FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-21494
WNC HOUSING TAX CREDIT FUND III, L.P.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
California 33-0463432
WNC HOUSING TAX CREDIT FUND III, L.P.
3158 Redhill Avenue, Suite 120, Costa Mesa, CA 92626
(714) 622-5565
Indicate by 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 ____
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, September 30, 1998 and December 31, 1997...................3
Statement of Operations
For the three months and nine months ended September 30, 1998 and 1997....4
Statement of Partners' Equity
For the nine months ended September 30, 1998 and 1997.....................5
Statement of Cash Flows
For the nine months ended September 30, 1998 and 1997.....................6
Notes to Financial Statements..............................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................10
Item 3: Quantitative and Qualitative Disclosures Above Market Risks.......12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................12
Signatures.................................................................13
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
BALANCE SHEETS
September 30, 1998 and December 31, 1997
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 332,818 $ 333,368
Investment in limited
partnerships 4,996,789 5,923,350
Other assets - -
--------- ---------
$ 5,329,607 $ 6,256,718
========= =========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Payable to limited partnerships $ 50,818 $ 50,818
Accrued fees and expenses due to
general partner and affiliates 1,147,337 923,399
--------- ---------
1,198,155 974,217
--------- ---------
Partners' equity (deficit):
General partner 794 12,304
Limited partners (15,000 units
issued and outstanding) 4,130,658 5,270,197
--------- ---------
Total partners' equity $ 4,131,452 5,282,501
--------- ---------
5,329,607 $ 6,256,718
========= =========
UNAUDITED
See Accompanying Notes to Financial Statements
3
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
STATEMENT OF OPERATIONS
For the Three and Nine Months Ended September 30, 1998 and 1997
1998 1997
----- ----
Three Nine Three Nine
Months Months Months Months
------ ------ ------ ------
Interest income $ 4,161 $ 10,375 $ 2,841 $ 8,994
--------- --------- --------- ---------
Operating expenses:
Amortization 11,812 35,436 11,812 35,436
Asset management fees 74,868 224,605 74,871 224,605
Legal and accounting - 5,250 1,339 8,314
Other 5,416 19,633 3,826 11,437
--------- --------- --------- ---------
Total operating expenses 92,096 284,924 91,848 279,792
--------- --------- --------- ---------
Loss from operations (87,935) (274,549) (89,007) (270,798)
Equity in loss from
limited partnerships (304,600) (876,500) (287,000) (982,000)
--------- --------- --------- ---------
Net loss $ (392,535) $ (1,151,049) $ (376,007) $ (1,252,798)
========= ========= ========= =========
Net loss allocated to:
General partner $ (3,925) (11,510) (3,760) (12,528)
========= ========= ========= =========
Limited partners $ (388,610) (1,139,539) (372,247) (1,240,270)
========= ========= ========= =========
Net loss per limited
partner units (15,000
units issued and
outstanding) $ (26) $ (76) $ (25) $ (83)
========= ========= ========= =========
UNAUDITED
See Accompanying Notes to Financial Statements
4
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
STATEMENT OF PARTNERS' EQUITY
For the Nine Months Ended September 30, 1998 and 1997
For the Nine Months Ended September 30, 1998
- --------------------------------------------
General Limited
Partner Partner Total
------- ------- -----
Equity (deficit), December 31, 1997 $ 12,304 $ 5,270,197 $ 5,282,501
Net loss for the nine months ended
September 30, 1997 (11,510) (1,139,539) (1,151,049)
--------- --------- ---------
Equity (deficit), September 30, 1998 $ 794 $ 4,130,658 $ 4,131,452
========= ========= =========
For the Nine Months Ended September 30, 1997
- --------------------------------------------
General Limited
Partner Partner Total
------- ------- -----
Equity (deficit), December 31, 1995 $ 28,170 $ 6,841,000 $ 6,869,170
Net loss for the nine months ended
September 30, 1997 (12,528) (1,240,270) (1,252,798)
--------- --------- ---------
Equity (deficit), September 30, 1997 $ 15,642 $ 5,600,730 $ 5,616,372
========= ========= =========
UNAUDITED
See Accompanying Notes to Financial Statements
5
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
STATEMENT OF CASH FLOWS For the Nine Months
Ended September 30, 1998 and 1997
1998 1997
---- ----
Cash flows used by operating activities:
Net loss $ (1,151,049) $ (1,252,798)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in loss of limited partnerships 876,500 982,000
Amortization 35,436 35,436
Accrued asset management fee 224,605 99,606
Decrease in other assets 531
Decrease in accrued expense due to
general partner and affiliates (667) (1,115)
--------- ---------
Net cash used in operating activities (15,175) (136,340)
--------- ---------
Cash flows used by investing activities:
Distribution from limited partnerships 14,625 19,031
--------- ---------
Cash flows provided by investing activities: 14,625 19,031
--------- ---------
Net decrease in cash and cash equivalents (550) (117,309)
Cash and cash equivalents, beginning of period 333,368 448,311
--------- ---------
Cash and cash equivalent, end of period $ 332,818 $ 331,002
========= =========
UNAUDITED
See Accompanying Notes to Financial Statements
6
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
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 financial statements;
accordingly, the financial statements included herein should be reviewed in
conjunction with the financial statements and related notes thereto contained in
the Partnership's Annual Report for the year ended December 31, 1997. 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 General Partner, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September 30,
1998 and the results of operations and changes in cash flows for the nine months
then ended.
Organization
- ------------
WNC Housing Tax Credit Fund III, L.P. (the "Partnership") was formed under the
California Revised Limited Partnership Act on May 10, 1991, and commenced
operations on September 30, 1992. The Partnership was formed to invest primarily
in other limited partnerships which will own and operate multi-family housing
complexes that will qualify for low income housing credits.
The general partner is WNC Tax Credit Partners, L.P. (the "General Partner"), a
California limited partnership. WNC & Associates, Inc. and Wilfred N. Cooper,
Sr. are the general partners of the General Partner. The Cooper Revocable Trust
owns 67% of the outstanding stock of WNC & Associates, Inc. John B. Lester, Jr.
is the original limited partner of the Partnership and owns, through the Lester
Family Trust, 29% of the outstanding stock of WNC & Associates, Inc.
The General Partner has a 1% interest in operating profits and losses, taxable
income and loss and in cash available for distribution from the Partnership. The
limited partners will be allocated the remaining 99% of these items in
proportion to their respective investments. After the limited partners have
received sale or refinancing proceeds equal to their capital contributions and
their preferred return (as defined in the Partnership's Agreement of Limited
Partnership) and the general partner has received a subordinated disposition fee
any additional sale or refinancing proceeds will be distributed 90% to the
limited partners (in proportion to their respective investments) and 10% to the
General Partner.
The Partnership considers all bank certificates of deposit with an original
maturity of three months or less to be cash equivalents.
7
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - INVESTMENT IN LIMITED PARTNERSHIPS
- -------------------------------------------
At September 30, 1998, the Partnership had acquired limited partnership
interests in forty-eight limited partnerships which own and operate fifty
apartment complexes. All of these have completed construction as of September
30, 1998.
The Partnership, as a limited partner, is a 99% owner and is entitled to 99% of
the operating profits and losses of the limited partnerships. Equity in losses
of limited partnerships is recognized in the financial statements until the
related investment account is reduced to a zero balance. Losses incurred after
the investment account is reduced to zero are not recognized. If the limited
partnerships report net income in future years, the Partnership will resume
applying the equity method only after its share of such net income equals the
share of net losses not recognized during the period(s) the equity method was
suspended. At September 30, 1998 four of the limited partnership investment
accounts have reached a zero balance and losses for those partnerships are not
recognized.
Following is a summary of the components of the Partnership's investment in
limited partnerships as of September 30, 1998 and December 31, 1997:
1998 1997
---- ----
Investment balance, beginning of period $ 5,923,350 $ 7,221,643
Increase in acquisition fees and costs
Equity in loss of limited partnership (876,500) (1,230,014)
Distributions (14,625) (21,031)
Amortization of capitalized acquisition
costs (35,436) (47,248)
---------- ----------
Investment balance, end of period $ 4,996,789 $ 5,923,350
========== ==========
Selected operating information from the combined financial statements of the
limited partnerships for the nine months ended September 30, 1998 and 1997 are
as follows:
1998 1997
---- ----
Total revenue $ 4,812,300 $ 4,702,600
---------- ----------
Interest expense 1,390,600 1,427,400
Depreciation 1,478,700 1,480,100
Operating expenses 2,981,500 2,848,200
---------- ----------
Total expenses 5,850,800 5,755,700
---------- ----------
Net loss $ (1,038,500) $ (1,053,100)
========== ==========
Net loss allocable to the
Partnership $ (1,028,200) $ (1,042,600)
========== ==========
Net loss recognized by the
Partnership $ (875,600) $ (982,000)
========== ==========
8
<PAGE>
WNC HOUSING TAX CREDIT FUND III, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - RELATED PARTY TRANSACTIONS
- -----------------------------------
Under the terms of its Agreement of Limited Partnership, the Partnership is
obligated to the General Partner or its affiliates for an annual management fee
equal to .5% of the invested assets (defined as the Partnership's capital
contributions plus its allocable percentage of the permanent financing) of the
limited partnerships. Fees of $224,605 were incurred for each nine months ended
September 30, 1998 and 1997.
Accrued fees and advances due to affiliates of General Partner consist of the
following at September 30, 1998 and December 31, 1997:
1998 1997
---- ----
Advances from general partner $ - $ 668
Accrued asset management fees 1,147,337 922,731
--------- -------
$ 1,147,337 $ 923,399
========= =======
NOTE 4 - CAPITAL CONTRIBUTIONS PAYABLE
- --------------------------------------
Capital contributions payable represent amounts which are due at various times
based on conditions specified in the respective limited partnership agreements.
These contributions are payable in installments, are generally due upon the
limited partnership achieving certain operating benchmarks and are generally
expected to be paid within two years of the Partnership's initial investment.
NOTE 5 - INCOME TAXES
- ---------------------
No provision for income taxes has been made as the liability for income taxes is
an obligation of the partners of the Partnership.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Liquidity and Capital Resources
- -------------------------------
The Partnership raised funds from investors through its public offering of units
of limited partnership interest ("Units") and intends to apply such funds,
including the installment payments of the limited partners' promissory notes as
received, to the acquisition of investments in partnerships, acquisition fees,
the establishment of reserves, the payment of operating expenses and the payment
of expenses of this offering.
As of September 30, 1998, the Partnership has received subscriptions for 15,000
units consisting of cash of $15,000,000. The Partnership's primary source of
capital has been the proceeds from its offering.
Overall, as reflected in its Statement of Cash Flows, the Partnership had a net
decrease in cash and cash equivalents of approximately $600 for the nine months
ended September 30, 1998. This decrease in cash was attributable to the cash
used by the Partnership's operating activities of approximately $15,200 and cash
provided by investing activities of approximately $14,600. The cash provided by
investing activities consisted entirely of the distributions from limited
partnerships. The cash provided by operating activities consisted primarily of
interest received on cash deposits and cash used consisted of payments for
operating fees and expenses. No cash was provided by financing activities during
the nine months ended September 30, 1998. All funds due from investors had been
received as of September 30, 1998. The major components of all these activities
are discussed in greater detail below.
Overall, as reflected in its Statement of Cash Flows, the Partnership had a net
decrease in cash and cash equivalents of approximately $117,000 for the nine
months ended September 30, 1997. This decrease in cash was attributable to the
cash used in the Partnership's operating activities and cash provided by
investing activities of approximately $(136,000) and $19,000, respectively. The
cash provided by investing activities consisted entirely of the distributions
from limited partnerships. The cash used by operating activities consisted
primarily of interest received on cash deposits and payments for operating fees
and expenses, including $125,000 of accrued asset management fees. No cash was
provided by financing activities during the nine months ended September 30,
1997. All funds due from investors had been received as of September 30, 1997.
The major components of all these activities are discussed in greater detail
below.
As of September 30, 1998, the Partnership had made capital contributions to
local limited partnerships in the amount of approximately $10,858,000.
The Partnership's investments will not be readily marketable and may be affected
by adverse general economic conditions which, in turn, could substantially
increase the risk of operating losses for the apartment complexes, the local
limited partnerships and the Partnership. These problems may result from a
number of factors, many of which cannot be controlled by the General Partner.
Nevertheless, the General Partner anticipates that capital raised from the sale
of the Units will be sufficient to fund the Partnership's future investment
commitments and proposed operations. The Partnership will establish working
capital reserves of at least 3% of capital contributions, an amount which is
anticipated to be sufficient to satisfy general working capital and
administrative expense requirements of the Partnership including payment of the
asset management fee as well as expenses attendant to the preparation of tax
returns and reports to the limited partners and other investor servicing
obligations of the Partnership. Liquidity would, however, be adversely affected
by unanticipated or greater than anticipated operating costs. The Partnership's
liquidity could also be affected by defaults or delays in payment of the
promissory notes, from which a portion of the working capital reserves is
10
<PAGE>
expected to be funded. To the extent that working capital reserves are
insufficient to satisfy the cash requirements of the Partnership, it is
anticipated that additional funds would be sought through bank loans or other
institutional financing. The General Partner may also apply any cash
distributions received from the local limited partnerships for such purposes or
to replenish or increase working capital reserves.
As part of its application for government assistance, each local limited
partnership must establish to the satisfaction of the agency providing the
government assistance that the local limited partnership will have sufficient
funds to complete construction or rehabilitation of its apartment complex. None
of the local limited partnerships has any material capital commitments other
than the completion of its apartment complex.
It is not expected that any of the local limited partnerships in which the
Partnership will invest will generate cash from operations sufficient to provide
distributions to the limited partners in any significant amount. Such cash from
operations, if any, would first be used to meet operating expenses of the
Partnership, including the payment of the asset management fee to the General
Partner.
Under its partnership agreement the Partnership does not have the ability to
assess its partners for additional capital contributions to provide capital if
needed by the Partnership or local limited partnerships. Accordingly, if
circumstances arise that cause the local limited partnerships to require capital
in addition to that contributed by the Partnership and any equity of the local
general partners, the only sources from which such capital needs will be able to
be satisfied (other than the limited reserves available at the Partnership
level) will be (i) third-party debt financing (which may not be available, if,
as expected, the apartment complexes owned by the local limited partnerships are
already substantially leveraged), (ii) additional equity contributions or
advances of the local general partners, (iii) other equity sources (which could
adversely affect the Partnership's interest in tax credits, cash flow and/or
proceeds of sale or refinancing of the apartment complexes and result in adverse
tax consequences to the limited partners), or (iv) the sale or disposition of
the apartment complexes (which could have the same adverse effects as discussed
in (iii) above). There can be no assurance that funds from any of such sources
would be readily available in sufficient amounts to fund the capital requirement
of the local limited partnerships in question. If such funds are not available,
the local limited partnerships would risk foreclosure on their apartment
complexes if they were unable to re-negotiate the terms of their first mortgages
and any other debt secured by the apartment complexes to the extent the capital
requirements of the local limited partnerships relate to such debt.
Results of Operations
- ---------------------
As of September 30, 1998 the Partnership had acquired 48 limited partnership
interests. Each of the 50 apartment complexes owned by such limited partnerships
receives government assistance and each of them has received a reservation for
federal low income housing credits.
Consistent with the Partnership's investment objectives, each limited
partnership is generating or is expected to generate federal low income housing
credits for a period of approximately ten years, commencing with completion of
construction or rehabilitation of its apartment complex(es), and (as discussed
below) is generating or is expected to generate losses until sale of the
apartment complex(es).
As reflected on its Statements of Operations, the Partnership has a losses of
approximately $1,151,000 and $1,253,000 for the nine months ended September 30,
1998 and 1997, respectively. The components items of revenue and expense are
discussed below.
11
<PAGE>
Revenue - Partnership revenues consisted of interest earned on cash deposits
held in financial institutions (i) as reserves, or (ii) pending investment in
limited partnerships. Interest revenue in future years will be a function of
prevailing interest rates and the amount of cash balances.
Expenses - The most significant component of operating expenses is, and is
expected to be, the asset management fee (called "Partnership management fee" in
the Statements of Operations). The asset management fee is equal to 0.5% of
invested assets in limited partnerships; accordingly, the amount to be incurred
in the future is a function of the level of such invested assets (i.e., the sum
of the Partnership's capital contributions to the limited partnerships plus the
Partnership's share of the debts related to the apartment complexes owned by
such limited partnerships). Amortization expense consists of the amortization
over a period of 30 years of the selection fee and other expenses attributable
to the acquisition of limited partnership interests.
Office expenses consists of the Partnership's administrative expenses, such as
accounting and legal fees, bank charges and investor reporting expenses.
Equity in losses from limited partnerships - The Partnership's equity in losses
from limited partnerships is equal to 99% of the aggregate net loss of the
limited partnerships. After rent-up, the limited partnerships are expected to
generate losses during each year of operations; this is so because, although
rental income is expected to exceed cash operating expenses, depreciation and
amortization deductions claimed by the limited partnerships are expected to
exceed net rental income.
Item 3: Quantitative and Qualitative Disclosures Above Market Risks
None.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
1. None.
No reports on Form 8-K were filed during the quarter ended September
30, 1998.
12
<PAGE>
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.
WNC HOUSING TAX CREDIT FUND III, L.P.
By: WNC Tax Credit Partners, L.P., General Partner
By: WNC & ASSOCIATES, INC. General Partner
By: /s/ John B. Lester, Jr.
- -----------------------------------------------------
John B. Lester, Jr. President
Date: November 12, 1998
By: /s/ Theodore M. Paul
-----------------------------------------------------
Theodore M. Paul Vice President-Finance
Date: November 12, 1998
13
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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0
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