SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark one)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended September 30, 2002 or |
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from to |
Commission file number 0-18407
WELLS REAL ESTATE FUND III, L.P.
(Exact name of registrant as specified
in its charter)
| Georgia (State or other jurisdiction of incorporation or organization) |
58-1800833 (I.R.S. Employer Identification No.) |
| 6200 The Corners Parkway, Suite 250 Atlanta, Georgia (Address of principal executive offices) |
30092 (Zip Code) |
Registrant’s telephone number, including area code (770) 449-7800
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
1
Form 10-Q
Wells Real Estate Fund III, L.P.
(A Georgia Public Limited Partnership)
| Page No. | |||||||||
| PART I. | FINANCIAL INFORMATION | ||||||||
| Item 1. | Financial Statements | ||||||||
| Balance Sheets — September 30, 2002 (unaudited) and December 31, 2001 | 3 | ||||||||
| Statements of (Loss) Income for the Three Months and Nine Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) | 4 | ||||||||
| Statements of Partner’s Capital for the Nine Months Ended September 30, 2002 (unaudited) and the Year Ended December 31, 2001 | 5 | ||||||||
| Statements of Cash Flows for the Nine Months Ended September 30, 2002 (unaudited) and 2001 (unaudited) | 6 | ||||||||
| Condensed Notes to Financial Statements (unaudited) | 7 | ||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | |||||||
| Item 4. | Controls and Procedures | 16 | |||||||
| PART II. | OTHER INFORMATION | 17 | |||||||
| Exhibits Index | 20 | ||||||||
| Exhibit 10.1 | Purchase and Sale Agreement for the Greenville Center dated July 1, 2002 | 21 | |||||||
| Exhibit 99.1 | Certification of Chief Executive Officer | 56 | |||||||
| Exhibit 99.2 | Certification of Chief Financial Officer | 57 | |||||||
WELLS REAL ESTATE FUND III, L.P.
(A Georgia Public Limited Partnership)
| (unaudited) September 30, 2002 |
December 31, 2001 |
||||||
| ASSETS: | |||||||
| Real estate held for sale, at cost: | |||||||
| Land | $ | 0 | $ | 576,350 | |||
| Building and improvements, less accumulated Depreciation of $0 at September 30, 2002 and $1,434,858 at December 31, 2001 |
0 | 2,286,693 | |||||
| Total real estate held for sale | 0 | 2,863,043 | |||||
| Cash and cash equivalents | 2,473,937 | 134,766 | |||||
| Investment in joint ventures | 10,672,393 | 10,655,517 | |||||
| Due from affiliates | 232,442 | 334,616 | |||||
| Accounts receivable | 3,257 | 0 | |||||
| Prepaid expenses and other assets | 0 | 20,515 | |||||
| Total assets | $ | 13,382,029 | $ | 14,008,457 | |||
| LIABILITIES AND PARTNERS’ CAPITAL: | |||||||
| Liabilities: | |||||||
| Accounts payable | $ | 4,970 | $ | 23,492 | |||
| Partners’ capital: | |||||||
| Limited partners: | |||||||
| Class A — 19,635,965 units | 13,377,059 | 13,984,965 | |||||
| Class B — 2,544,540 units | 0 | 0 | |||||
| Total partners’ capital | 13,377,059 | 13,984,965 | |||||
| Total liabilities and partners’ capital | $ | 13,382,029 | $ | 14,008,457 | |||
The accompanying notes are an integral part of these balance sheets.
WELLS REAL ESTATE FUND III, L.P.
(A Georgia Public Limited Partnership)
| (unaudited) Three Months Ended |
(unaudited) Nine Months Ended |
||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
||||||||||
| REVENUES: | |||||||||||||
| Equity in income of joint ventures (Note 2) |
$ | 39,706 | $ | 126,470 | $ | 61,488 | $ | 456,095 | |||||
| Other income | 1,909 | 0 | 1,909 | 0 | |||||||||
| Interest income | 1,660 | 6,107 | 4,831 | 8,574 | |||||||||
| 43,275 | 132,577 | 68,228 | 464,669 | ||||||||||
| EXPENSES: | |||||||||||||
| Partnership administration | 19,671 | 14,417 | 53,015 | 47,858 | |||||||||
| Legal and accounting | 1,630 | 1,475 | 11,379 | 14,790 | |||||||||
| Computer costs | 2,170 | 2,997 | 6,544 | 8,504 | |||||||||
| 23,471 | 18,889 | 70,938 | 71,152 | ||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS: |
19,804 | 113,688 | (2,710 | ) | 393,517 | ||||||||
| DISCONTINUED OPERATIONS: | |||||||||||||
| Operating loss | (10,334 | ) | (43,516 | ) | (111,053 | ) | (87,715 | ) | |||||
| Impairment loss | (96,000 | ) | 0 | (469,750 | ) | 0 | |||||||
| Loss on disposition | (24,393 | ) | 0 | (24,393 | ) | 0 | |||||||
| LOSS FROM DISCONTINUED OPERATIONS |
(130,727 | ) | (43,516 | ) | (605,196 | ) | (87,715 | ) | |||||
| NET (LOSS) INCOME | $ | (110,923 | ) | $ | 70,172 | $ | (607,906 | ) | $ | 305,802 | |||
| NET (LOSS) INCOME ALLOCATED TO CLASS A LIMITED PARTNERS |
$ | (110,923 | ) | $ | 70,172 | $ | (607,906) | $ | 305,802 | ||||
| NET LOSS ALLOCATED TO CLASS B LIMITED PARTNERS |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||
| PER CLASS A LIMITED PARTNER UNIT: | |||||||||||||
| Income (loss) from continuing operations | $ | 0.00 | $ | 0.01 | $ | (0.00 | ) | $ | 0.02 | ||||
| Loss from discontinued operations | (0.01 | ) | 0.00 | (0.03 | ) | 0.00 | |||||||
| Net (loss) income | $ | (0.01 | ) | $ | 0.01 | $ | (0.03 | ) | $ | 0.02 | |||
| PER CLASS B LIMITED PARTNER UNIT: | |||||||||||||
| Loss from continuing operations | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | |||||
| Loss from discontinued operations | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||
| Net loss | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | |||||
| CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT |
$ | 0.00 | $ | 0.02 | $ | 0.00 | $ | 0.05 | |||||
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND III, L.P.
(A Georgia Public Limited Partnership)
STATEMENTS OF PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2001
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
| Limited Partners | ||||||||||||||||
| Class A | Class B | |||||||||||||||
| Units | Amounts | Units | Amounts | Total Partners’ Capital |
||||||||||||
| BALANCE, December 31, 2000 | 19,635,965 | $ | 14,512,162 | 2,544,540 | $ | 0 | $ | 14,512,162 | ||||||||
| Net income | 0 | 375,442 | 0 | 0 | 375,442 | |||||||||||
| Partnership distributions | 0 | (902,639 | ) | 0 | 0 | (902,639 | ) | |||||||||
| BALANCE, December 31, 2001 | 19,635,965 | 13,984,965 | 2,544,540 | 0 | 13,984,965 | |||||||||||
| Net loss | 0 | (607,906 | ) | 0 | 0 | (607,906 | ) | |||||||||
| BALANCE, September 30, 2002 (unaudited) |
19,635,965 | $ | 13,377,059 | 2,544,540 | $ | 0 | $ | 13,377,059 | ||||||||
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND III, L.P.
(A Georgia Public Limited Partnership)
| (unaudited) Nine Months Ended |
|||||||
| September 30, 2002 |
September 30, 2001 |
||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net (loss) income from continuing operations | $ | (2,710 | ) | $ | 393,517 | ||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: |
|||||||
| Equity in income of joint ventures | (61,488 | ) | (456,095 | ) | |||
| Changes in assets and liabilities: | |||||||
| Due from affiliates | (1,815 | ) | 3,216 | ||||
| Accounts receivable | (7,036 | ) | (7,045 | ) | |||
| Prepaid expenses and other assets | 13,332 | (12,495 | ) | ||||
| Accounts payable | 860 | (7,882 | ) | ||||
| Net cash used for continuing operations | (58,857 | ) | (86,784 | ) | |||
| Net cash used for discontinued operations | (21,759 | ) | 49,527 | ||||
| Net cash used in operating activities | (80,616 | ) | (37,257 | ) | |||
| CASH FLOW FROM INVESTING ACTIVITIES: | |||||||
| Investment in real estate | 0 | (24,619 | ) | ||||
| Net proceeds from the sale of real estate assets | 2,271,187 | 0 | |||||
| Investments in joint ventures | (661,150 | ) | (502,340 | ) | |||
| Distributions received from joint ventures | 809,750 | 888,259 | |||||
| Net cash provided by investing activities | 2,419,787 | 361,300 | |||||
| CASH FLOW FROM FINANCING ACTIVITIES | |||||||
| Partnership distributions paid from accumulated earnings | 0 | (236,881 | ) | ||||
| Partnership distributions paid in excess of accumulated earnings | 0 | (378,025 | ) | ||||
| Net cash used in financing activities | 0 | (614,906 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 2,339,171 | (290,863 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of year | 134,766 | 409,476 | |||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 2,473,937 | $ | 118,613 | |||
The accompanying notes are an integral part of these statements.
WELLS REAL ESTATE FUND III, L.P.
(A Georgia Public Limited Partnership)
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
| Wells Real Estate Fund III, L.P. (the “Partnership”) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, Inc., a Georgia corporation, serving as the General Partners. The Partnership was formed on July 31, 1988 for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing and otherwise managing income-producing commercial properties for investment purposes. The Partnership has two classes of limited partnership interests, Class A and Class B units. The limited partners may vote to, among other things, (a) amend the partnership agreement, subject to certain limitations, (b) change the business purpose or investment objectives of the Partnership, and (c) add or remove a general partner. A majority vote on any of the above described matters will bind the Partnership without the concurrence of the general partners. Each limited partner unit has equal voting rights regardless of class. |
| On October 24, 1988, the Partnership commenced a public offering of its limited partnership units pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The offering was terminated on October 23, 1990 upon receiving and accepting $22,206,310 in limited partner capital contributions for a total of 22,206,310 Class A and Class B limited partner units at $1 per unit. From the original capital contributions, the Partnership has paid $1,554,442 in acquisition and advisory fees and acquisition expenses and $2,664,668 in selling commissions and organization and offering expenses, invested $17,983,843 in the properties described below, and maintains a working capital reserve of $3,357. In 1990 and 1991, the Partnership repurchased 6,128 and 19,677 limited partnership units, respectively. |
| The Partnership owned a 100% interest in Greenville Center, an office building located in Greenville, North Carolina, through September 30, 2002. On this date, the Partnership sold Greenville Center to East Carolina University Real Estate Foundation, Inc., an unrelated third-party, for a gross sales price of $2,400,000. As a result of this sale, the Partnership received net sale proceeds of $2,271,187 and recognized a loss of $494,143, which may be adjusted as additional information becomes available in subsequent periods. |
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
| The Partnership owns interests in the remainder of its real estate assets through joint ventures with other Wells Real Estate Funds. As of September 30, 2002, the Partnership owned interests in the following five properties through the affiliated joint ventures listed below: |
| Joint Venture | Joint Venture Partners | Properties | |
| Fund II-III Associates – Atrium | - Fund II-IIOW Associates* - Wells Real Estate Fund III, L.P. |
1. | Boeing at the Atrium A four story office building located in Houston Texas |
| Fund II-III Associates – Brookwood |
- Fund II-IIOW Associates* - Wells Real Estate Fund III, LP |
2. | Brookwood Grill A restaurant located in Fulton County, Georgia |
| Fund II-III-VI-VII Associates | - Fund II-III Associates – Brookwood - Wells Real Estate Fund VI, LP - Wells Real Estate Fund VII, LP |
3. | Holcomb Bridge Property An office/retail center located in Roswell, Georgia |
| Fund III-IV Associates | - Wells Real Estate Fund III, LP - Wells Real Estate Fund IV, LP |
4. 5. |
Stockbridge Village Shopping Center A retail shopping center located in Stockbridge, Georgia Reciprocal Group Building An office building located in Richmond, Virginia |
| * | Fund II-IIOW Associates is a joint venture between Wells Real Estate Fund II and Wells Real Estate Fund II-OW. |
| Each of the above properties was acquired on an all cash basis. For further information regarding the foregoing joint ventures and properties, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2001. |
| In March 2002, Boeing/Shuttle Division (“Boeing”) entered into a lease for the top three floors of the four-story Boeing at the Atrium, which commenced on September 1, 2002, extends for a term of 73 months and provides annual base rent payable of $1,483,697, or $15.75 per square foot. In October 2002, Boeing exercised an option to lease an additional 11,515 square feet comprising approximately half of the first floor for the same rental rate and lease term as that for the top three floors. The lease for the additional space on the first floor is estimated to commence in mid-November 2002. |
(b) Basis of Presentation
| The financial statements of the Partnership have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. The quarterly statements included herein have not been examined by independent accountants. However, in the opinion of the General Partners, the statements for the unaudited interim periods presented include all adjustments, that are of a normal and recurring nature and necessary to fairly present the results for those periods. For further information, refer to the financial statements and footnotes included in the report filed for the Partnership on Form 10-K for the year ended December 31, 2001. |
(c) Distribution of Net Cash From Operations
| As defined by the partnership agreement, cash available for distributions is distributed quarterly to limited partners as follows: |
| • | First, to the Class A limited partners until such limited partners have received an 8% per annum return on their respective adjusted capital contributions, as defined.
|
| • | Second, to the Class B limited partners until such limited partners have received an 8% per annum return on their respective adjusted capital contributions, as defined.
|
| • | Third, to the general partners until such partners have received distributions equal to 10% of the total net cash distributed from operations per annum. |
| • | Thereafter, to the limited partners and the General Partners allocated on a basis of 90% and 10%, respectively. |
(d) Impairment of Real Estate Assets
| On January 1, 2002, the Partnership adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under this accounting standard, management reviews each of the properties in which the partnership holds an interest for impairment as events or changes in circumstances arise, which indicate that the carrying amounts of such assets may not be recoverable and the future undiscounted cash flows expected to be generated by such assets are less than the respective carrying amounts. If such assets are considered to be impaired, the Partnership records impairment losses and reduces the carrying amounts of the impaired assets to amounts that reflect the fair value of the assets at the time impairment is evident. |
| Management also reviews estimated selling prices of assets held for sale and records impairment losses to reduce the carrying amount of assets held for sale when the carrying amounts exceed the estimated selling prices less costs to sell. Material long-lived assets held for sale are separately identified in the balance sheets, and the related net operating income is segregated as income from discontinued operations in the statements of income. Depreciation is not recorded for long-lived assets held for sale. If an asset held for sale reverts to an asset used in operations, the asset will be measured at the lower of the original carrying cost, adjusted for the forgone depreciation, or the fair value at the date of the decision to hold the assets for use in operations. |
| Using the criterion outlined above, the Partnership evaluated the carrying value of its investment in Greenville Center on a held for use basis as of June 30, 2002 and, accordingly, recognized an impairment loss of $373,750 in the second quarter of 2002. Upon executing the purchase-sale agreement for the sale of Greenville Center during the third quarter of 2002, the Partnership evaluated the carrying value of its investment in Greenville Center on a held for sale basis, which resulted in the recognition of an additional impairment loss of $96,000 in the third quarter of 2002. Total impairment losses of $469,750 are included in losses from discontinued operations in the accompanying statement of (loss) income for the nine months ended September 30, 2002. |
(e) Reclassifications
| Certain prior year amounts have been reclassified to conform with the current period financial statement presentation. |
2. INVESTMENT IN JOINT VENTURES
(a) Basis of Presentation
| The Partnership does not have control over the operations of the joint ventures described in Note 1; however, it does exercise significant influence. Accordingly, investments in joint ventures are recorded using the equity method of accounting. Interim results for 2002 are not necessarily indicative of results for the year. For further information, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2001. |
| The following information summarizes the operations of the unconsolidated joint ventures in which the Partnership held ownership interests for the three and nine months ended September 30, 2002 and 2001: |
| Total Revenues | Net Income | Partnership’s Share of Net Income |
|||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
||||||||||||||
| Fund II-III Associates – Atrium |
$ | 124,230 | $ | 368,814 | $ | (255,476 | ) | $ | (88,199 | ) | $ | (98,869 | ) | $ | (34,133 | ) | |||
| Fund II-III Associates – Brookwood |
60,294 | * | 59,155 | * | 50,609 | 56,123 | 19,479 | 21,130 | |||||||||||
| Fund III-IV Associates | 464,512 | 479,025 | 208,168 | 243,784 | 119,096 | 139,473 | |||||||||||||
| $ | 649,036 | $ | 906,994 | $ | 3,301 | $ | 211,708 | $ | 39,706 | $ | 126,470 | ||||||||
| Total Revenues | Net Income | Partnership’s Share of Net Income |
|||||||||||||||||
| Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
||||||||||||||
| Fund II-III Associates – Atrium |
$ | 119,656 | $ | 1,109,273 | $ | (969,051 | ) | $ | (126,659 | ) | $ | (375,022 | ) | $ | (49,017 | ) | |||
| Fund II-III Associates – Brookwood |
140,263 | * | 171,690 | * | 119,587 | 151,155 | 45,449 | 56,910 | |||||||||||
| Fund III-IV Associates | 1,401,381 | 1,384,249 | 683,534 | 783,410 | 391,061 | 448,202 | |||||||||||||
| $ | 1,661,300 | $ | 2,665,212 | $ | (165,930 | ) | $ | 807,906 | $ | 61,488 | $ | 456,095 | |||||||
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
| Total Revenues | Net Income | Partnership’s Share of Net Income |
|||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
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| Fund II-III-VI-VII Associates |
$ | 140,100 | $ | 215,407 | $ | 20,320 | $ | 84,664 | $ | 1,839 | * | $ | 7,672 | * | |||||
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