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 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 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets, June 30, 1996 and December 31, 1995 . . . . 1 Statements of Operations, Six and Three Months Ended June 30, 1996 and 1995 . . 2 Statement of Partners' Equity (Deficiency), Six Months Ended June 30, 1996 . . . . . . . . . . . . 3 Statements of Cash Flows, Six Months Ended June 30, 1996 and 1995 . . . . . . . 4 Notes to Financial Statements . . . . . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 10 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 10 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 ASSETS 1996 1995 (Unaudited) (Audited) ------------ ------------ INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 1,173,348 $ 930,576 CASH AND CASH EQUIVALENTS (Note 1) 9,780,417 9,028,963 SHORT TERM INVESTMENTS (Note 1) 125,000 125,000 OTHER ASSETS 135,000 100,500 ------------ ------------ TOTAL ASSETS $ 11,213,765 $ 10,185,039 ============ ============ LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY) LIABILITIES: Notes payable (Notes 3 and 6) $ 1,510,000 $ 1,510,000 Interest payable (Notes 3 and 6) 319,034 344,762 Accounts payable 2,517 13,391 ------------ ------------ 1,831,551 1,868,153 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 4 and 5) PARTNERS' EQUITY (DEFICIENCY): General partners (105,154) (115,807) Limited partners 9,487,368 8,432,693 ------------ ------------ 9,382,214 8,316,886 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY) $ 11,213,765 $ 10,185,039 ============ ============ The accompanying notes are integral part of these financial statements. 1 4 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (Unaudited) Six months Three months Six months Three months ended ended ended ended June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995 --------------- --------------- --------------- --------------- INTEREST AND OTHER INCOME $ 150,057 $ 79,920 $ 123,508 $ 80,573 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Legal and accounting 70,120 35,969 71,913 30,526 Management fees - general partner 227,410 113,700 227,400 113,700 Interest (Note 3) 75,500 37,750 75,500 37,750 Administrative (Note 4) 28,950 14,546 41,925 22,629 ------------ ------------ ------------ ------------ Total operating expenses 401,980 201,965 416,738 204,605 ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (251,923) (122,045) (293,230) (124,032) DISTRIBUTIONS FROM LIMITED PARTNERSHIPS RECOGNIZED AS INCOME (Note 2) 1,033,251 952,001 955,830 842,540 EQUITY IN INCOME OF LIMITED PARTNERSHIPS AND AMORTI- ZATION OF ACQUISITION COSTS (Note 2) 284,000 142,000 340,000 170,000 ------------ ------------ ------------ ------------ NET INCOME $ 1,065,328 $ 971,956 $ 1,002,600 $ 888,508 ============ ============ ============ ============ NET INCOME PER LIMITED PARTNERSHIP INTEREST (Note 1) $ 93 $ 85 $ 88 $ 78 ============ ============ ============ ============ The accompanying notes are integral part of these financial statements. 2 5 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENT OF PARTNERS' EQUITY (DEFICIENCY) SIX MONTHS ENDED JUNE 30, 1996 (Unaudited) General Limited Partners Partners Total ------------ ------------ ------------ PARTNERSHIP INTERESTS June 30, 1996 11,456 ============ EQUITY (DEFICIENCY), January 1, 1996 $ (115,807) $ 8,432,693 $ 8,316,886 Net income for the six months ended June 30, 1996 10,653 1,054,675 1,065,328 ------------ ------------ ------------ EQUITY (DEFICIENCY), June 30, 1996 $ (105,154) $ 9,487,368 $ 9,382,214 ============ ============ ============ The accompanying notes are integral part of these financial statements 3 6 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (Unaudited) 1996 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,065,328 $ 1,002,600 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of limited partnerships and amortization of acquisition costs (284,000) (340,000) Increase in other assets (34,500) - Decrease in interest and other payables (36,602) (54,949) ------------ ------------ Net cash provided by operating activities 710,226 607,651 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in investments - 220,000 Distribution from limited partnership recognized as a return of investment 41,228 - Decrease in short term investments - 1,021,022 ------------ ------------ Net cash provided by investing activities 41,228 1,241,022 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 751,454 1,848,673 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,028,963 7,209,247 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,780,417 $ 9,057,920 ============ ============ The accompanying notes are integral part of these financial statements. 4 7 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996 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, 1995. 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 June 30, 1996 and the results of operations for the six and three months then ended and changes in cash flows for the six 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. 5 8 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 six 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 June 30, 1996: Balance, beginning of period $ 930,576 Amortization of acquisitions costs (4,000) Cash distribution recognized as return of investment 41,228 Equity in income of limited partnerships 288,000 ---------- Balance, end of period $1,173,348 ========== 6 9 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 NOTE 2 - INVESTMENTS IN AND ADVANCES TO LIMITED PARTNERSHIPS (CONTINUED) The following are unaudited combined estimated statements of operations for the six months ended June 30, 1996 and 1995 for the limited partnerships in which the Partnership has investments: Six months Three months Six months Three months ended ended ended ended June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995 ------------- ------------- ------------- -------------- INCOME Rental and other $11,041,000 $5,521,000 $10,770,000 $5,385,000 ----------- ---------- ----------- ---------- EXPENSES Depreciation 1,751,000 876,000 1,850,000 925,000 Interest 3,457,000 1,729,000 3,538,000 1,769,000 Operating 5,821,000 2,910,000 5,868,000 2,934,000 --------- --------- ------------ ---------- 11,029,000 5,515,000 11,256,000 5,628,000 ---------- --------- ----------- ---------- NET INCOME (LOSS) $ 12,000 $ 6,000 $ (486,000) $ (243,000) ============= ============ ============ ========== 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 .4 percent of the invested assets. Invested assets are 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 management fee incurred for the six months ended June 30, 1996 and 1995 was $227,410. The Partnership reimburses NAPICO for certain expenses. The reimbursement paid to NAPICO was approximately $15,000 for the six months ended June 30, 1996 and 1995, and is included in administrative expenses. 7 10 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 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. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, when it is practicable to estimate that value. The notes payable are collateralized by the Partnership's investments in the investee limited partnerships and are payable only out of cash distributions from the investee partnerships. The operations generated by the investee limited partnerships are subject to various government rules, regulations and restrictions which make it impracticable to estimate the fair value of the notes payable and related accrued interest. The carrying amount of other assets and liabilities reported on the balance sheets that require such disclosure approximates fair value due to their short-term maturity. 8 11 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) JUNE 30, 1996 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. 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. Operating expenses did not vary significantly for the periods presented. 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. 9 12 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) JUNE 30, 1996 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) JUNE 30, 1996 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