1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1996 Commission file number 299435 Leastec Income Fund III A California Limited Partnership (Exact name of registrant as specified in its charter) California 68-0066209 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 2855 Mitchell Drive, Suite 215, Walnut Creek, California 94598 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (510) 938-3443 _____________________________________________________________________ (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 __ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: N/A Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___ No ___ APPLICABLE ONLY TO CORPORATE ISSUERS: N/A Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2 Part 1. Financial Information LEASTEC INCOME FUND III A California Limited Partnership CONDENSED BALANCE SHEETS (Unaudited) June 30 December 31 1996 1995 ------ ----------- ASSETS: Cash $ 337,326 $ 706,443 Accounts receivable 0 87,417 Net investment in direct financing leases 235,660 541,980 Equipment on operating leases, net of accumulated depreciation of $6,166 in 1996 and $6,166 in 1995 0 0 Equipment held for sale or lease, net of accumulated depreciation of $-0- in 1996 and $-0- in 1995. 0 0 -------- --------- Total assets $ 572,986 $1,335,840 ======== ========= LIABILITIES AND PARTNERS' CAPITAL: Liabilities: Payables to affiliates $ 6,090 $ 2,767 Accounts payable 44,349 64,323 Deposits 26,438 43,818 Prepaid rental income 0 2,944 Distributions payable 105,263 368,421 Notes payable 0 0 ------- --------- Total liabilities 182,140 482,273 ------- --------- Partners' capital: Partners' capital 390,846 853,567 ------- --------- Total partners' capital 390,846 853,567 ------- --------- Total liabilities & partners' capital $ 572,986 $1,335,840 ======== ========= The accompanying notes are an integral part of these condensed financial statements. 3 LEASTEC INCOME FUND III A California Limited Partnership CONDENSED STATEMENTS OF INCOME (Unaudited) Six Months Quarter Ended Ended June 30 June 30 1996 1995 1996 1995 ---- ---- ---- ---- Revenue: Rental income $ 78 $118,385 0 50,220 Direct financing lease income 16,831 191,120 6,655 103,572 Gain (loss) on sale of equipment 0 112,731 0 98,895 Interest income 4,754 8,840 1,777 4,064 Other income 6,601 124,963 0 121,976 ------- ------- ------ ------- Total revenues 28,264 556,039 8,432 378,727 ------- ------- ------ ------- Expenses: Management fees 22,886 91,940 8,367 56,055 General & administrative 87,343 97,167 46,815 50,063 Data processing 12,335 16,946 5,537 8,273 lnterest expense 0 3,064 0 1,044 ------- ------- ------ ------- Total expenses 122,564 209,117 60,719 115,435 ------- ------- ------ ------- Net Income (loss) $(94,300) $346,922 $(52,287) $263,292 ======= ======= ====== ======= Net income (loss) per limited partnership unit $ (1.20) $ 4.40 $ (0.66) $ 3.34 ======= ======= ====== ======= The accompanying notes are an integral part of these condensed financial statements. 4 LEASTEC INCOME FUND III A California Limited Partnership STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 1996 1995 ---- ---- Cash flows from operating activities: Net (loss) income $ (94,300) 346,922 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposition of equipment 0 (112,731) Change in assets and liabilities: Decrease (increase) in accounts receivable 87,417 (26,220) Increase (decrease) in payable to affiliates 3,323 (11,508) Decrease in accounts payable (19,974) (54,725) Decrease in deposits (17,380) (67,303) Decrease in prepaid rental income (2,944) (4,609) (Decrease) increase in distributions payable (263,158) 163,153 ------- --------- Net cash (used) provided by operating activities (307,016) 232,979 ------- --------- Cash flows from investing activities: Proceeds from disposition of equipment 0 126,364 Decrease in net investment in direct financing leases 306,320 942,128 ------- --------- Net cash provided by investing activities 306,320 1,068,492 _______ _________ Cash flows from financing activities: Repayment of notes payable 0 (44,864) Net distributions to partners (368,421) (947,265) ------- --------- Net cash used in financing activities (368,421) (992,129) ------- --------- Net (decrease) increase in cash (369,117) 309,342 Cash at beginning of period 706,443 645,072 ------- --------- Cash at end of period $ 337,326 $ 954,414 ======= ========= The accompanying notes are an integral part of these condensed financial statements. 5 LEASTEC INCOME FUND III A California Limited Partnership NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 1996, June 30, 1995 and December 31, 1995 (Unaudited) 1. Basis of Condensed Financial Statement Preparation __________________________________________________ In the opinion of the General Partner, the accompanying unaudited condensed financial statements contain all adjustments (consisting principally of normal, recurring accruals) necessary to present fairly the financial position of Leastec Income Fund III (the Partnership) as of June 30, 1996, June 30, 1995 and December 31, 1995. As provided for in the Partnership agreement and offering document, the Partnership engaged in leasing activities which intended to be completed in approximately eleven years from its inception at which time all remaining partnership assets will have been liquidated and cash proceeds distributed to the registrant's partners. The Partnership has presented its 1996 financial statements to reflect its leasing activities on a basis consistent with prior periods. 2. Wind Down Phase _______________ The Registrant has ceased acquisition of new capital equipment and is in the process of liquidating its lease portfolio. It is intended that the Registrant will be fully liquidated at the end of its eleventh full year of operation, December 1996. 6 LEASTEC INCOME FUND III A California Limited Partnership Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operation The Registrant has been winding down operations since 1993 by discontinuing new leasing activities and returning cash available from operations to the Registrant's Partners. Although the Registrant has until December 1997 to liquidate operations, the Registrant intends to be fully liquidated by December 1996. This is the Registrant's final year of operation. All of the Registrant's operating leases have terminated. As operating leases terminated the equipment was sold. The remaining lease portfolio is invested in Direct Finance leases which terminate with the lessee's contractually required purchase of equipment. The income of the Registrant is rapidly declining as the lease portfolio size declines. The cash balances and related interest income fluctuates according to the cash flow from rents and finance lease terminations during each quarter. Cash is distributed to the Partners according to their respective tax basis capital accounts. It is anticipated that the Partners will receive a return of approximately 80% of their original investment because of shortfalls in portfolio performance and a difficult economic environment during the life of the Partnerhsip. The Registrant reported a net loss of $94,300 or $1.20 per Limited Partnership Unit for the six months ended June 30, 1996 as compared to net income of $346,922 or $4.40 per Limited Partnership Unit for the six months ended June 30, 1995. Total revenues for the six months ended June 30, 1996, were $28,264 compared to $556,039 for the same period in the prior year. This decrease reflects a reduced rental income from both operating and finance leases due to the gradual liquidation of the Registrant's lease portfolio. Revenue derived from the Fund's equipment management activities comprised 83% of the total income for the period, with the remaining 17% being interest income. Direct financing lease income decreased from June 30, 1995, to June 30, 1996, ($191,120 to $16,831 respectively). The net investment in direct financing leases decreased from $1,345,006 at June 30, 1995, to $235,660 at June 30, 1996. Interest income decreased because the Registrant held lower cash balances due to distributions to Partners and lease termination's during the first six months of 1996 as compared to the same period in the prior year. All available cash is being paid out in distributions to the Fund's partners on a quarterly basis. 7 Total expenses for the six months ended June 30, 1996, were $122,564 compared to $209,117 for the same period in the prior year. Management fees, interest, and general and administrative costs comprised 90% of the total expenses. Interest expense decreased from June 30, 1995, to June 30, 1996, ($3,064 to $-0- respectively). General and administrative costs decreased from $97,167 for the first six months of 1995 to $87,343 for the same period in 1996. The variable expenses of the Registrant have been reduced steadily as the liquidation progressed. There are certain fixed expenses caused by the Partnership Agreement's requirements for Regulatory and Partner reporting which will continue at their current level until the Registrant's final close of operations. Liquidity and Capital Resources _______________________________ Cash used by operating activities for the six months ended June 30, 1996, was $307,016 compared to cash provided of $232,979 for the same period in the prior year. The decrease in cash provided by operating activities reflects the continued winding down of the operating lease portfolio and large decreases in distribution payable to Partners. Cash provided by investing activities decreased from $1,068,492 in the first half of 1995 to $306,320 for the first half of 1996, reflecting the final sales of operating lease equipment in the first half of 1995, lease terminations and fluctuation of rental receipts from the direct finance lease portfolio. As rental payment on finance leases are received, the cash is broken up into income and return of principal. As a finance lease ages the income portion of the rental receipts decreases and the return of principal portion increases. Cash provided by investing activities was used to repay notes payable of $44,864 in the first six months of 1995 compared to $-0- for the same period in 1996. As of June 30, 1996, the Fund's partners were allocated cash distributions of $105,263 payable on July 15, 1996. The size of investor distributions depend on the timing of lease terminations and collections of rents. As a result of the decreasing portfolio of leases, the amount of each distribution can be expected to gradually decrease during 1996. The cash balance increased from $645,072 at December 31, 1994, to $954,414 at June 30, 1995, and decreased to $706,443 at December 31, 1995, then decreased to $337,326 at June 30, 1996. The cash position as of June 30, 1996, was $337,326. The General Partner anticipates that funds from operations will be adequate to cover all operating expenses of the Partnership during 1996. 8 PART II. OTHER INFORMATION Item 1. Legal Proceeding None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K None. 8 Pursuant to 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. LEASTEC INCOME FUND III (Registrant) LEASTEC CORPORATION, General Partner Date: July 29, 1996 By: _____________________________ Ernest V. Lavagetto, President