<PAGE> 1
FORM 10-KSB-ANNUAL OR TRANSITIONAL REPORT
UNDER SECTION 13 OR 15 (d)
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-18419
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
--------------------------------------------
(Name of small business issuer in its charter)
Delaware
(State or other jurisdiction of 31-1266850
incorporation or organization) (IRS Employer
Identification No.)
3632 Wheeler Road, Suite 2
P.0. Box 204227
Augusta, Georgia 30917-4227
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (706) 863-0823
Securities registered under Section 2(b) of the Exchange Act:
None
----
Securities registered under Section 12(g) of the Exchange Act:
Limited Partnership Units
-------------------------
(Title of class)
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[X]
State issuer's revenues for its most recent fiscal year: $2,076,000
State the aggregate market value of the voting partnership interest held by
non-affiliates computed by reference to the price at which the partnership
interest were sold, or the average bid and asked prices of such partnership
interest, as of the specified date within the past 60 days: Market value
information for the registrant's partnership interest is not available. Should a
trading market develop for these interest, it is the Managing General Partner's
belief that the aggregate market value of the voting partnership's interest
would not exceed $25,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Prospectus of Registrant dated May 12, 1989 (included in
Registration Statement, No. 33-27407, of Registrant) are incorporated by
reference into Parts I and III.
<PAGE> 2
PART I
ITEM 1.
DESCRIPTION OF BUSINESS
General
Brunner Companies Income Properties L.P. III (the "Partnership" or "Registrant")
is a Delaware limited partnership founded in March 1989. The Partnership will
continue in existence until December 31, 2008, unless earlier dissolved or
terminated. Brunner Management Limited Partnership (the "General Partner"), an
Ohio limited partnership formed in February 1988, is the sole general partner of
the Partnership. 104 Management, Inc. (the "Managing General Partner"), an Ohio
corporation founded in February 1988, is the sole general partner of the General
Partner, and in that capacity manages the business of the Partnership.
As of December 31, 1998, the Partnership had 850,900 units of Class A Limited
Partnership Interest ("Units") and 8,600 units of Class B Limited Partnership
Interest ("Subordinated Interest") issued and outstanding. The Subordinated
Interest was sold to the Managing General Partner. Holders of the Units are
referred to as "Unitholders", the holder of the Subordinated Interest is
referred to as the "Subordinated Limited Partner", and Unitholders and the
Subordinated Limited Partner are collectively referred to as "Limited Partners."
Limited Partners are not required to make any additional capital contributions.
There are only two differences between the Class A and Class B limited
partnership interests. First, the holders of Class A units are entitled to
receive their Class A Priority Return before the holders of Class B units are
entitled to receive any portion of their Class B Priority Return. Second,
holders of Class B units, if such holders are affiliates of the General
Partners, are not entitled to vote upon the removal of the General Partner or
upon consideration of a sale of any Retail Center to the General Partner or any
affiliate of the General Partner.
The offering terminated in September 1989. Upon termination of the offering, the
Partnership had accepted subscriptions for 851,400 Units of Class A Interest and
8,600 units of Class B Interest purchased by the General Partner for aggregate
gross proceeds of $8,506,170. The number of Class A Limited Partnership units
has decreased due to Class A Limited Partners abandoning their units. The
Partnership invested substantially all of the net offering proceeds in four
investment properties (the "Retail Centers") which were acquired on September
22, 1989. During 1995, two of these Retail Centers were foreclosed upon by the
lender. The Partnership will not acquire or invest in any other properties or
debt or equity securities of any other issues (other than short term investments
of cash in high grade United States government obligations during interim
periods between the receipt of revenues and the distribution of cash to the
Limited Partners and pending payment of operating expenses of the Partnership)
and will not issue any additional limited partnership interests or other equity
securities in the Partnership. The policies of the Partnership noted above can
only be changed by an affirmative vote of limited partners owning a majority in
interest and the General Partner. The General Partner and the Managing General
Partner are affiliates of a related group of corporations and partnerships
engaged generally in the real estate development business. Pursuant to an
agreement
1
<PAGE> 3
effective December 31, 1992, IBGP, Inc., an affiliate of Insignia Financial
Group, Inc. ("Insignia"), acquired a majority of the outstanding stock of 104
Management Inc. on March 5, 1993. IBGP, Inc. was an indirect wholly-owned
subsidiary of Metropolitan Asset Enhancement, L.P. ("MAE"), an affiliate of
Insignia. Both IBGP, Inc. and Insignia Brunner, L.P. were affiliates of
Metropolitan Asset Enhancement, L.P. 104 Management, Inc. is the managing
general partner of Brunner Management Limited Partnership, which is the general
partner of the Registrant. On November 17, 1998, BCIP I & III, LLC purchased 104
Management, Inc. from IBGP, Inc. and thereby acquired the general partnership
interest in Brunner Management Limited Partnership. BCIP I & III, LLC also
purchased the limited partnership interest in Brunner Management Limited
Partnership and all of the outstanding Class B Limited Partnership units of the
Partnership and Brunner Companies Income Properties L.P. I, an affiliated
entity, from Insignia Brunner, L.P.
The Partnership is in the business of owning and operating for investment two
regional shopping centers: Gateway Plaza, Mt. Sterling, Kentucky, and Highpoint
Village, Bellefontaine, Ohio. During 1995, two of the Partnership's investment
properties, Forest Ridge and Bay Village, were foreclosed upon, leaving the
Partnership with the two remaining shopping centers mentioned previously. See
"Item 2. Description of Properties" for additional information regarding the
Retail Centers. The real estate business is highly competitive. The
Partnership's real property investments are subject to competition from similar
types of properties in the vicinities in which they are located and the
Partnership is not a significant factor in its industry. In addition, various
limited partnerships and limited liability companies have been formed by related
parties to engage in businesses which may be competitive with the Partnership.
The Partnership has no employees. Management and administrative services are
performed by affiliates of BCIP I & III, LLC as well as by Apex Realty, Inc. and
CB Richard Ellis, Inc. Apex Realty, Inc. and CB Richard Ellis, Inc. have been
appointed as receivers and given the authority to manage the Retail Centers. The
appointment of these receivers is more particularly discussed below at "Item 3".
The property managers are responsible for the day-to-day operations of each
property. The Managing General Partner has also selected affiliates of BCIP I &
III, LLC to provide real estate advisory and asset management services to the
Partnership. As advisor, such affiliates provide partnership accounting and
administrative services, investment management, and supervisory services over
property management and leasing. For a further discussion of property and
partnership management, see "Item 12", which descriptions are herein
incorporated by reference.
There have been, and it is possible there may be other, federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership. In certain cases environmental testing has been
performed, which resulted in no material adverse conditions or liabilities. In
no case has the Partnership received notice that it is a potentially responsible
party with respect to an environmental clean up site.
2
<PAGE> 4
ITEM 2.
DESCRIPTION OF PROPERTIES
The following table sets forth the Partnership's investments in properties:
<TABLE>
<CAPTION>
Property Date of Purchase Type of Ownership Use
- -------- ---------------- ----------------- ---
<S> <C> <C> <C>
Gateway Plaza 09/22/89 Fee ownership, subject to Retail Center
Mt. Sterling First mortgage 160,000 sf +/-
Highpoint Village 09/22/89 Fee ownership, subject to Retail Center
Bellefontaine, Ohio first mortgage 173,000 sf +/-
</TABLE>
A significant feature of both the retail centers is the fact that approximately
77% of the leasable space is, in the aggregate, leased to anchor tenants with
national or regional name recognition. Although such anchor tenants generally
pay lower base rents than smaller tenants, anchor tenants offer greater security
and stability of long-term leases from well-established and more credit worthy
tenants and tend to attract greater traffic to the retail centers.
SCHEDULE OF PROPERTIES (IN THOUSANDS):
<TABLE>
<CAPTION>
Gross
Carrying Accumulated Useful Federal
Property Value Depreciation Life Method Tax Basis
-------- ----- ------------ ---- ------ ---------
<S> <C> <C> <C> <C> <C>
Gateway Plaza $ 6,485 $ 1,789 3-31.5 yrs S/L $ 8,047
Highpoint Village 8,297 2,228 5-31.5 yrs S/L 8,606
-------- -------- --------
$ 14,782 $ 4,017 $ 16,653
======== ======== ========
</TABLE>
See "Note A" of the Notes to financial statements included in "Item 7" for a
description of the Partnership's depreciation policy.
SCHEDULE OF MORTGAGES (IN THOUSANDS):
<TABLE>
<CAPTION>
Principal Balance Stated Principal
at December 31, Interest Period Maturity Balance due
Property 1998 Rate Amortized Date at Maturity
<S> <C> <C> <C> <C> <C>
Gateway Plaza $ 5,244 9.25% 20.75 yrs 01/01/08 $ 3,498
Highpoint Village $ 6,149 9.25% 20.50 yrs. 10/01/08 $ 3,770
--------
Total $11,393
=======
</TABLE>
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<PAGE> 5
The mortgage notes payable are cross-collateralized and cross-defaulted and are
secured by the properties and by a pledge of revenues from the respective
properties. As discussed in "Item 3", the lenders have commenced foreclosure
proceedings.
SCHEDULE OF RENTAL RATES AND OCCUPANCY:
<TABLE>
<CAPTION>
Average Annual Rental Average Annual
Rates (per Square Foot) Occupancy
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Gateway Plaza $ 5.22 $ 4.63 74% 55%
Highpoint Village 4.84 4.88 100% 94%
</TABLE>
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties of the Partnership are subject to
competition from other retail centers in the area. The Managing General Partner
believes that all of the properties are adequately insured.
The following is a schedule of the lease expirations for the years
1999-2008:
<TABLE>
<CAPTION>
Number of Annual Rent % of Gross
Expirations Square Feet (in thousands) Annual Rent
----------- ----------- -------------- -----------
Gateway Plaza
- -------------
<C> <C> <C> <C> <C>
1999 4 10,930 74 11.9%
2000 4 9,200 59 9.5%
2001 3 5,100 43 6.9%
2002 0 0 0 0%
2003 2 5,800 42 6.8%
2004-2008 1 3,000 22 3.6%
Highpoint Village
- -----------------
1999 0 0 0 0%
2000 1 1,200 11 1.4%
2001 4 11,700 96 11.4%
2002 0 0 0 0.0%
2003 4 10,400 75 8.9%
2004-2008 4 94,530 290 35%
</TABLE>
The following schedule reflects information on tenants occupying 10% or more of
the leasable square feet for each property:
4
<PAGE> 6
<TABLE>
<CAPTION>
Square Footage Annual Rent Lease
Nature of Business Leased Per Square Foot Expiration
------------------ ------ --------------- ----------
<S> <C> <C> <C>
Gateway Plaza
-------------
Dept. Store 50,000 $3.90 8/31/13
Grocery Store 30,280 $5.30 5/09/16
Highpoint Village
-----------------
Discount Store 85,930 $2.62 10/14/08
Grocery Store 52,373 $6.77 01/14/10
</TABLE>
SCHEDULE OF REAL ESTATE TAXES (IN THOUSANDS) AND RATES:
<TABLE>
<CAPTION>
1998 1998
Taxes Rate
----- ----
<S> <C> <C>
Gateway Plaza $64 .94%
Highpoint Village $53 4.30%
</TABLE>
ITEM 3.
LEGAL PROCEEDINGS
In January 1999, the Managing General Partner stopped making the mortgage
payments in an attempt to negotiate a restructuring of the Partnership's
indebtedness.
On February 4, 1999, the lender, Peoples Benefit Life Insurance Company, through
its agent Aegon USA Realty Advisors, commenced foreclosure proceedings against
Highpoint Village in the Court of Common Pleas of Logan County, Ohio. The
Managing General Partner is attempting to reach a forbearance agreement with the
lender and feels that it is in the Partnership's best interest to contest the
foreclosure. The judge with jurisdiction over the Highpoint foreclosure action
has appointed CB Richard Ellis as receiver to manage the operation of Highpoint
Village.
On February 11, 1999, the lender, Commonwealth Life Insurance Company, through
its agent Aegon USA Realty Advisors, commenced foreclosure proceedings against
Gateway Plaza in the Montgomery Circuit Court of the Commonwealth of Kentucky.
The managing General Partner is attempting to reach a forbearance agreement with
the lender and feels that it is in the Partnership's best interest to contest
the foreclosure. The judge with jurisdiction over the Gateway foreclosure action
has appointed Apex Realty, Inc. as receiver to manage the operation of Gateway
Plaza.
In each of the foregoing foreclosure proceedings, the agent alleges that the
Partnership terminated a lease between the Partnership and Wal-Mart for premises
at the Gateway Plaza without proper notice to the agent and that the
Partnership's termination of the Wal-Mart lease and subsequent retention of the
termination fee paid by Wal-Mart constituted a material misrepresentation and
fraud. The Managing General Partner disputes that any material misrepresentation
were made and strongly denies any fraud on the part of the Partnership. The
Managing General Partner intends to vigorously defend these claims while
contesting the foreclosures.
The Managing General Partner of the Partnership believes that the debt
collateralized by Highpoint Village and Gateway Plaza may exceed the market
value of those properties.
5
<PAGE> 7
The Managing General Partner has engaged competent appraisers to opine their
opinion of the current market value of the partnership assets and to analyze the
expected partnership net operating income and cash flow until 2008. In the event
that a forbearance agreement cannot be reached with the lenders, it is the
intention of the Managing General Partner to respond to the foreclosure actions
by taking such legal actions as necessary and legally available to preserve the
Partnership's assets. The Managing General Partner is aware of no other
litigation effecting the Partnership other than of a routine nature.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal year ended December 31, 1998, no matters were submitted to a
vote of the Unitholders through the solicitation of proxies or otherwise.
PART II
ITEM 5.
MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS
As of January 1, 1999, the number of holders of record of Limited Partnership
Units and Subordinated Interest Units was 668 and one, respectively. Neither the
Limited Partnership Units nor the Subordinated Interest Units are traded on any
established public trading market, and it is not anticipated that such a market
will develop in the future. No cash distributions were paid during 1998 or 1997.
Future distributions will depend on the levels of cash generated from
operations, refinancings, property sales and the availability of cash reserves.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
The Partnership's net loss for the year ended December 31, 1998 was $23,000.
During 1998 the Partnership received a $512,000 lease termination fee from
Wal-Mart as the result of its 1996 termination of its lease in the Gateway
Plaza. Excluding the receipt of the fee, which was recorded as other income in
1998, net loss for the year ended December 31, 1998 was $535,000 compared to a
net loss of $279,000 for the preceding year. The increase in net loss was
primarily the result of a $241,000 or 13.6% decline in rental income to
$1,532,000 in 1998 from $1,773,000, without a corresponding decrease in expense.
The decline in rental income was $126,000 for Gateway Plaza and $116,000 for
Highpoint Village.
The Partnership's general and administrative expenses increased from $66,000 in
1997 to $182,000 in 1998. The increase in 1998 was primarily due to an
approximately $80,000 increase in maintenance in addition to an increase in
legal and other general and administrative expenses.
6
<PAGE> 8
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each 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 Managing 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 Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At December 31, 1998, the Partnership held cash and cash equivalents of $884,000
compared to $837,000 at December 31, 1997. The net increase in cash and cash
equivalents for the year ended December 31, 1998, was $47,000 compared to a net
decrease for the year ended December 31, 1997 of $127,000. Net cash provided by
operations increased due to the Wal-Mart lease termination fee of $512,000. Net
cash used in financing activities increased due to the increased principal
portion of the monthly mortgage payments on the investment properties. The
Partnership made and committed to make $345,000 of capital expenditures in the
form of tenant improvements during the year ended December 31, 1998. The
sufficiency of existing liquid assets to meet future liquidity and capital
expenditures requirements is directly related to (1) the level of capital
expenditures required at the properties to adequately maintain the physical
assets and (2) reserves for settlement of pending litigation and other operating
needs of the Partnership.
Beginning in January, 1999 the Managing General Partner has elected not to make
mortgage payments until it has obtained approval of restructuring of the
existing mortgage indebtedness. On February 4, 1999, the lender, Peoples Benefit
Life Insurance Company, through its agent Aegon USA Realty Advisors, commenced
foreclosure proceedings against Highpoint Village. The Managing General Partner
is attempting to reach a forbearance agreement with the lender and feels that it
is in the Partnership's best interest to contest the foreclosure. The judge with
jurisdiction over the Highpoint foreclosure action has appointed a receiver to
manage the operation of Highpoint Village.
On February 11, 1999, the lender, Commonwealth Life Insurance Company, through
its agent Aegon USA Realty Advisors, commenced foreclosure proceedings against
Gateway Plaza. The Managing General Partner is attempting to reach a forbearance
agreement with the lender and feels that it is in the Partnership's best
interest to contest the foreclosure. The judge with jurisdiction over the
Gateway foreclosure action has appointed Apex Realty, Inc. as a receiver to
manage the operation of Gateway Plaza.
In each of the foregoing foreclosure proceedings, the agent alleges that the
Partnership terminated a lease between the Partnership and Wal-Mart for premises
at the Gateway Plaza without proper notice to the agent and that the
Partnership's termination of the Wal-Mart lease and subsequent retention of the
termination fee paid by Wal-Mart constituted a material misrepresentation and
fraud. The Managing General Partner disputes that any material misrepresentation
were made and strongly denies any fraud on the part of the Partnership. The
Managing General Partner intends to vigorously defend these claims while
contesting the foreclosures.
7
<PAGE> 9
The Partnership's continued ability to operate is dependent on its ability to
either restructure its existing debt or raise additional capital. To that end
the managing General Partner is contesting the foreclosures, negotiating
alternative financing sources, and evaluating the Partnership's alternatives.
However, there can be no assurance that debt restructuring will occur or
additional capital will be raised in a manner that allows the Partnership to
continue its operations in its present form. Should the Partnership's properties
be liquidated pursuant to the foreclosure proceedings, the recorded asset amount
likely would not be recoverable.
No distributions were made in 1998 or 1997 and future cash distributions will
depend on the levels of net cash generated from operations, refinancing,
property sales, and the availability of cash reserves after resolution of
pending litigation and restructuring of existing indebtedness. The managing
General Partner envisions that additional funds may need to be raised in the
next twelve months in order to refinance the existing indebtedness.
Year 2000
The "Year 2000 Issue" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software systems
maintained by Hull/Storey Development, LLC ("Hull/Storey"), the management
company retained by the General Partner of the Partnership. Hull/Storey has
adopted a compliance program because it recognizes the importance of minimizing
the number and seriousness of any disruption that may occur as a result of the
Year 2000 issue. Hull/Storey compliance program includes an assessment of its
hardware and software computer systems and embedded systems.
Hull/Storey has invested in the implementation and maintenance of accounting and
reporting systems and equipment that are intended to enable the Partnership to
provide adequately for its information and reporting needs and which are also
Year 2000 compliant. Substantially all of Hull/Storey's in-house systems have
already been certified as Year 2000 compliant through testing and other
mechanisms and Hull/Storey has not delayed any systems projects due to the Year
2000 Issue. Hull/Storey is in the process of engaging a third party to review
its Year 2000 in-house compliance. The Managing General Partner believes that
future costs associated with Year 2000 issues for Hull/Storey's in-house systems
will be insignificant and will therefore not impact the Partnership's business,
financial condition and results of operations.
Other
Certain items discussed in this annual 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 of the Partnership expressed or implied by
such forward-looking statements. Such forward-looking statements speak only as
of the date of this annual 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.
8
<PAGE> 10
ITEM 7.
FINANCIAL STATEMENTS
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
LIST OF FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Balance sheet
Statements of operations
Statements of changes in partners' capital (deficit)
Statements of cash flows
Notes to financial statements
9
<PAGE> 11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
We have audited the accompanying balance sheet of BRUNNER COMPANIES INCOME
PROPERTIES L.P. III (the Partnership) as of December 31, 1998, and the related
statements of operations, changes in partners' capital (deficit) and cash flows
for the year then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Partnership's management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BRUNNER COMPANIES INCOME
PROPERTIES L.P. III as of December 31, 1998, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note I to the
financial statements, the Partnership has suffered recurring losses from
operations and, subsequent to year end, foreclosure proceedings against the
Partnership's retail shopping center properties began. These conditions raise
substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans regarding these matters are also described in Note
I. The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
/s/ ELLIOTT, DAVIS & COMPANY, LLP
Augusta, Georgia
February 26, 1999
10
<PAGE> 12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Partners
Brunner Companies Income Properties, L.P. III
We have audited the accompanying statements of operations, changes in partners'
capital (deficit) and cash flows of Brunner Companies Income Properties L.P.
III for the year ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the Partnership's management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Brunner
Companies Income Properties L.P. III for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
Greenville, South Carolina
February 6, 1998
11
<PAGE> 13
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
BALANCE SHEET
(IN THOUSANDS, EXCEPT UNIT DATA)
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 884
Accounts receivable - net 122
Other assets 198
Investment properties - net 10,765
--------
$ 11,969
========
LIABILITIES
Accounts payable and accrued expenses $ 452
Tenant security deposits payable 16
Mortgage notes payable 11,393
--------
11,861
PARTNERS' CAPITAL (DEFICIT)
General partner's $ (59) --
Class A limited partners' - 850,900 units
issued and outstanding 149 --
Class B limited partners' - 8,600 units
issued and outstanding 18 108
----- --------
$ 11,969
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
12
<PAGE> 14
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1998 1997
------- -------
<S> <C> <C>
REVENUE
Rental income $ 1,532 $ 1,773
Other income 544 42
------- -------
2,076 1,815
------- -------
EXPENSES
Operating 306 413
General and administrative 182 66
Depreciation 425 426
Interest 1,068 1,092
Property taxes 118 97
------- -------
2,099 2,094
------- -------
NET LOSS FROM OPERATIONS $ (23) $ (279)
======= =======
Net loss allocated to general partner (1%) $ -- $ (3)
Net loss allocated to Class A limited partners
(98.01%) (23) (273)
======= =======
Net loss allocated to Class B limited partners
(.99%) -- (3)
------- -------
$ (23) $ (279)
======= =======
Net loss per Class A limited partnership unit $ (.03) $ (.32)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 15
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED PARTNERS
GENERAL ----------------
PARTNER CLASS A CLASS B TOTAL
------- ------- ------- -----
<S> <C> <C> <C> <C>
Original capital contributions $ 1 $ 8,420 $ 86 $ 8,507
==== ======= ==== =======
Partners' capital (deficit) at
December 31, 1996 $(56) $ 445 $ 21 $ 410
Net loss for the year ended
December 31, 1997 (3) (273) (3) (279)
---- ------- ---- -------
Partners' capital (deficit) at
December 31, 1997 (59) 172 18 131
Net loss for the year ended
December 31, 1998 -- (23) -- (23)
---- ------- ---- -------
Partners' capital (deficit)
at December 31, 1998 $(59) $ 149 $ 18 $ 108
==== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 16
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1998 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (23) $ (279)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 425 426
Amortization of loan costs and leasing
commissions 19 13
Change in deferred and accrued amounts
Accounts receivable 49 (53)
Other assets (39) (19)
Accounts payable and accrued expenses 215 27
Tenant security deposits payable 9 1
------- -------
Net cash provided by operating activities 655 116
INVESTING ACTIVITIES
Purchase of property improvements and replacements (345) (4)
FINANCING ACTIVITIES
Payments on mortgage notes payable (263) (239)
------- -------
Net (decrease) increase in cash and cash
equivalents 47 (127)
Cash and cash equivalents at beginning of year 837 964
------- -------
Cash and cash equivalents at end of year $ 884 $ 837
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,067 $ 1,090
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 17
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Brunner Companies Income Properties L.P. III
(the "Partnership") a Delaware limited
partnership, which was formed on March 10,
1989, acquired and operates the following
retail centers: Gateway Plaza, a 160,021
square foot retail center in Mt. Sterling,
Kentucky and Highpoint Village, a 173,303
square foot retail center in Bellefontaine,
Ohio (collectively referred to as the
"Retail Centers"). The seller of these
Retail Centers was related to the then
general partners of the Partnership.
The Partnership shall continue in existence
until December 31, 2008, unless it is
earlier dissolved and terminated pursuant to
the provisions of the partnership agreement.
The general partner of the Partnership is
Brunner Management Limited Partnership
("General Partner"). The General Partner is
an Ohio limited partnership whose general
partner is 104 Management, Inc. ("Managing
General Partner"). From March 5, 1993
until November 17, 1998, the majority of the
outstanding stock of 104 Management, Inc.
was held by IBGP, Inc., an affiliate of
Insignia Financial Group, Inc. Prior to
November 17, 1998, IBGP, Inc. effectively
controlled the Managing General Partner of
the Partnership.
On November 17, 1998, BCIP I & III, LLC (a
Georgia limited liability company and an
affiliate of Hull/Storey Development, LLC)
purchased all of the outstanding stock of
104 Management, Inc. and thereby acquired
the general partnership interest in Brunner
Management Limited Partnership. BCIP I &
III, LLC also purchased all of the
outstanding Class B Limited Partnership
units of the Partnership. As a result of
this transaction, BCIP I & III, LLC
effectively controls the Managing General
Partner of the Partnership.
16
<PAGE> 18
Use of estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the amounts reported in the financial
statements and accompanying notes. Actual
results could differ from those estimates.
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid
investments with a maturity, when purchased,
of three months or less to be cash
equivalents as well as operating cash held
by the real estate management company on
behalf of the Partnership's individual
properties. At certain times, the amount of
cash deposited at a bank may exceed the
limit on insured deposits.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Partnership records as an allowance for
doubtful accounts 100% of receivables over
ninety days old, 50% of receivables over
sixty but less than ninety-one days old and
100% of receivables from former tenants.
LEASE COMMISSIONS
Lease commissions are capitalized and are
amortized by the straight-line method over
the term of the applicable lease. Lease
commissions of approximately $178,000, net
of accumulated amortization of approximately
$51,000, are included in other assets.
17
<PAGE> 19
LOAN COSTS
Loan costs of approximately $22,000, net of
accumulated amortization of approximately
$7,000, are included in other assets and are
being amortized on a straight-line basis
over the terms of the respective loans.
TENANT SECURITY DEPOSITS
The Partnership requires security deposits
from lessees for the duration of the lease.
The security deposits are refunded when the
tenant vacates, provided the tenant has not
damaged its space and is current on its
rental payments.
INVESTMENT PROPERTIES
Investment properties are stated at cost
less reductions for permanent impairments.
Acquisition fees are capitalized as a cost
of real estate. The Partnership records
impairment losses on long-lived assets used
in operations when events and circumstances
indicate that the assets might be impaired
and the undiscounted cash flows estimated to
be generated by those assets are less than
the carrying amounts of those assets.
DEPRECIATION
Buildings and improvements are depreciated
on the straight-line basis over an estimated
useful life of 5 to 31.5 years. Tenant
improvements are depreciated over the term
of the applicable leases.
For Federal income tax purposes, the
Partnership depreciates a portion (90
percent attributable to non tax-exempt
investors) of the property's basis using the
straight-line method over thirty-one and
one-half years and the balance (10 percent
attributable to tax-exempt investors) using
the straight-line method over forty years.
18
<PAGE> 20
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
ADVERTISING
The Partnership expenses the costs of
advertising as incurred.
LEASES
The Partnership leases certain commercial
space to tenants under various lease terms.
For leases with fixed rental increases
during their term, rents are recognized on a
straight-line basis over the terms of the
leases. For all other leases, rents are
recognized over the terms of the leases as
earned.
INCOME TAXES
No provision has been made in the financial
statements for Federal income taxes because
under current law, no Federal income taxes
are paid directly by the Partnership. The
Partners are responsible for their
respective share of Partnership net income
or loss.
FAIR VALUE
The Partnership believes that the carrying
amount of its financial instruments (except
for long-term debt) approximates their fair
value due to the short term maturity of
these instruments. The fair value of the
Partnership's long term debt, after
discounting the scheduled loan payments,
based on estimated borrowing rates currently
available to the Partnership, approximate
its carrying balance.
RECLASSIFICATIONS
Certain reclassifications have been made to
the 1997 information to conform to the 1998
presentation.
19
<PAGE> 21
NOTE B - PARTNERSHIP ALLOCATIONS OF INCOME, LOSS AND DISTRIBUTIONS
Distributions of operating cash flow, as
defined in the partnership agreement, will
be distributed as follows:
First, to the Class A Limited Partners until
they have received a cumulative
noncompounded annual cash return of 10%
(Class A priority return) of their adjusted
capital contributions;
Second, to the Class B Limited Partners
until they have received a cumulative
noncompounded annual cash return of 10%
(Class B priority return) of their adjusted
capital contributions;
Third, to the General Partner to the extent
that taxable income for the fiscal year is
allocated to the General Partner; and
Fourth, to the Class A Limited Partners and
to the Class B Limited Partners an amount
equal to 99% and 1%, respectively, of the
balance, if any, remaining.
20
<PAGE> 22
NOTE B - PARTNERSHIP ALLOCATION OF INCOME, LOSS AND DISTRIBUTIONS, continued
Taxable income or loss from operations will
be allocated 98.01% to the Class A Limited
Partners, .99% to the Class B Limited
Partners and 1% to the General Partner.
All excess proceeds from sales and debt
refinancings generally will be distributed
in the following order:
First, to the Class A Limited Partners until
their adjusted capital contributions are
reduced to zero;
Second, to the Class B Limited Partners
until their adjusted capital contributions
are reduced to zero;
Third, to the Class A Limited Partners for
any unpaid priority return of cash
distributions of operating cash flows;
Fourth, to the Class B Limited Partners for
any unpaid priority return of cash
distributions of operating cash flows;
Fifth, to the General Partner until its
original capital contribution is reduced to
zero; and
The balance, if any, 74.25% to the Class A
Limited Partners, .75% to the Class B
Limited Partners and 25% to the General
Partner.
As of December 31, 1998, the Partnership had
an undeclared distribution arrearage of
approximately $6,277,000 or $7.38 per Class
A unit and approximately $80,000 or $9.30
per Class B unit of the cumulative annual
10% cash returns.
21
<PAGE> 23
NOTE C - MORTGAGE NOTES PAYABLE
The principle terms of the mortgage notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
Principal Monthly
balance at principal Balance
December and interest Stated Maturity due at
Property 31, 1998 payment interest rate date maturity
- ------------- ---------- ------------ ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Gateway Plaza $ 5,244 $ 51 9.25% 01/01/08 $3,498
Highpoint
Village 6,149 60 9.25% 10/01/08 3,770
------- ----
Total $11,393 $111
======= ====
</TABLE>
The mortgage notes payable are cross-collateralized and cross-defaulted and are
secured by the properties and by a pledge of the revenues from the respective
properties.
As of December 31, 1998 scheduled principal payments of mortgage notes payable
as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 288
2000 316
2001 346
2002 380
2003 417
Thereafter 9,646
-------
$11,393
=======
</TABLE>
However, subsequent to December 31, 1998, the Partnership's lenders served
notice of default and commenced foreclosure proceedings against its retail
centers (See Note I).
NOTE D - OPERATING LEASES
Tenants are responsible for their own utilities, maintenance of their space, and
payment of their proportionate share of common area maintenance, utilities,
insurance and real estate taxes. Real estate taxes, insurance, and common area
maintenance expenses are paid directly by the Partnership. The Partnership is
then reimbursed by the tenants for their proportionate share. The expenses paid
by the Partnership are included in the accompanying statements of operations as
property taxes and operating expenses. Amounts reimbursed by the tenants are
included in rental income.
22
<PAGE> 24
The future minimum rental payments to be received under operating leases that
have initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 1,298
2000 1,239
2001 1,122
2002 1,057
2003 994
Thereafter 18,419
-------
$24,129
=======
</TABLE>
Four anchor tenants represent $21,146,000 of the above minimum future rentals
under leases expiring 2008, 2010, 2013 and 2016.
NOTE E - MAJOR TENANTS
Rent from tenants (excluding tenant reimbursements) representing at least 10% of
rental income were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Wal-Mart Stores $319 21% $452 25%
Kroger 345 23 345 19
Food Lion 154 10 -- --
</TABLE>
During 1996, Wal-Mart stores cancelled its lease at Gateway Plaza and in 1998
paid a lease termination fee of $512,000 which is included in other income.
NOTE F - INCOME TAXES
The Partnership is classified as a partnership for Federal income tax purposes.
Accordingly, no provision for income taxes is made in the financial statements
of the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.
23
<PAGE> 25
The following is a reconciliation of reported net loss and Federal taxable loss
(in thousands, except unit data):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Net loss as reported $ (23) $(279)
Add (deduct):
Depreciation difference (30) (29)
Unearned income (49) 30
Miscellaneous (21) (4)
----- ------
Federal taxable loss $(123) $(282)
===== =====
Federal taxable loss per Class A
limited partnership unit $(.15) $(.33)
===== =====
</TABLE>
The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net assets and liabilities:
<TABLE>
<S> <C>
Net assets as reported $ 108
Land and buildings 1,872
Accumulated depreciation (124)
Syndication costs 831
Other (11)
-------
Net assets - Federal tax basis $ 2,676
=======
</TABLE>
NOTE G - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing
General Partner and its affiliates for the management and administration of all
partnership activities. The partnership agreement provides for 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 Managing General Partner in 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property management fees (included in
operating expenses) $ 66 $53
Reimbursement for services of affiliates
(included in general and administrative
expenses) 35 25
Lease commissions for new leases
(included in other assets and amortized
over the term of the leases) 128 19
</TABLE>
24
<PAGE> 26
NOTE H - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION (IN THOUSANDS)
The Managing General Partner has evaluated the properties as if they
were a going concern and believes there is no impairment as of year end.
<TABLE>
<CAPTION>
Initial cost
to Partnership
---------------------------- Net costs
Buildings and removed
related personal subsequent to
Description Encumbrances Land property acquisition
----------- ------------ ---- -------- -----------
<S> <C> <C> <C> <C>
Gateway Plaza $ 5,244 $1,021 $ 6,591 $(1,127)
Highpoint
Village 6,149 721 7,848 (272)
------- ------ ------- -------
Totals $11,393 $1,742 $14,439 $(1,899)
======= ====== ======= =======
</TABLE>
25
<PAGE> 27
NOTE H - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION (IN THOUSANDS),
continued
<TABLE>
<CAPTION>
Gross carrying values
at December 31, 1998
------------------------------------------------------------
Buildings
and related
personal Accumulated Date Depreciable
Description Land property Total depreciation acquired life-years
----------- ---- ----------- ----- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gateway
Plaza $ 835 $ 5,650 $ 6,485 $ 1,789 9/22/89 3-31.5
Highpoint
Village 690 7,607 8,297 2,228 9/22/89 5-31.5
------- ------- ------- -------
$ 1,525 $13,257 $14,782 $ 4,017
======= ======= ======= =======
</TABLE>
Reconciliation of "Investment Properties and Accumulated Depreciation":
The Managing General Partner has evaluated the properties as if they
were a going concern and believes there is no impairment as of year end.
<TABLE>
<CAPTION>
1998 1997
---- ----
INVESTMENT PROPERTIES
- ---------------------
<S> <C> <C>
Balance at beginning of year $14,437 $14,433
Property improvements 345 4
------- -------
Balance at end of year $14,782 $14,437
======= =======
ACCUMULATED DEPRECIATION
- ------------------------
Balance at beginning of year $ 3,592 $ 3,166
Additions charged to expense 425 426
------- -------
Balance at end of year $ 4,017 $ 3,592
======= =======
</TABLE>
The aggregate cost of the real estate for Federal income tax purposes
at December 31, 1998 and 1997, is $16,653,000 and $16,309,000, respectively. The
accumulated depreciation balance for Federal income tax purposes at December 31,
1998 and 1997, is $4,141,000 and $3,686,000, respectively.
NOTE I - SUBSEQUENT EVENTS AND GOING CONCERN
On February 4, 1999, the lender, Peoples Benefit Life Insurance
Company, through its agent Aegon USA Realty Advisors, commenced foreclosure
proceedings against Highpoint Village. The Managing General Partner is
attempting to reach a forbearance
26
<PAGE> 28
NOTE I - SUBSEQUENT EVENTS AND GOING CONCERN, continued
agreement with the lender and feels that it is in the Partnership's best
interest to contest the foreclosure. The judge with jurisdiction over the
Highpoint foreclosure action has appointed a receiver to manage the operations
of Highpoint Village.
On February 11, 1999, the lender, Commonwealth Life Insurance Company,
through its agent Aegon USA Realty Advisors, commenced foreclosure proceedings
against Gateway Plaza. The Managing General Partner is attempting to reach a
forbearance agreement with the lender and feels that it is in the Partnership's
best interest to contest the foreclosure. The Gateway foreclosure action has
appointed a receiver to manage the operation of Gateway Plaza.
In each of the foregoing foreclosure proceedings, the lender alleges
that the Partnership terminated a lease between the Partnership and Wal-Mart for
premises at the Gateway Plaza without proper notice to the agent and that the
Partnership's termination of the Wal-Mart lease and subsequent retention of the
termination fee paid by Wal-Mart constituted a material misrepresentation and
fraud. The Managing General Partner disputes that any material
misrepresentations were made and strongly denies any fraud on the part of the
Partnership. The Managing General Partner intends to vigorously defend these
claims while contesting the foreclosures.
The Partnership's continued ability to operate is dependent on its
ability to either restructure its existing debt or raise additional capital. To
that end the Managing General Partner is contesting the foreclosures,
negotiating alternative financing sources, and evaluating the Partnership's
alternatives. However, there can be no assurance that debt restructuring will
occur or additional capital will be raised in a manner that allows the
Partnership to continue its operations in its present form. Should the
Partnership's properties be liquidated pursuant to the foreclosure proceedings,
the recorded asset amount likely would not be recoverable.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no disagreements with Elliott, Davis & Company, L.L.P. regarding the
1998 audit of the Partnership's financial statements nor were there any
disagreements with Ernst & Young L.L.P. regarding the 1997 audit of the
Partnership's financial statements.
On December 18, 1998 the Partnership terminated the engagement of Ernst & Young,
L.L.P., Greenville, South Carolina, as the Partnership's certifying accountants.
On December 15, 1998 the Partnership engaged Elliott, Davis & Company, L.L.P.,
Augusta, Georgia as the Partnership's certifying accountants. The Partnership
has not consulted with Elliott, Davis &
27
<PAGE> 29
Company, L.L.P. during its two most recent fiscal years nor during any
subsequent interim period prior to its engagement regarding the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Partnership's
financial statements.
The report of Ernst & Young L.L.P. on the financial statements for either of the
last two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified to uncertainty, audit scope, or
accounting principles.
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The Partnership has no officers or directors. The Managing General Partner
manages and controls the Partnership and has general responsibility and
authority in all matters affecting its business. The names and ages of the
directors and executive officers of 104 Management, Inc., the Partnership's
Managing General Partner, and the nature of all positions with 104 Management,
Inc. presently held by them are set forth below. There are no family
relationships between or among any officers and directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James M. Hull 47 President and Director
Wayne Grovenstein 30 Vice President
Deborah Mosley 45 Chief Accounting Officer
Frank B. Turner, Jr. 30 Secretary
</TABLE>
James M. Hull has been President and Director of the Managing General Partner
and the Member-Manager of BCIP I & III, LLC since November of 1998. BCIP I &
III, LLC is an affiliate of Hull/Storey Development, LLC ("Hull/Storey") Mr.
Hull has acted as Member-Manager of Hull/Storey since December, 1993.
Wayne Grovenstein has been Vice President of the Managing General Partner since
November 1998. Mr. Grovenstein joined Hull/Storey in July 1995 where he serves
as Hull/Storey's Director of Development and Counsel. Prior to joining
Hull/Storey, Mr. Grovenstein was in the private practice of law in Atlanta,
Georgia.
28
<PAGE> 30
Deborah Mosely has been the Chief Accounting Officer of the Managing General
Partner since November, 1998. Ms. Mosely joined Hull/Storey in June 1994 and has
served as Hull/Storey's Chief Accounting Officer since that time.
Frank B. Turner, Jr. has been the Secretary of the Managing General Partner
since November 1998. Mr. Turner joined Hull/Storey in February 1998 where he
serves as Counsel. From June 1996 until January 1998 Mr. Turner was an associate
with the Augusta, Georgia law firm of Dunstan, Dunstan & Cleary, P.C.
ITEM 10.
EXECUTIVE COMPENSATION
No direct form of compensation was paid by the Partnership to any director or
officer of the Managing General Partner for the year ended December 31, 1998.
The Partnership has no plans to pay any such remuneration to any director or
officer of the Managing General Partner in the future. However, reimbursements
and other payments have been made to the Partnership's Managing General Partner
and its affiliates, as described in "Item 12. Certain Relationships and Related
Transactions" below.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 1, 1999, there were 850,900 Limited Partnership Units ("Units")
and 8,600 units of Class B Limited Partnership Interest ("Subordinated
Interest") issued and outstanding. The following table sets forth certain
information, as of January 1,1999, with respect to the ownership of Units and
units of Subordinated Interest by: (i) any person or group who is known to the
Partnership to be the beneficial owner of more than 5% of either the Units or
units of Subordinated Interest; (ii) the directors and officers of the Managing
General Partner, naming them; and (iii) the directors and officers of the
Managing General Partner as a group.
29
<PAGE> 31
<TABLE>
<CAPTION>
Units (1) Interest (1)
----------------------- ------------------
Name and Address of Group Amount Percent Amount Percent
----------------------- ------------------
<S> <C> <C> <C> <C>
Brunner Management L.P. -- -- 8,600 100%
3632 Wheeler Road
Augusta, Georgia 30909
Hamilton National Life 106,383 (2) 12.5%
Insurance Company of
America
32991 Hamilton Court/Ste 100
Farmington Hills, MI 48334-
3305
Cosmo Plastics Company 50,000 5.9%
30201 Aurora Road
Cleveland, OH 44139
All directors and officers -- -- -- --
of the Managing General
Partner (4 persons) as a group
</TABLE>
(1) The Limited Partners have no right or authority to participate in the
management or control of the Partnership or its business. However, Limited
Partners do have limited rights to approve or disapprove certain fundamental
Partnership matters as provided in "Article 7" of the Partnership Agreement.
Transfer of Units are subject to certain restrictions set forth in "Article 9"
of the Partnership Agreement.
(2) To the best knowledge of the Partnership, these Units are held with sole
voting and investment power (see Note (1) above).
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The partnership agreement provides for 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 Managing General Partner
in 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property management fees $66 $53
Reimbursement for services of affiliates $35 $25
</TABLE>
30
<PAGE> 32
Additionally, the Partnership paid approximately $128,000 and $19,000 during the
years ended December 31, 1998 and 1997, respectively, to an affiliate of the
Managing General Partner for lease commissions related to new leases of the
Partnership's commercial properties. These lease commissions are included in
other assets and amortized over the term of the respective leases.
The General Partner did not receive cash distributions from or with respect to
the fiscal years ended December 31,1998 and 1997.
If the Partnership requires additional funds, the General Partner or its
affiliates may, but are not obligated to, lend funds to the Partnership. Any
such loan and any disposition, re-negotiation or other subsequent transaction
involving such loan, shall be made only upon receipt from an independent and
qualified advisor of an opinion letter to the effect that such proposed loan or
disposition, renegotiation or subsequent transaction is fair and at least as
favorable to the Partnership as a loan to an unaffiliated borrower in similar
circumstances. The advisors compensation must be paid by the General Partner and
is not reimbursable by the Partnership. No such loan has yet been made by the
General Partner.
A commission of up to 2% of the sale price may be paid to Brunner Management
Limited Partnership upon the sale of each of the Retail Centers, if it performs
substantial services in connection with the sale. Any such commission paid to
the Brunner Management Limited Partnership will be subordinated to the Limited
Partners priority distributions. Total commissions paid will not exceed those
reasonable, customary and competitive in light of the size and location of the
Retail Center sold.
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index contained herein.
(b) Reports on Form 8-K filed during the fourth quarter of 1998:
A Form 8-k was filed with the Securities and Exchange Commission on December 2,
1998. This filing discloses that there was a change in control of the Registrant
as of November 17, 1998 when BCIP I & III, LLC purchased 104 Management, Inc.
from IBGP, Inc. and thereby acquired the general partnership interest in Brunner
Management Limited Partnership. A copy of the General Partnership Sale
Agreement, dated as of November 17, 1998, by and between BCIP I & III, LLC,
IBGP, Inc. and Insignia Brunner, L.P. were also included as an exhibit.
31
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) 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,
A Delaware Limited Partnership
By: Brunner Management Limited Partnership
Its General Partner
By: 104 Management, Inc.
Its Managing General Partner
By: /s/ James M. Hull
--------------------------------------
James M. Hull
President and Director
Date: March 31, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
/s/ James M. Hull President and Date: March 31, 1999
- ---------------------- Director ----------------
James M. Hull
/s/ Deborah Mosley Vice President and Date: March 31, 1999
- ---------------------- Chief Accounting ----------------
Deborah Mosley Officer
32
<PAGE> 34
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
3.1 Partnership Agreement of Brunner Companies Income
Properties L.P. III (the "Partnership"); [included as
Exhibit B to the Prospectus of Registrant dated May
12,1989 contained in Registration Statement No.
33-27407 of Registrant filed May 12, 1989 (the
"Prospectus") and incorporated herein by reference.]
3.2 Certificate of Limited Partnership for the
Partnership; incorporated by reference to Exhibit 3.2
to Registration Statement No. 33-27407 on Form S-11.
4.1 Form of Unitholder Certificate for the Partnership;
incorporated by reference to Exhibit 4.1 to
Registration Statement No. 33-27407 on Form S-11.
4.2 Form of Subordinated Interest Certificate for the
Partnership; incorporated by reference to Exhibit 4.2
to Registration Statement No.33-27407 on Form S-11.
10.1 Purchase Agreement for Gateway Plaza; incorporated by
reference to Exhibit 19.3 to Form 10-Q for the fiscal
quarter ended September 30, 1989.
10.2 First Amendment to Real Property Purchase Agreement
for Gateway Plaza, dated September 22, 1989 between
Tennessee & Associates-IV ("T&A-IV") and the
Partnership; incorporated by reference to Exhibit
10.4 to Form 10-K for fiscal year ended December 31,
1989.
10.3 Second Amendment to Real Property Purchase Agreement
for Gateway Plaza, dated March 23, 1990, between
T&A-IV and the Partnership; incorporated by reference
to Exhibit 10.5 to Form 10-K for fiscal year ended
December 31, 1989.
10.4 Purchase Agreement for Highpoint Village;
incorporated by reference to Exhibit 19.4 to Form
10-Q for the fiscal quarter ended September 30, 1989.
10.5 First Amendment to Real Property Purchase Agreement
for Highpoint Village, dated September 2,1989,
between Tennessee & Associates-VII ("T&A-VII") and
the Partnership; incorporated by reference to Exhibit
10.7 to Form 10-K for fiscal year ended December 31,
1989.
10.6 Second Amendment to Real Property Purchase Agreement
for Highpoint Village, dated March 23, 1990 March
23,1990 between T&A-VII and the Partnership;
incorporated by reference to Exhibit 10.8 to Form
10-K for fiscal year ended December 31, 1989.
10.7 Gateway Plaza Lease with Wal-Mart Stores, Inc.;
incorporated by reference to Exhibit 10.15 to
Registration Statement No. 33-27407 on Form S-11.
</TABLE>
33
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<S> <C>
10.8 Gateway Plaza Lease with J.C. Penny Company, Inc.,
incorporated by reference to Exhibit 10.16 to
Registration Statement No. 33-27407 on Form S-11.
10.9 Gateway Plaza Lease with Food Lion, Inc.;
incorporated by reference to Exhibit 10.17 to
Registration Statement No. 33-27407 on Form S-11.
10.10 Highpoint Village Lease with Wal-Mart Stores, Inc.;
incorporated by reference to Exhibit 10.18 to
Registration Statement No. 33-27407 on Form S-11.
10.11 Second Amendment to Highpoint Village Lease with
Wal-Mart Stores, Inc.; incorporated by reference to
Exhibit 10.27 to Form 10-K for fiscal year ended
December 31, 1989.
10.12 Highpoint Village Lease with The Kroger Co.;
incorporated by reference to Exhibit 10.20 to
Registration Statement No. 33-27407 on Form S-11.
10.13 Promissory Note for $5,850,000 secured by a Mortgage
on Gateway Plaza, with Commonwealth Life Insurance
Company as Payee, incorporated by reference to
Exhibit 19.26 to Form 10-Q for the fiscal quarter
ended September 30, 1989.
10.14 Promissory Note for $6,600,000 secured by a Mortgage
on Highpoint Village, with Commonwealth Life
Insurance Company as Payee; incorporated by reference
to Exhibit 19.27 to Form 10-Q for the fiscal quarter
ended September 30, 1989.
10.15 Mortgage, Assignment of Rents and Security Agreement
for Gateway Plaza to Commonwealth Life Insurance
Company; incorporated by reference to Exhibit 19.28
to Form 10-Q for the fiscal quarter ended September
30, 1989.
10.16 Mortgage, Assignment of Rents and Security Agreement
for Highpoint Village to Commonwealth Insurance
Company; incorporated by reference to Exhibit 19.29
to Form 10-Q for the fiscal quarter ended September
30,1989.
10.17 Assignment of Rents and Leases for Gateway Plaza to
Commonwealth Insurance Company; incorporated by
reference Exhibit 19.30 to Form 10-Q for the fiscal
quarter ended September 30, 1989.
10.18 Assignment of Rents and Leases for Highpoint Village
to Commonwealth Insurance Company; incorporated by
reference to Exhibit 19.31 to Form I0-Q for the
fiscal quarter ended September 30,1989.
10.19 Modification of Promissory Note, Mortgage and
Security Agreement and Security Documents for Gateway
Plaza between T&A-IV and Fleet National Bank, dated
May 12, 1989; incorporated by reference to Exhibit
19.36 to Form 10-Q for the fiscal quarter ended
September 30, 1989.
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34
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<S> <C>
10.20 Advisory Agreement made as of September 1, 1991
between Brunner Companies Income Properties L.P. III
and Insignia GP Corporation and Insignia Financial
Group, Inc. by reference to Form l0-Q for the fiscal
quarter ended September 30,1991.
10.21 First Amendment to Advisory Agreement changing
effective date from September 1, 1991 to October 1,
1991 by reference to Form 10-Q for the fiscal quarter
ended September 30,1991.
10.22 Transfer Agent Agreement between Brunner Companies
Income Properties L.P. III and Insignia GP
Corporation incorporated by reference to exhibit
l0.105 to Form 10-K for fiscal year ended December
31, 1991.
10.23 Property Management Agreement for Highpoint Village
incorporated by reference to exhibit 10.106 to Form
10-K for fiscal year ended December 31, 1991.
10.24 Property Management Agreement for Gateway Plaza
incorporated by reference to exhibit 10.107 to Form
10-K for fiscal year ended December 31, 1991.
10.25 Closing Agreement dated October 16, 1992 showing the
acquisition of a majority of the outstanding stock of
104 Management, Inc. by IBGP, Inc. incorporated by
reference to Exhibit 2 to Form 8-K dated March 5,
1993.
10.50 General Partnership Sale Agreement, dated as of
November 17, 1998, by and between BCIP I & III, LEC,
IBGP, Inc. and Insignia Brunner, L.P. incorporated by
reference to Form 8-K dated December 2, 1998.
27 Financial Data Schedule (for SEC use only)
</TABLE>
35
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 884,000
<SECURITIES> 0
<RECEIVABLES> 122,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,006,000
<PP&E> 14,782,000
<DEPRECIATION> 4,017,000
<TOTAL-ASSETS> 11,969,000
<CURRENT-LIABILITIES> 452,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 108,000
<TOTAL-LIABILITY-AND-EQUITY> 11,969,000
<SALES> 2,076,000
<TOTAL-REVENUES> 2,076,000
<CGS> 0
<TOTAL-COSTS> 2,099,000
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (23,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,000)
<DISCONTINUED> 0
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