UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-11655
NTS-PROPERTIES IV
Incorporated pursuant to the Laws of the State of Kentucky
Internal Revenue Service - Employer Identification No. 61-1026356
10172 Linn Station Road, Louisville, Kentucky 40223
(502) 426-4800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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. Yes |X| No | |
TABLE OF CONTENTS
PART I
| Pages | ||||
| Item 1. | Financial Statements | |||
| Balance Sheets as of September 30, 2002 and December 31, 2001 | 3 | |||
| Statement of Partners' Equity as of September 30, 2002 | 3 | |||
| Statements of Operations for the Three Months and Nine Months | ||||
| Ended September 30, 2002 and 2001 | 4 | |||
| Statements of Cash Flows for the Nine Months | ||||
| Ended September 30, 2002 and 2001 | 5 | |||
| Notes to Financial Statements | 6-14 | |||
| Item 2. | Management's Discussion and Analysis of Financial | |||
| Condition and Results of Operations | 15-22 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 | ||
| Item 4. | Controls and Procedures | 23 |
PART II
| Item 1. | Legal Proceedings | 24 | ||
| Item 2. | Changes in Securities | 24 | ||
| Item 3. | Defaults Upon Senior Securities | 24 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 24 | ||
| Item 5. | Other Information | 24 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 24 | ||
| Signatures | 25 | |||
| Certifications | 26-27 |
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
NTS-PROPERTIES IV
BALANCE SHEETS
As of As of
September 30, December 31,
2002 2001*
-------------------- --------------------
(UNAUDITED)
ASSETS
- ------
Cash and equivalents $ 361,447 $ 462,107
Cash and equivalents - restricted 103,560 27,757
Accounts receivable 120,249 143,553
Land, buildings and amenities, net 6,289,886 6,561,375
Investment in and advances to joint ventures 1,068,523 952,413
Other assets 149,028 172,924
-------------------- --------------------
TOTAL ASSETS $ 8,092,693 $ 8,320,129
==================== ====================
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Mortgages and note payable $ 3,932,494 $ 4,356,152
Accounts payable 112,831 111,790
Security deposits 32,481 29,931
Other liabilities 176,005 38,061
-------------------- --------------------
TOTAL LIABILITIES 4,253,811 4,535,934
COMMITMENTS AND CONTINGENCIES (Note 11)
PARTNERS' EQUITY 3,838,882 3,784,195
-------------------- --------------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 8,092,693 $ 8,320,129
==================== ====================
STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Limited General
Partners Partner Total
------------------- ------------------- -------------------
PARTNERS' EQUITY/(DEFICIT)
- --------------------------
Capital contributions net of offering costs $ 25,834,899 $ -- $ 25,834,899
Net income - prior years 725,120 7,326 732,446
Net income - current year 54,138 547 54,685
Cash distributions declared to date (21,586,280) (218,253) (21,804,533)
Repurchase of limited partnership Interests (978,615) -- (978,615)
------------------- ------------------- -------------------
BALANCES AT SEPTEMBER 30, 2002 $ 4,049,262 $ (210,380)$ 3,838,882
=================== =================== ===================
* Reference is made to the audited financial statements in the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on April 1, 2002.
The accompanying notes to financial statements are an integral part of these statements.
3
NTS-PROPERTIES IV
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES
- --------
Rental income $ 606,530 $ 583,224 $ 1,767,466 $ 1,783,083
Income from investment in joint ventures 14,358 16,701 54,091 45,211
Interest and other income 2,538 5,435 7,255 17,109
Gain on sale of assets 249 -- 498 --
------------- ------------- ------------- -------------
TOTAL REVENUES 623,675 605,360 1,829,310 1,845,403
------------- ------------- ------------- -------------
EXPENSES
- --------
Operating expenses 133,695 140,182 406,889 443,608
Operating expenses - affiliated 102,756 102,905 310,560 305,375
Loss on disposal of assets -- -- 51,268 2,138
Interest expense 76,625 87,981 238,556 271,492
Management fees 35,230 32,964 100,197 99,753
Real estate taxes 30,788 33,944 92,363 91,250
Professional and administrative expenses 38,856 30,334 96,963 106,328
Professional and administrative expenses -
affiliated 33,007 41,108 103,641 119,724
Depreciation and amortization 125,680 121,203 374,188 365,494
------------- ------------- ------------- -------------
TOTAL EXPENSES 576,637 590,621 1,774,625 1,805,162
------------- ------------- ------------- -------------
Net income $ 47,038 $ 14,739 $ 54,685 $ 40,241
============= ============= ============= =============
Net income allocated to the limited partners $ 46,568 $ 14,592 $ 54,138 $ 39,839
============= ============= ============= =============
Net income per limited partnership Interest $ 1.93 $ 0.61 $ 2.25 $ 1.65
============= ============= ============= =============
Weighted average number of limited
partnership Interests 24,109 24,109 24,109 24,109
============= ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements.
4
NTS-PROPERTIES IV
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
------------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 54,685 $ 40,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposal of assets 51,268 2,138
Gain on sale of assets (498) --
Depreciation and amortization 405,212 396,292
Income from investment in joint ventures (54,091) (45,211)
Changes in assets and liabilities:
Cash and equivalents - restricted (75,803) (60,397)
Accounts receivable 23,304 83,385
Other assets (7,126) (14,319)
Accounts payable 1,041 52,708
Security deposits 2,550 493
Other liabilities 137,944 109,027
------------------ ------------------
Net cash provided by operating activities 538,486 564,357
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Additions to land, buildings and amenities (153,967) (85,230)
Proceeds from sale of land, buildings and amenities 498 --
Investment in and advances to joint ventures (62,019) (26,462)
------------------ ------------------
Net cash used in investing activities (215,488) (111,692)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from note payable -- 31,742
Principal payments on mortgages and note payable (423,658) (386,679)
------------------ ------------------
Net cash used in financing activities (423,658) (354,937)
------------------ ------------------
Net (decrease) increase in cash and equivalents (100,660) 97,728
CASH AND EQUIVALENTS, beginning of period 462,107 389,963
------------------ ------------------
CASH AND EQUIVALENTS, end of period $ 361,447 $ 487,691
================== ==================
Interest paid on a cash basis $ 235,588 $ 268,301
================== ==================
The accompanying notes to financial statements are an integral part of these statements.
5
NTS-PROPERTIES IV
NOTES TO FINANCIAL STATEMENTS
The unaudited financial statements included herein should be read in conjunction with the NTS- Properties IV's (the "Partnership") 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 1, 2002. In the opinion of the General Partner, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation have been made to the accompanying financial statements for the three months and nine months ended September 30, 2002 and 2001. As used in this Quarterly Report on Form 10-Q the terms "we," "us" or "our," as the context requires, may refer to the Partnership or its interests in these properties and joint ventures.
Note 1 - Basis of Presentation and Joint Venture AccountingThe financial statements include the accounts of all wholly-owned properties. Intercompany transactions and balances have been eliminated. Less than 50% owned joint ventures are accounted for under the equity method.
Note 2 - Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in accordance with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 3 - Concentration of Credit RiskNTS-Properties IV owns and operates, either wholly or through a joint venture, commercial properties in Louisville, Kentucky and Fort Lauderdale, Florida. In Louisville, Kentucky, one tenant occupies 100% of the Blankenbaker Business Center 1A property. We also own and operate, either wholly or through a joint venture, apartment communities in Louisville, Kentucky and Orlando, Florida.
Our financial instruments that are exposed to concentrations of credit risk consist of cash and equivalents. We maintain our cash accounts primarily with banks located in Kentucky. The total cash balances are insured by the FDIC up to $100,000 per bank account. We may at times, in certain accounts, have deposits in excess of $100,000.
Note 4 - Cash and EquivalentsCash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less. We have a cash management program which provides for the overnight investment of excess cash balances. Per an agreement with a bank, excess cash is invested
6
in a repurchase agreement for U.S. government or agency securities on a nightly basis. As of September 30, 2002, approximately $125,000 of said investment was included in cash and cash equivalents.
Note 5 - Cash and Equivalents - RestrictedCash and equivalents - restricted represents funds received for residential security deposits and funds escrowed with mortgage companies for property taxes and insurance in accordance with the loan agreements with said mortgage companies.
Note 6 - Basis of Property and DepreciationLand, buildings and amenities are stated at historical cost, less accumulated depreciation. Costs directly associated with the acquisition, development and construction of a project are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are 5-30 years for land improvements, 3-30 years for buildings and improvements, 3-30 years for amenities and the applicable lease term for tenant improvements. The aggregate cost of our properties for federal tax purposes is approximately $15,414,000.
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," became effective January 1, 2002, and specifies circumstances in which certain long-lived assets must be reviewed for impairment. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset's carrying value must be written down to fair value. Application of this standard by management during the period ended September 30, 2002 did not result in an impairment loss.
Note 7 - Investment in Joint VenturesWe own several investments in joint ventures in conjunction with our affiliates. The unconsolidated joint ventures of NTS-Properties IV consist of NTS/Willows Phase II Joint Venture, NTS Sabal Golf Villas Joint Venture, Plainview Point III Joint Venture, Blankenbaker Business Center Joint Venture and Lakeshore/University II Joint Venture described as follows:
7
For the three months ended September 30, 2002 and 2001, the unconsolidated joint ventures had total revenues of $2,272,552 and $2,387,127, respectively and net income of $160,718 and $254,333, respectively. For the nine months ended September 30, 2002 and 2001, the unconsolidated joint ventures had total revenues of $6,737,449 and $6,981,608, respectively, and net income of $513,143 and $742,249, respectively.
Note 8 - Tender OfferOn May 10, 2002, ORIG, LLC, ("ORIG") an affiliate of ours, commenced a tender offer to purchase up to 2,000 Interests at a price of $230 per Interest. ORIG had the option to acquire additional Interests on a pro rata basis if more than 2,000 Interests were tendered. The tender offer was scheduled to expire on August 9, 2002.
On July 31, 2002, ORIG amended its tender offer to extend the expiration date from August 9, 2002, to September 9, 2002.
ORIG's tender offer expired September 9, 2002. A total of 1,175 Interests were tendered. ORIG accepted all Interests tendered at a purchase price of $230 per Interest for a total of $270,250. We did not participate in this tender offer.
Detailed information on ORIG's tender offer, including the amendments to the offer and the final results of the offer, is available from the various filings made by ORIG with the Securities and Exchange Commission in connection with the offer.
8
Mortgages and note payable consist of the following:
September 30, December 31,
2002 2001
----------------- -----------------
Mortgage payable to an insurance company, bearing
interest at a fixed rate of 8.8%, due October 1, 2004,
secured by land and a building. $ 829,210 $ 1,092,538
Mortgage payable to an insurance company, bearing
interest at a fixed rate of 7.15%, due January 5, 2013,
secured by land, buildings and amenities. 1,585,851 1,661,672
Mortgage payable to an insurance company, bearing
interest at a fixed rate of 7.15%, due January 5, 2013,
secured by land, buildings and amenities. 1,509,654 1,581,832
Note payable to a bank, bearing interest the Prime Rate,
but no less than 6%, due March 27, 2003. At September
30, 2002, the interest rate was 6.0%. 7,779 20,110
----------------- -----------------
$ 3,932,494 $ 4,356,152
================= =================
As of September 30, 2002, the fair value of long-term debt is approximately $4,100,000, based on the borrowing rates currently available to us for loans with similar terms and average maturities.
Note 10 - Related Party TransactionsPursuant to an agreement with us, NTS Development Company, an affiliate of our General Partner, receives property management fees on a monthly basis. The fees are paid in an amount equal to 5% of the gross revenues from our residential property and 6% of the gross revenues from our commercial properties. Also pursuant to an agreement, NTS Development Company receives a repair and maintenance fee equal to 5.9% of costs incurred which relate to capital improvements. These repair and maintenance fees are capitalized as part of land, buildings and amenities.
We were charged the following amounts from NTS Development Company for the nine months ended September 30, 2002 and 2001. These charges include items which have been expensed as operating expenses - affiliated or professional and administrative expenses - affiliated and items which have been capitalized as other assets or as land, buildings and amenities.
9
Nine Months Ended
September 30,
---------------------------------------
2002 2001
----------------- ------------------
Property management fees $ 100,197 $ 99,753
----------------- ------------------
Property management 176,501 167,781
Leasing 81,022 85,639
Administrative - operating 50,048 46,324
Other 2,989 5,631
----------------- ------------------
Total operating expenses - affiliated 310,560 305,375
----------------- ------------------
Professional and administrative expenses - affiliated 103,641 119,724
----------------- ------------------
Repairs and maintenance fee 8,331 2,370
Leasing commissions 10,779 9,776
Construction management 5,287 --
----------------- ------------------
Total related party transactions capitalized 24,397 12,146
----------------- ------------------
Total related party transactions $ 538,795 $ 536,998
================= ==================
Note 11 - Commitments and Contingencies
We, as an owner of real estate, are subject to various environmental laws of federal, state and local governments. Compliance by us with existing laws has not had a material adverse effect on our financial condition or results of operations. However, we cannot predict the impact of new or changed laws or regulations on our current properties or properties that we may acquire in the future.
On December 12, 2001, three individuals filed an action in the Superior Court of the State of California for the County of Contra Costa against our General Partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us. The action purports to bring claims on behalf of a class of limited partners based on, among other things, tender offers made by the public partnership and an affiliate of our General Partner. The plaintiffs allege, among other things, that the prices at which Interests were purchased in these tender offers were too low. The plaintiffs are seeking monetary damages and equitable relief, including an order directing the disposition of the properties owned by the public partnerships and the proceeds distributed. Our General Partner believes that this action is without merit, and is vigorously defending it. No amounts have been accrued as a liability for this action in our financial statements at September 30, 2002. Under an indemnification agreement with our General Partner, we are responsible for the costs of the defense of this action. During the nine months ended September 30, 2002, our share of these legal costs was approximately $25,000, which was expensed.
10
On September 24, 2002, in a lawsuit filed in December 2001 against our General Partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us, the plaintiffs voluntarily dismissed two of the individuals and one of the entities that had objected to the lawsuit on personal jurisdiction grounds. This dismissal was the result of an agreement under which some defendants agreed not to contest jurisdiction and plaintiffs agreed to dismiss other defendants. For a description of the lawsuit, see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on April 1, 2002. For information on a development in the lawsuit occurring after September 30, 2002, see Part II, Item 5 of this Quarterly Report on Form 10-Q (see Note - 13 Subsequent Event).
We do not believe there is any other litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our financial position or results of operations except as discussed herein.
Note 12 - Segment ReportingOur reportable operating segments include Residential and Commercial Real Estate Operations. The residential operations represent our ownership and operating results relative to an apartment community known as The Willows of Plainview Phase I. The commercial operations represent our ownership and operating results relative to suburban commercial office space known as Commonwealth Business Center Phase I and Plainview Point Office Center Phases I and II.
The financial information of the operating segments has been prepared using a management approach, which is consistent with the basis and manner in which our management internally reports financial information for the purposes of assisting in making internal operating decisions. Our management evaluates performance based on stand-alone operating segment net income.
Three Months Ended September 30, 2002
---------------------------------------------------------
Residential Commercial Total
----------------- ----------------- ------------------
Rental income $ 277,915 $ 328,615 $ 606,530
Interest and other income 688 1,643 2,331
Gain on sale of assets 249 -- 249
----------------- ----------------- ------------------
Total net revenues $ 278,852 $ 330,258 $ 609,110
================= ================= ==================
Operating expenses and operating expenses -
affiliated $ 131,260 $ 105,191 $ 236,451
Interest expense 56,300 20,325 76,625
Management fees 14,162 21,068 35,230
Real estate taxes 15,020 15,768 30,788
Depreciation and amortization 52,633 71,518 124,151
----------------- ----------------- ------------------
Total expenses $ 269,375 $ 233,870 $ 503,245
================= ================= ==================
Net income $ 9,477 $ 96,388 $ 105,865
================= ================= ==================
11
Three Months Ended September 30, 2001
---------------------------------------------------------
Residential Commercial Total
----------------- ----------------- ------------------
Rental income $ 270,784 $ 312,440 $ 583,224
Interest and other income 1,465 1,135 2,600
----------------- ----------------- ------------------
Total net revenues $ 272,249 $ 313,575 $ 585,824
================= ================= ==================
Operating expenses and operating expenses -
affiliated $ 120,050 $ 123,037 $ 243,087
Interest expense 60,070 27,911 87,981
Management fees 14,014 18,950 32,964
Real estate taxes 15,105 18,839 33,944
Depreciation and amortization 51,118 68,556 119,674
----------------- ----------------- ------------------
Total expenses $ 260,357 $ 257,293 $ 517,650
================= ================= ==================
Net income $ 11,892 $ 56,282 $ 68,174
================= ================= ==================
Nine Months Ended September 30, 2002
---------------------------------------------------------
Residential Commercial Total
----------------- ----------------- ------------------
Rental income $ 765,522 $ 1,001,944 $ 1,767,466
Interest and other income 1,026 4,765 5,791
Gain on sale of assets 498 -- 498
----------------- ----------------- ------------------
Total net revenues $ 767,046 $ 1,006,709 $ 1,773,755
================= ================= ==================
Operating expenses and operating expenses -
affiliated $ 389,114 $ 330,335 $ 719,449
Loss on disposal of assets 51,268 -- 51,268
Interest expense 171,745 66,811 238,556
Management fees 38,584 61,613 100,197
Real estate taxes 45,059 47,304 92,363
Depreciation and amortization 155,048 214,553 369,601
----------------- ----------------- ------------------
Total expenses $ 850,818 $ 720,616 $ 1,571,434
================= ================= ==================
Net (loss) income $ (83,772) $ 286,093 $ 202,321
================= ================= ==================
12
Nine Months Ended September 30, 2001
---------------------------------------------------------
Residential Commercial Total
----------------- ----------------- ------------------
Rental income $ 841,905 $ 941,178 $ 1,783,083
Interest and other income 2,197 3,291 5,488
----------------- ----------------- ------------------
Total net revenues $ 844,102 $ 944,469 $ 1,788,571
================= ================= ==================
Operating expenses and operating expenses -
affiliated $ 378,773 $ 370,210 $ 748,983
Loss on disposal of assets 2,138 -- 2,138
Interest expense 182,414 89,078 271,492
Management fees 42,762 56,991 99,753
Real estate taxes 45,314 45,936 91,250
Depreciation and amortization 152,441 208,466 360,907
----------------- ----------------- ------------------
Total expenses $ 803,842 $ 770,681 $ 1,574,523
================= ================= ==================
Net income $ 40,260 $ 173,788 $ 214,048
================= ================= ==================
A reconciliation of the totals reported for the operating segments to the applicable line items in the financial statements for the three months and nine months ended September 30, 2002 and 2001 is necessary given amounts recorded at the Partnership level and not allocated to the operating properties for internal reporting purposes.
Three Months Ended
September 30,
---------------------------------------------
2002 2001
------------------ -------------------
NET REVENUES
- ------------
Total revenues for reportable segments $ 609,110 $ 585,824
Other income for Partnership 207 2,835
Income from investment in joint ventures 14,358 16,701
------------------ -------------------
Total consolidated net revenues $ 623,675 $ 605,360
================== ===================
DEPRECIATION AND AMORTIZATION
- -----------------------------
Total depreciation and amortization for
reportable segments $ 124,151 $ 119,674
Depreciation and amortization for Partnership 1,529 1,529
------------------ -------------------
Total depreciation and amortization $ 125,680 $ 121,203
================== ===================
NET INCOME (LOSS)
- -----------------
Total net income for reportable segments $ 105,865 $ 68,174
Net loss for Partnership (58,827) (53,435)
------------------ -------------------
Total net income $ 47,038 $ 14,739
================== ===================
13
Nine Months Ended September 30,
---------------------------------------------
2002 2001
------------------ -------------------
NET REVENUES
- ------------
Total revenues for reportable segments $ 1,773,755 $ 1,788,571
Other income for Partnership 1,464 11,621
Income from investment in joint ventures 54,091 45,211
------------------ -------------------
Total consolidated net revenues $ 1,829,310 $ 1,845,403
================== ===================
OPERATING EXPENSES
- ------------------
Operating expenses for reportable segments $ 719,449 $ 748,983
Other operating expenses for Partnership (2,000) --
------------------ -------------------
Total operating expenses $ 717,449 $ 748,983
================== ===================
DEPRECIATION AND AMORTIZATION
- -----------------------------
Total depreciation and amortization for reportable
segments $ 369,601 $ 360,907
Depreciation and amortization for Partnership 4,587 4,587
------------------ -------------------
Total depreciation and amortization $ 374,188 $ 365,494
================== ===================
NET INCOME (LOSS)
- -----------------
Total net income for reportable segments $ 202,321 $ 214,048
Net loss for Partnership (147,636) (173,807)
------------------ -------------------
Total net income $ 54,685 $ 40,241
================== ===================
Note 13 - Subsequent Event
On October 22, 2002, in a lawsuit filed in December 2001 against our General Partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us, the court issued an order sustaining the demurrer of our General Partner and the general partners of two limited partnerships affiliated with us. The effect of this ruling is that our General Partner and these other two general partners are no longer parties to the lawsuit. On the same date the court overruled the demurrer of the general partner of two of the partnerships affiliated with us and one individual and two entities affiliated with us. The entities and individuals whose demurrers were overruled remain defendants in the lawsuit. For a description of the lawsuit, see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on April 1, 2002. For information on another development in this lawsuit, see Part II, Item 1 of this Quarterly Report on Form 10-Q (see Note 11 - Commitments and Contingencies).
14
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Financial Statements in Item 1 and the Cautionary Statements below.
Critical Accounting PoliciesA critical accounting policy, for our business, is the assumption that our properties' occupancy will remain at a level which provides for debt payments and adequate working capital, currently and in the future. If occupancy were to fall below that level and remain at or below that level for a significant period of time, then our ability to make payments due under our debt agreements and to continue paying daily operational costs would be greatly affected. This would result in the impairment of the respective properties' assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets."
Cautionary StatementsSome of the statements included in this Item 2 may be considered "forward-looking statements" since such statements relate to matters which have not yet occurred. For example, phrases such as "we anticipate," "believe" or "expect," indicate that it is possible that the event anticipated, believed or expected may not occur. Should such event not occur, then the result which we expected also may not occur or occur in a different manner, which may be more or less favorable to us. We do not undertake any obligations to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.
Any forward-looking statements included in the MD&A section, or elsewhere in this report, which reflect management's best judgment, based on factors known, involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors including, but not limited to, those discussed below. Any forward-looking information provided by us pursuant to the safe harbor established by recent securities legislation should be evaluated in the context of these factors.
Our liquidity, capital resources and results of operations are subject to a number of risks and uncertainties including, but not limited to the following:
15
The occupancy levels at our properties and joint ventures as of September 30, 2002 and 2001 were as follows:
Nine Months Ended
September 30,
---------------------------------------------
2002 (1) 2001
------------------- -------------------
Wholly-Owned Properties
- -----------------------
Commonwealth Business Center Phase I (2) 86% 92%
Plainview Point Office Center Phases I & II 86% 78%
The Willows of Plainview Phase I 97% 89%
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
The Willows of Plainview Phase II (9.7%) 93% 81%
Golf Brook Apartments (3.97%) 94% 93%
Plainview Point III Office Center (4.96%)(3) 56% 81%
Blankenbaker Business Center 1A (29.61%) 100% 100%
Lakeshore Business Center Phase I (10.92%) (2) 80% 85%
Lakeshore Business Center Phase II (10.92%) (2) 85% 86%
Lakeshore Business Center Phase III (10.92%)(4) 37% 28%
16
The average occupancy levels at our properties and joint ventures during the three months and nine months ended September 30, 2002 and 2001 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Wholly-Owned Properties
- -----------------------
Commonwealth Business Center Phase I (1) 86% 90% 87% 87%
Plainview Point Office Center Phases I & II 86% 78% 86% 77%
The Willows of Plainview Phase I (1) 92% 87% 82% 88%
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
The Willows of Plainview Phase II (9.7%) (1) 90% 86% 83% 85%
Golf Brook Apartments (3.97%) 97% 93% 91% 89%
Plainview Point III Office Center (4.96%)(2) 56% 92% 55% 96%
Blankenbaker Business Center 1A (29.61%) 100% 100% 100% 100%
Lakeshore Business Center Phase I (10.92%) (1) 80% 86% 82% 83%
Lakeshore Business Center Phase II (10.92%) 85% 85% 85% 82%
Lakeshore Business Center Phase III (10.92%)(3) 37% 28% 36% 26%
Rental and other income generated by our properties and joint ventures for the three months and nine months ended September 30, 2002 and 2001 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ------------- ------------
Wholly-Owned Properties
- -----------------------
Commonwealth Business Center Phase I $ 181,864 $ 179,921 $ 558,965 $ 539,386
Plainview Point Office Center Phases I & II $ 148,394 $ 133,654 $ 447,744 $ 405,083
The Willows of Plainview Phase I $ 278,852 $ 272,249 $ 767,046 $ 844,102
(Continued on Next Page)
17
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ------------- ------------
Joint Venture Properties
- ------------------------
(Ownership % at September 30, 2002)
- -----------------------------------
The Willows of Plainview II (9.7%) $ 319,310 $ 322,467 $ 903,097 $ 950,889
Golf Brook Apartments (3.97%) $ 746,319 $ 778,221 $ 2,201,948 $ 2,201,886
Plainview Point III Office Center (4.96%) $ 140,001 $ 219,178 $ 422,242 $ 688,090
Blankenbaker Business Center 1A (29.61%) $ 237,406 $ 232,307 $ 714,851 $ 703,002
Lakeshore Business Center Phase I (10.92%) $ 400,292 $ 404,067 $ 1,210,294 $ 1,181,934
Lakeshore Business Center Phase II (10.92%) $ 355,482 $ 377,152 $ 1,068,140 $ 1,096,082
Lakeshore Business Center Phase III (10.92%) $ 73,742 $ 53,735 $ 216,877 $ 159,725
Ownership of Joint Ventures
On June 25, 2002, NTS-Properties Plus Ltd. merged with ORIG, LLC, ("ORIG") an affiliate of our General Partner. ORIG is the surviving entity as a result of this merger. NTS-Properties IV continues to hold a 29.61% interest in the Blankenbaker Business Center Joint Venture and a 10.92% interest in the Lakeshore/University II Joint Venture after the completion of the NTS-Properties Plus, Ltd./ORIG Merger. ORIG now holds a 39.05% interest in the Blankenbaker Business Center Joint Venture and a 7.69% interest in the Lakeshore/University II Joint Venture.
Results of OperationsIf there has not been a material change in an item from September 30, 2001 to September 30, 2002, we have omitted any discussion concerning that item.
Interest and Other IncomeInterest and other income decreased approximately $10,000, or 58%, for the nine months ended September 30, 2002, as compared to the same period in 2001, primarily as the result of decreased cash reserves available for investment.
Operating ExpensesOperating expenses decreased approximately $37,000, or 8%, for the nine months ended September 30, 2002, as compared to the same period in 2001, primarily as the result of a decrease in repairs and maintenance at Plainview Point Phases I and II and Commonwealth Business Center I. The decrease is also due to a decrease in landscaping at all three of our wholly-owned properties.
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The loss on disposal of assets for 2002 and 2001 can be attributed to the retirement of assets at The Willows of Plainview Phase I. The 2002 retirements are primarily the result of clubhouse renovations and the 2001 retirements are primarily the result of exterior lighting replacements. The loss represents the cost to retire assets, which were not fully depreciated at the time of replacement.
Interest ExpenseInterest expense decreased approximately $11,000, or 13%, and $33,000, or 12%, for the three months and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001, primarily as a result of principal payments made on the Commonwealth Business Center Phase I and The Willows of Plainview Phase I mortgages.
Professional and Administrative Expenses - AffiliatedProfessional and administrative expenses - affiliated decreased approximately $8,000, or 20%, and $16,000, or 13%, for the three months and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001. The decrease is due to decreased salary costs. Professional and administrative expenses - affiliated are expenses incurred for services performed by employees of NTS Development Company, an affiliate of our General Partner. The employee services include legal, financial and other services necessary to manage and operate the Partnership.
Consolidated Cash Flows and Financial ConditionIn the next 12 months, the demand on future liquidity is anticipated to increase as a result of the replacement of the roofs at Lakeshore Business Center Phase I and Blankenbaker Business Center 1A and as we continue our efforts in the leasing of our commercial properties. There may be significant demands of future liquidity due to the lease up of Lakeshore Business Center Phase III and returning Plainview Point III Office Center to full occupancy. At this time, the future leasing and tenant finish costs which will be required to renew the current leases or obtain new tenants are not certain. It is anticipated that the cash flow from operations and cash reserves will be sufficient to meet most of our needs, while additional financing may be required.
Cash flows provided by (used in):
Nine Months Ended
September 30,
---------------------------------------
2002 2001
----------------- ------------------
Operating activities $ 538,486 $ 564,357
Investing activities (215,488) (111,692)
Financing activities (423,658) (354,937)
----------------- ------------------
Net change in cash and equivalents $ (100,660) $ 97,728
================= ==================
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Net cash provided by operating activities decreased approximately $26,000, or 5%, for the nine months ended September 30, 2002, as compared to the same period in 2001. The decrease was primarily driven by a decrease in collections of accounts receivable and the change in accounts payable.
Net cash used in investing activities increased approximately $104,000, or 93%, for the nine months ended September 30, 2002, as compared to the same period in 2001. The increase is the result of increased capital expenditures, primarily related to the renovation of The Willows clubhouse and increased investment in joint ventures, primarily related to the capital contributions made to the Lakeshore University II Joint Venture.
Net cash used in financing activities increased approximately $69,000, or 19% for the nine months ended September 30, 2002, as compared to the same period in 2001. The increase is the result of continued principal payments partially offset by proceeds from a note payable obtained March 27, 2001 by The Willows of Plainview Phase I.
Due to the fact that no distributions were made during the nine months ended September 30, 2002 or 2001, the table which presents that portion of the distributions that represents a return of capital in accordance with GAAP basis has been omitted.
Our plans for renovations, other major capital expenditures, and other commitments that will affect future liquidity are described below.
The demand on future liquidity is anticipated to increase as we continue our efforts in the leasing of Plainview Point III Office Center. One tenant which occupied 16,895 square feet, or 27%, of the building, vacated its space on November 30, 2001 at the end of their lease. This left Plainview Point III Office Center with only 54% occupancy. As a result of this vacancy, there will likely be a protracted period for the property to become fully leased again and substantial funds, currently estimated to be approximately $635,000 will likely be needed for tenant finish costs. Our share of these costs would be approximately $31,000.
We anticipate having to continue to fund the working capital deficit of the Lakeshore/University II Joint Venture. Due to the extended time necessary to lease the Lakeshore Business Center Phase III addition, it is unknown at this time how much working capital we will need to fund the operations of the Lakeshore/University II Joint Venture.
As of September 30, 2002, we anticipate making certain building improvements during 2002. These improvements include HVAC replacements at Commonwealth Business Center I ($8,000) and at Plainview Point Phases I and II ($10,000).We also have commitments for approximately $148,000 at Commonwealth Business Center Phase I and $120,000 at Plainview Point Office Center Phase II for tenant improvements. The tenant improvements will be funded in 2002 from existing working capital.
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Blankenbaker Business Center 1A and Lakeshore Business Center Phase I are expected to require new roofs in 2003. The roof replacements are expected to cost approximately $205,000 and $200,000, respectively. Our share of these costs is expected to be approximately $61,000 and $22,000, respectively.
We have no other material commitments for renovations or capital improvements as of September 30, 2002.
The following describes the efforts being taken by us to increase the occupancy levels at our commercial properties. The leasing and renewal negotiations at the Lakeshore Business Center Development are conducted by an on-site leasing agent, an employee of NTS Development Company (an affiliate of our General Partner), who makes calls to potential tenants, negotiates lease renewals with current tenants and manages local advertising with the assistance of NTS Development Company's marketing staff. The leasing and renewal negotiations for our remaining commercial properties are managed by leasing agents, who are employees of NTS Development Company, located in Louisville, Kentucky. The leasing agents are located in the same city as the commercial properties. All advertising for these properties is coordinated by NTS Development Company's marketing staff located in Louisville, Kentucky.
In an effort to continue to improve occupancy at our residential properties, we have an on-site leasing staff, who are employees of NTS Development Company, at each of the apartment communities. The staff facilitates all on-site visits from potential tenants, coordinates local advertising with NTS Development Company's marketing staff, makes visits to local companies to promote fully furnished apartments and negotiates lease renewals with current residents.
Leases at Commonwealth Business Center Phase I, Blankenbaker Business Center 1A, and Lakeshore Business Center Phases I, II and III provide for tenants to contribute toward the payment of common area expenses, insurance and real estate taxes. Leases at Plainview Point Office Center Phases I, II and III provide for tenants to contribute toward the payment of increases in common area maintenance expenses, insurance, utilities and real estate taxes. These lease provisions, along with the fact that residential leases are generally for a period of one year, should protect our operations from the impact of inflation and changing prices.
Across the United States there have been recent reports of lawsuits against owners and managers of multi-family and commercial properties asserting claims of personal injury and property damage caused by the asserted presence of mold and other microbial organisms in residential units and commercial space. Some of these lawsuits have resulted in substantial monetary judgments or settlements. We have not, at present, been named as a defendant in any lawsuit that has alleged the presence of mold or other microbial organisms. Prior to September 13, 2002, we were insured against claims arising from the presence of mold due to water intrusion. However, since September 13, 2002, certain of our insurance carriers have excluded from insurance coverage property damage loss claims arising from the presence of mold, although certain of our insurance carriers do provide some coverage for personal injury claims. We are in the process of implementing protocols and procedures to prevent the build-up of mold and other microbial organisms in our properties, and are
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in the process of implementing more stringent maintenance, housekeeping and notification requirements for tenants in our properties. We believe that these measures will eliminate, or at least, minimize any effect that mold or other microbial organisms could have on our tenants. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change, however, we can make no assurance that liabilities resulting from the presence of, or exposure to, mold or other microbial organisms will not have a material adverse effect on our consolidated financial condition or results of operations and our subsidiaries taken as a whole.
Potential ConsolidationOur General Partner, along with the general partners of four other public limited partnerships affiliated with us, is investigating a consolidation of us with other entities affiliated with us. In addition to these entities, the consolidation would likely involve several private partnerships and other entities affiliated with us and our General Partner. The new combined entity would own all of the properties currently owned by the public limited partnerships, and the limited partners or other owners of these entities would receive an ownership interest in the combined entity. The number of ownership interests to be received by limited partners and the other owners of the entities participating in the consolidation would likely be determined based on the relative value of the assets contributed to the combined entity by each public limited partnership, reduced by any indebtedness assumed by the entity. The majority of the contributed assets would consist of real estate properties, whose relative values would be based on appraisals obtained at or near the consolidation date. The potential benefits of consolidating the entities include: reducing the administrative costs as a percentage of assets and revenues by reducing the number of public entities; diversifying limited partners' investments in real estate to include additional markets and types of properties; and creating an asset base and capital structure that may enable greater access to the capital markets. There are, however, also a number of potential adverse consequences, such as the expenses associated with a consolidation and the fact that the duration of the new entity would likely exceed our anticipated duration, and that the interests of our limited partners in the combined entity would be smaller on a percentage basis than their interests in us. Further, the new entity may adopt investment and management policies that are different from those presently used by our General Partner for us. A consolidation also requires approval of our limited partners and owners of the other proposed participants. Accordingly, there is no assurance that the consolidation will occur.
Item 3 - Quantitative and Qualitative Disclosures About Market RiskOur primary market risk exposure with regard to financial instruments is changes in interest rates. All of our debt bears interest at a fixed rate with the exception of the $7,779 note payable on The Willows of Plainview Phase I. At September 30, 2002, a hypothetical 100 basis point increase in interest rates would result in an approximate $156,000 decrease in the fair value of the debt and would not have a significant effect on interest expense of the variable rate note.
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The Chief Executive Officer and Chief Financial Officer of NTS Capital Corporation, the General Partner of our General Partner, have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.
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PART II - OTHER INFORMATION
Item 1 - Legal ProceedingsOn September 24, 2002, in a lawsuit filed in December 2001 against our General Partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us, the plaintiffs voluntarily dismissed two of the individuals and one of the entities that had objected to the lawsuit on personal jurisdiction grounds. This dismissal was the result of an agreement under which some defendants agreed not to contest jurisdiction and plaintiffs agreed to dismiss other defendants. For a description of the lawsuit, see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on April 1, 2002. For information on a development in the lawsuit occurring after September 30, 2002, see Part II, Item 5 of this Quarterly Report on Form 10-Q.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
On October 22, 2002, in a lawsuit filed in December 2001 against our General Partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us, the court issued an order sustaining the demurrer of our General Partner and the general partners of two limited partnerships affiliated with us. The effect of this ruling is that our General Partner and these other two general partners are no longer parties to the lawsuit. On the same date the court overruled the demurrer of the general partner of two of the partnerships affiliated with us and one individual and two entities affiliated with us. The entities and individuals whose demurrers were overruled remain defendants in the lawsuit. For a description of the lawsuit, see Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC on April 1, 2002. For information on another development in this lawsuit, see Part II, Item 1 of this Quarterly Report on Form 10-Q.
Item 6 - Exhibits and Reports on Form 8-Ka) Exhibits:
99.1 Certification of Chief Executive Officer and Chief Financial Officer.
b) Reports on Form 8-K:
None.
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SIGNATURES
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.
| NTS-PROPERTIES IV | |||
|---|---|---|---|
| By: | NTS-Properties Associates IV, | ||
| General Partner | |||
| By: NTS Capital Corporation, | |||
| General Partner | |||
| /s/ Gregory A. Wells |
| Gregory A. Wells |
| Senior Vice President and |
| Chief Financial Officer of |
| NTS Capital Corporation |
| Date: November 14, 2002 |
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CERTIFICATION
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, J.D. Nichols, certify that:Date: November 14, 2002
/s/ J.D. Nichols
Chief Executive Officer of NTS Capital Corporation, General Partner of
NTS-Properties Associates IV, General Partner of NTS-Properties IV
See also the certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, which is also attached to this report.
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CERTIFICATION
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Gregory A. Wells, certify that:Date: November 14, 2002
/s/ Gregory A. Wells
Chief Financial Officer of NTS Capital Corporation, General Partner of
NTS-Properties Associates IV, General Partner of NTS-Properties IV
See also the certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002, which is also attached to this report.
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