UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the United States Securities Exchange Act of 1934 ----------------------- For The Quarter Ended September 30, 1996 Commission File No. 2-95011 WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (Exact name of registrant as specified in its charter) Massachusetts 04-2846627 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Financial Center, 21st Floor, Boston, MA 02111 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 482-8000 ----------------------- Not Applicable (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 ___ There are no Exhibits. Page 1 of 14 WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) INDEX Page No. Part I. FINANCIAL INFORMATION Financial Statements Balance Sheets as of September 30, 1996 and December 31, 1995 3 Statements of Operations For the Quarters Ended September 30, 1996 and 1995 and For the Nine Months Ended September 30, 1996 and 1995 4 Statements of Cash Flows For the Nine Months Ended September 30, 1996 and 1995 5 Notes to Financial Statements 6 - 8 Management's Discussion and Analysis of Financial Conditions and Results of Operations 9 - 11 Computer Equipment Portfolio 12 Part II. OTHER INFORMATION Items 1 - 6 13 Signature 14 PART I. FINANCIAL INFORMATION WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Balance Sheets Assets (Unaudited) (Audited) 9/30/96 12/31/95 ---------------- ---------------- Investment property, at cost (note 3): Computer equipment $ 678,045 $ 1,556,972 Less accumulated depreciation 660,476 1,444,538 ---------------- ---------------- Investment property, net 17,569 112,434 Cash and cash equivalents 45,272 123,547 Marketable securities (notes 2 and 5) 1,219 10,158 Rents receivable, net (note 2) 10,926 17,627 Sales receivable - 1,125 Accounts receivable - affiliates (notes 2 and 6) - - ---------------- ---------------- Total assets $ 74,986 $ 264,891 ================ ================ Liabilities and Partners' Equity Liabilities: Accounts payable and accrued expenses - affiliates (note 4) $ 4,818 $ 6,657 Accounts payable and accrued expenses 20,413 31,749 Unearned rental revenue - 550 ---------------- ---------------- Total liabilities 25,231 38,956 ---------------- ---------------- Partners' equity: General Partner: Capital contribution 1,000 1,000 Cumulative net income 662,096 660,945 Cumulative cash distributions (663,092) (656,508) Unrealized losses on marketable securities (note 5) (4) (18) ---------------- ---------------- - 5,419 ---------------- ---------------- Limited Partners (25,020 units): Capital contribution, net of offering costs 11,139,998 11,139,998 Cumulative net income 1,508,928 1,556,014 Cumulative cash distributions (12,598,821) (12,473,721) Unrealized losses on marketable securities (note 5) (350) (1,775) ---------------- ---------------- 49,755 220,516 ---------------- ---------------- Total partners' equity 49,755 225,935 ---------------- ---------------- Total liabilities and partners' equity $ 74,986 $ 264,891 ================ ================ See accompanying notes to financial statements. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Statements of Operations (Unaudited) Quarters Ended Nine Months Ended September 30, September 30, ------------------------------- --------------------------------- 1996 1995 1996 1995 ------------------------------- --------------------------------- Revenue: Rental income $ 29,744 $ 117,174 $ 91,534 $ 355,205 Interest income 321 717 1,561 2,651 Recovery of net unsecured pre-petition claim (note 6) 2,683 19,646 10,278 30,154 ------------ ------------ ------------ ------------ Total revenue 32,748 137,537 103,373 388,010 ------------ ------------ ------------ ------------ Costs and expenses: Depreciation - 50,738 68,864 152,645 Provision for (reversal of) doubtful accounts 7,842 443 14,586 (7,537) Interest - 162 - 1,007 Related party expenses (note 4): Management fees 2,252 5,731 7,243 17,973 General and administrative 19,561 16,718 58,961 50,925 Net loss (gain) on sale of equipment 780 (825) (2,720) (3,562) Net loss on sale of marketable securities 2,374 - 2,374 - ------------ ------------ ------------ ------------ Total costs and expenses 32,809 72,967 149,308 211,451 ------------ ------------ ------------ ------------ Net (loss) income $ (61) $ 64,570 $ (45,935) $ 176,559 ============ ============ ============ ============ Net (loss) income per Limited Partnership Unit $ - $ 2.43 $ (1.88) $ 6.57 ============ ============ ============ ============ See accompanying notes to financial statements. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Statements of Cash Flows For the Nine Months Ended September 30, 1996 and 1995 (Unaudited) 1996 1995 ---- ---- Cash flows from operating activities: Net (loss) income $ (45,935) $ 176,559 ------------ ------------- Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 68,864 152,645 Provision for (reversal of) doubtful accounts 14,586 (7,537) Net gain on sale of equipment (2,720) (3,562) Net loss on sale of marketable securities 2,374 - Net increase in current assets (6,887) (23,001) Net decrease in current liabilities (13,725) (102,598) ------------ ------------- Total adjustments 62,492 15,947 ------------ ------------- Net cash provided by operating activities 16,557 192,506 ------------ ------------- Cash flows from investing activities: Proceeds from sale of marketable securities 8,131 - Proceeds from sales of investment property 28,721 3,562 ------------ ------------- Net cash provided by investing activities 36,852 3,562 ------------ ------------- Cash flows from financing activities: Principal payments on long-term debt - (30,536) Cash distributions to partners (131,684) (162,959) ------------ ------------- Net cash used in financing activities (131,684) (193,495) ------------ ------------- Net (decrease) increase in cash and cash equivalents (78,275) 2,573 Cash and cash equivalents at beginning of period 123,547 75,704 ------------ ------------- Cash and cash equivalents at end of period $ 45,272 $ 78,277 ============ ============= Supplemental cash flow information: Interest paid during the period $ - $ 2,083 ============ ============= See accompanying notes to financial statements. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Notes to Financial Statements For the Nine Months Ended September 30, 1996 and September 30, 1995 (Unaudited) (1) Organization and Partnership Matters The foregoing financial statements of Wellesley Lease Income Limited Partnership III-B (the "Partnership") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain note disclosures which are normally required under generally accepted accounting principles have been omitted. It is recommended that these financial statements be read in conjunction with the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995. (2) Summary of Significant Accounting Policies Allowance for Doubtful Accounts The financial statements include allowances for estimated losses on receivable balances. The allowances for doubtful accounts are based on past write off experience and an evaluation of potential uncollectible accounts within the current receivable balances. Receivable balances which are determined to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance. The allowance for doubtful accounts included in rents receivable was $15,425 and $839 at September 30, 1996 and December 31, 1995, respectively. The allowance for doubtful accounts - affiliates was $6,699 and $17,440 at September 30, 1996 and December 31, 1995, respectively, both of which pertained to the unsecured pre-petition claim balance. Marketable Securities The marketable securities are stated at fair value at the balance sheet date and consist of 629 shares of common stock in Continental Information Systems Corporation ("CISC") received by the Partnership in the distributions made December 27, 1994, July 20, 1995 and October 20, 1995 by the Trustee of the Liquidating Estate of CIS Corporation, et al ("the Trustee"), with respect to the outstanding unsecured pre-petition claim. During the second quarter of 1995, the stock began trading, thereby providing an objective valuation measure for establishing the cost basis. Unrealized gains and losses are recorded directly in partners' equity except those gains and losses that are deemed to be other than temporary, which would be reflected in income or loss (see note 5). (3) Investment Property At September 30, 1996, the Partnership owned computer equipment with a depreciated cost basis of $17,569, subject to existing leases. All purchases of computer equipment are subject to a 3% acquisition fee paid to the General Partner. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Notes to Financial Statements For the Nine Months Ended September 30, 1996 and September 30, 1995 (Unaudited) (4) Related Party Transactions Fees, commissions and other expenses paid or accrued by the Partnership to the General Partner or affiliates of the General Partner for the nine months ended September 30, 1996 and 1995 are as follows: 1996 1995 ---- ---- Management fees $ 7,243 $ 17,973 Reimbursable expenses paid 58,104 49,753 ------------ ------------ $ 65,347 $ 67,726 ============ ============ Under the terms of the Partnership Agreement, the General Partner is entitled to an equipment acquisition fee of 3% of the purchase price paid by the Partnership for the equipment. The General Partner is also entitled to a management fee equal to 7% of the monthly rental billings collected. In addition, the Partnership reimburses the General Partner and its affiliates for certain expenses incurred by them in connection with the operation of the Partnership. (5) Fair Values of Financial Instruments Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires investments in debt and equity securities other than those accounted for under the equity method to be carried at fair value or amortized cost for debt securities expected to be held to maturity, the Partnership has classified its investments in equity securities as available for sale. Accordingly, the net unrealized gains and losses computed in marking these securities to market are reported as a component of partners' equity. At September 30, 1996, the difference between the fair value and the cost basis of these securities is an unrealized loss of $354. The fair value is based on currently quoted market prices. The cost basis and estimated fair value of the Partnership's marketable securities at September 30, 1996 and December 31, 1995, respectively, are as follows: September 30, 1996 December 31, 1995 ------------------------ --------------------- Cost Fair Cost Fair Basis Value Basis Value Investment in Continental Information Systems Corporation Stock $ 1,573 $ 1,219 $ 11,951 $ 10,158 ======== ======== ======== ======== WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Notes to Financial Statements For the Nine Months Ended September 30, 1996 and September 30, 1995 (Unaudited) (6) Bankruptcy of Continental Information Systems Corporation On January 19, 1996, April 19, 1996 and July 19, 1996, respectively, the Partnership received the fourth, fifth and sixth distributions from the Trustee of the Liquidating Estate, et al, ("the Trustee") with respect to the unsecured pre-petition claim. The fourth, fifth and sixth distributions consisted of cash proceeds of $2,630, $4,965 and $2,555, respectively. The sixth distribution also included 51 shares of common stock in Continental Information Systems Corporation ("CISC"). Following the Trustee's sixth distribution, the Partnership has a remaining unsecured pre-petition claim balance of $6,699 as of September 30, 1996 (see note 7). (7) Subsequent Events On October 21, 1996, the Partnership received the seventh distribution from the Trustee with respect to the unsecured pre-petition claim. The distribution consisted of cash proceeds of $3,580. Following the Trustee's seventh distribution, the Partnership has a remaining unsecured pre-petition claim balance of $3,119 as of October 21, 1996. The General Partner anticipates that the Trustee will make future distributions on the remaining outstanding claim balance, although it is not possible at this time to determine when these distributions will be made. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) Results of Operations The following discussion relates to the Partnership's operations for the quarter and nine months ended September 30, 1996, compared to the same periods in 1995. The Partnership realized a net loss of $61 and net income of $64,570 for the quarters ended September 30, 1996, and 1995, respectively. Rental income decreased $87,430 or 75% due to lower rental rates obtained on equipment lease extensions and remarketings resulting after the initial lease term expires and due to the decrease in the equipment portfolio. Interest income decreased as a result of lower average short-term investment balances held during the current quarter. The recovery of the unsecured pre-petition claim of $2,683 for the quarter ended September 30, 1996 was the result of the receipt of the Trustee's sixth distribution on the fully reserved unsecured pre-petition receivable (for further discussion refer to note 6 to the financial statements). Total costs and expenses decreased $40,158 or 55% during the three month periods. Depreciation expense decreased due to a large portion of the equipment portfolio becoming fully depreciated. Included in depreciation expense for the quarter ended September 30, 1996 is a reversal of a provision for estimated losses on the ultimate disposition of equipment. During the third quarter of 1996, the provision for doubtful accounts was increased $7,842 to account for delinquent rents receivable. Management fees decreased as a result of the decline in rental income. General and administrative expenses increased $2,843 or 17% due to an increase in the allocable salaries of the partnership accounting and reporting personnel of the General Partner. The net loss on sale of equipment is due to sales of equipment carrying high net book values. The net loss on sale of marketable securities reflects the third quarter sale of stock that had been received from the Trustee. The Partnership realized a net loss of $45,935 and net income of $176,559 for the nine months ended September 30, 1996 and 1995, respectively. The Partnership realized rental income of $91,534 and $355,205 for the nine months ended September 30, 1996 and 1995, respectively. The $263,671 or 74% decrease includes a $48,880 adjustment in the nine months ended September 30, 1996 for an overaccrual of rental income recognized in prior periods. The adjustment relates to equipment that came off lease and was returned to inventory. Other factors impacting the decline in rental income are the remarketing of equipment at lower rates and the overall decrease in the equipment portfolio. Interest income decreased $1,090 due to the Partnership carrying lower average short-term investment balances during 1996. As mentioned above, the recovery of the unsecured pre-petition claim in the current period was the result of the receipt of the fourth, fifth and sixth distributions from the Trustee in the total amount of $10,278 (see note 6). WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) Total costs and expenses decreased $62,143 or 29% between the nine month periods. As discussed in the quarter analysis above, depreciation expense decreased $83,781 or 55% between 1996 and 1995 due to a large portion of the equipment portfolio becoming fully depreciated and due to the overall reduction of the Partnership's equipment portfolio. Another reason for the decrease in depreciation expense can be attributed to the reversal of a provision for estimated losses on the ultimate disposition of equipment. The provision for doubtful accounts increased in the current year due to an increase in delinquent rents receivable. Management fees decreased $10,730 or 60% due to the decline in rental income. General and administrative expenses increased $8,036 or 16% due to an increase in the allocable salaries of the partnership accounting and reporting personnel of the General Partner during the current year. The decrease in net gain on sale of equipment between 1995 and 1996 can be attributed to a decrease in equipment sales. The net loss on sale of marketable securities reflects the third quarter sale of stock that had been received from the Trustee, as stated above. The Partnership recorded net income per Limited Partnership Unit of $0.00 and net income of $2.43 for the quarters ended September 30, 1996 and 1995, respectively, and a net loss of $1.88 and net income of $6.57 for the nine months ended September 30, 1996 and 1995, respectively. The allocation for the nine months ended September 30, 1996 includes a cost recovery allocation of profit and loss among the General and Limited Partners which results in an allocation of net loss to the Limited Partners in the third quarter of 1996. This cost recovery allocation is required to maintain capital accounts consistent with the distribution provision of the Partnership Agreement. In certain periods, the cost recovery of profit and loss may result in an allocation of net loss to the Limited Partners in instances when the Partnership's operations were profitable for the period. Liquidity and Capital Resources For the quarter ended September 30, 1996, rental revenue generated from operating leases and sales proceeds generated from equipment sales were the primary sources of funds for the Partnership. As equipment leases terminate, the General Partner determines if the equipment will be extended to the same lessee, remarketed to another lessee, or if it is less marketable, sold. This decision is made upon analyzing which option would generate the most favorable results. Rental income will continue to decrease due to two factors. First, lower rates are obtained due to the remarketing of existing equipment after the expiration of the original lease. Typically the remarketed rates are lower due to the decrease in useful life of the equipment. Second, the increasing change of technology in the computer industry usually decreases the demand for older equipment, thus increasing the possibility of obsolescence. Both of these factors together will cause remarketed rates to be lower than original rates and will cause certain leases to terminate upon expiration. Future rental revenues amount to $22,718 and are to be received during the current year. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) During the fourth quarter of 1995, the General Partner announced its intentions of winding down the operations of the Partnership. It is anticipated that substantially all of the assets will be liquidated and the proceeds will be used to settle all outstanding liabilities and make a final distribution early in 1997. The Partnership will not be terminated until the unsecured pre-petition claim against CIS Corporation has been settled and the proceeds have been distributed to the Partners. The Partnership's investing activities as of September 30, 1996 generated proceeds of $28,721 from equipment sales with a cost basis of $26,000. The Partnership has no material capital expenditure commitments and will not purchase equipment in the future as the Partnership has reached the end if its reinvestment period and has announced its intentions of winding down the operations of the Partnership. The Partnership generated proceeds of $8,131 on the sale of 4,202 shares of CISC stock having a cost basis of $10,505. Cash distributions are currently halted in an effort to minimize cost and accumulate cash in anticipation of a final distribution to the Partners once the Partnership has been liquidated. The effects of inflation have not been significant to the Partnership and are not expected to have any material impact in future periods. On January 9, 1996, TLP Holding LLC purchased all the common stock of TLP Leasing Programs, Inc. from CMI Holding Co. Under the new ownership, it is expected that TLP Leasing Programs, Inc. will continue to operate in the same manner of business as it has in the past. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Computer Equipment Portfolio (Unaudited) September 30, 1996 Lessee Brylane, Incorporated FAX International, Incorporated Hughes Aircraft Company, Incorporated Securities Industry Automation Corporation Equipment Description Acquisition Price Computer Peripherals $ 488,192 Processors & Upgrades 47,463 Other 142,390 ---------------- $ 678,045 ================ PART II. OTHER INFORMATION WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (A Massachusetts Limited Partnership) Item 1. Legal Proceedings Response: None Item 2. Changes in the Rights of the Partnership's Security Holders Response: None Item 3. Defaults by the Partnership on its Senior Securities Response: None Item 4. Results of Votes of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: A. None B. None SIGNATURE Pursuant to the requirements of Section 13 or 15(d) 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. WELLESLEY LEASE INCOME LIMITED PARTNERSHIP III-B (Registrant) By: Wellesley Leasing Partnership, its General Partner By: TLP Leasing Programs, Inc., one of its Corporate General Partners Date: November 14, 1996 By: Arthur P. Beecher, President