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 March 31, 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 March 31, 1998 and December 31, 1997 3
Statements of Operations
For the three months ended March 31, 1998 and 1997 4
Statements of Cash Flows
For the three months ended March 31, 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
1. Legal Proceedings 17
2. Changes in Securities 17
3. Defaults upon Senior Securities 17
4. Submission of Matters to a Vote of Security Holders 17
5. Other Information 17
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
March 31, 1998 December 31, 1997*
-------------- ------------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 170,954 $ 266,940
Cash and equivalents - restricted 347,787 284,599
Investment Securities -- 101,591
Accounts receivable, net of allowance
for doubtful accounts of $40,700 (1998)
and $42,035 (1997) 251,176 269,922
Land, buildings and amenities, net 10,221,980 9,789,485
Construction in progress 47,452 39,477
Other assets 550,093 370,302
----------- -----------
Total assets $11,589,442 $11,122,316
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable $ 6,714,251 $ 6,734,603
Accounts payable - operations 179,201 36,773
Accounts payable - construction 372,132 102,655
Security deposits 103,971 103,816
Other liabilities 154,761 155,179
----------- -----------
7,524,316 7,133,026
Commitments and Contingencies
Partners' equity 4,065,126 3,989,290
----------- -----------
$11,589,442 $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 98,872 (23,037) 75,835
Cash distributions declared to
date (11,349,844) (206,985) (11,556,829)
Repurchase of limited partnership
units (318,240) -- (318,240)
------------ ------------ ------------
Balances at March 31, 1998 $ 4,105,589 $ (40,463) $ 4,065,126
============ ============ ============
</TABLE>
*Reference is made to the audited financial statements in the Form 10-K as filed
with the Commission on March 30, 1998.
- 3 -
<PAGE>
<TABLE>
NTS-PROPERTIES III
STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenues:
Rental income, net of provision for
doubtful accounts of $5,700 (1998)
and $4,640 (1997) $ 846,996 $ 749,016
Rental income - affiliated 75,752 71,883
Interest and other income 4,055 11,971
----------- -----------
926,803 832,870
Expenses:
Operating expenses 218,329 173,857
Operating expenses - affiliated 122,713 104,135
Amortization of capitalized leasing
costs 6,370 6,082
Interest expense 122,863 132,020
Management fees 48,442 42,279
Real estate taxes 51,727 52,798
Professional and administrative
expenses 15,006 13,280
Professional and administrative
expenses - affiliated 36,688 34,612
Depreciation and amortization 228,830 208,563
----------- ----------
850,968 767,626
----------- ----------
Net income $ 75,835 $ 65,244
=========== ==========
Net income allocated to the
limited partners $ 98,872 $ 88,767
=========== ==========
Net income per limited
partnership unit $ 7.03 $ 6.30
=========== ==========
Weighted average number of limited
partnership units 14,070 14,079
=========== ==========
</TABLE>
- 4 -
<PAGE>
<TABLE>
NTS-PROPERTIES III
STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 75,835 $ 65,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 5,700 4,640
Accrued interest on investment securities 923 --
Amortization of capitalized leasing costs 6,370 6,082
Depreciation and amortization 228,830 208,563
Change in assets and liabilities:
Cash and equivalents - restricted (10,410) (14,449)
Accounts receivable 13,046 (5,675)
Other assets (71,438) (20,422)
Accounts payable - operations 142,428 10,666
Security deposits 155 (2,599)
Other liabilities (416) 55,572
----------- ----------
Net cash provided by operating activities 391,023 307,622
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings, amenities and
construction in progress (394,701) (191,220)
Increase in cash and equivalents - restricted (2,777) (2,813)
Maturity of investment securities 100,668 --
----------- ---------
Net cash used in investing activities (296,810) (194,033)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage payable (20,352) (27,771)
Additions to loan costs (119,847) --
Repurchase of limited partnership units -- (5,408)
(Increase) decrease in cash and equivalents -
restricted (50,000) 27,168
----------- ----------
Net cash used in financing activities (190,199) (6,011)
----------- ----------
Net increase (decrease) in cash and equivalents (95,986) 107,578
CASH AND EQUIVALENTS, beginning of period 266,940 661,383
----------- ----------
CASH AND EQUIVALENTS, end of period $ 170,954 $ 768,961
=========== ==========
Interest paid on a cash basis $ 81,458 $ 133,157
=========== ==========
</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 ended March 31, 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 are replaced, 2) funds which have been
escrowed with a mortgage company for NTS Plainview Plaza II's property
taxes in accordance with the loan agreement, and 3)funds which the
Partnership has reserved for the repurchase of limited partnership Units.
The funds escrowed for HVAC system replacements were released subsequent to
March 31, 1998 when the $4,500,000 was repaid. See Note 10 Subsequent
Events.
4. Interest Repurchase Reserve
---------------------------
On January 16, 1998, NTS-Properties III 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 will be able to repurchase
up to 200 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. As of March 31, 1998, the Partnership had
repurchased a total of 1,530 units. Repurchased units are retired by the
Partnership, thus increasing the share of ownership of each remaining
investor. The Interest Repurchase Reserve was funded from cash reserves.
See Note 10 Subsequent Events for further information regarding the
Interest Repurchase Program.
- 6 -
<PAGE>
5. Investment Securities
---------------------
Investment securities represent investments in Certificates of Deposit or
securities issued by the U.S. Government 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 March 31, 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
======== ========
6. Mortgages Payable
-----------------
Mortgages payable consist of the following:
March 31, December 31,
1998 1997
---------- -----------
Mortgage payable to an insurance company
bearing interest at 9.125%, maturing
November 1, 1998, secured by land and
buildings $ 2,214,251 $ 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. The
current rate at March 31, 1998 is 6.34% 4,500,000 4,500,000
---------- ----------
$ 6,714,251 $ 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 is approximately $6,800,000.
The $2,214,251 mortgage matures within the next twelve months. See Note 10
Subsequent Events for a further discussion regarding this mortgage.
7. Reclassification of 1997 Financial Statements
---------------------------------------------
Certain reclassifications have been made to the March 31, 1997 financial
statements to conform with the March 31, 1998 classifications. These
reclassifications have no effect on previously reported operations.
8. Related Party Transactions
--------------------------
Property management fees of $48,442 and $42,279 for the three months ended
March 31, 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
$39,531 and $19,833 as a repair
- 7 -
<PAGE>
8. Related Party Transactions - Continued
--------------------------------------
and maintenance fee during the three months ended March 31, 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 three
months ended March 31, 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, land, buildings and amenities, or construction in
progress. These charges were as follows:
1998 1997
--------- ---------
Leasing $ 53,957 $ 64,603
Administrative 44,140 43,081
Property manager 59,398 38,160
Other 15,077 9,360
-------- --------
$ 172,572 $ 155,204
======== ========
During the three months ended March 31, 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 $76,000 in rental
payments from NTS Development Company during the three months ended March
31, 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. The
Partnership received approximately $72,000 in rental payments from NTS
Development Company during the three months ended March 31, 1997.
9. 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 will vacate the property at the end of the lease term,
August 1998. The Partnership is currently negotiating a 120 day renewal
with the tenant at their request. Any costs associated with this renewal
would not be significant. In the opinion of the General Partner of the
Partnership, the 120 day extension 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 will likely be needed for
leasing expenses; especially those needed to refinish space for new
tenants. At this time, the amount of such expenses are unknown.
At Plainview Plaza II, the Partnership expects to complete the landscaping
and exterior building renovations, and the addition of a handicap restroom
facility during 1998. The remaining commitment for this project is
approximately $80,000.
At Plainview Triad North, the Partnership is exploring the possibility of a
common area and exterior building renovation. As of March 31, 1998, the
Partnership had made a commitment for approximately $42,000 for
architectural services. These renovations will be designed to make the
property more competitive and enhance its value. Estimated cost for the
renovation is approximately $500,000 and the renovation is expected
- 8 -
<PAGE>
9. Commitments and Contingencies - Continued
-----------------------------------------
to begin during the summer of 1998. It is anticipated that the cash flow
from operations and cash reserves will be sufficient to meet the needs of
the Partnership in regard to the renovations.
For additional commitments see Note 10 Subsequent Events.
10. Subsequent Events
-----------------
Subsequent to March 31, 1998, the Partnership elected to fund an
additional amount of $25,000 to its Interest Repurchase Reserve. With this
funding, the Partnership will be able to repurchase up to 100 additional
Units at a price of $250 per Unit. If the number of Units submitted for
repurchase exceeds that which can be repurchased by the Partnership with
the current funding, those additional Units may be repurchased in
subsequent quarters.
Subsequent to March 31, 1998, the Partnership obtained from an insurance
company permanent financing in the amount of $6,800,000. The mortgage
payable bears interest at a fixed rate of 6.89% and is secured by a first
mortgage on Plainview Plaza II. The repayment of the principal will be
amortized over 17 years with monthly payments of principal and interest
totaling approximately $56,650. The proceeds of the mortgage were used to
pay off the $2,214,251 and $4,500,000 mortgages payable outstanding at
March 31, 1998 and to pay loan closing costs. As a result of the repayment
of the $4,500,000 mortgage payable, the funds escrowed for HVAC system
replacements, as discussed in Note 1, were released.
- 9 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
- ---------------------
The occupancy levels at the Partnership's properties as of March 31 were as
follows:
1998 1997
----- ----
Plainview Plaza II 100% 86%
Plainview Triad North 88% 91%
Peachtree Corporate Center 88% 83%
The rental and other income generated by the Partnership's properties for the
three months ended March 31 were as follows:
1998 1997
--------- ---------
Plainview Plaza II $ 343,364 $ 292,614
Plainview Triad North $ 295,735 $ 264,915
Peachtree Corporate Center $ 283,950 $ 266,581
The 14% increase in occupancy from March 31, 1997 to March 31, 1998 at Plainview
Plaza II can be attributed to five new leases totaling approximately 22,000
square feet. Of this total, approximately 17,000 square feet represents a new
five-year lease and approximately 4,000 square feet represents an expansion by a
current tenant. The new leases are partially offset by the move-out of three
tenants, approximately 4,000 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 regrading the tenant relocation. Average occupancy increased from
87% for the three months ended March 31, 1997 to 92% for the same period in
1998. The increase in rental and other income at Plainview Plaza II for the
three months ended March 31, 1998 as compared to the same period in 1997 can be
attributed to the increase in average occupancy during the period.
Plainview Triad North's occupancy decreased 3% from March 31, 1997 to March 31,
1998 as a result of an early move-out by one tenant (occupied a total of
approximately 5,000 square feet). The tenant is continuing to pay rent in
accordance with the lease terms. Partially offsetting the tenant move-out is one
new lease totaling approximately 1,900 square feet with a former tenant of
Plainview Plaza II. The tenant relocated to Plainview Triad North from Plainview
Plaza II to accommodate the needs of the new tenant at Plainview Plaza II who
required 17,000 square feet of contiguous space. Average occupancy decreased
from 94% in 1997 to 87% in 1998. Rental and other income increased for the three
months ended March 31, 1998 as compared to the same period 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.
Peachtree Corporate Center's occupancy increased 5% from March 31, 1997 to March
31, 1998, due to nine new leases totaling approximately 22,000 square feet, of
which approximately 8,600 square feet represents expansions by three current
tenants. Partially offsetting the new leases were the move- outs of six tenants
who had occupied approximately 15,000 square feet. Approximately 5,200 square
feet of this total represents three 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
- 10 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
9,800 square feet of total move-outs were the result of three tenants who
vacated at the end of the lease terms. Average occupancy at Peachtree Corporate
Center increased from 84% in 1997 to 87% in 1998. Rental and other income at
Peachtree Corporate Center increased for the three months ended March 31, 1998
as compared to the same period in 1997 as a result of a decrease in the
provision for doubtful accounts.
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 three months ended March 31, 1998 or
1997. As of March 31, 1998, there were no on-going cases.
Current and projected future occupancy levels are considered adequate to
continued 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 and from funds escrowed
for the replacement of the heating, ventilating and air conditioning ("HVAC")
system and asphalt paving at Peachtree Corporate Center. The decrease in
interest and other income for the three months ended March 31, 1998 as compared
to the same period in 1997 is due primarily to the decrease in cash reserves
available for investment.
Operating expenses increased for the three months ended March 31, 1998 as
compared to the same period in 1997 as a result of increased landscaping and
advertising costs at Plainview Plaza II and Plainview Triad North, an increase
in repair and maintenance costs and restroom supplies at Plainview Plaza II, and
an increase roof repairs at Peachtree Corporate Center. Partially offsetting the
increase in operating expenses during the three month period is a decrease in
utility costs at Plainview Triad North.
The increase in operating expenses-affiliated for the three months ended March
31, 1998 as compared to the same period in 1997 is a result of an increase in
property management costs at Plainview Triad North and Plainview Plaza II. The
increase in operating expenses - affiliated is partially offset by a decrease in
leasing costs at Peachtree Corporate Center and Plainview Triad North. Operating
expenses-affiliated are expenses incurred for services performed by employees of
NTS Development Company, an affiliate of the General Partner.
Amortization of capitalized leasing costs for the three months ended March 31,
1998 as compared to the same period in 1997 remained fairly constant.
Interest expense has decreased for the three months ended March 31, 1998 as
compared to the same period in 1997 due to a decrease in the interest rate on
the Partnership's $4,500,000 mortgage payable - 6.34% (1998) compared to 6.94%
(1997). The interest rate on this note adjusts quarterly to 60 basis points over
the 10-year treasury bill rate. The decrease in interest expense is also due to
a decrease in interest expense on the $2,214,251 mortgage payable as a result of
continued principle payments. See the Liquidity and Capital Resources section of
this item for details regarding the Partnership's debt.
- 11 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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 for the three months ended March 31, 1998 as compared to the
same period in 1997 remained fairly constant.
Professional and administrative expenses and professional and administrative
expenses - affiliated remained fairly constant for the three months ended March
31, 1998 as compared to the same period 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
ended March 31, 1998 as compared to the same period in 1997 is the result of
fixed assets being placed in service since March 31, 1997 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 since March 31, 1997. 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.
Liquidity and Capital Resources
- -------------------------------
The Partnership had cash flow from operations of $391,023 (1998) and $307,622
(1997) for the three months ended March 31. 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 March 31) were $170,954 and $768,961 at March 31, 1998 and 1997,
respectively.
As of March 31, 1998 the Partnership had a mortgage payable to an insurance
company in the amount of $4,500,000. The mortgage bears a variable interest rate
which adjusts quarterly to 60 basis points over the 10-year treasury bill rate.
The current rate at March 31, 1998 was 6.34%. The loan is secured by a first
mortgage on Plainview Triad North and Peachtree Corporate Center with a second
position behind the holder of the permanent mortgage on Plainview Plaza II. The
unpaid balance of the loan is due June 1, 2001.
As of March 31, 1998, the Partnership also had a mortgage payable to an
insurance company in the amount of $2,214,251. The mortgage bears a fixed
interest rate of 9.125% and is due November 1, 1998. This loan is secured by a
first mortgage on Plainview Plaza II. The outstanding balance at maturity based
on the current rate of amortization will be $2,140,539.
Subsequent to March 31, 1998, the Partnership obtained permanent financing from
an insurance company in the amount of $6,800,000. The mortgage payable bears
interest at a fixed rate of 6.89% and is secured by a first mortgage on
Plainview Plaza II. The repayment of principal will be amortized over 17 years,
with monthly payments of principal and interest totaling approximately $56,650.
The proceeds of the mortgage were used to pay off the $2,214,251 and $4,500,000
mortgages payable outstanding at March 31, 1998 to and to pay loan closing
costs.
- 12 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
The primary source of future liquidity and distributions 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.
The majority of the Partnership's cash flow is derived from operating
activities. Cash flows used in investing activities are 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 HVAC system and asphalt paving at
Peachtree Corporate Center. As part of its cash management activities, the
Partnership has purchased certificates of Deposit or securities issued by the U.
S. Government with initial maturities greater than three months to improve the
return on its excess cash. The Partnership has held the securities until
maturity. Cash flows provided by investing activities are from the maturity of
these investment securities. Cash flows used in financing activities include
principal payments on the $2.2 million mortgage payable, the funding of a
reserve for the purpose of the repurchase of limited partnership Units, actual
repurchase of such Units, and the addition of loan costs in 1998. 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. 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.
In the next 12 months, the General Partner expects a demand on future liquidity
as a result of 121,226 square feet in leases expiring from April 1, 1998 to
March 31, 1999 (Plainview Plaza II - 2,121 square feet, Plainview Triad North -
70,900 square feet and Peachtree Corporate Center - 50,605 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. It is anticipated that the cash flow from
operations and cash reserves will be sufficient to meet the needs of the
Partnership.
At Plainview Triad North, the Partnership is exploring the possibility of a
common area and exterior building renovation. As of March 31, 1998, the
Partnership had made a commitment for approximately $42,000 for architectural
services. These renovations will be designed to make the property more
competitive and enhance its value. Estimated costs for the renovation is
approximately $500,000 and the renovation is expected to begin during the summer
of 1998.
At Plainview Plaza II, the Partnership's renovation of the property is nearing
completion. Remaining items to be completed during 1998 include landscaping,
exterior staircase renovation, sidewalk replacements, a handicap restroom, and
new signage. Currently, the remaining project costs are estimated at
approximately $80,000. All of these projects are part of the Partnership's
continued effort to make the Plainview Plaza II property more competitive and
enhance its value.
The source of funds for the commitments listed above is expected to be cash flow
from operations and/or cash reserves.
- 13 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
On January 16, 1998, NTS-Properties III elected to resume the Interest
Repurchase Program and to fund an additional $50,000 to its Interest Repurchase
Reserve which was established in 1995 pursuant to Section 16.4 of the
partnership's Amended and Restated Agreement of Limited Partnership. With this
funding, the Partnership will be able to repurchase up to 200 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 Unit. As of March 31, 1998,
the Partnership had repurchased a total of 1,530 Units. Repurchased Units are
retired by the Partnership, thus increasing the share of ownership of each
remaining investor. The Interest Repurchase Reserve was funded from cash
reserves. See below for further information regarding the Interest Repurchase
Program.
The lease for Aetna Life Insurance Company, the largest tenant of Plainview
Triad North, occupying approximately 65% of the building, was extended during
the second quarter of 1997 from August 1997 to August 1998. There were no tenant
finish improvements as a result of this renewal. Aetna accounts for nearly 22%
of the NTS-Properties III total revenue. During the third quarter of 1997, the
Partnership received notice that Aetna will vacate the property at the end of
the extended lease term. The Partnership is currently negotiating a 120 day
renewal with the tenant at their request. Any costs associated with this renewal
would not be significant. In the opinion of the General Partner of the
Partnership, the 120 day extension will be all that can be anticipated. As a
result of the expected move-out, there will likely be a protracted period for
the property to become fully leased again and substantial funds will likely be
needed for leasing expenses especially those needed to refinish space for new
tenants. As this time, the amount of such expenses are unknown. The Partnership
is actively seeking new tenants for this space.
Accordingly, to conserve funds in anticipation of the loss of Aetna,
distributions were suspended starting December 31, 1996.
Subsequent to March 31, 1998, the Partnership elected to fund an additional
amount of $25,000 to its Interest Repurchase Reserve. With this funding, the
Partnership will be able to repurchase up to 100 additional Units at a price of
$250 per Unit. If the number of Units submitted for repurchase exceeds that
which can be repurchased by the Partnership with the current funding, those
additional Units may be repurchased in subsequent quarters as cash flow
availability permits.
The source of funds for the commitments listed above is expected to be cash flow
from operations and/or cash reserves. It is anticipated that the cash flow from
operations and cash reserves will be sufficient to meet the needs of the
Partnership.
During 1998, the Partnership plans to replace the roof on one of the three
buildings at Plainview Plaza II. This project is expected to be completed by the
end of 1998. The estimated cost for the project is $100,000. The source of funds
for this project will be funds which were escrowed in accordance with the loan
agreement obtained subsequent to March 31, 1998, as discussed above.
The Partnership has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the issue. The Year 2000 Issue, a
worldwide issue, is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Partnership's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in major systems
failures or miscalculations. The Partnership presently believes that, with
modifications to existing software and conversions to new software, the Year
2000 problem will not pose significant
- 14 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
operational problems for the Partnership's computer systems. The Partnership
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized. The Partnership does not expect the costs associated with
the resolution of the Year 2000 Issue to have a material effect on its financial
position or results of operations. The associated costs will be funded by cash
flow from operations or cash reserves. The amount expensed in 1998 was
immaterial.
The Partnership had no other material commitments for renovations or capital
improvements at March 31, 1998.
Due to the fact that no distributions were made during the three months ended
March 31, 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.
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 Plaza II and
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 both commercial properties. All advertising for the
Louisville properties 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.
- 15 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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.
A portion of the Partnership's debt service is based on a variable interest
rate. Any fluctuations in the interest rate are beyond the control of the
Partnership. These variances could, for example, impact the Partnership's
projected cash and cash requirements as well as its ability to pay distributions
to the limited partners.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
1. Legal Proceedings
-----------------
None
2. Changes in Securities
---------------------
None
3. Defaults upon Senior Securities
-------------------------------
None
4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
5. Other Information
-----------------
None
6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K was filed January 21, 1998 to report that the
Partnership has elected to resume the Repurchase Program and
fund an additional $50,000 to its Interest Repurchase Reserve.
- 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/ John W. Hampton
-------------------
John W. Hampton
Senior Vice President
Date: May 14, 1998
------------
- 18 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXPECTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1998 AND FROM THE STATEMENT OF OPERATIONS FOR THE QUARTER
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 518,741
<SECURITIES> 0
<RECEIVABLES> 251,176
<ALLOWANCES> 40,700
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,221,980
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 11,589,442
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,065,126
<TOTAL-LIABILITY-AND-EQUITY> 11,589,442
<SALES> 846,996
<TOTAL-REVENUES> 926,803
<CGS> 0
<TOTAL-COSTS> 728,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,700
<INTEREST-EXPENSE> 122,863
<INCOME-PRETAX> 75,835
<INCOME-TAX> 0
<INCOME-CONTINUING> 75,835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,835
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THE PARTNERSHIP HAS AN UNCLASSIFIED BALANCE SHEET; THEREFORE, THE VALUE
IS $0.
<F2>THIS INFOMRATION IS NOT DISCLOSED IN THE PARTNERSHIP'S FORM 10-Q FILING.
</FN>
</TABLE>
