Attached files
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EX-32.1 - SECTION 906 CEO CERTIFICATION - NNN 2003 VALUE FUND LLC | d389282dex321.htm |
EX-31.1 - SECTION 302 CEO CERTIFICATION - NNN 2003 VALUE FUND LLC | d389282dex311.htm |
EX-32.2 - SECTION 906 CFO CERTIFICATION - NNN 2003 VALUE FUND LLC | d389282dex322.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - NNN 2003 VALUE FUND LLC | d389282dex312.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-51295
NNN 2003 Value Fund, LLC
(Exact name of registrant as specified in its charter)
Delaware | 20-0122092 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
1551 N. Tustin Avenue, Suite 200, Santa Ana, California |
92705 | |
(Address of principal executive offices) | (Zip Code) |
(714) 975-2999
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of August 10, 2012, there were 9,970 units of NNN 2003 Value Fund, LLC outstanding.
Table of Contents
NNN 2003 VALUE FUND, LLC
(A Delaware limited liability company)
Page | ||||
PART I FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | 3 | ||
3 | ||||
4 | ||||
5 | ||||
Unaudited Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2011 |
6 | |||
Notes to Unaudited Condensed Consolidated Financial Statements |
7 | |||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
12 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | ||
Item 4. | Controls and Procedures | 16 | ||
PART II OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 17 | ||
Item 1A. | Risk Factors | 17 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 17 | ||
Item 3. | Defaults Upon Senior Securities | 17 | ||
Item 4. | Mine Safety Disclosures | 17 | ||
Item 5. | Other Information | 17 | ||
Item 6. | Exhibits | 17 | ||
Signatures | 18 |
1
Table of Contents
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ materially from those included in the forward-looking statements. We intend those forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of us, are generally identifiable by use of the words believe, expect, intend, anticipate, estimate, project, prospects, or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically; sales prices, lease renewals and new leases; legislative/regulatory changes; availability of capital; changes in interest rates; our ability to service our debt, competition in the real estate industry; the supply and demand for operating properties in our current and proposed market areas; changes in accounting principles generally accepted in the United States of America, or GAAP, policies and guidelines applicable to us; our ongoing relationship with our manager (as defined below); and litigation. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the United States Securities and Exchange Commission, or the SEC.
2
Table of Contents
PART I FINANCIAL INFORMATION
NNN 2003 VALUE FUND, LLC
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(Liquidation Basis)
June 30, 2012 |
December 31, 2011 |
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents |
$ | 145,000 | $ | 603,000 | ||||
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|
|
|
|||||
Total assets |
145,000 | 603,000 | ||||||
LIABILITIES | ||||||||
Accounts payable and accrued liabilities |
22,000 | 22,000 | ||||||
Reserve for estimated costs in excess of receipts during liquidation |
103,000 | 197,000 | ||||||
|
|
|
|
|||||
Total liabilities |
125,000 | 219,000 | ||||||
|
|
|
|
|||||
Net assets in liquidation |
$ | 20,000 | $ | 384,000 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(Liquidation Basis)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||
June 30, 2012 | June 30, 2012 | |||||||
Net assets in liquidation, beginning of period |
25,000 | 384,000 | ||||||
Distribution to unit holders |
| (350,000 | ) | |||||
Net increase in estimated liquidation costs |
(5,000 | ) | (14,000 | ) | ||||
|
|
|
|
|||||
Net assets in liquidation, end of period |
$ | 20,000 | $ | 20,000 | ||||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(Going Concern Basis)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||
June 30, 2011 | June 30, 2011 | |||||||
General and administrative expense |
$ | (119,000 | ) | $ | (175,000 | ) | ||
Equity in losses of unconsolidated real estate |
(6,000 | ) | (12,000 | ) | ||||
|
|
|
|
|||||
Loss from continuing operations |
(125,000 | ) | (187,000 | ) | ||||
Income from discontinued operations |
| 13,326,000 | ||||||
|
|
|
|
|||||
Consolidated net (loss) income |
(125,000 | ) | 13,139,000 | |||||
Income attributable to non-controlling interests |
| | ||||||
|
|
|
|
|||||
Net (loss) income attributable to NNN 2003 Value Fund, LLC |
$ | (125,000 | ) | $ | 13,139,000 | |||
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Comprehensive (loss) income: |
||||||||
Consolidated net (loss) income |
$ | (125,000 | ) | $ | 13,139,000 | |||
Other comprehensive income |
| | ||||||
|
|
|
|
|||||
Comprehensive (loss) income |
(125,000 | ) | 13,139,000 | |||||
Comprehensive income attributable to non-controlling interests |
| | ||||||
|
|
|
|
|||||
Comprehensive (loss) income attributable to NNN 2003 Value Fund, LLC |
$ | (125,000 | ) | $ | 13,139,000 | |||
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Going Concern Basis)
(Unaudited)
Six Months Ended | ||||
June 30, 2011 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||
Consolidated net income |
$ | 13,139,000 | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||
Gain on extinguishment of debt |
(13,634,000 | ) | ||
Depreciation and amortization (including deferred financing costs, deferred rent, lease inducements and above/below market leases) |
157,000 | |||
Equity in losses of unconsolidated real estate |
12,000 | |||
Allowance for doubtful accounts |
44,000 | |||
Change in operating assets and liabilities: |
||||
Accounts receivable, including accounts and loans receivable due from related parties |
(138,000 | ) | ||
Other assets |
38,000 | |||
Restricted cash |
(21,000 | ) | ||
Accounts payable and accrued liabilities, including accounts payable to related parties |
(235,000 | ) | ||
Security deposits, prepaid rent and other liabilities |
(181,000 | ) | ||
|
|
|||
Net cash used in operating activities |
(819,000 | ) | ||
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||
Net cash provided by investing activities |
| |||
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||
Distributions to unit holders |
(500,000 | ) | ||
Cash transferred to lender in connection with transfer of property |
(49,000 | ) | ||
|
|
|||
Net cash used in financing activities |
(549,000 | ) | ||
|
|
|||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(1,368,000 | ) | ||
CASH AND CASH EQUIVALENTS beginning of period |
2,031,000 | |||
|
|
|||
CASH AND CASH EQUIVALENTS end of period |
$ | 663,000 | ||
|
|
|||
NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||
Transfer of real estate and other assets and liabilities in connection with debt extinguishment |
$ | 29,788,000 | ||
Cancellation of debt and accrued interest in connection with transfer of real estate and other assets and liabilities |
$ | 43,471,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its subsidiaries, except where the context otherwise requires.
1. | Organization and Description of Business |
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003. We were organized to acquire, own, operate and subsequently sell ownership interests in a number of unspecified commercial office properties which management believed to have higher than average potential for capital appreciation, or value-added properties. During 2011, we completed the disposition of our remaining interests in commercial office properties. As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.
NNN Realty Investors, LLC (formerly, Grubb & Ellis Realty Investors, LLC), or our manager, manages us pursuant to the terms of an operating agreement, as amended, or the Operating Agreement. While we have no employees, certain executive officers and employees of our manager provide services to us pursuant to the Operating Agreement. Prior to the disposition of our remaining property interests in 2011, our manager engaged affiliated entities, including Daymark Properties Realty, Inc. (formerly, Triple Net Properties Realty, Inc.), or Realty, to provide certain services to us. Realty served as our property manager pursuant to the terms of the Operating Agreement and a property management agreement, as amended, or the Management Agreement. The Operating Agreement terminates upon our dissolution. The unit holders may not vote to terminate our manager prior to the termination of the Operating Agreement or our dissolution, except for cause. The Management Agreement terminated with respect to each of our properties upon their respective disposition.
2. | Summary of Significant Accounting Policies |
The summary of significant accounting policies presented below is designed to assist in understanding our interim unaudited condensed consolidated financial statements. Such interim unaudited condensed consolidated financial statements and accompanying notes thereto are the representations of our management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the accompanying interim unaudited condensed consolidated financial statements.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been prepared by us in accordance with GAAP and in conjunction with the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying interim unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying interim unaudited condensed consolidated financial statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such results may be less favorable.
In preparing our accompanying condensed consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that, although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 23, 2012.
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Table of Contents
NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Principles of Consolidation
The accompanying interim unaudited condensed consolidated financial statements include our accounts and those of our wholly- owned subsidiaries, any majority-owned subsidiaries and any variable interest entities, or VIEs, that we have concluded should be consolidated in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or Codification, Topic 810, Consolidation. All material intercompany transactions and account balances have been eliminated in consolidation. We accounted for all other unconsolidated real estate investments using the equity method of accounting. Accordingly, our share of the earnings (losses) of these real estate investments is included in consolidated net income.
Basis of Presentation
Prior to December 1, 2011, our consolidated financial statements were prepared on a going concern basis, which contemplated the realization of assets and the settlement of liabilities and commitments in the normal course of business. The consolidated financial statements for periods prior to December 1, 2011 do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classifications of liabilities that may be necessary if we are unable to continue as a going concern.
As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. Accordingly, all assets have been adjusted to their estimated fair value (on an undiscounted basis). Liabilities, including estimated costs associated with implementing our liquidation, were adjusted to their estimated settlement amounts. Actual values realized for assets and settlement of liabilities may differ materially from the amounts estimated. Due to the uncertainty in the timing of the anticipated liquidation costs and the cash flows there from, results may differ materially from amounts estimated. These amounts are presented in the accompanying consolidated statements of net assets. The net assets represent the estimated liquidation value of our assets available to our unit holders upon liquidation. The actual settlement amounts realized for assets and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts estimated.
Use of Estimates
The preparation of our interim unaudited condensed consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the interim unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the interim periods. Actual results could differ from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.
Income Taxes
We are a pass-through entity for income tax purposes and taxable income is reported by our unit holders on their individual tax returns. Accordingly, no provision has been made for income taxes in the accompanying condensed consolidated statements of operations except for insignificant amounts related to state franchise and income taxes.
We follow FASB Codification Topic 740, Income Taxes, to recognize, measure, present and disclose in our condensed consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of June 30, 2012 and December 31, 2011, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our condensed consolidated financial statements.
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprises reportable segments. We have determined that we had one reportable segment, with activities related to investing in office buildings and value-add commercial office properties. As each of our properties had similar economic characteristics, tenants, and products and services, our properties were aggregated into one reportable segment.
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Table of Contents
NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
3. | Liquidation Costs |
Under the liquidation basis of accounting, estimated costs expected to be incurred during liquidation are reflected on the statements of net assets in liquidation. The following table presents changes in our estimated liquidation costs during the three months ended June 30, 2012:
March 31, 2012 |
Payments | Adjustments | June 30, 2012 |
|||||||||||||
Tax fees |
$ | 80,000 | $ | (50,000 | ) | $ | | $ | 30,000 | |||||||
Audit fees |
63,000 | (20,000 | ) | | 43,000 | |||||||||||
Public filing costs |
24,000 | (10,000 | ) | 5,000 | 19,000 | |||||||||||
Legal fees |
11,000 | (2,000 | ) | | 9,000 | |||||||||||
Other |
29,000 | (5,000 | ) | | 24,000 | |||||||||||
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$ | 207,000 | $ | (87,000 | ) | $ | 5,000 | $ | 125,000 | ||||||||
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The following table presents changes in our estimated liquidation costs during the six months ended June 30, 2012:
December 31, 2011 |
Payments | Adjustments | June 30, 2012 |
|||||||||||||
Tax fees |
$ | 80,000 | $ | (50,000 | ) | $ | | $ | 30,000 | |||||||
Audit fees |
69,000 | (33,000 | ) | 7,000 | 43,000 | |||||||||||
Public filing costs |
28,000 | (10,000 | ) | 1,000 | 19,000 | |||||||||||
Legal fees |
12,000 | (6,000 | ) | 3,000 | 9,000 | |||||||||||
Other |
30,000 | (9,000 | ) | 3,000 | 24,000 | |||||||||||
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$ | 219,000 | $ | (108,000 | ) | $ | 14,000 | $ | 125,000 | ||||||||
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4. | Non-controlling Interests |
Non-controlling interests relate to interests in the following consolidated limited liability company that is not wholly-owned by us:
Entity |
Date Acquired |
Non-controlling Interests |
||||||
NNN Enterprise Way, LLC |
05/07/2004 | 26.7 | % |
NNN Enterprise Way, LLC owned a commercial office property located in Scotts Valley, California, known as the Enterprise Technology Center property. This property was sold at a trustees sale on November 29, 2011, and this entity is in the process of being dissolved.
5. | NNN 2003 Value Fund, LLC Unit Holders Equity |
Pursuant to our Private Placement Memorandum, we offered for sale a minimum of 1,000 and a maximum of 10,000 units at a price of $5,000 per unit. We relied on the exemptions from registration provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act.
There are three classes of membership interests, or units, each having different rights with respect to distributions. As of June 30, 2012 and December 31, 2011, there were 4,000 Class A units, 3,170 Class B units and 2,800 Class C units issued and outstanding. The rights and obligations of all unit holders are governed by the Operating Agreement.
Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed and unrecovered capital, respectively. In the event that any distribution of Cash from Operations is not sufficient to pay the return described above, all unit holders receive identical pro rata distributions, except that Class C unit holders do not receive more than an 8.0% return on their Class C units, and Class B unit holders do not receive more than a 9.0% return on their Class B units. Excess Cash from Operations is then allocated pro rata to all unit holders on a per outstanding unit basis and further distributed to the unit holders and our manager based on predetermined ratios providing our manager with a share of 15.0%, 20.0% and 25.0% of the distributions available to Class A units, Class B units and Class C units, respectively, of such excess Cash from Operations.
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Cash from Capital Transactions, as defined in the Operating Agreement, is first used to satisfy our debt and liability obligations; then distributed pro rata to all unit holders in accordance with their membership interests until all capital contributions are reduced to zero; and lastly, in accordance with the distributions as outlined above in the Cash from Operations.
Since the suspension of regular, monthly cash distributions to unit holders in the fourth quarter of 2008, we make periodic distributions to unit holders from available funds, if any. During the six months ended June 30, 2012, distributions of $35 per unit were declared, resulting in aggregate distributions paid of approximately $350,000 during the period. To date, Class A units, Class B units and Class C units have received identical per-unit distributions.
6. | Related Party Transactions |
The Management Agreement
Pursuant to the Operating Agreement and the Management Agreement, Realty was entitled to receive the payments and fees described below. Certain fees paid to Realty were passed through to our manager or its affiliate pursuant to an agreement between our manager and Realty, or the Realty Agreement.
Property Management Fees
We paid Realty a monthly property management fee of up to 5.0% of the gross receipts revenue of the properties. During the three and six months ended June 30, 2011, we incurred property management fees to Realty of $0 and $47,000, respectively. No property management fees were incurred during the three and six months ended June 30, 2012, as all of our remaining property interests were disposed of during 2011.
Real Estate Acquisition Fees
We paid Realty or its affiliate a real estate acquisition fee up to 3.0% of the gross purchase price of a property. During the three and six months ended June 30, 2012 and 2011, we did not incur any real estate acquisition fees.
Real Estate Disposition Fees
We paid Realty or its affiliate a real estate disposition fee up to 5.0% of the gross sales price of a property. During the three and six months ended June 30, 2012 and 2011, we did not incur any real estate disposition fees.
Leasing Commissions
We paid Realty a leasing commission for its services in leasing any of our properties equal to 6.0% of the value any lease entered into during the term of the Management Agreement and 3.0% with respect to any renewals. During the three and six months ended June 30, 2012 and 2011, we did not incur any leasing commissions.
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Accounting Fees
We paid our manager accounting fees for record keeping services provided to us. Beginning January 1, 2010, all accounting fees have been waived by our manager and, as such, we did not incur any accounting fees during the three and six months ended June 30, 2012 and 2011.
Construction Management Fees
We paid Realty a construction management fee for its services in supervising any construction or repair project in or about our properties equal to 5.0% of any amount up to $25,000, 4.0% of any amount over $25,000 but less than $50,000 and 3.0% of any amount over $50,000, which is expended in any calendar year for construction or repair projects. During the three and six months ended June 30, 2012 and 2011, we did not incur any construction management fees.
Loan Fees
We paid Realty or its affiliate a loan fee of 1.0% of the principal amount of the loan for its services in obtaining loans for our properties during the term of the Management Agreement. During the three and six months ended June 30, 2012 and 2011, we did not incur any loan fees.
7. | Commitments and Contingencies |
Litigation
We are not presently subject to any material litigation and, to our knowledge, no material litigation is threatened against us that, if determined unfavorably to us, would have a material adverse effect on our financial condition.
8. | Discontinued Operations |
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, the net income from consolidated properties sold are reflected in our consolidated statements of operations as discontinued operations for all periods presented. For the six months ended June 30, 2011, discontinued operations includes the net income of the following properties:
Property |
Date Sold | |||
Four Resource Square |
January 20, 2011 | |||
Sevens Building |
March 25, 2011 |
The following table summarizes the revenue and expense components that comprised income from discontinued operations for the six months ended June 30, 2011:
Six Months Ended | ||||
June 30, 2011 | ||||
Rental revenue |
$ | 964,000 | ||
Rental expense (including general, administrative, depreciation and amortization) |
(727,000 | ) | ||
Interest expense |
(545,000 | ) | ||
Gain on extinguishment of debt |
13,634,000 | |||
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|
|||
Income from discontinued operations |
13,326,000 | |||
Income from discontinued operations attributable to non-controlling interests |
| |||
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|
|||
Income from discontinued operations attributable to NNN 2003 Value Fund, LLC |
$ | 13,326,000 | ||
|
|
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Item 2. | Managements Discussion and Analysis Financial Condition and Results of Operations. |
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its subsidiaries, except where the context otherwise requires.
The following discussion should be read in conjunction with our financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview and Background
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003. We were organized to acquire, own, operate and subsequently sell ownership interests in a number of unspecified commercial office properties which we believed to have higher than average potential for capital appreciation, or value-added properties. During 2011, we completed the disposition of our remaining interests in commercial office properties. As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.
Our Manager
NNN Realty Investors, LLC (formerly, Grubb & Ellis Realty Investors, LLC), or our manager, manages us pursuant to the terms of an operating agreement, as amended, or the Operating Agreement. While we have no employees, certain executive officers and employees of our manager provide services to us pursuant to the Operating Agreement. Prior to the disposition of our remaining property interests in 2011, our manager engaged affiliated entities, including Daymark Properties Realty, Inc. (formerly, Triple Net Properties Realty, Inc.), or Realty, to provide certain services to us. Realty served as our property manager pursuant to the terms of the Operating Agreement and a property management agreement, as amended, or the Management Agreement. The Operating Agreement terminates upon our dissolution. The unit holders may not vote to terminate our manager prior to the termination of the Operating Agreement or our dissolution, except for cause. The Management Agreement terminated with respect to each of our properties upon their respective disposition.
Business Strategy
Our primary business strategy was to acquire, own, operate and subsequently sell ownership interests in a number of unspecified properties which we believed to have higher than average potential for capital appreciation, or value-added properties. Our principal objectives initially were to: (i) have the potential within approximately one to five years, subject to market conditions, to realize income on the sale of our properties; (ii) realize income through the acquisition, operation, development and sale of properties or interests in properties; and (iii) make periodic distributions to our unit holders from cash generated from operations and capital transactions. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.
Acquisitions and Dispositions
We did not acquire any consolidated properties during the six months ended June 30, 2012 and 2011.
On January 20, 2011, we sold the Four Resource Square property to Four Resource Square, LLC, an entity affiliated with the Four Resource Square lender, for a sales price of $21,977,000, which was equal to the outstanding principal balance of the loan.
On March 25, 2011, the successor trustee appointed by the Sevens Building lender conducted a public auction and sold the Sevens Building property to General Electric Credit Equities, an entity affiliated with the Sevens Building lender, or the buyer, for a sale price of $17,400,000. As a result of the sale, our ownership interest in the Sevens Building property was sold and conveyed to the buyer and a trustees deed was recorded on the Sevens Building property in favor of the buyer.
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Critical Accounting Policies
The complete listing of our critical accounting policies was previously disclosed in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 23, 2012, and there have been no material changes to our Critical Accounting Policies disclosed therein.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been prepared by us in accordance with GAAP and in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying interim unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying interim unaudited condensed consolidated financial statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such results may be less favorable.
In preparing our accompanying condensed consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that, although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 23, 2012.
Factors Which May Influence Net Assets in Liquidation
We disposed of our remaining property interests in 2011 and are currently in the process of winding up our operations. We are not aware of any material trends or uncertainties that may reasonably be expected to have a material impact, favorable or unfavorable, on our net assets in liquidation.
Changes in Net Assets in Liquidation Liquidation Basis
Three Months Ended June 30, 2012
During the three months ended June 30, 2012, our net assets in liquidation decreased $5,000, from $25,000 as of March 31, 2012 to $20,000 as of June 30, 2012. This decrease in net assets in liquidation was due to increases in our estimated liquidation costs.
Six Months Ended June 30, 2012
During the six months ended June 30, 2012, our net assets in liquidation decreased $364,000, from $384,000 as of December 31, 2011 to $20,000 as of June 30, 2012. This decrease in net assets in liquidation was primarily due to a $350,000 distribution paid to our unit holders during the period, as well as increases in our estimated liquidation costs.
Results of Operations Going Concern Basis
Our operating results were primarily comprised of income derived from our portfolio of properties, as described below. Because our primary business strategy historically was acquiring properties which we believed had a greater than average appreciation potential, enhancing value and realizing gains upon disposition of these properties, our operations historically have reflected significant property acquisitions and dispositions from period to period. As a result, the comparability of our financial data is generally very limited and varies significantly from period to period.
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We have made reclassifications for all properties sold as of June 30, 2011 from Loss from continuing operations to Income from discontinued operations for all periods presented.
Three Months Ended June 30, 2011
Three Months Ended | ||||
June 30, 2011 | ||||
General and administrative expense |
$ | (119,000 | ) | |
Equity in losses of unconsolidated real estate |
(6,000 | ) | ||
|
|
|||
Loss from continuing operations |
(125,000 | ) | ||
Income from discontinued operations |
| |||
|
|
|||
Consolidated net loss |
$ | (125,000 | ) | |
|
|
General and Administrative Expense
General and administrative expense was $119,000 during the three months ended June 30, 2011 and was comprised primarily of audit fees and other professional services.
Equity in Losses of Unconsolidated Real Estate
Equity in losses of unconsolidated real estate was $6,000 during the three months ended June 30, 2011 and was comprised of residual activity at two of our unconsolidated property interests that were sold in 2010.
Consolidated Net Loss
As a result of the above, consolidated net loss was $125,000 for the three months ended June 30, 2011.
Six Months Ended June 30, 2011
Six Months Ended | ||||
June 30, 2011 | ||||
General and administrative expense |
$ | (175,000 | ) | |
Equity in losses of unconsolidated real estate |
(12,000 | ) | ||
|
|
|||
Loss from continuing operations |
(187,000 | ) | ||
Income from discontinued operations |
13,326,000 | |||
|
|
|||
Consolidated net income |
$ | 13,139,000 | ||
|
|
General and Administrative Expense
General and administrative expense was $175,000 during the six months ended June 30, 2011 and was comprised primarily of audit fees and other professional services.
Equity in Losses of Unconsolidated Real Estate
Equity in losses of unconsolidated real estate was $12,000 during the six months ended June 30, 2011 and was comprised of residual activity at two of our unconsolidated property interests that were sold in 2010.
Income from Discontinued Operations
Income from discontinued operations was $13,326,000 during the six months ended June 30, 2011. The income from discontinued operations during the six months ended June 30, 2011 resulted primarily from the gains recognized on the extinguishment of debt in connection with the dispositions of the Four Resource Square and Sevens Building properties, which totaled $13,634,000.
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Consolidated Net Income
As a result of the above, consolidated net income was $13,139,000 for the six months ended June 30, 2011.
Liquidity and Capital Resources
Ability to Continue as a Going Concern
As a result of the dispositions of all of our remaining property interests, we adopted the liquidation basis of accounting on December 1, 2011. We are currently in the process of winding up our operations, which we expect will be completed within the next three to six months, at which time we will distribute any remaining available funds to our unit holders and will cease to be a going concern.
Sources of Capital and Liquidity
Our primary sources of capital historically have been derived from: (i) proceeds from the sale of properties; (ii) our ability to obtain debt financing from third parties and related parties including our manager and its affiliates; and (iii) our real estate operations. Currently, our only source of capital and liquidity is our existing cash balance, net of current and future obligations.
Our primary uses of cash historically have been: (i) the payment of principal and interest on indebtedness; (ii) capital investments in our portfolio of properties; (iii) administrative costs; and (iv) distributions to our unit holders. Currently, we expect our future uses of cash to primarily be related to administrative costs and other costs required to dissolve our entities. Any remaining cash will be distributed to unit holders.
Cash Flows
Cash flows used in operating activities were $819,000 for the six months ended June 30, 2011, which was primarily due to an $850,000 transfer of cash to the Sevens Building lender subsequent to the foreclosure of this property, which represented the approximate amount of net cash generated by the property subsequent to the default on the mortgage loan on October 31, 2010. There were no cash flows from investing activities for the six months ended June 30, 2011. Cash flows used in financing activities were $549,000 for the six months ended June 30, 2011, primarily due to a $500,000 distribution paid to our unit holders during the period.
Contractual Obligations
As of June 30, 2012, we had no material contractual obligations.
Off-Balance Sheet Arrangements
As of June 30, 2012, we had no off-balance sheet transactions nor do we currently have any such arrangements or obligations.
Inflation
As of June 30, 2012, we have no significant exposure to inflation.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, the primary market risk to which we were exposed was interest rate risk. However, we currently have no significant interest rate risk, as we have no debt obligations.
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Item 4. | Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our managers president and chief executive officer and our managers chief accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30, 2012 was conducted under the supervision and with the participation of our manager, including our managers president and chief executive officer and our managers chief accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our managers president and chief executive officer and our managers chief accounting officer concluded that our disclosure controls and procedures, as of June 30, 2012, were effective.
(b) Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
We are not presently subject to any material litigation and, to our knowledge, no material litigation is threatened against us that, if determined unfavorably to us, would have a material adverse effect on our financial condition.
Item 1A. | Risk Factors. |
Not applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this quarterly report.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NNN 2003 VALUE FUND, LLC | ||||||
(Registrant) | ||||||
August 10, 2012 |
/s/ TODD A. MIKLES | |||||
Date | Todd A. Mikles | |||||
President and Chief Executive Officer | ||||||
NNN Realty Investors, LLC, | ||||||
the Manager of NNN 2003 Value Fund, LLC | ||||||
(principal executive officer) | ||||||
August 10, 2012 | /s/ PAUL E. HENDERSON | |||||
Date | Paul E. Henderson | |||||
Chief Accounting Officer | ||||||
NNN Realty Investors, LLC, | ||||||
the Manager of NNN 2003 Value Fund, LLC | ||||||
(principal financial officer) |
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit index immediately precedes the exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the period ended June 30, 2012 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit Number |
Description | |
31.1* | Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1** | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2** | Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
** | Furnished herewith. |
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