For the quarterly period ended September 30, 2003
OR
Commission File Number 0-11176
| Georgia | 61-1017240 |
| (State or other jurisdiction of | (IRS Employer Identification No.) |
| incorporation or organization) |
10172 Linn Station
Road, Louisville, Kentucky 40223
(Address of Principal Executive Offices)
(502) 426-4800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).
Yes [ ] No [X]
| Pages |
| Item 1. | Financial Statements | |||
| Balance Sheets as of September 30, 2003 and December 31, 2002 | 4 | |||
| Statement of Partners' Equity as of September 30, 2003 | 4 | |||
| Statements of Operations for the Three and Nine | ||||
| Months Ended September 30, 2003 and 2002 | 5 | |||
| Statements of Cash Flows for the Nine Months | ||||
| Ended September 30, 2003 and 2002 | 6 | |||
| Notes to Financial Statements | 7-12 | |||
| Item 2. | Management's Discussion and Analysis of Financial | |||
| Condition and Results of Operations | 13-18 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 | ||
| Item 4. | Controls and Procedures | 18 | ||
| Items 1 - 6 | 19 | |||
| Signatures | 20 | |||
| Exhibit Index | 21 |
2
Some of the statements included in this Quarterly Report on Form 10-Q, particularly those included in Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the 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. If these events do not occur, the result which we expected also may not occur, or may occur in a different manner which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our general partner’s best judgment based on known factors, but 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 described in our filings with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended December 31, 2002. Any forward-looking information provided by us pursuant to the safe harbor established by securities legislation should be evaluated in the context of these factors.
3
As of As of
September 30, December 31,
2003 2002
------------------- -------------------
(UNAUDITED)
ASSETS
Cash and equivalents $ 260,131 $ 388,449
Cash and equivalents - restricted 64,191 6,078
Accounts receivable, net 720,723 631,237
Land, buildings and amenities, net 9,158,323 9,730,665
Other assets 372,045 337,558
------------------- -------------------
TOTAL ASSETS $ 10,575,413 $ 11,093,987
=================== ===================
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable $ 6,416,185 $ 7,296,088
Accounts payable 214,616 128,023
Security deposits 139,485 157,258
Other liabilities 135,349 99,215
------------------- -------------------
TOTAL LIABILITIES 6,905,635 7,680,584
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' EQUITY 3,669,778 3,413,403
------------------- -------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 10,575,413 $ 11,093,987
=================== ===================
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 income (loss) - prior years 238,319 (2,754,526) (2,516,207)
Net income (loss) - current year 289,455 (33,081) 256,374
Cash distributions declared to date (11,349,844) (206,985) (11,556,829)
Repurchase of limited partnership interests (698,240) -- (698,240)
----------------- ------------------ ------------------
BALANCES ON SEPTEMBER 30, 2003 $ 4,079,690 $ (409,912)$ 3,669,778
================= ================== ==================
The accompanying notes to financial statements are an integral part of these statements.
4
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- -------------- -------------
REVENUES
Rental income $ 858,003 $ 889,223 $ 2,625,971 $ 2,676,778
Rental income - affiliated 73,834 73,834 221,503 221,503
Interest and other income 3,749 5,159 13,949 16,884
------------- ------------- -------------- -------------
TOTAL REVENUES 935,586 968,216 2,861,423 2,915,165
------------- ------------- -------------- -------------
EXPENSES
Operating expenses 212,024 210,328 643,017 633,550
Operating expenses - affiliated 65,243 69,097 222,514 236,322
Loss on disposal of assets 4,077 -- 4,077 1,826
Interest expense 106,064 123,597 330,794 379,237
Management fees 44,799 46,694 137,710 140,992
Real estate taxes 52,041 51,570 156,123 154,710
Professional and administrative expenses 40,530 32,315 182,542 82,403
Professional and administrative expenses -
affiliated 33,286 31,853 107,612 98,485
Depreciation and amortization 267,107 289,842 820,660 888,485
------------- ------------- -------------- -------------
TOTAL EXPENSES 825,171 855,296 2,605,049 2,616,010
------------- ------------- -------------- -------------
Net income $ 110,415 $ 112,920 $ 256,374 $ 299,155
============= ============= ============== =============
Net income allocated to the limited partners $ 121,030 $ 124,944 $ 289,455 $ 335,624
============= ============= ============== =============
Net income per limited partnership interest $ 9.63 $ 9.94 $ 23.03 $ 26.70
============= ============= ============== =============
Weighted average number of limited
partnership interests 12,570 12,570 12,570 12,570
============= ============= ============== =============
The accompanying notes to financial statements are an integral part of these statements.
5
Nine Months Ended
September 30,
----------------------------------------
2003 2002
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 256,374 $ 299,155
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 11,732 15,202
Write - off of uncollectible accounts receivable (11,837) (14,342)
Loss on disposal of assets 4,077 1,826
Depreciation and amortization 906,230 973,268
Changes in assets and liabilities:
Cash and equivalents - restricted (58,113) (48,207)
Accounts receivable (89,381) (77,304)
Other assets (135,177) (73,334)
Accounts payable 86,593 (39,993)
Security deposits (17,773) 14,831
Other liabilities 36,134 80,134
------------------- -------------------
Net cash provided by operating activities 988,859 1,131,236
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings and amenities (237,274) (305,256)
------------------- -------------------
Net cash used in investing activities (237,274) (305,256)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgages payable (879,903) (998,801)
------------------- -------------------
Net cash used in financing activities (879,903) (998,801)
------------------- -------------------
Net decrease in cash and equivalents (128,318) (172,821)
CASH AND EQUIVALENTS, beginning of period 388,449 354,992
------------------- -------------------
CASH AND EQUIVALENTS, end of period $ 260,131 $ 182,171
=================== ===================
Interest paid on a cash basis $ 330,525 $ 377,835
=================== ===================
The accompanying notes to financial statements are an integral part of these statements.
6
The unaudited financial statements included herein should be read in conjunction with NTS-Properties III’s 2002 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2003. In the opinion of our general partner, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been made to the accompanying financial statements for the three and nine months ended September 30, 2003 and 2002. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. As used in this Quarterly Report on Form 10-Q the terms “we,” “us” or “our,” as the context requires, may refer to NTS-Properties III or its interests in its properties.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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.
We own and operate three commercial properties — Peachtree Corporate Center, in Norcross, Georgia, a suburb of Atlanta, and NTS Center and Plainview Center, both in 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. 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.
Cash 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. Under an agreement with a bank, excess cash is invested in a repurchase agreement for U.S. government or agency securities each night. As of September 30, 2003, approximately $163,000 of our overnight investment was included in cash and equivalents.
7
Cash 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.
Land, buildings and amenities are stated at historical cost, 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. The aggregate cost of our properties for federal tax purposes is approximately $28,400,000.
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” specifies circumstances in which certain long-lived assets must be reviewed for impairment. If 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 September 30, 2003 did not result in an impairment loss.
Mortgages payable consist of the following:
September 30, December 31,
2003 2002
------------------- -------------------
Mortgage payable to an insurance company in monthly
installments, bearing interest at 6.89%, maturing April 10,
2015, secured by land and buildings. $ 5,416,185 $ 5,639,838
Mortgage payable to a bank in monthly installments, bearing
a variable interest rate of Prime -0.25%, due March 1, 2004,
secured by land and a building. The interest rate on September
30, 2003 was 3.75%. 1,000,000 1,656,250
------------------- -------------------
$ 6,416,185 $ 7,296,088
=================== ===================
Based on the borrowing rates available to us for mortgages with similar terms and average maturities, the fair value of long-term debt on September 30, 2003 was approximately $6,664,000.
We intend on renewing the mortgage loan coming due March 1, 2004. There can be no assurance that we will be successful in obtaining this renewal or that the rate or terms will be acceptable.
Our mortgages may be prepaid but are generally subject to a yield-maintenance premium.
8
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 nine months ended September 30, 2003 and 2002. 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.
Nine Months Ended
September 30,
-----------------------------------------
2003 2002
------------------ -------------------
Property management fees $ 137,710 $ 140,992
------------------ -------------------
Property management 141,990 129,816
Leasing 44,189 79,563
Administrative - operating 30,227 22,275
Other 6,108 4,668
------------------ -------------------
Total operating expenses - affiliated 222,514 236,322
------------------ -------------------
Professional and administrative expenses - affiliated 107,612 98,485
------------------ -------------------
Repair and maintenance fees 10,217 14,726
Leasing commissions 7,216 2,340
------------------ -------------------
Total related party transactions capitalized 17,433 17,066
------------------ -------------------
Total related party transactions $ 485,269 $ 492,865
================== ===================
During the nine months ended September 30, 2003 and 2002, we were charged $5,964 and $4,866, respectively, for property maintenance fees from an affiliate of NTS Development Company.
During the nine months ended September 30, 2003 and 2002, NTS Development Company leased 20,368 square feet in NTS Center at a rental rate of $14.50 per square foot. We received $221,503 in rental payments from NTS Development Company during the nine months ended September 30, 2003 and 2002. The lease term for NTS Development Company ends on March 31, 2004.
9
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Our compliance 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.
Litigation
On December 12, 2001, three individuals filed an action in the Superior Court of the State of California for the County of Contra Costa captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) 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 partnerships and an affiliate of our general partner. The plaintiffs allege, among other things, that the prices at which limited partnership 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 distribution of the proceeds. No amounts have been accrued as a liability for this action in our financial statements. Under an indemnification agreement with our general partner, we are responsible for the costs of defending any such action.
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle with representatives of the class of plaintiffs to settle the Buchanan action. This settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for any of the claims asserted in the Buchanan litigation and the Bohm litigation described below. As part of the proposed settlement, the general partners have agreed, among other things, to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed partnership.
On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI-01740) against the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us. On March 21, 2003, the complaint was amended to include our general partner and the general partner of a partnership that was affiliated with us but is no longer in existence. In the amended complaint, the plaintiffs purport to bring claims on behalf of a class of limited partners and derivatively on behalf of us and affiliated public partnerships based on alleged overpayments of fees, prohibited investments, improper failures to make distributions, purchases of limited partnership interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and
10
punitive damages in an unspecified amount, an accounting, the appointment of a receiver or liquidating trustee, the entry of an order of dissolution against the public partnerships, a declaratory judgment, and injunctive relief. No amounts have been accrued as a liability for this action in our financial statements. Our general partner believes that this action is without merit, and is vigorously defending it.
On October 1, 2003, in the Bohm litigation, the judge granted the defendants’ motion to extend a stay that had been previously agreed upon by the parties which expired on September 8, 2003. The stay will remain in effect only if the parties in the Buchanan litigation seek preliminary approval of a settlement of that litigation by November 19, 2003 and the final settlement of the Buchanan litigation includes releases relating to the Bohm litigation. If these two conditions are satisfied, the stay will become permanent when the Buchanan settlement is subject to a final, non-appealable order. For the nine months ended September 30, 2003, our share of the legal costs for the Buchanan and Bohm litigations was approximately $19,000, which was included in our professional and administrative expenses.
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.
Proposed Merger
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle with representatives of the class of plaintiffs to settle the action captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01- 05090). The action was originally filed in the Superior Court of the State of California for the County of Contra Costa against the general partners and several affiliated individuals and entities in December 2001. The settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for any of the claims asserted in the Buchanan litigation and the class action and derivative litigation filed in the Circuit Court of Jefferson County, Kentucky and captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI- 01740).
As part of the proposed settlement of the Buchanan and Bohm litigation, the general partners have agreed to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed partnership. The general partners would seek to list the limited partnership interests to be issued in the merger on a national securities exchange. The merger will be subject to, among other things, approval by holders of a majority of the limited partner interests in each partnership, final approval of the court in which the Buchanan litigation is pending and receipt by the general partners of an opinion regarding the fairness of the merger to the limited partners from a financial point of view. An independent appraiser has been retained
11
to appraise all of the properties owned by the existing partnerships and affiliated entities that would be owned after the merger by the new partnership. The appraisal will be used in establishing exchange values which will determine the number of interests that will be issued to each existing partnership in the merger. The interests in the newly-formed partnership will be subsequently distributed to the limited and general partners in each existing partnership as though each partnership had been liquidated. The general partners have also retained a third party to provide an opinion on the fairness of the merger to limited partners from a financial point of view. For the nine months ended September 30, 2003, our share of the legal and professional fees for the proposed merger was approximately $35,000.
Our reportable operating segments include only one segment — Commercial Real Estate Operations.
12
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.
The accompanying financial statements were prepared in conformity with accounting principles generally accepted in the United States. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, we have made our best estimates and judgements of the amounts and disclosures included in the financial statements, giving due regard to materiality.
Impairment
We review properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These circumstances include, but are not limited to, declines in cash flows, occupancy and comparable sales per square foot at the property. We would be required to recognize an impairment when a property’s estimated undiscounted cash flow is less than the carrying value of the property. To the extent an impairment has occurred, we charge to income the excess of the carrying value of the property over its estimated fair value. We may decide to sell properties that are held for use. The sales prices of these properties may differ from their carrying values.
The following table includes our selected summarized operating data for the three and nine months ended September 30, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes thereto, in Part I, Item 1 of this report.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Total revenues $ 935,586 $ 968,216 $ 2,861,423 $ 2,915,165
Operating expenses and operating
expenses - affiliated 277,267 279,425 865,531 869,872
Interest expense 106,064 123,597 330,794 379,237
Depreciation and amortization 267,107 289,842 820,660 888,485
Net income 110,415 112,920 256,374 299,155
13
Rental and other income generated by our properties for the three and nine months ended September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
NTS Center $ 264,032 $ 315,850 $ 862,604 $ 982,677
Plainview Center $ 304,927 $ 303,185 $ 924,663 $ 910,268
Peachtree Corporate Center $ 365,728 $ 348,070 $ 1,071,092 $ 1,018,922
The occupancy levels at our properties as of September 30, 2003 and 2002 were as follows:
2003 2002
------------------- -------------------
NTS Center 72% 85%
Plainview Center 66% 70%
Peachtree Corporate Center 76% 87%
The average occupancy levels at our properties for the three and nine months ended September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
2003 2002 2003 2002
------------- ------------- -------------- --------------
NTS Center 72% 85% 77% 87%
Plainview Center 68% 69% 69% 69%
Peachtree Corporate Center 84% 85% 85% 83%
We are making efforts to increase the occupancy levels at our properties. The leasing and renewal negotiations for NTS Center and Plainview Center are handled by leasing agents that are employees of NTS Development Company, in Louisville, Kentucky. 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 located in Louisville, Kentucky.
The following discussion relating to changes in our results of operations includes only those line items within our Statements of Operations for which there was a material change between the three and nine months ending September 30, 2002 and 2003.
Rental Income
Rental income decreased approximately $31,000, or 4%, for the three months ended September 30, 2003, as compared to the same period in 2002, primarily as a result of the decreased average occupancy at NTS Center. The decrease is partially offset by increased rents at Peachtree Corporate Center.
Quarter-ending occupancy percentages represent occupancy only on a specific date; therefore, the above analysis considers average occupancy percentages, which are more representative of the entire year-to-date results.
14
Interest Expense
Interest expense decreased approximately $18,000, or 14%, and $48,000, or 13%, for the three and nine months ended September 30, 2003, respectively, as compared to the same periods in 2002, as a result of additional principal payments made in 2003 which reduced the outstanding balance on our mortgage payable secured by Plainview Center.
Professional and Administrative Expenses
Professional and administrative expenses increased approximately $8,000, or 25%, and $100,000, or 122%, for the three and nine months ended September 30, 2003, respectively, as compared to the same periods in 2002, primarily as a result of costs incurred for legal and professional fees related to our proposed merger and litigation filed by limited partners. See the following discussion under the caption “Proposed Merger,” and Part II, Item 1 of this Form 10- Q.
Depreciation and Amortization
Depreciation and amortization decreased approximately $23,000, or 8%, and $68,000, or 8%, for the three and nine months ended September 30, 2003, respectively, as compared to the same periods in 2002, as a result of assets becoming fully depreciated. The decrease in depreciation and amortization expense is partially offset by assets being placed in service, in the form of tenant improvements and building improvements at NTS Center, Plainview Center and Peachtree Corporate Center and land improvements at NTS Center. 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.
The following table sets forth the cash provided by or used in operating activities, investing activities and financing activities for the nine months ended September 30, 2003 and 2002.
Cash flows provided by (used in):
Nine Months Ended
September 30,
-----------------------------------------
2003 2002
------------------ -------------------
Operating activities $ 988,859 $ 1,131,236
Investing activities (237,274) (305,256)
Financing activities (879,903) (998,801)
------------------ -------------------
Net decrease in cash and equivalents $ (128,318)$ (172,821)
================== ===================
15
Cash Flows
Net cash provided by operating activities decreased approximately $142,000 for the nine months ended September 30, 2003, as compared to the same period in 2002. The decrease was primarily driven by reduced earnings from operations before non cash items which was partially offset by the change in accounts payable.
Net cash used in investing activities decreased approximately $68,000 for the nine months ended September 30, 2003, as compared to the same period in 2002. The decrease is a result of decreased capital expenditures primarily related to tenant finish activity.
Net cash used in financing activities decreased approximately $119,000 for the nine months ended September 30, 2003, as compared to the same period in 2002. The decrease is the result of additional principal payments on a mortgage payable in 2002.
We indefinitely suspended distributions starting December 31, 1996. Cash reserves which consist of unrestricted cash as shown on our balance sheets were $260,131 and $388,449 on September 30, 2003 and December 31, 2002, respectively.
Due to the fact that no distributions were made during the nine months ended September 30, 2003 or 2002, the table which presents that portion of the distributions that represents a return of capital in accordance with accounting principles generally accepted in the United States has been omitted.
Future Liquidity
We believe the current occupancy levels are adequate to fund the operations of our properties. However, our future liquidity depends significantly on our properties’ occupancy remaining 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, our ability to make payments due under our debt agreements and to continue paying daily operational costs would be greatly impaired. In addition, we may be required to obtain financing in connection with the capital improvements and leasing costs described below.
A major tenant at NTS Center with a near lease term expiration is seeking alternatives to renewing its expiring lease with us. This tenant is currently occupying 53,435 square feet, or 46% of the total rentable square feet of the building, at an annual rate of $13.59 per square foot. The failure of this tenant to renew its lease at NTS Center would result in a loss of annual rental revenue and operating expense recoveries of approximately $726,000, or 19% of last year’s total revenues. This would significantly impair our liquidity, and could result in significant costs to refurbish the vacated space and locate new tenants. At this time, we are not certain whether the tenant intends to renew its lease as allowed by the lease agreement, or vacate its space. We do not have an estimate for the costs to locate a replacement tenant or refinish the space occupied by this tenant.
16
At the end of August 2003, a significant tenant at Peachtree Corporate Center vacated its space. This tenant occupied 19,374 square feet, or 10% of the total rentable square feet of the building, at an annual rate of $9.25 per square foot. In September 2003, a lease was negotiated with a current tenant to occupy 8,037 square feet of the vacant space. This will leave 11,337 square feet unoccupied resulting in an annual loss of approximately $105,000, or 3% of last year’s total revenues. There may be significant demands on future liquidity as a result of the remaining vacancy. Approximately $119,000 will be needed to refinish the remaining vacated space and locate new tenants.
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. Approximately $406,000 will be needed for leasing costs, especially those needed to refinish space for new tenants. As of September 30, 2003, we had not made any commitments for tenant finish improvements at Plainview Center.
As of September 30, 2003, we anticipate making certain building improvements in 2003 totaling approximately $14,000. These improvements include HVAC replacements at NTS Center, estimated to cost $6,000, and at Peachtree Corporate Center, estimated to cost $8,000.
We anticipate using cash provided by operations and cash reserves to fund a portion of the capital improvements and leasing costs described above. However, we believe that funding these expenses may also require existing financing or additional financing secured by our properties and there is no assurance that this financing will be available.
We have no other material commitments for renovations or capital improvements as of September 30, 2003.
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle with representatives of the class of plaintiffs to settle the action captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01- 05090). The action was originally filed in the Superior Court of the State of California for the County of Contra Costa against the general partners and several affiliated individuals and entities in December 2001. The settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for any of the claims asserted in the Buchanan litigation and the class action and derivative litigation filed in the Circuit Court of Jefferson County, Kentucky and captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI- 01740).
As part of the proposed settlement, the general partners have agreed to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-
17
formed partnership. The general partners would seek to list the limited partnership interests to be issued in the merger on a national securities exchange. The merger will be subject to, among other things, approval by holders of a majority of the limited partner interests in each partnership, final approval of the court in which the Buchanan litigation is pending and receipt by the general partners of an opinion regarding the fairness of the merger to the limited partners from a financial point of view. An independent appraiser has been retained to appraise all of the properties owned by the existing partnerships and affiliated entities that would be owned after the merger by the new partnership. The appraisal will be used in establishing exchange values which will determine the number of interests that will be issued to each existing partnership in the merger. The interests in the newly-formed partnership will be subsequently distributed to the limited and general partners in each existing partnership as though each partnership had been liquidated. The general partners have also retained a third party to provide an opinion on the fairness of the merger to limited partners from a financial point of view. For the nine months ended September 30, 2003, our share of the legal and professional fees for the proposed merger was approximately $35,000.
Our website address is www.ntsdevelopment.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act are available and may be accessed free of charge through the “About NTS” section of our website as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. Our website and the information contained therein or connected thereto are not incorporated into this Quarterly Report on Form 10-Q.
Our primary market risk exposure with regard to financial instruments stems from changes in interest rates. Our debt bears interest at a fixed rate with the exception of the $3,500,000 mortgage payable obtained on May 9, 2000, which had a balance of $1,000,000 as of September 30, 2003. On September 30, 2003, a hypothetical 100 basis point increase in interest rates would result in an approximate $282,000 decrease in the fair value of the debt and would increase interest expense on the variable rate mortgage by approximately $10,000 annually.
The Chief Executive Officer and Chief Financial Officer of NTS Capital Corporation, the general partner of our general partner, have concluded, based on their evaluation as of September 30, 2003, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.
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On October 1, 2003, in the litigation against our general partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI-01740) that is pending in the Circuit Court of Jefferson County, Kentucky, the judge granted the defendants’ motion to extend a stay that had been previously agreed upon by the parties which expired on September 8, 2003. The stay will remain in effect only if the parties in the litigation captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090), filed against our general partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us that is pending in the Superior Court of the State of California, seek preliminary approval of a settlement of that litigation by November 19, 2003 and the final settlement of the Buchanan litigation includes releases relating to the Bohm litigation. If these two conditions are satisfied, the stay will become permanent when the Buchanan settlement is subject to a final, non-appealable order.
Items 2 through 5 are omitted because these items are inapplicable or the answers to the items are negative.
| (a) | Exhibits |
| (3) | Amended and Restated Agreement and Certificate of Limited Partnership of NTS-Properties III. * |
| (31.1) | Certification of Chief Executive Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** |
| (31.2) | Certification of Chief Financial Officer Pursuant to SEC Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ** |
| (32.1) | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
| (32.2) | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
| (b) |
Reports on Form 8-K |
| * | Incorporated by reference to documents filed with the Securities and Exchange Commission in connection with the filing of the Registration Statements on Form S-11 on June 25, 1982 (effective October 13, 1982) under Commission File No. 2-78152. |
| ** | Attached as an exhibit to this Quarterly Report on Form 10-Q. |
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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/ Brian F. Lavin |
| Brian F. Lavin |
| President of NTS Capital Corporation |
| /s/ Gregory A. Wells |
| Gregory A. Wells |
| Chief Financial Officer of NTS Capital Corporation |
Date: November 13, 2003
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| Exhibit Number |
Description of Document |
|
| 3 |
Amended and Restated Agreement and Certificate of Limited Partnership of
NTS-Properties III. * |
|
| 31.1 |
Certification of Chief Executive Officer Pursuant to SEC Rules 13a-15(e) and
15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
** |
|
| 31.2 |
Certification of Chief Financial Officer Pursuant to SEC Rules 13a-15(e) and
15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
** |
|
| 32.1 |
Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. ** |
|
| 32.2 |
Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. ** |
|
| * |
Incorporated by reference to documents filed with the Securities and Exchange
Commission in connection with the filing of the Registration Statements on Form
S-11 on June 25, 1982 (effective October 13, 1982) under Commission File No.
2-78152. |
| ** | Attached as an exhibit to this Quarterly Report on Form 10-Q. |
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