KBL Healthcare Acquisition Corp III (KHA) 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

¨ Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from            to            

Commission File Number 001-33583

KBL Healthcare Acquisition Corp. III

(Exact Name of Small Business Issuer as Specified in Its Charter)

Delaware	20-8191477
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

380 Lexington Avenue, 31st Floor, New York, New York 10168

(Address of Principal Executive Office)

212-319-5555

(Issuer’s Telephone Number, Including Area Code)

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  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  x	Smaller reporting company  ¨
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of May 14, 2008, 21,000,000 shares of common stock, par value $.0001 per share, were issued and outstanding.

		Page
Part I: Financial Information:
Item 1 –	Financial Statements:
Condensed Balance Sheets		3
Unaudited Condensed Statements of Operations		4
Condensed Statement of Stockholders’ Equity		5
Unaudited Condensed Statements of Cash Flows		6
Notes to Unaudited Condensed Financial Statements		7
Item 2 –	Management’s Discussion and Analysis or Results of Operations	14
Item 4 –	Controls and Procedures	16
Part II. Other Information
Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 6 –	Exhibits	18
Signatures		19

KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Condensed Balance Sheets

	As of March 31, 2008 (unaudited)		As of December 31, 2007
ASSETS
Current Assets
Cash	$	38,152	$	118,868
Investments held in trust		135,560,041		135,226,616
Prepaid expenses		117,168		141,359
Prepaid taxes		33,978		—
Total Current Assets		135,749,339		135,486,843
Computer equipment, (net of accumulated depreciation of $566 and $298, respectively)		5,089		4,452
Total assets	$	135,754,428	$	135,491,295
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	45,108	$	25,723
Capital and income tax payable		—		252,240
Deferred trust interest		157,535		—
Deferred underwriting fees		4,140,000		4,140,000
Total liabilities		4,342,643		4,417,963
Common stock, subject to possible conversion, 5,174,999 shares at conversion value		38,936,992		38,936,992
Commitments
Stockholders’ equity
Preferred stock, $.0001 par value, Authorized 1,000,000 shares; none issued or outstanding				—
Common stock, $.0001 par value Authorized 50,000,000 shares Issued and outstanding 21,000,000 shares (which includes 5,174,999 subject to possible conversion)		2,100		2,100
Additional paid-in capital		90,891,800		90,891,800
Earnings accumulated during the development stage		1,580,893		1,242,440
Total stockholders’ equity		92,474,793		92,136,340
Total liabilities and stockholders’ equity	$	135,754,428	$	135,491,295

See notes to unaudited condensed financial statements.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Unaudited Condensed Statements of Operations

	For the three months ended March 31, 2008		For the period January 9, 2007 (inception) to March 31, 2007		For the period January 9, 2007 (inception) to March 31, 2008
Income:
Interest	$	817,269	—		$	2,865,709
Total Income:		817,269	—			2,865,709
Expenses:
Professional fees		141,656	2,951			328,188
Franchise and capital taxes		20,625	—			101,342
Administrative fees		30,000	—			83,871
Dues and subscriptions		7,219	—			25,905
Insurance		17,500	—			48,968
Other operating expenses		127,942	738			236,145
Total expenses		344,942	3,689			824,419
Income (loss) before provision for income taxes		472,327	(3,689	)		2,041,290
Provision for income taxes		133,874	—			460,397
Net income (loss)	$	338,453	(3,689	)	$	1,580,893
Net income (loss) per share basic and diluted	$	0.02	(0.00	)	$	0.12
Weighted average shares outstanding basic and diluted		21,000,000	3,750,000			13,436,242

See notes to unaudited condensed financial statements.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Condensed Statement of Stockholders’ Equity

For the period January 9, 2007 (inception) to March 31, 2008

	Common Stock			Additional paid-in capital			Earnings Accumulated During the Development Stage		Stockholders’ Equity
	Shares	Amount
Issuance of common stock to initial stockholders on January 9, 2007 at approximately $.007 per share	3,750,000	$	375	$	24,625		$	—	$	25,000
Sale of 17,250,000 units, net of underwriters discount and offering expenses (includes 5,174,999 shares subject to possible conversion)	17,250,000		1,725		127,729,167			—		127,730,892
Private placement warrants (2,075,000 units)					2,075,000					2,075,000
Proceeds subject to possible conversion of 5,174,999 shares					(38,936,992	)				(38,936,992	)
Net income for the period								1,242,440		1,242,440
Balance at December 31, 2007	21,000,000	$	2,100	$	90,891,800		$	1,242,440	$	92,136,340
Unaudited:
Net income for the period	—		—		—			338,453		338,453
Balance at March 31, 2008	21,000,000	$	2,100	$	90,891,800		$	1,580,893	$	92,474,793

See notes to unaudited condensed financial statements.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Unaudited Condensed Statement of Cash Flows

	For the three months ended March 31, 2008			For the period January 9, 2007 (inception) to March 31, 2007			For the period January 9, 2007 (inception) to March 31, 2008
Cash flow from operating activities
Net income (loss)	$	338,453		$	(3,689	)	$	1,580,893
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Interest income on investments held in trust account		(974,425	)		—			(3,021,291	)
Depreciation		268			—			566
Changes in operating assets/liabilities:
Decrease/(Increase) in prepaid expenses		24,191			—			(117,168	)
Increase in prepaid taxes		(33,978	)		—			(33,978	)
Increase in accrued expenses		19,385			3,689			45,108
Decrease in capital and income tax payable		(252,240	)		—			—
Increase in deferred trust interest		157,535			—			157,535
Net cash used in operating activities		(720,811	)		—			(1,388,335	)
Cash flows from Investing Activities
Purchases of equipment		(905	)		—			(5,655	)
Investments held in trust		—			—			(133,930,000	)
Disbursements from investments held in trust		641,000			—			1,391,250
Net cash provided by (used in) investing activities		640,095			—			(132,544,405	)
Cash flows from financing activities
Gross proceeds from public offering		—			—			138,000,000
Proceeds from sale of shares of common stock		—			25,000			25,000
Proceeds from note payable, stockholder		—			100,000			100,000
Payment of note payable, stockholder		—			—			(100,000	)
Proceeds from private placement warrants		—			—			2,075,000
Payment of offering costs		—			(53,268	)		(6,129,108	)
Net cash provided by financing activities		—			71,732			133,970,892
Net (decrease) increase in cash		(80,716	)		71,732			38,152
Cash at beginning of the period		118,868			—			—
Cash at the end of the period	$	38,152		$	71,732		$	38,152
Supplemental schedule of non-cash financing activities:
Accrual of deferred underwriting fees		—			—		$	4,140,000
Accrual of deferred offering cost		—		$	13,000			—
Supplemental schedule of cash flow information:
Cash paid during the year for income taxes	$	360,000			—		$	515,000

See notes to unaudited condensed financial statements.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Notes to Unaudited Condensed Financial Statement

1. Organization and Business Operations KBL Healthcare Acquisition Corp. III (the “Company”) was incorporated in Delaware on January 9, 2007 as a blank check company whose objective is to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the healthcare or healthcare-related industries.   The condensed financial statements at March 31, 2008 and for the periods ended March 31, 2008 and 2007 are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal adjustments) have been made that are necessary to present fairly the financial position of the Company as of March 31, 2008, the results of its operations for the three months ended March 31, 2008, for the period January 9, 2007 (inception) to March 31, 2007 and for the period from January 9, 2007 (inception) to March 31, 2008, and its cash flows and changes in stockholders’ equity for the period from January 9, 2007 (inception) to March 31, 2008. Operating results for the interim period presented are not necessarily indicative of the results to be expected for a full year.   These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the period ended December 31, 2007 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 25, 2008. The December 31, 2007 balance sheet and the statement of stockholders’ equity for the period ended December 31, 2007 have been derived from these audited financial statements. The accounting policies used in preparing these unaudited financial statements are consistent with those described in the December 31, 2007 audited financial statements.   All activity from January 9, 2007 (inception) through July 25, 2007 relates to the Company’s formation and initial public offering described below. Subsequent to July 25, 2007, the Company has been seeking a business combination with an operating business as described below.   The registration statement for the Company’s initial public offering (“Offering”) was declared effective July 19, 2007. The Company consummated the Offering on July 25, 2007 and received net proceeds of approximately $127,731,000 (Note 2). The Company’s management has broad discretion with respect to the specific application of the net

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Notes to Unaudited Condensed Financial Statement

proceeds of this Offering, although substantially all of the net proceeds of this Offering are intended to be generally applied toward consummating a business combination with an operating business in the healthcare or healthcare-related industries (“Business Combination”). Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. An amount of $133,930,000, including $4,140,000 of deferred underwriting discounts and commissions and the $2,075,000 proceeds of the Private Placement Warrants described in Note 2 is being held in a trust account (“Trust Account”) and invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940 until the earlier of (i) the consummation of its first Business Combination and (ii) liquidation of the Company. The placing of funds in the Trust Account may not protect those funds from third party claims against the Company. Although the Company will seek to have all vendors, providers of financing, prospective target businesses or other entities it engages, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account, there is no guarantee that they will execute such agreements. The Company’s Chairman of the Board, the Company’s Chief Executive Officer and the Company’s Chief Operating Officer have agreed that they will be liable under certain circumstances to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or vendors, providers of financing, service providers or other entities that are owed money by the Company for services rendered to or contracted for or products sold to the Company. However, there can be no assurance that they will be able to satisfy those obligations. The remaining net proceeds (not held in the Trust Account) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. Additionally, up to an aggregate of $1,900,000 of interest earned on the Trust Account balance may be released to the Company to fund working capital requirements and tax obligations.

Contribution to trust	$	133,930,000
Interest income received		3,021,291
Withdrawals to fund operations (a)		(795,250	)
Withdrawals to fund estimated taxes		(596,000	)
Total investments held in trust	$	135,560,041

(a)    amount is limited to $1,900,000.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Notes to Unaudited Condensed Financial Statement

The Company, after signing a definitive agreement for the acquisition of a target business, is required to submit such transaction for stockholder approval. In the event that stockholders owning 30% or more of the shares sold in the Offering vote against the Business Combination and exercise their conversion rights described below, the Business Combination will not be consummated. All of the Company’s stockholders prior to the Offering, including all of the officers and directors of the Company (“Initial Stockholders”), have agreed to vote their 3,750,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company (“Public Stockholders”) with respect to any Business Combination. After consummation of a Business Combination, these voting safeguards will no longer be applicable.

With respect to a Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his or her shares. The per share conversion price will equal the amount in the Trust Account, calculated as of two business days prior to the consummation of the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding approximately 29.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Therefore, a portion of the net proceeds of the offering (approximately 29.99% of the amount placed in trust excluding the portion relating to the deferred underwriting fees) has been classified as common stock subject to possible conversion and a portion (29.99%) of the interest earned on the Trust Account, after deducting the amounts permitted to be utilized for income tax obligations and working capital requirements, has been classified as deferred interest in the accompanying condensed balance sheets. Such Public Stockholders are entitled to receive their per share interest in the Trust Account computed without regard to the shares held by Initial Stockholders.

The Company’s Certificate of Incorporation provides for mandatory liquidation of the Company in the event that the Company does not consummate a business combination by July 19, 2009. If the Company has not completed a Business Combination by such date, its corporate existence will cease and it will dissolve and liquidate for the purposes of winding up its affairs. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public offering price per share in the Offering (assuming no value is attributed to the Warrants contained in the Units sold in the Offering discussed in Note 2).

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Notes to Unaudited Condensed Financial Statement

Net Income (Loss) Per Share – Net income per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. The effect of the 17,250,000 outstanding warrants included in the units issued in connection with the Offering and the 2,075,000 outstanding warrants issued in connection with the private placement has not been considered in the diluted income per share calculation since such warrants are contingently exercisable.

New Accounting Pronouncements— In December 2007, the Financial Accounting Standards Board (“FASB”) released SFAS No. 141(R), Business Combinations (revised 2007) (“SFAS 142 (R)”), which changes many well-established business combination accounting practices and significantly affects how acquisition transactions are reflected in the financial statements. Additionally, SFAS 141(R) will affect how companies negotiate and structure transactions, model financial projections of acquisitions and communicate to stakeholders. SFAS 141(R) must be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

In December 2007, the FASB released SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interests and requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Previously, net income attributable to the noncontrolling interest was reported as an expense or other deduction in arriving at consolidated net income. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company believes the adoption of this statement will not have a material impact on its financial statements.

The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Notes to Unaudited Condensed Financial Statement

2.	Initial Public Offering	On July 25, 2007, the Company sold 17,250,000 Units (including 2,250,000 units to cover over-allotments) in the Offering. Each Unit consists of one share of the Company’s common stock and one Redeemable Common Stock Purchase Warrant (“Warrants”). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $6.00 commencing the later of the completion of a Business Combination and July 19, 2008 and expiring July 18, 2011. The Company may redeem the Warrants, at a price of $.01 per Warrant upon 30 days’ notice while the Warrants are exercisable, only in the event that the last sale price of the common stock is at least $11.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. In accordance with the warrant agreement relating to the Warrants sold and issued in the Offering, the Company is only required to use its best efforts to maintain the effectiveness of the registration statement covering the Warrants. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration is not effective at the time of exercise, the holder of such Warrant shall not be entitled to exercise such Warrant and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle the warrant exercise. Consequently, the Warrants may expire unexercised and unredeemed. The Company paid the underwriters in the Offering an underwriting discount of 7% of the gross proceeds of the Offering. However, the underwriters have agreed that 3% ($4,140,000) of the underwriting discounts will not be payable unless and until the Company completes a Business Combination and have waived their right to receive such payment upon the Company’s liquidation if it is unable to complete a Business Combination. In addition, the underwriters will forfeit a portion of this fee ($0.24 per share) to pay a portion of the amounts due to converting stockholders.
3.	Private Placement	Certain of the Company’s officers, directors and special advisors purchased a total of 2,075,000 Warrants (“Private Placement Warrants”) at $1.00 per Warrant (for an aggregate purchase price of $2,075,000) privately from the Company. These purchases took place simultaneously with the Offering. All of the proceeds received from these purchases have been placed in the Trust Account. The Private Placement Warrants are identical to the Warrants underlying the Units in the Offering except that if the Company calls the Warrants for redemption, the Private Placement Warrants may be exercisable on a “cashless basis,” at the holder’s option, so long as such securities are held by such purchaser or their affiliates.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Notes to Unaudited Condensed Financial Statement

		Furthermore, the purchasers have agreed that the Private Placement Warrants will not be sold or transferred by them until after the Company has completed a Business Combination.
4.	Commitments	The Company presently occupies office space provided by an affiliate of three of the Initial Stockholders. Such affiliate has agreed that, until the Company consummates a Business Combination, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $10,000 per month for such services commencing on the effective date of the Offering. The statement of operations for the three months ended March 31, 2008 and the period from January 9, 2007 (inception) to March 31, 2008 includes $30,000 and $83,871, respectively, of expense related to this agreement. Pursuant to letter agreements which the Initial Stockholders will enter with the Company and the underwriters, the Initial Stockholders will waive their right to receive distributions with respect to their founding shares upon the Company’s liquidation. The Initial Stockholders and the holders of the Private Placement Warrants (or underlying securities) will be entitled to registration rights with respect to their founding shares or Private Placement Warrants (or underlying securities) pursuant to an agreement dated as of July 19, 2007. The holders of the majority of the founding shares are entitled to demand that the Company register these shares at any time commencing three months prior to the first anniversary of the consummation of a Business Combination. The holders of the Private Placement Warrants (or underlying securities) are entitled to demand that the Company register these securities at any time after the Company consummates a Business Combination. In addition, the Initial Stockholders and holders of the Private Placement Warrants (or underlying securities) have certain “piggy-back” registration rights on registration statements filed after the Company’s consummation of a Business Combination. The Company entered into consulting agreements with two consultants on August 1, 2007 and August 29, 2007. The August 1, 2007 agreement is terminable by either party upon 60 days prior written notice. The August 29, 2007 agreement expires by its terms on July 20, 2009, although it is terminable by either party upon 30 days prior written notice. The Company is obligated to pay the consultants a combined fee of $33,750 per month plus expenses for consulting services and a success fee totaling $600,000 30 days after the closing of the initial Business Combination by the Company provided such Business Combination is completed within a certain number of days from the termination of the agreements. Included in professional fees in the accompanying unaudited condensed statements of operations for the three months ended March 31, 2008 and for the period January 9, 2007 (inception) to March 31, 2008, is $101,250 and $261,250 related to these agreements.

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KBL Healthcare Acquisition Corp. III

(a corporation in the development stage)

Notes to Unaudited Condensed Financial Statement

5.	Preferred Stock	The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. The agreement with the underwriters prohibits the Company, prior to a Business Combination, from issuing preferred stock which participates in the proceeds of the Trust Account or which votes as a class with the Common Stock on a Business Combination.
6.	Common Stock	Effective July 19, 2007, the Company’s Board of Directors authorized a stock dividend of 0.2 shares of common stock for each outstanding share of common stock. All references in the accompanying financial statements to the number of shares have been retroactively restated to reflect this transaction.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and footnotes thereto contained in this report.

Forward Looking Statements

The statements discussed in this Report include forward looking statements that involve risks and uncertainties detailed from time to time in the Company’s reports filed with the Securities and Exchange Commission.

Overview

We were formed on January 9, 2007 as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the healthcare or healthcare-related industries. We intend to utilize cash derived from the proceeds of our recently completed public offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination.

Results of Operations

For the three months ended March 31, 2008, we had a net income of $338,453 derived from interest income of $817,269 offset by $17,500 for officer liability insurance, $141,656 for professional fees, $125,350 for travel and other expenses, $20,625 in Delaware franchise taxes, $133,874 in New York State and City income taxes, $2,592 for transfer agent and trustee fees, $30,000 in administrative fees and $7,219 for dues and subscriptions.

For the period from January 9, 2007 (inception) to March 31, 2007, we had a net loss of $3,689 attributable to organization and formation expenses.

For the period from January 9, 2007 (inception) to March 31, 2008, we had a net income of $1,580,893 derived from interest income of $2,865,709 offset by $48,968 for officer liability insurance, $328,188 for professional fees, $220,253 for travel and other expenses, $101,342 in Delaware franchise taxes, $460,397 in New York State and City income taxes, $15,892 for transfer agent and trustee fees, $83,871 in administrative fees and $25,905 for dues and subscriptions.

Financial Condition and Liquidity

We consummated our initial public offering on July 25, 2007. Gross proceeds from our initial public offering (including from our private placement of warrants and exercise of the underwriters’ over-allotment option) were $138,000,000. We incurred a total of $9,660,000 in underwriting discounts and commissions and $609,108 for other costs and expenses related to the offering and the over-allotment option. After deducting the underwriting discounts and commissions and the offering expenses, the total net proceeds to us from the offering were approximately $131,871,000, of which $131,855,000 was deposited into the trust account. In addition, all of the proceeds from the private sale of the warrants were deposited into the trust fund, for a total of $133,930,000 held in trust (or approximately $7.76 per share sold in the offering). The remaining proceeds are available to be used by us to provide for business, legal and accounting due diligence on prospective acquisitions, tax payments and continuing general and

14

administrative expenses. We intend to use substantially all of the net proceeds of this offering to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust fund as well as any other net proceeds not expended will be used to finance the operations of the target business. We believe we will have sufficient available funds outside of the trust fund to operate through July 19, 2009, assuming that a business combination is not consummated during that time.

We expect our primary liquidity requirements during this period to include $600,000 of expenses for legal, accounting and other third-party expenses attendant to the search for target businesses and to the due diligence investigations, structuring and negotiating of a business combination, $240,000 for the administrative fee payable to KBL Healthcare Management ($10,000 per month for 24 months), $100,000 of expenses in legal and accounting fees relating to our SEC reporting obligations, $50,000 of expenses for the due diligence and investigation of a target business performed by our officers, directors and existing stockholders and $1,010,000 for general working capital that will be used for miscellaneous expenses, taxes and reserves, including approximately $140,000 for director and officer liability insurance premiums. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us. We would only consummate such a financing simultaneously with the consummation of a business combination.

Commencing on July 25, 2007, we began incurring a fee from KBL Healthcare Management of $10,000 per month for providing us with office space and certain general and administrative services. Additionally, on January 5, 2007, Marlene Krauss advanced to us $100,000 for payment of offering expenses on our behalf. The loan was repaid following our initial public offering from the proceeds of the offering.

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ITEM 4. CONTROLS AND PROCEDURES.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief operating officer, as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our chief executive officer and chief operating officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2008. Based upon their evaluation, they concluded that our disclosure controls and procedures were effective.

Our internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief operating officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

OTHER INFORMATION

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 25, 2007, we consummated our initial public offering of 17,250,000 Units, including 2,250,000 units subject to the underwriters’ over-allotment option. Each Unit consisted of one share of our common stock and one warrant, each to purchase one share of our common stock at an exercise price of $5.00 per share. The units were sold at an offering price of $8.00 per unit, generating total gross proceeds of $138,000,000. Simultaneously with the consummation of the IPO, we consummated the private sale of 2,075,000 warrants (“Insider Warrants”) at a price of $1.00 per warrant, generating total proceeds of $2,075,000. Citigroup Global Markets, Inc. was the managing underwriter in the offering. The securities sold in the offering were registered under the Securities Act of 1933 on a registration statement on Form S-1 (Nos. 333-141342 and 333-144722). The Securities and Exchange Commission declared the registration statement effective on July 19, 2007.

We paid a total of $9,660,000 in underwriting discounts and commissions. Of that total, $4,140,000 has been accrued and deferred and will not be payable unless and until the Company completes a Business Combination. In addition, we incurred approximately $609,108 for costs and expenses related to the offering.

After deducting the underwriting discounts and commissions and the offering expenses, the total net proceeds to us from the offering were approximately $131,871,000, of which $131,855,000 was deposited into the trust account and the remaining proceeds are available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. In addition, all of the proceeds from the private sale of the warrants were deposited into the Trust Fund, for a total of $133,930,000 (or approximately $7.76 per share sold in the offering).

For a description of the use of the proceeds generated in our initial public offering, see Part I, Item 2 of this Form 10-Q.

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ITEM 6: EXHIBITS

(a) Exhibits:

31.1 – Section 302 Certification by CEO

31.2 – Section 906 Certification by COO

32.1 – Section 302 Certification by CEO

32.2 – Section 906 Certification by COO

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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.

	KBL HEALTHCARE ACQUISITION CORP. III
Dated: May 14, 2008
	/s/ Marlene Krauss, M.D.
	Marlene Krauss, M.D.
	Chief Executive Officer (Principal Executive Officer)
	/s/ Michael Kaswan
	Michael Kaswan
	Chief Operating Officer (Principal Accounting and Financial Officer)

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