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 SEPTEMBER 30, 1997 Commission File Number 2-60561 REAL ESTATE ASSOCIATES LIMITED (A California Limited Partnership) I.R.S. Employer Identification No. 95-3187912 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 (a California limited partnership) INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets, September 30, 1997 and December 31, 1996 .........1 Statements of Operations, Nine and Three Months Ended September 30, 1997 and 1996 .....2 Statement of Partner's Equity (Deficiency), Nine Months Ended September 30, 1997.........................3 Statements of Cash Flows Nine Months Ended September 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 (A CALIFORNIA LIMITED PARTNERSHIP) BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 ASSETS 1997 1996 (Unaudited) (Audited) ----------- ----------- INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 2,709,126 $ 2,486,997 CASH AND CASH EQUIVALENTS (Note 1) 406,546 376,976 ----------- ----------- TOTAL ASSETS $ 3,115,672 $ 2,863,973 =========== =========== LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY) LIABILITIES: Accounts payable $ 42,244 $ 7,929 Accrued fees and expenses due general partner (Note 3) 1,017,182 1,021,677 ----------- ----------- 1,059,426 1,029,606 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 3 and 4) PARTNERS' EQUITY (DEFICIENCY): General partners (106,507) (108,726) Limited partners 2,162,753 1,943,093 ----------- ----------- 2,056,246 1,834,367 ----------- ----------- TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY) $ 3,115,672 $ 2,863,973 =========== =========== The accompanying notes are an integral part of these financial statements. 1 4 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) Nine months Three months Nine months Three months ended ended ended ended Sept. 30, 1997 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1996 -------------- ------------ ------------ -------------- INTEREST AND OTHER INCOME $ 17,808 $ 4,263 $ 12,308 $ 4,614 --------- --------- --------- --------- OPERATING EXPENSES: Legal and accounting 61,235 27,334 60,688 18,240 Management fees - general partner (Note 3) 305,505 101,835 305,505 101,835 Administrative (Note 3) 60,981 17,567 32,834 9,489 --------- --------- --------- --------- Total operating expenses 427,721 146,736 (386,719) (124,950) --------- --------- --------- --------- LOSS FROM OPERATIONS (409,913) (142,473) (386,719) (120,645) DISTRIBUTIONS FROM LIMITED PARTNERSHIPS RECOGNIZED AS INCOME (Note 2) 381,892 250,867 465,403 66,881 EQUITY IN INCOME OF LIMITED PARTNERSHIPS AND AMORTIZATION OF ACQUISITION COSTS (Note 2) 249,900 83,300 333,000 111,000 --------- --------- --------- --------- NET INCOME $ 221,879 $ 191,694 $ 411,684 $ 52,931 ========= ========= ========= ========= NET INCOME PER LIMITED PARTNERSHIP INTEREST (Note 1) $ 13 $ 12 $ 25 $ 3 ========= ========= ========= ========= The accompanying notes are an integral part of these financial statements. 2 5 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENT OF PARTNERS' EQUITY (DEFICIENCY) NINE MONTHS ENDED SEPTEMBER 30, 1997 (Unaudited) General Limited Partners Partners Total ----------- ----------- ---------- PARTNERSHIP INTERESTS September 30, 1997 16,505 ========== EQUITY (DEFICIENCY), January 1, 1997 $ (108,726) $1,943,093 $1,834,367 Net income for the nine months ended September 30, 1997 2,219 219,660 221,879 ---------- ---------- ---------- EQUITY (DEFICIENCY), September 30, 1997 $ (106,507) $2,162,753 $2,056,246 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 3 6 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) 1997 1996 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 221,879 $ 411,684 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of limited partnerships and amortization of acquisition costs (249,900) (333,000) Decrease in accrued fees and expenses due general partner (4,495) (69,495) Increase (Decrease) in accounts payable 34,315 (2,083) --------- --------- Net cash provided by operating activities 1,799 7,106 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital contributions/recoveries (8,710) -- Distributions from limited partnership recognized as return of capital 36,481 36,481 --------- --------- Net cash provided by investing activities 27,771 36,481 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 29,570 43,587 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 376,976 250,570 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 406,546 $ 294,157 ========= ========= The accompanying notes are an integral part of these financial statements. 4 7 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 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 annual report for the year ended December 31, 1996 prepared by Real Estate Associates Limited (the "Partnership.") 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, 1997, and the results of operations for the nine and three 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. 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 fees and other costs related to the acquisition of the projects have been capitalized to 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 16,505 for the periods presented. 5 8 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 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 six months or less. The Partnership has its cash and cash equivalents on deposit primarily with one high credit quality financial 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 has limited partnership interests in 18 limited partnerships. The limited partnerships own residential rental projects consisting of 1,969 apartment units. The mortgage loans of these projects are insured by various governmental agencies. The Partnership, as a limited partner, is entitled from 50 percent to 99 percent of the profits and losses in the limited partnerships. Equity in losses of limited partnerships are 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. 6 9 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED): Distributions from the limited partnerships are accounted for as a return of capital until the investment balance is reduced to zero. Subsequent distributions received are recognized as income. The following is a summary of the investments in limited partnerships for the nine months ended September 30, 1997: Balance, beginning of period $ 2,486,997 Capital contribution/recoveries 8,710 Amortization acquisition costs (2,100) Cash distribution recognized as return of capital (36,481) Equity in income of limited partnerships 252,000 ----------- Balance, end of period $ 2,709,126 =========== The limited partnership which owns Chidester Place Apartments, has executed, with NAPICO's consent, an Agreement for Purchase and Sale of the Chidester Place apartment complex. The pending sale is predicated on a $4,370,000 purchase offer from a Tennessee Limited Partnership sponsored by Brencor Capital Funding ("Brencor"). Brencor has obtained preliminary approval from the Ypsilanti Downtown Development Authority to finance the acquisition of the property with a new tax-exempt bond issue which will qualify the prospective buyer to receive an allocation of Low Income Housing Tax Credits. If the sale is completed, it is anticipated that the Partnership will receive sale proceeds more than sufficient to return the Partnership's original capital investment and to offset the projected tax liability associated with the Partnership's disposition of the property. The Partnership has a zero carrying value for this investment. The following are unaudited combined estimated statements of operations for the nine months ended September 30, 1997 and 1996 for the limited partnerships in which the Partnership has investments: Nine months Three months Nine months Three months ended ended ended ended Sept. 30, 1997 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1996 -------------- -------------- -------------- -------------- REVENUES Rental and other $12,714,000 $ 4,238,000 $12,414,000 $ 4,138,000 ----------- ----------- ----------- ----------- EXPENSES Depreciation 1,959,000 653,000 2,007,000 669,000 Interest 3,702,000 1,234,000 3,582,000 1,194,000 Operating 6,627,000 2,209,000 6,609,000 2,203,000 ----------- ----------- ----------- ----------- 12,288,000 4,096,000 12,198,000 4,066,000 ----------- ----------- ----------- ----------- NET INCOME $ 426,000 $ 142,000 $ 216,000 $ 72,000 =========== =========== =========== =========== 7 10 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED): 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 which it has invested that are subject to governmental mortgage and rental subsidy programs. The Partnership has began to incur expenses in connection with this review by various third party professionals, which amounted to $24,149 for the nine months ended September 30, 1997. NOTE 3 - ACCRUED FEES AND EXPENSES DUE TO GENERAL PARTNER (CONTINUED) Under the terms of the Restated Certificate and Agreement of Limited Partnership, the Partnership is obligated to NAPICO for an annual management fee equal to 1/2 and 1 percent of the original invested assets of the limited partnerships. Invested assets is defined as the costs of acquiring project interests, including the proportionate amount of the mortgage loans related to the Partnership's interest in the capital accounts of the respective partnerships. The management fee incurred for the nine-month periods presented was $305,505. The Partnership reimburses NAPICO for certain expenses. The reimbursement paid to NAPICO was approximately $17,800 and $17,600, for the nine months ended September 30, 1997 and 1996, respectively, and is included in administrative expenses. As of September 30, 1997, the fees and expenses due NAPICO exceeded the Partnership's cash. The general partner, during the forthcoming year, will not demand payment of amounts due in excess of such cash or such that the Partnership would not have sufficient operating cash. NOTE 4 - 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 5 - 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 operations generated by the investee limited partnerships, which account for the Partnership's primary source of revenues, are subject to various government rules, regulations and restrictions which make it impracticable to estimate the fair value of accrued fees and expenses due general partner. 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 (A CALIFORNIA LIMITED PARTNERSHIP SEPTEMBER 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. 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 limited partnership which owns Chidester Place Apartments, has executed, with NAPICO's consent, an Agreement for Purchase and Sale of the Chidester Place apartment complex. The pending sale is predicated on a $4,370,000 purchase offer from a Tennessee Limited Partnership sponsored by Brencor Capital Funding ("Brencor"). Brencor has obtained preliminary approval from the Ypsilanti Downtown Development Authority to finance the acquisition of the property with a new tax-exempt bond issue which will qualify the prospective buyer to receive an allocation of Low Income Housing Tax Credits. If the sale is completed, it is anticipated that the Partnership will receive sale proceeds more than sufficient to return the Partnership's original capital investment and to offset the projected tax liability associated with the Partnership's disposition of the property. The Partnership has a zero carrying value for this investment. 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 .5 percent of investment assets is payable to the corporate general partner. Operating expenses are consistent with the prior year. The Partnership is undergoing an extensive review of disposition, refinancing or re-engineering alternatives for the properties in which it has invested that are subject to governmental mortgage and rental subsidy programs. The Partnership has began to incur expenses in connection with this review by various third party professionals, which amounted to $24,149 for the nine months ended September 30, 1997. 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. The equity in income of limited partnerships is received from two investee limited partnerships. All other investee limited partnerships have reduced their investment balances to zero and as a result thereof, the Partnership does not recognize equity in losses from those investments 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. 9 12 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP SEPTEMBER 30, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) 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 income as reflected in the statements of operations. These investments can be converted to cash to meet obligations as they arise. 10 13 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 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 the Partnership. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) No exhibits are required per the provision of Item 7 of regulation S-K. 11 14 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 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 (a California limited partnership) By: National Partnership Investments Corp. General Partner ---------------------------------------- Bruce Nelson President Date: ---------------------------------------- ---------------------------------------- Charles H. Boxenbaum Chief Executive Officer Date: ---------------------------------------- 12