ITEM 1 - BUSINESS
Atlantic Income Properties (the "Registrant" or the "Partnership") is a North Carolina limited partnership organized as of March 30, 1988. The General Partners of the Registrant are ISC Realty Corporation ("ISCR"), a North Carolina corporation and a wholly-owned subsidiary of Interstate/Johnson Lane, Inc., and Chadsford Associates II ("Chadsford"), a North Carolina general partnership whose partners are Lat W. Purser, III and Lat Purser & Associates, Inc. ("LPA"). ISCR and Chadsford shall hereinafter be collectively referred to as the "General Partners". The Initial Limited Partner of the Registrant is Atlantic Income, Inc., a North Carolina corporation.
The Registrant's principal investment objectives are to own, hold, operate, lease, sell, and otherwise deal in commercial real estate properties (the "Properties") which offer the potential for (1) preservation and protection of capital invested in the Registrant, (2) cash distributions from operations of the Properties, (3) long term appreciation in value of the Properties, and (4) protection for investors against inflation. As of December 31, 1997, the offering proceeds and cash flow from operations have been used to: (i) acquire and maintain Southwest Plaza in Roanoke, Virginia; Lincoln Center in Lincolnton, North Carolina; Sangaree Plaza in Berkeley County, South Carolina; Rosewood Shopping Center in Columbia, South Carolina; and West Ridge Plaza in Bristol, Tennessee; (ii) make distributions to investors; and (iii) invest in short-term investments.
It is intended that the Registrant be self-liquidating and accordingly, the net proceeds of any sale of any Property will be distributed to the beneficial unit certificate holders.
The Registrant terminated its Offering of beneficial unit certificates effective on February 7, 1990, with the total number of BUCs subscribed being 508,594. Total gross proceeds from the offering were $10,174,012 and total net proceeds to the Registrant equaled $8,880,362 after deducting organization and offering expenses of $1,293,650.
The real estate business is highly competitive, and the Partnership competes with numerous established companies, real estate investment trusts and other limited partnerships, some of which have greater assets than the Partnership, and broader experience than the General Partners. Some of the competitive factors which the Partnership may encounter from time to time include a rising level of vacancies due to changes in supply or demand of competing properties in an area, such as excess supply resulting from competitive overbuilding and a decrease in rental rates due to an economic slowdown.
The General Partners or their affiliates currently serve as a general partner in over 12 public and private partnerships which currently own various types of real property. None of the prior partnerships sponsored by the General Partners now contemplate the acquisition of any additional properties due to all public funds being fully invested. However, it is likely that the General Partners or their affiliates will sponsor additional public or private partnerships in the future. In addition, the General Partners and their affiliates are and will continue to be engaged in
the business of real estate investment, development and management apart from their involvement in the Registrant.
The General Partners intend to devote only such time to the business of the Registrant as in their judgment is reasonably required. The General Partners are engaged in other similar activities which also require their time and attention.
As of December 31, 1997, the Registrant did not directly employ any persons in a full-time position. Certain employees of the General Partners performed services for the Registrant during such time.
On April 1, 1998, the Registrant sold three of its five properties. The pro-forma results are shown in Exhibit 99.1 and discussed in greater detail below.
ITEM 2
ITEM 2 - PROPERTIES
(a) Southwest Plaza
Southwest Plaza Shopping Center is an 88,308 square-foot shopping center situated on approximately 7.58 acres of land in Roanoke, Virginia. Southwest Plaza is anchored by a 30,450 square-foot Harris-Teeter Supermarket and a 10,678 square-foot Revco drug store. In addition, a 3,250 square-foot Firestone Tire Center and Car Maintenance Shop is located on a 0.487 acre tract of land separate from the Southwest Plaza Shopping Center but also owned by the Registrant. As of March 19, 1998, the center was 99% leased and 65% occupied. Three leases totaling 5,600 square feet will expire by December 31, 1998.
The original $3,700,000 loan from Prudential Insurance Company of America, secured by the center, had a five year-term, an interest rate of 9.75% and expired on September 15, 1993. An extension of the Southwest Loan was then granted by the lender for a period of 36 months from April 15, 1994. As of March 19, 1998, the Registrant had entered into a forebearance agreement extending the loan until June 15, 1998. Terms include monthly principal and interest payments of $39,631 at an interest rate of 10.0%. The balance of the mortgage at December 31, 1997 was $3,041,814. The Registrant previously executed and delivered to the lender an agreement cross-collateralizing and cross-defaulting the Southwest Plaza and Lincoln Center loans.
This property was sold to Edens & Avant Properties Limited Partnership on April 1, 1998. The aggregate purchase price was $5,688,227. The proceeds from the sale were used to repay the loan from Prudential which had an outstanding balance of $2,990,062, including accrued interest, and pay for various closing costs and adjustments. The balance of the net proceeds, approximately $2.55 million will be distributed to the beneficial unit certificate holders. The Contract of Sale is attached in Exhibit 99.
(b) Lincoln Center
Lincoln Center, located in Lincolnton, North Carolina, is a 275,470 square-foot shopping center completed in March of 1989. The center includes a 64,500 square-foot Belk Department Store and a 132,200 square-foot Wal-Mart Discount Store, neither of which are owned by the Registrant. Belk originally occupied a 44,544 square foot space which was expanded in 1997. The remaining 78,770 square feet owned by the Registrant is anchored by a 33,302 square-foot Bi-Lo Supermarket, an 8,450 square-foot Revco Drug Store, and a 6,000 square-foot Cato clothing store. As of March 19, 1998, occupancy at the Registrant's portion of the center was 100%. There are four leases representing 5,840 square feet scheduled to terminate before December 31, 1998.
The original $3,000,000 loan from the Prudential Insurance Company of America, secured by the center, expired April 15, 1994. The Registrant was granted a 36 month extension of the loan until April 15, 1997. As of March 19, 1997, the Registrant had entered into a forebearance agreement extending the loan until June 15, 1998. Terms include monthly principal and interest payments of $32,248.30 at an interest rate of 10.0%. The balance of the mortgage at December 31, 1997 was $2,475,417.95. The Registrant previously executed and delivered to the lender an agreement cross-collateralizing and cross-defaulting the Southwest Plaza and Lincoln Center loans.
This property was sold to Edens & Avant Properties Limited Partnership on April 1, 1998. The aggregate purchase price was $5,748,155. The proceeds from the sale were used to repay the loan from Prudential which had an outstanding balance of $2,421,117, including accrued interest, and pay for various closing costs and adjustments. The balance of the net proceeds, approximately $3.2 million will be distributed to the beneficial unit certificate holders. The Contract of Sale is attached in Exhibit 99.
(c) Sangaree Plaza
Sangaree Plaza, a 58,948 square-foot shopping center located in Berkeley County, South Carolina, is anchored by a 37,369 square-foot Bi-Lo Supermarket and an 8,450 square-foot Revco Drug Store. The remaining spaces are leased to local and regional tenants. The property was 97% leased as of March 19, 1998. There is one lease of 2,000 square feet expiring prior to December 31, 1998.
Sangaree Plaza was acquired subject to a permanent mortgage loan from Southern Farm Bureau Life Insurance Company with an original principal balance of $1,750,000. A new loan which added $1,200,000 to the loan balance was granted in conjunction with the Bi-Lo expansion and closed May 11, 1993. Loan terms are a 9 1/8% interest rate, 25 year amortization and a five year term. The balance of the mortgage at December 31, 1997, was $2,684,523. The loan matures on June 30, 1998.
This property was sold to Edens & Avant Properties Limited Partnership on April 1, 1998. The aggregate purchase price was $4,413,618. The proceeds from the sale were used to repay the loan from Southern Farm which had an outstanding balance of $2,694,926, including accrued interest, and pay for various closing costs and adjustments. The balance of the net proceeds,
approximately $1.6 million will be distributed to the beneficial unit certificate holders. The Contract of Sale is attached in Exhibit 99.
(d) Rosewood Shopping Center
Rosewood Shopping Center, a 55,087 square-foot shopping center located in Columbia, South Carolina, is anchored by three major tenants: Dollar General (subleasing from Rite Aid), Advance Auto, and First Citizen's Bank and Trust Company. The anchor tenants occupy a total of 14,600 square feet, or 25% of the net leasable area. Rite Aid vacated its space in 1996 and moved to a free-standing location, however, they have remained current on their lease payments and are obligated to do so until November 10, 2000. As of March 19, 1998, the center was 89% occupied. Two leases representing 5,400 square feet will expire by December 31, 1998.
Rosewood is owned subject to a mortgage loan originally obtained from the Independent Life and Accident Insurance Company. The loan bears interest at an annual rate of 9 7/8% and has a term of 27 years. The note is being repaid in equal monthly payments of principal and interest of $13,499 amortized over the remaining term of the loan ending October, 2016. The balance of the mortgage at December 31, 1997, was $1,379,966.
(e) West Ridge Plaza
West Ridge, a 140,985 square-foot shopping center situated on 14.372 acres of land in Bristol, Tennessee, is anchored by Wal-Mart, Food Lion, and Revco, which occupy 79,900 square feet, 27,885 square feet, and 10,500 square feet, respectively. In the aggregate, these tenants occupy 118,285 square feet or 83.9% of the center's net leasable space. As of March 19, 1998, the center was 98% leased and occupied. No leases are scheduled to expire prior to December 31, 1998.
West Ridge Plaza was purchased subject to revenue bonds and was refinanced in 1990. On January 5, 1990, the Registrant combined the net proceeds of a $4,500,000 loan received from Provident National Assurance Company ("Provident") with Offering proceeds and deposited $5,750,650 in cash and government securities with the Trustee of the Bonds, thereby causing the Bonds to be deemed paid. Provident received a first lien Deed of Trust encumbering West Ridge Plaza in consideration of making said loan. The Provident loan bears interest at 9.6% per annum and had a term of five years which expired January 1, 1995. The lender granted three one-year forbearance periods , the latest of which expired January 1, 1998. The Registrant and the lender are negotiating a further extension. The lender has continued to accept the normal monthly payment of principal and interest in the amount of $38,658. The General Partners are optimistic that the lender will extend the maturity of the note. The balance of the mortgage at December 31, 1997, was $4,248,130.
The Registrant received an offer for the purchase of this property on March 31, 1998. The offer states a price of $4.5 million. If this Buyer were to purchase the property, the proceeds would be used to retire the loan formerly held by Provident, which had a balance of approximately $4.24 million as of March 31, 1998. Any proceeds remaining after closing costs and adjustments would be available for distribution to the beneficial unit certificate holders.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Registrant has commenced an action seeking declaratory judgement for breach of contract against SunWest Properties Inc., and Republic Title of Texas, Inc. Registrant and SunWest were parties to a Real Estate Purchase Agreement dated July 11, 1997. The Registrant contends that SunWest breached this agreement and is seeking damages therefrom.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S SECURITIES AND OTHER RELATED SECURITIES HOLDER MATTERS
Transfer of the Registrant's Beneficial Unit Certificates ("BUCs") is subject to certain restrictions contained in the Registrant's Limited Partnership Agreement. There is no established market for the BUCs and it is not anticipated that any will occur in the future. The Registrant is aware of no significant resales of BUCs since the effective date of the Offering. As of March 19, 1998, 638 investors were record owners of 508,844 BUCs.
During the year ended December 31, 1997, the Registrant made four distributions totaling $256,934 to investors, representing a portion of net cash flow generated from operations during the fiscal year ended December 31, 1997.
For the year ended December 31, 1996, the Registrant made four distributions totaling $259,702 to investors, representing a portion of net cash flow generated from operations during the fiscal year ended December 31, 1996.
During the year ended December 31, 1995, the Registrant made distributions totaling $228,976 to investors, representing a portion of net cash flow generated from operations during the fiscal year ended December 31, 1995.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA (AUDITED)
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Registrant generated $1,028,397 of cash flow from operations during the year ended December 31, 1997. Cash payments during the year ended December 31, 1997, for interest on the Registrant's outstanding long-term debt amounted to $1,344,911. In addition, $420,854 of principal payments were made on loans.
As of December 31, 1997, the Registrant held cash and cash equivalents of $283,889. In addition, $122,066 was held in restricted cash accounts related to tenant deposits and property tax escrows.
As previously mentioned, the Registrant entered into a Contract of Sale on February 25, 1998 for the sale of Southwest Plaza, Lincoln Center and Sangaree Plaza. The sale closed on April 1, 1988 at the contract price. A portion of the sale proceeds were used to retire the outstanding indebtedness encumbering each property and pay for certain closing costs. The remainder of the proceeds will be reserved for operational needs and distributed to the BUC holders. The distribution is scheduled to be sent to the BUC holders on April 15, 1998 and totals $14.50 per BUC. The Contract of Sale is attached as Exhibit 99.
The Registrant continues to market the remaining real estate assets for sale. The Registrant believes, based upon the response from potential buyers that it will be successful in selling the assets and retiring the debt secured by those assets by December 31, 1998.
Results of Operations.
COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 31, 1997, TO THE FISCAL YEAR ENDED DECEMBER 31, 1996
The Partnership reported a net loss of $888,979 for the year ended December 31, 1997, as compared to net income of $134,508 for the year ended December 31, 1996.
Rental and reimbursement income for the year ended December 31, 1997, increased to $3,131,418 for the year ended December 31, 1997, from $3,099,739 for the year ended December 31, 1996, an increase of 1%. The increase is attributable to contractual rental increases within the exisiting tenant base and the continued strong occupancy at the properties.
Interest expense decreased slightly from $1,344,491 for the year ended December 31, 1996, to $1,340,972 for the year ended December 31, 1997. This decrease was due to a greater amount of principal being amortized with each monthly payment on all five mortgage notes. The decrease was partially offset by the higher interest rate on the Lincoln and Southwest loans.
Other operating expenses increased $116,652, or 13% to $985,395 for the year ended December 31, 1997. The increase resulted from higher expenses at Rosewood for common area maintenance and repairs, higher legal and accounting costs as well as adjustments made during the audit for the treatment of certain operating costs.
Write-down of rental property increased to $1,700,000 for the year ended December 31, 1997, from $773,000 for the year ended December 31, 1996. This write-down was due to the current marketing of the Partnership's properties for sale and the General Partner's opinion that the net sale prices for Rosewood Shopping Center and West Ridge Plaza will be less than their respective net book values. Under Statement of Financial Accounting Standards No. 121, this adjustment is shown as an operating expense.
COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 31, 1996, TO THE FISCAL YEAR ENDED DECEMBER 31, 1995
The Partnership reported net income of $134,508 for the year ended December 31, 1996, as compared with net income of $306,231 for the year ended December 31, 1995.
Rental and reimbursement income for the year ended December 31, 1996, decreased $47,869 from $3,147,608 for the year ended December 31, 1995, to $3,099,739 for the year ended December 31, 1996. Base rental income and expense recoveries generally were flat to slightly up at all five properties in 1996. This was due to continued strong occupancy and normal rent and expense recovery escalations at the properties. The main factor behind the decrease in total revenue was a $66,000 decline in percentage rent received from Wal-Mart at West Ridge Plaza. The reason for this decline was the loss of sales due to the opening of a new Wal-Mart store approximately nine miles from the West Ridge Plaza store. The long-term impact of the new Wal-Mart location on the existing West Ridge Plaza store is uncertain. Wal-Mart's lease at West Ridge Plaza expires November 12, 2004.
Interest and other income increased from $45,260 for the year ended December 31, 1995, to $49,609 for the year ended December 31, 1996. This increase was due primarily to an increase in miscellaneous fees and charges received at the properties.
Interest expense decreased slightly from $1,348,940 for the year ended December 31, 1995, to $1,344,491 for the year ended December 31, 1996. This decrease was due to a greater amount of principal being amortized with each monthly payment on all five mortgage notes.
Depreciation and amortization decreased from $712,442 for the year ended December 31, 1995, to $28,606 for the year ended December 31, 1996. This decrease was due to the
Partnership's adopting Statement of Financial Accounting Standards No. 121 in 1996. This statement, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, requires the Partnership to record a provision to write-down Partnership properties to fair market value and to cease recording depreciation expense at the time the properties began to be marketed for sale. As the properties began to be marketed for sale as of January 1, 1996, the depreciation expense for 1996 under Standard 121 was $0. The $28,606 represents amortization expense for 1996, primarily due to various capital improvements at the properties and tenant upfitting costs.
Other operating expenses increased $43,488 from $825,255 for the year ended December 31, 1995, to $868,743 for the year ended December 31, 1996. This increase was due largely to a $39,000 increase in lease commissions which was primarily due to new and/or expanded tenants at Southwest Plaza and West Ridge Plaza. In addition, maintenance and groundskeeping expenses were approximately $15,000 higher, primarily due to unusually high snow removal costs at the Southwest Plaza and West Ridge Plaza locations. Aside from these two categories, other operating expenses of the Partnership for 1996 were generally in line with or lower than the 1995 figures.
Write-down of rental property increased from $0 for the year ended December 31, 1995, to $773,000 for the year ended December 31, 1996. This write-down was due to the current marketing of the Partnership's properties for sale and the General Partner's opinion that the net sale prices for Rosewood Shopping Center and West Ridge Plaza will be less than their respective net book values. Under Statement of Financial Accounting Standards No. 121, this adjustment is shown as an operating expense.
Inflation
The Registrant's business is impacted by inflation in several ways. Inflation permits possible increases in rental rates generally to reflect the impact of higher operating and replacement costs. Continued inflation should increase the value of the Registrant's real property over a period of time as rental revenues and replacement costs continue to increase. The various debt instruments used in the acquisition of certain of the Registrant's properties are fixed-rate, with maturities ranging from less than 1 to 15 years. Therefore, inflation will not affect the Registrant's financing activities until such time as a refinancing may be desired or is required.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this report.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the year ended December 31, 1997, the Registrant made no changes in accountants and had no disagreements with accountants on accounting and financial disclosure.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant has no directors or executive officers. Information as to the directors and executive officers of ISCR and as to the general partners of Chadsford is as follows:
J. Christopher Boone is a Managing Director of Interstate/Johnson Lane Corporation ("I/JL"), an affiliate of ISCR and President of ISCR. Prior to joining I/JL in 1984, Mr. Boone was a tax specialist for Coopers & Lybrand. He received a bachelor's degree in business administration with an emphasis in accounting from the University of North Carolina at Chapel Hill.
Edward C. Ruff is Executive Managing Director and Chief Financial Officer of I/JL. He also serves as a member of the Board of Directors and Management Committee of I/JL. Mr. Ruff has been with I/JL since 1976. He is a graduate of the University of San Francisco, with a bachelor's degree in accounting. He is a director of ISCR.
Robert B. McGuire is Treasurer of ISC Realty Corporation. In addition, he is Senior Vice President and Treasurer of I/JL. Mr. McGuire received a B.A. in Business Administration from Furman University and a Masters in Business Administration from Emory University.
Michael D. Hearn has served as Secretary and General Counsel of I/JL since 1985. He is a Senior Managing Director and a member of the Board of Directors of I/JL. In May of 1992 he was elected a Director of ISCR. Mr. Hearn received a Bachelor of Science degree in Business Administration and a Juris Doctor from the University of North Carolina at Chapel Hill. He is secretary of ISCR.
Lew F. Semones, Jr. is Senior Managing Director and Chief Financial Officer of I/JL. He is also a director of I/JL. Mr. Semones is a graduate of Lenoir Rhyne College, a Certified Public Accountant and a graduate of the Securities Industry Institute at The Wharton School of The University of Pennsylvania. He was elected as a director of ISCR in September, 1997.
Lat W. Purser, III has been associated with LPA for 15 years. He is currently President and a member of the Board of Directors of LPA.
The General Partners are responsible for evaluating and selecting Properties to be acquired by the Partnership. The actual analyses and decisions as to Properties acquired for the Partnership were made by J. Christopher Boone for ISCR and by Lat W. Purser, III for Chadsford.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
During the fiscal year ended December 31, 1997, the Registrant paid no compensation to the executive officers, directors or partners, respectively, of the General Partners. See Item 13 "Certain Relationships and Related Transactions" for a discussion of amounts paid or which may be paid to the General Partners and certain affiliates of the General Partners for the year ending December 31, 1997.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 19, 1998, no person known to the Registrant has beneficial ownership of more than five percent of the BUCs.
The following individual directors and officers of ISCR and the partners of Chadsford owned, on March 19, 1998, the following number of BUCs of the Registrant.
- --------------------------- (1) All BUCs owned directly with sole voting control unless otherwise indicated.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the operational stage, ISCR will be entitled to receive a partnership monitoring fee in an amount equal to 3% of the annual Gross Revenues from the Properties, as defined in the Limited Partnership Agreement, for monitoring the operations of the Registrant and the Property Manager, on behalf of the Investors and for serving as liaison between the Registrant and the Investors. The partnership monitoring fee shall be payable in quarterly installments; provided, however, up to 50% of said fee may be subordinated on a non cumulative basis to the Annual Priority Return to the Investors, as defined in the Limited Partnership Agreement. Any portion of said fee which is subordinated will bear interest at the Prime Rate plus 1% per annum until paid. During the year ended December 31, 1997, ISCR earned partnership monitoring fees of $146,688.
During the operational stage, LPA will be entitled to a property management fee in an amount equal to 4% of the monthly Gross Revenues, as defined in the Limited Partnership Agreement, for supervising the continued management and operation of the Properties. LPA received $126,789 during 1997 as payment of such fees relating to services performed at Southwest Plaza, Lincoln Center, Sangaree Plaza, Rosewood Shopping Center, and West Ridge Plaza. In addition, LPA, or its affiliate, will receive a leasing commission of 4% (or 2% on renewals) of the gross lease value of each lease signed at Southwest Plaza, Lincoln Center, Sangaree Plaza, Rosewood Shopping Center, and West Ridge Plaza. Leasing commissions of $17,996 were paid to LPA during the year ended December 31, 1997, for leases signed or renewed during the same period at Southwest Plaza, Sangaree Plaza, Westridge Plaza, Lincoln Center and Rosewood Shopping Center.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. The response to this portion of Item 14 is submitted as a separate section of this report.
3. Exhibits.
27. Financial Data Schedule (for SEC use only) 99. Contract of Sale 99.1 Pro-Forma Balance Sheet and Statement of Operations
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ATLANTIC INCOME PROPERTIES A NORTH CAROLINA LIMITED PARTNERSHIP
BY: ISC REALTY CORPORATION GENERAL PARTNER
BY: /S/ J. CHRISTOPHER BOONE ------------------------ J. CHRISTOPHER BOONE PRESIDENT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP (A Limited Partnership)
AND FINANCIAL STATEMENT SCHEDULE [Item 14(a) 1 and 2]
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto.
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, 1996 AND 1995 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlantic Income Properties Limited Partnership:
We have audited the accompanying balance sheets of Atlantic Income Properties Limited Partnership (a North Carolina Limited Partnership) as of December 31, 1997 and 1996, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Atlantic Income Properties Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Notes 1, 2 and 3, the general partner began efforts in 1995 to sell the rental properties comprising the Partnership. On April 1, 1998, the Partnership consummated the sale of three of the properties comprising the Partnership. Also, as discussed in Note 3, the Partnership is in default on the mortgage note secured by West Ridge Plaza, giving the lender the right to seek remedies of default such as taking title to the rental property or commencing foreclosure proceedings against the Partnership.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements and financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina, February 27, 1998, (except for Note 2 and Note 3, as to which the date is April 1, 1998)
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
The accompanying notes to financial statements are an integral part of these balance sheets.
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these statements.
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these statements.
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes to financial statements are an integral part of these statements.
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Atlantic Income Properties Limited Partnership (a North Carolina Limited Partnership) (the Partnership) was formed on March 30, 1988, for the purpose of developing, leasing and investing in commercial real estate properties located primarily in the southeastern United States. ISC Realty Corporation and Chadsford II Associates are the general partners. The Partnership will be terminated upon the occurrence of certain events as defined in the limited partnership agreement but, in any event, no later than December 31, 2028.
Beneficial Unit Certificates (BUCs) have been sold at $20 per BUC (508,594 units). The initial admission of investors to the Partnership occurred on August 1, 1988.
Under the terms of the partnership agreement, net loss of the Partnership is allocated 99% to the limited partners and 1% to the general partners. Net income of the Partnership is allocated 95% to the limited partners and 5% to the general partners provided, however, that allocations and distributions to the general partners are subordinated to a portion of a property management fee payable to a general partner, as well as allocations and distributions to the limited partners until the limited partners have received allocations and distributions equal to a 9% cumulative noncompounded return on each limited partner's capital. No distributions were made to the general partners during 1997, 1996 or 1995.
During 1995, the general partner began efforts to sell the rental properties comprising the Partnership (see Note 2). Upon the sale, refinance or disposition of the partnership property, the partnership agreement specifies certain allocations of net proceeds and taxable gain or loss from the transaction.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash represents tenants' security deposits and funds restricted by the general partner in the amount of $63,680 in 1997 and $39,614 in 1996 for future property tax assessments and insurance.
RENTAL PROPERTIES
During 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 did not have an impact on the Company's financial position or results of operations with respect to long-lived assets held and used. Long-lived assets held for sale continue to be recorded at the lower of carrying amount or fair value less estimated cost to sell.
Rental properties are recorded at the lower of carrying amount or fair value less estimated costs to sell. Accordingly, the Partnership has recorded provisions to write-down the recorded amounts for Rosewood Shopping Center and West Ridge Plaza by $1,700,000 and $773,000, in 1997 and 1996, respectively, to approximate the properties' fair market value less estimated cost to sell, as estimated by the general partner.
Prior to 1996, depreciation on buildings and building improvements was computed for financial statement purposes using the straight-line method over the estimated useful life of 31.5 years. Effective January 1, 1996, depreciation of rental properties held for sale was discontinued in connection with the Partnership's efforts to actively pursue a sale of the properties.
DEFERRED LOAN COSTS
Deferred loan costs were incurred in connection with obtaining the mortgage loans and are amortized over the term of the loans.
SYNDICATION AND OFFERING COSTS
Fees and expenses relating to the sale of limited partnership units paid to affiliates of the general partners were charged against partners' equity. These fees included various legal and accounting services, sales commissions and supervisory fees equal to 12% of the gross proceeds from the offering.
INCOME TAXES
Under current income tax laws, income or loss of partnerships is included in the income tax returns of the partners. Accordingly, no provision has been made for federal or state income taxes in the accompanying financial statements.
The tax returns of the Partnership are subject to examination by federal and state taxing authorities. If such examinations occur and result in changes with respect to the Partnership's qualification or in changes to partnership income or loss, the tax liability of the partners would be changed accordingly.
NET INCOME PER BENEFICIAL UNIT CERTIFICATE
Net income per BUC is calculated based on the weighted average number of units outstanding during the period (508,594 in 1997, 1996 and 1995).
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate the value:
Cash and Cash Equivalents, Rents Receivable and Accounts Payable - The carrying amount approximates fair value because of the short term nature of these instruments.
Long-term Debt - In the general partner's opinion, the fair value of the Partnership's long-term debt approximates its carrying value.
NEW ACCOUNTING PRONOUNCEMENT
During 1997, the Partnership adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share. The adoption of the pronouncement did not have any impact on the Partnership's computation of per unit data in the accompanying financial statements.
USE OF ESTIMATES
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 the disclosure of contingent assets and liabilities at the date of the financial statements. These estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current year presentation.
2. RENTAL PROPERTIES HELD FOR SALE:
DESCRIPTION OF PROPERTIES
The Partnership acquired Southwest Plaza Shopping Center from an affiliate of Chadsford II Associates effective August 1, 1988. The property is an 86,601 square foot shopping center located in Roanoke, Virginia. The property was acquired for a purchase price of $5,380,000, excluding closing costs, which was partially funded by a $3,700,000 mortgage note payable.
During 1989, the Partnership acquired four properties: (a) Lincoln Center, Lincolnton, North Carolina, (b) Sangaree Plaza, Berkley County, South Carolina, (c) Rosewood Shopping Center, Columbia, South Carolina, and (d) West Ridge Plaza, Bristol, Tennessee.
Lincoln Center was acquired from an affiliate of Chadsford II Associates effective April 6, 1989. The total facility consists of a 255,468 square foot shopping center located in Lincolnton, North Carolina, of which approximately 110,000 square feet is owned by the Partnership. The purchase price of $5,053,000, excluding closing costs, was partially funded by a $3,000,000 mortgage note payable.
Sangaree Plaza was acquired effective May 31, 1989. The property is a 58,948 square foot shopping center located in Berkley County, South Carolina, near Charleston. The initial purchase price of $2,380,000, excluding closing costs, was partially funded by the assumption of a $1,715,102 mortgage note payable. During 1993, construction was completed to expand Sangaree Plaza by approximately 11,368 square feet. Total cost of the expansion was approximately $1,200,000.
Rosewood Shopping Center was acquired effective June 5, 1989. The property is a 55,087 square foot shopping center located in Columbia, South Carolina. The purchase price of $2,250,000, excluding closing costs, was funded entirely from partners' capital.
West Ridge Plaza was acquired effective September 14, 1989. The property is a 140,985 square foot shopping center located in Bristol, Tennessee. The purchase price of $6,567,000, excluding closing costs, was partially funded by the assumption of $5,120,000 of Industrial Revenue Development Bonds. Remaining funds for the acquisition were obtained from a mortgage note payable of $1,500,000, which was secured by Rosewood Shopping Center.
PLAN OF DISPOSITION
During 1995, the Partnership's limited partners approved a plan to seek a sale the Partnership's rental properties. Accordingly, the general partner has actively marketed the properties for sale during 1996 and 1997. On April 1, 1998, the Partnership consummated the sale of Southwest Plaza Shopping Center, Lincoln Center and Sangaree Plaza for a combined purchase price of $15,850,000. Net proceeds resulting from the sale, after repayment of the Partnership's outstanding indebtedness secured by the properties sold and the payment of certain closing costs, amounted to approximately $7.3 million. The Partnership expects to record a gain on the sale of the properties of approximately $2.3 million.
The Partnership continues to pursue the sale of Rosewood Shopping Center and West Ridge Plaza.
See Note 3 for further discussion regarding the status of the Partnership's mortgage notes payable secured by the rental properties.
3. MORTGAGE NOTES PAYABLE:
Mortgage notes payable consist of the following:
MORTGAGE LOANS PAST MATURITY
Southwest Plaza and Lincoln Center
The Partnership's mortgage loans secured by Southwest Plaza and Lincoln Center matured in April 1997. Since this date, the Partnership has been operating under forbearance agreements with the lender whereby the lender has agreed to forbear exercising any remedies for default through June 15, 1998. Under the terms of the forbearance agreements, the interest rate on the loans was increased from 8.4% to 10% and the monthly principal and interest payments were increased from a combined $66,000 to a combined $71,879. In addition, deferral interest accrues at 3.4% on the outstanding principal balances of the two loans, the payment of which will be waived by the lender upon repayment of the mortgage loans in full on or prior to June 15, 1998. As of December 31, 1997, deferral interest of $127,635 has been accrued by the lender under this provision of the forbearance agreements; however, no such interest has been recorded by the Partnership as of December 31, 1997, due to management's opinion that it would be successful in repaying or otherwise refinancing the outstanding loan balances on or before June 15, 1998.
As discussed in Note 2, consummated the sale of Southwest Plaza, Lincoln Center and Sangaree Plaza subsequent to year-end for a total purchase price of $15,850,000. Proceeds from the sale were used to repay all outstanding indebtedness on the mortgage loans secured by these properties.
West Ridge Plaza
The Partnership's mortgage loan secured by West Ridge Plaza matured in 1995. Pursuant to certain modification agreements and other arrangements, payment of the outstanding indebtedness due under the mortgage was extended to January 1, 1998, during which time the Partnership has continued to make regular monthly payments of principal and interest of $38,658. The Partnership is currently negotiating terms of a new forbearance agreement to extend the forbearance period.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liabilities and commitments in the ordinary course of business. The general partner intends to continue to pursue a sale of West Ridge Plaza. If, however, the Partnership is unsuccessful in consummating a sale of the property or otherwise is unable to repay the outstanding indebtedness secured by West Ridge Plaza, the lender may seek remedies of default as provided for under the loan agreement, such as taking title to the property or commencing foreclosure proceedings against the Partnership. As such, the carrying value of the West Ridge Plaza rental property has been reduced to approximate the carrying amount of the indebtedness secured by the rental property at December 31, 1997.
Maturities of the Partnership's mortgage loans that are not currently past maturity are as follows:
Cash paid for interest in 1997, 1996 and 1995 amounted to $1,344,911, $1,346,749 and $1,343,190, respectively.
4. LINE OF CREDIT:
During 1997, the Partnership entered into a nonrevolving line of credit with a bank providing borrowings up to $250,000 to finance capital improvements to the Partnership's rental properties. Outstanding borrowings accrued interest at the bank's prime rate plus 1% (9.5% at December 31, 1997), payable monthly. Maximum borrowings under this facility during 1997 were $75,000. The line of credit matured on December 31, 1997, and the outstanding balance of $75,000 was repaid subsequent to year-end.
5. LEASES:
The Partnership's rental properties are leased to tenants for terms ranging from month-to-month to 17 years. The leases are accounted for as operating leases. Minimum future rentals on noncancellable leases are as follows:
6. RECONCILIATION OF FINANCIAL STATEMENT INCOME (LOSS) TO TAXABLE INCOME (LOSS):
A reconciliation of financial statement net income (loss) and taxable income (loss) allocated to the limited partners follows:
7. RELATED-PARTY TRANSACTIONS:
The Partnership incurs certain costs and expenses related to services provided by its general partners and their affiliates. These costs and expenses were as follows for the years ended December 31, 1997, 1996 and 1995:
As specified in the partnership agreement, a general partner earns a partnership management fee equal to 3% of the annual gross revenue of the Partnership. Payment of 50% of this fee to the general partner is subordinate to certain limited partner distributions. Any earned but unpaid partnership management fees accrue interest at the rate of prime plus 1% and will be paid to the general partner upon satisfaction of certain conditions contained in the partnership agreement. At December 31, 1997 and 1996, the Partnership had accrued $479,635 and $493,576 respectively, in earned but unpaid partnership management fees and interest. These amounts are presented as due to general partner on the accompanying balance sheets.
SCHEDULE III
ATLANTIC INCOME PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1997
Reconciliation of activity from December 31, 1994, through December 31, 1997:
Aggregate cost for federal income tax purposes is $22,937,409 at December 31, 1997.