $249,000 for
the nine months ended September 30, 1997. The Partnership's net loss was
approximately $209,000 for the three months ended September 30, 1998, compared
to net income of approximately $115,000 for the corresponding period of 1997.
The increase in net income for the nine month period ended September 30, 1998 is
primarily due to an increase in other income and a decrease in operating
expenses. The increase in other income is primarily due to the lease
termination fee received in connection with the Wal-Mart lease buyout, as
discussed above. The decrease in operating expenses is primarily due to a
decrease in maintenance expense at Highpoint Village resulting from significant
parking lot repairs being made during 1997. Partially offsetting the increase
in other income and the decrease in operating expenses was a decrease in rental
revenue and an increase in general and administrative expenses. The decrease in
rental revenue is primarily attributable to a decrease in rental rates and
occupancy at Highpoint Village and the decrease in occupancy and the absence of
rental collections from Gateway Plaza's anchor tenant, Wal-Mart, as a result of
the lease termination agreement effective May 1998. General and administrative
expenses increased primarily due to increased expense reimbursements to an
affiliate of the General Partner.
The decrease in net income for the three months period, ended September 30, 1998
is primarily attributable to a decrease in rental revenue. The decrease in
rental revenue is primarily due to decreases in rental rates and occupancy at
Gateway Plaza and Highpoint Village.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of its investment properties to assess
the feasibility of increasing rents, maintaining or increasing occupancy levels
and protecting the Partnership from increases in expense. As part of this plan,
the General Partner attempts to protect the Partnership from the burden of
inflation-related increases in expenses by increasing rents and maintaining a
high overall occupancy level. However, due to changing market conditions, which
can result in the use of rental concessions and rental reductions to offset
softening market conditions, there is no guarantee that the General Partner will
be able to sustain such a plan.
At September 30, 1998, the Partnership held cash and cash equivalents of
approximately $968,000 compared to approximately $830,000 at September 30, 1997.
The net increase in cash and cash equivalents for the nine months ended
September 30, 1998 was approximately $131,000 compared to a net decrease of
approximately $134,000 for the nine months ended September 30, 1997. Net cash
provided by operating activities increased primarily due to the collection of
the lease termination fee and decreased operating expenses, as discussed above,
and an increase in cash provided by receivables and deposits relating to the
timing of receipts. Net cash used in investing activities increased due to
increases in lease commissions paid and property improvements and replacements.
Net cash used in financing activities increased due to an increase in principal
payments made on the mortgage notes.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the properties to adequately maintain the physical
assets and other operating needs of the Partnership and to comply with Federal,
State and local legal and regulatory requirements. Such assets are currently
thought to be sufficient for any near term needs of the Partnership. The General
Partner is currently assessing the need for capital improvements at each of the
Partnership's properties. To the extent that additional capital improvements
are required, the Partnership's distributable cash flow, if any, may be
adversely effected. The mortgage indebtedness of approximately $11,461 matures
in 2008 with balloon payments due at maturity. The General Partner will attempt
to refinance such indebtedness or sell the properties prior to such maturity
date. If the properties cannot be refinanced or sold for a sufficient amount,
the Partnership will risk losing such properties through foreclosure. No
distributions were made in 1997 or during the first nine months of 1998. The
Partnership's distribution policy will be reviewed on a quarterly basis. There
can be no assurance, however, that the Partnership will generate sufficient
funds from operations to permit distributions to its partners in 1998 or
subsequent periods.
Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Partnership is
dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any computer programs or hardware
that have date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Managing Agent has determined that it will be required to modify or replace
significant portions of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Managing Agent
presently believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Managing
Agent and the Partnership.
Status of Progress in Becoming Year 2000 Compliant
The Managing Agent's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Managing Agent has fully completed its assessment of all information systems
that could be significantly affected by the Year 2000, and has begun the
remediation, testing and implementation phase on both hardware and software
systems. Assessments are continuing in regards to embedded systems in operating
equipment. The Managing Agent anticipates having all phases complete by June 1,
1999.
In addition to the areas the Partnership is relying on the Managing Agent to
verify compliance with, the Partnership has certain operating equipment,
primarily at the property sites, which needed to be evaluated for Year 2000
compliance. The focus of the General Partner was to the security systems,
elevators, heating-ventilation-air-conditioning systems, telephone systems and
switches, and sprinkler systems. The General Partner is currently engaged in the
identification of all non-compliant operational systems, and is in the process
of estimating the costs associated with any potential modifications or
replacements needed to such systems in order for them to be Year 2000 compliant.
It is not expected that such costs would have a material adverse affect upon
the operations of the Partnership.
Risk Associated with the Year 2000
The General Partner believes that the Managing Agent has an effective program in
place to resolve the Year 2000 issue in a timely manner and has appropriate
contingency plans in place for critical applications that could affect the
Partnership's operations. To date, the General Partner is not aware of any
external agent with a Year 2000 issue that would materially impact the
Partnership's results of operations, liquidity or capital resources. However,
the General Partner has no means of ensuring that external agents will be Year
2000 compliant. The General Partner does not believe that the inability of
external agents to complete their Year 2000 resolution process in a timely
manner will have a material impact on the financial position or results of
operations of the Partnership. However, the effect of non-compliance by
external agents is not readily determinable.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance, or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BRUNNER COMPANIES INCOME PROPERTIES L. P. III,
By: Brunner Management Limited Partnership
Its General Partner
By: 104 Management, Inc.
Its Managing General Partner
By: /s/Carroll D. Vinson
Carroll D. Vinson
President and Director
By: /s/Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President and Chief Accounting
Officer
Date: November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Brunner
Companies Income Properties L.P. III 1998 Quarter ended September 30, 1998
10-QSB and is qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000847319
<NAME> BRUNNER COMPANIES INCOME PROPERTIES L.P. III
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 968
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 14,467
<DEPRECIATION> 3,909
<TOTAL-ASSETS> 11,929
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 11,461
0
0
<COMMON> 0
<OTHER-SE> 263
<TOTAL-LIABILITY-AND-EQUITY> 11,929
<SALES> 0
<TOTAL-REVENUES> 1,688
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 804
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132
<EPS-PRIMARY> .15<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
