<Page 1>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended Commission file number
December 31, 1996 2-99435
LEASTEC INCOME FUND III
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 68-0066209
(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation or organization) cation Number)
2855 Mitchell Drive, Suite 215, Walnut Creek, CA 94598
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 938-3443
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(TITLE OF CLASS)
Indicate by a 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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
X
DOCUMENTS INCORPORATED BY REFERENCE
EXHIBIT INDEX LOCATED AT PAGES 24
<Page 2>
TABLE OF CONTENTS
Item No. Page No.
Item 1 Business 3
Item 2 Properties 4
Item 3 Legal Proceedings 4
Item 4 Submission of Matters to a Vote of Security Holders 4
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 5
Item 6 Selected Financial Data 6
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 8 Financial Statements and Supplementary Data 9
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
Item 10 Directors and Executive Officers of the Registrant 22
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners and
Management 23
Item 13 Certain Relationships and Related Transactions 23
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 24
<Page 3>
Item 1. BUSINESS
Prior to 1993, the Registrant's primary business was to acquire a
diversified portfolio of capital equipment for lease subject to operating
and finance leases with terms of 36 to 60 months. The equipment leased was
selected by the lessees and was purchased directly from the manufacturer,
independent third parties and the lessees (via sale lease back transactions).
Operating leases, primarily of data processing equipment, are those in which
the Registrant maintains ownership of the equipment at the end of the lease.
Finance leases are those in which the lessee is contractually obligated to
purchase the equipment at a predetermined amount at the end of the lease.
Since the Operating leases did not transfer ownership through a purchase
obligation, the Registrant is dependent on re-lease or sale of the equipment
to realize a profitable return on its investment in the leased equipment.
Prior to 1993, the Registrant reinvested cash in excess of partners
distributions into new lease transactions. Starting in 1993, the Registrant
began to wind down its leasing operations by returning all cash proceeds from
operations to the partners through quarterly distributions. During the wind
down or liquidation phase, cash proceeds from the rents, equipment sold and
all available cash from operations have been distributed to the limited
partners in proportion to their respective tax basis capital accounts. The
Registrant was fully liquidated as of December 31, 1996.
During fiscal 1996, the Registrant fully liquidated its lease and
equipment portfolio. The Registrant accrued the final distribution of $97,167
as of December 31, 1996 paid in February 1997. With the final distribution all
assets will have been disposed of and all proceeds were distributed. The
Partnership was formed in 1985 with a capitalization of $20,000,000. Limited
partner distributions from inception to close of the Partnership were as
follows:
<TABLE>
<CAPTION>
Year Total Distribution Made
---- -----------------------
<S> <C>
1985 $ 5,030
1986 1,080,276
1987 1,757,055
1988 1,898,035
1989 2,029,950
1990 2,065,715
1991 531,318
1992 535,565
1993 1,499,913
1994 2,050,254
1995 1,499,902
1996 467,167
------------
Total $ 15,420,180
============
</TABLE>
Distributions noted herein are on an accrual basis of accounting as shown
on the Statement of Partners' Capital. The Registrant has accrued a
liquidation distribution of $97,167 to the limited partners for the quarter
ended December 31, 1996. Although the Registrant had until December 1997 to
liquidate its operations, the Registrant was fully liquidated at the end of its
eleventh full year of operation, December 1996.
<PAGE 4>
The Registrant failed to return 100 % of its invested capital. This loss
was primarily caused by the failure of the Operating lease equipment to achieve
its residual values. As reported in the 1990 Form 10-K residual values were
adversely impacted by factors discussed below including intense competition
from IBM Credit Corporation. Under an operating lease the risk of ownership
remains with the lessor and is not passed on to the lessee. An operating lease
yield depends entirely on the realization of residual expectations in order for
the lessor to achieve a positive return. The partnership's greatest risk area
was the residual values on its operating lease portfolio, and this was the area
in which the largest shortfalls occurred. Residual values can be realized
either by the sale or re-lease of equipment. In either case, the demand for
used equipment is affected by the cost of substitutes and the strength or
weakness in the general economy. Substitute new equipment may be more
desirable than used equipment because it has higher performance levels and if
the cost to maintain older equipment is high. Re-lease revenues are also
affected by interest rate levels. A lower interest rate environment will
reduce the monthly rent which can be charged for equipment.
Competition
While the Registrant is no longer seeking new leases, it has competed in
the past with manufacture leasing companies, independent leasing companies,
affiliates of banks, commercial credit companies and other leasing
partnerships. Competition with these entities was based primarily on lease
rates and terms as well as the type and amount of equipment. In addition the
condition and relative obsolescence of equipment are major factors in the
Partnership's ability to re-lease or sell its equipment from operating leases.
Other factors include the demand for a type of equipment, the cost of
maintenance, the availability of financing, trends in the economy, interest
rates, tax laws as well as many other factors over which neither the
Registrant nor its competitors have control.
Working Capital
The Partnership maintains cash reserves for normal operating expenses,
working capital and certain leasing costs such as payment of personal property
taxes, refurbishment cost and repossession costs. The Registrant has no
statistical information to compare its reserves with those of its competitors.
The Registrant had no employees. Leastec Corporation performed all
management duties for the Fund. In 1996, the General Partner of the
Registrant, Leastec Corporation, received management fees of seven percent (7%)
of the Registrant's gross receipts, or $34,893, for managing the Registrant's
operations.
The Registrant's revenues, income, and assets for the years ended
December 31, 1996, 1995, and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C>
Total Revenues $ 69,345 $ 724,735 $ 1,204,453
Net (Loss) Income (366,926) 396,074 469,972
Assets 293,433 1,335,840 2,995,740
</TABLE>
<PAGE 5>
Item 2. PROPERTIES
The Registrant has no plants, mines or other physical properties.
At December 31, 1996, the portfolio of leases was fully liquidated.
The equipment previously on lease had consisted primarily of data
processing equipment, office furniture, instrumentation and
semi-conductor fabrication equipment.
Item 3. LEGAL PROCEEDINGS
The Registrant is not a party to any material pending legal
proceedings at this time.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period from September 30, 1996 to December 31, 1996,
no matter was submitted to a vote of security holders, through
the solicitation of proxies or otherwise.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Registrant's Limited Partner Units and General Partner's Units
are not publicly traded. There is no established public trading
market for such Units and none is expected to develop. However
the Registrant's units are freely transferable. The General
Partner may at its sole discretion determine that the transfer of
a unit will not become effective if such transfer is restricted or
prohibited under Federal or state securities laws. In addition,
the General Partner, in its sole judgment may determine that a
transfer will not become effective if it would result in the
premature termination of the Partnership for Federal income tax
purposes or increase the risk of reclassification of the
Registrant under the publicly traded partnership provisions of the
Revenue Act of 1987 (the 1987 Act) or cause the Partnership to be
reclassified as an association taxable as a corporation under
Federal income tax regulations. The 1987 Act contains provisions
which have an adverse impact on investors in "publicly traded
partnerships," which include partnerships whose interests are
traded either on an established securities market or are readily
tradable on a secondary market. If the Partnership were to be
classified as a "publicly traded partnership", the Partnership
would be taxed as a corporation as of the time public trading was
deemed to commence. The general partner has represented that it
will take all action necessary to restrict transfers to assure
that the units will not become readily tradable on a secondary
market or substantial equivalent. To accomplish that goal the
General Partner intends to restrict the transfer of Units to
the extent necessary to comply with IRS Notice 99 containing safe
harbors for the transfer of partnership interest.
(b) The number of holders of partnership interests is set forth below:
Title of Class Number of Holders as of
December 31, 1996
Limited Partner Units 2,532
General Partner's Units 1
<PAGE 6>
(c) Distributions
During 1996, the Registrant made four (4) quarterly
distributions and accrued a fifth distribution in the amount
of $97,167 for the quarter ended December 31, 1996 (the first
distribution in 1996 related to 1995) to all limited partners
as follows:
<TABLE>
<CAPTION>
Period Ended Payment Distributions per $250
Investment Unit
___________ ------- ----------------------
<S> <C>
December 31, 1995 January 1996 $4.71
March 31, 1996 April 1996 $3.36
June 30, 1996 July 1996 $1.35
September 30, 1996 October 1996 $0.27
December 31, 1996 February 1997 $1.24
Item 6. SELECTED FINANCIAL DATA
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(in thousands, except per unit data)
1996 1995 1994 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues 69 725 1,204 1,761 2,521
Net (loss) income (367) 396 470 572 475
Total assets at December 31 293 1,336 2,996 5,090 7,452
Long-term portion of notes payable 0 0 0 43 927
Distributions declared to partners 487 1,578 2,158 1,579 564
Net (loss) income per weighted
average limited partner unit
outstanding (4.90) 4.02 4.59 6.25 4.92
</TABLE>
Cash dividends declared per limited partner unit data is not
applicable as cash distributions were distributed to those investors
electing to receive them at a fixed rate as determined by the general
partner based on the investors original investment for years
1986 - 1992. Distributions for the subsequent quarters were based on
each partner's tax basis capital account.
The above selected financial data should be read in conjunction
with the audited financial statements and related notes to the
financial statements appearing in Item 8 of the Form 10-K.
<PAGE 7>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Basis of Condensed Financial Statement Preparation
The partnership has presented its 1996 financial statements to
reflect its leasing liquidation activities on a basis consistent with
prior periods. The partnership has complete its leasing activities
and has distributed its remaining net assets (cash) to the partners
and has dissolved the partnership.
Results of Operations
Life of the Registrant
The Registrant began operations in late 1986. In 1986, the registrant
invested its initial capital into operating leases of IBM equipment in
accordance with the partnership agreement and investment prospectus. Under an
operating lease the risk of ownership remains with the lessor. The expectation
is that the equipment will retain its value and that the lessor will realize
profits through the sale or re-lease of the equipment. Historically the
Leasing Industry had experienced success with operating leases because the life
of IBM computer equipment had exceed the life of the initial lease contract.
However at the end of the 1980's and the beginning of the 1990's this
fundamental premise changed to the detriment of the partnership's investment.
At that time International Data Corporation (IDC) provided residual value
estimates to the Leasing industry through their Lease Planning Service (LPS).
The following is an example of the unexpected changes which swept through the
computer leasing industry in the period from 1989 to 1992. In October of 1986,
IDC estimated that an IBM 3380-AD4 disk drive would have a wholesale residual
value of 27% of original cost in 1990. By 1990 the wholesale cost had dropped
to 5% to 10% representing a 60% to 80% shortfall in residual expectations.
This dramatic drop in value was caused by a surge of technological changes in
the computer industry. As reported in prior year Forms 10-K, particularly
1990, residual values were impacted by increased competition from IBM Credit
Corporation. IBM was forced to cut prices and lease rates in order to
compete with newer technologies. The following is another example of the
magnitude of these technologicial changes. At the end of 1986 a new IBM 700
megabyte disk drive sold for about $70,000. By 1996 it was possible to buy a
PC 2.1 gigabit disk drive (200% larger than 700 megabyte) for $350. While an
IBM disk drive and a PC disk drive work in different computing environments,
this example still shows the magnitude of the technological changes which
were competing with IBM equipment and reducing the residual value of its
equipment. The dramatic failure of IBM equipment to maintain its value in the
face of competitive technological changes was also evidenced by the decline of
IBM stock value from $120 to $150 in 1986 to $50 to $40 by 1993. During this
time the demand for main frame computer decreased as competing lower cost
substitute systems became available.
An additional contributing cause to the registrant's failure to return
capital was the bankruptcy of Unicom Computer Corporation, one of the two
original General Partners, in the fall of 1988. As a result, certain rental
receipts were withheld by lessees for several months as claims by Unicom
creditors were worked out. In addition, certain pieces of equipment were tied
up and leasing activities were disrupted for almost nine months. At about this
same time in 1989, IBM Credit Corp. became extremely competitive forcing lease
rates down. This made it increasingly difficult for the partnership to find
transactions which met its yield requirements. The competitive force from
IBM Credit Corp. exacerbated a decline in rates as the general level of
interest rates also began to fall.
<PAGE 8>
Starting in 1989, the registrant diversified the equipment portfolio away
from IBM by leasing Digital Equipment Corp. (DEC) equipment and non-computer
assets subject to operating leases. The DEC equipment while serving a
different marketplace (the so-called mini-computer market as opposed to the
mainframe IBM market) also suffered from extreme residual value shortfalls
caused by the introduction of competing personal computer and client/server
technologies. In 1991 the registrant engaged in finance leasing to eliminate
the risk of residual values. Finance leases passed the risk of ownership to the
lessees by requiring them to buy the equipment at the end of the lease.
However, these leases were written in a decreasing interest rate environment.
These interest rate decreases were caused in part by the recession of 1990 to
1992. The market interest rates were at levels below those required to return
100% capital to the investors. Distributions were reduced at that time, but
continuing losses on the IBM equipment undercut efforts to earn back lost
capital. The 1991 switch to finance leases was approved by a vote of 88% of
the limited partnership units. This vote was required not only to allow the
shift of the asset mix away from operating leases but to change the type of
credit which could be accepted by the registrant. In general finance leases
are used by companies which are privately owned and smaller with higher risk of
credit default. While there were credit defaults as a result of this change,
they were significantly smaller than those incurred by residual value losses.
The switch to finance leases did not have enough time to rebuild the capital
lost as equipment was sold from the operating lease portfolio before the
partnerships liquidation date was reached. In summary the largest risk
position in the registrants portfolio was in residual values of computer
equipment, and it was the shortfalls in these residual values which was
responsible for the registrant's losses.
1996 versus 1995
The Registrant completed eleven (11) full years of operations and has fully
liquidated all its assets. During the wind down or liquidation phase of the
Partnership, all cash flows in excess of partnership expenses were distributed
to the limited partners in proportion to their respective tax basis capital
accounts.
Comparisons to prior year activities are limited due to the liquidation of
the Registrants assets during this final year of the Partnership.
The equipment on operating leases and the equipment held for sale was
disposed or fully depreciated as of late 1994 and, therefore, not a major
factor in the operations of 1995 and 1996. Consequently, operating lease
income was $78 in 1996 compared to $177,797 for 1995 and depreciation expense
was eliminated for 1995 and 1996. Rental income from operating leases
comprised 16.3% of total revenue during 1995. The remaining revenue consists
of direct financing lease income, interest, and the recovery of an operating
lease previously written off because of the bankruptcy of a lessee. The
decline in the percentage of income derived from operating leases reflects the
Registrant's effort to invest in finance leases and the decreased size of the
lease portfolio subject to operating leases. Direct financing lease income
decreased from $251,036 in 1995 to $33,762 in 1996 as the finance lease
portfolio decreased.
Direct services from general partners remained fairly constant at $74,801
in 1996, $78,103 in 1995 and $73,063 in 1994. Direct services are the
administrative and personnel costs (payroll) incurred on behalf of the
Partnership. The expense remained constant because a minimal staff was
required to complete the activities of the Partnership.
General and administrative expenses decreased from $220,621 in 1994 to
$147,244 in 1995 and increased to $271,959 in1996 due to the accrual of
closing expenses required to meet the regulatory requirements of tax
authorities and reporting requirements of the Limited Partnership Agreements.
<PAGE 9>
Total operating expenses decreased from $734,481 in 1994 to $328,661 in
1995 and increased to $436,271 in 1996 because of the write off of a lease to
a bankrupt lessee and closing expenses mentioned above. The majority of the
decrease from 1994 to 1995 related to the reduction of depreciation expense on
the operating lease portfolio and a write off of a direct finance lease in 1994.
The foregoing factors resulted in the Registrant reporting a net loss in
1996 of ($366,926) and net income of $396,074 in 1995 compared to $469,972 for
1994.
Liquidity and Capital Resources
Operating activities used cash flow of $142,527 in 1996 and $101,244 in
1995. The increase from year to year is a result of the rapid decline in the
size of the lease portfolio compared to the size of the direct finance lease
portfolio and the liquidation of the Registrant's assets.
Investing activities (which includes the payment of cash allocable to
return of principal under finance leases) provided net cash of $1,886,323 in
1995 and $487,412 in 1996. The entire 1996 amount was from finance leases.
The decrease in the net investment in direct financing leases occurs
naturally as the lease obligations are amortized by payment of rents. The sale
of equipment related to direct financing leases and operating leases provided
no cash in 1996 and amounts totaling $329,964 in 1994 and $89,050 in 1995.
All notes were fully retired at the end of 1995 therefore cash from
financing activities was not used to repay notes payable in 1996, but were used
in amounts totaling $44,864 in 1995 and $135,477 in 1994. Cash from financing
activities was also used to make the liquidating distributions to Partners,
which amounted to $2,158,162 in 1994, $1,578,844 in 1995 and the closing
distributions totaling $486,641 in 1996.
The cash position fluctuated during the liquidation years of the
Registrant. Cash available from lease rentals, terminations and sale of
equipment was used first to pay expenses and then distributed to the Partners.
The cash available varied quarter to quarter and year to year according to the
timing of the receipts of rents, sales and termination receipts.
<Page 10>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LEASTEC INCOME FUND III
(A California Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
Page Number
Independent Auditors' Report F-3
Financial Statements:
Balance Sheets - December 31, 1996 and 1995 F-4
Statements of Operations For The Years Ended
December 31. 1996, 1995, and 1994 F-5
Statements of Partners' Capital For The
Years Ended December 31, 1996, 1995 and 1994 F-6
Statements of Cash Flows For The Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Financial Statements F-8
F-2
<Page 11>
Independent Auditors' Report
The Partners
Leastec Income Fund III:
We have audited the accompanying balance sheets of Leastec Income Fund III
(a California limited partnership) as of December 31, 1996 and 1995, and
the related statements of operations, partners' capital and cash flows for
each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in note 1 to the financial statements, the Partnership
discontinued operations on December 31, 1996 and intends to make the final
liquidating cash distribution to the partners in 1997.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Leastec Income Fund III
(a California limited partnership) as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
February 7, 1997
Signed (KPMG Partner)
F-3
<Page 12>
<TABLE>
<CAPTION>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 293,433 $ 706,443
Receivables, net:
Rent --- 3,338
Other --- 84,079
Net investment in direct financing leases --- 541,980
Equipment on operating leases, net of
accumulated depreciation of $0
in 1996 and $6,166 in 1995 --- ---
--------- ----------
$ 293,433 $1,335,840
========= ==========
Liabilities and Partners' Capital
Trade accounts payable $ 193,787 64,323
Distributions payable to partners 97,167 368,421
Due to affiliates 2,479 2,677
Deferred rent revenue --- 2,944
Deposits --- 43,818
--------- ----------
Total liabilities 293,433 482,273
Partners' capital
General partner: Authorized 808 units;
issued and outstanding 807 units in
in 1996 and 1995 --- 200
Limited partners: Authorized 80,000
units; issued and outstanding 78,821
units in 1996 and 1995 --- 853,367
--------- ----------
Total partners' capital --- 853,567
--------- ----------
$ 293,433 $1,335,840
========= ==========
<FN>
See accompanying notes to financial statements.
F-4
</TABLE>
<Page 13>
<TABLE>
<CAPTION>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Statement of Operations
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Operating lease income $ 78 117,797 439,607
Direct financing lease income 33,762 251,036 354,831
Interest and other income 25,505 46,971 81,633
Recovery on direct financing leases 10,000 181,395 ---
Gain on disposition of direct
financing lease equipment, net --- 38,486 ---
Gain on disposition of equipment, net --- 89,050 328,382
--------- -------- --------
Total revenues 69,345 724,735 1,204,453
--------- -------- ---------
Expenses:
Depreciation of equipment on
operating leases --- --- 130,703
Management fees 34,893 100,004 177,065
Loss on write-off of direct financing
lease 54,568 --- 116,259
Direct services from general partner 74,801 78,103 73,063
Interest 50 3,310 16,770
General and administrative 271,959 147,244 220,621
--------- --------- --------
Total Expenses 436,274 328,661 734,481
--------- --------- --------
Net (loss) Income $(366,926) 396,074 469,972
========= ========= ========
Net (loss) income per weighted
average limited partner unit
outstanding $ (4.90) 4.02 4.59
======== ======== ========
<FN>
See accompanying notes to financial statements.
F-5
</TABLE>
<PAGE 14>
<TABLE>
<CAPTION>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Statements of Partners' Capital
Years ended December 31, 1996, 1995, and 1994
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' capital, December 31, 1993 $ 200 3,724,327 3,724,527
Net income 107,908 362,064 469,972
Distributions to partners (107,908) (2,050,254) (2,158,162)
--------- ---------- ----------
Partners' capital, December 31, 1994 200 2,036,137 2,036,337
Net income 78,942 317,132 396,074
Distributions to partners (78,942) (1,499,902) (1,578,844)
Partners' capital, December 31, 1995 200 853,367 853,567
--------- ---------- ----------
Net income (loss) 19,274 (386,200) (366,926)
Distributions to partners (19,474) (467,167) (486,641)
Partners' capital, December 31, 1996 $ --- --- ---
========== ========== ==========
<FN>
See accompanying notes to financial statements.
F-6
</TABLE>
<PAGE 15>
<TABLE>
<CAPTION>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1996,1995, and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(366,926) 396,074 469,972
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation --- --- 130,703
Gain on disposition of equipment --- (89,050) (328,382)
Gain on disposition of direct
financing lease --- (38,486) ---
Loss on write off of direct
financing leases 54,568 --- 116,259
Changes in operating assets and
liabilities:
Receivables 87,417 (37,546) 21,242
Trade accounts payable 129,464 (41,070) (25,085)
Due to affiliates (288) (68,490) 19,256
Deposits and deferred rent revenue (46,762) (222,676) (101,923)
-------- -------- --------
Net cash (used in) provided
by operating activities (142,527) (101,244) 302,042
-------- -------- --------
Cash flows from investing activities:
Net investment in direct financing
leases --- (48,532) ---
Decrease in net investment in direct
financing leases 487,412 1,456,542 1,743,566
Proceeds from sale of direct
financing leases --- 389,263 ---
Proceeds from disposition of equipment --- 89,050 329,964
--------- --------- ---------
Net cash provided by
investing activities 487,412 1,886,323 2,073,530
Cash flows from financing activities:
Repayment of notes payable
and bank line of credit --- (44,864) (135,477)
Distributions to partners (757,895) (1,678,844) (2,321,201)
--------- ---------- ----------
Net cash used in financing
activities (757,895) (1,723,708) (2,456,678)
--------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents (413,010) 61,371 (81,106)
Cash and cash equivalents at beginning
of year 706,443 645,072 726,178
--------- --------- -----------
Cash and cash equivalents at end of
year 296,433 706,443 645,072
========= ========= ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 50 3,010 16,770
========= ========= ===========
<FN>
See accompanying notes to financial statements.
F-7
</TABLE>
<PAGE 16>
[CAPTION]
LEASTEC INCOME FUND III
(A California Limited Partnership)
Notes to Financial Statements
Years ended December 31, 1996, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Leastec Income Fund III (the Partnership) was formed on July 1, 1985
and commenced operations on December 6, 1985, as a California limited
partnership. The Partnership was formed primarily for the purpose of
purchasing, holding, leasing and selling peripheral computer equipment.
The Partnership leased to various companies in a variety of industries
throughout the United States. The Partnership's operations consisted
of direct financing leases and operating leases.
The Partnership's general partner is Leastec Corporation (Leastec).
Leastec manages the Partnership, including investment of funds,
purchase and sale of equipment, lease negotiation and other
administrative duties.
The Partnership ceased operations and prepared for a final
liquidating cash distribution as of December 31, 1996. In accordance
with the Partnership agreement, the general partner will distribute
the net assets of the Partnership based on the limited partners' tax
basis capital accounts. At December 31, 1996, the Partnership accrued
$154,567 of estimated expenses, included in trade accounts payable,
necessary o complete the dissolution of the Partnership. These costs
include estimates for accounting, data processing, administrative
expenses, regulatory filings with the SEC, income tax filings with the
Internal Revenue Service and various states, and property tax filings
with local governments. The General Partner commenced the dissolution
in 1997.
(b) Allowance for Doubtful Accounts Receivable
The Partnership provides an allowance for doubtful accounts for
receivables deemed uncollectible. No allowance for doubtful accounts
was recorded at December 31, 1996 and 1995, respectively.
(c) Net Investment in Direct Financing Leases
Net investment in direct financing leases is the total of the future
minimum lease payments and the guaranteed residual value accruing to
the benefit of the lessor at the end of the lease term less the
unearnd income in the lease.
Generally, the equipment on lease secures the leases. In the event
of default on a lease, the Partnership has the right to foreclose on
the assets leased. Assets acquired in the foreclosure are recorded
at the lesser of the net investment in the direct financing lease or
their estimated fair value as of the date of the foreclosure.
(Continued)
F-8
<PAGE 17>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Notes to Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(d) Equipment on Operating Leases
Equipment on operating leases is stated at cost less accumulated
depreciation. The cost of equipment Iincludes acquisition fees paid
to the general partner on the purchase price of the equipment.
Depreciation is calculated on the straight-line method over the
estimated useful lives of the equipment ranging from two to seven
years. The estimated useful lives of equipment on operating leases
and depreciation rates are adjusted to reflect changes in the
estimated salvage value of the equipment at the end of the related
leases caused by technological advances or other market changes
during the lease term.
(e) Recognition of Lease Income
Operating lease income is recognized ratably over the lease term.
Unearned income on direct financing leases is recognized as revenue
over the lease term at a constant rate of return on the net
investment in the lease.
(f) Income Taxes
No provision is made for income taxes since the Partnership is not a
taxable entity. Individual partners report their allocable share of
partnership taxable income or loss.
(g) Cash Equivalents
For purposes of the statements of cash flows, the Partnership
considers all investments with an initial maturity at date of
purchase of three months or less to be cash equivalents.
(h) Net (Loss) Income Per Weighted Average Limited Partner Unit
Net (loss) income per weighted average limited partner unit is
computed by dividing the net (loss) income allocated to the limited
partners (($386,200) in 1996, $317,132 in 1995 and $362,064 in1994)
by the weighted average number of limited partner units outstanding
during the year (78,821 in 1996, 1995 and 1994).
(i) 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 the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(Continued)
F-9
<PAGE 18>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Notes to Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(j) Reclassifications
Certain prior year amounts were reclassified for financial statement
comparison purposes.
(2) Direct Financing Leases
Net investment in direct financing leases at December 31 consists of
the following:
1996 1995
Total minimum lease payments receivable $ --- 418,355
Guaranteed residual value of leased equipment --- 170,622
Less: Unearned lease income --- (46,997)
-------- --------
$ --- 541,980
======== ========
(3) Recovery on Direct Financing Leases
A lessee of the Partnership filed for Chapter 11 bankruptcy in 1994.
The Partnership recorded a loss of $116,259 related to this lessee, for
the year ended December 31, 1994. The Partnership subsequently received
income from auction sales of recovered equipment and insurance proceeds on
unrecovered equipment which resulted in a recovery of $78,863 recorded
in the year ended December 31, 1995. In December 1996, the Partnership
sold its claim in the bankruptcy to an unrelated third party for $10,000.
In October 1992, a lessee experiencing financial difficulties suspended
lease payments to the Partnership. The Partnership subsequently
renegotiated terms with the lessee to continue monthly rental receipts at
a reduced amount. The management of the Partnership believed that the
lessee would continue to make lease payments. However, due to the
uncertainty of the situation the Partnership recorded an allowance for
possible losses of $50,000 at December 31, 1994. In accordance with the
renegotiated terms with the lessee, the Partnership also received 13,133
equity shares of the lessee's common stock. However, the Partnership had
not assigned a value to the shares of common stock as the fair market
value was not determinable. In May 1995 the lessee was purchased by a
third party who paid off the Partnership for the related obligation and
purchased the related common stock shares. At December 31, 1995, the
related balances and allowance were eliminated. The Partnership recognized
income for the transaction which resulted in a recovery of $102,532
recorded in the year ended December 31, 1995.
(Continued)
F-10
<PAGE 19>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Notes to Financial Statements
(4) Transactions with the General Partner and Affiliates
The following is a summary of Partnership transactions with the general
partner and affiliates.
(a) Management Fees
The general partner is entitled to receive management fees as
compensation for services performed in connection with managing the
equipment equal to the lesser of (a) 5% of gross rental payments from
operating leases, 2% of gross rental payments from full payout leases
which contain net lease provisions, or 7% of gross receipts, excluding
sales, from Partnership equipment, whichever is applicable; or (b) the
fee which the general partner reasonably believes to be competitive
with that which would be charged by a nonaffiliate for rendering
comparable services. These fees totaled $34,893 in 1996, $100,004 in
1995 and $177,065 in 1994.
(b) Direct Services
The general partner provides various services directly related to
the operations of the Partnership. The Partnership reimburses the
general partner for administrative and personnel costs incurred on its
behalf. Such reimbursements totaled $74,801 in 1996, $78,103 in 1995
and $73,063 in 1994.
(c) Due to Affiliates
Amounts due to affiliates totaled $2,479 and $2,767 at December 31,
1996 and 1995, respectively.
(d) Direct Financing Lease Purchases
The Partnership purchased direct financing leases from an affiliate
of the general partner in the amount of $48,532 in 1995. The purchase
price was established by the net book value at which the leases were
recorded on the affiliate's books.
(Continued)
F-11
<PAGE 20>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Notes to Financial Statements
(5) Cash Distributions and Allocations of Profits and Losses
(a) Cash Distributions
The limited partners and general partner receive 95% and 5%,
respectively, of cash available for distribution, as defined in
the Partnership agreement, until the limited partners receive an
amount equal to their original capital contribution plus an 8% per
annum, cumulative, non-compounded return on the original capital
contributions. Thereafter, the limited partners and general partner
receive 85% and 15%, respectively, of cash available for
distribution. Distributions have not reached the above limit and are
currently distributed 95% to the limited partners and 5% to the
general partner.
Cash distributions of $370,000 relating to the 1996 financial year
of operations of the Partnership were madW to the limited partners.
In accordance with the Partnership agreement, a liquidating
distribution of $97,167 was declared and accrued to bring the limited
partners capital account to zero. Under the Partnership agreement, the
general partner's capital account was reduced to zero.
(b) Profit and Loss Allocations
Profits are allocated first to the general partner until the general
partner's capital accounts are brought to zero; second, 1% to
the general partner and 99% to the limited partners until the total
Partnership deficit is zero; third, to the general partner in an
amount equal to cash distributions, and the remainder to the limited
partners on the basis of their capital account balances.
In 1996 the general partner's capital account received a qualified
income offset allocation pursuant to Section 14.2 of the
Partnership agreement. The qualified income offset allocation was made
in order to maintain capital accounts in accordance with the
Partnership agreement.
(Continued)
F-12
<PAGE 21>
LEASTEC INCOME FUND III
(A California Limited Partnership)
Notes to Financial Statements
(6) Tax Information
The following reconciles net (loss) income for financial purposee and
federal income tax purposes for the years ended December 31:
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net (loss) income per financial statements $ (366,926) 396,074 469,972
Gain on disposition of equipment (1,008) (280) (122,303)
Loss on write off of direct financing
lease --- --- 116,259
Depreciation and amortization (486) (38,661) (50,595)
Loss on liquidation (456,150) --- ---
Allowance for doubtful direct
financing leases --- (50,000) ---
Allowance for doubtful accounts --- (14,262) ---
Direct financing leases --- 49,704 92,687
Deferred rent revenue (2,944) (1,665) (2,456)
Syndication fees (2,474,697) --- ---
---------- ------- -------
Partnership (loss) income for federal
income tax purposes $(3,302,211) 340,910 503,564
=========== ======== =======
Syndication fees are capitalized when incurred and allocated to the
partners upon liquidation for federal income tax purposes.
The following reconciles partners' capital for financial reporting
purposes and federal income tax purposes as of December 31:
1996 1995
---- ----
Partners' capital per financial statements $ --- 853,567
Commissions and offering costs on sale of
limited partnership units --- 2,474,697
Depreciation and amortization --- (490,155)
Loss on liquidation --- ---
Direct financing leases --- 856,043
Deferred rent revenue --- 2,944
Other --- 91,756
------ ---------
Partners' capital for federal income tax purposes $ --- 3,788,852
====== =========
F-13
<PAGE 22>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) At December 31, 1996, the General Partner of the Registrant
was Leastec Corporation, a California corporation, a wholly owned
subsidiary of The Earnest Group, formerly Partners Fund
Management, Inc.
(b) The directors and executive officers of the General Partner
of the Registrant who are not themselves general partners of the
Registrant are: Ernest V. Lavagetto, 49, President, Chief
Financial Officer, Secretary and Director of Leastec Corporation
since January 1990. Mr. Lavagetto's term of office as Director
ends on April 31, 1997. Mr. Lavagetto joined Leastec Corporation
in 1980. He is a Certified Public Accountant and a member in good
standing of the American Institute of Certified Public
Accountants.
The officer noted above is not subject to an employment
contract but serves at the pleasure of the Board of Directors of
the respective corporation.
(c) All significant employees are identified in Item 10 (b) above.
<PAGE 23>
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
(d) Leastec Corporation was formed in December 1976. Since its
formation, Leastec has sponsored numerous tenancies-in-common,
direct ownership transactions, and limited partnerships involving
the leasing of computer and high technology medical equipment.
Since 1980, Leastec has sponsored and served as a general partner
of the following partnerships:
Leastec Investors No. 1
Leastec Investors No. 2
Leastec Investors No. 3
Leastec Investors No. 4
Leastec Investors No. 5
Leastec Investors No. 6
Equipment Investors of Pacific No. 1
Equipment Investors of Pacific No. 2
Equipment Investors of Pacific No. 3
Equipment Investors of Pacific No. 4
Equipment Investors of Pacific No. 5
Equipment Investors of Pacific No. 6
Leastec Associates I
Leastec Associates II
Leastec Associates III
Leastec Associates IV
Leastec Associates V
Leastec Associates VI
Leastec Partners I
Leastec Partners II
Leastec Partners III
Leastec Partners IV
Leastec Partners V
Leastec Partners VI
Leastec Partners VII
Leastec Partners VIII
Leastec Partners IX
Leastec Partners X
Leastec Partners XI
Leastec Partners XII
Leastec Partners XIII
Leastec Partners XV
Leastec Partners XVI
Leastec Systems I
Western Trailer Associates
Catscan Associates
Leastec Income Fund 1984-1
Leastec Income Fund 1985-1
Leastec Income Fund III
Leastec Income Fund IV
Leastec Income Fund V
<PAGE 24>
Item 11. EXECUTIVE COMPENSATION
The Registrant has no employees. For information relating to fees
and compensation paid to the General Partner, see Item 13.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) No person owns of record, or is known by the Registrant to
own beneficially, more than five percent (5%) of the Limited
Partner Units. As noted below, the General Partner owns 100
percent of the General Partner Units.
(b) The General Partner of the Registrant owns the equity
securities of the Registrant set forth in the following table:
(1) (2) (3) (4)
Name of Amount and Nature
Title of Beneficial of Beneficial Percent
Class Owner Ownership of Class
General
Partner's
Unit Leastec Corporation 807 Units 100.0%
Leastec Corporation has the right to acquire all of the
Limited Partners Units of which it is the beneficial owner as
specified in Rule 13d-3(d)(1) under the Exchange Act.
(c) There are no arrangements known to the Registrant, including
any pledge by any person of securities of the Registrant, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth is information relating to all compensation paid or
accrued by the Registrant to the General Partner during the fiscal
year ended December 31, 1996
(A) (B) (C)
Name of Individual Capacities in Cash
or Number in Group Which Served Compensation
Leastec Corporation General Partner $34,893
The General Partner receives all of its compensation in cash from
the Registrant. The Registrant also reimburses the General Partner
for administrative, personnel and dissolution costs incurred and
accrued by the General Partner on behalf of the Registrant. Such
expenses totaled $271,959 in 1995.
Profits are allocated first to the General Partner until the General
Partner's capital account is brought to zero; second, 1% to the
General Partner and 99% to the limited partners until the total
Partnership deficit is zero; third, to the General Partner in an
amount equal to cash distributions, and the remainder to the limited
partners on the basis of their capital account balances. Net losses
are allocated 99% to the limited partners and 1% to the General
Partner. In 1995, the net income allocated to the General Partner
amounted to $19,474.
<PAGE 25>
Substantially all equipment leased by the Registrant is initially
purchased by the Registrant from the manufacturer or independent
third parties. The Registrant does not purchase any inventory of
equipment but usually acquires equipment that is already subject to
a lease. The Registrant purchases the equipment at cost. In
addition, the Registrant's purchase price includes commissions paid
to independent brokers for originating lease transactions and
acquiring equipment.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
1. Financial Statements
Page Number
Independent Auditors' Report F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Partners' Capital F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
financial statements or notes thereto.
Exhibit Page
Number Exhibit Name Number
3 Leastec Income Fund III
Limited Partnership Agreement
(Incorporated by reference from
Exhibit A on Form S-1 filed with
the Commission on November 1, 1985
File Number 2-99435)
(b) No reports on Form 8-K have been filed during the last
quarter of the fiscal year ending December 31, 1996.
<PAGE 26>
Pursuant to the requirements of Sections 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.
LEASTEC INCOME FUND III
(Registrant)
By: LEASTEC CORPORATION
General Partner
Dated: March 30, 1997 By:
ERNEST LAVAGETTO
President
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-K and is qualified in its entirety by reference to such
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 293,433
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 293,433
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 293,433
<CURRENT-LIABILITIES> 293,433
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 293,433
<SALES> 0
<TOTAL-REVENUES> 69,345
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 436,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> (366,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (366,926)
<EPS-PRIMARY> (4.90)
<EPS-DILUTED> (4.92)
</TABLE>
