For the fiscal year ended December 31, 2004
OR
Commission File Number 001-32389
NTS REALTY HOLDINGS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
| Delaware | 41-2111139 |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) | |
| 10172 Linn Station Road | 40223 |
| Louisville, Kentucky | (Zip Code) |
| (Address of principal executive offices) |
(502) 426-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Limited Partnership Units | American Stock Exchange |
| (Title of each class) | (Name of each exchange on which registered) |
Securities pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
The American Stock Exchange began to list the registrant's limited partnership units on December 29, 2004. Therefore, as of June 30, 2004, the aggregate market value of the registrant's limited partneship units held by non-affilaites was $0. As of March 1, 2005, there were 11,381,608 limited partnership units outstanding.
Documents Incorporated by Reference: Portions of the registrant's proxy statement for the annual meeting of limited partners to be held in 2005 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14.
TABLE OF CONTENTS
PART I
| Pages | ||||
| Item 1. | Business | 3-8 | ||
| Item 2. | Properties | 9-16 | ||
| Item 3. | Legal Proceedings | 17 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 18 |
PART II
| Item 5. | Market for Registrant's Limited Partnership Units and Related Partner Matters | 19 | ||
| Item 6. | Selected Financial Data | 20-21 | ||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 22-84 | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 85 | ||
| Item 8. | Financial Statements and Supplementary Data | 86-140 | ||
| Item 9. | Change in and Disagreements with Accountants on Accounting and Financial Disclosure | 141 | ||
| Item 9A. | Controls and Procedures | 142 |
PART III
| Item 10. | Directors and Executive Officers of the Registrant | 143 | ||
| Item 11. | Executive Compensation | 143 | ||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management | 143 | ||
| Item 13. | Certain Relationships and Related Transactions | 143 | ||
| Item 14. | Principal Accountant Fees and Services | 143 |
PART IV
| Item 15. | Exhibits and Financial Statement Schedules | 144-147 | ||
| Signatures | 148 |
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Some of the statements included in this Form 10-K, particularly those included in Part I, Items 1 and 2 – Business and Properties, and Part II, Item 7 — 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, or may not, 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 managing 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 registration statement on Form S-4 which became effective October 27, 2004. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.
Our Form 10-K for the year ended December 31, 2004 includes predecessor financial statements and information for the period from January 1 to December 27, 2004 and for the years ended December 31, 2003 and 2002. The information for the period ended December 27, 2004 is the equivalent to a full calendar year as our predecessors’ operations were substantially complete for the year 2004 as of that date and as reported herein.
NTS Realty Holdings Limited Partnership (“NTS Realty,” “we,” “us” or “our”) was organized as a limited partnership in the State of Delaware in 2003. The Partnerships were formed between 1982 and 1987 to invest in fixed portfolios of commercial and multifamily properties. Our registration statement on Form S-4 was made effective by the Securities and Exchange Commission (“SEC”) on October 27, 2004 with respect to a proposed merger of NTS-Properties III; NTS-Properties IV; NTS-Properties V, a Maryland limited partnership; NTS-Properties VI, a Maryland limited partnership; and NTS-Properties VII, Ltd. (the “Partnerships”) registered under the Securities Exchange Act of 1934, along with other real estate entities affiliated with their general partners, specifically Blankenbaker Business Center 1A and the NTS Private Group’s assets and liabilities. The merger was completed on December 28, 2004 after a majority of each Partnership’s limited partners voted for the merger. The Partnerships and Blankenbaker Business Center 1A were terminated by the merger and ceased to exist. Concurrent with the merger, ORIG, LLC, a Kentucky limited liability company (“ORIG”), affiliated with the Partnerships’ general partners, contributed substantially all of its assets and liabilities to NTS Realty, including the NTS Private Group properties. The merger was part of a court approved settlement of class action litigation involving the Partnerships. Prior to the merger and contribution, we had no operations and a limited amount of assets.
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Following the merger and contribution and as of December 31, 2004, we own thirty-two properties, comprised of: nine multifamily properties; nineteen office and business centers; three retail properties; and one ground lease. The properties are located in and around Louisville (22) and Lexington (3), Kentucky; Orlando (2) and Fort Lauderdale (3), Florida; Indianapolis (1), Indiana and Atlanta (1), Georgia. Our office and business centers aggregate approximately 1.7 million square feet. We own multifamily properties containing approximately 1,350 units and retail properties containing approximately 210,000 square feet of space, as well as one ground lease associated with a 120-space parking lot attached to one of our properties.
On December 29, 2004, the American Stock Exchange began to list our limited partnership units (the “Units”) for trading. Our Units currently are listed on the American Stock Exchange under the trading symbol “NLP.”
NTS Realty Capital, Inc. (“NTS Realty Capital”) and NTS Realty Partners, LLC serve as our general partners. Our partnership agreement vests principal management discretion in our managing general partner, NTS Realty Capital, which has the exclusive authority to oversee our business and affairs, subject only to the restrictions in our certificate of limited partnership and partnership agreement. NTS Realty Capital has a five-member board of directors, the majority of whom must be considered to be “independent directors” under the standards promulgated by the American Stock Exchange. Our limited partners have the power to elect these directors on an annual basis.
We do not have any employees. We have entered into a management agreement with NTS Development Company (“NTS Development”), an affiliate of our general partners, whereby NTS Development oversees and manages the day-to-day operations of our properties. The initial term of the management agreement is one year, provided that NTS Realty Capital is permitted to terminate the agreement on sixty days’ notice. Under this agreement, NTS Development is responsible for managing each of our properties and in return will receive, in most cases, an annual fee equal to 5% of all gross revenues generated by multifamily properties and 6% of all gross revenues generated by commercial properties. However, we will continue to pay NTS Development a fee equal to 5% of all gross revenues generated by the three properties we acquired in the merger from NTS-Properties III. NTS Development’s management fee is paid monthly. NTS Development is also reimbursed for its direct out-of-pocket expenses incurred in operating our properties, including the cost of any goods or services obtained on our behalf from unaffiliated third parties and the salaries or wages of all property management personnel, excluding the chairman, president and chief executive officer of NTS Realty Capital.
Our executive offices are located at 10172 Linn Station Road, Suite 200, Louisville, Kentucky 40223, and our phone number is (502) 426-4800.
Since our formation, our business and investment objectives have been to:
| • | generate cash flow for distribution; |
| • | obtain long-term capital gain on the sale of any properties; |
| • | make new investments in properties or joint ventures, including by, directly or indirectly, developing new properties; and |
| • | preserve and protect the limited partners' capital. |
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The board of directors of NTS Realty Capital, in the board’s sole discretion, may change these investment objectives as it deems appropriate and in our best interests. Prior to changing any of the investment objectives, the board will consider, among other factors, expectations, changing market trends, management expertise and ability and the relative risks and rewards associated with any change.
We intend to reach our business and investment objectives through our acquisition and operating strategies. Our acquisition and operating strategies are to:
| • | maintain a portfolio which is diversified by property type and to some degree by geographical location; |
| • | achieve and maintain high occupancy and increase rental rates through: (1) efficient leasing strategies, and (2) providing quality maintenance and services to tenants; |
| • | control operating expenses through operating efficiencies and economies of scale; |
| • | attract and retain high quality tenants; |
| • | invest in properties that we believe offer significant growth opportunity; and |
| • | emphasize regular repair and capital improvement programs to enhance the properties’ competitive advantages in their respective markets. |
We compete with other entities both to locate suitable properties for acquisition, to locate purchasers for our properties and to locate tenants to rent space at each of our properties. Although our business is competitive, it is not seasonal. While the markets in which we compete are highly fragmented with no dominant competitors, we face substantial competition. This competition is generally for the retention of existing tenants at lease expiration or for new tenants when vacancies occur. There are numerous other similar types of properties located in close proximity to each of our properties. We maintain the suitability and competitiveness of our properties primarily on the basis of effective rents, amenities and services provided to tenants. The amount of leasable space available in any market could have a material adverse effect on our ability to rent space and on the rents charged. Competition to acquire existing properties from institutional investors and other publicly traded real estate limited partnerships and real estate investment trusts has increased substantially in the past several years. In many of our markets, institutional investors and owners and developers of properties compete vigorously to acquire, develop and lease space. Many of these competitors have substantially more resources than us.
We believe that we have competitive advantages that will enable us to be selective with respect to additional real estate investment opportunities. Our competitive advantages include:
| • | substantial local market expertise where we own properties; |
| • | long standing relationships with tenants, real estate brokers and institutional and other owners of real estate in our markets; and |
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| • | fully integrated real estate operations that allow us to respond quickly to acquisition opportunities. |
We pay distributions if and when authorized by our managing general partner. We are required to pay distributions on a quarterly basis, commencing in the first quarter of 2005, equal to sixty-five percent (65%) of our “net cash flow from operations” as this term is defined in regulations promulgated by the Treasury Department under the Internal Revenue Code of 1986, as amended; provided that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity level taxation for federal, state or local income tax purposes, we will adjust the amount distributed to reflect our obligation to pay tax. Any distribution other than a distribution with respect to the final quarter of a calendar year shall be made no later than forty-five (45) days after the last day of such quarter based on our estimate of “net cash flow from operations” for the year. Any distribution with respect to the final quarter of a calendar year shall be made no later than ninety (90) days after the last day of such quarter based on actual “net cash flow from operations” for the year, adjusted for any excess or insufficient distributions made with respect to the first three quarters of the calendar year. For these purposes, “net cash flow from operations” means taxable income or loss, increased by:
| • | tax-exempt interest; |
| • | depreciation; |
| • | amortization; |
| • | cost recovery allowances; and |
| • | other noncash charges deducted in determining taxable income or loss, and decreased by: |
| • | principal payments on indebtedness; |
| • | property replacement or reserves actually established; |
| • | capital expenditures when made other than from reserves or from borrowings, the proceeds of which are not included in operating cash flow; and |
| • | any other cash expenditures not deducted in determining taxable income or loss. |
As noted above, “net cash flow from operations” is reduced by the amount of reserves as determined by us each quarter. NTS Realty Capital will establish these reserves for, among other things, working capital or capital improvement needs. Therefore, there is no assurance that we will have net cash flow from operations from which to pay distributions in the future. For example, our partnership agreement permits our managing general partner to reinvest sales or refinancing proceeds in new and existing properties or to create reserves to fund future capital expenditures. Because net cash flow from operations is calculated after reinvesting sales or refinancing proceeds or establishing reserves, we may not have any net cash flow from operations from which to pay distributions.
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We will consider the acquisition of additional multifamily properties, retail properties, office buildings and business centers from time to time, with our primary emphasis on multifamily and retail properties. These properties may be located anywhere within the continental United States; however, we will continue to focus on the Midwest and Southeast portions of the United States. We will evaluate all new real estate investment opportunities based on a range of factors including, but not limited to: (1) rental levels under existing leases; (2) financial strength of tenants; (3) levels of expense required to maintain operating services and routine building maintenance at competitive levels; (4) levels of capital expenditure required to maintain the capital components of the property in good working order and in conformity with building codes, health, safety and environmental standards. We also plan not to acquire any new properties at a capitalization rate less than five percent (5%). Any properties we acquire in the future would be managed and financed in the same manner as the properties that we acquired in the merger, and we will continue to enforce our policy of borrowing no more than seventy percent (70%) of the sum of: (a) the appraised value of our fully-constructed properties and (b) the appraised value of our properties in the development stage as if those properties were completed and ninety-five percent (95%) leased.
In addition to the foregoing, we may engage in transactions structured as “like kind exchanges” of property to obtain favorable tax treatment under Section 1031 of the Internal Revenue Code. If we are able to structure an exchange of properties as a “like kind exchange,” then any gain we realize from the exchange would not be recognized for federal income tax purposes. The test for determining whether exchanged properties are of “like kind” is whether the properties are of the same nature or character.
We must obtain the approval of the majority of NTS Realty Capital’s independent directors before we may enter into a contract or a transaction with either of our general partners or their respective affiliates. In addition, we are prohibited from:
| • | acquiring or leasing any properties from, or selling any properties to, either of our general partners or their respective affiliates; |
| • | leasing more than fifteen percent (15%) of any property to our general partners or their affiliates; provided further, that any lease that we enter into with our general partners or their affiliates must be on terms and conditions, and at a rental value, no less favorable to us than those which have been determined by arms’ length negotiations with an unaffiliated third party; |
| • | making any loans to our general partners or their affiliates; |
| • | acquiring any properties in exchange for Units; |
| • | paying any insurance brokerage fee to, or obtaining an insurance policy from, our general partners or their affiliates; and |
| • | commingling our funds with funds not belonging to us. |
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NTS Realty Capital, through its board of directors, will determine our distribution, investment, financing and other policies. The board reviews these policies at least annually to determine whether they are being followed and if they are in the best interests of our limited partners. The board may revise or amend these policies at any time without a vote of the limited partners.
Information about our working capital practices is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.
Each of our general partners is controlled directly or indirectly by Mr. J.D. Nichols. Mr. Nichols beneficially owns approximately 56% of our Units. Other entities controlled directly or indirectly by Mr. Nichols have made and may continue to make investments in properties similar to those that we acquired in the merger or contribution. In addition, affiliates of our general partners currently own vacant lots located adjacent to Blankenbaker Business Centers 1A and 1B and Outlets Mall. These affiliates may acquire additional properties in the future which are located adjacent to properties that we acquired in the merger or contribution.
We believe that our portfolio of properties complies in all material respects with all federal, state and local environmental laws, ordinances and regulations regarding hazardous or toxic substances. During approximately the last ten years, independent environmental consultants have conducted Phase I or similar environmental site assessments on a majority of the properties that we acquired in the merger. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments may not, however, have revealed all environmental conditions, liabilities or compliance concerns.
We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (the “SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available, free of charge, through our website, and by responding to requests addressed to investor relations department, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practical after such material is electronically filed or furnished to the SEC. Our website address is www.ntsdevelopment.com. The information contained on our website, or on other websites linked to our website, is not part of this document.
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As a result of the merger of the Partnerships with and into us and ORIG’s contribution of substantially all of its assets and liabilities, we own fee simple title to nineteen office buildings and business centers, nine multifamily properties, three retail properties and one ground lease. Set forth below is a description of each property
Office Buildings:
| • | NTS Center, which was constructed in 1977, is an office complex with approximately 116,200 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were seven tenants leasing office space aggregating approximately 86,600 square feet. NTS Center’s tenants are professional service entities, principally in real estate and grocery chain management. Two of these tenants individually lease more than 10% of NTS Center’s rentable area. NTS Center was 75% occupied as of December 31, 2004. |
| • | Plainview Center, which was constructed in 1983, is an office complex with approximately 96,100 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were nine tenants leasing office space aggregating approximately 79,600 square feet. The tenants are professional service entities, principally in healthcare and victim notification services. Two of these tenants individually lease more than 10% of Plainview Center’s net rentable area. Plainview Center was 83% occupied as of December 31, 2004. |
| • | Plainview Point Office Center Phases I and II, which were constructed in 1983, is an office center with approximately 57,300 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were six tenants leasing office space aggregating approximately 37,800 square feet. The tenants are professional service entities, including a business school and an insurance company. One of these tenants leases more than 10% of rentable area at Plainview Point Office Center Phases I and II. Plainview Point Office Center Phases I and II were 66% occupied as of December 31, 2004. |
| • | Plainview Point Office Center Phase III, which was constructed in 1987, is an office center with approximately 61,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eleven tenants leasing office space aggregating approximately 56,300 square feet. The tenants are professional service entities, principally involved in insurance claim processing, social security program management and consulting services. Three of these tenants individually lease more than 10% of Plainview Point Office Center Phase III. Plainview Point Office Center Phase III was 91% occupied as of December 31, 2004. |
| • | Anthem Office Center, which was constructed in 1995, is an office building with approximately 84,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases office space aggregating all 84,700 square feet. The tenant is a professional service entity in the insurance industry. Anthem Office Center was 100% occupied as of December 31, 2004. |
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| • | Atrium Center, which was constructed in 1984, is an office center with approximately 104,200 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eleven tenants leasing office space aggregating approximately 69,700 square feet. The tenants are professional service entities, principally involved in video and media monitoring services and educational services. Two of these tenants individually lease more than 10% of Atrium Center’s net rentable area. Atrium Center was 67% occupied as of December 31, 2004. |
| • | Springs Medical Office Center, which was constructed in 1988, is a medical office complex with approximately 97,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were nineteen tenants leasing office space aggregating approximately 87,100 square feet. The tenants are professional service entities, principally involving physicians and medical services. Three of these tenants individually lease more than 10% of Springs Medical Office Center’s net rentable area. Springs Medical Office Center was 89% occupied as of December 31, 2004. |
| • | Springs Office Center, which was constructed in 1990, is an office center with approximately 125,300 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eleven tenants leasing office space aggregating approximately 120,100 square feet. The tenants are professional service entities, principally in food service purchasing and insurance. Two of these tenants individually lease more than 10% of Springs Office Center’s net rentable area. Springs Office Center was 96% occupied as of December 31, 2004. |
| • | Sears Office Building, which was constructed in 1987, is an office building with approximately 66,900 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases office space aggregating all 66,900 square feet. The tenant is a professional service entity in the collection call center industry. Sears Office Building was 100% occupied as of December 31, 2004. |
Business Centers. The business center properties are a combination of office and warehouse space including bulk warehouse distribution facilities. The office component is generally 40% or less of the square footage, with the warehouse portion being unfinished and used for storage, distribution or light assembly. The following is a brief description of each of these business center properties:
| • | Blankenbaker Business Center 1A, which was constructed in 1988, is a business center with approximately 100,600 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, one tenant leases all 100,600 square feet. The tenant is a professional service entity in the insurance industry. Blankenbaker Business Center 1A was 100% occupied as of December 31, 2004. |
| • | Blankenbaker Business Center 1B, which was constructed in 1988, is a business center with approximately 60,000 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases all 60,000 square feet. The tenant is a professional service entity in the insurance industry. Blankenbaker Business Center 1B was 100% occupied as of December 31, 2004. |
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| • | Blankenbaker Business Center II, which was constructed in 1988, is a business center with approximately 74,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were five tenants leasing space aggregating approximately 56,600 square feet. The tenants are professional service entities, principally in pharmaceutical distribution and operations, woodworking shop and general office, electronics repairs and construction of communication towers. Four of these tenants individually lease more than 10% of Blankenbaker Business Center II’s net rentable area. Blankenbaker Business Center II was 76% occupied as of December 31, 2004. |
| • | Clarke American, which was constructed in 2000, is a business center with approximately 50,000 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, one tenant leases all 50,000 square feet. The tenant is a professional service entity in the check printing industry. Clarke American was 100% occupied as of December 31, 2004. |
| • | Commonwealth Business Center Phase I, which was constructed in 1984, is a business center with approximately 62,700 net rentable square feet in Louisville, Kentucky. As of December 31, 2004, there were eight tenants leasing space aggregating approximately 33,300 square feet. The tenants are professional service entities, including a healthcare office, insurance company and a machinery sales and monitoring company. Three of these tenants individually lease more than 10% of the net rentable area at Commonwealth Business Center Phase I. Commonwealth Business Center Phase I was 53% occupied as of December 31, 2004. |
| • | Commonwealth Business Center Phase II, which was constructed in 1985, is a business center with approximately 65,900 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were eight tenants leasing space aggregating approximately 37,200 square feet. The tenants are professional service entities, principally involved in engineering and a switching center. Two of these tenants individually lease more than 10% of Commonwealth Business Center Phase II’s net rentable area. Commonwealth Business Center Phase II was 56% occupied as of December 31, 2004. |
| • | Lakeshore Business Center Phase I, which was constructed in 1986, is a business center with approximately 103,800 net rentable square feet located in Fort Lauderdale, Florida. As of December 31, 2004, there were twenty-seven tenants leasing space aggregating approximately 68,500 square feet. The tenants are professional service entities, principally in engineering, insurance and financial services and dental equipment suppliers. None of the tenants individually lease more than 10% of the net rentable area at Lakeshore Business Center Phase I. Lakeshore Business Center Phase I was 66% occupied as of December 31, 2004. |
| • | Lakeshore Business Center Phase II, which was constructed in 1989, is a business center with approximately 97,000 net rentable square feet located in Fort Lauderdale, Florida. As of December 31, 2004, there were seventeen tenants leasing space aggregating approximately 71,300 square feet. The tenants are professional service entities, principally in medical equipment sales, financial and engineering services and technology. One of these tenants individually leases more than 10% of the net rentable area at Lakeshore Business Center Phase II. Lakeshore Business Center Phase II was 75% occupied as of December 31, 2004. |
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| • | Lakeshore Business Center Phase III, which was constructed in 2000, is a business center with approximately 38,900 net rentable square feet located in Fort Lauderdale, Florida. As of December 31, 2004, there were five tenants leasing space aggregating all 38,900 square feet. The tenants are professional service entities, principally insurance services, telecommunications, real estate development and engineering. Four of these tenants individually lease more than 10% of the net rentable area at Lakeshore Business Center Phase III. Lakeshore Business Center Phase III was 100% occupied as of December 31, 2004. |
| • | Peachtree Corporate Center, which was constructed in 1979, is a business park with approximately 191,300 net rentable square feet located in Atlanta, Georgia. As of December 31, 2004, there were fifty-three tenants leasing space aggregating approximately 171,400 square feet. The tenants are professional service entities, principally in sales-related services. None of these tenants individually lease more than 10% of Peachtree’s net rentable area. Peachtree was 90% occupied as of December 31, 2004. |
Multifamily Properties:
| • | Golf Brook Apartments, which was constructed in 1988 and 1989, is a 195-unit luxury apartment complex located on a 16.5-acre tract in Orlando, Florida. As of December 31, 2004, the property was 98% occupied. |
| • | The Park at the Willows, which was constructed in 1988, is a 48-unit luxury apartment complex located on a 2.8-acre tract in Louisville, Kentucky. As of December 31, 2004, the property was 94% occupied. |
| • | Park Place Apartments Phase I, which was constructed in 1987, is a 180-unit luxury apartment complex located on an 18-acre tract in Lexington, Kentucky. As of December 31, 2004, the property was 86% occupied. |
| • | Park Place Apartments Phase II, which was constructed in 1989, is a 132-unit luxury apartment complex located on an 11-acre tract in Lexington, Kentucky. As of December 31, 2004, the property was 88% occupied. |
| • | Park Place Apartments Phase III, which was constructed in 2000, is a 152-unit luxury apartment complex located on a 15-acre tract in Lexington, Kentucky. As of December 31, 2004, the property was 85% occupied. |
| • | Sabal Park Apartments, which was constructed in 1987, is a 162-unit luxury apartment complex located on a 13-acre tract in Orlando, Florida. As of December 31, 2004, the property was 99% occupied. |
| • | The Willows of Plainview Phase I, which was constructed in 1985, is a 118-unit luxury apartment complex in Louisville, Kentucky. As of December 31, 2004, the property was 80% occupied. |
| • | The Willows of Plainview Phase II, which was constructed in 1985, is a 144-unit luxury apartment complex in Louisville, Kentucky. As of December 31, 2004, the property was 74% occupied. |
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| • | Willow Lake Apartments, which was constructed in 1985, is a 207-unit luxury apartment complex located on an 18-acre tract in Indianapolis, Indiana. As of December 31, 2004, the property was 87% occupied. |
Retail Properties:
| • | Bed, Bath & Beyond, which was constructed in 1999, is a 35,000 square foot facility located in Louisville, Kentucky, all of which is leased to Bed, Bath & Beyond. |
| • | Outlets Mall, which was constructed in 1983, is a 162,600 square foot mall located in Louisville, Kentucky which as of December 31, 2004 was 100% occupied. The property is occupied by Garden Ridge L.P. and three subtenants. |
| • | Springs Station, which was constructed in 2001, is a retail facility with approximately 12,000 net rentable square feet located in Louisville, Kentucky. As of December 31, 2004, there were five tenants leasing space aggregating approximately 11,000 square feet. The tenants who occupy Springs Station are professional service entities whose principal businesses are occupational therapy, staffing and retail jewelry. Three of these tenants individually lease more than 10% of Springs Station’s rentable area. Springs Station was 92% occupied as of December 31, 2004. |
Ground Lease:
| • | We own the ground lease relating to a 120-space parking lot located in Louisville, Kentucky and leased to ITT Educational Services, Inc. The ITT Parking Lot is attached to Plainview Point Office Center Phases I and II. The lease expires July 30, 2009. |
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The table below sets forth the average occupancy rate for each of the past three years with respect to each of our properties.
Years Ended December 31,
-------------------------------------------------------
2004 2003 2002
----------------- --------------- ---------------
OFFICE BUILDING OCCUPANCY
NTS Center 74% 76% 87%
Plainview Center 80% 70% 70%
Plainview Point Office Center Phases I and II 73% 84% 86%
Plainview Point Office Center Phase III 74% 50% 55%
Anthem Office Center 100% 100% 100%
Atrium Center 55% 66% 80%
Springs Medical Office Center 93% 91% 96%
Springs Office Center 97% 90% 91%
Sears Office Building 100% 100% 100%
BUSINESS CENTER OCCUPANCY
Blankenbaker Business Center 1A 100% 100% 100%
Blankenbaker Business Center 1B 100% 100% 100%
Blankenbaker Business Center II 78% 90% 95%
Clarke American 100% 100% 100%
Commonwealth Business Center Phase I 82% 91% 87%
Commonwealth Business Center Phase II 60% 67% 77%
Lakeshore Business Center Phase I 71% 70% 80%
Lakeshore Business Center Phase II 77% 81% 84%
Lakeshore Business Center Phase III 91% 59% 36%
Peachtree Corporate Center 87% 84% 84%
MULTI-FAMILY OCCUPANCY
Golf Brook Apartments 96% 93% 91%
The Park at The Willows 90% 81% 83%
Park Place Apartments Phase I 83% 88% 79%
Park Place Apartments Phase II 84% 89% 82%
Park Place Apartments Phase III 90% 93% 83%
Sabal Park Apartments 96% 93% 93%
The Willows of Plainview Phase I 86% 93% 85%
The Willows of Plainview Phase II 80% 85% 85%
Willow Lake Apartments 86% 85% 88%
RETAIL OCCUPANCY
Bed, Bath & Beyond 100% 100% 100%
Outlets Mall 100% 100% 100%
Springs Station 97% 94% 62%
GROUND LEASE
ITT Parking Lot (1) N/A N/A N/A
(1) The ground lease expires July 30, 2009 and is leased by one tenant in Plainview Point Office Center Phases I and II.
14
We are not dependent upon any tenant for 10% or more of our revenues. The loss of any one tenant should not have a material adverse effect on our business or financial performance. The following table sets forth our ten largest tenants based on annualized base rent as of December 31, 2004.
Percentage of
Total Leased Annualized Base Annualized Base Lease
Tenant Square Feet Rent (1) Rent (1) Expiration
- ------ ------------- ----------------- ---------------- ------------
SHPS/Prudential Service Bureau 160,689 $1,712,843 5.48% 01/11/16
Anthem, Inc. 84,717 810,692 2.59% 08/31/05
Appriss, Inc. 53,605 919,752 2.94% 07/31/07
Food Service Purchasing Coop. 52,263 807,221 2.58% 02/28/13
Citicorp North America, Inc. 66,905 802,191 2.57% 07/15/05
Garden Ridge Corp. 162,617 731,777 2.34% 03/12/10
Kroger Company 53,435 695,489 2.23% 06/30/06
Clarke American Checks, Inc. 50,000 512,500 1.64% 08/31/10
Acordia of Kentucky 22,642 399,621 1.28% 04/18/10
Bed, Bath & Beyond 34,953 367,007 1.17% 01/31/15
| (1) | Annualized Base Rent means annual contractual rent. |
The table below reflects the outstanding indebtedness from mortgages and notes payable for our properties as of December 31, 2004. Properties that are not encumbered by mortgages or notes are not listed below. Some of our mortgages and notes bear interest in relation to the Libor Rate. As of December 31, 2004, the Libor Rate was 2.400%. The Libor Rate is a variable rate of interest that is adjusted from time to time based on interest rates set by London financial institutions.
Interest Maturity Balance on
Property Rate Date December 31, 2004
- ---------------------------------------------------- ------------------- -------------- -----------------
NTS Realty (1) Libor + 1.75% 06/28/05 $ 14,971,350
Lakeshore Business Center Phases I, II and III (2) Libor + 2.5% 01/01/08 14,000,000
NTS Realty Multifamily Properties 5.98% 01/15/15 75,000,000
Bed, Bath & Beyond (3) 9.00% 08/01/10 2,806,142
Clarke American 8.45% 11/01/15 3,101,366
Plainview Point Office Center Phase III (4) 8.375% 12/01/10 2,905,604
-----------------
$ 112,784,462
=================
| (1) | This note was replaced in March 2005 with a $30 million loan secured by Atrium Center, Blankenbaker Business Center 1A and 1B and Blankenbaker Business Center II, Springs Medical Office Center, Springs Office Center and Springs Station. The mortgage bears interest at a fixed rate of 5.07% per annum and matures March 15, 2015. |
| (2) | This note is guaranteed individually and severally by Mr. Nichols and Mr. Brian F. Lavin in the prorata amounts of 75% and 25%, respectively. |
| (3) | A balloon payment of $2,213,097 is due upon maturity. |
| (4) | A balloon payment of $2,243,300 is due upon maturity. |
Our mortgages may be prepaid but are generally subject to a yield-maintenance premium.
15
The following table sets forth for each property that we own, the property tax rate and annual property taxes.
Property Gross Amount
Tax Rate Annual Property
State Property (per $100) Taxes (1)
- ----- ----------------------------------------------------- --------------- -------------------
FL Golf Brook Apartments 1.69 $ 233,100
FL Lakeshore Business Center Phase I 2.47 185,563
FL Lakeshore Business Center Phase II 2.47 211,703
FL Lakeshore Business Center Phase III 2.47 66,356
FL Sabal Park Apartments 1.69 159,846
GA Peachtree Corporate Center 3.20 102,630
IN Willow Lake Apartments 2.66 236,614
KY Anthem Office Center 1.11 53,949
KY Atrium Center 1.11 64,487
KY Bed, Bath & Beyond 1.11 22,439
KY Blankenbaker Business Center 1A 1.11 53,786
KY Blankenbaker Business Center 1B 1.11 33,851
KY Blankenbaker Business Center II 1.11 42,353
KY Clarke American 1.11 25,952
KY Commonwealth Business Center I 1.11 46,805
KY Commonwealth Business Center II 1.11 39,414
KY ITT Parking Lot 1.11 1,613
KY NTS Center 1.11 76,512
KY Outlets Mall 1.11 52,052
KY The Park at the Willows 1.11 14,554
KY Park Place Apartments Phase I 0.97 76,472
KY Park Place Apartments Phase II 0.97 64,856
KY Park Place Apartments Phase III 0.97 70,664
KY Plainview Center 1.11 30,704
KY Plainview Point Office Center Phases I & II 1.11 19,161
KY Plainview Point Office Center Phase III 1.11 36,554
KY Sears Office Building 1.11 48,781
KY Springs Medical Office Center 1.11 79,726
KY Springs Office Center 1.11 95,414
KY Springs Station 1.11 10,141
KY The Willows of Plainview I 1.11 53,716
KY The Willows of Plainview II 1.11 58,698
-------------------
$ 2,368,466
===================
| (1) | Does not include any offset for property tax reimbursed by tenants. Property taxes in Jefferson County, Kentucky are discounted by approximately 2% if they are paid prior to the due date. Discounts for early payment in other states generally provide no discount to the gross amount of property tax. |
16
On May 6, 2004, the Superior Court of the State of California for the County of Contra Costa granted its final approval of the settlement agreement jointly filed by the general partners (the “General Partners”) of the Partnerships, along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan, et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090) on December 5, 2003. At the final hearing, any member of the class of plaintiffs was given the opportunity to object to the final approval of the settlement agreement, the entry of a final judgment dismissing with prejudice the Buchanan litigation, or an application of an award for attorneys’ fees and expenses to plaintiffs’ counsel. The Superior Court’s order provided, among other things, that: (1) the settlement agreement, and all transactions contemplated thereby, including the merger of the Partnerships into us, are fair, reasonable and adequate, and in the best interests of the class of plaintiffs; (2) the plaintiffs’ complaint and each and every cause of action and claim set forth therein is dismissed with prejudice; (3) each class member is barred from transferring, selling or otherwise disposing of (other than by operation of law) their interests until the earlier of the closing date of the merger, the termination of the settlement or June 30, 2004; and (4) each class member who requested to be excluded from the settlement released their claims in the Bohm litigation.
On June 11, 2004, Joseph Bohm and David Duval, class members who objected to the settlement agreement but whose objections were overruled by the Superior Court (the “Appellants”), filed an appeal in the Court of Appeals of the State of California, First Appellate District. The Appellants filed their opening appellate brief on October 22, 2004. The General Partners and the Partnerships, as well as the class representatives, filed their respective responses on February 14, 2005, and Appellants filed their reply. The appellate court is in the process of scheduling oral arguments on this matter.
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 certain of the General Partners and several individuals and entities affiliated with us. The complaint was amended to include the general partner of NTS-Properties III and the general partner of NTS-Properties Plus Ltd., which 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 the Partnerships based on alleged overpayment of fees, prohibited investments, improper failures to make distributions, purchases of limited partnerships interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and 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 Partnerships, a declaratory judgment and injunctive relief. No amounts have been accrued for the settlement of this action in our financial statements. The General Partners and their legal counsel believe that this action is without merit and are vigorously defending it.
On March 2, 2004, the General Partners filed a motion to dismiss the Bohm litigation. After the motion to dismiss was fully briefed, the settlement agreement in the Buchanan litigation received final court approval. The Circuit Court of Jefferson County, Kentucky, instructed the plaintiffs in the Bohm litigation to file an amended complaint in light of the approved settlement of the Buchanan litigation. The plaintiffs in the Bohm litigation filed a corrected second amended complaint on August 11, 2004. The General Partners, along with all defendants, filed a motion to strike the corrected second amended complaint. On February 9, 2005, the Circuit Court instructed the defendants to file a responsive pleading only as to direct claims asserted by the individual plaintiffs. On March 9, 2005, the General Partners, along with all of the defendants, filed: (1) a motion to dismiss and (2) a joint motion to dismiss the “corrected” second amended complaint. A hearing on these motions likely will occur during the second or third quarter of 2005. The General Partners believe that the claims asserted in the corrected second amended complaint have no merit.
17
From October 27, 2004, through December 27, 2004, the general partners of the Partnerships solicited the vote of their respective limited partners to approve the merger of the Partnerships and us. In addition, the general partners of NTS-Properties III and NTS-Properties IV solicited the vote of their respective limited partners to approve the amendment of each such Partnership’s limited partnership agreement. These amendments were necessary to permit the merger to occur. Each of the foregoing solicitations was approved by the requisite number of limited partnership units of the applicable Partnerships. Set forth below are the results of each solicitation.
Interests % of Interests Interests Voted % of Interests
Partnership Voted For Voted For Against Voted Against
- ----------------------- ------------------ ------------------- ------------------ -------------------
NTS-Properties III 9,026 71.81% 805 6.40%
NTS-Properties IV 17,038 70.67% 915 3.80%
NTS-Properties V 21,579 70.70% 1,457 4.77%
NTS-Properties VI 27,003 69.44% 910 2.34%
NTS Properties VII 367,298 66.51% 10,195 1.85%
Interests % of Interests Interests Voted % of Interests
Partnership Voted For Voted For Against Voted Against
- ----------------------- ------------------ ------------------- ------------------ -------------------
NTS-Properties III 9,026 71.8% 805 6.40%
Interests % of Interests Interests Voted % of Interests
Partnership Voted For Voted For Against Voted Against
- ----------------------- ------------------ ------------------- ------------------ -------------------
NTS-Properties IV 17,013 70.57% 915 3.80%
18
Beginning December 29, 2004, our units were listed for trading on the American Stock Exchange (the “Exchange”) under the symbol NLP. The approximate number of record holders of our units at December 31, 2004 was 5,839.
High and low unit prices on the Exchange for the period December 29, 2004 through December 31, 2004 were $5.50 to $5.00. No dividends were declared or paid in 2004.
We have a policy of paying regular cash dividends, although there is no assurance as to the payment of future dividends because they depend on future earnings, capital requirements and financial condition. In addition, the payment of dividends is subject to the restrictions described in Part II, Item 8, Note 2 – Section J, to the financial statements and discussed in Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
19
The following table sets forth selected historical combined condensed financial and operating data as if NTS-Properties III, NTS-Properties IV, NTS-Properties V, NTS-Properties VI, NTS-Properties VII, Ltd. (the “Partnerships”) and NTS Private Group were combined on a historical basis. This historical combined presentation reflects adjustments to the actual historical data to: 1) include a previously unconsolidated joint venture (Blankenbaker Business Center 1A); 2) eliminate the equity investment and minority interests in wholly combined joint ventures in the historical financial information of the applicable partnership; and 3) include any debt used by ORIG and its related interest cost to acquire interests in the Partnerships which was assumed by NTS Realty in the merger.
We have derived the combined condensed statement of operations and balance sheet data as of and for the year ended December 31, 2000 with respect to the Partnerships from the audited financial statements of said Partnerships and with respect to the NTS Private Group from its unaudited combined financial statements. We have derived the combined condensed statement of operations and balance sheet data as of and for the period from January 1, 2004 to December 27, 2004 and for the years ended December 31, 2003, 2002 and 2001 from the audited financial statements of the Partnerships and the NTS Private Group. We have derived the combined condensed statement of operations data consisting of interest expense relating to ORIG’s debt from the unaudited financial statements of ORIG for each of the five years ended December 31, 2004. In the opinion of management, our unaudited financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial condition and the results of operations as of such date and for such periods under U.S. generally accepted accounting principles.
20
Period Ended
December 27, Year Ended December 31,
---------------- -----------------------------------------------------------
2004 2003 2002 2001 2000
---------------- -------------- -------------- -------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
STATEMENT OF OPERATIONS DATA
Rental income $ 31,245,985 $ 31,762,268 $ 32,014,147 $ 32,414,553 $ 30,814,831
Tenant reimbursements 2,384,764 2,371,880 2,374,347 2,330,607 2,170,390
---------------- -------------- -------------- -------------- -------------
TOTAL REVENUES 33,630,749 34,134,148 34,388,494 34,745,160 32,985,221
Operating expenses and operating
expenses - affiliated 12,523,948 11,409,356 11,804,936 12,202,657 11,078,609
Management fees 1,829,000 1,854,917 1,876,685 1,900,161 1,831,860
Real estate taxes 1,993,251 2,422,711 2,267,523 2,332,384 2,214,205
Professional and administrative and
professional and administrative
- affiliated 4,816,931 3,517,787 1,839,931 1,564,025 1,618,543
Depreciation and amortization 8,239,203 8,006,076 8,370,527 8,318,800 7,507,502
---------------- -------------- -------------- -------------- -------------
TOTAL OPERATING EXPENSES 29,402,333 27,210,847 26,159,602 26,318,027 24,250,719
OPERATING INCOME 4,228,416 6,923,301 8,228,892 8,427,133 8,734,502
Interest and other income and
interest and other
income - affiliated 1,608,418 364,683 299,326 563,354 1,118,519
Interest expense and interest
expense - affiliated (13,408,912) (8,185,284) (8,763,601) (9,274,001) (9,283,010)
Loss on disposal of assets (74,452) (303,906) (132,478) (178,522) (1,061,224)
Settlement charge (2,896,259) - - - -
---------------- -------------- -------------- -------------- -------------
NET LOSS $ (10,542,789) $ (1,201,206) $ (367,861) $ (462,036) $ (491,213)
================ ============== ============== ============== =============
BALANCE SHEET DATA (end of period)
Land, buildings and amenities, net N/A $ 120,994,416 $125,902,043 $ 132,277,155 $ 137,888,786
Total assets N/A 129,831,524 141,020,277 147,246,636 151,960,898
Mortgages and notes payable N/A 109,258,373 122,391,250 123,937,185 123,993,289
21
This section provides the Historical Combined Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as if the Partnerships, ORIG and the NTS Private Group were combined on a historical basis. See Item 6 — Selected Financial Data for a description of certain assumptions made in the combined presentation.
The following discussion should be read in conjunction with the historical and proforma financial statements appearing in Part II – Item 8. This discussion is based primarily on our statements of operations and cash flow information for the years ended December 31, 2004, 2003 and 2002 as if it were combined with our predecessors.
General
A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.
Impairment and Valuation
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 this 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. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on among others, the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.
22
The merger was accounted for using the purchase method of accounting in accordance with SFAS No. 141 “Business Combinations.” NTS Realty was treated as the purchasing entity. The portion of each partnership’s assets and liabilities acquired from unaffiliated third parties was adjusted to reflect its fair market value. That portion owned by affiliates of the general partners of the Partnerships was reflected at historical cost. The assets and liabilities contributed by NTS Private Group were adjusted to reflect their fair market value, except for that portion owned by Mr. Nichols which was reflected at historical cost due to his common control over the contributing entities.
In accordance with SFAS No. 141, we have allocated the purchase price of each acquired investment property among land, building and improvements, other intangibles, including acquired above market leases, acquired below market leases and acquired in place lease origination cost which is the market cost avoidance of executing the acquired leases. Allocation of the purchase price is an area that requires complex judgments and significant estimates. We used the information contained in a third party appraisal as the primary basis for allocating the purchase price between land and buildings. A pro rata portion of the purchase price was allocated to the value of avoiding a lease-up period for acquired in-place leases. The value of in-place leases is amortized to expense over the remaining initial term of the respective leases. A portion of the purchase price was allocated to the estimated lease origination cost based on estimated lease execution costs for similar leases and considered various factors including geographic location and size of leased space. We then evaluated acquired leases based upon current market rates at the acquisition date and various other factors including geographic location, size and the location of leased space within the property, tenant profile and the credit risk of the tenant in determining whether the acquired lease is above or below market. After acquired leases were determined to be at, above or below market, we allocated a pro rata portion of the purchase price to any acquired above or below market lease based upon the present value of the difference between the contractual lease rate and the estimated market rate. We also consider an allocation of purchase price to in-place leases that have a customer relationship intangible value. The characteristics we consider in allocating these values include the nature and extent of existing business relationships with the tenant, growth prospects for developing new business with the tenant and the tenant’s credit quality and expectations of lease renewals. We currently do not have any tenants with whom we have developed a relationship that we believe has any current intangible value.
Recognition of Rental Income
Under GAAP, we are required to recognize rental income based on the effective monthly rent for each lease. The effective monthly rent is equal to the average monthly rent during the term of the lease, not the stated rent for any particular month. The process, known as “straight lining” or “stepping” rent generally has the effect of increasing rental revenues during the early phases of a lease and decreasing rental revenues in the latter phases of a lease. Due to the impact of “straight lining,” on a historical combining basis, rental income exceeded the cash collected for rent by approximately $100,000, $323,000 and $307,000, for the years ended December 31, 2004, 2003 and 2002, respectively. If rental income calculated on a straight line basis exceeds the cash rent due under the lease, the difference is recorded as an increase in deferred rent receivable and included as a component of accounts receivable on the relevant balance sheet. If the cash rent due under the lease exceeds rental income calculated on a straight line basis, the difference is recorded as a decrease in deferred rent receivable and is recorded as a decrease of accounts receivable on the relevant balance sheet. We defer recognition of contingent rental income, such as percentage or excess rent, until the specified target that triggers the contingent rental income is achieved. We periodically review the collectability of outstanding receivables. Allowances are generally taken for tenants with outstanding balances due for a period greater than ninety days and tenants with outstanding balances due for a period less than ninety days but that we believe are potentially uncollectible.
23
Recognition of Lease Termination Income
We recognize lease termination income upon receipt of the income. We accrue lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.
Cost Capitalization and Depreciation Policies
We review all expenditures and capitalize any item exceeding $1,000 deemed to be an upgrade or a tenant improvement with an expected useful life greater than one year. Land, buildings and amenities are stated at cost. Depreciation expense is computed using the straight line method over the estimated useful lives of the assets. Buildings and improvements have estimated useful lives between 5-40 years, land improvements have estimated useful lives between 5-30 years, and amenities have estimated useful lives between 3-30 years. Acquired above and below market leases are amortized on a straight line basis over the life of the related leases as an adjustment to rental income. Acquired in place lease origination cost is amortized over the life of the lease as a component of amortization expense.
Our most liquid asset is our cash and cash equivalents, which consist of cash and short term investments, but do not include any restricted cash. Operating income generated by the properties will be the primary source from which we generate cash. Other sources of cash include the proceeds from mortgage loans and notes payable. Our main uses of cash will relate to capital expenditures, required payments of mortgages and notes payable, distributions and property taxes.
Years Ended December 31,
--------------------------------------------------------
2004 2003 2002
----------------- ----------------- ------------------
Operating activities $ 7,882,465 $ 8,775,624 $ 8,179,298
Investing activities (2,129,478) 2,393,950 (2,074,162)
Financing activities (4,516,844) (12,381,984) (6,024,812)
----------------- ----------------- ------------------
Net increase (decrease) in cash and equivalents $ 1,236,143 $ (1,212,410) $ 80,324
================= ================= ==================
Cash Flow from Operating Activities
Net cash provided by operating activities decreased from approximately $8.8 million for the year ended December 31, 2003 to approximately $7.9 million for the year ended December 31, 2004. The decrease is primarily due to reduced results of operations and to the change in accounts payable. As a result of the merger, we were able to reimburse NTS Development Company, an affiliate of ours, for deferred fees and expenses. The change in accounts payable was also the result of decreased payables related to litigation filed by limited partners and settlement directed merger costs.
Net cash provided by operating activities increased from approximately $8.2 million for the year ended December 31, 2002 to approximately $8.8 million for the year ended December 31, 2003. The increase was primarily due to an increase in accounts payable related to our ongoing litigation filed by limited partners and settlement directed merger costs.
24
Cash Flow from Investing Activities
Net cash flow used in investing activities was approximately $2.1 million for the year ended December 31, 2004. For the year ended December 31, 2003, net cash flow provided by investing activities was approximately $2.4 million. The change from net cash flow provided in 2003 to net cash flow used in 2004 was primarily the result of cash payments in 2003 from NTS Private Group’s affiliates of approximately $6.1 million for notes receivable related to inter-company borrowings (no similar payments received in 2004), partially offset by a decrease of approximately $1.3 million in additions to land, buildings and amenities in 2004 as compared to 2003.
Net cash flow from investing activities was approximately $2.4 million for the year ended December 31, 2003. For the year ended December 31, 2002, we used approximately $2.1 million in net cash for investing activities. The change was primarily due to cash payments from NTS Private Group’s affiliates of approximately $6.1 million for notes receivable related to inter-company borrowings, which was partially offset by increased additions to land, buildings and amenities.
Cash Flow from Financing Activities
For the years ended December 31, 2004 and 2003, we used approximately $4.5 millions and $12.4 million, respectively in net cash for financing activities. The change was primarily the result of capital funding made as the result of the merger and cash payments made to NTS Private Group’s affiliates in 2003 of approximately $6.7 million for notes payable related to inter-company borrowings (no similar payments made in 2004), partially offset by a decrease of approximately $2.3 million in principal payments on mortgages and notes payable in 2004 as compared to 2003.
Net cash used in financing activities increased from approximately $6.0 million for the year ended December 31, 2002 to approximately $12.4 million for the year ended December 31, 2003. The increase in net cash used was primarily due to cash payments to NTS Private Group’s affiliates of approximately $6.7 million for notes payable related to inter-company borrowings and lower proceeds from mortgages and notes payable.
Future Liquidity
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 the next twelve months, we intend to operate the properties in a similar manner to their operation in recent years. Cash reserves which consist of unrestricted cash as shown on our balance sheet was approximately $2,574,000 on December 31, 2004. As part of the merger, we refinanced approximately $94.0 million of debt with approximately $104.0 million of new debt. The refinancing, among other things, lowered the average interest rate on the debt from approximately 6.8% to 6.0% and changed the amortization schedules to thirty years. The refinancing of this debt allowed us to generate cash flow to pay capital expenditures, principal and interest expenses from mortgages and notes payable, deferred fees and expenses to NTS Development Company. Subject to our Distribution Policy, we anticipate making quarterly distributions to our limited partners.
25
We expect to incur capital expenditures of approximately $11.0 million during the next twelve months primarily for roof replacements and tenant origination costs necessary to continue leasing our properties. This discussion of future liquidity along with the table of contractual obligations and commercial commitments that follows, details our material commitments.
This section describes our results of operations for the years ended December 31, 2004, 2003 and 2002 as if it were combined with our predecessors’ operations without adjustment. As of December 31, 2004, we owned nineteen office and business centers, nine multifamily properties, three retail properties and one ground lease. We generate substantially all of our operating income from property operations.
Merger/Settlement Charge
NTS Realty was formed as part of a class action settlement where its affiliate and limited partner ORIG has agreed to admit a “qualified settlement trust” as a special member of ORIG. This special member interest is being created for the benefit of the class members in the litigation who are former limited partners who sold their limited partnership interests to ORIG, its affiliates or the Partnerships either as part of tender offers, other repurchase programs or otherwise. Under the terms of ORIG’s operating agreement, all of the economic and other rights associated with up to 620,000 Units owned by ORIG will be designated for the benefit of the qualified settlement trust. ORIG will own the Units, but all of the rights associated with the Units will inure to the qualified settlement trust. Plaintiffs’ counsel, or his designee, will have the right, acting as a representative of these former limited partners, to cause ORIG to vote these designated Units pursuant to his direction. The amount of Units was determined based on the $6.2 million non-cash amount of the $6.85 million settlement amount agreed upon by the general partners and plaintiffs’ counsel. Therefore, if each Unit is valued at $10.00, then the economic and other rights associated with 620,000 Units will be needed to satisfy the settlement amount. The final amount of the settlement, however, is based on the amount of valid claims filed by the former limited partners in the class of plaintiffs. If claims are not made for the full $6.2 million settlement amount, ORIG will designate the economic and other rights to fewer Units for the benefit of the qualified settlement trust to satisfy the claims. We refer to these designated Units as the “Class Units.” Under the terms of the settlement agreement governing the qualified settlement trust, Mr. Nichols, his spouse and Mr. Lavin are jointly obligated, for a period of two years, to repurchase from the qualified settlement trust, using 75% of the distributions that ORIG receives in respect of the Units owned by ORIG which otherwise would have gone to Mr. Nichols, his spouse or Mr. Lavin, the economic and other rights associated with the number of Class Units calculated under the formula described below. Each payment will result in the redesignation of rights associated with the number of Class Units equal to the amount of the distribution divided by 115% of the “fair market value” of the Units. As a result of each payment, the number of Class Units designated for the benefit of the qualified settlement trust will decrease until the economic and other rights associated with all of the Class Units are ultimately redesignated for the benefit of Mr. Nichols, his spouse, and/or Mr. Lavin within two years of when we begin making distributions. If any Class Units remain at the end of this two-year period, Mr. Nichols, his spouse and Mr. Lavin must make a final payment to the qualified settlement trust that is sufficient to redesignate any remaining Class Units. For these purposes, fair market value will be equal to the average closing price of the Units on the American Stock Exchange for the thirty-day period prior to the date of the redesignation. Our Statement of Operations includes a non-cash charge for our estimate related to the settlement with a corresponding credit to Partners’ Equity immediately following the completion of the merger. The non-cash charge was approximately $2.9 million. Our earnings were negatively impacted by this non-cash charge. However, there was no effect on our future liquidity because Mr. Nichols, his spouse and Mr. Lavin must make the payments to the qualified settlement trust to redesignate the Class Units as set forth above.
26
Results of Operations — Year Ended December 31, 2004, as Compared to December 31, 2003, as Compared to December 31, 2002
On a historical combined basis, our net loss for the year ended December 31, 2004 was approximately $10,325,000 as compared to $1,201,000 for the year ended December 31, 2003 and $368,000 for the year ended December 31, 2002. Our net loss increased during the years ended December 31, 2004 and 2003 primarily because of the effects of continuing legal and professional expenses related to the merger and the class action litigation. Rental income remained relatively stable between 2003 and 2004 and between 2002 and 2003.
Year Ended December 31, 2004
(Unaudited)
--------------------------------------------------------------------------------
Land Retail Commercial Multifamily Non Segment Total
---------- ----------- -------------- --------------- ------------- ------------
Total revenues $ 45,087 $ 1,358,242 $ 18,428,825 $ 13,798,595 $ - $33,630,749
Operating expenses and
operating expenses-affiliated 1,133 233,261 6,027,827 6,261,727 - 12,523,948
Depreciation and amortization 5,087 315,343 4,588,057 3,207,783 122,933 8,239,203
Total interest expense - 423,166 7,965,089 3,954,071 1,066,586 13,408,912
Net income (loss) 3,293 240,684 (2,505,322) (1,058,413) (7,005,331) (10,325,089)
Year Ended December 31, 2003
(Unaudited)
--------------------------------------------------------------------------------
Land Retail Commercial Multifamily Non Segment Total
---------- ----------- -------------- --------------- ------------- ------------
Total revenues $ 53,537 $ 1,370,517 $ 18,373,809 $ 14,336,285 $ - $34,134,148
Operating expenses and
operating expenses-affiliated 2,261 92,024 5,546,958 5,768,113 - 11,409,356
Depreciation and amortization 5,087 293,497 4,423,417 3,138,276 145,799 8,006,076
Total interest expense 238 451,724 3,787,261 1,608,489 2,337,572 8,185,284
Net income (loss) 22,070 409,606 2,234,981 1,834,158 (5,702,021) (1,201,206)
Year Ended December 31, 2002
(Unaudited)
--------------------------------------------------------------------------------
Land Retail Commercial Multifamily Non Segment Total
---------- ----------- -------------- --------------- ------------- ------------
Total revenues $ 216,344 $ 1,245,555 $ 19,136,768 $ 13,789,827 $ - $34,388,494
Operating expenses and
operating expenses-affiliated 17,953 94,981 5,773,897 5,922,105 (4,000) 11,804,936
Depreciation and amortization 5,087 269,271 4,515,119 3,435,251 145,799 8,370,527
Total interest expense 224 501,406 4,251,936 1,629,166 2,380,869 8,763,601
Net income (loss) 237,138 299,519 2,501,054 936,845 (4,342,417) (367,861)
Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the years ended December 31, 2004 and 2003 were approximately $33,631,000 and $34,134,000, respectively. The decrease of approximately $503,000, or 1%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Rental income and tenant reimbursements for the years ended December 31, 2003 and 2002 were approximately $34,134,000 and $34,388,000, respectively. The decrease of approximately $254,000, or 1%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
27
Operating Expenses and Operating Expenses – Affiliated
Operating expenses and operating expenses — affiliated for the years ended December 31, 2004 and 2003 were approximately $12,524,000 and $11,409,000, respectively. The increase of approximately $1,115,000, or 10%, was primarily due to 1) increased repairs and maintenance expenses, tax consulting fees and insurance expense at the multifamily properties, 2) increased repairs and maintenance expenses and bad debt expense at the commercial properties, 3) increased bad debt expense for the retail properties mainly due to a tenant (at Outlets Mall) declaring bankruptcy during February 2004 and 4) increased personnel costs at the commercial properties, multifamily properties and the retail properties. The increase is partially offset by decreased bad debt expense at the multifamily properties and decreased non-recoverable expenses at the commercial properties.
Operating expenses and operating expenses — affiliated for the years ended December 31, 2003 and 2002 were approximately $11,409,000 and $11,805,000, respectively. The decrease of approximately $396,000, or 3%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses — affiliated are for the services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Real Estate Taxes
Real estate taxes for the years ended December 31, 2004, 2003 and 2002 were approximately $1,993,000, $2,423,000 and $2,268,000, respectively. The decrease of approximately $430,000, or 18%, in 2004 was primarily due to decreased tax assessments by the local taxing authority for one of the multifamily properties (Willow Lake Apartments). We received notice of increased tax assessments in 2003 and retained a consultant to negotiate a reduction of the assessments. During the ensuing time period, the general partners of the Partnerships decided to accrue property tax expense according to the assessed rate and not at the anticipated reduced rate. During the first and third quarters of 2004, the general partners of the Partnerships received notices of the reduction of the assessments and were able to adjust the periodic expense accordingly. The general partners of the Partnerships did not record a gain contingency for any property tax over-payments refunded in 2004. The increase of approximately $155,000, or 7%, in 2003 was primarily due to the increased tax assessment for Willow Lake Apartments received in 2003.
Professional and Administrative Expenses and Professional and Administrative Expenses – Affiliated
Professional and administrative expenses and professional and administrative expenses — affiliated for the years ended December 31, 2004 and 2003 were approximately $4,817,000 and $3,518,000, respectively. The increase of approximately $1,299,000, or 37%, was primarily the result of increased legal and professional fees related to the merger and to class action litigation. Professional and administrative expenses for the year ended December 31, 2004 included approximately $2,156,000 and $723,000 of merger and litigation expenses, respectively. Professional and administrative expenses for the year ended December 31, 2003 included approximately $757,000 and $704,000 of merger and litigation expenses, respectively.
28
Professional and administrative expenses and professional and administrative expenses — affiliated for the years ended December 31, 2003 and 2002 were approximately $3,518,000 and $1,840,000, respectively. The increase of approximately $1,678,000, or 91%, was primarily the result of increased legal and professional fees related to the class action litigation and the merger. Professional and administrative expenses for the year ended December 31, 2003 included approximately $757,000 and $704,000 of merger and litigation expenses, respectively. Professional and administrative expenses for the year ended December 31, 2002 included approximately $152,000 and $238,000 of merger and litigation expenses, respectively.
Professional and administrative expenses — affiliated are for the services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Professional and administrative expenses — affiliated consisted of the following:
Years Ended December 31,
-----------------------------------------------------------
2004 2003 2002
------------------ ----------------- -----------------
Finance $ 298,000 $ 246,000 $ 235,000
Accounting 485,000 415,000 328,000
Investor Relations 153,000 156,000 179,000
Human Resources 73,000 74,000 70,000
Overhead 102,000 112,000 142,000
------------------ ----------------- -----------------
Total $ 1,111,000 $ 1,003,000 $ 954,000
================== ================= =================
Depreciation and Amortization
Depreciation and amortization expenses for the years ended December 31, 2004, 2003 and 2002 were approximately $8,239,000, $8,006,000 and $8,371,000, respectively. The increase of approximately $233,000, or 3%, in 2004 and the decrease of approximately $365,000, or 4%, in 2003 were not significant and are not indicative of any known trend or uncertainty. There were no material offsetting changes.
Interest and Other Income
Interest and other income for the years ended December 31, 2004 and 2003 were approximately $1,608,000 and $365,000, respectively. The increase of approximately $1,243,000 was primarily the result of a $1,500,000 settlement payment received from NTS Development Company in 2004 in relation to the litigation settlement.
Interest and other income for the years ended December 31, 2003 and 2002 were approximately $365,000 and $299,000, respectively. The increase of approximately $66,000, or 22%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
29
Interest Expense
Interest expense for the years ended December 31, 2004 and 2003 were approximately $13,409,000 and $7,518,000 respectively. The increase of approximately $5,891,000, or 78%, was primarily the result of prepayment penalties and the disposing of loan costs not fully amortized as the result of the early extinguishment of debt at some of the commercial and multifamily properties. The increase is partially offset by decreased interest expense due to continued principal payments made on the mortgages and notes payable for some of the commercial and multifamily properties.
Interest expense for the years ended December 31, 2003 and 2002 were approximately $7,518,000 and $8,144,000, respectively. The decrease of approximately $626,000, or 8%, was primarily the result of continued principal payments on the mortgage loans by the commercial and retail properties and by one of the Partnerships for some of the multifamily properties. The decrease is also the result of additional principal payments made on a mortgage loan by one of the commercial properties. The decrease is partially offset by an $800,000 short-term mortgage loan obtained in July, 2002 by one of the commercial properties.
Loss on Disposal of Assets
Loss on disposal of assets for the years ended December 31, 2004 and 2003 were approximately $75,000 and $304,000 respectively. The decrease of approximately $229,000, or 75%, was primarily due to more retirements made in 2003 at the commercial and multifamily properties before the assets were fully depreciated than were made in 2004. The 2003 retirements were for roof replacements, tenant improvements, stair bracket replacements, and clubhouse renovation. The 2004 retirements were for tenant improvements, roof replacements and HVAC replacements.
Loss on disposal of assets for the years ended December 31, 2003 and 2002 were approximately $304,000 and $132,000 respectively. The increase of approximately $172,000 was primarily the result of retirements made at the commercial properties before the assets were fully depreciated. The 2003 retirements included tenant improvements and roof replacements. The 2002 retirements were for tenant improvements. There were no offsetting material changes.
30
The following table represents our obligations and commitments to make future payments as of December 31, 2004 under contracts, such as debt and lease agreements, and under contingent commitments, such as debt guarantees.
Payment Due by Period
--------------------------------------------------------------------------
Within One One - Three Three - Five After 5
Contractual Obligations Total Year Years Years Years
- ------------------------------------ ------------- ------------- ------------- ------------- ------------
Mortgages and notes payable $ 112,784,462 $ 16,415,295 $ 3,352,284 $ 16,460,355 $ 76,556,528
Capital lease obligations (1) 15,476 - 15,476 - -
Operating leases (2) - - - - -
Other long-term obligations (3) - - - - -
------------- ------------- ------------- ------------- ------------
Total contractual cash obligations $ 112,799,938 $ 16,415,295 $ 3,367,760 $ 16,460,355 $ 76,556,528
============= ============= ============= ============= ============
| (1) | The lease is for four golf carts purchased for Golf Brook Apartments and Sabal Park Apartments (two golf carts each). |
| (2) | We are party to numerous small operating leases for office equipment such as copiers, postage machines and fax machines, which represent an insignificant obligation. |
| (3) | We are party to several annual maintenance agreements with vendors for such items as outdoor maintenance, pool service and security systems, which represent an insignificant obligation. |
Amount of Commitment Expiration Per Period
Total ---------------------------------------------------------
Amounts Within One - Three Three - Five After Five
Other Commercial Commitments Committed One Year Years Years Years
- ------------------------------------------ ------------- ------------- ------------- -------------- -------------
Line of credit $ - $ - $ - $ - $ -
Standby letters of credit and guarantees - - - - -
Other commercial commitments (1) - - - - -
------------- ------------- ------------- ------------- -------------
Total commercial commitments $ - $ - $ - $ - $ -
============= ============= ============= ============= =============
| (1) | We do not, as a practice, enter into long term purchase commitments for commodities or services. We may from time to time agree to “fee for service arrangements” which are for a term of greater than one year. |
31
The following describes each of our predecessors’ results of operations on a historical basis for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. No adjustment or reconciliation is necessary to compare the period from January 1, 2004 to December 27, 2004 to the years ended December 31, 2003 and 2002 as our annual, quarterly and monthly operations were complete as of December 27, 2004.
This section describes the results of operations for NTS-Properties III (referred to in this discussion as “we,” “us” or “our”) for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. We owned three commercial properties. We generate almost all of our net operating income from property operations.
Net loss for the period ended December 27, 2004 was approximately $(254,000) as compared to net income of approximately $268,000 and $408,000 for the years ended December 31, 2003 and 2002, respectively. The changes in net income or loss are described in more detail below. The following tables include certain selected summarized operating data for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes attached hereto.
Period Ended Years Ended
December 27, December 31,
---------------- -----------------------------------
2004 2003 2002
---------------- ----------------- -----------------
Total revenues $ 3,811,008 $ 3,763,880 $ 3,877,281
Operating expenses and operating expenses
- affiliated 1,194,491 1,141,765 1,163,726
Depreciation and amortization 1,051,918 1,096,104 1,176,574
Total interest expense 1,104,216 433,874 495,940
Net (loss) income (253,950) 268,144 407,586
Rental income and tenant reimbursements generated by our properties were as follows:
Period Ended Years Ended
December 27, December 31,
--------------- -----------------------------------
2004 2003 2002
--------------- ----------------- ----------------
NTS Center $ 1,106,207 $ 1,139,036 $ 1,307,247
Plainview Center $ 1,340,769 $ 1,236,267 $ 1,210,020
Peachtree Corporate Center $ 1,364,032 $ 1,388,577 $ 1,360,014
We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
The occupancy levels at our properties were as follows:
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
NTS Center 75% 72% 85%
Plainview Center 83% 78% 71%
Peachtree Corporate Center 90% 83% 85%
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We believe the changes in occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
The average occupancy levels at our properties were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
NTS Center 74% 76% 87%
Plainview Center 80% 70% 70%
Peachtree Corporate Center 87% 84% 84%
We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
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 Atlanta, 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 period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $3,811,000, $3,764,000 and $3,877,000, respectively. The increase of approximately $47,000, or 1%, in 2004 was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes. The decrease of approximately $113,000, or 3%, in 2003 was primarily due to decreased average occupancy at NTS Center. The decrease was partially offset by increased rents at Peachtree Corporate Center and Plainview Center. Rental income –affiliated was approximately $295,000 for 2004, 2003 and 2002.
Year-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.
Operating Expenses and Operating Expenses – Affiliated
Our operating expenses were $862,000, $843,000 and $845,000 for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, respectively. The increase of approximately $19,000, or 2%, for 2004 was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes. The decrease of approximately $2,000 for 2003 was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
33
Our operating expenses – affiliated were $333,000, $299,000 and $318,000 for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, respectively. The increase of approximately $34,000, or 11%, for 2004 was primarily due to increased personnel costs. The decrease of approximately $19,000, or 6%, for 2003 was primarily due to decreased personnel costs.
Operating expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Professional and Administrative Expenses and Professional and Administrative Expenses — Affiliated
Our professional and administrative expenses were $385,000, $306,000 and $119,000 for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, respectively. The increases of approximately $79,000, or 26%, for 2004 and $187,000 for 2003 were results of costs incurred for legal and professional fees related to our merger.
Our professional and administrative expenses – affiliated were $156,000, $143,000 and $138,000 for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, respectively. The increase of approximately $13,000, or 9%, for 2004 was the result of increased personnel costs. The increase of approximately $5,000, or 4%, for 2003 was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Professional and administrative expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Professional and administrative expenses – affiliated consisted of approximately the following:
Period Ended Years Ended
December 27, December 31,
------------------ --------------------------------------
2004 2003 2002
------------------ ----------------- -----------------
Finance $ 40,000 $ 34,000 $ 32,000
Accounting 69,000 61,000 52,000
Investor Relations 21,000 20,000 24,000
Human Resources 11,000 11,000 11,000
Overhead 15,000 17,000 19,000
------------------ ----------------- -----------------
Total $ 156,000 $ 143,000 $ 138,000
================== ================= =================
Depreciation and Amortization
Our depreciation and amortization expenses were approximately $1,052,000, $1,096,000 and $1,177,000 for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, respectively. The decrease of approximately $44,000, or 4%, for 2004 was not significant and is not indicative of any known trend or uncertainty. There were no offsetting material changes. The decrease of $81,000, or 7%, in 2003 was the result of assets (primarily tenant improvements) becoming fully depreciated. The 2003 decrease in depreciation and amortization expense is partially offset by assets placed in service. Assets placed in service were building improvements and tenant improvements at all our properties.
34
Interest and Other Income
Interest and other income were approximately $217,000, $18,000 and $22,000 for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, respectively. The increase of approximately $199,000 for 2004 was primarily due to the settlement payment received by the partnership in regards to the litigation filed by limited partners. The decrease of approximately $4,000, or 18%, for 2003 was not significant and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Interest Expense
Our interest expense was approximately $1,104,000, $434,000 and $496,000 for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, respectively. The increase of approximately $670,000 was primarily a result of prepayment penalties paid by NTS Center due to the early payoff of the mortgage loan. The increase is partially offset by continued principal payments made by Plainview Center. The mortgage loan at Plainview Center was paid in full, prior to the maturity date, without prepayment penalties. The decrease of $62,000, or 13%, for 2003 was primarily the result of additional principal payments made in 2003 which reduced the outstanding balance on our mortgage payable secured by Plainview Center.
The majority of our cash flow is derived from operating activities. Cash flows used in investing activities consist of amounts spent for capital improvements at our properties. Cash flows used in financing activities consist of principal payments on mortgages payable and payment of loan costs.
The following table sets forth the cash provided by or used in operating activities, investing activities and financing activities for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Operating activities $ 1,284,744 $ 1,249,181 $ 1,544,644
Investing activities (189,422) (469,668) (410,360)
Financing activities (422,845) (987,051) (1,100,827)
----------------- ----------------- ----------------
Net increase (decrease) in cash and equivalents $ 672,477 $ (207,538) $ 33,457
================= ================= ================
Cash Flow from Operating Activities
Net cash provided by operating activities increased from approximately $1,249,000 for the year ended December 31, 2003 to approximately $1,285,000 for the period ended December 27, 2004. The $36,000 increase is a result of improved results from operations before the effect of the pre-payment penalty paid by NTS Center.
Net cash provided by operating activities decreased from approximately $1,545,000 for the year ended December 31, 2002 to approximately $1,249,000 for the year ended December 31, 2003. The $296,000 decrease was primarily due to decreased cash available from operating results.
35
Cash Flow from Investing Activities
Net cash flow used in investing activities decreased from approximately $470,000 for the year ended December 31, 2003 to approximately $189,000 for the period ended December 27, 2004. The $281,000 decrease in net cash used was primarily due to a decrease in additions to land, buildings and amenities.
Net cash used in investing activities increased from approximately $410,000 for the year ended December 31, 2002 to approximately $470,000 for the year ended December 31, 2003. The $60,000 increase in net cash used was primarily due to an increase in additions to land, buildings and amenities.
Cash Flow from Financing Activities
Net cash provided by financing activities was approximately $270,000 for the period ended December 27, 2004. Net cash used in financing activities for the year ended December 31, 2003 was approximately $987,000. The change was primarily due to the payoff of the mortgages payable as a result of the merger with NTS Realty.
Net cash used in financing activities decreased from approximately $1,101,000 for the year ended December 31, 2002 to approximately $987,000 for the year ended December 31, 2003. The $114,000 decrease in net cash used was primarily due to a decrease in additional principal payments in 2003.
Due to the fact that no distributions were made during 2004, 2003 or 2002, the table which presents that portion of the distributions that represents a return of capital in accordance with GAAP 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.
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 NTS Center. There has been and will likely continue to be a protracted period for NTS Center to become fully leased again. Approximately $416,000 will be needed for leasing costs, especially those needed to refinish space for new tenants to return NTS Center to full occupancy. As of December 27, 2004, we had not made any commitments for tenant improvements at NTS Center.
In December 2004, a major tenant at NTS Center who has been seeking alternatives to renewing its expiring lease with us, renewed its lease for a term of 18 months. It is unknown at this time if this tenant will renew its lease with us beyond this 18-month commitment. 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. As part of the lease renewal, this tenant’s annual rate will increase to $14.50 per square foot. No capital improvements will be required.
36
As of December 27, 2004, we anticipate making certain building improvements in 2005 totaling approximately $108,000. These improvements include HVAC replacements at NTS Center, Plainview Center and Peachtree Corporate Center, estimated to cost $67,000, sprinkler system repairs at Peachtree Corporate Center, estimated to cost $18,000, restroom renovations at NTS Center, estimated to cost $13,000 and exterior stairwell repairs at NTS Center, estimated to cost $10,000.
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 December 27, 2004.
37
This section describes our results of operations for NTS-Properties IV (referred to in this discussion as “we,” “us” or “our”) for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. We owned two commercial properties, one multifamily property and had investments in five joint venture properties. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the operating performance of the properties based on operating segments, which include commercial and multifamily operations. The financial information of the operating segments has been prepared consistent with the basis and manner in which our management internally disaggregates financial information for the purpose of decision making.
Net loss for the period ended December 27, 2004 was approximately $(640,000) as compared to net income of approximately $257,000 and $82,000 for the years ended December 31, 2003 and 2002, respectively. The changes in net income or loss are described in more detail below. The following table includes our selected summarized operating data for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes thereto.
The following table of segment data is provided:
Period Ended December 27, 2004
------------------------------------------------------------
Multifamily Commercial Partnership Total
------------------------------------------------------------
Total revenues $ 1,049,296 $ 1,185,651 $ - $ 2,234,947
Operating expenses and operating
expenses - affiliated 515,206 453,076 - 968,282
Depreciation and amortization 205,319 279,780 3,363 488,462
Total interest expense 536,784 15,853 - 552,637
Net (loss) income (319,369) 299,290 (620,321) (640,400)
Year Ended December 31, 2003
------------------------------------------------------------
Multifamily Commercial Partnership Total
------------------------------------------------------------
Total revenues $ 1,139,765 $ 1,453,264 $ - $ 2,593,029
Operating expenses and operating
expenses - affiliated 448,463 425,633 - 874,096
Depreciation and amortization 205,406 298,393 6,116 509,915
Total interest expense 211,536 52,361 - 263,897
Net income (loss) 165,857 512,435 (420,926) 257,366
Year Ended December 31, 2002
------------------------------------------------------------
Multifamily Commercial Partnership Total
------------------------------------------------------------
Total revenues $ 1,049,458 $ 1,334,047 $ - $ 2,383,505
Operating expenses and operating
expenses - affiliated 504,361 469,757 (2,000) 972,118
Depreciation and amortization 207,699 286,733 6,116 500,548
Total interest expense 227,071 85,134 - 312,205
Net (loss) income (53,363) 354,527 (219,246) 81,918
During 2004, our net revenues for the multifamily segment have decreased primarily due to lower average occupancy as well as decreased rental rates at The Willows of Plainview Phase I. Net revenues for the commercial segment have decreased primarily due to decreased lease buy-out income at Plainview Point Office Center Phases I and II and decreased average occupancy at Commonwealth Business Center Phase I and Plainview Point Office Center Phases I and II. Operating expenses and operating expenses — affiliated have increased from 2003 to 2004 for both multifamily and commercial
38
segments primarily due to personnel changes. Operating expenses and operating expenses – affiliated have decreased from 2002 to 2003 primarily as a result of decreased repairs and maintenance expenses and personnel changes for both the multifamily and commercial segments. Depreciation expense for the multifamily and commercial segments has remained relatively stable for all years presented. Interest expense for the multifamily segment increased from 2003 to 2004 primarily due to the prepayment penalty paid by The Willows of Plainview Phase I, while interest expense decreased from 2002 to 2003 primarily due to lower debt balances. Interest expense for the commercial segment has decreased primarily due to lower debt balances as well as repaying the Commonwealth Business Center Phase I loan in full in 2004. The expenses related to the litigation filed by limited partners as well as the settlement directed merger have contributed to the partnership’s net losses.
Rental income and tenant reimbursements generated by our properties and joint ventures were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Commonwealth Business Center Phase I $ 687,926 $ 772,897 $ 741,522
Plainview Point Office Center Phases I and II $ 497,725 $ 680,367 $ 592,525
The Willows of Plainview Phase I $ 1,049,296 $ 1,139,765 $ 1,049,458
Joint Venture Properties
(Ownership % on December 27, 2004)
The Willows of Plainview Phase II (9.70%) $ 1,111,361 $ 1,232,075 $ 1,225,210
Golf Brook Apartments (3.97%) $ 2,953,352 $ 2,994,374 $ 2,960,763
Plainview Point Office Center Phase III (4.96%) $ 736,596 $ 513,219 $ 610,958
Blankenbaker Business Center 1A (29.61%) $ 949,011 $ 949,011 $ 951,763
Lakeshore Business Center Phase I (10.92%) $ 1,465,488 $ 1,520,509 $ 1,557,015
Lakeshore Business Center Phase II (10.92%) $ 1,407,525 $ 1,446,848 $ 1,390,591
Lakeshore Business Center Phase III (10.92%) $ 600,429 $ 409,107 $ 289,816
We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except for Plainview Point Office Center Phase III where there has been a protracted period for the property to become fully leased again and Lakeshore Business Center Phase III where rental income and tenant reimbursements have gradually increased at this recently constructed property.
The occupancy levels at our properties and joint ventures were as follows:
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Commonwealth Business Center Phase I 53% 88% 91%
Plainview Point Office Center Phases I and II 66% 72% 86%
The Willows of Plainview Phase I 80% 91% 92%
Joint Venture Properties
Ownership % on December 27, 2004)
The Willows of Plainview Phase II (9.70%) 74% 82% 89%
Golf Brook Apartments (3.97%) 98% 93% 88%
Plainview Point Office Center Phase III (4.96%) 91% 52% 51%
Blankenbaker Business Center 1A (29.61%) 100% 100% 100%
Lakeshore Business Center Phase I (10.92%) 66% 71% 71%
Lakeshore Business Center Phase II (10.92%) 75% 79% 81%
Lakeshore Business Center Phase III (10.92%) 100% 89% 37%
39
We believe the changes in occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except for Plainview Point Office Center Phase III where there has been a protracted period for the property to become fully leased again and Lakeshore Business Center Phase III where occupancy has gradually increased at this recently constructed property.
The average occupancy levels at our properties and joint ventures were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Commonwealth Business Center Phase I 82% 91% 87%
Plainview Point Office Center Phases I and II 73% 84% 86%
The Willows of Plainview Phase I 86% 93% 85%
Joint Venture Properties
(Ownership % on December 27, 2004)
The Willows of Plainview Phase II (9.70%) 80% 85% 85%
Golf Brook Apartments (3.97%) 96% 93% 91%
Plainview Point Office Center Phase III (4.96%) 74% 50% 55%
Blankenbaker Business Center 1A (29.61%) 100% 100% 100%
Lakeshore Business Center Phase I (10.92%) 71% 70% 80%
Lakeshore Business Center Phase II (10.92%) 77% 81% 84%
Lakeshore Business Center Phase III (10.92%) 91% 59% 36%
We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except for Plainview Point Office Center Phase III where there has been a protracted period for the property to become fully leased again and Lakeshore Business Center Phase III where average occupancy has gradually increased at this recently constructed property.
We are making efforts to increase the occupancy levels at our commercial properties. The leasing and renewal negotiations at the Lakeshore Business Center development are conducted by an employee of NTS Development Company, who makes calls to potential tenants and negotiates lease renewals with current tenants. The leasing and renewal negotiations for our remaining commercial properties are managed by leasing agents that are employees of NTS Development Company in Louisville, Kentucky. The leasing agents are located in the same city as commercial properties. All advertising for these properties is coordinated by NTS Development Company’s marketing staff located in Louisville, Kentucky. In an effort to continue to improve occupancy at our multifamily properties, we have an on-site leasing staff that are employees of NTS Development Company, at each of the multifamily communities. The staff facilitates all on-site visits from potential tenants, coordinates local advertising with NTS Development Company’s marketing staff, makes visits to local companies to promote fully furnished units and negotiates lease renewals with current residents.
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 period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
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Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $2,235,000 and $2,593,000, respectively. The decrease of approximately $358,000, or 14%, was primarily the result of decreased lease buy-out income at Plainview Point Office Center Phases I and II as well as decreased average occupancy at Plainview Point Office Center Phases I and II, Commonwealth Business Center Phase I and The Willows of Plainview Phase I.
Rental income and tenant reimbursements for the years ended December 31, 2003 and 2002 were approximately $2,593,000 and $2,384,000, respectively. The increase of approximately $209,000, or 9%, was primarily the result of increased occupancy at The Willows of Plainview Phase I and Commonwealth Business Center Phase I as well as increased lease buy-out income at Plainview Point Office Center Phases I and II.
Year end 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’s results.
Operating Expenses and Operating Expenses – Affiliated
Operating expenses for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $495,000 and $500,000, respectively. The decrease of approximately $5,000, or 1%, was not significant and is not indicative of any know trend of uncertainty. There were no offsetting material changes.
Operating expenses for the years ended December 31, 2003 and 2002 were approximately $500,000 and $558,000, respectively. The decrease of approximately $58,000, or 10%, was primarily the result of decreased repairs and maintenance expenses, landscaping and cleaning expenses at The Willows of Plainview Phase I and Plainview Point Office Center Phases I and II and decreased advertising expense at The Willows of Plainview Phase I.
Operating expenses – affiliated for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $474,000, $374,000 and $414,000, respectively. The increase of approximately $100,000, or 27%, from the year ended December 31, 2003 to the period ended December 27, 2004 and the decrease of approximately $40,000, or 10%, from the year ended December 31, 2002 to the year ended December 31, 2003 were primarily due to changes in personnel costs.
Operating expenses – affiliated are for services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
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Professional and Administrative Expenses and Professional and Administrative Expenses – Affiliated
Professional and administrative expenses for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $618,000, $390,000 and $154,000, respectively. The increase of approximately $228,000, or 58%, from the year ended December 31, 2003 to the period ended December 27, 2004 and the increase of approximately $236,000 from the year ended December 31, 2002 to the year ended December 31, 2003 were primarily the result of increased legal and professional fees incurred in relation to the litigation filed by limited partners and the settlement directed merger.
Professional and administrative expenses – affiliated for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $166,000 and $147,000, respectively. The increase of approximately $19,000, or 13%, was primarily the result of personnel changes.
Professional and administrative expenses – affiliated for the years ended December 31, 2003 and 2002 were approximately $147,000 and $144,000, respectively. The increase of approximately $3,000, or 2%, was not significant and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Professional and administrative expenses – affiliated are for services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Professional and administrative expenses – affiliated consisted of the following:
Period Ended Years Ended
December 27, December 31,
------------------ --------------------------------------
2004 2003 2002
------------------ ----------------- -----------------
Finance $ 41,000 $ 34,000 $ 33,000
Accounting 78,000 64,000 53,000
Investor Relations 21,000 21,000 24,000
Human Resources 11,000 11,000 11,000
Overhead 15,000 17,000 23,000
------------------ ----------------- -----------------
Total $ 166,000 $ 147,000 $ 144,000
================== ================= =================
Depreciation and Amortization Expense
Depreciation and amortization expense for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $488,000, $510,000 and $501,000 respectively. The decrease of approximately $22,000, or 4%, from the year ended December 31, 2003 to the period ended December 27, 2004 and the increase of approximately $9,000, or 2%, from the year ended December 31, 2002 to the year ended December 31, 2003 were not significant and are not indicative of any known trend or uncertainty. There were no offsetting material changes.
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Interest and Other Income
Interest and other income for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was approximately $212,000, $8,000 and $8,000, respectively. The increase of approximately $204,000 from the year ended December 31, 2003 to the period ended December 27, 2004 was primarily due to the settlement payment received by the partnership in regards to the litigation filed by limited partners. Interest and other income did not change between the years ended December 31, 2003 and 2002. There were no offsetting material changes.
Interest Expense
Interest expense for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $553,000 and $264,000, respectively. The increase of approximately $289,000 was primarily the result of prepayment penalties paid by The Willows of Plainview Phase I in relation to the early payoff of their mortgage.
Interest expense for the years ended December 31, 2003 and 2002 were approximately $264,000 and $312,000, respectively. The decrease of approximately $48,000, or 15%, was the result of principal payments made reducing the outstanding balances on the Commonwealth Business Center Phase I and The Willows of Plainview Phase I mortgages.
Loss on Disposal of Assets
The loss on disposal of assets for the period ended December 27, 2004 was primarily due to the retirement of assets at The Willows of Plainview Phase I that were not fully depreciated as well as a roof replacement at Plainview Point Office Center Phases I and II. The loss on disposal of assets for the year ended December 31, 2003 can be attributed to the retirement of assets at Plainview Point Office Center Phases I and II, primarily as the result of the roof replacement and tenant improvements. The loss on disposal of assets for the year ended December 31, 2002 can be attributed to the retirement of assets at The Willows of Plainview Phase I, primarily as the result of clubhouse renovations. The loss represents the cost to retire assets which were not fully depreciated at the time of replacement.
Income or Loss from Investment in Joint Ventures
Income or loss from investment in joint ventures for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $(37,000) and $119,000, respectively. The decrease of approximately $156,000 was primarily due to increased net loss for the Lakeshore/University II Joint Venture and decreased net income at The Willows of Plainview Phase II, Blankenbaker Business Center 1A and Golf Brook Apartments. The decrease is partially offset by decreased net loss at Plainview Point Office Center Phase III.
Income from investment in joint ventures for the year ended December 31, 2003 and 2002 was approximately $119,000 and $82,000, respectively The increase of approximately $37,000, or 45%, was primarily the result of decreased net loss from the Lakeshore/University II Joint Venture and increased net income from The Willows of Plainview Phase II, partially offset by decreased net income from Blankenbaker Business Center 1A.
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The majority of our cash flow is derived from operating activities. Cash flows provided by investing activities consist of our investment in joint ventures. Cash flows used in financing activities consist of principal payments on mortgages payable and payment of loan costs.
The following table illustrates our cash flows used in or provided by operating activities, investing activities and financing activities:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Operating activities $ 451,170 $ 771,734 $ 649,224
Investing activities 12,088 (74,294) (334,894)
Financing activities (566,573) (604,929) (570,708)
----------------- ----------------- -----------------
Net (decrease) increase in cash and equivalents $ (103,315)$ 92,511 $ (256,378)
================= ================= =================
Cash Flow from Operating Activities
Net cash provided by operating activities decreased from approximately $772,000 for the year ended December 31, 2003 to approximately $451,000 for the period ended December 27, 2004. The decrease of approximately $321,000 was primarily due to decreased net income from operations as a result of increased expenses associated with litigation filed by limited partners and settlement directed merger costs. The decrease is partially offset by increased cash distributions from our investment in joint ventures.
Net cash provided by operating activities increased from approximately $649,000 for the year ended December 31, 2002 to approximately $772,000 for the year ended December 31, 2003. The increase of approximately $123,000 was primarily due to increased accounts payable related to amounts due for legal and professional services related to our litigation filed by limited partners and the merger and increased net income from operations.
Cash Flow from Investing Activities
Net cash provided by investing activities was approximately $12,000 for the period ended December 27, 2004. Net cash used in investing activities was approximately $74,000 for the year ended December 31, 2003. The change was primarily the result of increases in cash flows from our joint venture investments.
Net cash used in investing activities decreased from approximately $335,000 for the year ended December 31, 2002 to approximately $74,000 for the year ended December 31, 2003. The decrease of approximately $261,000 was primarily the result of decreased capital expenditures at our multifamily properties and changes in cash flows from our joint venture investments.
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Cash Flow from Financing Activities
Net cash used in financing activities decreased from approximately $605,000 for the year ended December 31, 2003 to approximately $567,000 for the period ended December 27, 2004. The decrease of approximately $38,000 was primarily the result of the payoff of The Willows of Plainview Phase I mortgages as a result of the merger with NTS Realty.
Net cash used in financing activities increased from approximately $571,000 for the year ended December 31, 2002 to approximately $605,000 for the year ended December 31, 2003. The increase of approximately $34,000 was the result of continued principal payments made on The Willows of Plainview Phase I and Commonwealth Business Center Phase I mortgages.
Due to the fact that no distributions were made during 2004, 2003 or 2002, the table which presents that portion of the distribution that represents a return of capital based on GAAP 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 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 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.
Currently, our plans for renovations and other major capital expenditures include tenant improvements at our commercial properties as required by lease negotiations at these properties. Changes to current tenant improvements are a typical part of any lease negotiation. Improvements generally include a revision to the current floor plan to accommodate a tenant’s needs, new carpeting and paint and/or wallcovering. The extent and cost of the improvements are determined by the size of the space being leased and whether the improvements are for a new tenant or incurred because of a lease renewal.
Over the next 12 months we have planned various building improvements, land improvements and repair projects for both multifamily and commercial segments. At Commonwealth Business Center Phase I, The Willows of Plainview Phase I and Plainview Point Office Center Phases I and II we plan to perform HVAC replacements for an estimated cost of approximately $16,000, $16,000 and $13,000, respectively. At Plainview Point Office Center Phases I and II we plan to replace a stairway for an estimated cost of approximately $10,000 and upgrade the security system for an estimated cost of approximately $8,000. At The Willows of Plainview Phase I we plan to replace the exterior steps of several buildings for an estimated cost of approximately $68,000 and lay patios for each townhouse for an estimated cost of approximately $10,000.
A major tenant at Commonwealth Business Center Phase I, who occupied 40,079 square feet, or 48% of the building, vacated their space at the end of their lease term, which expired November 9, 2004. This vacancy left Commonwealth Business Center Phase I with occupancy of only 53% at December 27, 2004. This vacancy may significantly impact our liquidity and could result in significant costs, currently estimated to be approximately $328,000, to refurbish the vacated space and locate new tenants. It is estimated that an additional $67,000 will be needed for tenant improvements in order to bring the building up to full occupancy and retain existing tenants.
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As of December 22, 2004, we have a commitment from a tenant to lease approximately 15,000 square feet of Commonwealth Business Center Phase I. The lease agreement calls for tenant improvements, estimated to cost approximately $306,000. As of December 27, 2004 no cost has been incurred for these tenant improvements.
We have also planned various building improvements, land improvements and repair projects at our joint venture properties for both the multifamily and commercial segments. At Lakeshore Business Center Phase I we plan to renovate two restrooms for an estimated cost of approximately $100,000, replace the corridor wallpaper and carpet for an estimated cost of approximately $60,000 and repaint the exterior of both buildings for an estimated cost of approximately $30,000. At Lakeshore Business Center Phases I and II as well as The Willows of Plainview Phase II we plan to perform HVAC replacements at an estimated cost of approximately $36,000, $16,000 and $16,000, respectively. At Lakeshore Business Center Phases I and II we also plan to install interior and exterior cameras with wireless technology for an estimated cost of approximately $15,000 and $14,000, respectively. At The Willows of Plainview Phase II we plan to replace the exterior steps of several buildings at an estimated cost of approximately $83,000, perform sidewalk repairs for an estimated cost of approximately $13,000 and upgrade the security alarms for an estimated cost of approximately $4,000. At Golf Brook Apartments we plan to replace heat pumps for an estimated cost of approximately $26,000, install new sprinklers for a portion of the property for an estimated cost of approximately $10,000, purchase new pool furniture for an estimated cost of approximately $8,000, perform a HVAC replacement and install a new wood floor, all in the clubhouse, for an estimated cost of approximately $4,000 and $4,000, respectively. At Plainview Point Office Center Phase III we plan to replace the front entry steps for an estimated cost of approximately $10,000 and upgrade the security system for an estimated cost of approximately $9,000.
As of November 11, 2004, we have a lease renewal commitment from a tenant at Lakeshore Business Center Phase II to continue leasing approximately 4,000 square feet. The commitment calls for tenant improvements, estimated to cost approximately $46,000, of which our share is approximately $5,000. As of December 27, 2004, approximately $19,000 of the tenant improvements have been incurred, of which our share is approximately $2,000.
On November 22, 2004, a tenant took occupancy of approximately 4,000 square feet of Lakeshore Business Center Phase III, which brought the building up to 100% occupancy at December 27, 2004.
The demands on liquidity as discussed above will be managed by our general partner using cash provided by operations, cash reserves, existing financing or additional financing secured by our properties. Typically, these capital improvements and leasing costs require use of existing financing or additional financing. There can be no guarantee that such funds will be available at which time our general partner will manage the demand on liquidity according to our best interest.
Leases at Commonwealth Business Center Phase I, Blankenbaker Business Center 1A and Lakeshore Business Center Phases I, II and III provide for tenants to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. Leases at Plainview Point Office Center Phases I, II and III provide for tenants to contribute toward the payment of common area maintenance expenses, insurance, utilities and real estate taxes. These lease provisions, along with the fact that multifamily leases are generally for a period of one year, provide limited protection to our operations from the impact of inflation and changing prices.
We had no other material commitments for renovations or capital improvements as of December 27, 2004.
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This section describes our results of operations for NTS-Properties V (referred to in this discussion as “we,” “us” or “our”) for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. We owned one commercial property and had investments in four joint venture properties. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the operating performance of the properties based on operating segments, which include commercial and multifamily operations. The financial information of the operating segments has been prepared consistent with the basis and manner in which our management internally disaggregates financial information for the purpose of decision making.
Net loss for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was approximately $(1,931,000), $(662,000) and $(684,000), respectively. The changes in net loss are described in more detail below. The following table includes our selected summarized operating data for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes thereto.
The following table of segment data is provided:
Period Ended December 27, 2004
-------------------------------------------------------------
Multifamily Commercial Partnership Total
-------------------------------------------------------------
Total revenues $ 1,111,361 $ 3,876,319 $ - $ 4,987,680
Operating expenses and operating expenses
- affiliated 577,331 1,642,978 - 2,220,309
Depreciation and amortization 258,567 1,049,785 15,074 1,323,426
Total interest expense 704,842 1,282,782 93,326 2,080,950
Net loss (548,923) (777,008) (605,376) (1,931,307)
Year Ended December 31, 2003
-------------------------------------------------------------
Multifamily Commercial Partnership Total
-------------------------------------------------------------
Total revenues $ 1,232,075 $ 3,849,055 $ - $ 5,081,130
Operating expenses and operating expenses
- affiliated 504,459 1,503,159 - 2,007,618
Depreciation and amortization 228,427 995,648 18,619 1,242,694
Total interest expense 278,086 678,678 20,362 977,126
Net income (loss) 101,020 36,307 (799,591) (662,264)
Year Ended December 31, 2002
-------------------------------------------------------------
Multifamily Commercial Partnership Total
-------------------------------------------------------------
Total revenues $ 1,225,210 $ 3,781,385 $ - $ 5,006,595
Operating expenses and operating expenses
- affiliated 593,838 1,551,296 (2,000) 2,143,134
Depreciation and amortization 226,011 1,094,496 18,619 1,339,126
Total interest expense 298,498 720,638 20,362 1,039,498
Net loss (75,047) (248,447) (360,493) (683,987)
During 2004, our net revenues for the multifamily segment have decreased primarily due to decreased average occupancy and a decrease in the average rental rate per unit. Net revenues for the commercial segment have increased primarily due to higher average occupancy at Lakeshore Business Center Phase III as a result of our efforts to lease this recently constructed property. The increase is partially offset by a decrease in lease-buy-out income at Lakeshore Business Center Phases I and II and a decrease in average occupancy at Commonwealth Business Center Phase II, where we have not been successful in renewing several tenants’ expired leases. We continue our leasing efforts by seeking new tenants for this property. Operating expenses and operating expenses – affiliated have increased for the
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multifamily segment primarily due to increased repairs and maintenance expenses and changes in personnel. Operating expenses and operating expenses – affiliated have increased for the commercial segment primarily due to increased bad debt expense at Lakeshore Business Center Phases I and II and changes in personnel at Commonwealth Business Center Phase II. Depreciation expense has increased for both the multifamily and commercial segments as the result of fixed asset additions. Interest expense has increased at both the multifamily and commercial segments as the result of prepayment penalties paid by The Willows of Plainview Phase II and Lakeshore Business Center Phases I and II for the early payoff of each of their mortgages. The expenses related to our ongoing litigation and proposed merger have negatively impacted our partnership’s net losses.
Rental income and tenant reimbursements generated by our properties and joint ventures were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Commonwealth Business Center Phase II $ 402,877 $ 472,591 $ 543,963
Joint Venture Properties
(Ownership % on December 27, 2004)
The Willows of Plainview Phase II (90.30%) $ 1,111,361 $ 1,232,075 $ 1,225,210
Lakeshore Business Center Phase I (81.19%) $ 1,465,488 $ 1,520,509 $ 1,557,015
Lakeshore Business Center Phase II (81.19%) $ 1,407,525 $ 1,446,848 $ 1,390,591
Lakeshore Business Center Phase III (81.19%) $ 600,429 $ 409,107 $ 289,816
We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except as described above for Commonwealth Business Center Phase II and Lakeshore Business Center Phase III.
The occupancy levels at our properties and joint ventures were as follows:
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Commonwealth Business Center Phase II 56% 62% 73%
Joint Venture Properties
(Ownership % on December 27, 2004)
The Willows of Plainview Phase II (90.30%) 74% 82% 89%
Lakeshore Business Center Phase I (81.19%) 66% 71% 71%
Lakeshore Business Center Phase II (81.19%) 75% 79% 81%
Lakeshore Business Center Phase III (81.19%) 100% 89% 37%
We believe the changes in occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except as described above for Commonwealth Business Center Phase II and Lakeshore Business Center Phase III.
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The average occupancy levels at our properties and joint ventures were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Commonwealth Business Center Phase II 60% 67% 77%
Joint Venture Properties
(Ownership % on December 27, 2004)
The Willows of Plainview Phase II (90.30%) 80% 85% 85%
Lakeshore Business Center Phase I (81.19%) 71% 70% 80%
Lakeshore Business Center Phase II (81.19%) 77% 81% 84%
Lakeshore Business Center Phase III (81.19%) 91% 59% 36%
We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except as described above for Commonwealth Business Center Phase II and Lakeshore Business Center Phase III.
We are making efforts to increase the occupancy levels at our properties. At Commonwealth Business Center Phase II, the leasing and renewal negotiations are conducted by leasing agents that are employees of NTS Development Company in Louisville, Kentucky. The leasing agents are located in the same city as the property. All advertising is coordinated by NTS Development Company’s marketing staff located in Louisville, Kentucky. The leasing and renewal negotiations at Lakeshore Business Center Phases I, II and III are managed by an employee of NTS Development Company. At The Willows of Plainview Phase II, we have an on-site leasing staff that are employees of NTS Development Company, who facilitate all on-site visits from potential tenants, make visits to local companies to promote fully furnished apartments, negotiate lease renewals with current residents and coordinate all local advertising with NTS Development Company’s marketing staff.
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 period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $4,988,000 and $5,081,000, respectively. The decrease of approximately $93,000, or 2%, was primarily the result of decreased lease buy-out income at Lakeshore Business Center Phases I and II as well as decreased average occupancy at The Willows of Plainview Phase II and Commonwealth Business Center Phase II. The decrease is partially offset by increased average occupancy at Lakeshore Business Center Phase III.
Rental income and tenant reimbursements for the years ended December 31, 2003 and 2002 were approximately $5,081,000 and $5,007,000, respectively. The increase of approximately $74,000, or 1%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Year end 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’s results.
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Operating Expenses and Operating Expenses – Affiliated
Operating expenses for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $1,591,000 and $1,435,000, respectively. The increase of approximately $156,000, or 11%, was primarily due to increased bad debt expenses at Lakeshore Business Center Phases I and II. The increase can also be attributed to increased repairs and maintenance expenses at The Willows of Plainview Phase II and Lakeshore Business Center Phases I, II and III and an increase in cleaning expenses and exterior landscaping at Lakeshore Business Center Phases I, II and III. The increase is partially offset by a decrease in insurance expense at Lakeshore Business Center Phases I, II and III, a decrease in exterior landscaping at The Willows of Plainview Phase II and Commonwealth Business Center Phase II and a decrease in non-recoverable professional services at Commonwealth Business Center Phase II and Lakeshore Business Center Phases II and III in relation to legal costs at the property level.
Operating expenses for the years ended December 31, 2003 and 2002 were approximately $1,435,000 and $1,468,000, respectively. The decrease of approximately $33,000, or 2%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses — affiliated for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $629,000, $572,000 and $675,000, respectively. The increase of approximately $57,000, or 10%, from the year ended December 31, 2003 to the period ended December 27, 2004 and the decrease of approximately $103,000, or 15%, from the year ended December 31, 2002 to the year ended December 31, 2003 were both the result of changes in personnel costs.
Operating expenses – affiliated are for services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance and other services necessary to manage and operate our business.
Professional and Administrative Expenses and Professional and Administrative Expenses – Affiliated
Professional and administrative expenses for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $845,000, $661,000 and $233,000, respectively. The increase of approximately $184,000, or 28%, from the year ended December 31, 2003 to the period ended December 27, 2004 and the increase of approximately $428,000 from the year ended December 31, 2002 to the year ended December 31, 2003 was primarily the result of increased legal and professional fees in relation to the litigation filed by limited partners and the settlement directed merger.
Professional and administrative expenses – affiliated for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $212,000, $187,000 and $168,000, respectively. The increase of approximately $25,000, or 13%, from the year ended December 31, 2003 to the period ended December 27, 2004 and the increase of approximately $19,000, or 11%, from the year ended December 31, 2002 to the year ended December 31, 2003 was primarily the result of increased salary costs.
Professional and administrative expenses – affiliated are for services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include legal, financial and other services necessary to manage and operate our business.
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Professional and administrative expenses – affiliated consisted of approximately the following:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Finance $ 50,000 $ 41,000 $ 40,000
Accounting 105,000 86,000 58,000
Investor Relations 25,000 26,000 29,000
Human Resources 13,000 13,000 12,000
Overhead 19,000 21,000 29,000
----------------- ----------------- -----------------
Total $ 212,000 $ 187,000 $ 168,000
================= ================= =================
Depreciation and Amortization Expense
Depreciation and amortization expense for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $1,323,000 and $1,243,000, respectively. The increase of approximately $80,000, or 6%, was not significant and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Depreciation and amortization expense for the years ended December 31, 2003 and 2002 was approximately $1,243,000 and $1,339,000, respectively. The decrease of approximately $96,000, or 7%, was primarily due to a change in estimate, by management, of the useful lives of the Lakeshore Business Center Phase I roofs from 30 years to 16.5 years in anticipation of replacing the roofs. The roofs became fully depreciated in December 2002.
Interest and Other Income
Interest and other income for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $375,000 and $127,000, respectively. The increase of approximately $248,000 was primarily due to the settlement payment received by the partnership in regards to the litigation filed by limited partners.
Interest and other income for the years ended December 31, 2003 and 2002 was approximately $127,000 and $28,000, respectively. The increase of approximately $99,000 was primarily the result of a reimbursement received in 2003 in relation to the litigation filed by limited partners.
Interest Expense
Interest expense for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $2,081,000 and $977,000, respectively. The increase of approximately $1,104,000 was primarily the result of prepayment penalties paid by The Willows of Plainview Phase II and Lakeshore Business Center Phases I and II for the early payoff of each of their mortgages.
Interest expense for the years ended December 31, 2003 and 2002 was approximately $977,000 and $1,039,000, respectively. The decrease of approximately $62,000, or 6%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
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The majority of our cash flow is derived from operating activities. Cash flows used in investing activities consist of amounts spent for capital improvements at our properties. Cash flows provided by financing activities consist of advances to payoff mortgages payable.
The following table illustrates our cash flows provided by or used in operating activities, investing activities and financing activities:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Operating activities $ 463,347 $ 798,627 $ 335,459
Investing activities (417,350) (858,537) (502,135)
Financing activities 78,059 15,430 (279,971)
----------------- ----------------- -----------------
Net increase (decrease) in cash and equivalents $ 124,056 $ (44,480)$ (446,647)
================= ================= =================
Cash Flow from Operating Activities
Net cash provided by operating activities was approximately $463,000 for the period ended December 27, 2004, as compared to the year ended December 31, 2003 when operating activities provided approximately $799,000. The change was primarily due to increased net operating loss which was negatively impacted by the costs of the ongoing litigation filed by limited partners, settlement directed merger costs and reimbursements of salary and overhead expenses due to NTS Development Company.
Net cash provided by operating activities increased from approximately $335,000 for the year ended December 31, 2002 to approximately $799,000 for the year ended December 31, 2003. The increase of approximately $464,000 was primarily due to the change in accounts payable and accounts payable — affiliate. This was due to our outstanding payables for professional services related to our litigation filed by limited partners and pending merger as well as reimbursements of salary and overhead expenses due to NTS Development Company.
Cash Flow from Investing Activities
Net cash flow used in investing activities was approximately $859,000 for the year ended December 31, 2003, as compared to approximately $417,000 for the period ended December 27, 2004. The decrease of approximately $442,000 was primarily due to decreased capital expenditures at Lakeshore Business Center Phase III.
Net cash flow used in investing activities increased from approximately $502,000 for the year ended December 31, 2002 to approximately $859,000 for the year ended December 31, 2003. The increase of approximately $357,000 was primarily the result of decreased investments in consolidated joint ventures by minority partners and increased capital expenditures for tenant improvements costs.
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Cash Flow from Financing Activities
Net cash flow provided by financing activities increased to approximately $78,000 from $15,000 for the period ended December 27, 2004 and the year ended December 31, 2003, respectively. The increase was primarily due to refinancing existing debt as a result of the merger with NTS Realty.
Net cash flow provided by financing activities was approximately $15,000 for the year ended December 31, 2003. For the year ended December 31, 2002, we used approximately $280,000 in net cash for financing activities. The increase in cash was primarily the result of refinancing the existing loans at Lakeshore Business Center Phases I and II and obtaining new financing for the construction loan at Lakeshore Business Center Phase III.
Due to the fact that no distributions were made during 2004, 2003 or 2002, the table which presents that portion of the distributions that represents a return of capital based on GAAP has been omitted.
Future Liquidity
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.
Currently, our plans for renovations and other major capital expenditures include tenant improvements at our commercial properties as required by lease negotiations at these properties. Changes to current tenant improvements are a typical part of any lease negotiation. Improvements generally include a revision to the current floor plan to accommodate a tenant’s needs, new carpeting and paint and/or wallcovering. The extent and cost of the improvements are determined by the size of the space being leased and whether the improvements are for a new tenant or incurred because of a lease renewal.
At Commonwealth Business Center Phase II, approximately $71,000 in tenant improvements will be needed to return the building to full occupancy and retain existing tenants. We also have a commitment from a tenant to provide improvements on approximately 3,000 square feet estimated to cost approximately $30,000. Capital improvements at Commonwealth Business Center Phase II also include HVAC replacements estimated to cost approximately $16,000. At Lakeshore Business Center Phase I we plan to renovate the restrooms for an estimated cost of approximately $100,000, repaint the exterior of the building for an estimated cost of approximately $30,000, replace the wall covering and carpet in the corridors for an estimated cost of approximately $60,000, provide HVAC replacements for an estimated cost of approximately $36,000, and install interior and exterior cameras with wireless technology for an estimated cost of approximately $15,000. We also plan to renovate four vacant suites (total of approximately 13,000 square feet) for an estimated cost of approximately $101,000. At Lakeshore Business Center Phase II we plan to provide HVAC replacements for an estimated cost of approximately $16,000 and install interior and exterior cameras with wireless technology for an estimated cost of approximately $14,000. We also plan to renovate two vacant suites (total of approximately 3,000 square feet) for an estimated cost of approximately $35,000. We also have a commitment from a tenant to provide improvements on approximately 4,000 square feet estimated to
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cost approximately $46,000. As of December 27, 2004 approximately $19,000 of this cost has been incurred. At December 27, 2004 there are no plans for any capital expenditures at Lakeshore Business Center Phase III. On November 22, 2004, a tenant took occupancy of approximately 4,000 square feet of Lakeshore Business Center Phase III, which brought the building up to 100% occupancy at December 27, 2004. At The Willows of Plainview Phase II we plan to replace the exterior staircases for an estimated cost of approximately $83,000, repair the sidewalks for an estimated cost of approximately $13,000, provide HVAC replacements for an estimated cost of approximately $16,000 and upgrade the security alarms for an estimated cost of approximately $4,000.
The demands on liquidity as discussed above will be managed by our general partner using cash provided by operations, cash reserves, deferral of amounts owed to NTS Development Company and existing or additional financing secured by our properties. Typically, these capital improvements and leasing costs require use of existing financing or additional financing. There can be no guarantee that such funds will be available at which time our general partner will manage the demand on liquidity according to our best interest.
Leases at our commercial properties provide for tenants to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. These lease provisions, along with the fact that multifamily leases are generally for a period of one year, provide limited protection to our operations from the impact of inflation and changing prices.
We have no other material commitments for renovations or capital improvements as of December 27, 2004.
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This section describes our results of operations for NTS-Properties VI (referred to in this discussion as “we,” “us” or “our”) for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. We owned four multifamily properties and had investments in two joint venture properties. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the operating performance of the properties based on operating segments, which include commercial and multifamily operations. The financial information of the operating segments has been prepared consistent with the basis and manner in which our management internally disaggregates financial information for the purpose of decision making.
Net loss for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was approximately $(1,985,000), $(1,507,000) and $(1,367,000), respectively. The changes in net loss are described in more detail below. The following table includes our selected summarized operating data for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes thereto.
The following table of segment data is provided:
Period Ended December 27, 2004
---------------------------------------------------------------
Multifamily Commercial Partnership Total
---------------------------------------------------------------
Total revenues $ 10,066,386 $ 736,596 $ - $ 10,802,982
Operating expenses and operating expenses
- affiliated 4,490,747 348,279 - 4,839,026
Depreciation and amortization 2,359,139 225,704 78,771 2,663,614
Total interest expense 2,474,823 22,272 884,263 3,381,358
Net (loss) income (302,501) 46,396 (1,729,324) (1,985,429)
Year Ended December 31, 2003
---------------------------------------------------------------
Multifamily Commercial Partnership Total
---------------------------------------------------------------
Total revenues $ 10,326,587 $ 513,219 $ - $ 10,839,806
Operating expenses and operating expenses
- affiliated 4,144,729 297,616 - 4,442,345
Depreciation and amortization 2,324,165 206,505 89,466 2,620,136
Total interest expense 867,225 - 1,646,668 2,513,893
Net income (loss) 1,390,266 (57,306) (2,840,265) (1,507,305)
Year Ended December 31, 2002
---------------------------------------------------------------
Multifamily Commercial Partnership Total
---------------------------------------------------------------
Total revenues $ 9,999,631 $ 610,958 $ - $ 10,610,589
Operating expenses and operating expenses
- affiliated 4,139,268 338,074 - 4,477,342
Depreciation and amortization 2,527,785 183,967 89,466 2,801,218
Total interest expense 840,145 - 1,738,038 2,578,183
Net income (loss) 1,131,128 29,117 (2,526,779) (1,366,534)
During 2004, our continuing net losses have been negatively impacted by the expense related to our consolidation/merger costs. Net revenues have decreased due to decreased average rent per unit at Park Place Apartments Phase I and Willow Lake Apartments and decreased average occupancy at Park Place Apartments Phase I, net of the increased average occupancy at Sabal Park Apartments. The decrease is partially offset by an increase in revenues at our commercial property, Plainview Point Office Center Phase III, as the result of increased average occupancy. Operating expenses increased as the result of increased repairs and maintenance costs at Willow Lake Apartments and Plainview Point Office Center Phase III, landscaping costs at Golf Brook Apartments and tax consulting fees at Willow Lake Apartments. Operating expenses – affiliated has remained fairly stable. Interest expense increased
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as the result of prepayment penalties and disposing of loan costs as the result of the early extinguishment of debt.
Rental income and tenant reimbursements generated by our properties and joint ventures were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Wholly-Owned Properties
Sabal Park Apartments $ 1,954,657 $ 1,902,491 $ 1,881,597
Park Place Apartments Phase I $ 1,583,409 $ 1,726,943 $ 1,480,563
Willow Lake Apartments $ 2,054,065 $ 2,190,889 $ 2,365,523
Park Place Apartments Phase III $ 1,520,903 $ 1,511,890 $ 1,311,185
Joint Venture Properties
(Ownership % on December 27, 2004)
Golf Brook Apartments (96.03%) $ 2,953,352 $ 2,994,374 $ 2,960,763
Plainview Point Office Center Phase III (95.04%) $ 736,596 $ 513,219 $ 610,958
We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
The occupancy levels at our properties and joint ventures were as follows:
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Sabal Park Apartments 99% 95% 96%
Park Place Apartments Phase I 86% 82% 88%
Willow Lake Apartments 87% 79% 93%
Park Place Apartments Phase III 85% 93% 97%
Joint Venture Properties
(Ownership % on December 27, 2004)
Golf Brook Apartments (96.03%) 98% 93% 88%
Plainview Point Office Center Phase III (95.04%) 91% 52% 51%
We believe the changes in occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except for Plainview Point Office Center Phase III which had low occupancy for an extended period of time. During the fourth quarter of 2004, a tenant who leased approximately 8,300 square feet moved in, bringing the building’s occupancy up to 91%.
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The average occupancy levels at our properties and joint ventures were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- ----------------
Wholly-Owned Properties
Sabal Park Apartments 96% 93% 93%
Park Place Apartments Phase I 83% 88% 79%
Willow Lake Apartments 86% 85% 88%
Park Place Apartments Phase III 90% 93% 83%
Joint Venture Properties
(Ownership % on December 27, 2004)
Golf Brook Apartments (96.03%) 96% 93% 91%
Plainview Point Office Center Phase III (95.04%) 74% 50% 55%
We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except for Plainview Point Office Center Phase III which had low occupancy for an extended period of time. During the fourth quarter of 2004, a tenant who leased approximately 8,300 square feet moved in, bringing the building’s occupancy up to 91%.
In an effort to continue to improve occupancy at our multifamily properties, we have an on-site leasing staff, who are employees of NTS Development Company, at each of the multifamily properties. The staff handles all on-site visits from potential tenants, coordinates local advertising with NTS Development Company’s marketing staff, makes visits to local companies to promote fully furnished apartments, and negotiates lease renewals with current residents.
The leasing and renewal negotiations for our commercial property are handled by leasing agents, who are employees of NTS Development Company, located in Louisville, Kentucky. The leasing agents are located in the same city as the commercial property. All advertising for the commercial property is coordinated by 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 period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $10,803,000 and $10,840,000, respectively. The decrease of approximately $37,000 is not a significant change, however, there are significant offsetting changes between our reporting segments. The decrease is made up of a net decrease in multifamily rental income as the result of decreased average rent per unit at Park Place Apartments Phase I and Willow Lake Apartments and decreased average occupancy at Park Place Apartments Phase I, net of the increased average occupancy at Sabal Park Apartments. The decrease is partially offset by an increase in commercial rental income at Plainview Point Office Center Phase III as the result of increased average occupancy.
Rental income and tenant reimbursements for the years ended December 31, 2003 and 2002 were approximately $10,840,000 and $10,611,000, respectively. The increase of approximately $229,000, or 2%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
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Operating Expenses and Operating Expenses — Affiliated
Operating expenses for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $3,217,000 and $2,941,000, respectively. The increase of approximately $276,000, or 9% is the result of an increase in 1) repairs and maintenance at Willow Lake Apartments and Plainview Point Office Center Phase III, 2) landscaping costs at Golf Brook Apartments and Willow Lake Apartments, 3) tax consulting fees at Willow Lake Apartments, 4) cleaning costs at Golf Brook Apartments, Willow Lake Apartments and Plainview Point Office Center Phase III and 5) insurance expense at all of the underlying properties. The increase is partially offset by a decrease in bad debt expense and administrative expenses at Willow Lake Apartments and Golf Brook Apartments.
Operating expenses for the years ended December 31, 2003 and 2002 were approximately $2,941,000 and $2,883,000, respectively. The increase of approximately $58,000, or 2%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses – affiliated for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $1,622,000 and $1,501,000, respectively. The increase of approximately $121,000, or 8%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses – affiliated for the years ended December 31, 2003 and 2002 were approximately $1,501,000 and $1,595,000, respectively. The decrease of approximately $94,000, or 6%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses – affiliated are for services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance and other services necessary to manage and operate our business.
Real Estate Taxes
Real estate taxes for the period ended December 27, 2004 and the years ended December 31, 2003, and 2002 were approximately $592,000, $1,057,000 and $883,000, respectively. The decrease of approximately $465,000, or 44%, in 2004 was primarily due to decreased tax assessments at Willow Lake Apartments and Golf Brook Apartments. We received notice of increased tax assessments in 2003 and retained a consultant to negotiate a reduction of the assessments. At Willow Lake Apartments, for 2003, we accrued property tax expense according to the assessed rate, not at the anticipated reduced rate. During the first and third quarters of 2004, we received notices of the reduction of the assessments and were able to adjust the periodic expense accordingly. We have not recorded a gain contingency for any property tax over-payments refunded in 2004. The increase of $174,000, or 20%, in 2003 was primarily due to increased tax assessments at Willow Lake Apartments and at Plainview Office Center Phase III, partially offset by a decreased tax assessment at Park Place Apartments Phase I.
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Professional and Administrative Expenses and Professional and Administrative Expenses — Affiliated
Professional and administrative expenses for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $1,029,000 and $763,000, respectively. The increase of approximately $266,000, or 35%, was primarily the result of increased legal and professional fees related to our merger with NTS Realty. The increase is partially offset by a decrease in legal and professional fees related to litigation filed by limited partners.
Professional and administrative expenses for the years ended December 31, 2003 and 2002 were approximately $763,000 and $279,000, respectively. The increase of approximately $484,000 was primarily the result of increased legal and professional fees related to our proposed merger and litigation filed by limited partners.
Professional and administrative expenses – affiliated for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $432,000 and $395,000, respectively. The increase of approximately $37,000, or 9%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Professional and administrative expenses – affiliated for the years ended December 31, 2003 and 2002 were approximately $395,000 and $390,000, respectively. The increase of approximately $5,000, or 1%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Professional and administrative expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Professional and administrative expenses – affiliated consisted of approximately the following:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Finance $ 140,000 $ 117,000 $ 111,000
Accounting 150,000 130,000 111,000
Investor Relations 74,000 75,000 86,000
Human Resources 31,000 31,000 30,000
Overhead 37,000 42,000 52,000
----------------- ----------------- -----------------
Total $ 432,000 $ 395,000 $ 390,000
================= ================= =================
Depreciation and Amortization Expense
Depreciation and amortization expense for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $2,664,000 and $2,620,000, respectively. The increase of approximately $44,000, or 2%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Depreciation and amortization expense for the years ended December 31, 2003 and 2002 was approximately $2,620,000 and $2,801,000, respectively. The decrease of approximately $181,000, or 6%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
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Interest and Other Income
Interest and other income for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $749,000 and $132,000, respectively. The increase of approximately $617,000 was primarily the result of a settlement payment received from NTS Development Company in 2004. As part of the settlement of the litigation filed by limited partners, NTS Development Company agreed to pay the Partnerships upon the closing date of the merger. NTS Properties VI’s portion of this was $723,000. The increase is partially offset by income received in 2003, in relation to the litigation filed by limited partners.
Interest and other income for the years ended December 31, 2003 and 2002 were approximately $132,000 and $21,000, respectively. The increase of approximately $111,000 was primarily the result of a reimbursement received in 2003 in relation to the litigation filed by limited partners.
Interest Expense
Interest expense for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $3,381,000 and $2,514,000, respectively. The increase of $867,000, or 34%, was primarily the result of prepayment penalties as the result of the early extinguishment of debt at Sabal Park Apartments. The increase is also the result of disposing of loan cost assets at Sabal Park Apartments, Park Place Apartments Phase III, and NTS Properties VI in relation to the early extinguishment of debt.
Interest expense for the years ended December 31, 2003 and 2002 was approximately $2,514,000 and $2,578,000, respectively. The decrease of approximately $64,000, or 2%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Loss on Disposal of Assets
Loss on disposal of assets for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $14,000 and $104,000, respectively. The decrease of approximately $90,000, or 87%, was primarily the result of retirements made (before the assets were fully depreciated) at Willow Lake Apartments in 2003 for stair bracket replacements, security system installation and clubhouse renovation, partially offset by retirements made in 2004 for HVAC replacements at Sabal Park Apartments and Willow Lake Apartments.
Loss on disposal of assets for the years ended December 31, 2003 and 2002 were approximately $104,000 and $5,000, respectively. The increase of approximately $99,000 was primarily the result of retirements made (before the assets were fully depreciated) at Willow Lake Apartments in 2003 for stair bracket replacements, security system installation and clubhouse renovation and at Sabal Park Apartments for walkway and curb replacements, partially offset by retirements made in 2002 for retirement of a roof before it was fully depreciated at Willow Lake Apartments.
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The majority of our cash flow is typically derived from operating activities. Cash flows used in investing activities are for tenant improvements and other capital improvements at our properties. The tenant improvements and other capital additions were funded by cash flow from operations and from debt financing. Cash flows used in financing activities consist of the early extinguishment of debt, principal payments on mortgages and notes payable, and payment of loan costs.
The following table illustrates our cash flows provided by or used in operating activities, investing activities and financing activities:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Operating activities $ 1,665,653 $ 1,518,719 $ 1,310,961
Investing activities (770,830) (787,801) (317,172)
Financing activities (358,174) (1,664,390) 4,858
----------------- ----------------- -----------------
Net increase (decrease) in cash and equivalents $ 536,649 $ (933,472) $ 998,647
================= ================= =================
Cash Flow from Operating Activities
Net cash provided by operating activities increased from approximately $1,519,000 for the year ended December 31, 2003 to approximately $1,666,000 for the period ended December 27, 2004. The increase was primarily a result of improved results from operations before the effect of the pre-payment penalty paid by Sabal Park. The increase is partially offset by the change in accounts payable – affiliate and other liabilities (as a result of the merger with NTS Realty, we were able to reimburse NTS Development Company for salary and overhead costs in December 2004 and we were able to pay current year property taxes, respectively).
Net cash provided by operating activities increased from approximately $1,311,000 for the year ended December 31, 2002 to approximately $1,519,000 for the year ended December 31, 2003. The increase was primarily driven by the increase in accounts payable – affiliate due to NTS Development Company as reimbursement of salary and overhead costs.
Cash Flow from Investing Activities
Net cash used in investing activities decreased from approximately $788,000 for the year ended December 31, 2003 to approximately $771,000 for the period ended December 27, 2004. The decrease in net cash used was primarily due to a decrease in capital expenditures at the multifamily properties. Additions made in 2004 were for structural improvements at Park Place Apartments Phase I, roof replacements at Willow Lake Apartments, HVAC replacements and golf carts at Golf Brook Apartments and Sabal Park Apartments, playground and fitness equipment at Sabal Park Apartments and pool resurfacing at Golf Brook Apartments. Additions were made in 2003 for clubhouse renovation, a paving project and stair bracket replacements at Willow Lake Apartments. The decrease at the multifamily properties is partially offset by an increase in capital expenditures at our commercial property –Plainview Point Office Center Phase III. The 2004 additions at Plainview Point Office Center Phase III included tenant improvements and HVAC replacements. The 2003 additions at Plainview Point Office Center Phase III included tenant improvements.
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Net cash used in investing activities increased from approximately $317,000 for the year ended December 31, 2002 to approximately $788,000 for the year ended December 31, 2003. The increase was primarily due to increased capital expenditures in 2003 for a clubhouse renovation, a paving project and roof replacements at Willow Lake Apartments and tenant improvements at Plainview Point Office Center Phase III.
Cash Flow from Financing Activities
Net cash used in financing activities was approximately $1,664,000 for the year ended December 31, 2003 compared to approximately $358,000 for the period ended December 27, 2004. The decrease in net cash used in financing activities is primarily the result of advances received from NTS Realty as a result of the merger.
Net cash provided by financing activities was approximately $5,000 for the year ended December 31, 2002. For the year ended December 31, 2003, we used approximately $1,664,000 in net cash for financing activities. The increase in net cash used was primarily due to the fact that $2,000,000 in loan proceeds was received in 2002 while only $400,000 in loan proceeds was received in 2003. These loan proceeds were used for capital improvements and working capital. The increase is also the result of an increase in principal payments made on mortgages payable.
Due to the fact that no distributions were made during 2004, 2003 or 2002, the table which presents that portion of the distributions that represents a return of capital based on GAAP has been omitted.
Future Liquidity
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.
The primary source of future liquidity is expected to be cash from operations. It is anticipated that the cash flow from operations will be sufficient to meet our day to day working capital needs.
The demand on future liquidity is anticipated to increase as a result of the replacement of the roofs at both Willow Lake Apartments (26 buildings) and Park Place Apartments Phase I (23 buildings) all of which were installed using shingles produced by a single manufacturer. The shingles appear to contain defects which may cause roofs to fail. As the shingle manufacturer has declared bankruptcy, we do not expect to be able to recover any of the costs of the roof replacements in the event of any such failures. We do not have sufficient working capital to make all of the roof replacements at one time. As of December 27, 2004, eight buildings at Willow Lake Apartments have had roofs replaced while no roofs have been replaced at Park Place Apartments Phase I. The total cost of replacing all of the remaining roofs is estimated to be $820,000 ($20,000 per building).
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The demand on future liquidity is also anticipated to increase as the result of 1) replacement/ repair of wood and alarm systems at Park Place Apartments Phase I, estimated to cost $100,000, 2) heat pump replacements at Sabal Park Apartments, estimated to cost $41,000, 3) exterior light fixture replacements at Willow Lake Apartments, estimated to cost $27,000 and 4) heat pump replacements at Golf Brook Apartments, estimated to cost $26,000.
The demands on liquidity as discussed above will be managed by our general partner using cash provided by operations, cash reserves and existing or additional financing secured by our properties. Typically, these capital improvements and leasing costs require use of existing financing or additional financing. There can be no guarantee that such funds will be available at which time our general partner will manage the demand on liquidity according to our best interest.
Leases at Plainview Point Office Center Phase III provide for tenants to contribute toward the payment of common area maintenance expenses, insurance, utilities and real estate taxes. These lease provisions, along with the fact that multifamily leases are generally for a period of one year, should protect our operations from the impact of inflation and changing prices.
We had no other material commitments for renovations or capital expenditures as of December 27, 2004.
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This section describes our results of operations for NTS-Properties VII (referred to in this discussion as “we,” “us” or “our”) for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. We owned two multifamily properties and had investments in one joint venture property. We generate almost all of our net operating income from property operations.
Net loss for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was approximately $(333,000), $(170,000) and $(212,000), respectively. The changes in net loss are described in more detail below. The following table includes our selected summarized operating data for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes thereto.
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Total revenues $ 1,571,552 $ 1,637,858 $ 1,515,528
Operating expenses and operating expenses
- affiliated 678,441 670,462 684,638
Depreciation and amortization 408,391 407,690 501,168
Total interest expense (264,931) (254,763) (266,573)
Net loss (332,902) (170,319) (211,696)
Rental income and tenant reimbursements generated by our properties and joint venture were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Wholly-Owned Properties
The Park at the Willows $ 321,060 $ 298,890 $ 323,104
Park Place Apartments Phase II $ 1,250,492 $ 1,338,968 $ 1,192,424
Joint Venture Property
(Ownership % on December 27, 2004)
Blankenbaker Business Center 1A (31.34%) $ 949,011 $ 949,011 $ 951,763
We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
The occupancy levels at our properties and joint venture were as follows:
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Wholly-Owned Properties
The Park at the Willows 94% 83% 90%
Park Place Apartments Phase II 88% 83% 89%
Joint Venture Property
(Ownership % on December 27, 2004)
Blankenbaker Business Center 1A (31.34%) 100% 100% 100%
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We believe the changes in occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
The average occupancy levels at our properties and joint were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Wholly-Owned Properties
The Park at the Willows 90% 81% 83%
Park Place Apartments Phase II 84% 89% 82%
Joint Venture Property
(Ownership % on December 27, 2004)
Blankenbaker Business Center 1A (31.34%) 100% 100% 100%
We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend.
We are making efforts to improve occupancy at our multifamily communities. We have an on-site leasing staff, who are employees of NTS Development Company, at each of the multifamily communities. The staff handles all on-site visits from potential tenants, coordinates local advertising with NTS Development Company’s marketing staff, makes visits to local companies to promote fully furnished apartments and works with current residents on lease renewals.
The lease at Blankenbaker Business Center 1A provides for the tenant to contribute toward the payment of common area maintenance expenses, insurance, utilities and real estate taxes. These lease provisions, along with the fact that multifamily leases are generally for a period of one year, should protect our operations from the impact of inflation and changing prices.
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 period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Rental Income
Rental income for the period ended December 27, 2004 and year ended December 31, 2003 was approximately $1,572,000 and $1,638,000, respectively. The decrease of approximately $66,000, or 4%, was primarily the result of decreased average occupancy at Park Place Apartments Phase II and a decrease in average income per unit at The Park at the Willows and Park Place Apartments Phase II. The decrease is partially offset by an increase in average occupancy at The Park at the Willows.
Rental income for the years ended December 31, 2003 and 2002 was approximately $1,638,000 and $1,516,000, respectively. The increase of approximately $122,000, or 8%, was primarily the result of increased average occupancy at Park Place Apartments Phase II partially offset by a decrease in average occupancy at The Park at the Willows.
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Operating Expenses and Operating Expenses — Affiliated
Operating expenses for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $395,000 and $406,000, respectively. The decrease of approximately $11,000, or 3%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses for the years ended December 31, 2003 and 2002 were approximately $406,000 and $418,000, respectively. The decrease of approximately $12,000, or 3%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses – affiliated for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $283,000 and $264,000, respectively. The increase of approximately $19,000, or 7%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses – affiliated for the years ended December 31, 2003 and 2002 were approximately $264,000 and $266,000, respectively. The decrease of approximately $2,000, or 1%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Professional and Administrative Expenses and Professional and Administrative Expenses — Affiliated
Professional and administrative expenses for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $358,000 and $278,000, respectively. The increase of approximately $80,000, or 29%, was primarily the result of increased legal and professional fees related to our merger with NTS Realty.
Professional and administrative expenses for the years ended December 31, 2003 and 2002 were approximately $278,000 and $100,000, respectively. The increase of approximately $178,000 was primarily the result of increased legal and professional fees related to our proposed merger and litigation filed by limited partners.
Professional and administrative expenses-affiliated for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $142,000 and $132,000, respectively. The increase of approximately $10,000, or 8%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Professional and administrative expenses-affiliated for the years ended December 31, 2003 and 2002 were approximately $132,000 and $115,000, respectively. The increase of approximately $17,000, or 15%, was primarily the result of increased personnel costs.
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Professional and administrative expenses — affiliated are for the services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Professional and administrative expenses – affiliated consisted of approximately the following:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Finance $ 25,000 $ 21,000 $ 20,000
Accounting 83,000 75,000 54,000
Investor Relations 13,000 13,000 15,000
Human Resources 7,000 8,000 7,000
Overhead 14,000 15,000 19,000
----------------- ----------------- -----------------
Total $ 142,000 $ 132,000 $ 115,000
================= ================= =================
Depreciation and Amortization Expense
Depreciation and amortization expense for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $408,000 and $408,000, respectively. There is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Depreciation and amortization expenses for the years ended December 31, 2003 and 2002 were approximately $408,000 and $501,000, respectively. The decrease of approximately $93,000, or 19%, was primarily the result of the roof assets at Park Place Apartments Phase II becoming fully depreciated by December 31, 2002.
Interest and Other Income
Interest and other income for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $31,000 and $7,000, respectively. The increase of approximately $24,000 was primarily the result of a settlement payment received from NTS Development Company in 2004 with no similar income in 2003. The increase is partially offset by a decrease in interest income as a result of maintaining lower balances in our bank accounts in 2004.
Interest and other income for the years ended December 31, 2003 and 2002 was approximately $7,000 and $8,000, respectively. The decrease of approximately $1,000, or 13%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Interest Expense
Interest expense for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $265,000 and $255,000, respectively. The increase of approximately $10,000, or 4%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
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Interest expense for the years ended December 31, 2003 and 2002 was approximately $255,000 and $267,000, respectively. The decrease of approximately $12,000, or 4%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Income from Investment in the Joint Venture
Income from investment in the joint venture for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $78,000 and $88,000, respectively. The decrease of $10,000, or 11%, was primarily the result of increased depreciation expense and operating expenses, net of decreased loss on disposal and interest expense at Blankenbaker Business Center 1A.
Income from investment in the joint venture for the years ended December 31, 2003 and 2002 was approximately $88,000 and $96,000, respectively. The decrease of approximately $8,000, or 8%, is not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
The majority of our cash flow is typically derived from operating activities. Cash flows used in operating activities in 2004 consist of amounts spent to reimburse NTS Development for fees owed to them and for amounts spent on legal expenses for the merger with NTS Realty and for litigation. Cash flows used in investing activities consist of amounts spent for capital improvements at our properties. Cash flows provided by investing activities represent a decreased investment in our joint venture, Blankenbaker Business Center 1A. Cash flows used in financing activities consist of the early extinguishment of debt net of funds received as part of the merger with NTS Realty in 2004 and principal payments on mortgages payable.
The following table illustrates our cash flows provided by or used in operating activities, investing activities and financing activities:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Operating activities $ (90,391) $ 274,452 $ 184,149
Investing activities 100,084 (238,129) (67,288)
Financing activities (87,258) (155,201) (165,560)
----------------- ----------------- -----------------
Net decrease in cash and equivalents $ (77,565) $ (118,878) $ (48,699)
================= ================= =================
Cash Flow from Operating Activities
Net cash provided by operating activities was approximately $274,000 for the year ended December 31, 2003. For the period ended December 27, 2004, we used approximately $90,000 in net cash for operating activities. The increase in net cash used was primarily driven by the reduced results of operations and the change in accounts payable – affiliate (as a result of the merger we were able to reimburse NTS Development Company for salary and overhead costs in December 2004) and accounts payable.
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Net cash provided by operating activities increased from approximately $184,000 for the year ended December 31, 2002 to approximately $274,000 for the year ended December 31, 2003. The increase was primarily driven by the change in accounts payable which was partially offset by the change in other liabilities. The increased accounts payable included amounts due for professional services related to our litigation filed by limited partners and proposed merger.
Cash Flow from Investing Activities
For the year ended December 31, 2003, we used approximately $238,000 in net cash for investing activities. Net cash provided by investing activities was approximately $100,000 for the period ended December 27, 2004. The increase in net cash provided was primarily the result of decreased capital expenditures at Park Place Apartments Phase II which was partially offset by increased capital expenditures at The Park at the Willows, and the decreased investment in the joint venture due to the advance from NTS Realty.
Net cash used in investing activities increased from approximately $67,000 for the year ended December 31, 2002 to approximately $238,000 for the year ended December 31, 2003. The increase was primarily the result of increased capital expenditures at Park Place Apartments Phase II and The Park at the Willows.
Cash Flow from Financing Activities
Net cash used in financing activities decreased from approximately $155,000 for the year ended December 21, 2003 to approximately $87,000 for the period ended December 27, 2004. The decrease was primarily due to the payoff of debt as a result of the merger with NTS Realty and payment of property taxes net of the cash used for the actual payment of the debt.
Net cash used in financing activities decreased from approximately $166,000 for the year ended December 21, 2002 to approximately $155,000 for the year ended December 31, 2003. The decrease was primarily the result of decreased principal payments made in 2003.
Due to the fact that no distributions were made during 2004, 2003 or 2002, the table which presents that portion of the distributions that represents a return of capital based on GAAP has been omitted.
Future Liquidity
We believe the current occupancy levels are considered 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. The primary source of future liquidity is expected to be derived from cash generated by our properties after adequate cash reserves are established for future leasing, roof replacement and renovation costs. It is anticipated that the future cash flow from operations combined with our cash reserves will be sufficient to meet these needs.
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The demand on future liquidity is anticipated to increase as a result of the replacement of the roofs at Park Place Apartments Phase II (18 buildings), all of which were installed using shingles produced by a single manufacturer. The shingles appear to contain defects which may cause the roofs to fail. As the shingle manufacturer has declared bankruptcy, we do not expect to be able to recover any of the costs of the roof replacements in the event of any such failures. We do not have sufficient working capital to make all of the roof replacements at one time. As of December 27, 2004, fifteen roof replacements have been completed. The total cost of replacing the remaining roofs is estimated to be $60,000 ($20,000 per building). The three remaining roof replacements have been budgeted for completion in the second quarter of 2005.
The demand on future liquidity is also anticipated to increase as a result of an exterior painting project at Park Place Apartments Phase II and HVAC replacements at The Park at the Willows. All projects are budgeted for 2005. We expect to spend approximately $10,000 on painting the exterior of the buildings at Park Place Apartments Phase II. The HVAC replacements at The Park at the Willows are expected to cost approximately $16,000.
We had no other material commitments for renovations or capital expenditures as of December 27, 2004.
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This section describes our results of operations for NTS Private Group (referred to in this discussion as “we,” “us” or “our”) for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. We owned three retail properties, eight commercial properties and operated a land lease. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the operating performance of the properties based on operating segments, which include retail operations, commercial real estate operations and land leases. The financial information of the operating segments have been prepared consistent with the basis and manner in which our management internally disaggregates financial information for the purpose of decision making.
Net loss for the period ended December 27, 2004 was approximately $(2,159,000) as compared to net income of approximately $1,177,000 and $1,933,000 for the years ended December 31, 2003 and 2002, respectively. The changes in net income or loss are described in more detail below. The following tables include certain selected summarized operating data for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes attached hereto.
Period Ended December 27, 2004
----------------------------------------------------------------
Land Retail Commercial Total
-------------- ------------- ---------------- ---------------
Total revenues $ 45,087 $ 1,358,242 $ 7,870,240 $ 9,273,569
Operating expenses and operating expenses
- affiliated 1,133 233,260 2,200,789 2,435,182
Depreciation and amortization 5,087 315,343 1,686,923 2,007,353
Total interest expense - 423,166 5,432,268 5,855,434
Net income (loss) 3,293 240,684 (2,403,036) (2,159,059)
Year Ended December 31, 2003
----------------------------------------------------------------
Land Retail Commercial Total
-------------- ------------- ---------------- ---------------
Total revenues $ 53,537 $ 1,370,517 $ 7,845,380 $ 9,269,434
Operating expenses and operating expenses
- affiliated 2,261 92,024 2,014,658 2,108,943
Depreciation and amortization 5,087 293,497 1,617,913 1,916,497
Total interest expense 238 451,724 2,490,612 2,942,574
Net income 22,070 409,606 745,817 1,177,493
Year Ended December 31, 2002
----------------------------------------------------------------
Land Retail Commercial Total
-------------- ------------- ---------------- ---------------
Total revenues $ 216,344 $ 1,245,555 $ 8,581,334 $ 10,043,233
Operating expenses and operating expenses
- affiliated 17,953 94,981 2,098,038 2,210,972
Depreciation and amortization 5,087 269,271 1,569,683 1,844,041
Total interest expense 224 501,406 2,773,388 3,275,018
Net income 237,138 299,519 1,396,183 1,932,840
During 2004, our revenues for the commercial segment increased slightly due to increased average occupancy at Springs Office Center and Springs Medical Office Center. This increase is partially offset by decreased average occupancy at Atrium Center and Blankenbaker Business Center II as a result of unsuccessful attempts to renew tenants’ expired leases. We continue our leasing efforts by seeking new tenants for these properties. Our revenues for the retail segment decreased slightly due primarily to decreased recoverable operating expenses incurred in 2004. The decrease is partially offset
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by increased average occupancy at Springs Station. Our revenues for the land segment also decreased slightly due to decreased rental rates for 2004.
Rental income and tenant reimbursements generated by our properties were as follows:
Period Ended Years Ended
December 27, December 31,
-------------------- ----------------------------------------
2004 2003 2002
-------------------- ------------------- -------------------
Anthem Office Center $ 810,692 $ 810,692 $ 810,692
Atrium Center 789,858 1,011,176 1,259,463
Sears Office Building 785,300 757,506 756,741
Springs Medical Office Center 1,680,865 1,556,473 1,623,775
Springs Office Center 2,048,589 1,870,711 2,270,683
Blankenbaker Business Center 1B 577,686 577,686 578,276
Blankenbaker Business Center II 632,406 720,075 754,877
Clarke American 544,844 541,062 526,826
Bed, Bath & Beyond 423,091 447,685 401,374
Outlets Mall 665,887 662,838 662,838
Springs Station 269,264 259,993 181,342
ITT Parking Lot 45,087 53,537 53,537
Other - - 162,809
-------------------- ------------------- -------------------
$ 9,273,569 $ 9,269,434 $ 10,043,233
==================== =================== ===================
We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except as described above for Atrium Center and Blankenbaker Business Center II.
The occupancy levels at our properties were as follows:
December 27, December 31,
-------------------- ----------------------------------------
2004 2003 2002
-------------------- -------------------- ------------------
Anthem Office Center 100% 100% 100%
Atrium Center 67% 62% 78%
Sears Office Building 100% 100% 100%
Springs Medical Office Center 89% 90% 93%
Springs Office Center 96% 97% 76%
Blankenbaker Business Center 1B 100% 100% 100%
Blankenbaker Business Center II 76% 90% 90%
Clarke American 100% 100% 100%
Bed, Bath & Beyond 100% 100% 100%
Outlets Mall 100% 100% 100%
Springs Station 92% 100% 71%
ITT Parking Lot 100% 100% 100%
We believe the changes in occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except as described above for Atrium Center and Blankenbaker Business Center II.
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The average occupancy levels at our properties were as follows:
Period Ended Years Ended
December 27, December 31,
-------------------- ----------------------------------------
2004 2003 2002
-------------------- ------------------- -------------------
Anthem Office Center 100% 100% 100%
Atrium Center 55% 66% 80%
Sears Office Building 100% 100% 100%
Springs Medical Office Center 93% 91% 96%
Springs Office Center 97% 90% 91%
Blankenbaker Business Center 1B 100% 100% 100%
Blankenbaker Business Center II 78% 90% 95%
Clarke American 100% 100% 100%
Bed, Bath & Beyond 100% 100% 100%
Outlets Mall 100% 100% 100%
Springs Station 97% 94% 62%
ITT Parking Lot 100% 100% 100%
We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and are not indicative of any known trend, except as described above for Atrium Center and Blankenbaker Business Center II.
We are making efforts to increase the occupancy levels at our properties. The leasing and renewal negotiations are conducted by leasing agents, who are employees of NTS Development Company, located in Louisville, Kentucky. The leasing agents are located in the same city as the property. All advertising is coordinated by NTS Development Company’s marketing staff located in Louisville, Kentucky. The staff facilitates all on-site visits from potential tenants, negotiates lease renewals with current tenants and coordinates all local advertising with NTS Development Company’s marketing staff.
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 period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the period ended December 27, 2004 and the years ended December 31, 2003, and 2002 were approximately $9,274,000, $9,269,000 and $10,043,000, respectively. The increase of approximately $5,000 in 2004 was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes. The decrease of approximately $774,000, or 8%, in 2003 was primarily a result of decreased average occupancy at Atrium Center, Blankenbaker Business Center II, Springs Medical Office Center and Springs Office Center. The decrease was partially offset by increased average occupancy at Springs Station. Average occupancy for the year is calculated using the end of the month occupancies for each month.
Year-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.
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Operating Expenses and Operating Expenses – Affiliated
Operating expenses for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $1,689,000, $1,459,000 and $1,479,000, respectively. The increase of approximately $230,000, or 16%, for 2004 was primarily due to increased bad debt expense at Outlets Mall due to the tenant declaring bankruptcy during February 2004. The decrease of approximately $20,000, or 1%, in 2003 was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses – affiliated for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $746,000, $650,000 and $732,000, respectively. The increase of approximately $96,000, or 15%, for 2004 was primarily due to increased personnel costs. The decrease of approximately $82,000, or 11%, in 2003 was primarily due to decreased personnel costs.
Operating expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of ours. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Professional and Administrative Expenses
Professional and administrative expenses for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $158,000, $116,000 and $0, respectively. The increases of approximately $42,000, or 36%, for 2004 and $116,000 for 2003 were the result of costs incurred for legal and professional fees.
Depreciation and Amortization
Depreciation and amortization expenses for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $2,007,000, $1,916,000 and $1,844,000, respectively. The increases of approximately $91,000, or 5%, for 2004 and $72,000, or 4%, for 2003 were not significant and are not indicative of any known trend or uncertainty. There were no offsetting material changes.
Interest and Other Income
Interest and other income for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $23,000, $19,000 and $70,000, respectively. The increase of approximately $4,000, or 21%, for 2004 was not significant and is not indicative of any known trend or uncertainty. There were no offsetting material changes. The decrease of approximately $51,000, or 73%, for 2003 was primarily due to a decrease in recoveries from former tenants.
Interest Income – Affiliated
Interest income from affiliates for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $0, $54,000 and $143,000, respectively. The decreases of approximately $54,000 for 2004 and $89,000 for 2003 were the result of decreased balances due from affiliates and the notes being paid in their entirety by NTS Financial Partnership on June 30, 2003.
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Interest Expense
Interest expense for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was approximately $5,855,000, $2,873,000 and $3,119,000, respectively. The increase of approximately $2,982,000 for 2004 was primarily a result of prepayment penalties paid by Atrium Center, Anthem Office Center, Blankenbaker Business Center 1B, Blankenbaker Business Center II, Springs Medical Office Center and Springs Office Center due to the early payoff of their mortgage loans and note payable. The increase is partially offset by continued principal payments made by Outlets Mall, Springs Station, Clarke American and Bed, Bath & Beyond. The mortgage loans at Outlets Mall and Springs Station were paid in full, prior to their maturity date, without prepayment penalties. The decrease of approximately $246,000, or 8%, for 2003 was primarily due to decreased principal balances as a result of continued principal payments.
Interest Expense – Affiliated
Interest expense paid to affiliates for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was approximately $0, $70,000 and $156,000, respectively. The decreases of approximately $70,000 for 2004 and $86,000 for 2003 were primarily a result of decreased balances due to affiliates and the notes being paid in their entirety to NTS Financial Partnership on June 30, 2003.
Loss on Disposal of Assets
The loss on disposal of assets for the period ended December 27, 2004 was primarily due to the retirement of the roof, which was not fully depreciated, at Blankenbaker Business Center 1B. The loss on disposal of assets for the year ended December 31, 2003 was primarily due to the retirements of assets (primarily tenant improvements) not fully depreciated at Springs Office Center.
This section describes our balance sheet and discusses our liquidity and capital commitments. Our most liquid asset is our cash and cash equivalents which consists of cash and short-term investments, but does not include our cash which is restricted. Our historical cash and cash equivalents as of December 27, 2004 was $255,476. Operating income generated from our properties is the primary source from which we generate cash. Other sources of cash include proceeds from mortgage loans and notes payable. Below is a chart which reflects our cash flow from operating, investing and financing activities for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002, followed by a comparison of the respective periods.
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Operating activities $ 3,156,716 $ 3,591,774 $ 3,640,545
Investing activities (837,669) 4,977,401 (428,322)
Financing activities (2,503,620) (8,560,750) (3,396,111)
----------------- ----------------- -----------------
Net (decrease) increase in cash and equivalents $ (184,573) $ 8,425 $ (183,888)
================= ================= =================
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Cash Flow from Operating Activities
Net cash provided by operating activities decreased from approximately $3,592,000 for the year ended December 31, 2003 to approximately $3,157,000 for the period ended December 27, 2004. The decrease is a result of decreased cash provided by results of operations primarily due to increased expenses incurred in relation to the merger with NTS Realty.
Net cash provided by operating activities decreased from approximately $3,641,000 for the year ended December 31, 2002 to approximately $3,592,000 for the year ended December 31, 2003. The decrease is due primarily to less cash provided by results of operations, which was offset by increased cash collections of outstanding accounts receivable.
Cash Flows from Investing Activities
Net cash flow used in investing activities was approximately $838,000 for the period ended December 27, 2004. Net cash flow provided by investing activities for the year ended December 31, 2003 was approximately $4,977,000. The change was primarily due to cash payments received in 2003 from affiliates of approximately $6,200,000 for notes receivable.
Net cash flow from investing activities was approximately $4,977,000 for the year ended December 31, 2003. For the year ended December 31, 2002, we used approximately $428,000 in net cash for investing activities. The change was primarily due to cash payments received from affiliates of approximately $6,200,000 for notes receivable, partially offset by additions to land, buildings and amenities.
Cash Flows from Financing Activities
Net cash used in financing activities was approximately $2,504,000 for the period ended December 27, 2004. Net cash used in financing activities for the year ended December 31, 2003 was approximately $8,561,000. The change was primarily due to the payoff of certain mortgages as a result of the merger with NTS Realty and is also due to cash payments made in 2003 to affiliates of approximately $6,700,000 on notes payable.
Net cash used by financing activities increased from approximately $3,396,000 for the year ended December 31, 2002 to approximately $8,561,000 for the year ended December 31, 2003. The increase in net cash used was primarily due to cash payments made to affiliates of approximately $6,700,000 on notes payable.
Future Liquidity
On June 30, 2003, the notes receivable-affiliate of approximately $6,200,000 for the year ended December 31, 2002 was paid in its entirety by NTS Financial Partnership. In the same transaction we paid the notes payable-affiliate in its entirety owed to NTS Financial Partnership of approximately $6,700,000 for the year ended December 31, 2002. As a result of the simultaneous transactions we paid the difference of approximately $500,000 in cash to NTS Financial Partnership.
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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.
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 Atrium Center. There has been and will likely continue to be a protracted period for Atrium Center to become fully leased again. Approximately $485,000 will be needed for leasing costs, especially those needed to refinish space for new tenants to return Atrium Center to full occupancy. As of December 27, 2004, we had not made any commitments for tenant improvements at Atrium Center.
As of December 27, 2004, we anticipate making certain building improvements in 2005 totaling approximately $442,000. These improvements include a roof replacement at Blankenbaker Business Center II, estimated to cost $143,000, common area renovations at Atrium Center and Springs Medical Office Center, estimated to cost $180,000, HVAC replacements at Atrium Center, Blankenbaker Business Center II, Sears Office Center, Springs Medical Office Center and Springs Office Center, estimated to cost $88,000, restroom renovations at Atrium Center and Springs Office Center, estimated to cost $24,000, and tenant signage replacements at Springs Medical Office Center, estimated to cost $7,000.
In July 2004, the sole tenant at Sears Office Center, whose lease expires July 15, 2005, notified us of its intention to vacate its space in July 2005. The tenant occupies 66,905 square feet at an annual rate of $11.99 per square foot. This will result in an annual loss of approximately $785,000, or 8%, of 2004‘s total revenues. There may be significant demands on future liquidity as a result of this vacancy. Approximately $1,760,000 may be needed to refinish the vacated space and locate a new tenant.
In August 2004, we signed a lease renewal and expansion agreement with a significant tenant at Springs Office Center. As part of the lease renewal and expansion, the tenant will be expanding into an additional 4,502 square feet and approximately $750,000 in tenant improvements will be required. As of December 27, 2004, no costs have been incurred for these tenant improvements.
As of January 12, 2005, we signed a lease renewal agreement with the sole tenant at Blankenbaker Business Center 1B. As part of the lease renewal, approximately $1,621,000 in tenant improvements will be required. These improvements include HVAC replacements, ceiling tile replacements, new computer cabling, parking lot renovations, restroom renovations, courtyard renovations, a new visitor entrance, monument signage, exterior window modifications, sewer system repairs, design fees and tenant improvements.
In January 2005, the sole tenant at Anthem Office Center, whose lease expires August 31, 2005, notified us of its intention to vacate its space in August 2005. The tenant occupies 84,717 square feet at an annual rate of $9.57 per square foot. This will result in an annual loss of approximately $811,000, or 9%, of 2004‘s total revenues. There may be significant demands on future liquidity as a result of this vacancy. Approximately $1,830,000 will be needed to refinish the vacated space and locate a new tenant.
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As of February 7, 2005, we signed a lease renewal agreement with the sole tenant at Outlets Mall. As part of the lease renewal, we agreed to replace the roof on the existing building. This is estimated to cost us approximately $330,000.
In February 2005, we signed a lease renewal and expansion agreement with a significant tenant at Blankenbaker Business Center II. As part of the lease renewal and expansion, the tenant will be expanding into an additional 19,530 square feet and approximately $1,000,000 in tenant improvements will be required.
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 December 27, 2004.
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This section describes our results of operations for Blankenbaker Business Center 1A (referred to in this discussion as “we,” “us” or “our”) for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. We owned one commercial property. We generate almost all of our net operating income from property operations.
Net income for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was approximately $247,000, $280,000 and $306,000, respectively. The changes in net income are described in more detail below. The following table includes our selected summarized operating data for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. This data should be read in conjunction with our financial statements, including the notes thereto.
Period Ended Years Ended
December 27, December 31,
----------------- -----------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Total revenues $ 949,011 $ 949,011 $ 951,763
Operating expenses and operating expenses
- affiliated 188,217 164,127 153,006
Depreciation and amortization 296,039 213,040 207,852
Total interest expense 107,697 131,736 176,836
Net income 247,498 280,014 306,111
During our most recent operating period net revenues have remained relatively stable. Operating expenses and operating expenses – affiliated have increased primarily due to an increase in prepaid leasing commissions amortization as the result of the sole tenant renewing their expiring lease in January 2005. Depreciation and amortization has also increased as the result of a change in estimate, by management, of the useful lives of the leasehold improvements of the sole tenant at Blankenbaker Business Center 1A. The leasehold improvements became fully depreciated at December 27, 2004 as the result of the sole tenant renewing their expiring lease in January 2005. Interest expense has decreased primarily due to continued principal payments made on the mortgage. The mortgage was repaid in full in December 2004 in relation to the merger with NTS Realty. Our net income has decreased primarily as the result of increased operating costs and depreciation and amortization.
Rental income and tenant reimbursements generated by our property were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Blankenbaker Business Center 1A $ 949,011 $ 949,011 $ 951,763
The occupancy levels at our property were as follows:
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Blankenbaker Business Center 1A 100% 100% 100%
79
The average occupancy levels at our property were as follows:
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Blankenbaker Business Center 1A 100% 100% 100%
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 period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Rental Income and Tenant Reimbursements
Rental income and tenant reimbursements for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 were approximately $949,000, $949,000, and $952,000, respectively. There was no change between the year ended December 31, 2003 to the period ended December 27, 2004 and the decrease of approximately $3,000 from the year ended December 31, 2002 to the year ended December 31, 2003 was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating Expenses and Operating Expenses – Affiliated
Operating expenses for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $143,000 and $121,000, respectively. The increase of approximately $22,000, or 18%, was primarily due to an increase in prepaid leasing commissions amortization as the result of the sole tenant renewing their expiring lease in January 2005. The lease commissions were fully amortized as of December 27, 2004. The increase can also be attributed to an increase in income tax expense, partially offset by a decrease in repairs and maintenance expense.
Operating expenses for the years ended December 31, 2003 and 2002 were approximately $121,000 and $115,000, respectively. The increase of approximately $6,000, or 5%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses — affiliated for the period ended December 27, 2004 and the year ended December 31, 2003 were approximately $46,000 and $43,000, respectively. The increase of approximately $3,000, or 7%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Operating expenses — affiliated for the years ended December 31, 2003 and 2002 were approximately $43,000 and $38,000, respectively. The increase of approximately $5,000, or 13%, was a result of changes in personnel costs.
Operating expenses – affiliated are for services performed by employees of NTS Development Company, an affiliate of our general partner. These employee services include property management, leasing, maintenance and other services necessary to manage and operate our business.
80
Depreciation and Amortization Expense
Depreciation and amortization expense for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $296,000 and $213,000, respectively. The increase of approximately $83,000, or 39%, was primarily due to a change in estimate, by management, of the useful lives of the tenant improvements of the sole tenant at Blankenbaker Business Center 1A. The tenant improvements became fully depreciated at December 27, 2004 as the result of the sole tenant renewing its expiring lease in January 2005.
Depreciation and amortization expense for the years ended December 31, 2003 and 2002 was approximately $213,000 and $208,000, respectively. The increase of approximately $5,000, or 2%, was not a significant change and is not indicative of any known trend or uncertainty. There were no offsetting material changes.
Interest Expense
Interest expense for the period ended December 27, 2004 and the year ended December 31, 2003 was approximately $108,000 and $132,000, respectively. The decrease of approximately $24,000, or 18%, was primarily due to continued principal payments made on the mortgage in 2004. The mortgage was paid in full in December 2004 in relation to the merger with NTS Realty.
Interest expense for the year ended December 31, 2003 and 2002 was approximately $132,000 and $177,000, respectively. The decrease of approximately $45,000, or 25%, was primarily due to continued principal payments made on the mortgage in 2003.
Loss on Disposal of Assets
The 2003 loss on disposal of assets can be attributed to the retirement of the roof at Blankenbaker Business Center 1A. The loss represents the cost to retire assets, which were not fully depreciated at the time of replacement.
The following table sets forth the cash provided by or used in operating activities, investing activities and financing activities for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002.
Period Ended Years Ended
December 27, December 31,
----------------- ------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
Operating activities $ 951,226 $ 571,137 $ 514,316
Investing activities (26,379) (155,022) (13,991)
Financing activities (656,433) (425,093) (516,493)
----------------- ----------------- -----------------
Net increase (decrease) in cash and equivalents $ 268,414 $ (8,978) $ (16,168)
================= ================= =================
Cash Flow from Operating Activities
Net cash provided by operating activities increased from approximately $571,000 for the year ended December 31, 2003 to approximately $951,000 for the period ended December 27, 2004, primarily due to cash generated by operating results.
81
Net cash provided by operating activities increased from approximately $514,000 for the year ended December 31, 2002 to approximately $571,000 for the year ended December 31, 2003, primarily due to the change in accounts payable, partially offset by decreased net income from operations.
Cash Flow from Investing Activities
Net cash used in investing activities decreased from approximately $155,000 for the year ended December 31, 2003 to approximately $26,000 for the period ended December 27, 2004, primarily due to decreased capital expenditures as the result of replacing the roof in 2003.
Net cash used in investing activities increased from approximately $14,000 for the year ended December 31, 2002 to approximately $155,000 for the year ended December 31, 2003, primarily due to increased capital expenditures as the result of replacing the roof in 2003.
Cash Flow from Financing Activities
Net cash used in financing activities increased from approximately $425,000 for the year ended December 31, 2003 to approximately $656,000 for the period ended December 27, 2004, primarily due to the payoff of the mortgages as a result of the merger with NTS Realty.
Net cash used in financing activities decreased from approximately $516,000 for the year ended December 31, 2002 to approximately $425,000 for the year ended December 31, 2003, primarily due to capital contributions received in 2003 from NTS Properties IV, NTS Properties VII, Ltd. and ORIG, LLC, partially offset by continued principal payments made on the mortgage.
Future Liquidity
We believe the current occupancy level is considered adequate to fund the operations of our property. However, our future liquidity depends significantly on our property’s 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.
Currently, our plans for renovations and other major capital expenditures include tenant improvements at our commercial property as required by lease negotiations. Changes to current tenant improvements are a typical part of any lease negotiation. Improvements generally include a revision to the current floor plan to accommodate a tenant’s needs, new carpeting and paint and/or wall covering. The extent and cost of the improvements are determined by the size of the space being leased and whether the improvements are for a new tenant or incurred because of a lease renewal.
As of January 12, 2005, we signed a lease renewal agreement with the sole tenant of our commercial building. As part of the lease renewal, approximately $2,703,000 in tenant improvements will be required. These improvements include HVAC replacements, courtyard, restroom, parking lot and loading dock renovations, ceiling tile replacements, new computer cabling, new visitor entrance, cafeteria relocation, monument signage, exterior window modifications, sewer system repairs, and design fees.
82
The demands of liquidity as discussed above will be managed by our general partner using cash provided by operations, cash reserves, existing financing or additional financing secured by our property. Typically, these capital improvements and leasing costs require use of existing financing or additional financing. There can be no guarantee that such funds will be available at which time our general partner will manage the demand on liquidity according to our best interest.
We had no other material commitments for renovations or capital expenditures as of December 27, 2004.
83
Each of the forgoing discussions regarding liquidity, capital resources and results of operations are subject to a number of risks and uncertainties including, but not limited to the following:
| • | our ability to achieve planned revenues; |
| • | our ability to control expenses relative to fluctuating revenues; |
| • | our ability to make payments due under our debt agreements; |
| • | our ability to negotiate and maintain terms with vendors and service providers for operating expenses; |
| • | competitive pressures from other real estate companies, including large commercial and multifamily real estate companies, which may affect the nature and viability of our business strategy; |
| • | trends in the economy as a whole which may affect consumer confidence and demand for the types of rental property held by us; |
| • | our ability to predict the demand for specific rental properties; |
| • | our ability to attract and retain tenants; |
| • | availability and costs of management and labor employed; |
| • | real estate occupancy and development costs, including the substantial fixed investment costs associated with renovations necessary to obtain new tenants and retain existing tenants; |
| • | the risk of a major commercial tenant defaulting on its lease due to risks generally associated with real estate, many of which are beyond our control, including general or local economic conditions, competition, interest rates, real estate tax rates, other operating expenses and acts of God; and |
| • | the risk of revised zoning laws, taxes, and utilities regulations as well as municipal mergers of local governmental entities. |
84
Our primary market risk exposure with regard to financial instruments is our exposure to changes in interest rates. We refinanced substantially all of our debt at the time of our merger with instruments which bear interest at a fixed rate with the exception of an approximately $14.0 million mortgage. We anticipate that a hypothetical 100 basis point increase in interest rates would result in an approximate $5,100,000 decrease in the fair value of our fixed rate debt while increasing interest expense on our variable rate debt by approximately $290,000 annually.
85
Board of Directors
NTS Realty Holdings Limited Partnership:
We have audited the accompanying balance sheets of NTS Realty Holdings Limited Partnership (the Company) as of December 31, 2004 and January 15, 2004 and the related statements of operations, partners’ equity and cash flows for the year ended December 31, 2004. We have also audited the accompanying balance sheets of NTS-Properties III, NTS-Properties IV, NTS-Properties V, A Maryland Limited Partnership, NTS-Properties VI, A Maryland Limited Partnership, NTS-Properties VII, Ltd., NTS Private Group and Blankenbaker Business Center 1A Joint Venture (collectively, Predecessors to the Company) as of December 31, 2003 and the related statements of operations, partners’ equity and cash flows for the period from January 1, 2004 through December 27, 2004 and for the years ended December 31, 2003 and 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NTS Realty Holdings Limited Partnership at December 31, 2004 and the results of its operations and its cash flows for the year ended December 31, 2004 and the financial position of NTS-Properties III, NTS-Properties IV, NTS-Properties V, A Maryland Limited Partnership, NTS-Properties VI, A Maryland Limited Partnership, NTS-Properties VII, Ltd., NTS Private Group and Blankenbaker Business Center 1A Joint Venture as of December 31, 2003 and the results of their operations and their cash flows for the period from January 1, 2004 through December 27, 2004 and for the years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Louisville, Kentucky
March 30, 2005
86
December 31, 2004 January 15, 2004
--------------------------- --------------------------
ASSETS
Cash and equivalents $ 2,573,855 $ 100
Cash and equivalents - restricted 313,255 -
Accounts receivable, net of allowance for doubtful
accounts of $125,485 at December 31, 2004 1,609,802 -
Land, buildings and amenities, net 156,243,048 -
Other assets 5,807,464 -
--------------------------- --------------------------
TOTAL ASSETS $ 166,547,424 $ 100
=========================== ==========================
LIABILITIES AND PARTNERS' EQUITY
Mortgages and notes payable $ 112,799,938 $ -
Accounts payable and accrued expenses 2,588,663 -
Accounts payable and accrued expenses - affiliate 177,879 -
Security deposits 676,665 -
Other liabilities 774,294 -
--------------------------- --------------------------
TOTAL LIABILITIES 117,017,439 -
COMMITMENTS AND CONTINGENCIES (NOTE 9)
PARTNERS' EQUITY 49,529,985 100
--------------------------- --------------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 166,547,424 $ 100
=========================== ==========================
The accompanying notes to financial statements are an integral part of these statements.
87
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
---------------------------------------------------------------------------------
ASSETS
Cash and equivalents $ 180,911 298,240 191,321 125,342 263,655 440,049 33,977
Cash and equivalents
- restricted 9,233 47,101 363,643 245,599 26,625 80,064 7,914
Accounts receivable, net 804,027 171,432 576,113 132,859 4,577 716,510 67,907
Land, buildings and
amenities, net 9,118,287 5,847,221 20,360,408 40,446,437 7,091,886 35,115,339 3,014,838
Other assets 347,164 1,198,424 893,961 1,203,286 789,567 1,366,956 69,302
Investments - 92,601 - - 46,021 - -
---------------------------------------------------------------------------------
TOTAL ASSETS $ 10,459,622 7,655,019 22,385,446 42,153,523 8,222,331 37,718,918 3,193,938
=================================================================================
LIABILITIES AND PARTNERS'
EQUITY
Mortgages and notes payable $ 6,309,037 3,180,515 13,614,792 31,872,038 3,339,017 36,599,920 1,186,699
Accounts payable and
accrued expenses 291,500 246,940 725,261 615,661 184,617 596,279 15,322
Accounts payable and
accrued expenses
- affiliate - - 294,771 206,789 - - -
Security deposits 143,292 28,663 210,252 239,429 26,700 212,398 -
Other liabilities 34,246 75,422 192,601 541,677 22,572 168,120 48,837
---------------------------------------------------------------------------------
TOTAL LIABILITIES 6,778,075 3,531,540 15,037,677 33,475,594 3,572,906 37,576,717 1,250,858
COMMITMENTS AND CONTINGENCIES
(NOTE 11)
MINORITY INTEREST - - 1,015,947 - - - -
---------------------------------------------------------------------------------
PARTNERS' EQUITY 3,681,547 4,123,479 6,331,822 8,677,929 4,649,425 142,201 1,943,080
---------------------------------------------------------------------------------
TOTAL LIABILITIES AND
PARTNERS' EQUITY $ 10,459,622 7,655,019 22,385,446 42,153,523 8,222,331 37,718,918 3,193,938
=================================================================================
The accompanying notes to financial statements are an integral part of these statements.
88
2004
----------------------
REVENUES
Rental income $ -
Tenant reimbursements -
----------------------
TOTAL REVENUES -
----------------------
EXPENSES
Professional and administrative expenses 312,027
Professional and administrative expenses - affiliated 2,543
----------------------
TOTAL OPERATING EXPENSES 314,570
----------------------
OPERATING LOSS (314,570)
Interest and other income 2,978
Interest expense (61,689)
Settlement charge (2,896,259)
----------------------
Net loss $ (3,269,540)
=======================
Net loss allocated to limited partners $ (3,064,291)
=======================
Net loss per limited partnership unit $ (0.29)
=======================
Number of limited partnership units 10,667,117
=======================
The accompanying notes to financial statements are an integral part of these statements.
89
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
------------------------------------------------------------------------------------
REVENUES
Rental income $ 3,456,002 2,064,585 3,831,453 10,801,371 1,571,552 8,768,235 752,787
Tenant reimbursements 355,006 170,362 1,156,227 1,611 - 505,334 196,224
------------------------------------------------------------------------------------
TOTAL REVENUES 3,811,008 2,234,947 4,987,680 10,802,982 1,571,552 9,273,569 949,011
------------------------------------------------------------------------------------
EXPENSES
Operating expenses 861,730 494,648 1,590,944 3,217,277 394,960 1,688,990 142,697
Operating expenses
- affiliated 332,761 473,634 629,365 1,621,749 283,481 746,192 45,520
Management fees 181,963 125,242 276,476 549,901 79,390 559,082 56,946
Real estate taxes 207,702 118,737 541,946 591,783 79,119 401,254 52,710
Professional and
administrative expenses 384,710 618,122 844,973 1,029,137 358,214 158,374 -
Professional and
administrative expenses
- affiliated 155,872 166,250 212,127 432,158 142,424 - -
Depreciation and amortization 1,051,918 488,462 1,323,426 2,663,614 408,391 2,007,353 296,039
------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,176,656 2,485,095 5,419,257 10,105,619 1,745,979 5,561,245 593,912
------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 634,352 (250,148) (431,577) 697,363 (174,427) 3,712,324 355,099
Interest and other income 217,175 211,508 374,782 748,531 30,591 22,757 96
Interest expense (1,104,216) (552,637)(2,080,950) (3,381,358) (264,931) (5,855,434) (107,697)
Loss on disposal of assets (1,261) (12,200) (6,181) (14,404) (1,700) (38,706) -
(Loss) income from
investment in
joint ventures - (36,923) - 77,565 - -
------------------------------------------------------------------------------------
(Loss) income before
minority interest (253,950) (640,400)(2,143,926) (1,949,868) (332,902) (2,159,059) 247,498
Minority interest - - (212,619) 35,561 - - -
------------------------------------------------------------------------------------
Net (loss) income $ (253,950) (640,400)(1,931,307) (1,985,429) (332,902) (2,159,059) 247,498
====================================================================================
Net loss allocated to the
limited partners $ (204,535) (633,996)(1,911,994) (1,965,575) (329,573)
=============================================================
Net loss per limited
partnership unit $ (16.27) (26.30) (62.65) (50.54) (0.60)
=============================================================
Weighted average number of
limited partnership units 12,570 24,109 30,521 38,889 552,236
=============================================================
The accompanying notes to financial statements are an integral part of these statements.
90
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
----------------------------------------------------------------------------------
REVENUES
Rental income $ 3,396,583 2,412,791 3,970,342 10,837,063 1,637,858 8,754,844 752,787
Tenant reimbursements 367,297 180,238 1,110,788 2,743 - 514,590 196,224
----------------------------------------------------------------------------------
TOTAL REVENUES 3,763,880 2,593,029 5,081,130 10,839,806 1,637,858 9,269,434 949,011
----------------------------------------------------------------------------------
EXPENSES
Operating expenses 842,779 500,182 1,435,268 2,941,389 406,138 1,459,097 121,034
Operating expenses
- affiliated 298,986 373,914 572,350 1,500,956 264,324 649,846 43,093
Management fees 179,651 145,239 286,176 548,558 82,176 556,157 56,960
Real estate taxes 206,470 115,806 508,053 1,057,245 78,054 405,145 51,938
Professional and
administrative expenses 305,687 390,396 660,988 763,430 277,924 116,016 -
Professional and
administrative expenses
- affiliated 143,346 146,608 186,979 394,841 131,572 - -
Depreciation and amortization 1,096,104 509,915 1,242,694 2,620,136 407,690 1,916,497 213,040
----------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,073,023 2,182,060 4,892,508 9,826,555 1,647,878 5,102,758 486,065
----------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 690,857 410,969 188,622 1,013,251 (10,020) 4,166,676 462,946
Interest and other income 17,596 7,894 126,934 132,071 6,707 73,164 317
Interest expense (433,874) (263,897) (977,126) (2,513,893) (254,763) (2,942,574) (131,736)
Loss on disposal of assets (6,435) (16,895) (5,784) (103,506) - (119,773) (51,513)
Income from investment in
joint ventures - 119,295 - - 87,757 - -
----------------------------------------------------------------------------------
Income (loss) before
minority interest 268,144 257,366 (667,354) (1,472,077) (170,319) 1,177,493 280,014
Minority interest - - (5,090) 35,228 - - -
----------------------------------------------------------------------------------
Net income (loss) $ 268,144 257,366 (662,264) (1,507,305) (170,319) 1,177,493 280,014
==================================================================================
Net income (loss) allocated
to the limited partners $ 312,826 254,792 (655,641) (1,492,232) (168,616)
===========================================================
Net income (loss) per limited
partnership unit $ 24.89 10.57 (21.48) (38.37) (0.31)
===========================================================
Weighted average number of
limited partnership units 12,570 24,109 30,521 38,889 552,236
===========================================================
The accompanying notes to financial statements are an integral part of these statements.
91
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
----------------------------------------------------------------------------------
REVENUES
Rental income $ 3,518,484 2,204,548 3,894,447 10,603,305 1,515,528 9,525,048 752,787
Tenant reimbursements 358,797 178,957 1,112,148 7,284 - 518,185 198,976
----------------------------------------------------------------------------------
TOTAL REVENUES 3,877,281 2,383,505 5,006,595 10,610,589 1,515,528 10,043,233 951,763
----------------------------------------------------------------------------------
EXPENSES
Operating expenses 845,350 557,689 1,467,950 2,882,559 418,331 1,479,305 114,999
Operating expenses
- affiliated 318,376 414,429 675,184 1,594,783 266,307 731,667 38,007
Management fees 188,331 135,082 283,677 546,539 77,413 588,510 57,133
Real estate taxes 206,035 122,565 515,924 883,396 84,039 404,283 51,281
Professional and
administrative expenses 118,507 154,049 233,440 279,351 100,183 - -
Professional and
administrative expenses
- affiliated 137,511 143,715 167,824 390,127 115,224 - -
Depreciation and amortization 1,176,574 500,548 1,339,126 2,801,218 501,168 1,844,041 207,852
----------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,990,684 2,028,077 4,683,125 9,377,973 1,562,665 5,047,806 469,272
----------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 886,597 355,428 323,470 1,232,616 (47,137) 4,995,427 482,491
Interest and other income 21,518 7,963 27,554 21,219 7,753 69,687 456
Interest income - affiliated - - - - - 143,176 -
Interest expense (495,940) (312,205) (1,039,498) (2,578,183) (266,573) (3,119,435) (176,836)
Interest expense - affiliated - - - - - (155,583) -
Loss on disposal of assets (4,589) (50,770) (69,972) (5,041) (1,674) (432) -
Income from investment in
joint ventures - 81,502 - - 95,935 - -
----------------------------------------------------------------------------------
Income (loss) before
minority interest 407,586 81,918 (758,446) (1,329,389) (211,696) 1,932,840 306,111
Minority interest - - (74,459) 37,145 - - -
----------------------------------------------------------------------------------
Net income (loss) $ 407,586 81,918 (683,987) (1,366,534) (211,696) 1,932,840 306,111
==================================================================================
Net income (loss) allocated
to the limited partners $ 456,133 81,099 (677,147) (1,352,869) (209,579)
===========================================================
Net income (loss) per limited
partnership unit $ 36.29 3.36 (22.19) (34.79) (0.38)
===========================================================
Weighted average number of
limited partnership units 12,570 24,109 30,521 38,889 552,236
===========================================================
The accompanying notes to financial statements are an integral part of these statements.
92
2004
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,269,540)
Adjustments to reconcile net loss to net cash used in
operating activities:
Settlement charge 2,896,259
Changes in assets and liabilities:
Other assets (182,326)
Accounts payable and accrued expenses 477,090
Accounts payable and accrued expenses - affiliate 386
----------------------------
Net cash used in operating activities (78,131)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES -
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from refinancing mortgages and notes payable 104,921,350
Principal payments on mortgages and notes payable (950,000)
Advances to refinance predecessors' mortgages and notes payable (89,172,270)
Payoff to refinance mortgages and notes payable (13,563,968)
Cash contributed via merger 2,514,062
Additions to loan costs (1,097,288)
----------------------------
Net cash provided by financing activities 2,651,886
----------------------------
Net increase in cash and equivalents 2,573,755
----------------------------
CASH AND EQUIVALENTS, beginning of period 100
----------------------------
CASH AND EQUIVALENTS, end of period $ 2,573,855
============================
The accompanying notes to financial statements are an integral part of these statements.
93
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
---------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (253,950) (640,400) (1,931,307)(1,985,429) (332,902) (2,159,059) 247,498
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Provision for doubtful accounts 14,666 3,390 117,824 97,456 12,417 153,854 -
Write-off of uncollectible accounts
receivable (2,092) (8,833) (7,522) (110,406) (14,777) (16,217) -
Loss on disposal of assets 1,261 12,200 6,181 14,404 1,700 38,706 -
Depreciation and amortization 1,166,345 514,538 1,546,043 2,717,934 411,252 2,279,668 361,383
Write-off of loan costs 47,647 16,336 130,853 261,355 24,449 214,464 1,652
Income (loss) from investment in
joint ventures - 36,923 - - (77,565) - -
Minority interest (loss) income - - (212,619) 35,561 - - -
Yield maintenance premiums 693,160 327,590 1,005,521 778,458 - 3,011,814 18,419
Changes in assets and liabilities:
Cash and equivalents - restricted 9,233 26,207 340,199 12,294 (525) 70,815 (547)
Accounts receivable (217,246) 17,680 (171,477) 113,615 5,549 (8,812) 20,749
Other assets (75,421) (5,815) (75,173) (33,758) 3,700 (215,603) 1,279
Accounts payable and accrued
expenses (120,351) 136,722 76,701 28,809 (45,410) (234,145) (7,403)
Accounts payable and accrued
expenses - affiliate 15,256 (9,081) (345,514) (134,600) (79,407) 34,521 304,168
Security deposits 5,590 (2,950) 20,060 5,630 - (29,801) -
Other liabilities 646 26,663 (36,423) (135,670) 1,128 16,511 4,028
---------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 1,284,744 451,170 463,347 1,665,653 (90,391) 3,156,716 951,226
---------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings and
amenities (189,422) (120,395) (443,645) (719,744) (13,846) (857,672) (26,379)
Proceeds from sales of land,
buildings and amenities - - - - - 20,003 -
Investment in and advances (to)
from joint ventures - 132,483 - - 113,930 - -
Minority interest - - 26,295 (51,086) - - -
---------------------------------------------------------------------------------
Net cash (used in) provided
by investing activities (189,422) 12,088 (417,350) (770,830) 100,084 (837,669) (26,379)
---------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and notes
payable - - 396,653 19,216 - 400,000 -
Principal payments on mortgages
and notes payable (442,192) (579,588) (1,262,240) (2,216,594) (160,840) (2,786,019) (595,096)
Refinancing / loan payoff (6,560,005)(2,928,517) (13,754,726)(27,532,038) (3,178,177)(31,318,207) (610,022)
Advance from NTS Realty 6,581,327 2,941,532 14,701,488 29,371,242 3,251,759 31,412,706 912,217
Cash distributions - - - - - (1,114,100) (363,532)
Cash contributions - - - - - 902,000 -
Additions to loan costs (1,975) - (3,116) - - - -
---------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (422,845) (566,573) 78,059 (358,174) (87,258) (2,503,620) (656,433)
---------------------------------------------------------------------------------
Net increase (decrease) in cash
and equivalents 672,477 (103,315) 124,056 536,649 (77,565) (184,573) 268,414
CASH AND EQUIVALENTS, beginning
of period 180,911 298,240 191,321 125,342 263,655 440,049 33,977
----------------------------------------------------------------------------------
CASH AND EQUIVALENTS, end of period $ 853,388 194,925 315,377 661,991 186,090 255,476 302,391
==================================================================================
Interest and yield maintenance
premiums paid on a cash basis $ 1,074,532 549,616 1,972,669 3,196,545 249,083 5,740,666 98,555
==================================================================================
The accompanying notes to financial statements are an integral part of these statements.
94
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
-------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 268,144 257,366 (662,264) (1,507,305) (170,319) 1,177,493 280,014
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Loss on disposal of assets 6,435 16,895 5,784 103,506 - 119,773 51,513
Depreciation and amortization 1,208,522 553,353 1,459,207 2,672,111 410,811 2,192,063 252,493
Loss from investment in joint
ventures - (119,295) - - (87,757) - -
Minority interest (loss) income - - (5,090) 35,228 - - -
Changes in assets and liabilities:
Cash and equivalents
- restricted (3,155) (20,351) (289,041) (8,190) 2,150 134,949 (4,251)
Accounts receivable (172,790) (48,020) (243,834) (98,745) (45) 28,734 (16,777)
Other assets (142,517) 3,487 (250,302) (4,996) 3,991 (86,591) 4,155
Accounts payable and accrued
expenses 163,477 142,294 456,321 1,114 136,034 34,737 6,282
Accounts payable and accrued
expenses - affiliate - - 294,771 206,789 - - -
Security deposits (13,966) (2,968) 45,545 12,836 (2,075) 17,259 -
Other liabilities (64,969) (11,027) (12,470) 106,371 (18,338) (26,643) (2,292)
-------------------------------------------------------------------------------
Net cash provided by operating
activities 1,249,181 771,734 798,627 1,518,719 274,452 3,591,774 571,137
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings and
amenities (469,668) (118,173) (847,587) (724,970) (200,794)(1,183,840) (155,022)
Proceeds from sales of land, buildings
and amenities - 2,781 3,123 - 797 - -
Notes receivable - affiliate - - - - - 6,161,241 -
Investment in and advances (to)
from joint ventures - 41,098 - - (38,132) - -
Minority interest - - (14,073) (62,831) - - -
-------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (469,668) (74,294) (858,537) (787,801) (238,129) 4,977,401 (155,022)
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and notes
payable - - 3,098,101 400,000 - 152,928 -
Principal payments on mortgages
and notes payable (987,051) (604,929) (3,000,679) (2,064,390) (155,201)(3,022,310) (546,767)
Notes payable - affiliate - - - - - (6,664,748) -
Cash distributions - - - - - (377,000) (6,636)
Cash contributions - - - - - 1,351,369 128,310
Additions to loan costs - - (81,992) - - (989) -
-------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (987,051) (604,929) 15,430 (1,664,390) (155,201)(8,560,750) (425,093)
-------------------------------------------------------------------------------
Net (decrease) increase in cash
and equivalents (207,538) 92,511 (44,480) (933,472) (118,878) 8,425 (8,978)
CASH AND EQUIVALENTS, beginning
of period 388,449 205,729 235,801 1,058,814 382,533 431,624 42,955
-------------------------------------------------------------------------------
CASH AND EQUIVALENTS, end of period $ 180,911 298,240 191,321 125,342 263,655 440,049 33,977
===============================================================================
Interest paid on a cash basis $ 433,073 260,306 920,073 2,478,435 252,155 2,802,304 126,369
===============================================================================
The accompanying notes to financial statements are an integral part of these statements.
95
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group BBC 1A
-------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 407,586 81,918 (683,987) (1,366,534) (211,696) 1,932,840 306,111
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Loss on disposal of assets 4,589 50,770 69,972 5,041 1,674 432 -
Depreciation and amortization 1,298,636 541,934 1,575,006 2,870,049 504,289 2,125,666 247,306
Loss from investment in joint ventures - (81,502) - - (95,935) - -
Minority interest (loss) income - - (74,459) 37,145 - - -
Changes in assets and liabilities:
Cash and equivalents - restricted 10,469 1,007 45,822 (19,503) (5,207) (7,669) 5,934
Accounts receivable (111,786) 20,141 (94,579) 18,275 (3,359) (40,032) 9,108
Other assets (66,769) (7,988) (222,841) (39,980) 5,780 (249,644) (1,666)
Accounts payable and
accrued expenses (36,557) (7,144) (317,681) (317,748) (49,021) (188,742) (50,183)
Security deposits 15,334 1,700 (49,425) 3,060 5,400 10,915 -
Other liabilities 23,142 48,388 87,631 121,156 32,224 56,779 (2,294)
-------------------------------------------------------------------------------
Net cash provided by operating
activities 1,544,644 649,224 335,459 1,310,961 184,149 3,640,545 514,316
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings and
amenities (410,360) (249,080) (732,892) (265,559) (72,080) (266,208) (13,991)
Proceeds from sales of land,
buildings and amenities - 498 559 539 364 - -
Notes receivable - affiliate - - - - - (162,114) -
Investment in and advances (to)
from joint ventures - (86,312) - - 4,428 - -
Minority interest - - 230,198 (52,152) - - -
-------------------------------------------------------------------------------
Net cash used in investing activities (410,360) (334,894) (502,135) (317,172) (67,288) (428,322) (13,991)
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and notes
payable - - 955,974 2,000,000 - 81,831 -
Principal payments on mortgages
and notes payable (1,100,827) (570,708) (1,231,420) (1,937,954) (165,560)(2,799,587) (502,363)
Notes payable - affiliate - - - - - 554,901 -
Cash distributions - - - - - (1,231,100) (14,130)
Cash contributions - - - - - - -
Additions to loan costs - - (4,525) (57,188) - (2,156) -
-------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (1,100,827) (570,708) (279,971) 4,858 (165,560)(3,396,111) (516,493)
-------------------------------------------------------------------------------
Net increase (decrease) in cash
and equivalents 33,457 (256,378) (446,647) 998,647 (48,699) (183,888) (16,168)
CASH AND EQUIVALENTS, beginning
of period 354,992 462,107 682,448 60,167 431,232 615,512 59,123
-------------------------------------------------------------------------------
CASH AND EQUIVALENTS, end of period $ 388,449 205,729 235,801 1,058,814 382,533 431,624 42,955
===============================================================================
Interest paid on a cash basis $ 495,105 308,287 987,759 2,534,995 263,928 3,042,759 170,773
===============================================================================
The accompanying notes to financial statements are an integral part of these statements.
96
General Limited
Partner Partners General Limited
Interests Interests Partner Partners Total
-------------------------------------------------------------------------------
PARTNERS' EQUITY
Balances on January 1, 2004 - -$ - $ - $ -
Capital contribution on
January 15, 2004 - - 100 - 100
Net loss - - (205,249) (3,064,291) (3,269,540)
Non-cash settlement charge - - 181,816 2,714,443 2,896,259
Issuance of limited partnership
units 714,491 10,667,117 3,132,721 46,770,445 49,903,166
-------------------------------------------------------------------------------
Balances on December 31, 2004 714,491 10,667,117$ 3,109,388 $ 46,420,597 $ 49,529,985
===============================================================================
| (1) | For the period presented, there are no elements of other comprehensive income as defined by the Financial Accounting Standards Board, Statement of Financial Accounting Standards Statement No. 130, “Reporting Comprehensive Income.” |
The accompanying notes to financial statements are an integral part of these statements.
97
Limited
Partners' Limited General
Interests Partners Partner Total
---------------- ---------------- ---------------- ---------------
PARTNERS' EQUITY/(DEFICIT)
Balances on January 1, 2002 12,570 $ 3,334,101 $ (328,284) $ 3,005,817
Net income (loss) - 456,133 (48,547) 407,586
---------------- ---------------- ---------------- ---------------
Balances on December 31, 2002 12,570 3,790,234 (376,831) 3,413,403
Net income (loss) - 312,826 (44,682) 268,144
---------------- ---------------- ---------------- ---------------
Balances on December 31, 2003 12,570 4,103,060 (421,513) 3,681,547
Net loss - (204,535) (49,415) (253,950)
Merger into NTS Realty (12,570) (3,898,525) 470,928 (3,427,597)
---------------- ---------------- ---------------- ---------------
Balances on December 27, 2004 - $ - $ - $ -
================ ================ ================ ===============
Limited
Partners' Limited General
Interests Partners Partner Total
---------------- ---------------- ---------------- ----------------
PARTNERS' EQUITY/(DEFICIT)
Balances on January 1, 2002 24,109 $ 3,995,123 $ (210,928) $ 3,784,195
Net income - 81,099 819 81,918
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2002 24,109 4,076,222 (210,109) 3,866,113
Net income - 254,792 2,574 257,366
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2003 24,109 4,331,014 (207,535) 4,123,479
Net loss - (633,996) (6,404) (640,400)
Merger into NTS Realty (24,109) (3,697,018) 213,939 (3,483,079)
---------------- ---------------- ---------------- ----------------
Balances on December 27, 2004 - $ - $ - $ -
================ ================ ================ ================
| (1) | For the periods presented, there are no elements of other comprehensive income as defined by the Financial Accounting Standards Board, Statement of Financial Accounting Standards Statement No. 130, “Reporting Comprehensive Income.” |
The accompanying notes to financial statements are an integral part of these statements.
98
Limited
Partners' Limited General
Interests Partners Partner Total
---------------- ---------------- ---------------- ----------------
PARTNERS' EQUITY/(DEFICIT)
Balances on January 1, 2002 30,521 $ 7,784,080 $ (106,007) $ 7,678,073
Net loss - (677,147) (6,840) (683,987)
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2002 30,521 7,106,933 (112,847) 6,994,086
Net loss - (655,641) (6,623) (662,264)
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2003 30,521 6,451,292 (119,470) 6,331,822
Net loss - (1,911,994) (19,313) (1,931,307)
Merger into NTS Realty (30,521) (4,539,298) 138,783 (4,400,515)
---------------- ---------------- ---------------- ----------------
Balances on December 27, 2004 - $ - $ - $ -
================ ================ ================ ================
Limited
Partners' Limited General
Interests Partners Partner Total
---------------- ---------------- ---------------- ----------------
PARTNERS' EQUITY/(DEFICIT)
Balances on January 1, 2002 38,889 $ 11,766,941 $ (215,173) $ 11,551,768
Net loss - (1,352,869) (13,665) (1,366,534)
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2002 38,889 10,414,072 (228,838) 10,185,234
Net loss - (1,492,232) (15,073) (1,507,305)
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2003 38,889 8,921,840 (243,911) 8,677,929
Net loss - (1,965,575) (19,854) (1,985,429)
Merger into NTS Realty (38,889) (6,956,265) 263,765 (6,692,500)
---------------- ---------------- ---------------- ----------------
Balances on December 27, 2004 - $ - $ - $ -
================ ================ ================ ================
| (1) | For the periods presented, there are no elements of other comprehensive income as defined by the Financial Accounting Standards Board, Statement of Financial Accounting Standards Statement No. 130, “Reporting Comprehensive Income.” |
The accompanying notes to financial statements are an integral part of these statements.
99
Limited
Partners' Limited General
Interests Partners Partner Total
---------------- ---------------- ---------------- ----------------
PARTNERS' EQUITY/(DEFICIT)
Balances on January 1, 2002 552,236 $ 5,086,022 $ (54,582) $ 5,031,440
Net loss - (209,579) (2,117) (211,696)
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2002 552,236 4,876,443 (56,699) 4,819,744
Net loss - (168,616) (1,703) (170,319)
---------------- ---------------- ---------------- ----------------
Balances on December 31, 2003 552,236 4,707,827 (58,402) 4,649,425
Net loss - (329,573) (3,329) (332,902)
Merger into NTS Realty (552,236) (4,378,254) 61,731 (4,316,523)
---------------- ---------------- ---------------- ----------------
Balances on December 27, 2004 - $ - $ - $ -
================ ================ ================ ================
Partners' Equity/(Deficit)
---------------------------
Balance on January 1, 2002 $ (2,216,746)
Net income 1,932,840
Distributions (1,231,100)
---------------------------
Balance on December 31, 2002 (1,515,006)
Contributions 1,351,369
Net income 1,177,493
Distributions (871,655)
---------------------------
Balance on December 31, 2003 142,201
Contributions 902,000
Net loss (2,159,059)
Distributions (1,114,100)
---------------------------
Balance on December 27, 2004 $ (2,228,958)
===========================
| (1) | For the periods presented, there are no elements of other comprehensive income as defined by the Financial Accounting Standards Board, Statement of Financial Accounting Standards Statement No. 130, “Reporting Comprehensive Income.” |
The accompanying notes to financial statements are an integral part of these statements.
100
Partners' Equity
---------------------------
Balance on January 1, 2002 $ 1,249,411
Net income 306,111
Distributions (14,130)
---------------------------
Balance on December 31, 2002 1,541,392
Net income 280,014
Distributions (6,636)
Capital contributions 128,310
---------------------------
Balance on December 31, 2003 1,943,080
Net income 247,498
Distributions (363,532)
Merger into NTS Realty (1,827,046)
---------------------------
Balance on December 27, 2004 $ -
===========================
| (1) | For the periods presented, there are no elements of other comprehensive income as defined by the Financial Accounting Standards Board, Statement of Financial Accounting Standards Statement No. 130, “Reporting Comprehensive Income.” |
The accompanying notes to financial statements are an integral part of these statements.
101
NTS Realty Holdings Limited Partnership (“NTS Realty”), a newly formed limited partnership, was organized in the state of Delaware in 2003. Our registration statement on Form S-4 was made effective by the Securities and Exchange Commission (“SEC”) on October 27, 2004 with respect to a proposed merger of NTS-Properties III; NTS-Properties IV; NTS-Properties V, a Maryland limited partnership; NTS-Properties VI, a Maryland limited partnership; and NTS-Properties VII, Ltd. (the “Partnerships”) registered under the Securities Exchange Act of 1934, along with other real estate entities affiliated with their general partners, specifically Blankenbaker Business Center 1A and the NTS Private Group’s assets and liabilities. Certain litigation as described in Note — 9 Commitments and Contingencies was settled as a result of the merger. The merger was completed on December 28, 2004 after a majority of each Partnership’s limited partners voted for the merger. The Partnerships and Blankenbaker Business Center 1A were terminated by the merger and ceased to exist. Concurrent with the merger, ORIG, LLC, a Kentucky limited liability company (“ORIG”), affiliated with the Partnerships’ general partners, contributed substantially all of its assets and liabilities to NTS Realty, including the NTS Private Group properties.
The Partnerships, NTS Private Group and Blankenbaker Business Center 1A are referred to as NTS Realty’s Predecessors (the “Predecessors”). NTS Realty did not have significant operations until the merger on December 28, 2004. All operations prior to that are for the Predecessors and are reflected as such in the accompanying Statements of Operations. The Predecessors’ operating results were substantially complete as of December 27, 2004 for the calendar year ended December 31, 2004, making the results for the period from January 1, 2004 to December 27, 2004 comparable to the years ended December 31, 2003 and 2002. No adjustments or reconciliations are necessary for comparability.
In connection with the merger, we issued 11,381,608 limited partnership units to the former partners of the Partnerships and to ORIG.
At the time of the merger, we refinanced approximately $94.0 million of debt on the properties contributed by the Partnerships and ORIG with approximately $104.0 million of new debt. Acquisition of the new debt required us to pay the yield maintenance premium on the refinanced debt, which totaled approximately $5.8 million.
We are in the business of developing, constructing, owning and operating multifamily properties, commercial and retail real estate and land leases. Following the merger and contribution and as of December 31, 2004, we own thirty-two properties, comprised of: nine multifamily properties; nineteen office and business centers; three retail properties; and one ground lease. The properties are located in and around Louisville (22) and Lexington (3), Kentucky; Orlando (2) and Fort Lauderdale (3), Florida; Indianapolis (1), Indiana and Atlanta (1), Georgia. Our office and business centers aggregate approximately 1.7 million square feet. We own multifamily properties containing approximately 1,350 units and retail properties containing approximately 210,000 square feet of space, as well as one ground lease associated with a 120-space parking lot attached to one of our properties.
The terms “we,” “us” or “our,” as the context requires, may refer to NTS Realty, one of the Partnerships or their interests in the properties and joint ventures listed below.
102
A) Basis of Presentation
The consolidated financial statements of NTS-Properties V and NTS-Properties VI include the accounts of all wholly-owned properties and majority-owned joint ventures. Intercompany transactions and balances have been eliminated.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” In December 2003, the FASB issued FIN No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The primary objectives of these interpretations are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity.
Our adoption of these provisions did not have any impact on our financial statements.
Minority Interest
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 was effective for all financial instruments created or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, FASB Staff Position No. FAS 150-3 was issued, which deferred for an indefinite period the classification and measurement provisions, but not the disclosure provisions of SFAS 150.
NTS-Properties V and NTS-Properties VI consolidated certain properties that were also owned by affiliated parties that have noncontrolling interests. In certain cases, the applicable joint venture agreement provides for a contractual termination date of the agreement based on certain specified events. SFAS 150 describes this type of arrangement as a “limited-life subsidiary”. SFAS 150 requires the disclosure of the estimated settlement value of these noncontrolling interests. As of December 31, 2003, the estimated settlement value of these noncontrolling interests for NTS-Properties V and NTS-Properties VI was approximately $3,147,000 and $555,000, respectively. This settlement value is based on estimated third party consideration paid to the joint venture upon disposition of each property and is net of all other assets and liabilities including any yield maintenance that would have been due on that date had the mortgages encumbering the properties been prepaid on December 31, 2003. The affected joint ventures were merged and ceased to exist at the time of the merger with NTS Realty.
B) Properties and Joint Ventures
NTS Realty succeeded the predecessor entities ownership of properties following the merger whereby all of the joint ventures were combined into NTS Realty and ceased to exist.
103
NTS-Properties III was a limited partnership organized under the laws of the state of Georgia on June 24, 1982. The general partner was NTS-Properties Associates, a Georgia limited partnership.
| • | NTS Center, an office complex with approximately 116,200 net rentable square feet located in Louisville, Kentucky. |
| • | Plainview Center, an office complex with approximately 96,100 net rentable square feet located in Louisville, Kentucky. |
| • | Peachtree Corporate Center, a business park with approximately 191,300 net rentable square feet located in Atlanta, Georgia. |
NTS-Properties IV was a limited partnership organized under the laws of the Commonwealth of Kentucky on May 13, 1983. The general partner was NTS-Properties Associates IV, a Kentucky limited partnership.
| • | Commonwealth Business Center Phase I, a business center with approximately 62,700 net rentable square feet in Louisville, Kentucky. |
| • | Plainview Point Office Center Phases I and II, an office center with approximately 57,300 net rentable square feet in Louisville, Kentucky. |
| • | The Willows of Plainview Phase I, a 118-unit luxury apartment community in Louisville, Kentucky. |
| • | A 9.70% joint venture interest in The Willows of Plainview Phase II, a 144-unit luxury apartment community in Louisville, Kentucky. |
| • | A 3.97% joint venture interest in Golf Brook Apartments, a 195-unit luxury apartment community in Orlando, Florida. |
| • | A 4.96% joint venture interest in Plainview Point Office Center Phase III, an office center with approximately 61,700 net rentable square feet in Louisville, Kentucky. |
| • | A 29.61% joint venture interest in Blankenbaker Business Center 1A, a business center with approximately 100,600 net rentable square feet in Louisville, Kentucky. |
| • | A 10.92% joint venture interest in the Lakeshore/University II Joint Venture. A description of the properties owned by the Joint Venture appears below: |
| • | Lakeshore Business Center Phase I — a business center with approximately 103,800 net rentable square feet located in Fort Lauderdale, Florida. |
| • | Lakeshore Business Center Phase II — a business center with approximately 97,000 net rentable square feet located in Fort Lauderdale, Florida. |
104
| • | Lakeshore Business Center Phase III — a business center with approximately 38,900 net rentable square feet located in Fort Lauderdale, Florida. |
NTS-Properties V, a Maryland limited partnership, was a limited partnership organized on April 30, 1984. The general partner was NTS-Properties Associates V, a Kentucky limited partnership.
| • | Commonwealth Business Center Phase II, a business center with approximately 65,900 net rentable square feet located in Louisville, Kentucky. |
| • | A 90.30% joint venture interest in The Willows of Plainview Phase II, a 144-unit luxury apartment complex located in Louisville, Kentucky. |
| • | An 81.19% joint venture interest in the Lakeshore/University II Joint Venture. A description of the properties owned by the Joint Venture appears below: |
| • | Lakeshore Business Center Phase I — a business center with approximately 103,800 net rentable square feet located in Fort Lauderdale, Florida. |
| • | Lakeshore Business Center Phase II — a business center with approximately 97,000 net rentable square feet located in Fort Lauderdale, Florida. |
| • | Lakeshore Business Center Phase III — a business center with approximately 38,900 net rentable square feet located in Fort Lauderdale, Florida. |
NTS-Properties VI, a Maryland limited partnership, was a limited partnership organized under the laws of the state of Maryland in December 1984. The general partner was NTS-Properties Associates VI, a Kentucky limited partnership.
| • | Sabal Park Apartments, a 162-unit luxury apartment complex in Orlando, Florida. |
| • | Park Place Apartments Phase I, a 180-unit luxury apartment complex in Lexington, Kentucky. |
| • | Park Place Apartments Phase III, a 152-unit luxury apartment complex in Lexington, Kentucky. |
| • | Willow Lake Apartments, a 207-unit luxury apartment complex in Indianapolis, Indiana. |
| • | A 96.03% joint venture interest in Golf Brook Apartments, a 195-unit luxury apartment complex in Orlando, Florida. |
| • | A 95.04% joint venture interest in Plainview Point Office Center Phase III, an office center with approximately 61,700 net rentable square feet in Louisville, Kentucky. |
105
NTS-Properties VII, Ltd. was a limited partnership organized under the laws of the state of Florida in April 1987. The general partner was NTS-Properties Associates VII, a Kentucky limited partnership.
| • | The Park at the Willows, a 48-unit luxury apartment complex in Louisville, Kentucky. |
| • | Park Place Apartments Phase II, a 132-unit luxury apartment complex in Lexington, Kentucky. |
| • | A 31.34% joint venture interest in Blankenbaker Business Center 1A, a business center with approximately 100,600 net rentable square feet in Louisville, Kentucky. |
NTS Private Group (the “Group”) was a group of partnerships and pass-through entities under the common ownership and control of Mr. Nichols. The Group included those properties that were contributed to ORIG as part of a restructuring and then to NTS Realty as part of the merger.
| • | Anthem Office Center, an office building with approximately 84,700 net rentable square feet in Louisville, Kentucky. |
| • | Atrium Center, an office center with approximately 104,200 net rentable square feet in Louisville, Kentucky. |
| • | Blankenbaker Business Center 1B, a business center with approximately 60,000 net rentable square feet in Louisville, Kentucky. |
| • | Blankenbaker Business Center II, a business center with approximately 74,700 net rentable square feet in Louisville, Kentucky. |
| • | Clarke American, a business center with approximately 50,000 net rentable square feet in Louisville, Kentucky. |
| • | Outlets Mall, a retail center with approximately 162,600 net rentable square feet in Louisville, Kentucky. |
| • | Sears Office Building, an office building with approximately 66,900 net rentable square feet in Louisville, Kentucky. |
| • | Springs Medical Office Center, an office center with approximately 97,700 net rentable square feet in Louisville, Kentucky. |
| • | Springs Office Center, an office center with approximately 125,300 net rentable square feet in Louisville, Kentucky. |
| • | Bed, Bath & Beyond, a retail company with approximately 35,000 net rentable square feet in Louisville, Kentucky. |
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| • | Springs Station, a retail center with approximately 12,000 net rentable square feet in Louisville, Kentucky. |
| • | ITT Parking Lot, a ground lease relating to a 120-space parking lot located in Louisville, Kentucky. |
| • | Blankenbaker Business Center Joint Venture owned Blankenbaker Business Center 1A, a business center with approximately 100,600 net rentable square feet in Louisville, Kentucky. |
C) Tax Status
All of the Predecessors were treated as partnerships or pass-through entities for federal income tax purposes with the exception of one property in NTS Private Group which was owned by an individual. As such, no provisions for income taxes were made. The taxable income or loss was passed through to the holders of the partnership units or individual owner for inclusion on their individual income tax returns.
A reconciliation of net income for financial statement purposes versus that for income tax reporting is as follows:
Period Ended Years Ended
December 27, December 31,
------------------ -------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Net (loss) income $ (253,950) $ 268,144 $ 407,586
Items handled differently for tax purposes:
Depreciation and amortization 416,078 335,800 485,293
Prepaid rent and other capitalized costs (133,545) (247,562) (109,335)
Loss on disposal of assets (42,775) (45,580) (237,278)
Allowance for doubtful accounts 12,574 828 1,781
Merger costs 232,691 101,565 -
Other (10,924) 7,634 2,633
------------------ ----------------- ------------------
Taxable income $ 220,149 $ 420,829 $ 550,680
================= ================= ==================
Period Ended Years Ended
December 27, December 31,
------------------ ------------------------------------- ---------------------------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Net (loss) income $ (640,400) $ 257,366 $ 81,918
Items handled differently for tax purposes:
Depreciation and amortization 335,842 300,674 122,776
Rental income 31,374 (5,359) 56,682
Merger costs 444,677 184,679 -
Other (17,835) (110,555) (31,237)
------------------ ----------------- ------------------
Taxable income $ 153,658 $ 626,805 $ 230,139
================= ================= ==================
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Period Ended Years Ended
December 27, December 31,
------------------ -------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Net loss $ (1,931,307) $ (662,264)$ (683,987)
Items handled differently for tax purposes:
Depreciation and amortization 54,529 19,905 2,716
Rental income (9,050) (24,313) (27,140)
Merger costs 559,085 236,455 -
Other 1,267 (219,184) (288,268)
------------------ ----------------- ------------------
Taxable loss $ (1,325,476) $ (649,401)$ (996,679)
================= ================= ==================
Period Ended Years Ended
December 27, December 31,
------------------ -------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Net loss $ (1,985,429) $ (1,507,305)$ (1,366,534)
Items handled differently for tax purposes:
Depreciation and amortization 14,337 6,491 32,336
Loss on disposal of assets (63,918) (100,037) (4,412)
Prepaid rent and other capitalized leasing
costs 40,223 25,379 99,930
Bad debt allowance (12,637) 5,141 5,106
Merger costs 715,540 302,746 -
Accrued expenses - - (2,000)
Other 3,416 4,206 4,140
------------------ ----------------- ------------------
Taxable loss $ (1,288,468) $ (1,263,379)$ (1,231,434)
================= ================= ==================
Period Ended Years Ended
December 27, December 31,
------------------ -------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Net loss $ (332,902) $ (170,319)$ (211,696)
Items handled differently for tax purposes:
Depreciation and amortization 59,190 5,085 88,113
Prepaid rent and other capitalized leasing
costs 3,435 (22,335) 28,958
Bad debt allowance (2,360) (4,148) 6,508
Gain (loss) on disposal of assets 612 (100,231) 658
Merger costs 204,199 83,927 -
Accrued expenses - 476 1,056
Non-deductible expenses 299 393 201
------------------ ----------------- ------------------
Taxable loss $ (67,527) $ (207,152)$ (86,202)
================= ================= ==================
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Period Ended Years Ended
December 27, December 31,
------------------ -------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Net (loss) income $ (2,159,059) $ 1,177,493 $ 1,932,840
Items handled differently for tax purposes:
Depreciation and amortization 18,333 (1,472,625) 278,146
Section 743 adjustments (110,130) (109,236) (107,786)
Prepaid rent and other capitalized costs (19,464) 11,072 (3,634)
Allowance for doubtful accounts 138,963 4,240 -
Accrued expenses - 3,581 (25,854)
Other 476 1,592 599
------------------ ----------------- ------------------
Taxable (loss) income $ (2,130,881) $ (383,883)$ 2,074,311
================= ================= ==================
Period Ended Years Ended
December 27, December 31,
------------------ -------------------------------------
2004 2003 2002
------------------ ----------------- ------------------
Net income $ 247,498 $ 280,014 $ 306,111
Items handled differently for tax purposes:
Depreciation and amortization 52,819 (16,553) (22,751)
Loss on disposal of assets - (2,050) -
Other 31 143 23
------------------ ----------------- ------------------
Taxable income $ 300,348 $ 261,554 $ 283,383
================= ================= ==================
D) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us 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.
E) Cash and Equivalents — Restricted
Cash and equivalents — restricted represents funds which have been escrowed with mortgage companies for property taxes, insurance and tenant improvements in accordance with the loan agreements and certain security deposits.
F) Basis of Property and Depreciation
Land, buildings and amenities are stated at cost. Costs directly associated with the acquisition, development and construction of a project are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are 5-30 years for land improvements, 5-40 years for buildings and improvements and 3-30 years for amenities. Tenant improvements are generally depreciated over the life of the initial or renewal term of the respective tenant lease. The aggregate cost of our properties for federal tax purposes is approximately $237,542,000 at December 31, 2004.
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Depreciation expense for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002 was as follows:
Period Ended Years Ended
December 27, December 31,
---------------- ------------------------------------
2004 2003 2002
---------------- ---------------- -----------------
NTS-Properties III $ 1,030,425 $ 1,075,611 $ 1,156,125
NTS-Properties IV 488,462 509,915 500,548
NTS-Properties V 1,323,426 1,242,694 1,333,412
NTS-Properties VI 2,662,978 2,620,136 2,801,218
NTS-Properties VII 408,391 407,690 501,168
NTS Private Group 1,893,890 1,821,879 1,750,524
Blankenbaker Business Center 1A 296,039 213,040 207,852
---------------- ---------------- -----------------
$ 8,103,611 $ 7,890,965 $ 8,250,847
================ ================ =================
Statement of Financial Accounting Standards 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. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected. Application of this standard during the period from January 1, 2004 to December 27, 2004 and for years ended December 31, 2004, 2003 and 2002 did not result in an impairment loss.
G) Accounts Receivable and Other Assets
Other assets for NTS-Properties VI include minority interest in our joint venture properties totaling approximately $713,000 as of December 31, 2003. This amount was derived primarily from distributions of the joint ventures in excess of the respective minority partners’ historical investment in the joint ventures used for financial reporting purposes. This amount was eliminated in the merger.
Accounts receivable is reported net of allowance for doubtful accounts of $2,609 for NTS-Properties III, $5,443 for NTS-Properties IV, $0 for NTS-Properties V, $12,949 for NTS-Properties VI, $2,360 for NTS-Properties VII, $5,566 for NTS Private Group and $0 for Blankenbaker Business Center 1A at December 31, 2003.
H) Accounts Payable — Affiliate
Accounts payable — affiliate includes amounts owed to NTS Development Company for reimbursement of salary and overhead expenses.
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I) Revenue Recognition
Our multifamily communities have resident leases with terms generally of twelve months or less. We recognize rental revenue on an accrual basis when due from residents. Rental concessions and other inducements to the leases are recognized to revenue on a straight-line basis over the life of the respective leases. In accordance with our standard lease terms, rental payments are generally due on a monthly basis.
Our commercial properties, retail properties and commercial land lease are accounted for as operating leases. We accrue minimum rents on a straight-line basis over the initial or renewal terms of their respective leases. Substantially all of our retail tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. We recognize overage rents only when each tenant’s sales exceeds it sales threshold. We structure our leases to allow us to recover a significant portion of our real estate taxes, property operating and repairs and maintenance expenses from our commercial tenants. Property operating expenses typically include utility, insurance, security, janitorial, landscaping and other administrative expenses. We accrue reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. We also receive estimated payments for these reimbursements from substantially all our tenants throughout the year. We do this to reduce the risk of loss on uncollectible accounts once we perform the final year-end billings for recoverable expenditures. We recognize the difference between estimated recoveries and the final billed amounts in the subsequent year and we believe these differences are not material in any period presented.
We recognize revenue in accordance with each tenant’s lease agreement. Certain of our lease agreements are structured to include scheduled and specified rent increases over the lease term. For financial reporting purposes, the income from these leases is being recognized on a straight-line basis over the initial or renewal lease term. Accrued income from these leases in accounts receivable was $0 at December 31, 2004 due to the application of purchase accounting. All commissions paid to commercial leasing agents and incentives paid to tenants are deferred and amortized on a straight-line basis over the applicable initial or renewal lease term.
We recognize lease termination income upon receipt of the income. We accrue lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.
J) Advertising
We expense advertising costs as incurred. Advertising expense was immaterial to us during the years ended December 31, 2004, 2003 and 2002.
K) Dividend Policy
We pay distributions if and when authorized by our managing general partner. We are required to pay distributions on a quarterly basis, commencing in the first quarter of 2005, equal to sixty-five percent (65%) of our “net cash flow from operations” as this term is defined in regulations promulgated by the Treasury Department under the Internal Revenue Code of 1986, as amended; provided that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity level taxation for federal, state or local income tax purposes, we will adjust the amount distributed to reflect our obligation to pay tax. Any distribution
111
other than a distribution with respect to the final quarter of a calendar year shall be made no later than forty-five (45) days after the last day of such quarter based on our estimate of “net cash flow from operations” for the year. Any distribution with respect to the final quarter of a calendar year shall be made no later than ninety (90) days after the last day of such quarter based on actual “net cash flow from operations” for the year, adjusted for any excess or insufficient distributions made with respect to the first three quarters of the calendar year.
“Net cash flow from operations” may be reduced by the amount of reserves as determined by us each quarter. NTS Realty Capital will establish these reserves for, among other things, working capital or capital improvement needs. Therefore, there is no assurance that we will have net cash flow from operations from which to pay distributions in the future. For example, our partnership agreement permits our managing general partner to reinvest sales or refinancing proceeds in new and existing properties or to create reserves to fund future capital expenditures. Because net cash flow from operations is calculated after reinvesting sales or refinancing proceeds or establishing reserves, we may not have any net cash flow from operations from which to pay distributions.
L) Statements of Cash Flows
For purposes of reporting cash flows, cash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less.
The merger was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141. NTS Realty was treated as the purchasing entity. A portion of each partnership’s assets and liabilities was adjusted to reflect their fair market value. That portion owned by affiliates of the general partner of the Partnerships was reflected at net book value at the merger date. The assets and liabilities contributed through ORIG by NTS Private Group were accounted for as an exchange of partnership units (equivalent to shares) among entities under common control. Accordingly, the portion of the assets and liabilities representing Mr. Nichols’ ownership interest in each of the respective entities comprising NTS Private Group were carried over at net book value at the merger date. The remaining portion of assets and liabilities contributed by and through ORIG were adjusted to reflect their fair market value at the date of the merger. We allocated the purchase price for each property to net tangible and identified intangible assets acquired based on their fair values (including land, buildings, tenant improvements, acquired above and below market leases and the origination cost of acquired in-place leases) and acquired liabilities. No customer relationship intangibles exist. At December 28, 2004 the carrying value of mortgages and notes payable approximated fair market value. We retained an independent appraiser to assess fair value based on estimated cash flow projections that utilize discount and capitalization rates deemed appropriate and available market information.
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Presented below is the balance sheet at December 28, 2004 after giving effect to the purchase accounting, refinancing and exchange of units as discussed above:
ASSETS
Cash and equivalents $ 3,523,855
Cash and equivalents - restricted 313,255
Accounts receivable, net 1,609,802
Land, buildings and amenities, net 156,243,048
Other assets 5,807,464
---------------------------
TOTAL ASSETS $ 167,497,424
===========================
LIABILITIES AND PARTNERS' EQUITY
Mortgages and notes payable $ 113,749,938
Accounts payable and accrued expenses 2,588,663
Account payable and accrued expenses - affiliate 177,879
Security deposits 676,665
Other liabilities 774,294
---------------------------
TOTAL LIABILITIES 117,967,439
---------------------------
PARTNERS' EQUITY 49,529,985
---------------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 167,497,424
===========================
Presented below is proforma condensed unaudited operating results for the years ended December 31, 2004 and 2003 as if the merger was completed on January 1, 2003:
Years Ended December 31,
------------------------------------------------
2004 2003
----------------------- -----------------------
(UNAUDITED) (UNAUDITED)
Total revenues $ 34,269,118 $ 34,404,331
Total operating expenses 32,697,133 31,059,947
----------------------- -----------------------
Operating income 1,571,985 3,344,384
Interest and other income 1,605,440 364,683
Interest expense (13,444,753) (7,568,831)
Loss on disposal of assets (74,452) (303,906)
Settlement charge - (2,896,259)
----------------------- -----------------------
Net loss $ (10,341,780) $ (7,059,929)
======================= =======================
Net loss allocated to limited partners $ (9,692,564) $ (6,616,735)
======================= =======================
Net loss per limited partnership unit $ (0.91) $ (0.62)
======================= =======================
Number of limited partner units 10,667,117 10,667,117
======================= =======================
Ratio of earnings to fixed charges 0.23 0.07
======================= =======================
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We own and operate multifamily, commercial and retail properties in Louisville and Lexington, Kentucky, Fort Lauderdale and Orlando, Florida, Indianapolis, Indiana and Atlanta, Georgia.
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.
The following schedule provides an analysis of our investment in property held for lease as of December 31:
2004
------------------------------
Land and improvements $ 40,452,470
Buildings and improvements 114,913,433
Amenities 877,145
------------------------------
$ 156,243,048
==============================
The following schedule provides an analysis of the Partnerships, Private Group and Blankenbaker Business Center 1A’s investment in property held for lease as of December 31, 2003:
NTS NTS NTS NTS NTS NTS
Properties Properties Properties Properties Properties Private
III IV V VI VII Group (1) BBC 1A
-----------------------------------------------------------------------------------
Land and improvements $ 4,907,512 3,271,528 10,654,904 16,530,082 3,117,945 207,622 2,236,517
Buildings and improvements 23,736,312 12,150,120 31,197,692 59,772,588 10,169,447 14,718,362 5,210,516
Amenities 128,075 - - - - 40,509,543 -
-----------------------------------------------------------------------------------
28,771,899 15,421,648 41,852,596 76,302,670 13,287,392 55,435,527 7,447,033
Less accumulated depreciation 19,653,612 9,574,427 21,492,188 35,856,233 6,195,506 20,320,188 4,432,195
-----------------------------------------------------------------------------------
$ 9,118,287 5,847,221 20,360,408 40,446,437 7,091,886 35,115,339 3,014,838
===================================================================================
| (1) | During 2003 we transferred land and related step rent receivable and lease commission assets of approximately $495,000 to an affiliate. |
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Mortgages and notes payable as of December 31 consist of the following:
2004 2003
---------------- ---------------
Note payable to a bank with interest payable in monthly installments, at a
variable rate based on LIBOR one-month rate plus 1.75%, currently 4.04%, due
June 28, 2005. Refinanced in March 2005 as discussed below. $ 14,971,350 $ -
Mortgage payable to a bank in monthly installments, bearing interest at a
variable rate based on LIBOR one-month rate plus 2.50%, currently 4.78%, due
January 1, 2008, secured by certain land and buildings, with a carrying value
of $17,251,405. The mortgage is guaranteed by Mr. Nichols (75%) and Mr.
Lavin (25%). 14,000,000 -
Mortgage payable to an insurance company in monthly installments, bearing
interest at 5.98%, maturing January 15, 2015, secured by certain land and
buildings, with a carrying value of $74,096,103. 75,000,000 -
Mortgage payable to a bank in monthly installments, bearing interest at
9.00%, maturing August 1, 2010, secured by certain land and a building, with
a carrying value of $3,025,112. 2,806,142 2,884,419
Mortgage payable to an insurance company in monthly installments, bearing
interest at 8.45%, maturing November 1, 2015, secured by certain land and a
building, with a carrying value of $2,687,613. 3,101,366 3,267,522
Mortgage payable to an insurance company in monthly installments, bearing
interest at 8.375%, maturing December 1, 2010, secured by certain land,
buildings and amenities, with a carrying value of $2,821,720. 2,905,604 2,988,656
Note payable to a finance company in monthly installments, bearing interest
at 8.50%, due July 15, 2006, secured by equipment. 15,476 -
NTS-Properties III mortgages refinanced - 6,309,037
NTS-Properties IV mortgages refinanced - 3,180,515
NTS-Properties V mortgages refinanced - 13,614,792
NTS-Properties VI mortgages refinanced - 28,883,382
NTS-Properties VII mortgages refinanced - 3,339,017
NTS Private Group mortgages refinanced - 30,447,979
Blankenbaker Business Center 1A mortgage refinanced - 1,186,699
---------------- ---------------
$ 112,799,938 $ 96,102,018
================ ===============
Based on the borrowing rates currently available to us for loans with similar terms and average maturities, the fair value of long-term debt on December 31, 2004 was approximately $110,067,000.
The note payable to a bank was paid from the proceeds of a $30 million mortgage payable to an insurance company in March 2005. The mortgage payable bears interest at a fixed rate of 5.07%, maturing on March 15, 2015 and is secured by certain land and buildings, with a carrying value of $25,429,635.
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Our mortgages may be prepaid but are generally subject to a yield-maintenance premium.
Scheduled maturities of debt giving effect to the refinancing discussed above are as follows:
For the Years Ended December 31, Amount
- ----------------------------------------------------- ---------------------------------------------------
2005 $ 1,909,812
2006 2,270,794
2007 2,392,473
2008 15,494,585
2009 2,409,774
Thereafter 88,322,500
---------------------------------------------------
$ 112,799,938
===================================================
The following is a schedule of minimum future rental income on noncancellable operating leases as of December 31, 2004:
For the Years Ended December 31, Amount
- ----------------------------------------------------- ---------------------------------------------------
2005 $ 15,361,919
2006 10,972,190
2007 8,496,907
2008 6,083,236
2009 4,379,845
Thereafter 9,386,195
---------------------------------------------------
$ 54,680,292
===================================================
NTS Realty is externally managed under an agreement with NTS Development Company (“NTS Devco”) an affiliate of NTS Realty’s general partner. NTS Devco is paid a management fee pursuant to the terms of an agreement entered into with NTS Devco. NTS Devco is reimbursed its actual costs for services rendered to NTS Realty.
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Pursuant to an agreement with us, NTS Development Company, an affiliate of our general partner, receives property management fees. The fees are paid in an amount equal to 5% of the gross receipts 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 period ended December 27, 2004 and the years ended December 31, 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.
Period Ended
December 27, Years Ended December 31,
-------------------- ------------------------------------------
2004 2003 2002
-------------------- --------------------- --------------------
Property management fees $ 181,963 $ 179,651 $ 188,331
-------------------- --------------------- --------------------
Property management 211,682 191,010 177,032
Leasing 45,047 56,563 105,341
Administrative - operating 66,498 43,603 29,700
Other 9,534 7,810 6,303
-------------------- --------------------- --------------------
Total operating expenses - affiliated 332,761 298,986 318,376
-------------------- --------------------- --------------------
Professional and administrative expenses
- affiliated 155,872 143,346 137,511
-------------------- --------------------- --------------------
Repairs and maintenance fees 9,093 24,859 19,206
Leasing commissions 6,414 9,382 4,135
-------------------- --------------------- --------------------
Total related party transactions capitalized 15,507 34,241 23,341
-------------------- --------------------- --------------------
Total related party transactions $ 686,103 $ 656,224 $ 667,559
==================== ===================== ====================
During the period and years ended 2004, 2003 and 2002, we were charged $7,313, $7,952 and $6,489, respectively, for property maintenance fees from an affiliate of NTS Development Company.
During 2003, NTS Development Company leased 20,368 square feet in NTS Center at a rental rate of $14.50 per square foot. We received approximately $295,000, or 8%, of total rental income from NTS Development Company during 2004 and 2003.
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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 receipts from the multifamily property and 6% of the gross receipts from the commercial properties. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of 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 period ended December 27, 2004 and the years ended December 31, 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.
Period Ended
December 27, Years Ended December 31,
-------------------- ------------------------------------------
2004 2003 2002
-------------------- --------------------- --------------------
Property management fees $ 125,242 $ 145,239 $ 135,082
-------------------- --------------------- --------------------
Property management 296,208 239,620 235,231
Leasing 60,011 57,382 104,833
Administrative - operating 106,740 74,484 68,398
Other 10,675 2,428 5,967
-------------------- --------------------- --------------------
Total operating expenses - affiliated 473,634 373,914 414,429
-------------------- --------------------- --------------------
Professional and administrative expenses
- affiliated 166,250 146,608 143,715
-------------------- --------------------- --------------------
Repairs and maintenance fees 3,889 7,444 13,046
Leasing commissions 17,069 925 18,765
Other - - 5,287
-------------------- --------------------- --------------------
Total related party transactions capitalized 20,958 8,369 37,098
-------------------- --------------------- --------------------
Total related party transactions $ 786,084 $ 674,130 $ 730,324
==================== ===================== ====================
During 2004 and 2003, NTS Development Company leased 1,604 square feet in Commonwealth Business Center Phase I at a rental rate of $5.50 per square foot. We received $8,822 in rental payments from NTS Development Company during 2004 and 2003.
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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 receipts from the multifamily property and 6% of the gross receipts from the commercial properties. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of 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 from NTS Development Company for the period ended December 27, 2004 and the years ended December 31, 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.
Period Ended
December 27, Years Ended December 31,
--------------------- ------------------------------------------
2004 2003 2002
--------------------- -------------------- --------------------
Property management fees $ 276,476 $ 286,176 $ 283,677
--------------------- -------------------- --------------------
Property management 443,260 391,933 441,170
Leasing 47,783 74,119 135,610
Administrative - operating 130,116 105,386 97,022
Other 8,206 912 1,382
--------------------- -------------------- --------------------
Total operating expenses - affiliated 629,365 572,350 675,184
--------------------- -------------------- --------------------
Professional and administrative expenses
- affiliated 212,127 186,979 167,824
--------------------- -------------------- --------------------
Repairs and maintenance fees 16,920 6,251 32,505
Leasing commissions 567 6,341 77,760
Construction management - - 6,061
--------------------- -------------------- --------------------
Total related party transactions capitalized 17,487 12,592 116,326
--------------------- -------------------- --------------------
Total related party transactions $ 1,135,455 $ 1,058,097 $ 1,243,011
===================== ==================== ====================
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Pursuant to an agreement with us, NTS Development Company, an affiliate of our general partner, receives property management fees on a monthly basis. The fee is equal to 5% and 6% of the gross revenues from the multifamily communities and the commercial property, respectively. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of costs incurred which relate to capital improvements and major repair and renovation projects. 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 period ended December 27, 2004 and the years ended December 31, 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.
Period Ended
December 27, Years Ended December 31,
--------------------- ------------------------------------------
2004 2003 2002
--------------------- -------------------- --------------------
Property management fees $ 549,901 $ 548,558 $ 546,539
--------------------- -------------------- --------------------
Property management 1,061,364 1,035,840 1,019,792
Leasing 140,561 156,094 193,428
Administrative - operating 390,518 297,022 339,753
Other 29,306 12,000 41,810
--------------------- -------------------- --------------------
Total operating expenses - affiliated 1,621,749 1,500,956 1,594,783
--------------------- -------------------- --------------------
Professional and administrative expenses
- affiliated 432,158 394,841 390,127
--------------------- -------------------- --------------------
Repairs and maintenance fees 32,063 37,347 12,385
Leasing commissions 10,990 13,938 8,515
--------------------- -------------------- --------------------
--------------------- -------------------- --------------------
Total related party transactions capitalized 43,053 51,285 20,900
--------------------- -------------------- --------------------
Total related party transactions $ 2,646,861 $ 2,495,640 $ 2,552,349
===================== ==================== ====================
During the period and years ended 2004, 2003 and 2002, we were charged $28,025, $29,643 and $29,586, respectively, for property maintenance fees from an affiliate of NTS Development Company.
120
Pursuant to an agreement with us, NTS Development Company, an affiliate of our general partner, receives property management fees on a monthly basis. The fee is equal to 5% of the gross revenues from our multifamily communities. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of costs incurred which relates to capital improvements and major repair and renovation projects. 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 period ended December 27, 2004 and the years ended December 31, 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.
Period Ended
December 27, Years Ended December 31,
--------------------- ------------------------------------------
2004 2003 2002
--------------------- -------------------- --------------------
Property management fees $ 79,390 $ 82,176 $ 77,413
--------------------- -------------------- --------------------
Property management 167,206 155,314 153,129
Leasing 25,141 27,627 31,968
Administrative - operating 88,408 75,108 79,844
Other 2,726 6,275 1,366
--------------------- -------------------- --------------------
Total operating expenses - affiliated 283,481 264,324 266,307
--------------------- -------------------- --------------------
Professional and administrative expenses
- affiliated 142,424 131,572 115,224
--------------------- -------------------- --------------------
Repair and maintenance fees - 11,186 2,235
Construction management - - 1,547
--------------------- -------------------- --------------------
Total related party transactions capitalized - 11,186 3,782
--------------------- -------------------- --------------------
Total related party transactions $ 505,295 $ 489,258 $ 462,726
===================== ==================== ====================
121
NTS Development Company, an affiliate of ours, receives property management fees on a monthly basis. The fee is equal to 6% of the gross revenues from commercial and retail properties and $100 monthly for each commercial land lease. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5% of costs incurred which relate to capital improvements and major repair and renovation projects. These repair and maintenance fees are capitalized as part of land, buildings and amenities.
We were charged the following amounts by NTS Development Company for the period ended December 27, 2004 and the years ended December 31, 2003 and 2002. These charges include items which have been expensed as operating expenses — affiliated and items which have been capitalized as other assets or as land, buildings and amenities.
Period Ended
December 27, Years Ended December 31,
--------------------- ----------------------------------------
2004 2003 2002
--------------------- -------------------- ------------------
Property management fees $ 559,082 $ 556,157 $ 588,510
Property management 474,749 410,144 400,372
Leasing 80,305 107,036 218,844
Administrative - operating 171,943 121,321 99,000
Other 19,195 11,345 13,451
--------------------- -------------------- ------------------
Total operating expenses - affiliated 746,192 649,846 731,667
--------------------- -------------------- ------------------ --------------------- ------------------------------------------
Repairs and maintenance fees 43,468 73,669 25,436
Leasing commissions 30,152 57,015 81,672
Construction management - 5,001 -
--------------------- -------------------- ------------------
Total related party transactions capitalized 73,620 135,685 107,108
--------------------- -------------------- ------------------
Total related party transactions $ 1,378,894 $ 1,341,688 $ 1,427,285
===================== ==================== ==================
During the period and years ended 2004, 2003 and 2002, we were charged $33,807, $23,660, and $34,427, respectively, for property maintenance fees from an affiliate of NTS Development Company.
122
Pursuant to an agreement with the partnerships which formed the Blankenbaker Business Center Joint Venture, NTS Development Company, an affiliate of the general partners of the partnerships, receives property management fees on a monthly basis. The fee is equal to 6% of the gross revenues from the partnerships’ commercial properties. Also permitted by an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of costs incurred which relate to capital improvements. These repair and maintenance fees are capitalized as part of land, buildings and amenities.
The Blankenbaker Business Center Joint Venture was charged the following amounts pursuant to an agreement with NTS Development Company for the period ended December 27, 2004 and the years ended December 31, 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. The professional and administrative expenses —affiliated includes a cost recovery to provide for expenditures made on the Joint Venture’s behalf.
Period Ended
December 27, Years Ended December 31,
--------------------- ----------------------------------------
2004 2003 2002
--------------------- -------------------- ------------------
Property management fees $ 56,946 $ 56,960 $ 57,133
--------------------- -------------------- ------------------
Property management 32,239 28,873 22,595
Leasing - 1,657 3,831
Administrative - operating 12,264 11,700 9,900
Other 1,017 863 1,681
--------------------- -------------------- ------------------
Total operating expenses - affiliated 45,520 43,093 38,007
--------------------- -------------------- ------------------
Repair and maintenance fees - 7,817 -
--------------------- -------------------- ------------------
Total related party transactions $ 102,466 $ 107,870 $ 95,140
===================== ==================== ==================
We, as an owner of real estate, 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 and 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.
We do not believe there is any 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 combined financial position or results of operations.
Litigation
On May 6, 2004, the Superior Court of the State of California for the County of Contra Costa granted its final approval of the settlement agreement jointly filed by the general partners (the “General Partners”) of the Partnerships, along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan, et al. v. NTS-Properties Associates, et al. (Case No. C 01-05090)
123
on December 5, 2003. At the final hearing, any member of the class of plaintiffs was given the opportunity to object to the final approval of the settlement agreement, the entry of a final judgment dismissing with prejudice the Buchanan litigation, or an application of an award for attorneys’ fees and expenses to plaintiffs’ counsel. The Superior Court’s order provided, among other things, that: (1) the settlement agreement, and all transactions contemplated thereby, including the merger of the Partnerships into us, are fair, reasonable and adequate, and in the best interests of the class of plaintiffs; (2) the plaintiffs’ complaint and each and every cause of action and claim set forth therein is dismissed with prejudice; (3) each class member is barred from transferring, selling or otherwise disposing of (other than by operation of law) their interests until the earlier of the closing date of the merger, the termination of the settlement or June 30, 2004; and (4) each class member who requested to be excluded from the settlement released their claims in the Bohm litigation.
On June 11, 2004, Joseph Bohm and David Duval, class members who objected to the settlement agreement but whose objections were overruled by the Superior Court (the “Appellants”), filed an appeal in the Court of Appeals of the State of California, First Appellate District. The Appellants filed their opening appellate brief on October 22, 2004. The General Partners and the Partnerships, as well as the class representatives, filed their respective responses on February 14, 2005, and Appellants filed their reply. The appellate court is in the process of scheduling oral arguments on this matter.
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 certain of the General Partners and several individuals and entities affiliated with us. The complaint was amended to include the general partner of NTS-Properties III and the general partner of NTS-Properties Plus Ltd., which 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 the Partnerships based on alleged overpayment of fees, prohibited investments, improper failures to make distributions, purchases of limited partnerships interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and 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 Partnerships, a declaratory judgment and injunctive relief. No amounts have been accrued for the settlement of this action in our financial statements. The General Partners and their legal counsel believe that this action is without merit and are vigorously defending it.
On March 2, 2004, the General Partners filed a motion to dismiss the Bohm litigation. After the motion to dismiss was fully briefed, the settlement agreement in the Buchanan litigation received final court approval. The Circuit Court of Jefferson County, Kentucky, instructed the plaintiffs in the Bohm litigation to file an amended complaint in light of the approved settlement of the Buchanan litigation. The plaintiffs in the Bohm litigation filed a corrected second amended complaint on August 11, 2004. The General Partners, along with all defendants, filed a motion to strike the corrected second amended complaint. On February 9, 2005, the Circuit Court instructed the defendants to file a responsive pleading only as to direct claims asserted by the individual plaintiffs. On March 9, 2005, the General Partners, along with all of the defendants, filed: (1) a motion to dismiss and (2) a joint motion to dismiss the “corrected” second amended complaint. A hearing on these motions likely will occur during the second or third quarter of 2005. The General Partners believe that the claims asserted in the corrected second amended complaint have no merit.
124
Merger/Settlement Charge
NTS Realty was formed as part of a class action settlement where its affiliate and limited partner ORIG has agreed to admit a “qualified settlement trust” as a special member of ORIG. This special member interest is being created for the benefit of the class members in the litigation who are former limited partners who sold their limited partnership interests to ORIG, its affiliates or the Partnerships either as part of tender offers, other repurchase programs or otherwise. Under the terms of ORIG’s operating agreement, all of the economic and other rights associated with up to 620,000 Units owned by ORIG will be designated for the benefit of the qualified settlement trust. ORIG will own the Units, but all of the rights associated with the Units will inure to the qualified settlement trust. Plaintiffs’ counsel, or his designee, will have the right, acting as a representative of these former limited partners, to cause ORIG to vote these designated Units pursuant to his direction. The amount of Units was determined based on the $6.2 million non-cash amount of the $6.85 million settlement amount agreed upon by the general partners and plaintiffs’ counsel. Therefore, if each Unit is valued at $10.00, then the economic and other rights associated with 620,000 Units will be needed to satisfy the settlement amount. The final amount of the settlement, however, is based on the amount of valid claims filed by the former limited partners in the class of plaintiffs. If claims are not made for the full $6.2 million settlement amount, ORIG will designate the economic and other rights to fewer Units for the benefit of the qualified settlement trust to satisfy the claims. We refer to these designated Units as the “Class Units.” Under the terms of the settlement agreement governing the qualified settlement trust, Mr. Nichols, his spouse and Mr. Lavin are jointly obligated, for a period of two years, to repurchase from the qualified settlement trust, using 75% of the distributions that ORIG receives in respect of the Units owned by ORIG which otherwise would have gone to Mr. Nichols, his spouse or Mr. Lavin, the economic and other rights associated with the number of Class Units calculated under the formula described below. Each payment will result in the redesignation of rights associated with the number of Class Units equal to the amount of the distribution divided by 115% of the “fair market value” of the Units. As a result of each payment, the number of Class Units designated for the benefit of the qualified settlement trust will decrease until the economic and other rights associated with all of the Class Units are ultimately redesignated for the benefit of Mr. Nichols, his spouse, and/or Mr. Lavin within two years of when we begin making distributions. If any Class Units remain at the end of this two-year period, Mr. Nichols, his spouse and Mr. Lavin must make a final payment to the qualified settlement trust that is sufficient to redesignate any remaining Class Units. For these purposes, fair market value will be equal to the average closing price of the Units on the American Stock Exchange for the thirty-day period prior to the date of the redesignation. Our Statement of Operations includes a non-cash charge for our estimate related to the settlement with a corresponding credit to Partners’ Equity immediately following the completion of the merger. The non-cash charge was approximately $2.9 million. Our earnings were negatively impacted by this non-cash charge. However, there was no effect on our future liquidity because Mr. Nichols, his spouse and Mr. Lavin must make the payments to the qualified settlement trust to redesignate the Class Units as set forth above.
125
Our reportable operating segments include only one segment — Commercial Real Estate Operations.
Our reportable operating segments include — Multifamily and Commercial Real Estate Operations. The multifamily operations represent our ownership and operating results relative to a multifamily community known as The Willows of Plainview Phase I. The commercial operations represent our ownership and operating results relative to suburban commercial office space known as Commonwealth Business Center Phase I and Plainview Point Office Center Phases I and II.
The financial information of the operating segments has been prepared using a management approach, which is consistent with the basis and manner in which our management internally reports financial information for the purposes of assisting in making internal operating decisions. Our management evaluates performance based on stand-alone operating segment net income or loss.
Certain items such as professional and administrative expenses and joint venture income or loss incurred at the Partnership level have not been allocated to the operating segments.
Period Ended December 27, 2004
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 1,049,296 $ 1,015,289 $ 2,064,585
Tenant reimbursements - 170,362 170,362
--------------------- --------------------- ---------------------
Total revenues $ 1,049,296 $ 1,185,651 $ 2,234,947
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 515,206 $ 453,076 $ 968,282
Management fees 53,238 72,004 125,242
Real estate taxes 52,642 66,095 118,737
Depreciation and amortization 205,319 279,780 485,099
--------------------- --------------------- ---------------------
Total operating expenses $ 826,405 $ 870,955 $ 1,697,360
--------------------- --------------------- ---------------------
Operating income 222,891 314,696 537,587
Interest and other income 1,116 6,055 7,171
Interest expense (536,784) (15,853) (552,637)
Loss on disposal of assets (6,592) (5,608) (12,200)
--------------------- --------------------- ---------------------
Net (loss) income $ (319,369) $ 299,290 $ (20,079)
===================== ===================== =====================
126
Year Ended December 31, 2003
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 1,139,765 $ 1,273,026 $ 2,412,791
Tenant reimbursements - 180,238 180,238
--------------------- --------------------- ---------------------
Total revenues $ 1,139,765 $ 1,453,264 $ 2,593,029
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 448,463 $ 425,633 $ 874,096
Management fees 56,764 88,475 145,239
Real estate taxes 51,976 63,830 115,806
Depreciation and amortization 205,406 298,393 503,799
--------------------- --------------------- ---------------------
Total operating expenses $ 762,609 $ 876,331 $ 1,638,940
--------------------- --------------------- ---------------------
Operating income 377,156 576,933 954,089
Interest and other income 237 4,758 4,995
Interest expense (211,536) (52,361) (263,897)
Loss on disposal of assets - (16,895) (16,895)
--------------------- --------------------- ---------------------
Net income $ 165,857 $ 512,435 $ 678,292
===================== ===================== =====================
Land, buildings and amenities, net $ 3,082,611 $ 2,761,920 $ 5,844,531
===================== ===================== =====================
Expenditures for land, buildings
and amenities $ 12,690 $ 105,483 $ 118,173
===================== ===================== =====================
Segment liabilities $ 2,909,359 $ 459,125 $ 3,368,484
===================== ===================== =====================
Year Ended December 31, 2002
------------------------------------------------------------------
Multifamily Commercial Total
-------------------- --------------------- ---------------------
Rental income $ 1,049,458 $ 1,155,090 $ 2,204,548
Tenant reimbursements - 178,957 178,957
-------------------- --------------------- ---------------------
Total revenues $ 1,049,458 $ 1,334,047 $ 2,383,505
-------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 504,361 $ 469,757 $ 974,118
Management fees 53,364 81,718 135,082
Real estate taxes 60,481 62,084 122,565
Depreciation and amortization 207,699 286,733 494,432
-------------------- --------------------- ---------------------
Total operating expenses $ 825,905 $ 900,292 $ 1,726,197
-------------------- --------------------- ---------------------
Operating income 223,553 433,755 657,308
Interest and other income 925 5,906 6,831
Interest expense (227,071) (85,134) (312,205)
Loss on disposal of assets (50,770) - (50,770)
-------------------- --------------------- ---------------------
Net (loss) income $ (53,363) $ 354,527 $ 301,164
==================== ===================== =====================
Land, buildings and amenities, net $ 3,278,109 $ 2,972,457 $ 6,250,566
==================== ===================== =====================
Expenditures for land, buildings
and amenities $ 143,962 $ 105,118 $ 249,080
==================== ===================== =====================
Segment liabilities $ 3,125,495 $ 866,195 $ 3,991,690
==================== ===================== =====================
127
A reconciliation of the totals reported for the operating segments to the applicable line items in the financial statements is necessary given amounts recorded at the Partnership level and not allocated to the operating properties for internal reporting purposes:
Period Ended
December 27, Years Ended December 31,
------------------- -----------------------------------------
2004 2003 2002
------------------- --------------------- -------------------
OPERATING EXPENSES AND OPERATING
EXPENSES - AFFILIATED
Operating expenses and operating expenses -
affiliated for reportable segments $ 968,282 $ 874,096 $ 974,118
Operating expenses and operating expenses
- affiliated for Partnership - - (2,000)
------------------- --------------------- -------------------
Total operating expenses and operating
expenses - affiliated $ 968,282 $ 874,096 $ 972,118
=================== ===================== ===================
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for
reportable segments $ 485,099 $ 503,799 $ 494,432
Depreciation and amortization for Partnership 3,363 6,116 6,116
------------------- --------------------- -------------------
Total depreciation and amortization $ 488,462 $ 509,915 $ 500,548
=================== ===================== ===================
INTEREST AND OTHER INCOME
Interest and other income for reportable
segments $ 7,171 $ 4,995 $ 6,831
Interest and other income for Partnership 204,337 2,899 1,132
------------------- --------------------- -------------------
Total interest and other income $ 211,508 $ 7,894 $ 7,963
=================== ===================== ===================
NET (LOSS) INCOME
Net (loss) income for reportable segments $ (20,079) $ 678,292 $ 301,164
Net loss for Partnership (1) (620,321) (420,926) (219,246)
------------------- --------------------- -------------------
Total net (loss) income $ (640,400) $ 257,366 $ 81,918
=================== ===================== ===================
LAND, BUILDINGS AND AMENITIES
Land, buildings and amenities for
reportable segments $ N/A $ 5,844,531 $ 6,250,566
Land, building and amenities for Partnership N/A 2,690 8,073
------------------- --------------------- -------------------
Total land, buildings and amenities $ N/A $ 5,847,221 $ 6,258,639
=================== ===================== ===================
LIABILITIES
Liabilities for reportable segments $ N/A $ 3,368,484 $ 3,991,690
Liabilities for Partnership N/A 163,056 16,480
------------------- --------------------- -------------------
Total liabilities $ N/A $ 3,531,540 $ 4,008,170
=================== ===================== ===================
| (1) | The Partnership net loss was primarily composed of professional and administrative costs born by the Partnership and also includes any joint venture income or loss recorded at the Partnership level and not allocated to the operating segments. The professional and administrative costs include the tax and public company reporting and compliance costs associated with a public limited partnership. |
128
Our reportable operating segments include — Multifamily and Commercial Real Estate Operations. The multifamily operations represent our ownership and operating results relative to a multifamily community known as The Willows of Plainview Phase II. The commercial operations represent our ownership and operating results relative to suburban commercial office space known as Commonwealth Business Center Phase II and Lakeshore Business Center Phases I, II and III.
The financial information of the operating segments has been prepared using a management approach, which is consistent with the basis and manner in which our management internally reports financial information for the purposes of assisting in making internal operating decisions. Our management evaluated performance based on stand-alone operating segment net income or loss. Professional and administrative expenses, interest and other income, depreciation, interest expense and minority interest income or loss recorded at the Partnership level have not been allocated to the segments.
Period Ended December 27, 2004
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 1,111,361 $ 2,720,092 $ 3,831,453
Tenant reimbursements - 1,156,227 1,156,227
--------------------- --------------------- ---------------------
Total revenues $ 1,111,361 $ 3,876,319 $ 4,987,680
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 577,331 $ 1,642,978 $ 2,220,309
Management fees 57,043 219,433 276,476
Real estate taxes 57,524 484,422 541,946
Depreciation and amortization 258,567 1,049,785 1,308,352
--------------------- --------------------- ---------------------
Total operating expenses $ 950,465 $ 3,396,618 $ 4,347,083
--------------------- --------------------- ---------------------
Operating income 160,896 479,701 640,597
Interest and other income 721 26,556 27,277
Interest expense (704,842) (1,282,782) (1,987,624)
Loss on disposal of assets (5,698) (483) (6,181)
--------------------- --------------------- ---------------------
Net loss $ (548,923) $ (777,008) $ (1,325,931)
===================== ===================== =====================
129
Year Ended December 31, 2003
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 1,232,075 $ 2,738,267 $ 3,970,342
Tenant reimbursements - 1,110,788 1,110,788
--------------------- --------------------- ---------------------
Total revenues $ 1,232,075 $ 3,849,055 $ 5,081,130
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 504,459 $ 1,503,159 $ 2,007,618
Management fees 61,971 224,205 286,176
Real estate taxes 56,796 451,257 508,053
Depreciation and amortization 228,427 995,648 1,224,075
--------------------- --------------------- ---------------------
Total operating expenses $ 851,653 $ 3,174,269 $ 4,025,922
--------------------- --------------------- ---------------------
Operating income 380,422 674,786 1,055,208
Interest and other income 754 43,913 44,667
Interest expense (278,086) (678,678) (956,764)
Loss on disposal of assets (2,070) (3,714) (5,784)
--------------------- --------------------- ---------------------
Net income $ 101,020 $ 36,307 $ 137,327
===================== ===================== =====================
Land, buildings and amenities, net $ 3,432,043 $ 16,925,973 $ 20,358,016
===================== ===================== =====================
Expenditures for land, buildings
and amenities $ 14,382 $ 833,205 $ 847,587
===================== ===================== =====================
Segment liabilities $ 3,940,786 $ 10,696,988 $ 14,637,774
===================== ===================== =====================
Year Ended December 31, 2002
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 1,225,210 $ 2,669,237 $ 3,894,447
Tenant reimbursements - 1,112,148 1,112,148
--------------------- --------------------- ---------------------
Total revenues $ 1,225,210 $ 3,781,385 $ 5,006,595
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 593,838 $ 1,551,296 $ 2,145,134
Management fees 62,995 220,682 283,677
Real estate taxes 65,768 450,156 515,924
Depreciation and amortization 226,011 1,094,496 1,320,507
--------------------- --------------------- ---------------------
Total operating expenses $ 948,612 $ 3,316,630 $ 4,265,242
--------------------- --------------------- ---------------------
Operating income 276,598 464,755 741,353
Interest and other income 1,666 22,595 24,261
Interest expense (298,498) (720,638) (1,019,136)
Loss on disposal of assets (54,813) (15,159) (69,972)
--------------------- --------------------- ---------------------
Net loss $ (75,047) $ (248,447) $ (323,494)
===================== ===================== =====================
Land, buildings and amenities, net $ 3,656,265 $ 17,100,980 $ 20,757,245
===================== ===================== =====================
Expenditures for land, buildings
and amenities $ 164,738 $ 568,154 $ 732,892
===================== ===================== =====================
Segment liabilities $ 4,099,888 $ 10,032,994 $ 14,132,882
===================== ===================== =====================
130
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is necessary given amounts recorded at the Partnership level and not allocated to the operating properties for internal reporting purposes:
Period Ended
December 27, Years Ended December 31,
-------------------- ------------------------------------------
2004 2003 2002
-------------------- --------------------- --------------------
OPERATING EXPENSES AND OPERATING EXPENSES
- AFFILIATED
Operating expenses and operating expenses -
affiliated for reportable segments $ 2,220,309 $ 2,007,618 $ 2,145,134
Operating expenses and operating expenses -
affiliated for Partnership - - (2,000)
-------------------- --------------------- --------------------
Total operating expenses and operating
expenses - affiliated $ 2,220,309 $ 2,007,618 $ 2,143,134
==================== ===================== ====================
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for
reportable segments $ 1,308,352 $ 1,224,075 $ 1,320,507
Depreciation and amortization for Partnership 15,074 18,619 18,619
-------------------- --------------------- --------------------
Total depreciation and amortization $ 1,323,426 $ 1,242,694 $ 1,339,126
==================== ===================== ====================
INTEREST AND OTHER INCOME
Interest and other income for reportable
segments $ 27,277 $ 44,667 $ 24,261
Interest and other income for Partnership 347,505 82,267 3,293
-------------------- --------------------- --------------------
Total interest and other income $ 374,782 $ 126,934 $ 27,554
==================== ===================== ====================
INTEREST EXPENSE
Interest expense for reportable segments $ 1,987,624 $ 956,764 $ 1,019,136
Interest expense for Partnership 93,326 20,362 20,362
-------------------- --------------------- --------------------
Total interest expense $ 2,080,950 $ 977,126 $ 1,039,498
==================== ===================== ====================
NET (LOSS) INCOME
Net (loss) income for reportable segments $ (1,325,931) $ 137,327 $ (323,494)
Net loss for Partnership (1) (817,995) (804,681) (434,952)
Minority interest (212,619) (5,090) (74,459)
-------------------- --------------------- --------------------
Total net loss $ (1,931,307) $ (662,264) $ (683,987)
==================== ===================== ====================
LAND, BUILDINGS AND AMENITIES
Land, buildings and amenities for
reportable segments $ N/A $ 20,358,016 $ 20,757,245
Land, buildings and amenities for Partnership N/A 2,392 7,177
-------------------- --------------------- --------------------
Total land, buildings and amenities $ N/A $ 20,360,408 $ 20,764,422
==================== ===================== ====================
LIABILITIES
Liabilities for reportable segments $ N/A $ 14,637,774 $ 14,132,882
Liabilities for Partnership N/A 399,903 23,206
-------------------- --------------------- --------------------
Total liabilities $ N/A $ 15,037,677 $ 14,156,088
==================== ===================== ====================
| (1) | The Partnership net loss was primarily composed of professional and administrative costs born by the Partnership as well as interest and other income, depreciation, interest expense and minority interest recorded at the Partnership level and not allocated to the operating segments. The professional and administrative costs include the tax and public company reporting and compliance costs associated with a public limited partnership. |
131
Our reportable operating segments include — Multifamily and Commercial Real Estate Operations. The multifamily operations represent our ownership and operating results relative to the multifamily communities known as Willow Lake Apartments, Park Place Apartments Phases I and III, Sabal Park Apartments and Golf Brook Apartments. The commercial operations represent our ownership and operating results relative to suburban commercial office space known as Plainview Point Office Center Phase III.
The financial information of the operating segments has been prepared using a management approach, which is consistent with the basis and manner in which our management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. We evaluate performance based on stand-alone operating segment net income or loss. Professional and administrative expenses, depreciation and amortization, interest and other income, interest expense and minority interest income or loss recorded at the Partnership level have not been allocated to the segments.
Period Ended December 27, 2004
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 10,066,386 $ 734,985 $ 10,801,371
Tenant reimbursements - 1,611 1,611
--------------------- --------------------- ---------------------
Total revenues $ 10,066,386 $ 736,596 $ 10,802,982
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 4,490,747 $ 348,279 $ 4,839,026
Management fees 505,661 44,240 549,901
Real estate taxes 545,857 45,926 591,783
Depreciation and amortization 2,359,139 225,704 2,584,843
--------------------- --------------------- ---------------------
Total operating expenses $ 7,901,404 $ 664,149 $ 8,565,553
--------------------- --------------------- ---------------------
Operating income 2,164,982 72,447 2,237,429
Interest and other income 17,610 355 17,965
Interest expense (2,474,823) (22,272) (2,497,095)
Loss on disposal of assets (10,270) (4,134) (14,404)
--------------------- --------------------- ---------------------
Net (loss) income $ (302,501) $ 46,396 $ (256,105)
===================== ===================== =====================
132
Year Ended December 31, 2003
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 10,326,587 $ 510,476 $ 10,837,063
Tenant reimbursements - 2,743 2,743
--------------------- --------------------- ---------------------
Total revenues $ 10,326,587 $ 513,219 $ 10,839,806
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 4,144,729 $ 297,616 $ 4,442,345
Management fees 517,054 31,504 548,558
Real estate taxes 1,021,875 35,370 1,057,245
Depreciation and amortization 2,324,165 206,505 2,530,670
--------------------- --------------------- ---------------------
Total operating expenses $ 8,007,823 $ 570,995 $ 8,578,818
--------------------- --------------------- ---------------------
Operating income (loss) 2,318,764 (57,776) 2,260,988
Interest and other income 42,233 470 42,703
Interest expense (867,225) - (867,225)
Loss on disposal of assets (103,506) - (103,506)
--------------------- --------------------- ---------------------
Net income (loss) $ 1,390,266 $ (57,306) $ 1,332,960
===================== ===================== =====================
Land, buildings and amenities, net $ 38,278,447 $ 2,164,103 $ 40,442,550
===================== ===================== =====================
Expenditures for land, buildings
and amenities $ 592,613 $ 132,357 $ 724,970
===================== ===================== =====================
Segment liabilities $ 12,738,030 $ 164,322 $ 12,902,352
===================== ===================== =====================
Year Ended December 31, 2002
-------------------------------------------------------------------
Multifamily Commercial Total
--------------------- --------------------- ---------------------
Rental income $ 9,999,631 $ 603,674 $ 10,603,305
Tenant reimbursements - 7,284 7,284
--------------------- --------------------- ---------------------
Total revenues $ 9,999,631 $ 610,958 $ 10,610,589
--------------------- --------------------- ---------------------
Operating expenses and operating expenses
- affiliated $ 4,139,268 $ 338,074 $ 4,477,342
Management fees 509,300 37,239 546,539
Real estate taxes 857,879 25,517 883,396
Depreciation and amortization 2,527,785 183,967 2,711,752
--------------------- --------------------- ---------------------
Total operating expenses $ 8,034,232 $ 584,797 $ 8,619,029
--------------------- --------------------- ---------------------
Operating income 1,965,399 26,161 1,991,560
Interest and other income 10,915 2,956 13,871
Interest expense (840,145) - (840,145)
Loss on disposal of assets (5,041) - (5,041)
--------------------- --------------------- ---------------------
Net income $ 1,131,128 $ 29,117 $ 1,160,245
===================== ===================== =====================
Land, buildings and amenities, net $ 40,189,678 $ 2,243,770 $ 42,433,448
===================== ===================== =====================
Expenditures for land, buildings
and amenities $ 83,937 $ 181,622 $ 265,559
===================== ===================== =====================
Segment liabilities $ 13,375,308 $ 90,115 $ 13,465,423
===================== ===================== =====================
133
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is necessary given amounts recorded at the Partnership level and not allocated to the operating properties for internal reporting purposes:
Period Ended
December 27, Years Ended December 31,
-------------------- ------------------------------------------
2004 2003 2002
-------------------- ---------------------- -------------------
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for
reportable segments $ 2,584,843 $ 2,530,670 $ 2,711,752
Depreciation and amortization for Partnership 78,771 89,466 89,466
-------------------- ---------------------- -------------------
Total depreciation and amortization $ 2,663,614 $ 2,620,136 $ 2,801,218
==================== ====================== ===================
INTEREST AND OTHER INCOME
Interest and other income for reportable
segments $ 17,965 $ 42,703 $ 13,871
Interest and other income for Partnership 730,566 89,368 7,348
-------------------- ---------------------- -------------------
Total interest and other income $ 748,531 $ 132,071 $ 21,219
==================== ====================== ===================
INTEREST EXPENSE
Interest expense for reportable segments $ 2,497,095 $ 867,225 $ 840,145
Interest expense for Partnership 884,263 1,646,668 1,738,038
-------------------- ---------------------- -------------------
Total interest expense $ 3,381,358 $ 2,513,893 $ 2,578,183
==================== ====================== ===================
NET (LOSS) INCOME
Net (loss) income for reportable segments $ (256,105) $ 1,332,960 $ 1,160,245
Net loss for Partnership (1) (1,693,763) (2,805,037) (2,489,634)
Minority interest 35,561 35,228 37,145
-------------------- ---------------------- -------------------
Total net loss $ (1,985,429) $ (1,507,305) $ (1,366,534)
==================== ====================== ===================
LAND, BUILDINGS AND AMENITIES
Land, buildings and amenities for
reportable segments $ N/A $ 40,442,550 $ 42,433,448
Land, buildings and amenities for Partnership N/A 3,887 11,661
-------------------- ---------------------- -------------------
Total land, buildings and amenities $ N/A $ 40,446,437 $ 42,445,109
==================== ====================== ===================
LIABILITIES
Liabilities for reportable segments $ N/A $ 12,902,352 $ 13,465,423
Liabilities for Partnership (2) N/A 20,573,242 21,347,451
-------------------- ---------------------- -------------------
Total liabilities $ N/A $ 33,475,594 $ 34,812,874
==================== ====================== ===================
| (1) | The Partnership’s net loss was primarily composed of professional and administrative costs born by the Partnership and also includes interest expense, depreciation and minority interest recorded at the Partnership level and not allocated to the operating segments. The professional and administrative costs include the tax and public company reporting and compliance costs associated with a public limited partnership. |
| (2) | These amounts primarily represent the mortgages held by us secured by the assets of the operating segments. |
134
Our reportable operating segments include only one segment — Multifamily Operations.
Our reportable operating segments include – Land, Retail and Commercial Real Estate Operations. The retail operations represent our ownership and operating results relative to Springs Station and Outlets Mall properties located in Louisville, Kentucky. The commercial operations represent our ownership and operating results relative to suburban commercial office space located in Louisville, Kentucky. The land operations represent our ownership and operating results relative to a ground lease located in Louisville, Kentucky.
The financial information of the operating segments has been prepared using a management approach, which is consistent with the basis and manner in which our management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. We evaluate performance based on stand-alone operating segment net income or loss.
Period Ended December 27, 2004
--------------------------------------------------------------------------
Land Retail Commercial Total
---------------- ------------------ ----------------- -----------------
Rental income $ 45,087 $ 1,281,893 $ 7,441,255 $ 8,768,235
Tenant reimbursements - 76,349 428,985 505,334
---------------- ------------------ ----------------- -----------------
Total revenues 45,087 1,358,242 7,870,240 9,273,569
Operating expenses and operating
expenses - affiliated 1,133 233,260 2,200,789 2,435,182
Management fees 1,200 81,579 476,303 559,082
Real estate taxes 1,581 29,777 369,896 401,254
Professional and administrative
expenses 32,793 35,080 90,501 158,374
Depreciation and amortization 5,087 315,343 1,686,923 2,007,353
---------------- ------------------ ----------------- -----------------
Total operating expenses 41,794 695,039 4,824,412 5,561,245
Operating income 3,293 663,203 3,045,828 3,712,324
Interest and other income - 647 22,110 22,757
Interest expense - (423,166) (5,432,268) (5,855,434)
Loss on disposal of assets - - (38,706) (38,706)
---------------- ------------------ ----------------- -----------------
Net income (loss) $ 3,293 $ 240,684 $ (2,403,036) $ (2,159,059)
================ ================== ================= =================
135
Year Ended December 31, 2003
--------------------------------------------------------------------------
Land Retail Commercial Total
---------------- ------------------ ----------------- ----------------
Rental income $ 53,537 $ 1,280,514 $ 7,420,793 $ 8,754,844
Tenant reimbursements - 90,003 424,587 514,590
---------------- ------------------ ----------------- ----------------
Total revenues 53,537 1,370,517 7,845,380 9,269,434
Operating expenses and operating
expenses - affiliated 2,261 92,024 2,014,658 2,108,943
Management fees 1,200 81,445 473,512 556,157
Real estate taxes 1,561 29,402 374,182 405,145
Professional and administrative
expenses 24,861 24,861 66,294 116,016
Depreciation and amortization 5,087 293,497 1,617,913 1,916,497
---------------- ------------------ ----------------- ----------------
Total operating expenses 34,970 521,229 4,546,559 5,102,758
Operating income 18,567 849,288 3,298,821 4,166,676
Interest and other income - 429 18,500 18,929
Interest income - affiliated 3,741 11,613 38,881 54,235
Interest expense - (451,724) (2,421,281) (2,873,005)
Interest expense - affiliated (238) - (69,331) (69,569)
Loss on disposal of assets - - (119,773) (119,773)
---------------- ------------------ ----------------- ----------------
Net income $ 22,070 $ 409,606 $ 745,817 $ 1,177,493
================ ================== ================= ================
Land, buildings and amenities, net $ 163,111 $ 7,664,048 $ 27,288,180 $ 35,115,339
================ ================== ================= ================
Expenditures for land, buildings
and amenities $ - $ 142,285 $ 1,041,555 $ 1,183,840
================ ================== ================= ================
Segment liabilities $ 5,553 $ 5,941,154 $ 31,630,010 $ 37,576,717
================ ================== ================= ================
136
Year Ended December 31, 2002
--------------------------------------------------------------------------------
Land Retail Commercial Total
------------------ -------------------- ----------------- ------------------
Rental income $ 216,344 $ 1,216,528 $ 8,092,177 $ 9,525,049
Tenant reimbursements - 29,027 489,157 518,184
------------------ -------------------- ----------------- ------------------
Total revenues 216,344 1,245,555 8,581,334 10,043,233
Operating expenses and operating
expenses - affiliated 17,953 94,981 2,098,038 2,210,972
Management fees 3,600 77,406 507,504 588,510
Real estate taxes 1,563 29,875 372,845 404,283
Depreciation and amortization 5,087 269,271 1,569,683 1,844,041
------------------ -------------------- ----------------- ------------------
Total operating expenses 28,203 471,533 4,548,070 5,047,806
Operating income 188,141 774,022 4,033,264 4,995,427
Interest and other income 37,960 359 31,368 69,687
Interest income - affiliated 11,261 26,544 105,371 143,176
Interest expense (224) (501,406) (2,617,805) (3,119,435)
Interest expense - affiliated - - (155,583) (155,583)
Loss on disposal of assets - - (432) (432)
------------------ -------------------- ----------------- ------------------
Net income $ 237,138 $ 299,519 $ 1,396,183 $ 1,932,840
================== ==================== ================= ==================
Land, buildings and amenities, net $ 574,306 $ 7,788,281 $ 27,916,674 $ 36,279,261
================== ==================== ================= ==================
Expenditures for land, buildings
and amenities $ - $ 3,454 $ 262,754 $ 266,208
================== ==================== ================= ==================
Segment liabilities $ 8,370 $ 6,330,785 $ 40,746,339 $ 47,085,494
================== ==================== ================= ==================
The joint venture’s reportable operating segments include only one segment —Commercial Real Estate Operations.
137
For the Quarters Ended
-------------------------------------------------------------------
2004 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------- ----------------------------------
Operating loss $ (18,041) $ (286) $ (5,789) $ (3,245,424)(1)
Net loss allocated to the limited partners (16,908) (268) (5,426) (3,041,689)
Net loss per limited partnership unit - - - (0.29)
| (1) | See Note 9 - Committments and Contingencies for a discussion of our Merger/Settlement Charge. |
For the Quarters Ended
-----------------------------------------------------------------
2004 March 31 June 30 September 30 December 27
- --------------------------------------------------------------------------------------------------------------
Total revenues $ 934,067 $ 941,357 $ 955,054 $ 980,530
Operating income 118,630 169,855 210,636 135,231
Net income (loss) allocated to the limited
partners 31,184 82,594 125,578 (443,891)
Net income (loss) per limited partnership unit 2.48 6.57 9.99 (35.31)
For the Quarters Ended
-----------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------
Total revenues $ 992,864 $ 922,773 $ 931,837 $ 916,406
Operating income 225,742 134,746 216,807 113,562
Net income allocated to the limited partners 127,495 40,930 121,030 23,371
Net income per limited partnership unit 10.14 3.26 9.63 1.86
For the Quarters Ended
-----------------------------------------------------------------
2004 March 31 June 30 September 30 December 27
- --------------------------------------------------------------------------------------------------------------
Total revenues $ 597,208 $ 584,315 $ 557,256 $ 496,168
Operating (loss) income (86,370) 5,068 (10,955) (157,891)
Net loss allocated to the limited partners (116,877) (17,261) (61,512) (438,346)
Net loss per limited partnership unit (4.85) (0.72) (2.55) (18.18)
For the Quarters Ended
-----------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------
Total revenues $ 624,518 $ 632,816 $ 614,204 $ 721,491
Operating income 112,589 68,192 129,550 100,638
Net income allocated to the limited partners 75,015 36,671 80,040 63,066
Net income per limited partnership unit 3.11 1.52 3.32 2.62
138
For the Quarters Ended
-----------------------------------------------------------------
2004 March 31 June 30 September 30 December 27
- --------------------------------------------------------------------------------------------------------------
Total revenues $ 1,215,284 $ 1,279,607 $ 1,257,912 $ 1,234,877
Operating (loss) income (181,759) 29,120 (142,563) (136,375)
Minority interest (10,364) 694 (28,098) (174,851)
Net loss allocated to the limited partners (406,332) (211,541) (346,814) (947,307)
Net loss per limited partnership unit (13.31) (6.93) (11.36) (31.05)
For the Quarters Ended
-----------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------- --------------------------
Total revenues $ 1,206,033 $ 1,392,484 $ 1,232,267 $ 1,250,346
Operating income 7,921 83,693 70,520 26,488
Minority interest (7,046) 11,688 (4,925) (4,807)
Net loss allocated to the limited partners (229,576) (170,975) (161,165) (93,925)
Net loss per limited partnership unit (7.52) (5.60) (5.28) (3.08)
For the Quarters Ended
-----------------------------------------------------------------
2004 March 31 June 30 September 30 December 27
- ----------------------------------------------------------------------------------- --------------------------
Total revenues $ 2,614,659 $ 2,657,086 $ 2,734,123 $ 2,797,114
Operating income 73,612 326,974 110,821 185,956
Minority interest 5,416 8,193 8,675 13,277
Net loss allocated to the limited partners (524,166) (265,596) (484,478) (691,335)
Net loss per limited partnership unit (13.48) (6.83) (12.46) (17.77)
For the Quarters Ended
-----------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- -------------------------------------------- -----------------------------------------------------------------
Total revenues $ 2,748,067 $ 2,711,069 $ 2,694,201 $ 2,686,469
Operating income (loss) 361,311 (8,885) 270,682 390,143
Minority interest 8,743 6,336 7,674 12,475
Net loss allocated to the limited partners (280,881) (719,330) (360,295) (131,726)
Net loss per limited partnership unit (7.22) (18.50) (9.26) (3.39)
For the Quarters Ended
-----------------------------------------------------------------
2004 March 31 June 30 September 30 December 27
- ----------------------------------------------------------------------------------- --------------------------
Total revenues $ 385,305 $ 385,414 $ 408,219 $ 392,614
Operating loss (83,968) (34,097) (4,870) (51,492)
Net loss allocated to the limited partners (115,179) (67,652) (50,157) (96,585)
Net loss per limited partnership unit (0.21) (0.12) (0.09) (0.18)
For the Quarters Ended
-----------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------- --------------------------
Total revenues $ 431,371 $ 427,262 $ 398,423 $ 380,802
Operating income (loss) 24,585 (7,204) 20,782 (48,183)
Net loss allocated to the limited partners (9,251) (40,357) (34,128) (84,880)
Net loss per limited partnership unit (0.02) (0.07) (0.06) (0.16)
For the Quarters Ended
-----------------------------------------------------------------
2004 March 31 June 30 September 30 December 27
- -------------------------------------------- ------------------ ------------------ ---------------------------
Total revenues $ 2,305,856 $ 2,277,937 $ 2,305,774 $ 2,384,002
Operating income 854,754 882,775 946,252 1,028,543
Net income (loss) 144,515 234,225 293,741 (2,831,540)
For the Quarters Ended
- - ------------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------
Total revenues $ 2,269,918 $ 2,241,155 $ 2,367,046 $ 2,391,315
Operating income 1,067,700 972,737 992,152 1,134,087
Net income 304,172 144,296 283,958 445,067
For the Quarters Ended
-----------------------------------------------------------------
2004 March 31 June 30 September 30 December 27
- -------------------------------------------- -----------------------------------------------------------------
Total revenues $ 237,253 $ 237,253 $ 237,253 $ 237,252
Operating income 113,981 106,707 68,632 65,779
Net income 88,535 84,296 46,286 28,381
For the Quarters Ended
-----------------------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------------------------------
Total revenues $ 237,253 $ 237,253 $ 237,253 $ 237,252
Operating income 128,257 121,842 105,448 107,399
Net income 91,077 87,568 22,472 78,897
140
None.
141
Our managing general partner established disclosure controls and procedures to ensure that our material information is made known to the officers of our managing general partner who certify our financial reports, to our management and to the board of directors of our managing partner.
As of December 31, 2004, our managing general partner’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
142
The information required by this Item 10 is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing no later than April 30, 2005.
The information required by this Item 11 is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing no later than April 30, 2005.
The information required by this Item 12 is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing no later than April 30, 2005.
The information required by this Item 13 is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing no later than April 30, 2005.
The information required by this Item 14 is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing no later than April 30, 2005.
143
PART IV
Item 15 - Exhibits and Financial Statement Schedules
1 — Financial Statements
The financial statements along with the report from Ernst & Young LLP dated March 30, 2005, appear in Part II, Item 8. The following schedules should be read in conjunction with those financial statements.
2 — Financial Statement Schedules
| Schedules | Page No. |
| Schedule III - Real Estate and Accumulated Depreciation | 146-147 |
All other schedules have been omitted because they are not applicable, are not required, or because the required information is included in the financial statements or notes thereto.
Exhibit No.
| 2.01 | Agreement and Plan of Merger entered into by and among NTS Realty Holdings Limited Partnership, NTS-Properties III, NTS-Properties IV, NTS- Properties V, a Maryland limited partnership, NTS-Properties VI, a Maryland limited partnership and NTS-Properties VII, Ltd. | (2) |
| 2.02 | Contribution Agreement entered into by and among NTS Realty Holdings Limited Partnership and ORIG, LLC. | (3) |
| 3.01 | Certificate of Limited Partnersip of NTS Realty Holdings Limited Partnership | (5) |
| 3.02 | Form of Agreement of Limited Partnership of NTS Realty Holdings Limited Partnership. | (4) |
| 3.03 | Certificate of Incorporation of NTS Realty Capital, Inc. | (5) |
| 3.04 | Bylaws of NTS Realty Capital, Inc. | (6) |
| 10.01 |
Form of Management Agreement between NTS Realty Holdings Limited Partnership and NTS Development Company. |
(5) |
| 10.02 | Lease Agreement dated as of Janaury 12, 2005, between NTS Realty Holdings Limited Partnership and SHPS, Inc. | (1) |
| 14.01 | Code of Conduct and Ethics. | (1) |
144
Exhibit No.
| 31.1 |
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
(1) |
| 31.2 |
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
(1) |
| 32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) |
| 32.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) |
| 99.1 |
Form of Lock-up Agreement between NTS Realty Holdings Limited Partnership and the executive officers of NTS Realty Capital, Inc. |
(5) |
| 99.2 |
Registration Statement on Form S-4, as filed by the Registrant with the Securities and Exchange Commission on October 27, 2004. |
(5) |
| (1) | Filed as part of this Annual Report on Form 10-K. | |
| (2) | Incorporated by reference to Appendix B to the Registrant's Registration Statement on Form S-4, as filed by the Registrant with the Securities and Exchange Commission on October 27, 2004 (file number 333-112467). | |
| (3) | Incorporated by reference to Appendix C to the Registrant's Registration Statement on Form S-4, as filed by the Registrant with the Securities and Exchange Commission on October 27, 2004 (file number 333-112467). | |
| (4) | Incorporated by reference to Appendix D to the Registrant's Registration Statement on Form S-4, as filed by the Registrant with the Securities and Exchange Commission on October 27, 2004 (file number 333-112467). | |
| (5) | Incorporated by reference to the Registrant's Form S-4, as filed by the Registrant with the Securities and Exchange Commission on February 4, 2004. | |
| (6) | Incorporated by reference to Amendment No. 1 to the Form S-4, as filed by the Registrant with the Securities and Exchange Commission on June 18, 2004. | |
| (7) | Incorporated by refence to the Registrant's Registration Statement on Form S-4, as filed with the Securities and Exchange Commission on October 27, 2004 (file number 333-112467). |
145
Cost Capitalized
Initial Cost to Subsequent to Gross Amount at Which
Company Acquisition Carried at Close of Period
-------------------- ------------------- ------------------------------
Buildings Buildings Buildings
Property and and and Accum. Year
Description Encumbrances Land Improvements Land Improvements Land Improvements Total(1) Deprec.(2)Const
- ----------------- ------------ ---- ------------ ---- ------------ ---- ------------ -------- -------- -------
Commercial
Anthem Office Center - $ 760,037 $ 3,339,521 $ - $ - $ 760,037 $3,339,521 $4,099,558 - 1995
Atrium (8) - 1,032,711 1,839,129 - - 1,032,711 1,839,129 2,871,840 - 1984
BBC 1A (8) - 1,529,025 2,270,164 - - 1,529,025 2,270,164 3,799,189 - 1988
BBC 1B (8) - 365,659 1,428,756 - - 365,659 1,428,756 1,794,415 - 1988
BBC II (8) - 543,639 2,025,969 - - 543,639 2,025,969 2,569,608 - 1988
Clarke American(3) 3,101,366 521,736 2,165,877 - - 521,736 2,165,877 2,687,613 - 2000
CBC I - 981,827 1,964,935 - - 981,827 1,964,935 2,946,762 - 1984
CBC II - 891,649 1,208,480 - - 891,649 1,208,480 2,100,129 - 1985
Lakeshore I (7) - 2,128,882 3,661,323 - - 2,128,882 3,661,323 5,790,205 - 1986
Lakeshore II (7) - 3,171,812 3,772,955 - - 3,171,812 3,772,955 6,944,767 - 1989
Lakeshore III (7) - 1,264,136 3,252,297 - - 1,264,136 3,252,297 4,516,433 - 2000
NTS Center - 1,074,010 2,977,364 - - 1,074,010 2,977,364 4,051,374 - 1977
Peachtree - 1,417,444 3,459,185 - - 1,417,444 3,459,185 4,876,629 - 1979
Plainview Center - 753,160 3,414,356 - - 753,160 3,414,356 4,167,516 - 1983
Plainview Point
I & II - 447,129 1,993,392 - - 447,129 1,993,392 2,440,521 - 1983
Plainview Point
III (4) 2,905,604 681,927 2,139,793 - - 681,927 2,139,793 2,821,720 - 1987
Sears - 925,539 1,390,215 - - 925,539 1,390,215 2,315,754 - 1987
Springs Med. I (8) - 1,221,864 3,438,614 - - 1,221,864 3,438,614 4,660,478 - 1988
Springs Office (8) - 2,667,040 5,660,709 - - 2,667,040 5,660,709 8,327,749 - 1990
Multifamily (6)
Golf Brook - 2,728,354 11,607,036 - - 2,728,354 11,607,036 14,335,390 - 1989
Park Place I - 1,697,989 6,633,194 - - 1,697,989 6,633,194 8,331,183 - 1987
Park Place II - 1,584,214 6,004,630 - - 1,584,214 6,004,630 7,588,844 - 1989
Park Place III - 1,899,320 8,444,639 - - 1,899,320 8,444,639 10,343,959 - 2000
Park at the Willows - 350,273 1,481,672 - - 350,273 1,481,672 1,831,945 - 1988
Sabal Park - 2,260,385 6,350,527 - - 2,260,385 6,350,527 8,610,912 - 1987
Willow Lake - 2,555,062 8,368,028 - - 2,555,062 8,368,028 10,923,090 - 1985
Willows of
Plainview I - 1,326,136 4,489,812 - - 1,326,136 4,489,812 5,815,948 - 1985
Willows of
Plainview II - 1,339,039 4,975,793 - - 1,339,039 4,975,793 6,314,832 - 1985
Retail
Bed, Bath &
Beyond (5) 2,806,142 734,860 2,290,252 - - 734,860 2,290,252 3,025,112 - 1999
Outlets Mall - 1,008,618 2,763,070 - - 1,008,618 2,763,070 3,771,688 - 1983
Springs Station(8) - 427,465 978,891 - - 427,465 978,891 1,406,356 - 2001
Land
IIT Parking Lot - 161,529 - - - 161,529 - 161,529 - N/A
--------------------------------------------------------------------------------
$40,452,470 $115,790,578 $ - $ - $40,452,470 $115,790,578 $156,243,048 $ -
================================================================================
| (1) | Aggregate cost of real estate for tax purposes is approximately $237,542,000. |
| (2) | Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are 5-30 years for land improvements, 5-40 years for buildings and improvements and 3-30 years for amenities. Tenant improvements are generally depreciated over the life of the respective tenant lease. |
| (3) | Mortgage held by an insurance company secured by certain land and a building. |
| (4) | Mortgage held by an insurance company secured by certain land, building and amenities. |
| (5) | Mortgage help by a bank secured by certain land and a building. |
| (6) | $75,000,000 mortgage held by an insurance company secured by Golf Brook, Sabal Park, Willow Lake, The Willows of Plainview Phases I and II, The Park at the Willows and Park Place Phases I, II and III. |
| (7) | $14,000,000 mortgage held by a bank secured by Lakeshore Business Center Phases I, II and III. |
| (8) | These properties were mortgaged in connection with a $30 million mortgage payable to an insurance company in March 2005. |
146
Real Accumulated
Estate Depreciation
---------------------- ----------------------
Balances on January 15, 2004 $ - $ -
Merger acquisitions:
Land 40,452,470 -
Buildings and amenities 115,790,578 -
---------------------- ----------------------
Balances on December 31, 2004 $ 156,243,048 $ -
====================== ======================
147
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NTS REALTY HOLDINGS LIMITED PARTNERSHIP
By: NTS REALTY CAPITAL, INC.
Its: Managing General Partner
| By: | /s/ Brian F. Lavin | |
| Brian F. Lavin | ||
| Its: President and Chief Executive Officer | ||
| Date: March 31, 2005 | ||
| By: | /s/ Gregory A. Wells | |
| Gregory A. Wells | ||
| Its: Chief Financial Officer | ||
| Date: March 31, 2005 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the registrant in their capacities and on the date indicated above.
| By: | /s/ J.D. Nichols |
| J.D. Nichols | |
| Its: Chairman of the Board | |
| Date: March 31, 2005 | |
| By: | /s/ Brian F. Lavin |
| Brian F. Lavin | |
| Its: Director | |
| Date: March 31, 2005 | |
| By: | /s/ Mark D. Anderson |
| Mark D. Anderson | |
| Its: Director | |
| Date: March 31, 2005 | |
| By: | /s/ John Daly |
| John Daly | |
| Its: Director | |
| Date: March 31, 2005 | |
| By: | /s/ John S. Lenihan |
| John S. Lenihan | |
| Its: Director | |
| Date: March 31, 2005 |
148