UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 16
Total Pages: 17
<PAGE>
TABLE OF CONTENTS
Pages
PART I
Item 1. Financial Statements
Balance Sheets and Statement of Partners' Equity
as of June 30, 1998 and December 31, 1997 3
Statements of Operations
For the three months and six months ended
June 30, 1998 and 1997 4
Statements of Cash Flows
For the three months and six months ended
June 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 10-15
PART II
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
- 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
June 30,1998 December 31, 1997*
------------ ------------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 266,352 $ 266,940
Cash and equivalents - restricted 124,983 284,599
Investment securities -- 101,591
Accounts receivable, net of allowance
for doubtful accounts of $4,200 (1998)
and $42,035 (1997) 217,637 269,922
Land, buildings and amenities, net 10,238,185 9,828,962
Other assets 404,665 370,302
----------- -----------
Total assets $11,251,822 $11,122,316
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable $ 6,764,652 $ 6,734,603
Accounts payable - operations 90,629 36,773
Accounts payable - construction 33,076 102,655
Security deposits 101,463 103,816
Other liabilities 146,946 155,179
----------- -----------
7,136,766 7,133,026
Commitments and Contingencies
Partners' equity 4,115,056 3,989,290
----------- ----------
$11,251,822 $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 246,348 (45,583) 200,765
Cash distributions declared to
date (11,349,844) (206,985) (11,556,829)
Repurchase of limited partnership
units (393,240) -- (393,240)
------------ ----------- -----------
Balances at June 30, 1998 $ 4,178,065 $ (63,009) $ 4,115,056
============ =========== ===========
</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 Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income, net of provision
for doubtful accounts of $0
(1998) and $14,552 (1997) $ 953,550 $ 766,511 $ 1,800,542 $ 1,515,552
Rental income - affiliated 73,834 68,742 149,590 140,600
Interest and other income 2,986 7,096 7,042 19,068
----------- ----------- ----------- -----------
1,030,370 842,349 1,957,174 1,675,220
EXPENSES:
Operating expenses 224,731 168,559 443,059 342,417
Operating expenses - affiliated 89,106 108,128 211,820 212,264
Write-off of unamortized tenant
improvements 8,438 -- 8,438 --
Amortization of capitalized
leasing costs 6,370 6,081 12,740 12,163
Interest expense 114,392 134,431 237,254 266,451
Management fees 50,922 42,072 99,364 84,352
Real estate taxes 52,042 52,921 103,770 105,719
Professional and administrative
expenses 16,767 17,509 31,715 30,789
Professional and administrative
expenses - affiliated 33,779 34,805 70,525 69,417
Depreciation and amortization 243,635 210,396 472,466 418,957
----------- ----------- ----------- -----------
840,182 774,902 1,691,151 1,542,529
----------- ----------- ----------- -----------
Net income before extraordinary
item 190,188 67,447 266,023 132,691
Extraordinary item - write-off of
unamortized loan costs 65,258 -- 65,258 --
----------- ----------- ----------- -----------
Net income $ 124,930 $ 67,447 $ 200,765 $ 132,691
=========== =========== =========== ===========
Net income allocated to the limited partners:
Income before extraordinary item $ 212,081 $ 90,943 $ 310,953 $ 179,706
Extraordinary item (64,605) -- (64,605) --
----------- ----------- ----------- -----------
Net income $ 147,476 $ 90,943 $ 246,348 $ 179,706
=========== =========== =========== ===========
Net income per limited partnership unit:
Income before extraordinary item $ 15.36 $ 6.46 $ 22.30 $ 12.77
Extraordinary item (4.68) -- (4.63) --
----------- ----------- ----------- -----------
Net income per limited partnership
unit $ 10.68 $ 6.46 $ 17.67 $ 12.77
=========== =========== =========== ===========
Weighted average number of units 13,813 14,074 13,941 14,074
=========== =========== =========== ===========
</TABLE>
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<PAGE>
<TABLE>
NTS-PROPERTIES III
STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 124,930 $ 67,447 $ 200,765 $ 132,691
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for doubtful accounts (5,700) 9,912 -- 14,552
Accrued interest on investment
securities -- -- 923 --
Amortization of capitalized
leasing costs 6,370 6,081 12,740 12,163
Write-off of unamortized tenant
improvements 8,438 -- 8,438 --
Write-off of unamortized loan costs 65,258 -- 65,258 --
Depreciation and amortization 243,635 210,396 472,466 418,957
Changes in assets and liabilities:
Cash and equivalents - restricted (2,729) (15,615) (13,139) (30,064)
Accounts receivable 39,239 (30,900) 52,285 (36,577)
Other assets 30,119 10,852 (41,319) (9,570)
Accounts payable - operations (88,572) (29,024) 53,856 (18,358)
Security deposits (2,508) 759 (2,353) (1,840)
Other liabilities (7,816) 48,573 (8,232) 104,149
----------- ----------- ----------- -----------
Net cash provided by operating
activities 410,664 278,481 801,688 586,103
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings, and (558,751) (382,451) (953,453) (573,671)
amenities
Increase in cash and equivalents -
restricted (101,831) (2,914) (88,819) (5,727)
Decrease in cash and equivalents -
restricted 277,363 -- 261,574 --
Maturity of investment securities -- -- 100,668 --
----------- ----------- ----------- -----------
Net cash used in investing
activities (383,219) (385,365) (680,030) (579,398)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in mortgage payable 6,800,000 -- 6,800,000 --
Principal payments on mortgages
payable (6,749,599) (28,409) (6,769,951) (56,180)
Decrease (increase) in loan costs 42,552 -- (77,295) --
Repurchase of limited partnership
units (75,000) -- (75,000) (5,408)
Decrease in cash and equivalents -
restricted 50,000 -- -- 27,168
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 67,953 (28,409) (122,246) (34,420)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and
equivalents 95,398 (135,293) (588) (27,715)
CASH AND EQUIVALENTS, beginning of
period 170,954 768,961 266,940 661,383
----------- ----------- ----------- -----------
CASH AND EQUIVALENTS, end of period $ 266,352 $ 633,668 $ 266,352 $ 633,668
=========== =========== =========== ===========
Interest paid on a cash basis $ 148,441 $ 134,431 $ 212,650 $ 267,588
=========== =========== =========== ===========
</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 six months ended June 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 and 4) escrow funds which are to be released as the roof
is replaced at one of the three buildings at Plainview Plaza II. 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 was able to repurchase up
to 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 was able to
repurchase 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 3, 1995 (date Interest
Repurchase Reserve established) to June 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 June 30, 1998
was $0.
- 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 June 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
======== ========
6. Mortgages Payable
-----------------
Mortgages payable consist of the following:
June 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 $ 6,764,652 $ --
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
----------- -----------
$ 6,764,652 $ 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 $6,700,000.
7. Reclassification of 1997 Financial Statements
---------------------------------------------
Certain reclassifications have been made to the June 30, 1997 financial
statements to conform with the June 30, 1998 classifications. These
reclassifications have no effect on previously reported operations.
- 7 -
<PAGE>
8. Related Party Transactions
--------------------------
Property management fees of $99,364 and $84,352 for the six months ended
June 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
$51,082 and $38,338 as a repair and maintenance fee during the six months
ended June 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 six months ended June 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 $ 80,372 $ 127,538
Administrative 85,429 86,355
Property manager 114,288 81,288
Other 36,861 16,167
--------- ---------
$ 316,950 $ 311,348
========= =========
During the six months ended June 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 $150,000 in rental
payments from NTS Development Company during the six months ended June 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 $141,000 in
rental payments from NTS Development Company during the six months ended
June 30, 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 30 day renewal with
the tenant for the approximately 63,000 square feet that they currently
lease. Such renewal terms would also include an extended renewal on 10,000
square feet of the original 63,000 square feet through March 31, 1999. Any
costs associated with this renewal are not expected to be significant. In
the opinion of the General Partner of the Partnership, the six-month
extension for 10,000 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.
- 8 -
<PAGE>
9. Commitments and Contingencies - Continued
-----------------------------------------
At Plainview Triad North, the Partnership is exploring the possibility of a
common area and exterior building renovation. As of June 30, 1998, the
Partnership has 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. The estimated cost of the
renovation is approximately $1,000,000 and the renovation 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.
At Plainview Plaza II, the Partnership has a commitment of $86,000 to
replace the roof on one of the three buildings at Plainview Plaza II. This
project should be completed by the end of 1998. The source of funds for
this project will be funds which are escrowed in accordance with the loan
agreement obtained April 1, 1998.
- 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 June 30 were as
follows:
1998 1997
---- ----
Plainview Plaza II 100% 89%
Plainview Triad North 91% 91%
Peachtree Corporate Center 86% 87%
The rental and other income generated by the Partnership's properties for the
three months and six months ended June 30 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
--------- --------- --------- ---------
Plainview Plaza II $ 391,380 $ 314,798 $ 734,744 $ 607,412
Plainview Triad North $ 342,714 $ 247,457 $ 638,450 $ 512,372
Peachtree Corporate Center $ 293,625 $ 271,369 $ 577,575 $ 537,950
The 11% increase in occupancy from June 30, 1997 to June 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 June 30
and from 88% in 1997 to 96% in 1998 for the six month period. The increase in
rental and other income at Plainview Plaza II for the three months and six
months ended June 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 was 91% at June 30, 1997 and 1998. During the
twelve month period ended June 30, 1998, one tenant, who had occupied
approximately 5,000 square feet, vacated prior to the end of the lease term,
which ended May 31, 1998. The tenant continued to pay rent in accordance with
the lease terms. Offsetting the tenant move-out are 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 the
new tenant at Plainview Plaza II who required 17,000 square feet of contiguous
space. Average occupancy decreased from 91% in 1997 to 89% in 1998 for the three
months ended June 30 and decreased from 92% in 1997 to 88% in 1998 for the six
month period. Rental and other income increased at Plainview Triad North for the
three months and six months ended June 30, 1998 as compared to the same periods
in 1997 due to the increase in rental rates for lease renewals and an increase
- 10 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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 decreased 1% from June 30, 1997 to June
30, 1998 due to the move-out of four tenants who had occupied approximately
14,000 square feet. Approximately 7,000 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 7,000 square feet of total move-outs was the result of one tenant who
vacated at the end of the lease term. Partially offsetting the move-outs are six
new leases totaling approximately 13,000 square feet. Of this total,
approximately 5,800 square feet represents the expansion by two current tenants.
Average occupancy at Peachtree Corporate Center remained constant at 86% for the
three month period ended June 30, 1998 as compared to the same period in 1997
and increased from 85% in 1997 to 87% in 1998 for the six month period. Rental
and other income at Peachtree Corporate Center increased for the three months
and six months ended June 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 Peachtree Corporate Center provide for
tenants to contribute toward the payment of increases in common area maintenance
expenses, insurance, utilities and real estate taxes.
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 June 30, 1998 or
1997. As of June 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 six months ended June 30, 1998 as compared to
the same periods in 1997 is due primarily to the decrease in cash reserves
available for investment.
Operating expenses at Plainview Plaza II increased for the three months and six
months ended June 30, 1998 as compared to the same periods in 1997 as a result
of increased utility costs, janitorial service and supply expenses, security
service expenses and landscaping costs. The increase in operating expenses for
both periods 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 at Peachtree Corporate Center remained fairly constant for
both the three month and six month periods.
Operating expenses - affiliated remained fairly constant for the six months
ended June 30, 1998 as compared to the same period in 1997. Operating expenses
affiliated decreased for the three months ended June 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 is partially offset by increased property management costs at
Plainview Plaza II and Peachtree Corporate Center. 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. 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.
Amortization of capitalized leasing costs for the three months and six months
ended June 30, 1998 as compared to the same periods in 1997 remained fairly
constant.
Interest expense has decreased for the three months and six months ended June
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 and was 7.39% April to June 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 six months ended June 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
six months ended June 30, 1998 as compared to the same periods in 1997 is the
result of assets being placed in service since June 30, 1997. Assets placed in
service are primarily tenant improvements at all the Partnership's properties
and exterior building and land improvements 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 since June 30, 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.
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
retired 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 June 30, 1998
was $6,764,652. 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 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. 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
- 12 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
$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 $801,688 (1998) and $586,103
(1997) for the six months ended June 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 or securities
issued by the U. S. Government 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 funding of a reserve for the purpose of the repurchase of 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, proceeds received from a new mortgage obtained April 1, 1998
and the decrease in loan costs associated with the debt activity. 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 June 30) were $266,352 and $633,668 at June
30, 1998 and 1997, respectively.
In the next 12 months, the General Partner expects a demand on future liquidity
as a result of 142,183 square feet in leases expiring from July 1, 1998 to June
30, 1999 (Plainview Plaza II - 2,121 square feet, Plainview Triad North - 73,516
square feet and Peachtree Corporate Center - 66,546 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 will vacate the property at the end of the lease term, August 1998. The
Partnership is currently negotiating a 30 day renewal with the tenant for the
approximately 63,000 square feet that they currently lease. Such renewal terms
would also include an extended renewal on 10,000 square feet of the original
63,000 square feet through March 31, 1999. Any costs associated with this
renewal are not expected to be significant. In the opinion of the General
Partner of the Partnership, the six-month extension for 10,000 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.
- 13 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
At Plainview Triad North, the Partnership is exploring the possibility of a
common area and exterior building renovation. As of June 30, 1998, the
Partnership has 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. The estimated cost of the renovation is
approximately $1,000,000 and the renovation 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.
At Plainview Plaza II, the Partnership has a commitment of $86,000 to replace
the roof on one of the three buildings at Plainview Plaza II. This project
should be completed by the end of 1998. The source of funds for this project
will be funds which are escrowed in accordance with the loan agreement obtained
April 1, 1998 (see discussion above).
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 was able to repurchase up to 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 was able to repurchase 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 3, 1995 (date Interest
Repurchase Reserve established) to June 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 June 30, 1998 was $0.
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.
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
computer 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 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 June 30, 1998.
- 14 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
Due to the fact that no distributions were made during the three months ended
June 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.
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.
- 15 -
<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
Form 8-K was filed April 7, 1998 to report in Item 5 that the
Partnership has elected to fund an additional amount of $25,000
to its Interest Repurchase Reserve.
Items 1,2,4, and 5 are not applicable and have been omitted.
- 16 -
<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: August 12, 1998
---------------
- 17 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1998 AND FROM THE STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 391,335
<SECURITIES> 0
<RECEIVABLES> 217,637
<ALLOWANCES> 4,200
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,238,185
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 11,251,822
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 6,764,652
0
0
<COMMON> 0
<OTHER-SE> 4,115,056
<TOTAL-LIABILITY-AND-EQUITY> 11,251,822
<SALES> 1,800,542
<TOTAL-REVENUES> 1,957,174
<CGS> 0
<TOTAL-COSTS> 1,453,897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237,254
<INCOME-PRETAX> 266,023
<INCOME-TAX> 0
<INCOME-CONTINUING> 266,023
<DISCONTINUED> 0
<EXTRAORDINARY> 65,258
<CHANGES> 0
<NET-INCOME> 200,765
<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 FILING.
</FN>
</TABLE>
