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 |
||||||||||||||
| Fund II-III-VI-VII Associates |
$ | 140,100 | $ | 215,407 | $ | 20,320 | $ | 84,664 | $ | 1,839 | * | $ | 7,672 | * | |||||
| 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-VI-VII Associates |
$ | 498,567 | $ | 631,698 | $ | 140,517 | $ | 175,834 | $ | 12,717 | * | $ | 15,935 | * | |||||
| * | The Partnership’s share of income earned from its investment in Fund II-III-VI-VII Associates is recorded by Fund II-III Associates - Brookwood as equity in income of joint ventures, which is classified as revenue. |
(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 |
||||||||||||||
| Reciprocal Group Building |
$ | 144,584 | $ | 144,584 | $ | 47,170 | $ | 44,546 | $ | 26,944 | $ | 25,485 | |||||||
| 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 |
||||||||||||||
| Reciprocal Group Building |
$ | 433,756 | $ | 385,555 | $ | 134,395 | $ | 161,233 | $ | 76,887 | $ | 92,241 | |||||||
3. DISCONTINUED OPERATIONS
| The Partnership adopted SFAS No. 144 effective January 1, 2002, which requires, among other things, that the operating results of real estate assets sold or held for sale subsequent to January 1, 2002 be included in discontinued operations in the statements of (loss) income for all periods presented, and to classify the carrying value of such assets as held for sale for all periods presented. The Greenville Center property was sold on September 30, 2002. |
| Condensed financial information of the results of operations for the real estate assets sold, which are included in discontinued operations in the accompanying statements of (loss) income, is presented below: |
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
||||||||||
| Total property revenues | $ | 44,830 | $ | 48,744 | $ | 141,532 | $ | 223,164 | |||||
| Operating costs-rental property, net of Tenant reimbursements |
43,778 | 42,365 | 144,987 | 146,029 | |||||||||
| Depreciation | 0 | 44,384 | 89,294 | 137,242 | |||||||||
| Management and leasing fees | at11,386 | 5,511 | 18,304 | 27,608 | |||||||||
| Total expenses | 55,164 | 92,260 | 252,585 | 310,879 | |||||||||
| 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 | ) | |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| The following discussion and analysis should be read in conjunction with the Partnership’s accompanying financial statements and notes thereto. |
(a) Forward-Looking Statements
| This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including discussion and analysis of the financial condition of the Partnership, anticipated capital expenditures required to complete certain projects, amounts of cash distributions anticipated to be distributed to limited partners in the future and certain other matters. Readers of this report should be aware that there are various factors that could cause actual results to differ materially from any forward-looking statements made in this report, including construction costs that may exceed estimates, construction delays, lease-up risks, inability to obtain new tenants upon the expiration of existing leases, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows. |
(b) Results of Operations
| Revenues |
| Gross revenues decreased to $68,228 for the nine months ended September 30, 2002, compared to $464,669 for the same period in 2001, due to decreased equity in income generated from joint ventures resulting from (i) a reduction in occupancy of Boeing at the Atrium beginning in December 2001, (ii) reduced rental rates for Brookwood Grill, (iii) decreases in occupancy of the Holcomb Bridge Property experienced during the preceding twelve months, (iv) increased property insurance rates and repair expenses for the Stockbridge Village Center, (v) reduced operating cost reimbursement billings to tenants of the Reciprocal Group Building during the first half of 2002, and (vi) decreased occupancy at Stockbridge Village Center during the third quarter of 2002, partially offset by (i) an increase in occupancy rates for the Reciprocal Group Building during the first quarter of 2001, and (ii) receivables due from tenants at the Holcomb Bridge Property, which were written -off in 2001 and collected in 2002. Tenants are billed for operating cost reimbursements at estimated amounts, which are reconciled as tenants are billed (credited) for the net annual under (over) billings in the following year. |
| 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. |
| Expenses |
| Expenses remained relatively constant at $70,938 for the nine months ended September 30, 2002 compared to $71,152 for the same period in 2001. |
| Discontinued Operations |
| The Partnership adopted SFAS No. 144 effective January 1, 2002, which requires, among other things, that the operating results of real estate assets sold or held for sale subsequent to January 1, 2002 be included in discontinued operations in the statements of (loss) income for all periods presented, and to classify the carrying value of such assets as held for sale for all periods presented. The Greenville Center property was sold on September 30, 2002. |
| Condensed financial information of the results of operations for the real estate assets sold, which are included in discontinued operations in the accompanying statements of (loss) income, is presented below: |
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, 2002 |
September 30, 2001 |
September 30, 2002 |
September 30, 2001 |
||||||||||
| Total property revenues | $ | 44,830 | $ | 48,744 | $ | 141,532 | $ | 223,164 | |||||
| Operating costs-rental property, net of Tenant reimbursements |
43,778 | 42,365 | 144,987 | 146,029 | |||||||||
| Depreciation | 0 | 44,384 | 89,294 | 137,242 | |||||||||
| Management and leasing fees | 11,386 | 5,511 | 18,304 | 27,608 | |||||||||
| Total expenses | 55,164 | 92,260 | 252,585 | 310,879 | |||||||||
| 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 | ) | |
| As a result, net (loss) income was $(607,906) for the nine months ended September 30, 2002, as compared to net income of $305,802 for the same period in 2001. |
| Distributions |
| The Partnership has reserved distributions to the Class A limited partners for the first, second and third quarters of 2002 due to the reasons described in the preceding section. Distributions were made to the limited partners holding Class A units of $0.05 per unit with respect to the nine months ended September 30, 2001. Such distributions have been made from net cash from operations and distributions received from investments in joint ventures. No cash distributions have been made to the limited partners holding Class B units or to the General Partners during these periods. |
| The General Partners’ guidance with regard to future operating cash distributions to the limited partners holding Class A units is that such distributions are likely to be reinstated following the completion of funding expenditures related to the Boeing Project estimated at approximately $500,000. Currently, the Boeing Project is scheduled to be completed during the fourth quarter of 2002. |
(c) Liquidity and Capital Resources
| Net cash flows used in operating activities increased to $80,616 for the nine months ended September 30, 2002, from $37,257 for the nine months ended September 30, 2001, primarily due to a change in the timing of utilizing and paying for current assets and current liabilities associated with the Greenville Center. Net cash provided by investing activities increased to $2,419,787 for 2002, compared to $361,300 for 2001, primarily as a result of sales proceeds received from the sale of |
| Greenville Center, partially offset by contributing additional capital to joint ventures in order to fund tenant improvements for the Boeing Project related to re-leasing 76% of the building effective September 1, 2002. Net cash used in financing activities decreased to $0 for 2002 compared to $614,906 for 2001 as a result of withholding funds otherwise distributable to limited partners in order to fund tenant improvements for Boeing at the Atrium in 2002. |
| The Partnership expects to continue to meets its short-term liquidity requirements, generally through the use of net cash from operations and distributions received from investments in joint ventures. The General Partners believe that such sources will continue to provide adequate cash flows for the purposes of meeting the Partnership’ operating requirements. |
| Rather than being distributed to the limited partners, the Partnership is holding the net proceeds generated from the sale of Greenville Center as it evaluates the capital needs of the existing properties, in which it holds an interest through investments in joint ventures, in connection with positioning the such properties for sale in the market. Upon completing this evaluation, the Partnership will distribute the net proceeds not utilized to satisfy capital needs of existing properties to the partners in accordance with the terms of the Partnership Agreement. The Partnership expects to continue to meet its short-term liquidity requirements generally through net cash provided by operations and distributions received from joint ventures. |
(d) Inflation
| The real estate market has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. Most tenant leases contain provisions for common area maintenance, real estate tax and insurance reimbursements from tenants either on a per square foot basis, or above a certain allowance per square foot annually, which should reduce the Partnership’s exposure to increases in costs and other operating expenses resulting from the impact of inflation. In addition, a number of the Partnership’s leases are for remaining terms of less than five years, which may allow the Partnership to enter into new leases at higher base rental rates in the event that market rental rates rise above the existing lease rates. There is no assurance, however, that the Partnership would be able to replace existing leases with new leases containing higher base rental rates. |
(d) Critical Accounting Policies
| The Partnership’s accounting policies have been established and conformed to in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to use judgments in the application of accounting policies, including making estimates and assumptions. These judgments may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements presented and the reported amounts of revenues and expenses during the respective reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied; thus, resulting in a different presentation of our financial statements. |
| The accounting policies that we consider to be critical, in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain, are discussed below. For further information related to the Partnership’s accounting policies, including the critical accounting policies described below, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2001. |
| Straight-Lined Rental Revenues |
| The Partnership recognizes rental income generated from all leases on real estate assets in which the Partnership has an ownership interest either directly or through its investments in joint ventures on a straight-line basis over the terms of the respective leases. Should tenants encounter financial difficulties in future periods, the amounts recorded as receivables may not be fully realized. |
| Operating Cost Reimbursements |
| The Partnership generally bills tenants for operating cost reimbursements either directly or through its investments in joint ventures on a monthly basis at amounts estimated largely based on actual prior period activity and the respective tenant lease terms. Such billings are generally adjusted on an annual basis to reflect reimbursements owed to the landlord based on the actual costs incurred during the period and the respective tenant lease terms. Should tenants encounter financial difficulties in future periods, the amounts recorded as receivables may not be fully realized. |
| Real Estate |
| Management continually monitors events and changes in circumstances indicating that the carrying amounts of the real estate assets in which the Partnership has ownership interests either directly or through its investments in joint ventures may not be recoverable. When such events or changes in circumstances are present, management assesses the potential impairment by comparing the fair market value of the underlying assets, estimated at amounts equal to the future undiscounted operating cash flows expected to be generated from tenants over the life of the assets and from their eventual disposition, to the carrying value of the assets. In the event that the carrying amount exceeds the estimated fair market value, the Partnership would recognize an impairment loss in the amount required to adjust the carrying amount of the asset to its estimated fair market value. |
| The Partnership recognized impairment losses of $373,750 and $96,000 on its investment in Greenville Center during the second and third quarters of 2002, respectively, which are included in the total loss on disposition in the accompanying statement of (loss) income for the nine months ended September 30, 2002. |
| ITEM 4. | CONTROLS AND PROCEDURES |
| Within the 90 days prior to the date of this report, the Partnership carried out an evaluation, under the supervision and with the participation of management of Wells Capital, Inc., the corporate General Partner of the Partnership, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures pursuant to Rule 13a – 14 under the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Partnership’s disclosure controls and procedures were effective. |
| There were no significant changes in the Partnership’s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation. |
(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
| ITEM 6 | EXHIBITS AND REPORTS ON FORM 8-K |
| (a) | The Exhibits to this report are set forth on the Exhibit Index to Third Quarter Form 10-Q attached hereto. | |
| (b) | During the third quarter of 2002, the Registrant filed a Current Report on Form 8-K dated July 3, 2002 disclosing the appointment of Ernst & Young LLP as the principal accountant to audit the financial statements of the Registrant. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WELLS REAL ESTATE FUND III, L.P. (Registrant) | |||
| By: | WELLS CAPITAL,INC. |
||
| (Corporate General Partners) | |||
November 13, 2002 |
/s/ LEO F. WELLS, III | ||
| Leo F. Wells, III President |
November 13, 2002 |
/s/ DOUGLAS P. WILLIAMS | ||
| Douglas P. Williams Principal Financial Officer of Wells Capital, Inc. |
CERTIFICATIONS
I, Leo F. Wells, III, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of the Partnership; | ||
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared, | ||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the board of directors of the corporate General Partner: |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Dated: November 13, 2002 |
By: | /s/ LEO F. WELLS,III | |
| Leo F. Wells, III Principal Executive Officer | |||
CERTIFICATIONS
I, Douglas P. Williams, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of the Partnership; | ||
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | ||
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared, | ||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the board of the corporate General Partner: |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Dated: November 13, 2002 |
By: | /s/ DOUGLAS P. WILLIAMS | |
| Principal Financial Officer | |||
EXHIBIT INDEX
TO
THIRD QUARTER FORM 10-Q
OF
WELLS REAL ESTATE FUND III, L.P.
| Exhibit No. |
Description |
| 10.1 | Purchase and Sale Agreement for the Greenville Center dated July 1, 2002 |
| 99.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 99.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |