UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-11176
NTS-PROPERTIES III
Incorporated pursuant to the Laws of the State of Georgia
Internal Revenue Service - Employer Identification No. 61-1017240
10172 Linn Station Road, Louisville, Kentucky 40223
(502) 426-4800
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 | |
TABLE OF CONTENTS
PART I
| Pages | ||||
| Item 1. | Financial Statements | |||
| Balance Sheets as of June 30, 2002 and December 31, 2001 | 3 | |||
| Statement of Partners' Equity as of June 30, 2002 | 3 | |||
| Statements of Operations for the Three Months and Six Months | ||||
| Ended June 30, 2002 and 2001 | 4 | |||
| Statements of Cash Flows for the Six Months | ||||
| Ended June 30, 2002 and 2001 | 5 | |||
| Notes to Financial Statements | 6-9 | |||
| Item 2. | Management's Discussion and Analysis of Financial | |||
| Condition and Results of Operations | 10-15 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | ||
PART II
| Item 1. | Legal Proceedings | 16 | ||
| Item 2. | Changes in Securities | 16 | ||
| Item 3. | Defaults Upon Senior Securities | 16 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 16 | ||
| Item 5. | Other Information | 16 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | ||
| Signatures | 17 |
2
NTS-PROPERTIES III
BALANCE SHEETS
As of As of
June 30, December 31,
2002 2001*
------------------- -------------------
(UNAUDITED)
ASSETS
- ------
Cash and equivalents $ 483,231 $ 354,992
Cash and equivalents - restricted 49,295 16,547
Accounts receivable, net of allowance for doubtful accounts
of $14,041 at June 30, 2002 and $0 at December 31, 2001 559,449 519,451
Land, buildings and amenities, net 10,011,489 10,481,019
Other assets 395,175 413,300
------------------- -------------------
TOTAL ASSETS $ 11,498,639 $ 11,785,309
=================== ===================
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Mortgages payable $ 7,848,913 $ 8,396,915
Accounts payable 134,458 164,580
Security deposits 143,284 141,924
Other liabilities 179,931 76,073
------------------- -------------------
TOTAL LIABILITIES 8,306,586 8,779,492
COMMITMENTS AND CONTINGENCIES (Note 9)
PARTNERS' EQUITY 3,192,053 3,005,817
------------------- -------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 11,498,639 $ 11,785,309
=================== ===================
STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Limited General
Partners Partner Total
------------------ ------------------ -------------------
PARTNERS' EQUITY/(DEFICIT)
- --------------------------
Initial equity $ 15,600,000 $ 8,039,710 $ 23,639,710
Adjustment to historical basis -- (5,455,030) (5,455,030)
------------------ ------------------ -------------------
EQUITY $ 15,600,000 $ 2,584,680 $ 18,184,680
Net loss - prior years (217,814) (2,705,979) (2,923,793)
Net income (loss) - current year 210,680 (24,445) 186,235
Cash distributions declared to date (11,349,844) (206,985) (11,556,829)
Repurchase of limited partnership Interests (698,240) -- (698,240)
------------------ ------------------ -------------------
BALANCES AT JUNE 30, 2002 $ 3,544,782 $ (352,729)$ 3,192,053
================== ================== ===================
* Reference is made to the audited financial statements in the Form 10-K as filed with the Securities and Exchange
Commission on March 29, 2002.
The accompanying notes to financial statements are an integral part of these statements.
3
NTS-PROPERTIES III
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- -------------- -------------
REVENUES
- --------
Rental income $ 876,299 $ 904,760 $ 1,787,556 $ 1,778,882
Rental income - affiliated 73,834 73,834 147,668 147,668
Interest and other income 7,533 5,432 11,725 164,567
------------- ------------- -------------- -------------
TOTAL REVENUES 957,666 984,026 1,946,949 2,091,117
------------- ------------- -------------- -------------
EXPENSES
- --------
Operating expenses 231,098 245,307 423,222 459,162
Operating expenses - affiliated 84,581 114,352 167,226 212,426
Loss on disposal of assets 1,826 -- 1,826 --
Interest expense 124,892 156,330 255,640 324,476
Management fees 45,627 53,755 94,297 99,223
Real estate taxes 51,570 54,273 103,140 108,546
Professional and administrative expenses 29,546 27,494 50,088 43,789
Professional and administrative expenses -
affiliated 32,872 32,481 66,632 62,526
Depreciation and amortization 288,966 326,150 598,643 644,351
------------- ------------- -------------- -------------
TOTAL EXPENSES 890,978 1,010,142 1,760,714 1,954,499
------------- ------------- -------------- -------------
Net income (loss) $ 66,688 $ (26,116)$ 186,235 $ 136,618
============= ============= ============== =============
Net income (loss) allocated to the limited
partners $ 79,175 $ (8,804)$ 210,680 $ 169,354
============= ============= ============== =============
Net income (loss) per limited partnership
Interest $ 6.30 $ (0.69)$ 16.76 $ 13.37
============= ============= ============== =============
Weighted average number of limited
partnership Interests 12,570 12,670 12,570 12,670
============= ============= ============== =============
The accompanying notes to financial statements are an integral part of these statements.
4
NTS-PROPERTIES III
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 186,235 $ 136,618
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 14,342 17,571
Write-off of uncollectible accounts receivable (301) (3,508)
Loss on disposal of assets 1,826 --
Depreciation and amortization 655,663 701,116
Changes in assets and liabilities:
Cash and equivalents - restricted (32,748) (66,898)
Accounts receivable (54,039) (41,343)
Other assets (49,262) (45,044)
Accounts payable (30,122) (97,921)
Security deposits 1,360 5,285
Other liabilities 103,858 123,984
------------------ ------------------
Net cash provided by operating activities 796,812 729,860
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Additions to land, buildings and amenities (120,571) (345,730)
------------------ ------------------
Net cash used in investing activities (120,571) (345,730)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from mortgages payable -- 462,945
Principal payments on mortgages payable (548,002) (188,840)
------------------ ------------------
Net cash (used in) provided by financing activities (548,002) 274,105
------------------ ------------------
Net increase in cash and equivalents 128,239 658,235
CASH AND EQUIVALENTS, beginning of period 354,992 45,164
------------------ ------------------
CASH AND EQUIVALENTS, end of period $ 483,231 $ 703,399
================== ==================
Interest paid on a cash basis $ 254,993 $ 320,714
================== ==================
The accompanying notes to financial statements are an integral part of these statements.
5
NTS-PROPERTIES III
NOTES TO FINANCIAL STATEMENTS
The unaudited financial statements included herein should be read in conjunction with NTS- Properties III's (the "Partnership") 2001 Form 10-K as filed with the Securities and Exchange Commission on March 29, 2002. In the opinion of the General Partner, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation have been made to the accompanying financial statements for the three months and six months ended June 30, 2002 and 2001. As used in this Form 10-Q the terms "we," "us" or "our," as the context requires, may refer to the Partnership or its interests in these properties.
Note 1 - Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in accordance with accounting principles generally accepted in the United States ("GAAP") 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.
Note 2 - Concentration of Credit RiskNTS-Properties III is a limited partnership which owns and operates commercial properties in Norcross, Georgia, a suburb of Atlanta, and Jeffersontown, Kentucky, a suburb of Louisville. One tenant in NTS Center occupies 46% of the office building's net rentable area. One tenant in Plainview Center occupies 49% of the office building's net rentable area.
Our financial instruments that are exposed to concentrations of credit risk consist of cash and equivalents. We maintain our cash accounts primarily with banks located in Kentucky. The total cash balances are insured by the FDIC up to $100,000 per bank account. We may at times, in certain accounts, have deposits in excess of $100,000.
Note 3 - Cash and EquivalentsCash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less. We have a cash management program which provides for the overnight investment of excess cash balances. Per an agreement with a bank, excess cash is invested in a repurchase agreement for U.S. government or agency securities on a nightly basis. As of June 30, 2002, approximately $367,300 of said investment was included in cash and cash equivalents.
Note 4 - Cash and Equivalents - RestrictedCash and equivalents - restricted represents funds which have been escrowed with a mortgage company for NTS Center's property taxes in accordance with the loan agreement.
6
Land, buildings and amenities are stated at cost as determined by the historical cost of the property to the General Partner for its interest and by the purchase price of the property to us for the limited partners' interests, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are 6-30 years for land improvements, 5- 30 years for buildings and improvements, 3-27 years for amenities and the applicable lease term for tenant improvements.
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," became effective January 1, 2002, and specifies circumstances in which certain long-lived assets must be reviewed for impairment. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset's carrying value must be written down to fair value. Application of this standard during the period ended June 30, 2002 did not result in any impairment loss.
Note 6 - Tender OfferOn May 10, 2002, ORIG, LLC, ("ORIG") an affiliate of ours, filed a tender offer with the Securities and Exchange Commission, to purchase up to 2,000 of the limited partnership Interests at a price of $300 per Interest as of the date of the tender offer. Approximately $610,000 ($600,000 to purchase 2,000 Interests plus approximately $10,000 for expenses associated with the tender offer) is required to purchase all 2,000 Interests. If more than 2,000 Interests are tendered, ORIG may choose to acquire the additional Interests on a pro rata basis. Interests acquired by ORIG will be held by it. The tender offer will expire on August 16, 2002 unless extended. We are not participating in this tender offer.
Note 7 - Mortgages PayableMortgages payable consist of the following:
June 30, December 31,
2002 2001
------------------- -------------------
Mortgage payable to an insurance company, bearing
interest at 6.89%, maturing April 10, 2015, secured by
land and buildings. $ 5,782,663 $ 5,920,665
Mortgage payable to a bank, bearing a variable interest
rate of Prime -0.25%, due March 1, 2004, secured by
land and a building. The current interest rate at June
30, 2002 is 4.50%. 2,066,250 2,476,250
------------------- -------------------
$ 7,848,913 $ 8,396,915
=================== ===================
As of June 30, 2002, the fair value of long-term debt is approximately $8,176,000, based on the borrowing rates currently available to us for mortgages with similar terms and average maturities.
7
Pursuant to an agreement with us, NTS Development Company, an affiliate of our General Partner, receives property management fees on a monthly basis. The fees are paid in an amount equal to 5% of the gross revenues from our properties. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of the costs incurred which relate to capital improvements. These repair and maintenance fees are capitalized as part of land, buildings and amenities.
We were charged the following amounts pursuant to an agreement with NTS Development Company for the six months ended June 30, 2002 and 2001. These charges include items which have been expensed as operating expenses - affiliated or professional and administrative expenses - affiliated and items which have been capitalized as other assets or as land, buildings and amenities.
Six Months Ended
June 30,
-------------------------------------------
2002 2001
------------------ -------------------
Property management fees $ 94,297 $ 99,223
------------------ -------------------
Property management 87,440 131,199
Leasing 61,936 63,061
Administrative - operating 14,850 14,970
Other 3,000 3,196
------------------ -------------------
Total operating expenses - affiliated 167,226 212,426
------------------ -------------------
Professional and administrative expenses - affiliated 66,632 62,526
------------------ -------------------
Repairs and maintenance fee 5,285 16,787
Leasing commissions -- 22,385
------------------ -------------------
Total related party transactions capitalized 5,285 39,172
------------------ -------------------
Total related party transactions $ 333,440 $ 413,347
================== ===================
During the six months ended June 30, 2002 and 2001, we were charged $3,244 and $2,662 respectively, for property maintenance fees from an affiliate of NTS Development Company.
During the six months ended June 30, 2002 and 2001, NTS Development Company leased 20,368 square feet in NTS Center at a rental rate of $14.50 per square foot. We received $147,668 in rental payments from NTS Development Company during the six months ended June 30, 2002 and 2001. The lease term for NTS Development Company ends on March 31, 2004.
8
We, as an owner of real estate, are subject to various environmental laws of federal, state and local governments. Compliance by us with existing laws has not had a material adverse effect on our financial condition or results of operations. However, we cannot predict the impact of new or changed laws or regulations on our current properties or on properties that we may acquire in the future.
On December 12, 2001, three individuals filed an action in the Superior Court of the State of California for the County of Contra Costa against our General Partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us. The action purports to bring claims on behalf of a class of limited partners based on, among other things, tender offers made by the public partnership and an affiliate of our General Partner. The plaintiffs allege, among other things, that the prices at which Interests were purchased in these tender offers were too low. The plaintiffs are seeking monetary damages and equitable relief, including an order directing the disposition of the properties owned by the public partnerships and the proceeds distributed. Our General Partner believes that this action is without merit, and is vigorously defending it. No amounts have been accrued as a liability for this action in our financial statements at June 30, 2002. Under an indemnification agreement with our General Partner, we are responsible for the costs of the defense of this action. During the six months ended June 30, 2002, our share of these legal costs was approximately $12,000, which was expensed.
We do not believe there is any other litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our financial position or results of operations except as discussed herein. However, due to the event on September 11, 2001 affecting the insurance industry, we are unable to determine at what price we will be able to renew our insurance coverage when the current policies expire in September 2002, or if the coverage available will be adequate.
Note 10 - Segment ReportingOur reportable operating segments include only one segment - Commercial Real Estate Operations.
Note 11 - Subsequent EventsOn July 12, 2002, a third party unaffiliated with us or ORIG, LLC, ("ORIG") an affiliate of ours, commenced a tender offer at a price of $310 per Interest. On July 17, 2002, ORIG amended its tender offer to increase the purchase price to $315 per interest. The total costs of the tender offer are expected to increase to approximately $640,000 ($630,000 to purchase 2,000 Interests plus approximately $10,000 for expenses associated with the tender offer).
On August 7, 2002, ORIG amended its tender offer to extend the expiration date from August 16, 2002 to September 16, 2002.
9
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Financial Statements in Item 1 and the Cautionary Statements below.
Critical Accounting PoliciesA critical accounting policy, for our business, is the assumption that our properties' occupancy will remain at a level which provides for debt payments and adequate working capital, currently and in the future. If occupancy were to fall below that level and remain at or below that level for a significant period of time, then our ability to make payments due under our debt agreements and to continue paying daily operational costs would be greatly affected. This would result in the impairment of the respective properties' assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets."
Cautionary StatementsSome of the statements included in this Item 2 may be considered "forward-looking statements," because such statements relate to matters which have not yet occurred. For example, phrases such as "we anticipate," "believe" or "expect," indicate that it is possible that the event anticipated, believed or expected may not occur. Should such event not occur, then the result which we expected also may not occur or occur in a different manner, which may be more or less favorable to us. We do not undertake any obligations to publicly release the result of any revisions to these forward- looking statements that may be made to reflect any future events or circumstances.
Any forward-looking statements included in the MD&A section, or elsewhere in this report, which reflect management's best judgment, based on factors known, involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those discussed below. Any forward-looking information provided by us pursuant to the safe harbor established by recent securities legislation should be evaluated in the context of these factors.
Our liquidity, capital resources and results of operations are subject to a number of risks and uncertainties including, but not limited to the following:
10
At Plainview Center, there has been and will likely continue to be a protracted period for the property to become fully leased again. Failure to lease the vacant space at Plainview Center may have an adverse effect on our operations and liquidity. The extent of the impact on us is unknown at this time.
Occupancy LevelsThe occupancy levels at our properties as of June 30, 2002 and 2001 were as follows:
Six Months Ended
June 30,
------------------------------------------------
2002 (1) 2001
------------------- -------------------
NTS Center (2) 85% 94%
Plainview Center (2) 68% 76%
Peachtree Corporate Center 83% 83%
The average occupancy levels at our properties during the three months and six months ended June 30, 2002 and 2001 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2002 (1) 2001 2002 (1) 2001
------------- ------------- -------------- -------------
NTS Center (2) 85% 94% 88% 93%
Plainview Center (2) 68% 74% 70% 72%
Peachtree Corporate Center (2) 83% 84% 82% 83%
11
Rental and other income generated by our properties for the three months and six months ended June 30, 2002 and 2001 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------- -------------- ------------
NTS Center $ 316,485 $ 350,036 $ 666,827 $ 691,894
Plainview Center $ 300,767 $ 308,191 $ 607,083 $ 600,010
Peachtree Corporate Center $ 339,493 $ 320,553 $ 670,851 $ 638,762
Results of Operations
If there has not been a material change in an item from June 30, 2001 to June 30, 2002, we have omitted any discussion concerning that item.
Other IncomeOther income decreased approximately $153,000, for the six months ended June 30, 2002, as a result of a one-time settlement of certain claims in our favor in 2001.
Operating ExpensesOperating expenses decreased approximately $14,000, or 6%, and $36,000, or 8%, for the three months and six months ended June 30, 2002, respectively, as compared to the same periods in 2001. The decrease is primarily due to decreased utilities (Plainview Center and NTS Center), increased utility reimbursements (Plainview Center), decreased cleaning services (Peachtree Corporate Center), decreased HVAC repairs (NTS Center and Peachtree Corporate Center), decreased travel expenses (Peachtree Corporate Center) and decreased landscaping (Peachtree Corporate Center). The decrease is partially offset by increased parking lot maintenance and outside management costs (Peachtree Corporate Center).
Operating Expenses - AffiliatedOperating expenses - affiliated decreased approximately $30,000, or 26%, and $45,000, or 21%, for the three months and six months ended June 30, 2002, respectively, as compared to the same periods in 2001. The decrease is primarily due to decreased employee costs at Peachtree Corporate Center as a result of hiring an outside management company to replace the on-site leasing agent. Operating expenses - affiliated are expenses incurred for services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services may include property management, leasing, maintenance, security and other services necessary to manage and operate our properties.
12
Interest expense decreased approximately $31,000, or 20%, and $69,000, or 21%, for the three months and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, as a result of additional principal payments made on our mortgage payable secured by Plainview Center.
Depreciation and Amortization ExpenseDepreciation and amortization expense decreased approximately $37,000, or 11%, and $46,000, or 7%, for the three months and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, as a result of assets (primarily tenant finish improvements) becoming fully depreciated. The decrease in depreciation and amortization expense is partially offset by assets being placed in service. Assets placed in service are tenant improvements and building improvements at Peachtree Corporate Center and NTS Center and land improvements at Peachtree Corporate Center. Depreciation is computed using the straight-line method over the estimated useful lives of the assets that are 6-30 years for land improvements, 5-30 years for buildings and improvements, 3-27 years for amenities and the applicable lease term for tenant improvements. The aggregate cost of our properties for federal tax purposes is approximately $28,600,000.
Consolidated Cash Flows and Financial ConditionCash flows provided by (used in):
Six Months Ended
June 30,
---------------------------------------------
2002 2001
------------------ -------------------
Operating activities $ 796,812 $ 729,860
Investing activities (120,571) (345,730)
Financing activities (548,002) 274,105
------------------ -------------------
Net increase in cash and equivalents $ 128,239 $ 658,235
================== ===================
Net cash provided by operating activities increased approximately $67,000 for the six months ended June 30, 2002, as compared to the same period in 2001. The increase was primarily driven by an increase in accounts payable.
Net cash used in investing activities decreased approximately $225,000 for the six months ended June 30, 2002, as compared to the same period in 2001. The decrease is a result of decreased capital expenditures.
Net cash used in financing activities increased approximately $822,000 for the six months ended June 30, 2002, as compared to the same period in 2001. This is the result of a draw in 2001 on a mortgage loan for renovations and tenant finish activity along with additional principal payments in 2002.
13
We indefinitely suspended distributions starting December 31, 1996, as a result of the anticipated decrease in occupancy at Plainview Center. Cash reserves, which consist of unrestricted cash as shown on our balance sheet, as of June 30, 2002 were $483,231.
Due to the fact that no distributions were made during the six months ended June 30, 2002 or 2001, the table which presents that portion of the distributions that represents a return of capital in accordance with GAAP basis has been omitted.
In the next 12 months, we expect the demand on future liquidity to increase as a result of future leasing activity driven primarily by the decreased occupancy at Plainview Center. There has been and will likely continue to be a protracted period for Plainview Center to become fully leased again and substantial funds, currently estimated to be $590,000, will likely be needed for leasing expenses; especially those needed to refinish space for new tenants.
Future liquidity will be affected by increased insurance expense. We have budgeted for an increase of approximately 25% upon renewal of our policies in September 2002, as compared to 2001.
As of June 30, 2002, we anticipate making certain building improvements during 2002 totaling approximately $260,000, which will be funded from cash from operations. These improvements include HVAC replacements, stairwell and parking lot repairs and restroom renovations at NTS Center ($120,000), window repairs at Plainview Center ($80,000) and HVAC replacements and landscaping renovations at Peachtree Corporate Center ($60,000).
The following describes the efforts being taken by us to increase the occupancy levels at our properties. At Peachtree Corporate Center in Norcross, Georgia, we have an off-site leasing agent, who makes calls to potential tenants, negotiates lease renewals with current tenants and manages local advertising with the assistance of NTS Development Company's marketing staff. The leasing and renewal negotiations for NTS Center and Plainview Center are handled by leasing agents, employees of NTS Development Company, located in Louisville, Kentucky. The leasing agents are located in the same city as both commercial properties. All advertising for the Louisville properties is coordinated by NTS Development Company's marketing staff located in Louisville, Kentucky.
Leases at all our properties provide for tenants to contribute toward the payment of increases in common area maintenance expenses, insurance, utilities and real estate taxes. These lease provisions should protect our operations from the impact of inflation and changing prices.
Potential ConsolidationOur General Partner, along with the general partners of four other public limited partnerships affiliated with us, is investigating a consolidation of us with other entities affiliated with us. In addition to these entities, the consolidation would likely involve several private partnerships and other entities affiliated with us and our General Partner. The new combined entity would own all of the properties currently owned by the public limited partnerships, and the limited partners or other owners of these entities would receive an ownership interest in the combined entity. The number of ownership interests to be received by limited partners and the other owners of the entities
14
participating in the consolidation would likely be determined based on the relative value of the assets contributed to the combined entity by each public limited partnership, reduced by any indebtedness assumed by the entity. The majority of the contributed assets would consist of real estate properties, whose relative values would be based on appraisals obtained at or near the consolidation date. The potential benefits of consolidating the entities include: reducing the administrative costs as a percentage of assets and revenues by reducing the number of public entities; diversifying limited partners' investments in real estate to include additional markets and types of properties; and creating an asset base and capital structure that may enable greater access to the capital markets. There are, however, also a number of potential adverse consequences such as, the expenses associated with a consolidation and the fact that the duration of the new entity would likely exceed our anticipated duration, and that the interests of our limited partners in the combined entity would be smaller on a percentage basis than their interests in us. Further, the new entity may adopt investment and management policies that are different from those presently used by our General Partner for us. A consolidation also requires approval of our limited partners and owners of the other proposed participants. Accordingly, there is no assurance that the consolidation will occur.
Item 3 - Quantitative and Qualitative Disclosures About Market RiskOur primary market risk exposure with regards to financial instruments is changes in interest rates. All of our debt bears interest at a fixed rate with the exception of the $3,500,000 note payable ($2,066,250 as of June 30, 2002), which we obtained on May 9, 2000. At June 30, 2002, a hypothetical 100 basis point increase in interest rates would result in an approximate $304,000 decrease in the fair value of the debt and would increase interest expense on the variable rate mortgage by approximately $21,000 annually.
15
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits:
99.1 Certification of Chief Executive Officer of the General Partner
99.2 Certification of Chief Financial Officer of the General Partner
b) Reports on Form 8-K:
Form 8-K was filed on May 29, 2002 to report in Item 4 that we have elected to change our
independent public accountant. This Form 8-K was amended on June 12, 2002.
16
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.
| NTS-PROPERTIES III | |||
|---|---|---|---|
| By: | NTS-Properties Associates, | ||
| General Partner | |||
| By: NTS Capital Corporation, | |||
| General Partner | |||
| /s/ Gregory A. Wells |
| Gregory A. Wells |
| Senior Vice President and |
| Chief Financial Officer of |
| NTS Capital Corporation |
| Date: August 14, 2002 |
17