1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended JUNE 30, 1997 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 Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed 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, 1997 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets, June 30, 1997 and December 31, 1996....................................... 1 Statements of Operations, Six and Three Months Ended June 30, 1997 and 1996 ................................ 2 Statement of Partners' Equity (Deficiency), Six Months Ended June 30, 1997 ................................................... 3 Statements of Cash Flows, Six Months Ended June 30, 1997 and 1996 .......................................... 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, 1997 AND DECEMBER 31, 1996 ASSETS 1997 1996 ------------ ------------ (Unaudited) (Audited) INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 1,071,487 $ 1,063,487 CASH AND CASH EQUIVALENTS (Note 1) 10,619,670 9,734,531 OTHER ASSETS 135,000 135,000 ------------ ------------ TOTAL ASSETS $ 11,826,157 $ 10,933,018 ============ ============ LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY) LIABILITIES: Notes payable (Notes 3 and 6) $ 1,510,000 $ 1,510,000 Interest payable (Notes 3 and 6) 358,708 374,603 Accounts payable 22,418 7,450 ------------ ------------ 1,891,126 1,892,053 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 4 and 5) PARTNERS' EQUITY (DEFICIENCY): General partners (99,625) (108,566) Limited partners 10,034,656 9,149,531 ------------ ------------ 9,935,031 9,040,965 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY) $ 11,826,157 $ 10,933,018 ============ ============ 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 AND THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited) Six months Three months Six months Three months ended ended ended ended June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996 ------------- ------------- ------------- ------------- INTEREST AND OTHER INCOME $ 225,819 $ 115,875 $ 150,057 $ 79,920 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Legal and accounting 65,824 34,729 70,120 35,969 Management fees - general partner (Note 4) 227,400 113,710 227,410 113,700 Interest (Note 3) 75,500 37,750 75,500 37,750 Administrative (Note 4) 43,941 24,132 28,950 14,546 ----------- ----------- ----------- ----------- Total operating expenses 412,665 210,321 401,980 201,965 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (186,846) (94,446) (251,923) (122,045) DISTRIBUTIONS FROM LIMITED PARTNERSHIPS RECOGNIZED AS INCOME (Note 2) 952,912 871,871 1,033,251 952,001 EQUITY IN INCOME OF LIMITED PARTNERSHIPS AND AMORTI- ZATION OF ACQUISITION COSTS (Note 2) 128,000 64,000 284,000 142,000 ----------- ----------- ----------- ----------- NET INCOME $ 894,066 $ 841,425 $ 1,065,328 $ 971,956 =========== =========== =========== =========== NET INCOME PER LIMITED PARTNERSHIP INTEREST (Note 1) $ 78 $ 73 $ 93 $ 85 =========== =========== =========== =========== The accompanying notes are integral part of these financial statements. 2 5 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY) SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) General Limited Partners Partners Total ------------ ------------ ------------ PARTNERSHIP INTERESTS June 30, 1997 11,456 =========== EQUITY (DEFICIENCY), January 1, 1997 $ (108,566) $ 9,149,531 $ 9,040,965 Net income for the six months ended June 30, 1997 8,941 885,125 894,066 ----------- ----------- ----------- EQUITY (DEFICIENCY), June 30, 1997 $ (99,625) $10,034,656 $ 9,935,031 =========== =========== =========== 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, 1997 AND 1996 (Unaudited) 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 894,066 $ 1,065,328 Adjustments to reconcile net income to net cash provided by operating activities Equity in income of limited partnerships and amortization of acquisition costs (128,000) (284,000) Increase in other assets - (34,500) Decrease in interest and other payables (927) (36,602) ------------ ------------ Net cash provided by operating activities 765,139 710,226 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Distribution from limited partnership recognized as a return of investment 120,000 41,228 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 885,139 751,454 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,734,531 9,028,963 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,619,670 $ 9,780,417 ============ ============ 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, 1997 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, 1996. 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, 1997 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, selection and other costs related to the acquisition of the projects are capitalized as part of the investment account, and are being amortized on a straight line basis over the estimated lives of the underlying assets, which is generally 30 years. 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. 5 8 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The Partnership has its cash and cash equivalents on deposit primarily with one high credit quality institution. Such cash and cash equivalents are in excess of the FDIC insurance limit. 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. IMPAIRMENT OF LONG-LIVED ASSETS The Partnership adopted Statement of Financial Accounting Standards No. 121, Account for the Improvement of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of as of January 1, 1996 without a significant effect on its financial statements. The Partnership reviews long-lived assets to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the assets, the Partnership recognizes an impairment loss. NOTE 2 - INVESTMENTS IN 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. 6 9 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) 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 for the six months ended June 30, 1997: Balance, beginning of period $1,063,487 Amortization of acquisitions costs (2,000) Distribution recognized as a return of capital (120,000) Equity in income of limited partnerships 130,000 ---------- Balance, end of period $1,071,487 ========== The following are unaudited combined estimated statements of operations for the six months ended June 30, 1997 and 1996 for the limited partnerships in which the Partnership has investments: Six months Three months Six months Three months ended ended ended ended June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996 ------------- ------------- ------------- ------------- REVENUES Rental and other $11,194,000 $ 5,597,000 $ 11,042,000 $ 5,521,000 ----------- ------------ ------------ ------------ EXPENSES Depreciation 1,878,000 939,000 1,752,000 876,000 Interest 3,514,000 1,757,000 3,458,000 1,729,000 Operating 6,218,000 3,109,000 5,820,000 2,910,000 ----------- ------------ ------------ ------------ 11,610,000 5,805,000 11,030,000 5,515,000 ----------- ------------ ------------ ------------ NET INCOME $ (416,000) $ (208,000) $ 12,000 $ 6,000 =========== ============ ============ ============ NAPICO, or one of its affiliates, is the general partner and property management agent for certain of the limited partnerships included above. The Partnership is undergoing an extensive review of disposition, refinancing or re-engineering alternatives for the properties in its Portfolio that are subject to governmental mortgage and rental subsidy programs. The Partnership has begun to incur expenses in connection with this review by various third party professionals. Amounts incurred to date are not material to the operating results of the Partnership. 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. 7 10 REAL ESTATE ASSOCIATES LIMITED III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 NOTE 3 - NOTES PAYABLES (CONTINUED) These notes are payable by the Partnership through REA, and have principal maturity dates in June 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, 1997 and 1996 was approximately $227,000. The Partnership reimburses NAPICO for certain expenses. The reimbursement paid to NAPICO was approximately $16,000 and $15,000 for the six months ended June 30, 1997 and 1996, respectively, and is included in administrative expenses. NOTE 5 - CONTINGENCIES The corporate general partner of the Partnership is involved in various 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, 1997 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. 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 is undergoing an extensive review of disposition, refinancing or re-engineering alternatives for the properties in its Portfolio that are subject to governmental mortgage and rental subsidy programs. The Partnership has begun to incur expenses in connection with this review by various third party professionals. Amounts incurred to date are not material to the operating results of the Partnership. 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. Funds temporarily not required for such investments in projects are invested in certificate of deposit and money market funds which provide substantial amounts of interest as reflected in the statement 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) JUNE 30, 1997 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The corporate general partner is involved in various 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, 1997 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: ----------------------------------------- Charles H. Boxenbaum Chief Executive Officer Date: ----------------------------------------- 11