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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-11176
NTS-PROPERTIES III
(Exact name of registrant as specified in its charter)
Georgia 61-1017240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10172 Linn Station Road
Louisville, Kentucky 40223
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code (502) 426-4800
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (l) 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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
Exhibit Index: See page 17
Total Pages: 18
<PAGE>
TABLE OF CONTENTS
Pages
PART I
Item 1. Financial Statements
Balance Sheets and Statement of Partners' Equity
as of September 30, 1998 and December 31, 1997 3
Statements of Operations
For the three months and nine months ended
September 30, 1998 and 1997 4
Statements of Cash Flows
For the three months and nine months ended
September 30, 1998 and 1997 5
Notes To Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
PART II
Item 3. Defaults Upon Senior Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
NTS-PROPERTIES III
BALANCE SHEETS AND STATEMENT OF PARTNERS' EQUITY
<CAPTION>
As of As of
September 30,1998 December 31, 1997*
----------------- ------------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 255,398 $ 266,940
Cash and equivalents - restricted 279,550 284,599
Investment securities -- 101,591
Accounts receivable, net of allowance
for doubtful accounts of $7,934 (1998)
and $42,035 (1997) 156,459 269,922
Land, buildings and amenities, net 10,124,054 9,828,962
Other assets 388,743 370,302
----------- -----------
Total assets $11,204,204 $11,122,316
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable $ 6,710,864 $ 6,734,603
Accounts payable - operations 78,238 36,773
Accounts payable - construction 4,790 102,655
Security deposits 93,792 103,816
Other liabilities 145,801 155,179
----------- -----------
7,033,485 7,133,026
Commitments and Contingencies
Partners' equity 4,170,719 3,989,290
----------- -----------
$11,204,204 $11,122,316
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
-------- ------- -----
PARTNERS' EQUITY
<S> <C> <C> <C>
Initial equity $ 15,600,000 $ 8,039,710 $ 23,639,710
Adjustment to historical basis -- (5,455,030) (5,455,030)
------------ ------------ ------------
15,600,000 2,584,680 18,184,680
Net income (loss) - prior years 74,801 (2,395,121) (2,320,320)
Net income (loss) - current year 325,318 (68,890) 256,428
Cash distributions declared to
date (11,349,844) (206,985) (11,556,829)
Repurchase of limited partnership
units (393,240) -- (393,240)
------------ ------------ ------------
Balances at September 30, 1998 $ 4,257,035 $ (86,316) $ 4,170,719
============ ============ ============
<FN>
*Reference is made to the audited financial statements in the Form 10-K as filed
with the Commission on March 30, 1998.
</FN>
</TABLE>
- 3 -
<PAGE>
<TABLE>
NTS-PROPERTIES III
STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income, net of provision
for doubtful accounts of $1,943
(1998) and $22,570 (1997) $ 864,393 $ 790,256 $ 2,664,929 $ 2,305,780
Rental income - affiliated 73,834 70,388 223,430 211,016
Interest and other income 4,026 9,277 11,068 28,344
----------- ----------- ----------- -----------
942,253 869,921 2,899,427 2,545,140
EXPENSES:
Operating expenses 233,602 216,559 689,402 571,139
Operating expenses - affiliated 91,363 118,008 303,182 330,272
Write-off of unamortized tenant
improvements 39,670 69,912 48,108 69,912
Interest expense 116,213 131,640 353,468 398,091
Management fees 50,140 42,221 149,504 126,572
Real estate taxes 51,727 49,651 155,496 155,369
Professional and administrative
expenses 14,252 15,031 45,965 45,819
Professional and administrative
expenses - affiliated 32,601 33,610 103,127 103,028
Depreciation and amortization 257,023 209,322 729,489 628,280
----------- ----------- ----------- -----------
886,591 885,954 2,577,741 2,428,482
----------- =========== ----------- -----------
Net income (loss) before
extraordinary item 55,662 (16,033) 321,686 116,658
Extraordinary item - write-off of
unamortized loan costs -- -- (65,258) --
----------- ----------- ----------- -----------
Net income (loss) $ 55,662 $ (16,033) $ 256,428 $ 116,658
=========== =========== =========== ===========
Net income allocated to the limited partners:
Income before extraordinary item $ 78,970 $ 17,005 $ 389,923 $ 196,710
Extraordinary item -- -- (64,605) --
----------- ----------- ----------- -----------
Net income $ 78,970 $ 17,005 $ 325,318 $ 196,710
=========== =========== =========== ===========
Net income per limited partnership unit:
Income before extraordinary item $ 5.73 $ 1.21 $ 28.08 $ 13.98
Extraordinary item -- -- (4.65) --
----------- ----------- ----------- -----------
Net income per limited partnership
unit $ 5.73 $ 1.21 $ 23.43 $ 13.98
=========== =========== =========== ===========
Weighted average number of units 13,770 14,070 13,883 14,073
=========== =========== =========== ===========
</TABLE>
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<PAGE>
<TABLE>
NTS-PROPERTIES III
STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 55,662 $ (16,033) $ 256,428 $ 116,658
Adjustments to reconcile net income
(loss)to net cash provided by
operating activities:
Provision for doubtful accounts 1,943 8,017 1,943 22,570
Accrued interest on investment
securities -- (54) 923 (54)
Write-off of unamortized tenant
improvements 39,670 69,912 48,108 69,912
Write-off of unamortized loan costs -- -- 65,258 --
Depreciation and amortization 257,023 209,322 729,489 628,280
Changes in assets and liabilities:
Cash and equivalents - restricted (28,350) (15,615) (41,489) (45,679)
Accounts receivable 59,235 833 111,520 (35,746)
Other assets 14,790 5,856 (13,790) 10,051
Accounts payable - operations (12,391) 18,096 41,465 (262)
Security deposits (7,671) (9,057) (10,024) (10,897)
Other liabilities (1,143) 7,576 (9,375) 111,725
----------- ----------- ----------- -----------
Net cash provided by operating
activities 378,768 278,853 1,180,456 866,558
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings, and
amenities (209,717) (255,064) (1,163,170) (830,338)
Decrease (increase) in cash and
equivalents - restricted (1,217) 12,814 171,538 7,088
Purchase of investment securities -- (102,461) -- (102,461)
Maturity of investment securities -- -- 100,668 --
----------- ----------- ----------- -----------
Net cash used in investing
activities (210,934) (344,711) (890,964) (925,711)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in mortgage payable -- -- 6,800,000 --
Principal payments on mortgages
payable (53,788) (29,062) (6,823,739) (85,242)
Increase in loan costs -- -- (77,295) --
Repurchase of limited partnership
units -- -- (75,000) (5,408)
Decrease (increase)in cash and
equivalents - restricted (125,000) -- (125,000) 27,168
----------- ----------- ----------- -----------
Net cash used in financing
activities (178,788) (29,062) (301,034) (63,482)
----------- ----------- ----------- -----------
Net decrease in cash and equivalents (10,954) (94,920) (11,542) (122,635)
CASH AND EQUIVALENTS, beginning of
period 266,352 633,668 266,940 661,383
----------- ----------- ----------- -----------
CASH AND EQUIVALENTS, end of period $ 255,398 $ 538,748 $ 255,398 $ 538,748
=========== =========== =========== ===========
Interest paid on a cash basis $ 116,213 $ 132,915 $ 328,864 $ 400,503
=========== =========== =========== ===========
</TABLE>
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<PAGE>
NTS-PROPERTIES III
NOTES TO FINANCIAL STATEMENTS
The financial statements included herein should be read in conjunction with the
Partnership's 1997 Annual Report. In the opinion of the General Partner, all
adjustments (only consisting of normal recurring accruals) necessary for a fair
presentation have been made to the accompanying financial statements for the
three months and nine months ended September 30, 1998 and 1997.
1. Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Concentration of Credit Risk
----------------------------
NTS-Properties III is a limited partnership which owns and operates
commercial properties in Norcross, Georgia, a suburb of Atlanta, and
Jeffersontown, Kentucky, a suburb of Louisville. One tenant in Plainview
Triad North occupies 65% of the office building's net rentable area and
one tenant in Plainview Plaza II occupies 46% of the office building's
net rentable area. Substantially all of the Partnership's tenants are
local businesses or are businesses which have operations in the location in
which they lease space.
3. Cash and Equivalents - Restricted
---------------------------------
Cash and equivalents - restricted represent 1) escrow funds which are to be
released as the heating, ventilating and air conditioning ("HVAC") system
at Peachtree Corporate Center is replaced (December 31, 1997 balance only),
2) funds which have been escrowed with a mortgage company for NTS Plainview
Plaza II's property taxes in accordance with the loan agreement, 3)funds
which the Partnership has reserved for the repurchase of limited
partnership Units 4) escrow funds which are to be released as the roof is
replaced at one of the three buildings at Plainview Plaza II, and 5) funds
which the Partnership has reserved to purchase limited Partnership Units
under the Tender Offer (see Note 5). The funds escrowed for HVAC system
replacements were released April 1, 1998 when the $4,500,000 mortgage
payable to an insurance company was repaid.
4. Interest Repurchase Reserve
---------------------------
On January 16, 1998, the Partnership elected to resume the Interest
Repurchase Program and to fund an additional $50,000 to its Interest
Repurchase Reserve, which was originally established in 1995 pursuant to
Section 16.4 of the Partnership's Amended and Restated Agreement of Limited
Partnership. With this funding, the Partnership repurchased 200 additional
Units at a price of $250 per Unit. On April 7, 1998, the Partnership
elected to fund an additional $25,000 to its Interest Repurchase Reserve.
With this funding, the Partnership repurchased 100 additional Units at a
price of $250 per Unit. The above offering price per Unit was established
by the General Partner in its sole discretion and does not purport to
represent the fair market value or liquidation value of the Units. From
October 1995 to September 30, 1998, the Partnership has repurchased a total
of 1,830 units for $393,240. Repurchased units are retired by the
Partnership, thus increasing the percentage of ownership of each remaining
limited partner investor. The Interest Repurchase Reserve was funded from
cash reserves. The balance in the reserve at September 30, 1998 was $0.
- 6 -
<PAGE>
5. Tender Offer
------------
On September 30, 1998, the Partnership and ORIG, LLC, an affiliate of the
Partnership, commenced a Tender Offer to purchase up to 1,000 of the
Partnership's limited partnership Units at a price of $250 per Unit.
Although the Partnership and ORIG, LLC believes that this price is
appropriate, the price of $250 per Unit may not equate to the fair market
value or the liquidation value of the Unit, and is less than the book value
per Unit. Approximately $285,000 ($250,000 to purchase 1,000 Units plus
approximately $35,000 for expenses associated with the Offer) is required
to purchase all 1,000 Units. The Partnership will purchase the first 500
Units tendered and will fund its purchases and its portion of the expenses
from cash reserves. If more than 500 Units are tendered, ORIG, LLC will
purchase up to an additional 500 Units. If more than 1,000 Units are
tendered, the Partnership and ORIG, LLC may choose to acquire the
additional Units on the same terms. Otherwise, tendered Units will be
purchased on a pro rata basis up to 1,000. Units that are acquired by the
Partnership will be retired. Units that are acquired by ORIG, LLC will be
held by it. The General Partner, NTS-Properties Associates, does not intend
to participate in the Tender Offer. The Tender Offer will expire December
29, 1998 unless extended.
6. Investment Securities
---------------------
Investment securities represent investments in Certificates of Deposit with
initial maturities of greater than three months. The investments are
carried at cost which approximates market value. The Partnership intends to
hold the securities until maturity. During 1997 and 1998, the Partnership
sold no investment securities. As of September 30, 1998, the Partnership
held no investment securities.
The following provides details regarding the investments held at December
31, 1997:
Amortized Maturity Value at
Type Cost Date Maturity
---- ---- ---- --------
Certificate of deposit $101,591 02/13/98 $102,232
======= =======
7. Mortgages Payable
-----------------
Mortgages payable consist of the following:
September 30, December 31,
1998 1997
------------- ------------
Mortgage payable to an insurance company,
bearing interest at 6.89%, maturing April
10, 2015, secured by land and buildings $ 6,710,864 $ --
Mortgage payable to an insurance company,
bearing interest at 9.125%, maturing
November 1, 1998, secured by land and
buildings -- 2,234,603
Mortgage payable to an insurance company,
maturing June 1, 2001, secured by land
and buildings, bearing a variable
interest rate based on the 10-year
treasury bill rate plus 60 basis points.
The rate is adjusted quarterly. -- 4,500,000
----------- -----------
$ 6,710,864 $ 6,734,603
=========== ===========
Based on the borrowing rates currently available to the Partnership for
mortgages with similar terms and average maturities, the fair value of long
term debt approximately carrying value.
- 7 -
<PAGE>
8. Basis of Property
-----------------
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, specifies circumstances in which certain long-lived assets
must be reviewed for impairment. If such review indicates that the carrying
amount of an asset exceeds the sum of its expected future cash flows, the
asset's carrying value must be written down to fair market value.
Application of this standard during the nine months ended September 30,
1998 and 1997 did not result in an impairment loss.
9. Reclassification of 1997 Financial Statements
---------------------------------------------
Certain reclassifications have been made to the September 30, 1997
financial statements to conform with the September 30, 1998
classifications. These reclassifications have no effect on previously
reported operations.
10. Related Party Transactions
--------------------------
Property management fees of $149,504 and $126,572 for the nine months ended
September 30, 1998 and 1997, respectively, were paid to NTS Development
Company, an affiliate of the General Partner, pursuant to an agreement with
the Partnership. The fee is equal to 5% of gross revenues from the
Partnership's properties. Also permitted by an agreement, NTS Development
Company will receive a repair and maintenance fee equal to 5.9% of costs
incurred which relate to capital improvements. The Partnership incurred
$61,009 and $52,486 as a repair and maintenance fee during the nine months
ended September 30, 1998 and 1997, respectively, and has capitalized this
cost as a part of land, buildings and amenities. As permitted by an
agreement, the Partnership also was charged the following amounts from NTS
Development Company for the nine months ended September 30, 1998 and 1997.
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 land, buildings and
amenities. These charges were as follows:
1998 1997
-------- --------
Leasing $ 125,397 $ 209,389
Administrative 125,497 127,012
Property manager 166,097 126,476
Other 49,715 23,701
-------- --------
$ 466,706 $ 486,578
======== ========
During the nine months ended September 30, 1998, NTS Development Company
leased 20,368 square feet in Plainview Plaza II at a rental rate of $14.50
per square foot. The Partnership received approximately $223,000 in rental
payments from NTS Development Company during the nine months ended
September 30, 1998. The lease term for NTS Development Company ends on
March 31, 2002.
During January 1997, NTS Development Company leased 23,160 square feet of
the available space in Plainview Plaza II at a base rent of $13.50 per
square foot. During February and March of 1997, NTS Development Company
leased 20,368 square feet at a rental rate of $13.50 per square foot.
Effective April 1, 1997, the NTS Development Company lease was extended for
five years to March 2002 at a rental rate of $14.50 per square foot for
20,368 square feet. The Partnership received approximately $211,000 in
rental payments from NTS Development Company during the nine months ended
September 30, 1997.
- 8 -
<PAGE>
11. Commitments and Contingencies
-----------------------------
One tenant at Plainview Triad North occupies approximately 65% of the
building. During the third quarter of 1997, the Partnership received notice
that the tenant would vacate the property at the end of the lease term,
August 1998. The Partnership was able to negotiate a 30 day renewal
(through September 30, 1998) with the tenant for the approximately 63,000
square feet that they leased. The Partnership was also able to negotiate a
renewal for approximately 11,000 square feet of the original 63,000 square
feet through March 31, 1999. Costs associated with this renewal were not
significant. In the opinion of the General Partner of the Partnership, the
six-month extension for the 11,000 square feet of space will be all that
can be anticipated. As a result, there will likely be a protracted period
for the property to become fully leased again and substantial funds,
currently estimated to be from $2,000,000 to $2,500,000, will likely be
needed for leasing expenses; especially those needed to refinish space for
new tenants.
At Plainview Triad North, the Partnership is exploring the possibility of
common area and exterior building renovations. As of September 30, 1998,
the Partnership has made a commitment of approximately $50,000 for
architectural services in connection with planning the renovations. These
renovations will be designed to make the property more competitive and
enhance its value. The estimated cost of the renovations is approximately
$1,000,000 and is expected to begin during 1998.
It may be necessary to borrow a portion of the funds required for the
renovation and leasing costs discussed above. With the partnership having
two of its three properties free and clear of debt, it is expected that any
such borrowings could be readily facilitated. However, there is no
assurance that financing will be able to be obtained when needed, or that
any financing will be on favorable terms.
- 9 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The management's discussion and analysis of financial condition and results of
operations included herein should be read in conjunction with the Partnership's
1997 Annual Report.
Results of Operations
- ---------------------
The occupancy levels at the Partnership's properties as of September 30 were as
follows:
1998 1997
---- ----
Plainview Plaza II 100% 89%
Plainview Triad North 91% 86%
Peachtree Corporate Center 86% 89%
The rental and other income generated by the Partnership's properties for the
three months and nine months ended September 30 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
--------- --------- ---------- ---------
Plainview Plaza II $ 373,761 $ 316,746 $1,108,505 $ 924,158
Plainview Triad North $ 293,604 $ 268,945 $ 932,054 $ 781,317
Peachtree Corporate Center $ 272,231 $ 275,218 $ 849,806 $ 813,168
The 11% increase in occupancy from September 30, 1997 to September 30, 1998 at
Plainview Plaza II can be attributed to four new leases totaling approximately
18,800 square feet. Of this total, approximately 17,000 square feet represents a
new five-year lease. The new leases are partially offset by the move-out of
three tenants, who had occupied approximately 4,300 square feet, at the end of
the lease terms, and the relocation of an approximately 1,000 square foot tenant
to Plainview Triad North. There was no accrued income associated with this
lease. See below for information regarding the tenant relocation. Average
occupancy increased from 89% in 1997 to 100% in 1998 for the three months ended
September 30 and from 88% in 1997 to 97% in 1998 for the nine month period. The
increase in rental and other income at Plainview Plaza II for the three months
and nine months ended September 30, 1998 as compared to the same periods in 1997
can be attributed to the increase in average occupancy and increased rental
rates for lease renewals.
Plainview Triad North's occupancy increased 5% from September 30, 1997 to
September 30, 1998 due to two new leases totaling approximately 4,500 square
feet, of which approximately 1,900 square feet represents a former tenant of
Plainview Plaza II. The tenant relocated to Plainview Triad North from Plainview
Plaza II to accommodate the needs of a new tenant at Plainview Plaza II who
required 17,000 square feet of contiguous space. Average occupancy increased
from 89% in 1997 to 91% in 1998 for the three months ended September 30 and
decreased from 91% in 1997 to 89% in 1998 for the nine month period. Rental and
other income increased at Plainview Triad North for the three months and nine
months ended September 30, 1998 as compared to the same periods in 1997 due to
the increase in rental rates for lease renewals and an increase in pass through
expense reimbursements. Leases at Plainview Triad North provide for tenants to
contribute toward the payment of increases in common area maintenance expenses,
insurance, utilities and real estate taxes.
- 10 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
Peachtree Corporate Center's occupancy decreased 3% from September 30, 1997 to
September 30, 1998 due to the move-out of six tenants who had occupied
approximately 18,400 square feet. Approximately 10,200 square feet of this total
represents four tenants who vacated and ceased making rental payments in breach
of the lease terms. There was no accrued income associated with these leases.
The remaining 8,200 square feet of total move-outs was the result of two tenants
who vacated at the end of the lease term. Partially offsetting the move-outs are
four new leases totaling approximately 11,600 square feet. Of this total,
approximately 2,800 square feet represents an expansion by a current tenant.
Average occupancy decreased from 89% in 1997 to 84% in 1998 for the three months
ended September 30, and decreased from 86% in 1997 to 85% in 1998 for the nine
month period. Rental and other income increased for the nine months ended
September 30, 1998 as compared to the same period in 1997 as the result of
increased rental rates on lease renewals and an increase in common area expense
reimbursements. Tenants at Peachtree Corporate Center reimburse the Partnership
for common area expenses as part of the lease agreement. Rental and other income
remained fairly constant for the three months ended September 30, 1998 as
compared to the same period in 1997.
In cases of tenants who cease making rental payments or abandon the premises in
breach of the lease terms, the Partnership pursues collection through the use of
collection agencies or other remedies available by law when practical. In the
case of tenants who vacated Peachtree Corporate Center as a result of
bankruptcy, the Partnership has taken legal action when it was thought there
could be a possible collection. There have been no significant funds recovered
as a result of these actions during the nine months ended September 30, 1998 or
1997. As of September 30, 1998, there were no on-going cases.
Current and projected future occupancy levels are considered adequate to
continue the operation of the Partnership's properties without the need for any
additional financing. See the discussion below regarding the Aetna Company lease
at Plainview Triad North.
Interest and other income includes interest income earned from short-term
investments made by the Partnership with cash reserves. The decrease in interest
income for the three months and nine months ended September 30, 1998 as compared
to the same periods in 1997 is due primarily to the decrease in cash reserves
available for investment.
Operating expenses increased for the nine months ended September 30, 1998 as
compared to the same period in 1997 as a result of increased utility costs at
Plainview Plaza II and Peachtree Corporate Center, and increased janitorial,
security and landscaping costs at Plainview Plaza II. The increase in operating
expenses for the nine month period is also attributable to the fact that the
Plainview Triad North parking lot was resealed and striped during the second
quarter of 1998. Operating expenses increased for the three months ended
September 30, 1998 as compared to the same period in 1997 as a result of
increased utility costs at Plainview Plaza II and Peachtree Corporate Center and
increased janitorial costs at Plainview Plaza II. The increase in operating
expenses for the three month period is partially offset by decreased landscaping
costs at Plainview Triad North.
Operating expenses - affiliated decreased for the three months and nine months
ended September 30, 1998 as compared to the same period in 1997 as a result of
decreased leasing costs at Peachtree Corporate Center and Plainview Triad North.
The decrease in operating expenses - affiliated for both periods is partially
offset by increased property management costs at all of the Partnership's
properties. Operating expenses-affiliated are expenses incurred for services
performed by employees of NTS Development Company, an affiliate of the General
Partner.
- 11 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
The 1998 write-off of unamortized tenant improvements can be attributed to
Plainview Plaza II and Peachtree Corporate Center. At Plainview Plaza II, tenant
improvements were made to accommodate the new lease for approximately 17,000
square feet. 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. In order to complete the renovation, it is sometimes necessary to
replace improvements which have not been fully depreciated. This results in a
write-off of unamortized tenant improvements.
The 1997 write-off of unamortized building improvements is the result of the
renovation of common area lobbies, corridors and restrooms at Plainview Plaza
II. The write-off represents the cost of previous renovations which had not been
fully depreciated.
Interest expense has decreased for the three months and nine months ended
September 30, 1998 as compared to the same periods in 1997 as the result of a
lower interest rate (6.89%) on the permanent financing obtained by the
Partnership April 1, 1998. Prior to the new financing, the Partnership's debt
bore interest at a fixed rate of 9.125% (on an approximately $2,200,000 mortgage
payable) and a variable rate based on the 10-year treasury bill rate plus 60
basis points (on a $4,500,000 mortgage payable). The variable rate was 6.94%
from January to March 1997, 7.39% April to June 1997 and was 7.05% from July to
September 1997. See the Liquidity and Capital Resources section of this item for
details regarding the Partnership's debt.
Management fees are calculated as a percentage of cash collections; however,
revenue for reporting purposes is on the accrual basis. As a result, the
fluctuations of revenues between periods will differ from the fluctuations of
management fee expense.
Real estate taxes, professional and administrative expenses and professional and
administrative expenses - affiliated remained fairly constant for the three
months and nine months ended September 30, 1998 as compared to the same periods
in 1997. Professional and administrative expenses - affiliated are expenses
incurred for services performed by employees of NTS Development Company, an
affiliate of the General Partner.
The increase in depreciation and amortization expenses for the three months and
nine months ended September 30, 1998 as compared to the same periods in 1997 is
the result of assets being placed in service. Assets placed in service are
primarily tenant improvements at all the Partnership's properties and exterior
building and land improvement costs at Plainview Plaza II. The increase in
depreciation and amortization expense is partially offset by a portion of the
Partnership's assets (primarily tenant finish improvements) becoming fully
depreciated. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets which are 5 - 30 years for land
improvements, 30 years for buildings, 5 - 30 years for building improvements and
3 - 30 years for amenities. The aggregate cost of the Partnership's properties
for Federal tax purposes is approximately $25,400,000.
The 1998 write-off of unamortized loan costs (recorded as an extraordinary item)
relates to the loan costs associated with two mortgages of the Partnership. The
unamortized loan costs were expensed due to the fact that the mortgages were
repaid April 1, 1998 prior to their maturity (November 1998 and June 2001) as a
result of a new mortgage loan. See the Liquidity and Capital Resources section
of this item for further discussion.
Liquidity and Capital Resources
- -------------------------------
On April 1, 1998, the Partnership obtained permanent financing from an insurance
company in the amount of $6,800,000. The outstanding balance at September 30,
1998 was $6,710,864. The mortgage payable is due April 10, 2015, bears interest
at a fixed rate of 6.89% and is secured by a first mortgage on Plainview Plaza
II. The repayment of principal is being amortized over 17 years with monthly
payments of principal and interest totaling approximately $56,650. The proceeds
- 12 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
of the mortgage were used to pay off the $2,214,251 and $4,500,000 mortgages
payable and to pay loan closing costs. At maturity, the mortgage will have been
repaid based on the current rate of amortization. As part of the loan agreement,
the Partnership was required to place in escrow $100,000 for the replacement of
the roof on one of the three buildings at Plainview Plaza II. The source of
funds for this escrow was an escrow which had been maintained in connection with
the $4,500,000 mortgage payable.
The Partnership had cash flow from operations of $1,180,456 (1998) and $866,558
(1997) for the nine months ended September 30. The majority of the Partnership's
cash flow is derived from operating activities. Cash flows used in investing
activities are primarily for tenant finish improvements and other capital
additions and are funded by operating activities. 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 these
improvements are determined by the size of the space and whether the
improvements are for a new tenant or incurred because of a lease renewal. Cash
flows used in investing activities also include cash which is being escrowed for
the replacement of the heating, ventilating and air conditioning ("HVAC") system
(1997) at Peachtree Corporate Center and the replacement of the roof on one of
the three buildings at Plainview Plaza II (1998). As part of its cash management
activities, the Partnership has purchased Certificates of Deposit with initial
maturities greater than three months to improve the return on its cash reserves.
The Partnership has held the securities until maturity. Cash flows provided by
investing activities are from the maturity of these investment securities and
the release of funds escrowed for the replacement of the HVAC system at
Peachtree Corporate Center. Cash flows used in financing activities include
principal payments on the mortgages payable, the repurchase of limited
partnership Units, cash reserved by the Partnership to fund the Tender Offer to
purchase limited partnership Units, and the addition of loan costs associated
with the debt activity. Cash flows provided by financing activities represent
the utilization of cash which has been reserved by the Partnership for the
repurchase of limited partnership Units, and proceeds received from a new
mortgage loan obtained April 1, 1998. The Partnership does not expect any
material changes in the mix and relative cost of capital resources from those in
1997 except for change resulting from the new debt financing obtained by the
Partnership during 1998, as discussed above.
The Partnership indefinitely suspended distributions starting December 31, 1996
in an effort to conserve funds in anticipation of the loss of Aetna Life
Insurance Company at Plainview Triad North. See below for a further discussion.
Cash reserves (which are unrestricted cash and equivalents as shown on the
Partnership's balance sheet as of September 30) were $255,398 and $641,263 at
September 30, 1998 and 1997, respectively.
In the next 12 months, the General Partner expects a demand on future liquidity
as a result of 122,897 square feet in leases expiring from October 1, 1998 to
September 30, 1999 (Plainview Plaza II - 2,121 square feet, Plainview Triad
North - 70,900 square feet and Peachtree Corporate Center - 49,876 square feet).
The majority of the square feet in leases which expire in 1998 relate to a
single tenant (Aetna Life Insurance Company) at Plainview Triad North. See below
for a discussion regarding the lease for this tenant. At this time, the future
leasing and tenant finish costs which will be required to renew the current
leases or obtain new tenants are unknown.
One tenant at Plainview Triad North occupies approximately 65% of the building.
During the third quarter of 1997, the Partnership received notice that the
tenant would vacate the property at the end of the lease term, August 1998. The
Partnership was able to negotiate a 30 day renewal (through September 30, 1998)
with the tenant for the approximately 63,000 square feet that they leased. The
Partnership was also able to negotiate a renewal for approximately 11,000 square
feet of the original 63,000 square feet through March 31, 1999. Costs associated
with this renewal were not significant. In the opinion of the General Partner
- 13 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
of the Partnership, the six-month extension for 11,000 square feet of space will
be all that can be anticipated. As a result, there will likely be a protracted
period for the property to become fully leased again and substantial funds,
currently estimated to be from $2,000,000 to $2,500,000, will likely be needed
for leasing expenses, particularly those needed to refinish space for new
tenants.
At Plainview Triad North, the Partnership is exploring the possibility of common
area and exterior building renovations. As of September 30, 1998, the
Partnership has made a commitment of approximately $50,000 for architectural
services in connection with planning the renovations. These renovations will be
designed to make the property more competitive and enhance its value. The
estimated cost of the renovations is approximately $1,000,000 and is expected to
begin during 1998.
It may be necessary to borrow a portion of the funds required for the
renovations and leasing costs discussed above. With the partnership having two
of its three properties free and clear of debt, it is expected that any such
borrowings could be readily facilitated. However, there is no assurance that
financing will be able to be obtained when needed, or that any financing will be
on favorable terms.
On January 16, 1998, the Partnership elected to resume the Interest Repurchase
Program and to fund an additional $50,000 to its Interest Repurchase Reserve,
which was originally established in 1995 pursuant to Section 16.4 of the
Partnership's Amended and Restated Agreement of Limited Partnership. With this
funding, the Partnership repurchased 200 additional Units at a price of $250 per
Unit. On April 7, 1998, the Partnership elected to fund an additional $25,000 to
its Interest Repurchase Reserve. With this funding, the Partnership repurchased
100 additional Units at a price of $250 per Unit. The above offering price per
Unit was established by the General Partner in its sole discretion and does not
purport to represent the fair market value or liquidation value of the Units.
From October 1995 to September 30, 1998, the Partnership has repurchased a total
of 1,830 units for $393,240. Repurchased units are retired by the Partnership,
thus increasing the percentage of ownership of each remaining limited partner
investor. The Interest Repurchase Reserve was funded from cash reserves. The
balance in the reserve at September 30, 1998 was $0.
On September 30, 1998, the Partnership and ORIG, LLC, an affiliate of the
partnership, commenced a Tender Offer to purchase up to 1,000 of the
Partnership's limited partnership Units at a price of $250 per Unit. Although
the Partnership and ORIG, LLC believes that this price is appropriate, the price
of $250 per Unit may not equate to the fair market value or the liquidation
value of the Unit, and is less than the book value per Unit. Approximately
$285,000 ($250,000 to purchase 1,000 Units plus approximately $35,000 for
expenses associated with the Offer) is required to purchase all 1,000 Units. The
Partnership will purchase the first 500 Units tendered and will fund its
purchases and its portion of the expenses from cash reserves. If more than 500
Units are tendered, ORIG, LLC will purchase up to an additional 500 Units. If
more than 1,000 Units are tendered, the Partnership and ORIG, LLC may choose to
acquire the additional Units on the same terms. Otherwise, tendered Units will
be purchased on a pro rata basis up to 1,000. Units that are acquired by the
Partnership will be retired. Units that are acquired by ORIG, LLC will be held
by it. The General Partner, NTS-Properties Associates, does not intend to
participate in the Tender Offer. The Tender Offer will expire December 29, 1998
unless extended.
The primary source of future liquidity is expected to be derived from cash
generated by the Partnership's properties after adequate cash reserves are
established for future leasing and tenant finish costs. In addition to cash flow
from operations and cash reserves it may be necessary for the Partnership to
obtain debt financing as discussed above.
- 14 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
All divisions of NTS, the General Partner of the Partnership, are reviewing the
effort necessary to prepare our information systems (IT) and non-information
technology with embedded technology (ET) for the Year 2000. The information
technology solutions have been addressed separate for the Year 2000 since the
company saw the need to move to more advanced management and accounting systems
made available by new technology and software developments during the decade of
the 1990's.
The PILOT software system, purchased in the early 1990's, needed to be replaced
by a windows based network system both for our headquarters functions and other
locations. The real estate accounting system developed, sold, and supported by
the Yardi Company of Santa Barbara, California has been selected to supercede
PILOT. The Yardi system is compatible with Year 2000 and beyond. This system is
being implemented with the help of third party consultants and should be fully
operational by the third quarter of 1999. Our system for multi-family apartment
locations was converted to GEAC's Power Site System earlier in 1998 and is Year
2000 compliant.
The few remaining systems not addressed by these conversions are being modified
by our in-house staff of programmers. The Hewlett Packard 3000 system, used for
PILOT and custom applications, was purchased in 1997 and will be part of our new
network. It will be retained as long as necessary to assure smooth operations
and has been upgrades to meet Year 2000 requirements.
All risks identified with information technology are believed to be addressed by
these plans.
The cost of these advances in our systems technology is not all attributable to
the Year 2000 issue since we had already identified the need to move to a
network based system regardless of the Year 2000. The costs involved will be
approximately $55,000 over 1998 and 1999. These costs include hardware,
software, internal staff and outside consultants.
NTS property management staff has been surveying our vendors to evaluate
embedded technology in our alarm systems, HVAC controls, telephone systems and
other computer associated facilities. In a few cases, equipment is being
replaced. In some cases circuitry is being upgraded. The cost involved is still
being evaluated. There are no known significant risks that are currently without
solutions. Management anticipates that applications involving ET will be Year
2000 compliant by the third quarter of fiscal year 1999.
We are also currently addressing the Year 2000 readiness of third parties whose
business interruption could have a material negative impact on our business. All
significant vendors and tenants have indicated that they will be compliant by
the end of 1999. Such assurances are being evaluated and documented.
Management has determined that at our current state of readiness, the need does
not presently exist for a contingency plan. We will continue to evaluate the
need for such a plan.
Despite diligent preparation, unanticipated third-party failures, more general
public infrastructure failures or failure to successfully conclude our
remediation efforts as planned could have a material adverse impact on our
results of operations, financial conditions and/or cash flows in 1999 and
beyond.
The Partnership had no other material commitments for renovations or capital
improvements at September 30, 1998.
Due to the fact that no distributions were made during the nine months ended
September 30, 1998 or 1997, the table which presents that portion of the
distribution that represents a return of capital on a Generally Accepted
Accounting Principle basis has been omitted.
- 15 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
The following describes the efforts being taken by the Partnership to increase
the occupancy levels at the Partnership's properties. At Peachtree Corporate
Center in Norcross, Georgia, the Partnership has an on-site leasing agent, an
employee of NTS Development Company (an affiliate of the General Partner), who
makes calls to potential tenants, negotiates lease renewals with current tenants
and manages local advertising with the assistance of NTS Development Company's
marketing staff. The leasing and renewal negotiations for Plainview Triad North
are handled by leasing agents, employees of NTS Development Company, located in
Louisville, Kentucky. The leasing agents are located in the same city as the
property. All advertising for the Louisville property is also coordinated by NTS
Development Company's marketing staff located in Louisville, Kentucky.
Leases at all the Partnership's properties provide for tenants to contribute
toward the payment of increases in common area maintenance expenses, insurance,
utilities and real estate taxes. This lease provision should protect the
Partnership's operations from the impact of inflation and changing prices.
Some of the statements included in Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations, may be considered to be
"forward-looking statements" since such statements relate to matters which have
not yet occurred. For example, phrases such as the Partnership "anticipates",
"believes" or "expects" indicate that it is possible that the event anticipated,
believed or expected may not occur. Should such event not occur, then the result
which the Partnership expected also may not occur or occur in a different
manner, which may be more or less favorable to the Partnership. The Partnership
does not undertake any obligations to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
Any forward-looking statements included in Managements's Discussion and Analysis
of Financial Condition and Results of Operations, or elsewhere in this report,
which reflect management's best judgment based on factors known, involve risks
and uncertainties. Actual results could differ materially from those anticipated
in any forward-looking statements as a result of a number of factors, including
but not limited to those discussed below. Any forward-looking information
provided by the Partnership pursuant to the safe harbor established by recent
securities legislation should be evaluated in the context of these factors.
The Partnership's principal activity is the leasing and management of commercial
office buildings and a business center. If a major commercial tenant defaults on
its lease, the Partnership's ability to make payments due under its debt
agreements, payment of operating costs and other partnership expenses would be
directly impacted. A lessee's ability to make payments are subject to risks
generally associated with real estate, many of which are beyond the control of
the Partnership, including general or local economic conditions, competition,
interest rates, real estate tax rates, other operating expenses and acts of God.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
3. Defaults Upon Senior Securities
-------------------------------
None.
6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
Items 1,2,4, and 5 are not applicable and have been omitted.
- 17 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NTS-PROPERTIES III
------------------
(Registrant)
BY: NTS-Properties Associates,
General Partner,
BY: NTS Capital Corporation,
General Partner
/s/ Richard L. Good
-------------------
Richard L. Good
President
/s/ Lynda J. Wilbourn
---------------------
Lynda J. Wilbourn
Vice President
Principal Accounting Officer
Date: November 13, 1998
- 18 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1998 AND FROM THE STATEMENTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 534,948
<SECURITIES> 0
<RECEIVABLES> 156,459
<ALLOWANCES> 7,934
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,124,054
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 11,204,204
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 6,710,864
0
0
<COMMON> 0
<OTHER-SE> 4,170,719
<TOTAL-LIABILITY-AND-EQUITY> 11,204,204
<SALES> 2,664,929
<TOTAL-REVENUES> 2,899,427
<CGS> 0
<TOTAL-COSTS> 2,224,273
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 353,468
<INCOME-PRETAX> 321,686
<INCOME-TAX> 0
<INCOME-CONTINUING> 321,686
<DISCONTINUED> 0
<EXTRAORDINARY> 65,258
<CHANGES> 0
<NET-INCOME> 256,428
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THE PARTNERSHIP HAS AN UNCLASSIFIED BALANCE SHEET; THEREFORE THE VALUE IS $0.
<F2>THIS INFORMATION IS NOT DISCLOSED IN THE PARTNERSHIP'S FORM 10-Q.
</FN>
</TABLE>
