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 SEPTEMBER 30, 1995 COMMISSION FILE NUMBER 2-68983 REAL ESTATE ASSOCIATES LIMITED III A CALIFORNIA LIMITED PARTNERSHIP I.R.S. EMPLOYER IDENTIFICATION NO. 95-3547611 9090 Wilshire Blvd., Suite 201, Beverly Hills, Calif. 90211 Registrant's Telephone Number, Including Area Code (310) 278-2191 Securities Registered Pursuant to Section 12(b) or 12(g) of the Act NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed with the Commission by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 ----- ----- 2 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) INDEX TO FORM 10Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets, September 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . 1 Statements of Operations, Nine and Three Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 2 Statement of Partners' Equity, Nine Months Ended September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Statements of Cash Flows, Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 ASSETS 1995 1994 (Unaudited) (Audited) ----------- ----------- INVESTMENTS IN LIMITED PARTNERSHIPS $ 903,737 $ 690,570 CASH AND CASH EQUIVALENTS 9,114,554 7,209,247 SHORT TERM INVESTMENTS 125,000 1,146,022 OTHER ASSETS 50,500 50,000 ----------- ---------- TOTAL ASSETS $10,193,791 $9,095,839 =========== ========== LIABILITIES AND PARTNERS' EQUITY LIABILITIES: NOTES PAYABLE $ 1,510,000 $1,510,000 INTEREST PAYABLE 307,012 344,007 ACCOUNTS PAYABLE 5,243 10,958 ----------- ---------- 1,822,255 1,864,965 PARTNERS' EQUITY 8,371,536 7,230,874 ----------- ---------- TOTAL LIABILITIES AND PARTNERS' EQUITY $10,193,791 $9,095,839 =========== ========== The accompanying notes are an integral part of these balance sheets. 1 4 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) Nine months Three months Nine months Three months ended ended ended ended Sept. 30, 1995 Sept. 30, 1995 Sept. 30, 1994 Sept. 30, 1994 -------------- -------------- -------------- -------------- INTEREST INCOME $ 191,140 $ 67,632 $ 133,637 $ 50,303 ---------- --------- --------- --------- OPERATING EXPENSES Legal and accounting 109,490 37,577 78,450 17,052 Management fees-general partner 341,100 113,700 341,100 113,700 Interest expense 113,250 37,750 113,250 37,750 General and administrative 68,060 26,135 49,490 11,787 ---------- --------- --------- --------- Total operating expenses 631,900 215,162 582,290 180,289 ---------- --------- --------- --------- LOSS FROM OPERATIONS (440,760) (147,530) (448,653) (129,986) DISTRIBUTIONS RECOGNIZED AS INCOME 1,071,422 115,593 657,194 - EQUITY IN INCOME OF LIMITED PARTNERSHIPS AND AMORTI- ZATION OF ACQUISITION COSTS 510,000 170,000 546,000 182,000 ---------- --------- --------- --------- NET INCOME $1,140,662 $ 138,063 $ 754,541 $ 52,014 ========== ========= ========= ========= NET INCOME PER LIMITED PARTNERSHIP INTEREST $ 100 $ 12 $ 66 $ 4 ========== ========= ========= ========= The accompanying notes are an integral part of these financial statements. 2 5 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENT OF PARTNERS' EQUITY (DEFICIENCY) NINE MONTHS ENDED SEPTEMBER 30, 1995 (Unaudited) General Limited Partners Partners Total -------- --------- ------- PARTNERSHIP INTERESTS September 30, 1995 11,456 ========== EQUITY (DEFICIENCY), at January 1, 1995 $(126,667) $7,357,541 $7,230,874 Net income for nine months ended September 30, 1995 11,407 1,129,255 1,140,662 --------- ---------- ---------- EQUITY (DEFICIENCY), at September 30, 1995 $(115,260) $8,486,796 $8,371,536 ========= ========== ========== The accompanying notes are an integral part of these financial statements. 3 6 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) 1995 1994 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,140,662 $ 754,541 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of limited partnerships (514,500) (552,000) Amortization of acquisition costs 4,500 6,000 Advances to limited partnerships (500) (75,595) Decrease in - Accounts payable (5,715) (9,110) Interest payable (36,995) (72,967) ---------- ---------- Net cash provided by operating activities 587,452 50,869 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease (increase) in short term investments 1,021,022 (125,000) Distributions recognized as return of capital 296,833 502,321 ---------- ---------- Net cash provided by investing activities 1,317,855 377,321 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,905,307 428,190 CASH AND CASH EQUIVALENTS, beginning of period 7,209,247 6,610,307 ---------- ---------- CASH AND CASH EQUIVALENTS, end of period $9,114,554 $7,038,497 ========== ========== The accompanying notes are an integral part of these financial statements. 4 7 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The information contained in the following notes to the financial statements is condensed from that which would appear in the annual audited financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the Real Estate Associates Limited III (the "Partnership") annual report for the year ended December 31, 1994. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim period presented are not necessarily indicative of the results for the entire year. In the opinion of the Partnership, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position as of September 30, 1995 and the results of operations for the three and nine months then ended and changes in cash flows for the nine months then ended. The general partners have a 1 percent interest in profits and losses of the Partnership. The limited partners have the remaining 99 percent interest which is allocated in proportion to their respective individual investments. National Partnership Investments Corp. (NAPICO) is the corporate general partner of the Partnership. METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS The investment in limited partnerships is accounted for on the equity method. Acquisition and selection fees and other costs related to the acquisition of the projects have been capitalized to the investment account. NET INCOME PER LIMITED PARTNERSHIP INTEREST Net income per limited partnership interest was computed by dividing the limited partners' share of net income by the number of limited partnership interests outstanding during the year. The number of limited partnership interests was 11,456 for the periods presented. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and bank certificates of deposit with an original maturity of three months or less. SHORT TERM INVESTMENTS Short term investments consist of bank certificates of deposit and other securities with original maturities ranging from more than three months to twelve months. The fair value of these securities, which have been classified as held for sale, approximates their carrying value. 5 8 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES No provision has been made for income taxes in the accompanying financial statements since such taxes, if any, are the liability of the individual partners NOTE 2 - INVESTMENTS IN AND ADVANCES TO LIMITED PARTNERSHIPS The Partnership holds limited partnership interests in 26 limited partnerships. In addition, the Partnership holds a general partner interest in REA. NAPICO is also a general partner in REA. REA, in turn, holds limited partner interests in nine additional limited partnerships. In total, therefore, the Partnership holds interest, either directly or indirectly including through REA, 32 partnerships which own residential rental projects consisting of 3,062 apartment units. The mortgage loans of these projects are insured by various governmental agencies. The Partnership, as a limited partner, is entitled to between 75 percent and 99 percent of the profits and losses of the limited partnerships it has invested in directly. The Partnership is also entitled to 99.9 percent of the profits and losses of REA. REA holds a 99 percent interest in each of the limited partnerships in which it has invested. Equity in losses of limited partnerships is recognized in the financial statements until the limited partnership investment account is reduced to a zero balance. Losses incurred after the limited partnership investment account is reduced to zero are not recognized. Distributions from limited partnerships are recognized as a reduction of capital until the investment balance has been reduced to zero. Subsequent distributions received are recognized as income. The following is a summary of the investment in limited partnerships as of September 30, 1995: Balance, beginning of period $ 690,570 Distributions recognized as return of capital (296,833) Amortization of acquisitions costs (4,500) Equity in income of limited partnerships 514,500 --------- Balance, end of period $ 903,737 ========= 6 9 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995 NOTE 2 - INVESTMENTS IN AND ADVANCES TO LIMITED PARTNERSHIPS (CONTINUED) The following are unaudited combined estimated statements of operations for the limited partnerships in which the Partnership has investments: Nine months Three months Nine months Three months ended ended ended ended Sept. 30, 1995 Sept. 30, 1995 Sept. 30, 1994 Sept. 30, 1994 -------------- -------------- -------------- -------------- INCOME Rental and other $16,155,000 $5,385,000 $16,056,000 $5,352,000 ----------- ---------- ----------- ---------- EXPENSES Depreciation 2,775,000 925,000 2,829,000 943,000 Interest 5,307,000 1,769,000 5,496,000 1,832,000 Operating 8,802,000 2,934,000 8,106,000 2,702,000 ----------- ---------- ----------- ---------- 16,884,000 5,628,000 16,431,000 5,477,000 ----------- ---------- ----------- ---------- NET LOSS $ (729,000) $ (243,000) $ (375,000) $ (125,000) =========== ========== =========== ========== NAPICO, or one of its affiliates, is the general partner and property management agent for certain of the limited partnerships included above. NOTE 3 - NOTES PAYABLES Certain of the Partnership's investments involved purchases of partnership interests from partners who subsequently withdrew from the operating partnerships. The Partnership is obligated on non-recourse notes payable of $1,510,000, bearing interest at 10 percent, to the sellers of the partnership interests. These notes are payable by the Partnership through REA, and have principal maturity dates in September 2020 and March 2024 or upon the sale or refinancing of the underlying partnership properties. These notes and the related interest are collaterized by REA's investment in the respective limited partnerships and are payable only out of cash distributions from the investee partnerships, as defined in the notes. Unpaid interest is due at maturity of the notes. NOTE 4 - MANAGEMENT FEE AND EXPENSES DUE TO GENERAL PARTNER Under the terms of the Restated Certificate and Agreement of Limited Partnership, the Partnership is obligated to NAPICO for an annual management fee approximately equal to .5% of the invested assets. Invested assets is defined as the costs of acquiring project interests, including the porportionate amount of the mortgage loans related to the Partnership's interests in the capital accounts of the respective partnership. The fee incurred for the nine months ended September 30, 1995 and 1994 was $341,100. The Partnership reimburses NAPICO for certain expenses. In 1995, the reimbursement to NAPICO of $22,445 has been paid and included in the Partnership's operating expenses. 7 10 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1995 NOTE 5 - CONTINGENCIES The corporate general partner of the Partnership is a plaintiff in various lawsuits and has also been named a defendant in other lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the corporate general partner, the claims will not result in any material liability to the Partnership. 8 11 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1995 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary sources of funds include interest income earned from investing available cash and distributions from limited partnerships in which the Partnership has invested. It is not expected that any of the local limited partnerships in which the Partnership has invested will generate cash flow sufficient to provide for distributions to limited partners in any material amount. The $1,510,000 notes which are payable by the Partnership through REA, are due in June 2020 and March 2024 or upon the sale or refinancing of the properties. These obligations bear interest at 10% and are payable to unrelated parties. RESULTS OF OPERATIONS Partnership revenues consist primarily of interest income earned on certificates of deposit and other temporary investment of funds not required for investment in local partnerships. Operating expenses consist primarily of recurring general and administrative expenses and professional fees for services rendered to the Partnership. In addition, an annual Partnership management fee in an amount equal to .4 percent of investment assets is payable to the corporate general partner. In 1995, legal expenses are higher than in 1994 because of legal consulting services regarding various properties and miscellaneous issues. The Partnership accounts for its investments in the local limited partnerships on the equity method, thereby adjusting its investment balance by its proportionate share of the income or loss of the local limited partnerships. Losses incurred after the limited partnership investment account is reduced to zero are not recognized in accordance with the equity accounting method. Distributions received from limited partnerships are recognized as return of capital until the investment balance has been reduced to zero or to a negative amount equal to future capital contributions required. Subsequent distributions received are recognized as income. Overall distributions from limited partnerships continue to be favorable. This primarily due, to improved operating results at several of the properties. Except for certificates of deposit and money market funds, the Partnership's investments are entirely interests in other limited partnerships owning government assisted projects. Available cash is invested in these funds earning interest as reflected in the statements of operations. These investments are converted to cash to meet obligations as they arise. The Partnership intends to continue investing available funds in this manner. 9 12 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1995 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The corporate general partner is a plaintiff or defendant in several lawsuits. None of these are related to REAL III. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) No exhibits are required per the provision of item 7 of regulation S-K. 10 13 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1995 SIGNATURES 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. REAL ESTATE ASSOCIATES LIMITED III (a California limited partnership) By: National Partnership Investments Corp. General Partner Date:____________________________________ By:______________________________________ Bruce Nelson President Date:____________________________________ By:______________________________________ Shawn Horwitz Executive Vice President and Chief Financial Officer 11