FORM 10-QSB.--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB (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, 1997 [ ] 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 0-10273 CONSOLIDATED CAPITAL PROPERTIES III (Exact name of small business issuer as specified in its charter) California 94-2653686 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Insignia Financial Plaza, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) 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 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) CONSOLIDATED CAPITAL PROPERTIES III CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) September 30, 1997 Assets Cash and cash equivalents: Unrestricted $ 1,839 Restricted-tenant security deposits 118 Accounts receivable 19 Escrows for taxes and insurance 193 Restricted escrows 136 Other assets 326 Investment properties: Land $ 1,552 Buildings and related personal property 12,506 14,058 Less accumulated depreciation (9,514) 4,544 $ 7,175 Liabilities and Partners' Capital (Deficit) Liabilities Accounts payable $ 56 Tenant security deposits 120 Accrued property taxes 162 Other liabilities 144 Mortgage notes payable 4,200 Partners' Capital (Deficit) General partner's $(1,930) Limited partners' (158,945 units issued and 158,636 outstanding) 4,423 2,493 $ 7,175 See Accompanying Notes to Consolidated Financial Statements b) CONSOLIDATED CAPITAL PROPERTIES III CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Revenues: Rental income $ 903 $ 1,025 $ 2,583 $ 3,171 Other income 71 93 204 289 Gain on disposition of property (Note E) -- 1,820 -- 1,820 Total revenues 974 2,938 2,787 5,280 Expenses: Operating 366 401 1,053 1,309 General and administrative 93 105 218 302 Maintenance 177 168 438 487 Depreciation 109 211 316 672 Interest 85 187 255 560 Property taxes 54 71 162 283 Total expenses 884 1,143 2,442 3,613 Income before extraordinary item 90 1,795 345 1,667 Extraordinary gain on foreclosure (Note E) -- 1,149 -- 1,149 Net income $ 90 $ 2,944 $ 345 $ 2,816 Net income allocated to general partners (4%) $ 4 $ 118 $ 14 $ 113 Net income allocated to limited partners (96%) 86 2,826 331 2,703 Net income $ 90 $ 2,944 $ 345 $ 2,816 Net income (loss) per limited partnership unit: Income before extraordinary item $ .54 $ 10.86 $ 2.09 $ 10.09 Extraordinary gain -- 6.95 -- 6.95 Net income $ .54 $ 17.81 $ 2.09 $ 17.04 See Accompanying Notes to Consolidated Financial Statements c) CONSOLIDATED CAPITAL PROPERTIES III CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (Unaudited) (in thousands, except unit data) Limited Partnership General Limited Units Partner's Partners' Total Original capital contributions 158,945 $ 1 $79,473 $79,474 Partners' (deficit) capital at December 31, 1996 158,636 $(1,853) $ 6,263 $ 4,410 Distributions paid -- (91) (2,171) (2,262) Net income for the nine months ended September 30, 1997 -- 14 331 345 Partners' (deficit) capital at September 30, 1997 158,636 $(1,930) $ 4,423 $ 2,493 <FN> See Accompanying Notes to Consolidated Financial Statements </FN> d) CONSOLIDATED CAPITAL PROPERTIES III CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 1997 1996 Cash flows from operating activities: Net income $ 345 $ 2,816 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposition of property -- (1,820) Extraordinary gain on foreclosure -- (1,149) Depreciation 316 672 Amortization of lease commissions and loan costs 38 38 Change in account: Restricted cash (3) 9 Accounts receivable 29 72 Escrows for taxes and insurance (104) (201) Other assets (42) (11) Accounts payable (58) (171) Tenant security deposits liabilities 6 (8) Accrued property taxes 162 168 Other liabilities (17) 127 Net cash provided by operating activities 672 542 Cash flows from investing activities: Property improvements and replacements (240) (140) Receipts from restricted escrows 147 7 Deposits to restricted escrows (61) -- Net cash used in investing activities (154) (133) Cash flows from financing activities: Payments on mortgage notes payable -- (33) Repayment of mortgage notes payable -- (3,174) Proceeds from mortgage notes payable -- 4,200 Payment of loan costs (20) (146) Partners' distributions (2,262) (380) Net cash (used in) provided by financing activities (2,282) 467 Net (decrease) increase in unrestricted cash and cash equivalents (1,764) 876 Unrestricted cash and cash equivalents at beginning of period 3,603 2,854 Unrestricted cash and cash equivalents at end of period $ 1,839 $ 3,730 Supplemental disclosure of cash flow information: Cash paid for interest $ 231 $ 553 See Accompanying Notes to Consolidated Financial Statements CONSOLIDATED CAPITAL PROPERTIES III CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) (in thousands) SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES Foreclosure During the third quarter of 1996, Mountain Plaza Apartments was foreclosed upon by the lender. In connection with this foreclosure, the following balance sheet accounts were adjusted by the non-cash amounts noted below: 1996 Accounts receivable $ (15) Other assets (106) Investment properties (2,364) Accrued property taxes 34 Other liabilities 141 Mortgage notes payable 3,459 See Accompanying Notes to Consolidated Financial Statements CONSOLIDATED CAPITAL PROPERTIES III NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Consolidated Capital Properties III (the "Partnership") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of ConCap Equities, Inc. (the "General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1997, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Partnership's annual report on Form 10-KSB for the fiscal year ended December 31, 1996. Certain reclassifications have been made to the 1996 information to conform to the 1997 presentation. Consolidation The Partnership's financial statements include the accounts of ConCap Mountain Plaza Associates, Ltd. (which was dissolved in 1996, see "Note E") and ConCap Village Green Associates, Ltd., two majority-owned limited partnerships. All intercompany transactions have been eliminated. NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES The Partnership has paid property management fees based on collected gross rental revenues for property management services in each of the nine months ended September 30, 1997 and 1996. Property management fees of approximately $135,000 and $162,000 were paid to affiliates of the General Partner for the nine months ended September 30, 1997 and 1996, respectively. These fees are included in operating expenses. The Limited Partnership Agreement ("Partnership Agreement") provides for a special management fee equal to 9% of the total distributions made to the limited partners from cash flow from operations to be paid to the General Partner for executive and administrative management services. Under this provision of the Partnership Agreement, fees of approximately $38,000 and $32,000 were paid to affiliates of the General Partner during the nine months ended September 30, 1997 and 1996, respectively. The Partnership Agreement also provides for reimbursement to the General Partner and its affiliates for costs incurred in connection with the administration of Partnership activities. Reimbursements for services of affiliates of approximately $110,000 and $147,000 were paid to the General Partner and its affiliates for the nine months ended September 30, 1997 and 1996, respectively. Additionally, the Partnership paid approximately $33,000 and $23,000 during the nine months ended September 30, 1997 and 1996, respectively, to an affiliate of the General Partner for lease commissions at the Partnership's commercial property. These lease commissions are included in other assets and are amortized over the terms of the respective leases. For the period of January 1, 1996, to August 31, 1997, the Partnership insured its properties under a master policy through an agency and insurer unaffiliated with the General Partner. An affiliate of the General Partner acquired, in the acquisition of a business, certain financial obligations from an insurance agency which was later acquired by the agent who placed the master policy. The agent assumed the financial obligations to the affiliate of the General Partner who received payment on these obligations from the agent. The amount of the Partnership's insurance premiums accruing to the benefit of the affiliate of the General Partner by virtue of the agent's obligations is not significant. NOTE C - DISTRIBUTIONS In April of 1996, the Partnership paid state withholding taxes of $12,000 for non-resident limited partners. This payment is reflected as a distribution to the Limited Partners. In September of 1996, the Partnership paid distributions attributable to cash flow from operations, totaling approximately $368,000 to the partners. In April of 1997, the Partnership paid distributions, representing a return of capital, totaling approximately $1,150,000 to the partners. In September of 1997, the Partnership paid distributions totaling approximately $1,112,000 to the partners, of which approximately $435,000 was attributable to cash flow from operations and approximately $677,000 represented a return of capital. NOTE D - MORTGAGE NOTES PAYABLE During the second quarter of 1996, the Partnership entered into an interim financing arrangement for both Ventura Landing and Village Green for $2,200,000 and $2,000,000, respectively. The previous Ventura Landing note of $3,200,000 million was repaid at that time. The interest rate was 250 basis points over the 30-day LIBOR, resulting in a total note rate of 8.00%. The loans matured on August 1, 1996, with a 60-day extension option. The Partnership exercised this option to convert the interim loans to fixed rate amortizing loans with an interest rate equal to the Treasury Rate, as defined in the financing agreement, plus 2.15%. Such converted loans would mature in ten years with monthly payments of principal and interest based on a schedule which would fully amortize the loans over a thirty year term. The Partnership, however, continued seeking alternative long-term financing to obtain a lower interest rate. In November of 1996, these two properties obtained long-term refinancing. Proceeds from this transaction totaled $4,200,000. The debt accrues interest at a rate of 7.33% per year, matures on November 1, 2003, and requires balloon payments at maturity for the full principal amount. Throughout the mortgage term, interest only payments are made. Loan costs of approximately $215,000 have been incurred by the properties as a result of the long-term refinancing. Loan costs are included in other assets on the balance sheet and are amortized as interest expense over the term of the mortgage notes. NOTE E - FORECLOSURE OF MOUNTAIN PLAZA APARTMENTS On September 3, 1996, the lender foreclosed on Mountain Plaza Apartments. The mortgage note payable had been in default since May 13, 1996. In the General Partner's opinion, it was not in the Partnership's best interest to contest the foreclosure action. During the third quarter of 1996, the Partnership recorded a gain on disposition of property of $1,820,000, to increase the carrying value of the Mountain Plaza assets to their estimated market value and an extraordinary gain on the foreclosure of $1,149,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The Partnership's remaining investment properties consist of three apartment complexes and one commercial property. The following table sets forth the average occupancy of the properties for each of the nine months ended September 30, 1997 and 1996: Average Occupancy 1997 1996 Professional Plaza Office Building Salt Lake City, UT 94% 97% Ventura Landing Apartments Orlando, FL 97% 95% Village Green Apartments Altamante Springs, FL 94% 95% West Chase Apartments Lexington, KY 88% 93% The decrease in occupancy at West Chase Apartments is attributable to competition from recently built apartment complexes in the Lexington area. The Partnership realized net income of $345,000 for the nine months ended September 30, 1997, of which $90,000 was net income for the third quarter. The corresponding net income for the comparable periods in 1996 were $2,816,000 and $2,944,000, respectively. The decrease in net income for both the three and nine month periods ended September 30, 1997, is primarily due to the gain on disposition of property and the extraordinary gain on foreclosure from the foreclosure of Mountain Plaza Apartments in September of 1996. This foreclosure resulted in an extraordinary gain on foreclosure in 1996 of $1,149,000, as well as a gain recorded to increase the carrying value of the Mountain Plaza assets to their estimated market value of $1,820,000 (see "Item 1. Note E - Foreclosure of Mountain Plaza Apartments"). Total revenues and expenses decreased primarily due to the foreclosure of Mountain Plaza Apartments. Rental income for the remaining properties increased primarily as a result of an increase in rental rates at Ventura Landing. Contributing to the decrease in depreciation expense was certain assets at the remaining properties becoming fully depreciated in 1996. The decrease in interest expense was also impacted by the refinancing of the Ventura Landing note payable which resulted in a lower interest rate and principal balance. This decrease was offset by a new mortgage at Village Green. Contributing to the property tax decrease was the payoff of a 1990 tax liability in 1996, of which approximately $45,000 was unaccrued, in order to secure the new note payable at Village Green. General and administrative expenses decreased for the nine months ended September 30, 1997, compared to the nine months ended September 30, 1996, due to a decrease in professional fees and expense reimbursements. Included in maintenance expense for the nine months ended September 30, 1997, is approximately $99,000 of major repairs and maintenance comprised primarily of exterior building, tennis court and parking lot repairs. For the nine months ended September 30, 1996, approximately $122,000 of major repairs and maintenance consisting primarily of interior and exterior building repairs and landscaping is included in maintenance expense. As part of the ongoing business plan of the Partnership, the General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expenses. As part of this plan, the General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the General Partner will be able to sustain such a plan. At September 30, 1997, the Partnership held unrestricted cash and cash equivalents of $1,839,000 compared to $3,730,000 at September 30, 1996. Net cash provided by operating activities increased primarily due to the foreclosure of Mountain Plaza in 1996. During the nine months ended September 30, 1996, the property had an operating cash outflow of approximately $78,000. Also contributing to the increase in cash provided by operating activities was a decrease in cash used for accounts payable due to the timing of payments. Net cash used in investing activities increased due to increased property improvements and replacements and increased deposits to restricted escrows. These increases were partially offset by an increase in receipts from restricted escrows. Net cash used in financing activities increased due to higher distributions to the partners in 1997 than in 1996 and due to proceeds received in excess of the previous mortgage pay off and costs associated with the refinancing in 1996. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the various properties to adequately maintain the physical assets and other operating needs of the Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The mortgage indebtedness of $4,200,000 matures at November 1, 2003 with balloon payments due at maturity, at which time the encumbered properties will either be refinanced or sold. Future cash distributions will depend on the levels of net cash generated from operations, capital expenditure requirements, property sales and the availability of cash reserves. During 1997, the Partnership distributed approximately $2,262,000. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. (b) Reports on Form 8-K: None filed during the quarter ended September 30, 1997. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSOLIDATED CAPITAL PROPERTIES III By: CONCAP EQUITIES, INC. Its General Partner By: /s/ William H. Jarrard, Jr. William H. Jarrard, Jr. President and Director By: /s/ Ronald Uretta Ronald Uretta Vice President/Treasurer Date: November 12, 1997