<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 0-24683
Brunner Companies Income Properties L.P. III
(Exact name of registrant as specified in its charter)
Delaware 31-1266850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3632 Wheeler Road
P.O. Box 204227
Augusta, Georgia 30917-204227
(Address of principal executive offices)
(706) 863-0823
(Registrant's telephone number, including area code)
(Former address 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
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
Class A Units 850,900 March 31, 1999
Class B Units 8,600
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
BALANCE SHEET
(in thousands, except unit data)
<TABLE>
<CAPTION>
March 31, 1999 Dec. 31, 1998
(unaudited) (audited)
-------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 759 $ 884
Accounts receivable - net 119 122
Other assets 197 198
Investment properties - net 10,651 10,765
------- -------
$11,726 $11,969
======= =======
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 202 $ 452
Tenant security deposit liabilities 9 16
Mortgage notes payable 11,393 11,393
------- -------
11,604 11,861
Partners' Capital (Deficit)
General partner's (59) (59)
Class A limited partners' - (850,900 units issued and
outstanding) 163 149
Class B limited partners' - (8,600 units issued and
outstanding) 18 122 18 108
--- ------- ---- -------
$11,726 $11,969
======= =======
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE> 3
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----- -----
<S> <C> <C>
Revenues:
Rental income $ 259 $ 407
Other income -0- 9
----- -----
Total revenues 259 416
----- -----
Expenses:
Operating 62 73
General and administrative 35 24
Depreciation 113 105
Interest 6 268
Property taxes 29 24
----- -----
Total expenses 245 494
----- -----
Net income (loss) $ 14 $ (78)
===== =====
Net loss allocated to general partner (1%) $ -- $ (1)
Net income (loss) allocated to Class A limited
partners (98.01%) 14 (76)
Net loss allocated to Class B limited
partners (.99%) -- (1)
----- -----
$ 14 $ (78)
===== =====
Net income (loss) per Class A limited partnership unit $ .02 $(.09)
===== =====
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE> 4
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Limited Partners'
---------------------------
General
-------
Partner's 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, 1998 $(59) $ 149 $18 $ 108
Net income for the three months ended
March 31, 1999 0 14 0 14
---- ------ --- ------
Partners' capital (deficit) at
March 31, 1999 $(59) $ 163 $18 $ 122
==== ====== === ======
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE> 5
BRUNNER COMPANIES INCOME PROPERTIES L.P. III
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 14 $ (78)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 113 105
Amortization of loan costs and leasing commissions 3 4
Change in accounts:
Receivables 3 12
Other assets (1) 3
Accounts payable and accrued expenses (250) (104)
Tenant security deposit liabilities (7) 1
----- -----
Net cash provided by operating activities: (125) (57)
----- -----
Cash flows from investing activities -- --
----- -----
Cash flows from financing activities:
Mortgage principal payments 0 (63)
----- -----
Net cash used in financing activities 0 (63)
----- -----
Net decrease in cash and cash equivalents (125) (120)
Cash and cash equivalents at beginning of period 884 837
----- -----
Cash and cash equivalents at end of period $ 759 $ 717
===== =====
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6 $ 269
===== =====
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE> 6
BRUNNER COMPANIES INCOME PROPERTIES, L.P. III
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited financial statements of Brunner Companies Income
Properties L.P. 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.
As discussed herein at Management's Discussion and Analysis or Plan of Operation
(Item 2), receivers have been appointed at the request of the Partnership's
lenders to manage the Partnership's investment properties pending resolution of
ongoing foreclosure proceedings. Pursuant to the terms of those receiverships,
the receivers have been granted authority to collect all rents and to pay all
expenses arising from the ordinary operation of the investment properties.
Pursuant to the terms of the notes and mortgages securing the Partnership's
loans, rents collected by the receivers are applied to the partnership's payment
obligations. As a result, these unaudited financial statements do not reflect
any activities of the receivers, including, but not limited to, any revenues the
properties have earned or any expenses they have incurred. As further discussed
herein at Management's Discussion and Analysis or Plan or Operation (Item 2),
the carrying amounts of the Partnership's investment properties exceed their
appraised values. Additionally, the Partnership's mortgage notes payable, which
are nonrecourse, exceed the carrying amounts of the Partnership's investment
properties. As the lender is limited to foreclosure of the properties for
satisfaction of the mortgage notes payable, no impairment has been made to the
Partnership's investment properties. Further, no adjustment has been made to the
Partnership's mortgage notes payable balances from that at the end of fiscal
year 1998. The Partnership's certifying accountants issued their audit opinion
on the December 31, 1998 financial statements noting a substantial doubt about
the Partnership's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments which might result from the
outcome of that uncertainty.
Operating results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1999. 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, 1998.
Certain reclassifications have been made to the 1998 information to conform to
the 1999 presentation.
Note B - 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. All of the outstanding stock of the Managing General
Partner is owned by BCIP I & III, LLC, an affiliate of Hull/Storey Development,
LLC ("Hull/Storey"). The partnership agreement provides for payments to
affiliates for property management services based on a percentage of revenue 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 during the three months ended March 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Property management fees (included in
operating expenses) $8 $22
Reimbursement for services of affiliates
(included in general and administrative expenses) $2 $11
</TABLE>
Additionally, the Partnership paid approximately $7,000 and $1,000 to an
affiliate of the Managing General Partner for lease commissions related to new
leases at the Partnership's properties during the three months ended March
31,1999 and 1998, respectively. These lease commissions are included in other
assets and amortized over the terms of the respective leases.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of two retail centers. The
following table sets forth the average occupancy of the properties for the three
months ended March 31, 1999 and 1998:
<PAGE> 7
<TABLE>
<CAPTION>
Average
Occupancy
1999 1998
---- ----
<S> <C> <C>
Gateway Plaza, 74% 56%
Mt. Sterling, Kentucky
Highpoint Village 99% 93%
Bellefontaine, Ohio
</TABLE>
The Partnership realized a net income of approximately $14,000 for the three
months ended March 31, 1999, compared to a net loss of approximately $78,000 for
the three months ended March 31, 1998. The increase in net income is primarily
due to a decrease in interest expenses. The decrease in interest expenses was
due to the election of the Managing General Partner, in January 1999, to stop
making mortgage payments. The Managing General Partner of the Partnership
believed that the debt collateralized by Highpoint Village Shopping Center and
Gateway Plaza Shopping Center exceeded the market value of those properties. By
withholding mortgage payments, the Managing General Partner hoped to negotiate a
restructuring of the Partnership's indebtedness and, in the event such a
restructuring was not achieved, to maximize the amounts disbursable to the
partners. The lender declared the entire indebtedness immediately due and
payable. On February 4, 1999, the lender, Peoples Benefit Life Insurance
Company, through its agent Aegon USA Realty Advisors, commenced foreclosure
proceedings against Highpoint Village Shopping Center in the Court of Common
Pleas of Logan County, Ohio. The court hearing the Highpoint foreclosure action
appointed CB Richard Ellis as receiver to manage the operation of Highpoint
Village effective as of that date. On February 11, 1999, the lender,
Commonwealth Life Insurance Company, through its agent Aegon USA Realty
Advisors, commenced foreclosure proceedings against Gateway Plaza Shopping
Center in the Montgomery Circuit Court of the Commonwealth of Kentucky. The
court hearing the Gateway foreclosure action appointed Apex Realty, Inc. as
receiver to manage the operation of Gateway Plaza effective March 16, 1999.
Pursuant to the terms of their receiverships, each receiver has been granted the
authority to collect rents and to pay expenses arising from the ordinary
operation of the property. As a result, both rental income and operating
expenses have decreased.
At March 31, 1999, the Partnership held cash and cash equivalents of
approximately $759,000 compared to approximately $717,000 at March 31, 1998. The
net decrease in cash and cash equivalents for the three months ended March 31,
1999 was approximately $125,000 compared to a net decrease of approximately
$120,000 for the three months ended March 31, 1998. Net cash and cash
equivalents for the three months ended March 31, 1999 increased due to the
absence of mortgage payments and reduced expenses but was offset by reduced
rental income and the payment of a required construction allowance in excess of
$270,000 to an anchor tenant at Gateway Plaza.
In March, 1999 and at the recommendation of legal counsel for the Partnership in
both foreclosure actions, the Managing General Partner engaged independent MAI
real estate appraisers to render their opinion of the market value of the
partnership assets. With regard to Highpoint Shopping Center, the appraiser
valued the property at $6,100,000. The appraiser valued Gateway Plaza Shopping
Center at $3,750,000. Both properties were appraised at below their carrying
amounts. While the combined appraised values total $9,850,000, the combined
outstanding principal balances on the two loans total approximately $11,390,000
plus accrued interest. Each shopping center serves as cross default collateral
of the debt of the other and an event of default on either mortgage is an event
of default for the other. The mortgage notes payable are "nonrecourse".
Accordingly the lender may take the properties pledged as collateral to satisfy
the mortgage notes payable, but has no recourse to other assets of the
Partnership. Because the investment properties may be taken in full satisfaction
of the mortgage notes payable, which exceeds their carrying amounts, an
impairment of the investment properties has not been recorded.
The Partnership's continued ability to operate is dependent on its ability to
either restructure the existing debt, to raise additional capital, or find an
additional method of retaining its investment properties. The Managing General
Partner has negotiated in good faith with the lender but has been unable to
reach any acceptable agreement with the lender to restructure the Partnership's
indebtedness. With regard to additional capital contributions, the partnership
agreement neither obligates nor allows for such contributions from the limited
partners. The Managing General Partner has retained legal counsel to explore the
protections afforded by the bankruptcy laws. It is currently the intention of
the Managing General Partner to proceed in the manner which it determines to be
in the best interest of the partners.
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
<PAGE> 8
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 disruptions 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 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.
<PAGE> 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27, Financial Data Schedule, (for SEC purposes only), is filed
as an exhibit to this report.
(b) Reports on Form 8-K:
A form 8-K/A was filed with the Securities and Exchange Commission on
March 29, 1999. This filing discloses that there was a change in
Registrant's certifying accountant effective December 18, 1999.
A form 8-K/A was filed with the Securities and Exchange Commission on
March 31,1999. This filing amended the previous 8-K/A filed on March
29, 1999 to include the letter of the prior certifying accountant.
<PAGE> 10
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/ James M. Hull
---------------------------------
James M. Hull
President and Director
By: /s/ Deborah Mosley
---------------------------------
Deborah Mosley
Chief Accounting Officer
Date: May 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,000
<SECURITIES> 0
<RECEIVABLES> 119,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 878,000
<PP&E> 12,264,000
<DEPRECIATION> 538,000
<TOTAL-ASSETS> 11,726,000
<CURRENT-LIABILITIES> 202,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 122,000
<TOTAL-LIABILITY-AND-EQUITY> 11,726,000
<SALES> 259,000
<TOTAL-REVENUES> 259,000
<CGS> 0
<TOTAL-COSTS> 245,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
