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EX-32.1 - SECTION 906 CEO CERTIFICATION - NNN 2003 VALUE FUND LLCd389282dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - NNN 2003 VALUE FUND LLCd389282dex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - NNN 2003 VALUE FUND LLCd389282dex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - NNN 2003 VALUE FUND LLCd389282dex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number: 0-51295

 

 

NNN 2003 Value Fund, LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-0122092
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

1551 N. Tustin Avenue, Suite 200,

Santa Ana, California

  92705
(Address of principal executive offices)   (Zip Code)

(714) 975-2999

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of August 10, 2012, there were 9,970 units of NNN 2003 Value Fund, LLC outstanding.

 

 

 


Table of Contents

NNN 2003 VALUE FUND, LLC

(A Delaware limited liability company)

TABLE OF CONTENTS

 

          Page
PART I — FINANCIAL INFORMATION   
Item 1.    Financial Statements    3
  

Consolidated Statements of Net Assets in Liquidation as of June 30, 2012 (Unaudited) and December 31, 2011

   3
  

Unaudited Consolidated Statements of Changes in Net Assets in Liquidation for the Three and Six Months Ended June 30, 2012

   4
  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2011

   5
  

Unaudited Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2011

   6
  

Notes to Unaudited Condensed Consolidated Financial Statements

   7
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   12
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    15
Item 4.    Controls and Procedures    16
PART II — OTHER INFORMATION   
Item 1.    Legal Proceedings    17
Item 1A.    Risk Factors    17
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    17
Item 3.    Defaults Upon Senior Securities    17
Item 4.    Mine Safety Disclosures    17
Item 5.    Other Information    17
Item 6.    Exhibits    17
Signatures       18

 

1


Table of Contents

Forward-Looking Statements

Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ materially from those included in the forward-looking statements. We intend those forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of us, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “prospects,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically; sales prices, lease renewals and new leases; legislative/regulatory changes; availability of capital; changes in interest rates; our ability to service our debt, competition in the real estate industry; the supply and demand for operating properties in our current and proposed market areas; changes in accounting principles generally accepted in the United States of America, or GAAP, policies and guidelines applicable to us; our ongoing relationship with our manager (as defined below); and litigation. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the United States Securities and Exchange Commission, or the SEC.

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

NNN 2003 VALUE FUND, LLC

CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION

(Liquidation Basis)

 

     June 30,
2012
     December 31,
2011
 
     (Unaudited)         
ASSETS      

Cash and cash equivalents

   $ 145,000       $ 603,000   
  

 

 

    

 

 

 

Total assets

     145,000         603,000   
LIABILITIES      

Accounts payable and accrued liabilities

     22,000         22,000   

Reserve for estimated costs in excess of receipts during liquidation

     103,000         197,000   
  

 

 

    

 

 

 

Total liabilities

     125,000         219,000   
  

 

 

    

 

 

 

Net assets in liquidation

   $ 20,000       $ 384,000   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

NNN 2003 VALUE FUND, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION

(Liquidation Basis)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30, 2012     June 30, 2012  

Net assets in liquidation, beginning of period

     25,000        384,000   

Distribution to unit holders

     —          (350,000

Net increase in estimated liquidation costs

     (5,000     (14,000
  

 

 

   

 

 

 

Net assets in liquidation, end of period

   $ 20,000      $ 20,000   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

NNN 2003 VALUE FUND, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE (LOSS) INCOME

(Going Concern Basis)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30, 2011     June 30, 2011  

General and administrative expense

   $ (119,000   $ (175,000

Equity in losses of unconsolidated real estate

     (6,000     (12,000
  

 

 

   

 

 

 

Loss from continuing operations

     (125,000     (187,000

Income from discontinued operations

     —          13,326,000   
  

 

 

   

 

 

 

Consolidated net (loss) income

     (125,000     13,139,000   

Income attributable to non-controlling interests

     —          —     
  

 

 

   

 

 

 

Net (loss) income attributable to NNN 2003 Value Fund, LLC

   $ (125,000   $ 13,139,000   
  

 

 

   

 

 

 

Comprehensive (loss) income:

    

Consolidated net (loss) income

   $ (125,000   $ 13,139,000   

Other comprehensive income

     —          —     
  

 

 

   

 

 

 

Comprehensive (loss) income

     (125,000     13,139,000   

Comprehensive income attributable to non-controlling interests

     —          —     
  

 

 

   

 

 

 

Comprehensive (loss) income attributable to NNN 2003 Value Fund, LLC

   $ (125,000   $ 13,139,000   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

NNN 2003 VALUE FUND, LLC

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Going Concern Basis)

(Unaudited)

 

     Six Months Ended  
     June 30, 2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Consolidated net income

   $ 13,139,000   

Adjustments to reconcile net income to net cash provided by operating activities:

  

Gain on extinguishment of debt

     (13,634,000

Depreciation and amortization (including deferred financing costs, deferred rent, lease inducements and above/below market leases)

     157,000   

Equity in losses of unconsolidated real estate

     12,000   

Allowance for doubtful accounts

     44,000   

Change in operating assets and liabilities:

  

Accounts receivable, including accounts and loans receivable due from related parties

     (138,000

Other assets

     38,000   

Restricted cash

     (21,000

Accounts payable and accrued liabilities, including accounts payable to related parties

     (235,000

Security deposits, prepaid rent and other liabilities

     (181,000
  

 

 

 

Net cash used in operating activities

     (819,000
  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

  

Net cash provided by investing activities

     —     
  

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

  

Distributions to unit holders

     (500,000

Cash transferred to lender in connection with transfer of property

     (49,000
  

 

 

 

Net cash used in financing activities

     (549,000
  

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (1,368,000

CASH AND CASH EQUIVALENTS — beginning of period

     2,031,000   
  

 

 

 

CASH AND CASH EQUIVALENTS — end of period

   $ 663,000   
  

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

  

Transfer of real estate and other assets and liabilities in connection with debt extinguishment

   $ 29,788,000   

Cancellation of debt and accrued interest in connection with transfer of real estate and other assets and liabilities

   $ 43,471,000   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


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NNN 2003 VALUE FUND, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The use of the words “we,” “us,” or “our” refers to NNN 2003 Value Fund, LLC and its subsidiaries, except where the context otherwise requires.

 

1. Organization and Description of Business

NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003. We were organized to acquire, own, operate and subsequently sell ownership interests in a number of unspecified commercial office properties which management believed to have higher than average potential for capital appreciation, or value-added properties. During 2011, we completed the disposition of our remaining interests in commercial office properties. As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.

NNN Realty Investors, LLC (formerly, Grubb & Ellis Realty Investors, LLC), or our manager, manages us pursuant to the terms of an operating agreement, as amended, or the Operating Agreement. While we have no employees, certain executive officers and employees of our manager provide services to us pursuant to the Operating Agreement. Prior to the disposition of our remaining property interests in 2011, our manager engaged affiliated entities, including Daymark Properties Realty, Inc. (formerly, Triple Net Properties Realty, Inc.), or Realty, to provide certain services to us. Realty served as our property manager pursuant to the terms of the Operating Agreement and a property management agreement, as amended, or the Management Agreement. The Operating Agreement terminates upon our dissolution. The unit holders may not vote to terminate our manager prior to the termination of the Operating Agreement or our dissolution, except for cause. The Management Agreement terminated with respect to each of our properties upon their respective disposition.

 

2. Summary of Significant Accounting Policies

The summary of significant accounting policies presented below is designed to assist in understanding our interim unaudited condensed consolidated financial statements. Such interim unaudited condensed consolidated financial statements and accompanying notes thereto are the representations of our management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the accompanying interim unaudited condensed consolidated financial statements.

Interim Financial Data

Our accompanying interim unaudited condensed consolidated financial statements have been prepared by us in accordance with GAAP and in conjunction with the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying interim unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying interim unaudited condensed consolidated financial statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such results may be less favorable.

In preparing our accompanying condensed consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that, although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 23, 2012.

 

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NNN 2003 VALUE FUND, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — Continued

 

Principles of Consolidation

The accompanying interim unaudited condensed consolidated financial statements include our accounts and those of our wholly- owned subsidiaries, any majority-owned subsidiaries and any variable interest entities, or VIEs, that we have concluded should be consolidated in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or Codification, Topic 810, Consolidation. All material intercompany transactions and account balances have been eliminated in consolidation. We accounted for all other unconsolidated real estate investments using the equity method of accounting. Accordingly, our share of the earnings (losses) of these real estate investments is included in consolidated net income.

Basis of Presentation

Prior to December 1, 2011, our consolidated financial statements were prepared on a going concern basis, which contemplated the realization of assets and the settlement of liabilities and commitments in the normal course of business. The consolidated financial statements for periods prior to December 1, 2011 do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classifications of liabilities that may be necessary if we are unable to continue as a going concern.

As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. Accordingly, all assets have been adjusted to their estimated fair value (on an undiscounted basis). Liabilities, including estimated costs associated with implementing our liquidation, were adjusted to their estimated settlement amounts. Actual values realized for assets and settlement of liabilities may differ materially from the amounts estimated. Due to the uncertainty in the timing of the anticipated liquidation costs and the cash flows there from, results may differ materially from amounts estimated. These amounts are presented in the accompanying consolidated statements of net assets. The net assets represent the estimated liquidation value of our assets available to our unit holders upon liquidation. The actual settlement amounts realized for assets and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts estimated.

Use of Estimates

The preparation of our interim unaudited condensed consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the interim unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the interim periods. Actual results could differ from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.

Income Taxes

We are a pass-through entity for income tax purposes and taxable income is reported by our unit holders on their individual tax returns. Accordingly, no provision has been made for income taxes in the accompanying condensed consolidated statements of operations except for insignificant amounts related to state franchise and income taxes.

We follow FASB Codification Topic 740, Income Taxes, to recognize, measure, present and disclose in our condensed consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of June 30, 2012 and December 31, 2011, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our condensed consolidated financial statements.

Segments

FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we had one reportable segment, with activities related to investing in office buildings and value-add commercial office properties. As each of our properties had similar economic characteristics, tenants, and products and services, our properties were aggregated into one reportable segment.

 

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NNN 2003 VALUE FUND, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — Continued

 

3. Liquidation Costs

Under the liquidation basis of accounting, estimated costs expected to be incurred during liquidation are reflected on the statements of net assets in liquidation. The following table presents changes in our estimated liquidation costs during the three months ended June 30, 2012:

 

     March 31,
2012
     Payments     Adjustments      June 30,
2012
 

Tax fees

   $ 80,000       $ (50,000   $ —         $ 30,000   

Audit fees

     63,000         (20,000     —           43,000   

Public filing costs

     24,000         (10,000     5,000         19,000   

Legal fees

     11,000         (2,000     —           9,000   

Other

     29,000         (5,000     —           24,000   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 207,000       $ (87,000   $ 5,000       $ 125,000   
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents changes in our estimated liquidation costs during the six months ended June 30, 2012:

 

     December 31,
2011
     Payments     Adjustments      June 30,
2012
 

Tax fees

   $ 80,000       $ (50,000   $ —         $ 30,000   

Audit fees

     69,000         (33,000     7,000         43,000   

Public filing costs

     28,000         (10,000     1,000         19,000   

Legal fees

     12,000         (6,000     3,000         9,000   

Other

     30,000         (9,000     3,000         24,000   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 219,000       $ (108,000   $ 14,000       $ 125,000   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

4. Non-controlling Interests

Non-controlling interests relate to interests in the following consolidated limited liability company that is not wholly-owned by us:

 

Entity

   Date
Acquired
     Non-controlling
Interests
 

NNN Enterprise Way, LLC

     05/07/2004         26.7

NNN Enterprise Way, LLC owned a commercial office property located in Scotts Valley, California, known as the Enterprise Technology Center property. This property was sold at a trustee’s sale on November 29, 2011, and this entity is in the process of being dissolved.

 

5. NNN 2003 Value Fund, LLC Unit Holders’ Equity

Pursuant to our Private Placement Memorandum, we offered for sale a minimum of 1,000 and a maximum of 10,000 units at a price of $5,000 per unit. We relied on the exemptions from registration provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act.

There are three classes of membership interests, or units, each having different rights with respect to distributions. As of June 30, 2012 and December 31, 2011, there were 4,000 Class A units, 3,170 Class B units and 2,800 Class C units issued and outstanding. The rights and obligations of all unit holders are governed by the Operating Agreement.

Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed and unrecovered capital, respectively. In the event that any distribution of Cash from Operations is not sufficient to pay the return described above, all unit holders receive identical pro rata distributions, except that Class C unit holders do not receive more than an 8.0% return on their Class C units, and Class B unit holders do not receive more than a 9.0% return on their Class B units. Excess Cash from Operations is then allocated pro rata to all unit holders on a per outstanding unit basis and further distributed to the unit holders and our manager based on predetermined ratios providing our manager with a share of 15.0%, 20.0% and 25.0% of the distributions available to Class A units, Class B units and Class C units, respectively, of such excess Cash from Operations.

 

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Table of Contents

NNN 2003 VALUE FUND, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — Continued

 

Cash from Capital Transactions, as defined in the Operating Agreement, is first used to satisfy our debt and liability obligations; then distributed pro rata to all unit holders in accordance with their membership interests until all capital contributions are reduced to zero; and lastly, in accordance with the distributions as outlined above in the Cash from Operations.

Since the suspension of regular, monthly cash distributions to unit holders in the fourth quarter of 2008, we make periodic distributions to unit holders from available funds, if any. During the six months ended June 30, 2012, distributions of $35 per unit were declared, resulting in aggregate distributions paid of approximately $350,000 during the period. To date, Class A units, Class B units and Class C units have received identical per-unit distributions.

 

6. Related Party Transactions

The Management Agreement

Pursuant to the Operating Agreement and the Management Agreement, Realty was entitled to receive the payments and fees described below. Certain fees paid to Realty were passed through to our manager or its affiliate pursuant to an agreement between our manager and Realty, or the Realty Agreement.

Property Management Fees

We paid Realty a monthly property management fee of up to 5.0% of the gross receipts revenue of the properties. During the three and six months ended June 30, 2011, we incurred property management fees to Realty of $0 and $47,000, respectively. No property management fees were incurred during the three and six months ended June 30, 2012, as all of our remaining property interests were disposed of during 2011.

Real Estate Acquisition Fees

We paid Realty or its affiliate a real estate acquisition fee up to 3.0% of the gross purchase price of a property. During the three and six months ended June 30, 2012 and 2011, we did not incur any real estate acquisition fees.

Real Estate Disposition Fees

We paid Realty or its affiliate a real estate disposition fee up to 5.0% of the gross sales price of a property. During the three and six months ended June 30, 2012 and 2011, we did not incur any real estate disposition fees.

Leasing Commissions

We paid Realty a leasing commission for its services in leasing any of our properties equal to 6.0% of the value any lease entered into during the term of the Management Agreement and 3.0% with respect to any renewals. During the three and six months ended June 30, 2012 and 2011, we did not incur any leasing commissions.

 

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NNN 2003 VALUE FUND, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — Continued

 

Accounting Fees

We paid our manager accounting fees for record keeping services provided to us. Beginning January 1, 2010, all accounting fees have been waived by our manager and, as such, we did not incur any accounting fees during the three and six months ended June 30, 2012 and 2011.

Construction Management Fees

We paid Realty a construction management fee for its services in supervising any construction or repair project in or about our properties equal to 5.0% of any amount up to $25,000, 4.0% of any amount over $25,000 but less than $50,000 and 3.0% of any amount over $50,000, which is expended in any calendar year for construction or repair projects. During the three and six months ended June 30, 2012 and 2011, we did not incur any construction management fees.

Loan Fees

We paid Realty or its affiliate a loan fee of 1.0% of the principal amount of the loan for its services in obtaining loans for our properties during the term of the Management Agreement. During the three and six months ended June 30, 2012 and 2011, we did not incur any loan fees.

 

7. Commitments and Contingencies

Litigation

We are not presently subject to any material litigation and, to our knowledge, no material litigation is threatened against us that, if determined unfavorably to us, would have a material adverse effect on our financial condition.

 

8. Discontinued Operations

In accordance with FASB Codification Topic 360, Property, Plant and Equipment, the net income from consolidated properties sold are reflected in our consolidated statements of operations as discontinued operations for all periods presented. For the six months ended June 30, 2011, discontinued operations includes the net income of the following properties:

 

Property

   Date Sold  

Four Resource Square

     January 20, 2011   

Sevens Building

     March 25, 2011   

The following table summarizes the revenue and expense components that comprised income from discontinued operations for the six months ended June 30, 2011:

 

     Six Months Ended  
     June 30, 2011  

Rental revenue

   $ 964,000   

Rental expense (including general, administrative, depreciation and amortization)

     (727,000

Interest expense

     (545,000

Gain on extinguishment of debt

     13,634,000   
  

 

 

 

Income from discontinued operations

     13,326,000   

Income from discontinued operations attributable to non-controlling interests

     —     
  

 

 

 

Income from discontinued operations attributable to NNN 2003 Value Fund, LLC

   $ 13,326,000   
  

 

 

 

 

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Item 2. Management’s Discussion and Analysis Financial Condition and Results of Operations.

The use of the words “we,” “us,” or “our” refers to NNN 2003 Value Fund, LLC and its subsidiaries, except where the context otherwise requires.

The following discussion should be read in conjunction with our financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Overview and Background

NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003. We were organized to acquire, own, operate and subsequently sell ownership interests in a number of unspecified commercial office properties which we believed to have higher than average potential for capital appreciation, or value-added properties. During 2011, we completed the disposition of our remaining interests in commercial office properties. As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.

Our Manager

NNN Realty Investors, LLC (formerly, Grubb & Ellis Realty Investors, LLC), or our manager, manages us pursuant to the terms of an operating agreement, as amended, or the Operating Agreement. While we have no employees, certain executive officers and employees of our manager provide services to us pursuant to the Operating Agreement. Prior to the disposition of our remaining property interests in 2011, our manager engaged affiliated entities, including Daymark Properties Realty, Inc. (formerly, Triple Net Properties Realty, Inc.), or Realty, to provide certain services to us. Realty served as our property manager pursuant to the terms of the Operating Agreement and a property management agreement, as amended, or the Management Agreement. The Operating Agreement terminates upon our dissolution. The unit holders may not vote to terminate our manager prior to the termination of the Operating Agreement or our dissolution, except for cause. The Management Agreement terminated with respect to each of our properties upon their respective disposition.

Business Strategy

Our primary business strategy was to acquire, own, operate and subsequently sell ownership interests in a number of unspecified properties which we believed to have higher than average potential for capital appreciation, or value-added properties. Our principal objectives initially were to: (i) have the potential within approximately one to five years, subject to market conditions, to realize income on the sale of our properties; (ii) realize income through the acquisition, operation, development and sale of properties or interests in properties; and (iii) make periodic distributions to our unit holders from cash generated from operations and capital transactions. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.

Acquisitions and Dispositions

We did not acquire any consolidated properties during the six months ended June 30, 2012 and 2011.

On January 20, 2011, we sold the Four Resource Square property to Four Resource Square, LLC, an entity affiliated with the Four Resource Square lender, for a sales price of $21,977,000, which was equal to the outstanding principal balance of the loan.

On March 25, 2011, the successor trustee appointed by the Sevens Building lender conducted a public auction and sold the Sevens Building property to General Electric Credit Equities, an entity affiliated with the Sevens Building lender, or the buyer, for a sale price of $17,400,000. As a result of the sale, our ownership interest in the Sevens Building property was sold and conveyed to the buyer and a trustee’s deed was recorded on the Sevens Building property in favor of the buyer.

 

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Critical Accounting Policies

The complete listing of our critical accounting policies was previously disclosed in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 23, 2012, and there have been no material changes to our Critical Accounting Policies disclosed therein.

Interim Financial Data

Our accompanying interim unaudited condensed consolidated financial statements have been prepared by us in accordance with GAAP and in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying interim unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying interim unaudited condensed consolidated financial statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such results may be less favorable.

In preparing our accompanying condensed consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that, although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 23, 2012.

Factors Which May Influence Net Assets in Liquidation

We disposed of our remaining property interests in 2011 and are currently in the process of winding up our operations. We are not aware of any material trends or uncertainties that may reasonably be expected to have a material impact, favorable or unfavorable, on our net assets in liquidation.

Changes in Net Assets in Liquidation – Liquidation Basis

Three Months Ended June 30, 2012

During the three months ended June 30, 2012, our net assets in liquidation decreased $5,000, from $25,000 as of March 31, 2012 to $20,000 as of June 30, 2012. This decrease in net assets in liquidation was due to increases in our estimated liquidation costs.

Six Months Ended June 30, 2012

During the six months ended June 30, 2012, our net assets in liquidation decreased $364,000, from $384,000 as of December 31, 2011 to $20,000 as of June 30, 2012. This decrease in net assets in liquidation was primarily due to a $350,000 distribution paid to our unit holders during the period, as well as increases in our estimated liquidation costs.

Results of Operations – Going Concern Basis

Our operating results were primarily comprised of income derived from our portfolio of properties, as described below. Because our primary business strategy historically was acquiring properties which we believed had a greater than average appreciation potential, enhancing value and realizing gains upon disposition of these properties, our operations historically have reflected significant property acquisitions and dispositions from period to period. As a result, the comparability of our financial data is generally very limited and varies significantly from period to period.

 

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We have made reclassifications for all properties sold as of June 30, 2011 from “Loss from continuing operations” to “Income from discontinued operations” for all periods presented.

Three Months Ended June 30, 2011

 

     Three Months Ended  
     June 30, 2011  

General and administrative expense

   $ (119,000

Equity in losses of unconsolidated real estate

     (6,000
  

 

 

 

Loss from continuing operations

     (125,000

Income from discontinued operations

     —     
  

 

 

 

Consolidated net loss

   $ (125,000
  

 

 

 

General and Administrative Expense

General and administrative expense was $119,000 during the three months ended June 30, 2011 and was comprised primarily of audit fees and other professional services.

Equity in Losses of Unconsolidated Real Estate

Equity in losses of unconsolidated real estate was $6,000 during the three months ended June 30, 2011 and was comprised of residual activity at two of our unconsolidated property interests that were sold in 2010.

Consolidated Net Loss

As a result of the above, consolidated net loss was $125,000 for the three months ended June 30, 2011.

Six Months Ended June 30, 2011

 

     Six Months Ended  
     June 30, 2011  

General and administrative expense

   $ (175,000

Equity in losses of unconsolidated real estate

     (12,000
  

 

 

 

Loss from continuing operations

     (187,000

Income from discontinued operations

     13,326,000   
  

 

 

 

Consolidated net income

   $ 13,139,000   
  

 

 

 

General and Administrative Expense

General and administrative expense was $175,000 during the six months ended June 30, 2011 and was comprised primarily of audit fees and other professional services.

Equity in Losses of Unconsolidated Real Estate

Equity in losses of unconsolidated real estate was $12,000 during the six months ended June 30, 2011 and was comprised of residual activity at two of our unconsolidated property interests that were sold in 2010.

Income from Discontinued Operations

Income from discontinued operations was $13,326,000 during the six months ended June 30, 2011. The income from discontinued operations during the six months ended June 30, 2011 resulted primarily from the gains recognized on the extinguishment of debt in connection with the dispositions of the Four Resource Square and Sevens Building properties, which totaled $13,634,000.

 

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Consolidated Net Income

As a result of the above, consolidated net income was $13,139,000 for the six months ended June 30, 2011.

Liquidity and Capital Resources

Ability to Continue as a Going Concern

As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.

Sources of Capital and Liquidity

Our primary sources of capital historically have been derived from: (i) proceeds from the sale of properties; (ii) our ability to obtain debt financing from third parties and related parties including our manager and its affiliates; and (iii) our real estate operations. Currently, our only source of capital and liquidity is our existing cash balance, net of current and future obligations.

Our primary uses of cash historically have been: (i) the payment of principal and interest on indebtedness; (ii) capital investments in our portfolio of properties; (iii) administrative costs; and (iv) distributions to our unit holders. Currently, we expect our future uses of cash to primarily be related to administrative costs and other costs required to dissolve our entities. Any remaining cash will be distributed to unit holders.

Cash Flows

Cash flows used in operating activities were $819,000 for the six months ended June 30, 2011, which was primarily due to an $850,000 transfer of cash to the Sevens Building lender subsequent to the foreclosure of this property, which represented the approximate amount of net cash generated by the property subsequent to the default on the mortgage loan on October 31, 2010. There were no cash flows from investing activities for the six months ended June 30, 2011. Cash flows used in financing activities were $549,000 for the six months ended June 30, 2011, primarily due to a $500,000 distribution paid to our unit holders during the period.

Contractual Obligations

As of June 30, 2012, we had no material contractual obligations.

Off-Balance Sheet Arrangements

As of June 30, 2012, we had no off-balance sheet transactions nor do we currently have any such arrangements or obligations.

Inflation

As of June 30, 2012, we have no significant exposure to inflation.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, the primary market risk to which we were exposed was interest rate risk. However, we currently have no significant interest rate risk, as we have no debt obligations.

 

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Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our manager’s president and chief executive officer and our manager’s chief accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30, 2012 was conducted under the supervision and with the participation of our manager, including our manager’s president and chief executive officer and our manager’s chief accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our manager’s president and chief executive officer and our manager’s chief accounting officer concluded that our disclosure controls and procedures, as of June 30, 2012, were effective.

(b) Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

We are not presently subject to any material litigation and, to our knowledge, no material litigation is threatened against us that, if determined unfavorably to us, would have a material adverse effect on our financial condition.

 

Item 1A. Risk Factors.

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information.

None.

 

Item 6. Exhibits.

The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this quarterly report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NNN 2003 VALUE FUND, LLC
    (Registrant)

August 10, 2012

   

/s/ TODD A. MIKLES

Date     Todd A. Mikles
    President and Chief Executive Officer
    NNN Realty Investors, LLC,
    the Manager of NNN 2003 Value Fund, LLC
    (principal executive officer)
August 10, 2012    

/s/ PAUL E. HENDERSON

Date     Paul E. Henderson
    Chief Accounting Officer
    NNN Realty Investors, LLC,
    the Manager of NNN 2003 Value Fund, LLC
    (principal financial officer)

 

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EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit index immediately precedes the exhibits.

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the period ended June 30, 2012 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit

Number

  Description
  31.1*   Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*   Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1**   Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2**   Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed herewith.
** Furnished herewith.

 

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